Expedia’s Growth In Q3’14 Fueled By New Partnerships, Expanding Global Footprint & Advanced Platforms

Expedia (NASDAQ:EXPE), the world’s largest online travel services provider (in terms of bookings volume), released its third quarter earnings on October 30th. Performing in line with the previous strong quarters of 2014, Expedia displayed a 22% year-on-year increase in revenues ($1.7 billion) and a 29% year-on-year growth in gross bookings (13.5 billion). The key factors propelling this growth were the healthy performance of the hotel room nights and air tickets segments. Brand Expedia and Hotels.com led to a 24% growth in both domestic and international room nights booking. This was complemented by the Travelocity marketing agreement. The top line growth, combined with the vigorous investments in selling and marketing, led to a solid bottom line. EBITDA increased by 20% to $409 million and adjusted EPS grew by 35% to $1.93 ^[1].

Our $85.04 price estimate for Expedia is slightly above the current market price. We are in the process of updating our model for the Q3 2014 earnings.

See Our Complete Analysis for Expedia Here

Expedia’s Successful Brands And Partnerships Fuel Growth

Expedia’s brands continue performing strongly. Brand Expedia and Hotels.com are aggressively churning business on the room nights booking front, at the domestic and international level. Expedia signed an agreement with its rival, Travelocity in 2013, 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). In Q3 2014, Travelocity added 4 percentage points growth to global room nights and 18 percentage points to total air ticket volume growth. The marketing team at Travelocity are leveraging on the expanded supply channels due to the partnership, and trying to steer further growth for Expedia.

Expedia aims to compete against Priceline (NASDAQ: PCLN) with its partnership with Travelocity. Priceline’s accelerated international expansion, backed by its acquisitions aided, it in the process of overthrowing Expedia from its top position in the online travel agency by sales. Currently,  Priceline is posing threats in 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.

In September 2014, Expedia declared that it will continue 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 ^[2]. Expedia would now be able to list 115,000 HomeAway vacation rental properties on its U.S. website. 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. However,  management does admit to some risk of cannibalization due to the cross selling. The net effect will be evident in the next few quarters ^[3].

Global Expansions To Reign The Worldwide OTA Market

Expedia is concentrating on the Asian markets with presence in India, Japan, Singapore, Thailand, Malaysia, Hong Kong and Korea, with a strong emphasis on the Chinese market. Expedia’s partnership with eLong, a leading travel service provider in China, has helped it grow in this aspect. Recently, eLong has experienced set back in the face of aggressively competitive Chinese market. There has been a deceleration in the international room night booking growth which was primarily due to China. Expedia plans to gear up for investments in China as it sees great long term potential there, but expects eLong’s losses to carry on till early 2015. The investments will be mostly into technology, due to the rapid mobile penetration, supply front, and marketing.

Like the previous couple of years, Expedia expects its business in Malaysia to continue generating triple-digit growth in the near future. Expedia has a partnership with AirAsia BhD in Malaysia. AirAsia claimed that the joint venture, registered a maiden annual profit in 2013, with 46% growth in transactions to 1.9 million. This resulted in above 30% increase in revenue. ^[4].

Expedia is trying to dominate the markets in New Zealand and Australia as well by taking over its major rival, wotif.com in the region. The deal should close by the end of 2014. Wotif.com, home to the Wotif, Lastminute.com.au and Latestays brands, claimed to service a 3.5 million strong customer base (as of December 2013) ^[5].

Rapid Adoption Of ETP Erodes Priceline’s Competitive Advantage Over The Agency Model

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.

ETP adoption has been successful with positive traction from both suppliers and customers. Recently Choice Hotels were signed up on the ETP platform. Most major hotel chains are part of the ETP platform currently. We believe that this trend of rapid ETP adoption to continue in the future as the program gets rolled out globally, resulting in an increased revenue contribution from the agency model. 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. Expedia, Inc. Reports Third Quarter 2014 Results, October 2014 [↩]
2. HomeAway Vacation Rentals Get Broader Exposure With Expedia Launch, Skift, September 18, 2014 [↩]
3. Expedia’s (EXPE) CEO Dara Khosrowshahi on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [↩]
4. Expedia Eyes Triple Digit Growth In Malaysia Again, malaysiandigest.com, October, 2014 [↩]
5. Expedia to acquire Wotif Group for $658 million, tnooz, July 2014 [↩]
6. Why the competition between Expedia and Priceline continues to burn brightly, tnooz, October 2014 [↩]