Expedia’s Results Impress And Show Focus On European And Asian Growth

Expedia (NASDAQ:EXPE), the biggest US online travel agency (OTA) in terms of booking volumes, announced its Q2 2012 earnings on Thursday, July 26. At $1.04 billion, Expedia registered a 13% increase in gross bookings and a 14% increase in revenues fueled by robust growth in the hotel bookings business. Having reported a marginal loss last quarter, the company posted a net income of $105 million in Q2,  translating into a 33% y-o-y loss.

Though the continued growth in hotel bookings, which was additionally fueled by the VIA Travel acquisition and the AirAsia-Expedia joint venture, led to a solid second quarter for the company, the growth momentum was partially offset by macroeconomic headwinds, a slowdown in certain European markets and unfavorable exchange rates.

We estimate hotel bookings to contribute close to 65% to Expedia’s valuation. The fact that global room nights registered a 22% growth rate in Q2, despite the economic weakness, points towards the continuing strength in Expedia’s hotel business.

While there are certain foreseeable headwinds in the future such as increasing airfares, volatile exchange rates and higher ADR for hotels, there are certain factors that help us maintain a positive outlook on the company’s future performance. With an increase in market spend in the Asia-Pacific region this quarter, an increase in product innovations in hotel and aircraft segments, and the expected roll out of packages in 2013, we remain positive on the company’s long term outlook.

We feel that the fragmented European market and the rising per capita income in emerging economies provide tremendous growth opportunities for travel agencies. The recent acquisition of VIA Travel and growing partnership with AirAsia are indicative of Expedia’s increasing focus on these markets, which we believe will positively impact its valuation in the long run.

See our complete analysis for Expedia

Acquisition of VIA Travel To Increase Presence In Europe

Expedia’s corporate travel management arm, Egencia, completed the acquisition of VIA Travel, a leading travel management company in the Nordics, in April this year. The additional business from VIA Travel contributed close to 2% growth in gross bookings and revenues in the second quarter.

VIA travel not only helped sustain growth in the hotel bookings, but also pushed air tickets volume higher, which registered a 3% growth in the second quarter. Currently, the company accounts for approximately 5% of the online travel segment in Europe. We believe that the acquisition of VIA Travel will further open up opportunities for Expedia in the European region, which is more fragmented than the US.

Increasing Opportunities In The Asian Markets

The AirAsia-Expedia joint venture contributed an additional 2% to the global room nights growth rate, which further contributed to the 16% growth in hotel revenues in the second quarter. The online travel segment in the Asia-Pacific region has been growing at a rapid pace and currently accounts for around 24% of the total travel market in the region, which we estimate to increase further in the future.

Currently, Expedia accounts for only 4% of the Asia-Pacific online travel market. However, with increasing number of partnerships and a continued focus on the long term growth opportunity in this region, we believe that the company has the potential to increase its market share.

The recent partnership with Thomas Cook India, the expansion of the tie-up with Air-Asia and the seven new strategic alliances by Egencia, are evidence of the company’s focus to expand its presence in international markets. (Read Related Article: Expedia’s Global Growth Soars With Asian Partnerships)

We are in the process of updating our current price estimate of $33.19 for Expedia.

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