Expedia Experienced An Organic Growth Driven Healthy First Quarter

Expedia (NASDAQ:EXPE) released its first quarter earnings on April 30th. The company displayed a 14% year-on-year increase in revenues to $1.4 billion and 19% year-on-year growth in gross bookings ($15 billion). The key factors propelling this growth were the healthy performance of hotel room nights and Expedia’s organic growth. ^[1] The inorganic impact was negative for the first quarter. The company expects positive returns from its acquisitions towards the second half of 2015.

Expedia’s EBITDA grew at a slower rate due to various factors, including adverse FX trends, expenditure on acquisition and restructuring activities, and poor performance from Expedia’s partner, eLong, in China. EBITDA grew by 25% excluding eLong, but declined by 5% including eLong. ^[2]

In its Q4 Earnings Call, Expedia announced that it had segmented its portfolio into four distinct businesses: the core OTA (online travel agency) group, eLong, Trivago, and Egencia. The core OTA group comprises Expedia, Hotels.com, Travelocity, Wotif, Hotwire, Venere, and CarRentals.com. The company had entered into a definitive agreement to acquire Orbitz Worldwide.

Our $89.80 price estimate for Expedia is slightly below the current market price. We are in the process of updating our model for the Q1 2015 earnings.

Performance Of Some Of Expedia’s Major Brands

Wotif Didn’t Generate Bottom Line Growth Due To FX Headwinds

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 in Australia, China, Indonesia, Malaysia, New Zealand, Singapore, Thailand, the UK and Vietnam. ^[3]

In line with the management’s expectation in the fourth quarter of 2014, Wotif hadn’t been a growth contributor in Q1 2015. Negative FX trends and the elimination of some consumer booking fees hindered Wotif ‘s ability to add meaningful growth to the bottom line. However, Expedia witnessed positive conversion trends among Australian hoteliers and travelers. Wotif is expected to turn more profitable towards the end of 2015. ^[2]

Travelocity Expected To Dampen Near-Term EBITDA Due To Expedia’ Investments On The Brand

On January 23rd, 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.

Travelocity is generating double-digit transaction growth on a year-over-year basis and management is happy with this brand’s progress. The Travelocity brand will further help Expedia in acquiring the former’s loyal customer base that approximately amounts to 20 million. ^{[4] [5]}

Currently, Travelocity is in a migration stage into Brand Expedia’s website. Expedia would ramp up the selling and marketing investments on Travelocity to generate growth momentum for the brand. This might dampen EBITDA from Travelocity for the short term. ^[2]

Trivago Driving Advertising Revenues And Bringing In Hotel Inventories Into Expedia’s Core OTA Platform

Expedia’s advertising revenues stood at around $500 million on a trailing 12-month basis, reflecting a 35% increase year-over-year. This growth was primarily driven by Trivago and Expedia Media Solutions. Expedia holds a majority stake in Trivago (a travel meta search engine focusing on hotels). Expedia has been reinvesting profits from the Trivago’s core markets to fund Trivago’s global growth. Trivago is gaining strength in the U.S., its largest market in terms of revenues. For the quarter, advertising and media revenue grew 23% net of intercompany amounts.

The factors that drove Trivago’s sales were its healthy performance in the core European markets as well as in the U.S. Trivago helps drive hotel properties to Expedia’s core brands and so its growth gives an indirect boost to room night growth. ^[2]

Investments on eLong Gradually Paying Off

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 a great long-term potential but expects eLong’s losses to carry on till early 2015.

On the basis of the investments in the last few quarters, eLong witnessed year-on-year growth in room-nights. Investments in the mobile segment bore positive results with mobile booking growing by triple digits and accounting for 65% of eLong brand room nights booking for the first quarter. ^[2]

Trends That Governed Expedia’s First Quarter Performance

American markets recovering And A Shift Towards Lower Priced Hotels

Expedia witnessed higher growth in the U.S. markets than on an international basis. Americans took advantage of the strong U.S. dollar to increase spending on international as well as domestic travels. Europeans and Asian travelers contributed to growth in domestic travel. The company witnessed a shift towards more local and low star hotels growth, with a shorter duration of stay. ^[2]

Factors driving room night growth

In Q1 2015, Expedia added 14,000 properties to its global inventory base, more than double the additions in Q4 2014.The loyalty program for Hotels.com was a primary growth driver for room night volumes. Though the loyalty program dampened margins, it helped the company gain more customers and hotel partners, especially at the international level. The loyalty program aided Expedia in being competitive in local markets and in tying up with local hotel partners. Expedia is lowering commissions to attract local hoteliers in Europe and Asia. The partners in turn join to gain access to Expedia’s huge international client base. Hence, Expedia is gaining a newer customer base, which would help grow its repeat customer base, eventually. ^[2]

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

1. Expedia, Inc. Reports First Quarter 2015 Results, ExpediaInc, April 30, 2015 [↩]
2. Expedia (EXPE) CEO Dara Khosrowshahi on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 30, 2015 [↩] [↩] [↩] [↩] [↩] [↩] [↩]
3. Expedia, Inc. Completes Acquisition Of Wotif Group, Expedia, Nov 2014 [↩]
4. Sabre and Expedia Announce Expedia’s Acquisition of Travelocity, Expedia Press Release, January 23, 2015 [↩]
5. Expedia Acquires Travelocity for $280 million, Skift, January 23, 2015 [↩]