Travelocity Deal And Broader Roll Out Of ETP To Boost Expedia’s Second Quarter Results

In the first half of 2013, high competition in the travel industry negatively impacted Expedia (NASDAQ:EXPE) 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, have all helped the leading online travel agency to regain its momentum in the back half of 2013. The company continued to build on the momentum in Q1 2014, registering a 12% year-on-year increase in hotel revenue, a 28% increase in air revenue, and a 116% increase in advertising and media revenue. ^[1]

Expedia is slated to release its results for Q2 FY 2014 on Thursday, July 31. We expect the company to post healthy growth owing to rapid adoption of its ETP program, particularly in Europe, and due to the implementation of its partnership with Travelocity.

Our $77 price estimate for Expedia’s stock is almost in line with its market price. We will update our estimate after the upcoming results are announced.

Broader Rollout Of ETP To Fuel Gross Bookings Growth But Also Weigh On Revenue Margins

We estimate that Expedia registered a robust 23% rise in hotel gross bookings in 2013, as travelers switched from traditional methods to the online mode for reservations. Increased adoption of the Expedia Traveler Preference (ETP) program, which was launched in the back half of 2012, was one of the major drivers that fueled the growth. ETP allows travelers to choose between paying for bookings upfront (merchant model) and paying after the stay is completed (agency model). Prior to the rollout of ETP, Expedia was predominantly a merchant model company. Hotels are adopting ETP at a fast pace since many guests prefer to pay at the time of checking out of the hotel. According to latest data available, over 45,000 hotels have signed up for the ETP program. ^[2]

While ETP has provided a boost to Expedia’s hotel business, it has also weighed on the company’s revenue margins. 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.

Travelocity Partnership To Help In Countering Increasing Competition In The U.S.

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. To dive into the details of the deal, read our article: Expedia Is Better Positioned For Growth After The Travelocity Deal.

The deal with Travelocity yielded positive results for Expedia in Q1. The company sold approximately 36 million rooms globally, higher by 24% compared to the year-ago quarter and Travelocity accounted for 3% of that growth. The effect on air ticket volume growth was even more pronounced. About 30% more air tickets were sold by Expedia, of which 18% was contributed by Travelocity. We are encouraged by the growth in bookings considering that only Travelocity’s U.S. operations were included in the results. The Canadaian website was launched in Q2 and therefore, it did not contribute to Expedia’s Q1 results. ^[2]

We believe that Travelocity will help Expedia to counter increased competition from Priceline in the U.S. 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. 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.

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