Expedia’s Stock Shows Warning Signs As Competition Sinks Results

Expedia (NASDAQ:EXPE), the world’s largest online travel agency by gross bookings, posted another quarter of weak results as competition in the OTA space increased and Hotwire performed worse than the management’s expectations due to inventory pressures and stiffening competition in hotels and car rentals business. Trivago, eLong and Egencia performed relatively better with significant revenue growth and market share gains. Hotel revenue, which contributes about 75% to Expedia’s total revenue, grew by 12% y-o-y as growth in gross bookings was offset by a decline in revenue margin on hotels. Airline ticket revenue grew 8% y-o-y driven by 7% increase in tickets sold and 1% rise in ticket prices. ^[1]

While total revenue increased to $1.21 billion, growing at a slower pace of 16% y-o-y compared to Q1 2013 (24% y-o-y revenue growth), net income declined by more than 30% to $63 million as operating expenses, mostly sales and marketing related, grew faster than revenues to counter competitive forces and retain market share.

This has impacted the company’s top-line as well as the bottom-line in recent quarters. Expedia’s stock lost over one-fifth of its value post the earnings results, last week. ^[2] We believe the above trends will continue to put pressure on the company as we do not see the competition decreasing in the near future.

See our complete analysis for Expedia

EBITDA Hit As Competition Prompts Expedia To Increase Marketing Spend

Expedia faced heightened competition in Q2 2013, especially in the U.S., in the off-line brand marketing channel from Booking.com, TripAdvisor and its own Trivago. In light of this, sales and marketing spend rose more than 33% y-o-y in Q2 2013 as the company continued to invest heavily in increasing its operational scale and building a leadership position. The high competition also resulted in weaker growth in direct type-in traffic, which is the most efficient traffic for customer loyalty and profitability according to the company’s management.

Increased investments on marketing of Trivago and eLong led to a decline of 14% y-o-y in adjusted EBITDA compared to 3% rise in the previous quarter. Expedia intends to continue investing aggressively in these companies to expand its market penetration as it perceives these businesses to hold long term growth potential. Although such investments are necessary to drive growth, we believe that due to stiff competition from other OTAs, particularly Priceline, Expedia’s EBITDA will grow at a slower pace than its revenues, leading to decline in EBITDA margins.

Hotel Business Under Pressure As Room Night Growth and Revenue Margins Weaken

Room night growth at Expedia decelerated to 19% y-o-y in Q2 2013 from an altitude of 28% in the previous quarter primarily due to Easter falling earlier this year (in Q1) compared to 2012. Disruptions at eLong and TripAdvisor’s transition to meta display were other factors that contributed to the deceleration. Earlier, advertisements on TripAdvisor appeared in pop-up windows every time a user clicked on show prices. Now, all the comparison based shopping including prices and availability take place on TripAdvisor’s website itself, sending fewer leads to advertisers. This resulted in significant traffic, revenue and profitability headwinds for Expedia as TripAdvisor is one of the largest marketing channels for the company.

Revenue per room night continued its downward trend, declining by 6% y-o-y due to the increasing mix of low ADR (Average Daily Rate) room nights in Asia-Pacific via eLong. The decline is also attributable to competitive discounting, shift to bigger hotel chains with lower margins and the relatively new ETP (Expedia Traveler Preference) program. The ETP program offers users the choice to book under the agency or the merchant model. Revenue margins under the merchant model are higher as the transaction is completed on Expedia’s website itself, while under the agency model Expedia simply acts as a travel agent and earns a smaller commission on bookings. The shift from the previously dominant merchant model to the ETP model has lowered overall revenue margins for Expedia.

As a result of the deceleration in room night growth, and the decline in revenue per room night, worldwide hotel revenue for Q2 2013 increased by only 12% y-o-y compared to 24% rise in the same quarter last year. Although Expedia expects further improvement in conversion rates from TripAdvisor’s meta transition and the ETP program in the future, we believe the company’s room night growth rate and revenue per room night will remain under pressure owing to additional factors such as stiff competition from OTAs and hotel chains that are increasingly selling their inventory online.

We are in the process of updating our price estimate of $69 for Expedia’s stock.

1. Expedia Q2 2013 Earnings Call Transcript, Seeking Alpha, July 25, 2013 [↩]
2. Expedia Plunges 24% As Big EPS Miss Spooks The Street, Fox Business, July 26, 2013 [↩]