Expedia Inc. (EXPE) shares jumped 4.5% in after-hours trading, as the company reported very strong second-quarter results, beating our estimates on both the top and bottom lines. The 60%+ year-over-year increase in adjusted earnings was the highest in the last few years.
Revenue
Revenue for the quarter was $1.49 billion, up 24.5% sequentially and 24.0% year over year, in line with normal seasonality. While growth rates across most brands were healthy, Expedia, Trivago and Hotels.com were strongest. Egencia and eLong, which remain in the investment mode, also contributed. The Hotwire brand remained weak however, impacted by the domestic car business (improving demand impacting opaque sales).
Revenue by Segment
Leisure customers remained the significantly larger contributors in the last quarter, generating around 93% of revenue. Corporate customers (Egencia) accounted for the balance. The two segments saw revenue grow 26.5% and 3.0%, respectively from the seasonally softer prior quarter and 25.4% and 8.4%, 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 and inventory). Expedia continued to benefit from the 2012 acquisition of VIA Travel (included in Egencia) and the March 2013 acquisition of trivago (included in Liesure). VIA’s operations are mostly in Northern Europe, which has done much better than the South in recent times.
Revenue by Channel
Around 65% of total revenue was generated through the merchant business (direct sales), another 27% came through the agency model (where Expedia operates as an agent of the supplier) and roughly 8% came from Advertising and Media. The three channels were up 20.7%, 26.3% and 24.3%, respectively from the Mar quarter of 2014. Growth from the year-ago quarter was 47.0%, 14.0% and 53.8%, respectively.
Revenue by Geography
Around 53% of Expedia’s quarterly revenue was generated domestically, with the remaining 47% coming from international sources. The domestic business grew 22.9% sequentially and 21.4% from a year ago. The international business was even stronger, growing 26.3% sequentially and up 27.2% from last year.
Revenue by Product Line
Hotel and Air, the two main product lines grew 23% and 22% respectively from the year-ago quarter. The increase in Hotel revenue came from a 28% increase in room nights supported by a 2% increase in the average daily rate (“ADR”).
Revenue per night dropped 4%, which for the first time is not attributable to lower-cost inventories in international markets, but the impact of inventory expansion, discounting and loyalty programs. In the last quarter, international room night growth of 31% was much higher than the domestic room night growth of 24%.
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 22% increase in ticket revenue was attributable to a 28% increase in ticket volumes and a 3% increase in airfares. Revenue per ticket growth fell 5%.
Bookings and Revenue Margin
Gross bookings were $13.05 billion in the last quarter, up 3.3% sequentially and 28.9% year over year. The revenue margin was 11.5%, up 195 bps sequentially and down 45 bps from a year ago. Strong leisure conversions in both the domestic and international businesses resulted in the sequential increase. The decline from the year-ago quarter was on account of relative weakness especially in the domestic merchant business.
Margins
The pro forma gross margin for the quarter was 79.9%, up 445 bps sequentially and 169 bps year over year. Higher costs for credit card processing (due to merchant bookings growth) was offset by the higher volumes, leading to a 26.7% year-over-year increase in gross profit dollars.
The operating expenses of $1.02 billion were up 14.5% sequentially and 23.4% from last year. The operating margin expanded 1,039 bps sequentially and 207 bps year over year to 12.0% as all except S&M expenses declined as a percentage of sales. S&M declined sequentially but increased from the year-ago quarter.
Adjusted EBITDA as reported by the company was $259.3 million, up 7.1% sequentially and 35.2% from the year-ago quarter.
Net Income
On a pro forma basis, Expedia generated a net profit of $121.1 million, or 8.1% net profit margin compared to $597K, or 0.0% in the previous quarter and $79.4 million or 6.6% 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 $89.5 million ($0.67 a share) compared to a loss of $14.3 million ($0.11 a share) in the previous quarter and income of $71.5 million ($0.51 a share) in the year-ago quarter.
Balance Sheet
Cash and short term investments totaled $2.37 billion at quarter-end, up $200.3 million during the quarter. As a result, the net cash position of $1.12 billion was up $200.3 million. Including long term liabilities, the debt-to-total-capital ratio was 56.0%, still at manageable levels. Days sales outstanding (DSOs) went from 49 to nearly 57. We note that around 40% of assets is goodwill (not a real asset).
In the last quarter, Expedia generated $493.5 million of cash from operations and spent $82.5 million on capex, $19.2 million on dividends and $217.2 million on share repurchases.
Our Take
Expedia reported a strong second quarter. The company continues to grow both in the U.S. and internationally, driven by the secular growth in the online travel booking industry. Expedia continues to add inventory especially in international markets and growth rates indicate that this is the way to go. At the same time, its leadership position in the domestic market has been cemented with higher inventory and strategic deals.
The growing inventory in international markets has affected ADRs for a while, but the last quarter saw positive ADR growth, which is very encouraging and indicative of relatively reduced reliance on lower-cost inventory to drive sales. Indeed, management stated that improving demand had a negative impact on opaque sales, which seems to indicate that consumers are now willing to spend more on travel.
This of course doesn’t mean that there will be an alleviation in competitive pressures from companies like Priceline.com (PCLN), MakeMyTrip Limited (MMYT), 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 #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment