Expedia Q2 2015 Earnings Preview: Domestic Growth Might Continue, While Negative Inorganic Impact Might Weigh On Revenues

July 29th, 2015 by Trefis Team
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Expedia (NASDAQ:EXPE) will release its Q2 2015 earnings on July 30th. After witnessing a healthy 2014 on the back of its Expedia Traveler Preference (ETP) model and strategic acquisitions, Expedia was off to a relatively rough start for 2015 due to the negative inorganic impact, due to the acquisitions, which did not show much positive impact, so far. After a host of acquisitions in 2014, the company continued its shopping spree well into 2015 .The only exception was Expedia’s sell-off of its majority stake in Chinese OTA, eLong, to Ctrip (NASDAQ:CTRP), the Chinese online travel leader.

Expedia’s revenues for 2014 grew by 21% year on year to reach $5.8 billion. In Q1 2015 Expedia 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 company expects positive returns from its acquisitions towards the second half of 2015.

We will update our $103 price estimate for Expedia post the Q2 2015 earnings.

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Expedia’s Shopping Spree Continued In The First Half Of 2015

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

In January 2015, Expedia acquired Travelocity. 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. [1] [2] 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. [3]

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] Expedia might own up to 75% of the U.S. online travel market post the Orbitz acquisition, according to the 2013 market shares provided by PhoCusWright. Online travel agencies (OTAs) together account for 16% of total gross travel bookings from the U.S. [5]

In March 2015, Expedia expanded its existing partnership (initiated in 2002) with Latin American Online Travel leader Decolar.com, Inc. This partnership offers Expedia better exposure to the Latin American travelers. [6] By 2016, Latin America is predicted to be one of the leaders in global online travel sales growth.

Expedia Sheds Off eLong And Strikes A Partnership With Ctrip

In May 2015, Expedia sold its 62% eLong Stake to Ctrip and other Chinese investors. Ctrip bought 40% of eLong’s shares. Prior to the acquisition, Ctrip’s main competitors in China included Qunar and eLong. [7] [8] Currently, Expedia and Ctrip have entered into a partnership to share inventory in certain geographies, mainly in the air and packaged tours segment. Priceline (NASDAQ:PCLN) will remain Ctrip’s primary non-China hotel partner. But Expedia and Ctrip are expected to share hotel inventories as well. [8] (Read details of the deal here.)

  • Reasons For The Divestiture:

eLong’s lackluster performance triggered Expedia’s decision. After failing to revive in 2014, in Q1 2015 eLong recorded a $33 million EBITDA loss. This in turn dampened Expedia’s EBITDA which grew by 25% excluding eLong, but declined by 5% after including eLong. [3]

Hence, not only did Expedia offload a loss-making company, but, in turn, gained partnership with China’s most powerful OTA giant player. With a 55.9% share in revenues (as of Q3 2014), Ctrip is the market leader in the Chinese online travel market. [9]

Expedia Witnessed Higher Growth In The Domestic U.S. Market And Lowered International Commissions 

In the first quarter, 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.

In Q1 2015, Expedia added 14,000 properties to its global inventory base, more than double the additions in Q4 2014. [3] 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.

Given the current economic scenario and existing competition, we believe that in Q2 2015, Expedia will continue seeing more growth from the U.S. travelers, and it will continue with its lower international commission strategy to gain a portion of the (currently) weak international market.

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Notes:
  1. Sabre and Expedia Announce Expedia’s Acquisition of Travelocity, Expedia Press Release, January 23, 2015 [↩]
  2. Expedia Acquires Travelocity for $280 million, Skift, January 23, 2015 [↩]
  3. Expedia (EXPE) CEO Dara Khosrowshahi on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 30, 2015 [↩] [↩] [↩]
  4. Expedia to buy Orbitz in cash deal worth $1.6 billion, tnooz, February 12, 2015 [↩]
  5. Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015 [↩]
  6. Expedia and Decolar.com Strengthen Partnership, Expedia Inc. Press Releases, March 10, 2015 [↩]
  7. Expedia sells stake in eLong to Ctrip and others for $671 million, tnooz, May 22, 2015 [↩]
  8. Expedia Reverses Course and Sells eLong Stake, Priceline Snubbed, Skift, May 22, 2015 [↩] [↩]
  9. China Online Travel GMV Grows to 70 Bn Yuan, iReasearch Views, November 2014 [↩]