Expedia Inc. (EXPE) shares jumped over 13% in extended trading, as the company reported very strong fourth-quarter results, beating our estimates on both the top and bottom lines. The 52.2% year-over-year increase in adjusted earnings was the highest in five quarters.
In the past, Expedia shares have responded very enthusiastically to good results: for instance, the announcement of third-quarter results sent shares up 18.8%.
Revenue
Revenue for the quarter was $1.15 billion, down 17.8% sequentially and up 18.2% year over year, in line with normal seasonality. While growth rates across most brands were healthy, Expedia, Trivago and Hotels.com were strongest. The Expedia affiliate network, Egencia and eLong also contributed, while the Hotwire brand remained weak, impacted by the domestic car business (fleet constraints and attempts to drive up pricing).
Revenue by Segment
Leisure customers remained the significantly larger contributors in the last quarter, generating around 92% of revenue. Corporate customers (Egencia) accounted for the balance. The two segments saw revenue grow -19.8% and 12.9%, respectively from the seasonally stronger prior quarter and 18.7% and 12.9%, respectively from the year-ago quarter.
With TripAdvisor gone, Expedia is almost totally dependent on the Leisure segment (although it has been beefing up the Egencia segment with acquisitions). Expedia continued to benefit from the acquisitions of VIA Travel that closed in the second quarter of 2012 and trivago, which closed in the beginning of March 2013.
VIA’s operations are mostly in Northern Europe, which has done much better than the South in recent times. Trivago has grown 85% over the past year and currently has over 30% of its leads coming from mobile devices.
Revenue by Channel
Around 67% of total revenue was generated through the merchant business (direct sales), another 25% came through the agency model (where Expedia operates as an agent of the supplier) and roughly 7% came from Advertising and Media. The three channels were down 11.2%, 19.6% and 22.9%, respectively from the Sep quarter of 2013. Growth from the year-ago quarter was 38.2%, 6.0% and 154.5%, respectively.
Revenue by Geography
Around 51% of Expedia’s quarterly revenue was generated domestically, with the remaining 49% coming from international sources. The domestic business declined 18.7% sequentially and grew 14.1% from a year ago. The international business was down 16.9% sequentially and up 22.6% from last year. Trivago and eLong helped the international business grow in the last quarter.
Revenue by Product Line
Hotel and Air, the two main product lines grew 14% and 17% respectively from the year-ago quarter. The increase in Hotel revenue came from a 25% increase in room nights supported by a flat average daily rate (“ADR”). Revenue per night dropped 9%, which is attributable to lower-cost inventories in places like China. In the last quarter, international room night growth of 18% was more than double the domestic room night growth of 31%.
Mix was clearly negative, as the growth in Asia (much lower ADRs and revenue per room night) remains much stronger than other regions and this will likely remain a negative impact on hotel margins, while driving up volumes. The added scale of the lower-margin business is expected to more than make up for the negative mix impact going forward.
The increase in ticket revenue was attributable to a 13% increase in ticket volumes and a 1% increase in airfares. Revenue per ticket increased 3%.
Bookings and Revenue Margin
Gross bookings were $9.10 billion in the last quarter, down 12.8% sequentially and up 21.0% year over year. The revenue margin was 12.7%, down 77 bps sequentially and 30 bps from a year ago due to weaker leisure conversions. Corporate conversion was the lone bright spot in the sequential comparison, while agency conversion was the lone bright spot in the year-over-year comparison.
Margins
The pro forma gross margin for the quarter was 78.4%, down 186 bps sequentially and up 152 bps year over year. Higher costs for credit card processing (due to merchant bookings growth) was offset by the higher volumes, leading to a 20.5% year-over-year increase in gross profit dollars.
The operating expenses of $735.5 million were down 14.6% sequentially and up 17.4% from last year. The operating margin shrank 425 bps sequentially (entirely on account of the decline in revenue) while expanding 193 bps year over year (lower costs as well as higher revenue) to 14.6%. As a percentage of sales, selling cost declined sequentially and increased from last year. Other costs were up sequentially while remaining below year-ago levels.
Adjusted EBITDA as reported by the company was $242.0 million, down 29% sequentially and 31% from the year-ago quarter.
Net Income
On a pro forma basis, Expedia generated a net profit of $113.4 million, or 9.8% net profit margin compared to $177.2 million, or 12.6% in the previous quarter and $77.9 million or 8.0% net income margin in the same quarter last year.
Our pro forma estimate excludes intangibles amortization charges, legal reserves and other charges on a tax-adjusted basis but includes deferred stock compensation. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.
Including the above special items, as well as non-controlling interests, the GAAP earnings attributable to Expedia shareholders was $94.7 million ($0.70 a share) compared to $170.9 million ($1.22 a share) in the previous quarter and $6.7 million ($0.05 a share) in the year-ago quarter.
Balance Sheet
Cash and short term investments totaled $1.35 billion at quarter-end, down $465.9 million during the quarter. As a result, the net cash position of $97.1 million was down significantly from $563.0 million in net cash going into the quarter. Including long term liabilities, the debt to total capital ratio was 50.5%, still at manageable levels. Days sales outstanding (DSOs) went from 45 to nearly 49. We note that over 47% of assets is goodwill (not a real asset).
In the last quarter, Expedia used $212.2 million of cash in operations. It spent $73.2 million on capex, $19.7 million on dividends and $167.2 million on share repurchases.
Our Take
Expedia reported a strong fourth quarter to end a very successful year. The company continues to grow both in the U.S. and internationally, driven by the secular growth in the online travel booking industry. Additionally, TripAdvisor’s transition to the metasearch model appears successful. Expedia is expected to continue investment in international markets because of the higher growth potential in these markets.
However, growth in these markets comes at a cost. The Asia/Pacific region for instance is likely to remain one of the strongest drivers of the company’s business over the next few quarters, particularly since online penetration in many Asia/Pacific markets remains relatively low. The company has responded by steadily increasing its hotel inventory and entering into strategic relationships, such as the one with Air Asia. However, profitability here depends on very high volumes, since the region typically yields lower ADRs.
Of course, in every region, the company will continue to face challenges from players like Priceline.com (PCLN), Orbitz Worldwide (OWW), Travelocity and Ctrip.com International (CTRP), as well as a growing number of other local players that could make expansion more difficult.
Expedia shares carry a Zacks Rank #2 (Buy).
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