Why Will Expedia’s Total Expenses See Single-Digit Growth In 2019?

Expedia‘s (NASDAQ: EXPE) total expenses have trended higher from $8 billion in 2016 to $10 billion in 2018. Operating expenses are the biggest driver of Expedia’s expenses, accounting for 83% of Revenue in 2015 and 84% of Revenues in 2018. We estimate that this increase in Operating Expenses as % of Revenue has impacted Expedia’s Operating Income by about $250 million. However, with Revenue expected to pick up in the near term driven by higher gross bookings from HomeAway and Egencia, Operating Expense as % of revenue is likely to decline to 82% in 2020, leading to improved operating profits.

In 2019, we expect Expedia’s total expenses to grow at a slower rate as compared to the last 2 years. This is because the company expects a bigger impact on the cost rationalization efforts at Trivago. We have created an interactive dashboard on Expedia’s Expenses: How Does Expedia Spend Its Money?, where we take a look at Expedia’s expenses and net margins. We also discuss how the company’s key expense components have trended and the key reasons for the change. Expedia’s total expenses have increased from $8.1 billion in 2016 to $10 billion in 2018. The company’s total expenses are projected to stand at $11 billion for 2019.

1. Cost of Sales :

Cost of Sales have increased from $1.6 billion in 2016 to $2 billion in 2018, driven by higher customer operations, data center, and cloud expenses. As Cost of Sales has grown at a slower rate than Revenues, the Gross Profit Margin has grown from 81.8% to 82.5% over the same period.

2. Operating Expenses Have Increased From $6.7 billion in 2016 to $8.5 billion in 2018, Driven By (A) $1.4 Billion Increase In S&M Expenses, (B) $380 Million Increase In T&C, and (C) $130 Million Increase in G&C Expenses

(A) SG&M expenses have increased from $4.4 billion in 2016 to $5.8 billion in 2018. As a % of Revenues, SG&A has increased from 49.8% in 2016 to 51.4% in 2018

In 2019, we expect the company’s selling and marketing expense to grow at a slower rate and add nearly $150 million to total operating expenses. The company expects a bigger impact on the cost rationalization efforts at Trivago in 2019.

(B) T&C Expenses increased from $1.2 billion in 2016 to about $1.6 billion in 2018, due to higher cloud costs. As a % of Revenue, T&C expenses have grown from 14.1% in 2016 to 14.4% in 2018

We expect T&C expense to add nearly $350 million to operating expenses in 2019. This is due to higher cloud cost as well as continued investments in product enhancements and platform initiatives across the company in 2019. Expedia expects cloud expenses to increase from $141 million in 2018 to around $250 million in 2019.

(C) G&A Expenses increased from $678 million in 2016 to about $808 million in 2018. As a % of Revenue, R&D expenses have declined from 7.7% in 2016 to 7.2% in 2018

3. Non-Operating Income :

Expedia’s Non-Operating Income Has Decreased From -$185 million in 2016 to -$230 million in 2018 driven by higher interest expenses relating to more long-term debt, partially offset by higher Interest and dividend income from its investments.

4. Tax Expense:

Expedia’s Income Tax Expense has declined from -$15 million in 2016 to about -$87 million in 2018, driven by U.S. Federal Income Tax Reforms, with Effective Tax rate declining from -6% to -18%.

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