Expedia’s Fourth Quarter Review: Growth Slows Due To eLong’s Weakness, FX Headwinds, And Acquisition Related Spending

Expedia (NASDAQ:EXPE) released its fourth quarter earnings on February 5^th. Performing in line with the previous strong quarters of 2014, Expedia displayed a 18% year-on-year increase in revenues to $1.4 billion and a 24% year-on-year growth in gross bookings ($11.3 billion). The key factors propelling this growth were the healthy performance of the hotel room nights and air tickets segments. ^[1]

Hotel room nights grew by 28% and the recently acquired Travelocity and Wotif contributed around 5 percentage points to this growth. Air revenue growth of 18% was due to growth in air ticket volume (26%). Travelocity contributed by around 12 percentage points to the ticket volume growth. However, this was partially offset by a 6% decline in revenue per ticket, as a result of Expedia’s expenditures on airline renewal deals.

Expedia’s EBITDA grew at a slower rate, due to various factors including adverse FX trends, higher spedning and the poor performance of Expedia’s partner, eLong’s, in China. Expedia spent a substantial amount on improving the efficacy of its customer operations platform, and on deals and restructuring related activities. Consequently, EBITDA grew by 13% (as against a 20% growth in Q3 2014) without considering eLong. EBITDA growth was a dismal 3%, after including eLong. ^[2]

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 Q4 2014 earnings.

Expedia’s Segregated Business Segments

In its Q4 Earnings Call, Expedia announced that it has segmented its portfolio into four distinct businesses: the core OTA (online travel agency) group, eLong, Trivago, and Egencia. All the segments except eLong  displayed healthy growth in the fourth quarter.

The core OTA group comprises Expedia, Hotels.com, Travelocity, Wotif, Hotwire, Venere, and CarRentals.com. The core OTA business contributed $43 billion in gross bookings for 2014, reflecting a 30% year-on-year growth.

Expedia holds a majority stake in Trivago (a travel metasearch engine focusing on hotels) which generated $410 million in revenues, displaying a 68% year-on-year growth. Expedia is focusing on generating top line growth for the brand in the near term and Trivago’s bottom line growth is a long term objective. Expedia has been reinvesting profits from the Trivago’s core markets to fund Trivago’s global growth.

Expedia’s corporate travel arm, Egencia,  had gross bookings in excess of  $5 million and it is signing up new businesses at a rapid pace. Expedia plans on industry disruption by introducing new services and better technologies to its corporate customers.

Expedia’s China Challenges Persist With eLong’s Lackluster Performance

Expedia is concentrating on the Asian markets with a presence in India, Japan, Singapore, Thailand, Malaysia, Hong Kong and Korea. More important is a strong emphasis on the Chinese market. Expedia’s partnership with eLong (where Expedia has a 65% stake), a leading travel service provider in China, has helped it grow in this aspect. Recently, eLong has experienced set back in the face of the aggressively competitive Chinese market. In its Q3 2014 earnings call, Expedia’s management spoke about 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.

In the fourth quarter, eLong incurred a $27 million loss in adjusted EBITDA due to the persistence of aggressive competition in the Chinese online travel market. However, eLong has sufficient capital (with almost $300 million in cash) and Expedia’s management believes that eLong has the potential to tide over competition and generate meaningful growth for Expedia in the long run. ^[2]

Expedia’s Acquisitions Will Drive Long Term Growth Though Short Term Profitability Might Be Dampened

The travel market is valued at $1.3 trillion currently, and Expedia commands almost 5% of the market. ^[2] If we look into the past couple of years, the forerunners in the online travel space have been growing through acquisition. The rule in the OTA space seems to be: the bigger the scale and the more diversified the offerings, the higher  the chances are of generating profitability. Expedia’s management also believes that the consolidation in the online travel space will continue this year as well. Hence, we expect Expedia’s “shopping spree” to continue in full swing even in 2015. (Read about Expedia’s major deals in 2014 here).

The two big ticket acquisitions for Expedia in 2014 were Travelocity and Wotif. The company expects profitability from these acquisitions in the long run, and is ready to face a temporary set back on account of marketing and consolidation related expenses.

• Travelocity Acquisition: Expedia Plans On Rejuvenating The Travelocity Brand Name Through Advertisements

On January 23, Expedia 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. ^{[3] [4]}

Presently, Expedia will focus on advertising the Travelocity brand to reinvigorate the brand value. Travelocity was acquired from the financially weak Sabre Group (read about the details of the acquisition here) and Expedia’s management believes that the Travelocity brand needs aggressive marketing before the brand name gets widely recognized and Travelocity in turn starts delivering meaningful growth. ^[2]

• Wotif Acquisition: Integration Related Expenses And FX Headwinds Will Curb Meaningful Growth In 2015

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. ^[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]

According to Expedia’s management, Wotif might not generate profitability in 2015. Wotif was facing financial challenges when Expedia acquired it. Additionally, Expedia anticipates FX headwinds to affect Wotif’s business in 2015, along with the integration related expenses that Expedia has to incur. ^[2]

The international traffic from Wotif has been transferred to brand Expedia and the rest of Wotif’s business is in a transition state. Wotif’s integration with brand Expedia  is expected to complete by the first half of 2015.

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1. Expedia, Inc. Reports Fourth Quarter and Full Year 2014 Results, ExpediaInc, February 5, 2015 [↩]
2. Expedia (EXPE) CEO Dara Khosrowshahi on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2015 [↩] [↩] [↩] [↩] [↩]
3. Sabre and Expedia Announce Expedia’s Acquisition of Travelocity, Expedia Press Release, January 23, 2015 [↩]
4. Expedia Acquires Travelocity for $280 million, Skift, January 23, 2015 [↩]
5. Expedia, Inc. Completes Acquisition Of Wotif Group, Expedia, Nov 2014 [↩]
6. Deep dive into Asia Pacific online travel market, tnooz, Dec 2013 [↩]