Expedia Earnings Preview: ETP Adoption, Big Ticket Acquisitions, And Focus On Growing Economies Can Further Rev Up Revenues

Expedia (NASDAQ:EXPE), the world’s second largest online travel services provider (in terms of gross booking volume of $39.2 billion), is set to release its fourth and final quarter earnings on February 5th. Expedia witnessed a favorable 2014, so far. The company displayed a 22% year-on-year increase in revenues for the first nine months of 2014, to $4.4 billion. The key factors propelling this growth were the healthy performance of the hotel room nights and air tickets segments. The top line growth, combined with the disciplined investments in selling and marketing, led to a solid bottom line. Expedia’s net income for the first nine months of 2014 grew by 141% year-on-year to $332 million.

Our $84 price estimate for Expedia is slightly below the current market price.

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ETP Model Might Boost Revenue For Q4 2014

The ETP (Expedia Traveler Preference) 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. 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% ^[1].

Expedia’s Partnerships And Big Ticket Acquisitions Might Further Propel Growth In The Fourth Quarter

• Travelocity Acquisition: Ensuring North American Dominance

On January 23, Expedia (NASDAQ: EXPE) acquired Travelocity for $280 million, from its parent company Sabre Corp. The acquisition is a progression from the 2013 strategic agreement between Expedia and Travelocity, wherein Expedia provided content, inventory, customer service and technology to Travelocity’s U.S. and Canadian websites, while Travelocity focused on brand marketing and received a performance-based marketing fee. The acquisition pertains to Travelocity’s websites in the U.S. and Canada. Expedia intends to retain the Travelocity brand, alongside Expedia’s signature brands such as Hotels.com, Hotwire, Venere, and so on. The Travelocity brand name will further help Expedia in acquiring the former’s loyal customer base that approximately amounts to 20 million. ^{[2] [3]}

Expedia aims to compete against Priceline (NASDAQ: PCLN) with its Travelocity acquisition. Priceline’s accelerated international expansion, backed by its acquisitions, aided it in the process of overtaking Expedia as the largest player in the online travel agency by sales. Currently,  Priceline is posing threats 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.

• Wotif Acquisition: Market Leadership In Australia And New Zealand

In November 2014, Expedia completed its acquisition of Australia-based Wotif Group. Wotif’s portfolio focuses on hotel and air, offering consumers more than 29,000 bookable properties across the globe. The group currently operates from Australia, China, Indonesia, Malaysia, New Zealand, Singapore, Thailand, UK and Vietnam. ^[4]

Wotif was Expedia’s major rival in Australia and New Zealand. With 1.3 million hotel reviews on its platform, Wotif had a market leadership in hotel reviews in the Australia New Zealand (ANZ) market. ^[5]

According to a report by PhoCusWright, the Asia Pacific (APAC) market overtook Europe to become the global leader in regional travel in 2012. The Australia-New Zealand market accounted for 17% of APAC’s online travel market and earned $13.7 billion in online gross bookings. For 2015, the market size is estimated to be around $126.6 billion. ^[6]

Hence, both now and in the future, Asia Pacific will be a strategically important sector for online travel companies. The ANZ market is the third largest market in the APAC region, and Wotif is a prominent player in the ANZ market. Hence, we expect the acquisition to propel Expedia’s growth in the ANZ market and this in turn would be a contributing factor in establishing Expedia’s dominance in the APAC market.

• Auto Escape Acquisition: Car Rental Service Segment Will Complement Existing Offerings

Expedia acquired French car rental company, Auto Escape, in June 2014. The acquisition increased its exposure to the $36.9 billion global car rental industry, which is expected to grow at a compounded rate of 13.6% to reach $79.5 billion by 2019, according to Transparency Market Research. ^[7]

Auto Escape offers car rental services from over 300 car rental suppliers in 125 countries, and has a fleet of over 800,000 vehicles. It is estimated that Auto Escape’s revenues increased fivefold in the last five years to €120 million ($160 million). ^[8] Although the contribution of car rentals and cruises to the valuation of Expedia is in low single-digits, we believe that the Auto Escape acquisition will help it sell more vacation packages and destination services since car rental is an integral part of such offerings.

• Extended Partnership With HomeAway: Expedia Expands Portfolio With Vacation Rentals

In September 2014, Expedia declared that it will continue its partnership (initiated in October 2013) 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 ^[9]. 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 ^[10].

Expedia’s Asia Focus

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 a 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 until early 2015. The investments will be mostly into technology, due to rapid mobile penetration, increased supply, 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. ^[11].

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1. Why the competition between Expedia and Priceline continues to burn brightly, tnooz, October 2014 [↩]
2. Sabre and Expedia Announce Expedia’s Acquisition of Travelocity, Expedia Press Release, January 23, 2015 [↩]
3. Expedia Acquires Travelocity for $280 million, Skift, January 23, 2015 [↩]
4. Expedia, Inc. Completes Acquisition Of Wotif Group, Expedia, Nov 2014 [↩]
5. Expedia to acquire Wotif Group for $658 million, tnooz, July 2014 [↩]
6. Deep dive into Asia Pacific online travel market, tnooz, Dec 2013 [↩]
7. Global Car Rental Market is Expected to Reach USD 79.46 billion in 2019: Transparency Market Research, PR Newswire, June 2014 [↩]
8. Expedia prend le volant chez Auto Escape, Les Echos, June 2014 [↩]
9. HomeAway Vacation Rentals Get Broader Exposure With Expedia Launch, Skift, September 18, 2014 [↩]
10. Expedia’s (EXPE) CEO Dara Khosrowshahi on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [↩]
11. Expedia Eyes Triple Digit Growth In Malaysia Again, malaysiandigest.com, October, 2014 [↩]