Expedia Q1 2015 Earnings Preview: Strategic Alliances And eLong’s Performance In Focus

April 29th, 2015 by Trefis Team
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Expedia (NASDAQ:EXPE), is set to release its first quarter earnings on April 30th. Expedia witnessed a favorable 2014. Expedia’s revenues for 2014 grew by 21% year on year to reach $5.8 billion. The key factors propelling this growth were the healthy performance of the hotel room nights and air tickets segments. The ETP (Expedia Traveler Preference) model’s success, coupled with strategic acquisitions and alliances across the globe, led to a healthy performance in 2014. The ETP model, 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). ETP adoption has been successful with positive traction from both suppliers and customers.

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 72% year on year to $373 million.

Our $90 price estimate for Expedia is slightly below the current market price. We will be updating our estimate post the Q1 2015 earnings release.

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See Our Complete Analysis for Expedia Here

Expedia’s Acquisition Spree Continued In The First Quarter of 2015

The travel market is sized at $1.3 trillion currently, and Expedia commands almost 5% of the market. [1] 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 in 2015. (Read about Expedia’s major deals in 2014 here).

After an eventful 2014, a year in which Expedia acquired the Australian and New Zealand OTA leader, Wotif, the company started 2015 on an aggressive consolidation mode.

  • Travelocity

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. [2] [3]

  • Orbitz Worldwide

In February 2015, Expedia announced its intention to acquire Orbitz Worldwide, the Chicago-based online travel agency (OTA) responsible for brands like Orbitz.com and Cheaptickets.com.   Expedia expects the deal to close by the second half of 2015, once regulatory approvals are achieved. [4]

Orbitz currently has $12 million in gross bookings. Also, the Orbitz partner network and Orbucks loyalty programme would be beneficial for Expedia’s growth. Orbitz’s airfare search technology is one of the most advanced for combining fares across different airlines.These factors would propel an increased number of hotel partners and air ticket buyers on the Expedia platform and eventually lead to a bigger scale for its operation. [5]

Expedia might own up to 75% of the U.S. online travel market as a result of this acquisition, according to the 2013 market shares provided by PhoCusWright. However, online travel agencies (OTAs) together account for 16% of total gross travel bookings from the U.S. [6]

  • Decolar.com

In March 2015, Expedia expanded its existing partnership (initiated in 2002) with Latin American Online Travel leader Decolar.com, Inc., which operates the Portuguese Decolar.com and Spanish Despegar.com branded websites. Expedia made a $270 million minority equity investment and will have access to Decolar’s hotel supplies in Latin America. While this partnership offers Expedia better exposure to the Latin American travelers, Decolar also benefits by expanding its portfolio of international hotel supply through Expedia. [7]

Online travel sales are growing at a greater pace than total travel sales in Latin America. By 2016, Latin America is predicted to be one of the leaders in global online travel sales growth. Latin America is estimated to have witnessed approximately 25% increase in online travel sales in 2014. [8]

Expedia doesn’t seem to limit  its acquisitions and alliances to North America and Asia Pacific, and is now eyeing for  Latin American dominance, as well. Expedia’s acquisition of former partner Travelocity suggests that a future acquisition of Decolar might be on the cards. Whether the Middle East and African region is next on Expedia’s radar, is something we should wait and watch.

Expedia’s Persistent Problems In China Might Spill Over To Q1 2015 As Well

Expedia has a 65% stake in eLong, a leading travel service provider in China. Erstwhile, eLong had bolstered Expedia’s growth in the Chinese market, one of the most important business destinations for the company. Recently, eLong has been floundering in the face of aggressive competition in China. As a result, in Q4 2014, eLong incurred a $27 million loss in adjusted EBITDA. 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 but expects eLong’s losses to carry on till early 2015.

With almost $300 million in cash, eLong has sufficient capital and Expedia’s management believes that eLong has the potential to tide over the near term losses and generate meaningful growth for Expedia in the future. [9]

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In Q4 2014, eLong incurred a $27 million loss in adjusted EBITDA .
Notes:
  1. Expedia (EXPE) CEO Dara Khosrowshahi on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2015 [↩]
  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 to buy Orbitz in cash deal worth $1.6 billion, tnooz , February 12, 2015 [↩]
  5. You’re About to Lose Choices in How You Book Travel. What the Expedia/Orbitz deals Means For You, View From The Wing, February 12, 2015 [↩]
  6. Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015 [↩]
  7. Expedia and Decolar.com Strengthen Partnership, Expedia Inc. Press Releases, March 10, 2015 [↩]
  8. Latin American Overview, European Travel Commission Digital Portal, 2014 [↩]
  9. Expedia (EXPE) CEO Dara Khosrowshahi on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2015 [↩]