Travelocity Partnership Boosts Expedia’s First Quarter Results

Expedia (NASDAQ:EXPE) marked a good start to fiscal year 2014 with a 19% year-on-year increase in Q1 revenues, topping $1.2 billion. The growth was broad-based since all the divisions and brands witnessed an increase in bookings and revenues. About 24% more rooms were booked via Expedia compared to the same period a year ago. However, revenue per room night fell by 10% due to which hotel revenues increased by only 12%. Hotel bookings is the most important business for Expedia and accounts for over 70% of our valuation for the company. ^[1]

The Q1 results benefited from the recently announced partnership between Expedia and Travelocity. The deal has effectively created an additional distribution channel for Expedia in the U.S. The results also benefited from the company’s disciplined approach in managing cost of revenue, as well as technology, content and general administrative expenses.  This helped it to invest in selling and marketing while also delivering low-single-digit EBITDA growth. ^[2]

We are in the process of updating our $73 price estimate for Expedia to account for the Q1 results.

Travelocity Implementation Adding Strongly To Growth

Expedia inked a strategic marketing agreement with rival Travelocity last year. As per the deal, Expedia provides content, inventory, customer service and technology to Travelocity, while the latter focuses on brand marketing and receives a performance-based marketing fee. The deal pertains only to Travelocity’s websites in the U.S. and Canada. The Canadaian website was launched in this quarter and therefore, it did not contribute to Expedia’s Q1 results. The partnership in the U.S. added 3 percentage points to room nights growth and another 18 points to air ticket volume growth. ^[2]

We believe that Travelocity will help Expedia to counter increased competition from Priceline. Rapid international expansion helped Priceline to overtake Expedia as the world’s largest online travel agency by sales in 2010. The company is now taking different routes to compete aggressively with Expedia in the U.S. domestic market. It launched the first offline advertising campaign (Booking.yeah) for Booking.com last year. It entered into a partnership with NYC and Co. to power bookings on New York City’s official tourism website. It also completed the acquisition of Kayak, a leading meta-search engine in the U.S. with over 50% share of the travel search market.

Revenue Per Room Night Continues to Fall

The revenue earned by Expedia per room night has been on a decline primarily due to increasing penetration of the Expedia Traveler Preference (ETP). 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.

Revenue margins 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 revenue margins are higher as the transaction is completed on Expedia’s website itself. The shift from the previously dominant merchant model to the ETP model has lowered revenue margins for Expedia’s hotel business.

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

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1. Expedia, Inc. Reports First Quarter 2014 Results, Expedia Investor Relations, May 2014 [↩]
2. Expedia Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 [↩] [↩]