Expedia Posts Solid Volume Growth Helped By Travelocity Partnership As Revenues And Profitability Climb

Expedia (NASDAQ:EXPE) reported a healthy set of quarterly numbers for Q2 2014, with a 24% year-on-year increase in revenues, reaching the $1.5 billion mark. The growth was broad-based across all the divisions and brands with the exception of Hotwire, which faced pressure due to lower demand for opaque bookings and competition from Priceline’s (NASDAQ:PCLN) Express Deals product. ^[1]

Expedia’s second quarter results benefited from the company’s partnership with Travelocity that it entered into last year. 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 the cost of revenue, technology, content and general administrative expenses, which helped it to invest in selling and marketing while also delivering a robust 35% growth in adjusted EBITDA. ^[2]

We are in the process of updating our $77 price estimate for Expedia, based on the second quarter results.

Travelocity Deal Boosts Hotel And Airline Business, To Help Counter Competition In Domestic Market

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 better than expected results for Expedia in Q2. The company sold close to 46 million rooms globally, higher by 28% compared to the year-ago quarter and Travelocity accounted for 4% of that growth. The hotel bookings business is Expedia’s most important and accounts for nearly 70% of our valuation for the company. The effect on air ticket volume growth was even more pronounced. About 28% more air tickets were sold by Expedia, of which 18% were contributed by Travelocity. ^[1]

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. Priceline is now taking different routes to compete aggressively with Expedia in the 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, the leading meta-search engine in the U.S.

Revenue Per Room Night Declined At A Relatively Low Rate, But Could Fall More Aggressively Going Forward

Expedia’s revenue per room night fell by 4% in Q2. The decline was the result of the company’s efforts to increase its global hotel inventory via the Expedia Traveler Preference (ETP) program, and to generate higher sales volumes via loyalty programs and discounts. It is the slowest year-over-year decline that Expedia has witnessed in the previous five quarters, as room rents registered their largest increase in at least ten quarters. However, we note the possibility that revenue per room night could post steeper declines in the future. ^[2]

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. According to latest data available, over 59,000 hotels have signed up for the ETP program since its launch.

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’s (EXPE) CEO Dara Khosrowshahi on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, 2014 [↩] [↩]
2. Expedia, Inc. Quarterly Results, Expedia Earnings Release, Q2 2014 [↩] [↩]