Expedia Earnings Preview: Room Nights Growth And Revenue Margins In Focus

Expedia (NASDAQ:EXPE) is scheduled to release its results for the first quarter of 2014 on Thursday, May 01. In the first half of 2013, high competition in the travel industry negatively impacted Expedia by weakening the growth in direct type-in traffic, which is the most efficient traffic for customer loyalty and profitability, according to the company’s management. Ramped-up bidding activity on TripAdvisor’s meta platform, broader roll-out of the Expedia Traveler Preference (ETP) program, and rapid growth in advertising and media revenue from the newly acquired Trivago, helped Expedia to regain its momentum in Q3. The company continued to build on the momentum in Q4 registering 14% year-on-year increase in hotel revenue, 17% increase in air revenue, and 37% increase in advertising and media revenue. We expect the company to post healthy growth in Q1 2014 as well, owing to rapid adoption of its ETP program, particularly in Europe. We think that the program is beneficial for the company, even though it puts pressure on the revenue margins.

We have a $73 price estimate for Expedia’s stock, in line with its market price. We will update our estimate after the upcoming results are announced.

See our complete analysis of Expedia here

Increased Adoption Of ETP To Fuel Growth In Hotel Bookings But Also Pressurize Margins

The Hotel bookings business is the most important division in Expedia’s portfolio. It contributes approximately 65% to the company’s valuation as per our estimate. In the final quarter last year, Expedia registered robust growth of 25% in hotel room nights sold on the back of a wider roll-out of its ETP program. Prior to the roll out of ETP in the back half of 2012, Expedia’s hotel business was predominantly based on merchant model. ETP allows travelers to choose between paying for bookings upfront (merchant model), and paying after the stay is completed (agency model). Hotels are adopting ETP at a fast pace since many guests prefer to pay at the time of checking out of the hotel. By the third quarter of 2013, about 35,000 hotels had signed up for ETP. The company added 10,000 hotels to this list in Q4. ^[1]

While ETP has provided a boost to Expedia’s hotel business, it has also weighed on the company’s revenue margins. Revenues under the agency model are lower as Expedia simply acts as a travel agent and earns a small commission on bookings, while under the merchant model it books the full revenue as the transaction is completed on Expedia’s website itself. The shift from the previously dominant merchant model to the ETP model has the lowered revenue contribution for Expedia’s hotel business. The company’s revenue per room night fell by 9% year on year in Q4, registering the worst decline in at least two years.

We believe that Expedia’s customers will adopt ETP program at a fast pace as the program is rolled out globally, leading to further increases in revenue contribution from the agency model. Although this will lower revenue  for the company, in our view the program will compensate for it by bolstering growth in room nights sold by the company.

Growth In Europe Should Be Strong Despite Booking.com’s Dominance In The Region

Although Expedia did not mention the absolute growth rate for its European business in the fourth quarter, it said that it grew faster in the region as compared to the prior couple of quarters. It also said that the growth was broad-based across different brands and channels. The improvement was mainly driven by the disproportionate benefit from the ETP program, strong revenue growth at Trivago, and rising traffic from the TripAdvisor channel. ^[2]

PhoCusWright estimates that OTA bookings in Europe rose 10% in 2013 to approximately $58 billion. The travel market research company expects the growth to accelerate to 12% in 2014 and 11% in 2015. This is against the backdrop of less than 4% growth expected in total European travel bookings, during the same periods. ^[3]

Priceline’s (NASDAQ:PCLN) booking.com had about 31% share of Europe’s OTA market in 2012 while Expedia’s share was less than half of that. ^[3] However, we believe Expedia has geared itself well to leverage future growth in the European travel industry and catch up with booking.com. Its Trivago brand is the leading meta-search engine in Europe and grew revenues by more than 85% in 2013. Trivago also delivered healthy EBITDA growth (according to management) that allowed it to invest back into building new markets. Additionally, Expedia’s ETP program is experiencing higher acceptance by hoteliers in Europe than in North America since European travelers have a greater appetite for agency model bookings. ^[3] The company expects this trend to continue in 2014 which should act as a tailwind for it.

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1. Expedia, Inc. Reports Fourth Quarter and Full Year 2013 Results, Expedia Investor Relations, February 06, 2014 [↩]
2. Expedia Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, February 06, 2014 [↩]
3. PhoCusWright: Online travel spending on the rise in Europe, Travel Weekly, January 15, 2014 [↩] [↩] [↩]