Expedia’s Performance Soared In The Second Quarter On The Back Of Organic And Inorganic Growth

Expedia (NASDAQ:EXPE) delivered one of its healthiest performances in the second quarter of 2015. On the back of organic and inorganic growth, the company displayed a 15% year-on-year increase in revenues to $1.7 billion and 20% year-on-year growth in gross bookings ($15 billion). All of Expedia’s divisions displayed strong performance. Expedia’s global room nights, air tickets, and car rental days, experienced 35%, 26%, and 35% year-on-year growth, respectively. Its adjusted EBITDA grew by 12% year-on-year to $281 million. However, revenue per night declined by around 16% and the average daily rate (ADR) declined by 6%. Though the weak international exchange rate was to some extent responsible for this decline, the primary reason was Expedia’s lower commission strategy in international markets, and its huge spends on loyalty programs and promotions to rev up demand in order to gain a bigger share of the international online travel segment. A crucial reason for Expedia’s well-rounded performance was the sale of its majority stake in the Chinese online travel agency (OTA), eLong. ^{[1] [2]}

We are in the process of updating our  price estimate of $103 for Expedia’s stock.

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Expedia Owes A Significant Portion Of Its Growth To The eLong Divestiture, However, Its China Focus Is Still Intact

One of the primary reasons for Expedia’s strong performance in Q2 2015 was the offloading of its 62.4% stake in the loss making, Chinese OTA, eLong. eLong brought down Expedia’s financial performance in each of the last few quarters. After failing to revive in 2014, eLong recorded a $33 million EBITDA loss in the first quarter of 2015. This, in turn, weighed down Expedia’s EBITDA which grew by 25% excluding eLong, but declined by 5% after including eLong. ^[3]

In May 2015, Expedia sold its eLong stake to Chinese OTA leader, Ctrip (40% of shares) and other Chinese investors. ^[4] Currently, Expedia and Ctrip have formed a partnership to share inventory in several geographies, primarily in the air and packaged tours segment.

Additionally, Expedia has commercial agreements which allow its access to outbound Chinese travelers of Ctrip and eLong. Expedia’s brands, Expedia.com and Expedia Affiliate Network, are also displaying rapid growth in China. Brand Expedia has a presence in Hong Kong, with more future expansion planned in China. Chinese outbound travel displays high demand for package travel and Expedia’s management hinted that there might be future partnerships with local travel companies. ^[2]

Expedia Is Focusing On Expansion At The Cost Of Lower Commissions

In its Q4 Earnings Call, Expedia announced that it had segmented its portfolio into four distinct businesses: the core OTA group, eLong, Trivago, and Egencia. The core OTA group comprises Expedia, Hotels.com, Travelocity, Wotif, Hotwire, Venere, and CarRentals.com.

The core OTA group’s 15% growth to $1.5 billion was driven by brand Expedia and Hotels.com. This was complemented by healthy inorganic growth from Wotif and AirAsia-Expedia joint venture (where Expedia has a 75% stake). Wotif and AirAsia contributed to around 7 percentage points to Expedia’s global room night growth. ^[2]

Expedia added around 27,000 properties to its platform this quarter (including those from its acquisitions) and now has added more properties in the first half of 2015, than it added in all of 2014. This gives a perspective as to the rate at which Expedia is expanding its network.

On the flip side, as Expedia is lowering commissions to get new hotels, the contribution per hotel is falling, as more smaller hotels are getting the opportunity to join Expedia’s platform. Expedia’s aggressive spending on loyalty programs is proving to be beneficial as an increased proportion of its business is being generated by repeat customers. Hence, the company’s focus on lowering commissions, spending on loyalty programs, and making investments on technology, seem to be generating a positive impact, though at the cost of less earnings from each hotel.

Expedia’s “No” To TripAdvisor’s Instant Booking

TripAdvisor’s Instant Booking feature is aimed at providing users with an end-to-end booking experience. Instant Booking (currently available in the U.S. and some select destinations) allow users to book hotels on the TripAdvisor platform itself with the “Book with TripAdvisor” option, as against visiting the hotel or OTA website to complete the booking process, after searching for hotels through TripAdvisor.

According to Expedia’s management, even though Expedia participates as advertisers on TripAdvisor’s Market Place, it likely wouldn’t feature on Instant Booking. However, it is more open to displaying its products on Google’s travel platform because Google doesn’t act as a merchant and directs the booking traffic to the OTAs. ^[2]

Basically, Instant Booking, to some extent, undermines the functionalities of OTAs like Expedia. With Instant Booking, all the steps of the booking process get completed on TripAdvisor’s website. ^[5]

Additionally, with TripAdvisor’s meta search option, Expedia can attract customers to its own websites, in order to eventually convert users to direct bookers. This would generate direct business in the future. The “Book With TripAdvisor” option associated with Instant Booking doesn’t allow that to happen. ^[6]

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1. Expedia, Inc. Reports Second Quarter 2015 Results, Expedia, July 30, 2015 [↩]
2. Expedia’s Q2 2015 Earnings Call Transcript, July 30, 2015 [↩] [↩] [↩] [↩]
3. Expedia (EXPE) CEO Dara Khosrowshahi on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 30, 2015 [↩]
4. Expedia sells stake in eLong to Ctrip and others for $671 million, tnooz, May 22, 2015 [↩]
5. Priceline & Expedia Could Undermine TripAdvisor Instant Bookings, Amigo Bulls, December 8, 2014 [↩]
6. What TripAdvisor’s instant booking means for hotels, tnooz, November 2014 [↩]