Expedia Q3 Earnings Preview: Successful Partnerships To Fuel Growth In The Quarter

Expedia (NASDAQ:EXPE), the world’s largest online travel services provider (in terms of bookings volume), is set to release its Q3 2014 earnings on Oct 30th. Expedia performed strongly in the first half of 2014, with revenues of $2,695 million reflecting a 22% year-on-year growth. It demonstrated broad-based growth across almost all divisions and brands, with the exception of Hotwire, its discount travel website. Hotwire faced a setback in Q2, due to competition from Priceline’s (NASDAQ:PCLN) competing product, Express Deals, and also due to lower demand for opaque bookings. Expedia’s partnership with Travelocity helped in generating growth by creating an additional distribution channel in the U.S. The company’s performance received a further boost from its disciplined management of cost of revenue, technology, content, and general administrative expenses. This in turn fueled investments into sales and marketing, and resulted in healthy growth of adjusted EBITDA by 23% to $366 million and net income to $75 million with a year-on-year growth rate of above 300%.

Our $85.04 price estimate for Expedia is at slightly above the current market price. We will update our estimate after the Q3 2014 earnings release.

See Our Complete Analysis for Expedia Here

Expanding Offerings And  Market Presence To Create A Niche Against Competition

Expedia recently announced the continuance of its partnership with HomeAway, the world’s largest vacation rental website. HomeAway services account for approximately 15% of the U.S. and European vacation rental bookings market ^[1]. In October2013, the two companies launched a pilot program with the addition of around 10,000 vacation rentals to the U.S. version of Expedia.com. Expedia would now be able to list 115,000 HomeAway vacation rental properties on its U.S. website.

Vacation rentals are residential properties which owners and managers rent out to travelers for few nights, weeks, or months. The US market for such rentals was estimated to be around $23 billion in 2012 ^[2]. The share of online travel in the vacation rental segment doubled from 12% in 2007 to 24% in 2012, and this is expected to increase to 30% by 2014. The partnership is symbiotic in nature with HomeAway getting an exposure to Expedia’s 13.4 million monthly visitors and with Expedia offering its user greater convenience of combining home rentals with flights, cars and other travel bookings offered through the website.

Expedia is also in talks to take over its major rival in New Zealand and Australia, wotif.com, home to the Wotif, Lastminute.com.au and Latestays brands. The deal is expected to close by the end of 2014. The company claims to serve a customer base of 3.5 million (as of December 2013), and its acquisition will further strengthen Expedia’s position in the APAC region ^[3].

Partnership With Travelocity Continues To Boost Growth

In 2013, Expedia and its rival, Travelocity signed an agreement wherein Expedia contributes to the content, inventory, customer service and technology for Travelocity’s U.S. and Canadian websites, while the latter concentrates on the marketing aspect of the brand and in return, receives a performance-based marketing fee. (To know further details of the deal, read our article: Expedia Is Better Positioned For Growth After The Travelocity Deal) The Canadian website was launched in Q1 2014. As a consequence of the partnership, there was a 3% room nights growth and 18% growth in ticket volume in the U.S. ^[4]. In Q2 2014, Expedia’s worldwide room sales were close to 46 million, yielding a 28% year-on-year growth and Travelocity contributed to 4% of that growth. The hotel booking division accounts for nearly 70% of our valuation of Expedia. In the air tickets segment too, there was a 28% growth in Q2, with Travelocity’s contribution being 18% ^[5].

Expedia’s partnership with Travelocity is expected to offer stiff competition to Priceline, which in 2010 overthrew Expedia from its top position in the online travel agency by sales. Priceline’s accelerated international expansion, backed by its acquisitions aided it in the process.  Currently Priceline is proving to be a formidable competitor for Expedia on the domestic front, with its offline advertising campaign (Booking.yeah) for Booking.com , its partnership with NYC and Co. to aid bookings on New York City’s official tourism website, and its acquisition of Kayak, a leading US meta-search engine with 50% share of the US market.

Declining Revenue Per Room Due To Increased Penetration Of Expedia Traveler Preference (ETP) Program

The ETP program, introduced in the latter half of 2012, offers customers the choice between upfront payments for bookings (merchant model) and paying post the stay (agency model). The agency model gained popularity as more travelers preferred paying after their stay. As a consequence, over 59,000 hotels have signed up for the ETP program since its launch. Revenue margins are lower under the agency model, as Expedia acts as a travel agent and earns a small commission based on the bookings. The merchant model which was the predominant paying mode prior to ETP, offered higher revenue margins as the transaction was completed in Expedia’s website itself. Due to this shift in the transaction pattern, the revenue margins have been adversely affected. This, coupled by the largest hike in room rents (over the last ten quarters),  resulted in a 4% decline in Expedia’s revenue per room night in Q2 2014.

We believe the ETP program adoption would be rapid amongst customers, as the programs gets rolled out globally, resulting in an increased revenue contribution from the agency model. The program will compensate for the lower margins by boosting the room nights sale. Additionally, the agency model puts Expedia at a better position to compete against Priceline in terms of flexibility. In 2013, the agency model accounted for 83% of Priceline’s sales as it was used by its subsidiary Booking.com. Expedia’s agency model registered a 38% sales growth in H1 2014, as against the merchant model sales growth of 18% ^[6].

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1. HomeAway Vacation Rentals Get Broader Exposure With Expedia Launch, Skift, September 18, 2014 [↩]
2. The Rise of U.S. Online Vacation Rentals, PhoCusWright, October 2013 [↩]
3. Expedia to acquire Wotif Group for $658 million, tnooz, July 2014 [↩]
4. Expedia Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 [↩]
5. Expedia’s (EXPE) CEO Dara Khosrowshahi on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 2014 [↩]
6. Why the competition between Expedia and Priceline continues to burn brightly, tnooz, October 2014 [↩]