Expedia Inc. EXPE shares gained 8.5% in extended trading yesterday, as the company’s second-quarter results showed particular strength in the core OTA business.
Investors also welcomed the sale of eLong, which was a low-margin business severely impacted by currency effects.
The other acquisitions (trivago, Wotif, Travelocity) continued to contribute to growth in the last quarter. The large number of acquisitions and investments over the past few years continue to strengthen Expedia’s market position in the U.S. while helping it expand rapidly in other growth markets.
Revenue
Revenue for the quarter was $1.66 billion, up 21.1% sequentially and 11.2% year over year and in line with the Zacks Consensus Estimate of $1.66 billion.
Revenue by Segment
Management changed the segment revenue presentation yet again to adjust the amounts attributable to eLong.
Core OTA segment revenue grew 25.0% sequentially and 15.4% year over year with brand Expedia and Hotels.com the major contributors. Wotif and the Air Asia JV (now 75% owned by Expedia added to the strength. Management also mentioned the addition of 27,000 properties from all over the world, which was more than the number added through all of 2014.
trivago grew 20.2% sequentially and 37.5% from last year (estimated year-over-year growth excluding FX impact was 67%). This remains a high-investment area for Expedia as it focuses on growing its U.S. footprint in the busy season for the travel sector.
Egencia managed to grow 3.1% on a sequential basis but stayed 1.9% below year-ago levels. Egencia is still largely focused on Europe, which is why currency usually has a significant impact on the business.
Management said that the outbound opportunity in China would be tapped using commercial agreements with Ctrip (CTRP) and eLong (LONG). This is also positive for Expedia because these would be dollar-denominated sales.
Core OTA, trivago and Egencia contributed 86%, 8% and 6% of gross revenue, respectively.
Revenue by Channel
Around 64% 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 9% came from Advertising and Media. The three channels were up 20.9%, 20.9% and 17.2%, respectively from the Mar quarter of 2015. Growth from the year-ago quarter was 13.9%, 8.7% and 16.3%, respectively.
Revenue by Geography
Around 55% of Expedia’s quarterly revenue was generated domestically, with the remaining 45% coming from international sources. The domestic business grew 18.5% sequentially and 15.3% from a year ago. The international business grew 30.2% sequentially and 13.9% from last year.
Revenue by Product Line
Hotel and Air, the two main product lines grew 14% each from the year-ago quarter. The increase in Hotel revenue came from a 35% increase in room nights, 7 point of which was contributed by Wotif and Air Asia. But this was offset by a 6% decline in the average daily rate (“ADR”). The ADR was negatively impacted by the higher mix of International revenue and currency, which offset the positive impact of the improving travel market. Revenue per night dropped 16%, nearly half of which was the negative currency impact, with the rest attributable to discounts, promotions and FX. In the last quarter, international room night growth of 50% trumped the domestic room night growth of 24%.
The 14% increase in ticket revenue was attributable to an 26% increase in ticket volumes, offset by a 12% decline in airfares. Revenue per ticket fell 10%.
Bookings and Revenue Margin
Gross bookings were $15.06 billion in the last quarter, flattish sequentially and up 15.5% year over year. The revenue margin was 11.0%, up 160 bps sequentially and down 55 bps from a year ago. Conversions were higher sequentially across all product lines and geographies. Conversions in international and through the merchant channel were notably weaker.
Margins
The pro forma gross margin for the quarter was 80.7%, down 413 bps sequentially and up 79 bps year over year. eLong-related expenses included in the gross margin were $11.3 million. The year-over-year expansion in gross margin was helped by higher volumes despite the higher costs related to transactions, data centers and acquisitions. This led to a 12.3% year-over-year increase in gross profit dollars.
The operating expenses of $1.21 billion were up 13.3% sequentially and 19.5% from last year. But this included $25.76 million related to the eLong business. The operating margin expanded 907 bps sequentially but shrank 427 bps year over year to 7.7%, with all expenses dropping sequentially as a percentage of sales and only selling and marketing costs up from last year.
Adjusted EBITDA as reported by the company was $101.8 million, up 176.3% sequentially and 11.8% from the year-ago quarter. Stronger Core OTA and Egencia businesses drove the results.
Net Income
On a pro forma basis, Expedia generated a net income of $42.8 million, or 2.6% net loss margin compared to loss of $28.4 million, or 2.1% in the previous quarter and income of $121.5 million or 8.1% net income margin in the same quarter last year.
Our pro forma estimate excludes intangibles amortization charges, restructuring charges, legal reserves, other charges and a gain on sale of business 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 $449.6 million ($3.38 a share) in the last quarter compared to earnings of $44.1 million ($0.34 a share) in the previous quarter and income of $89.5 million ($0.67 a share) in the year-ago quarter.
Balance Sheet
Cash and short term investments totaled $3.38 billion at quarter-end, up $1.35 billion during the quarter. The net cash balance was $910.6 million, up from $283.4 million going into the quarter. Including long term liabilities, the debt to total capital ratio was 63.6% (on the high side). Days sales outstanding (DSOs) went from 65 to 61. We note that around 34% of assets is goodwill (not a real asset).
In the last quarter, Expedia generated $611.0 million of cash from operations and spent $366.1 million on capex and $$23.1 million on dividends. Share repurchases were minimal. Cash proceeds from the eLong sale were $527.2 million.
Recommendation
Expedia’s second quarter results are indicative of the broad strength in the travel market that is typical of this time of the year. As a result, both the core OTA business and trivago saw notable strength. The company continues to add inventory strategically and price aggressively. None of this is too bad as long as it continues to grow profit dollars because it’s the only way to take share from a largely fragmented and highly competitive market.
We also view positively its decision to exit from the eLong business and focus instead on the outbound travel market in China, since this way, it will be insulated from foreign exchange fluctuations. Expedia is extremely well positioned with extensive assets in North America, so this sort of deal should work out very well for the company. It also won’t have to deal with the cut-throat competition from local players in mainland China.
Expedia shares currently have a Zacks Rank #1 (Strong Buy). Other stocks worth considering include Amazon .com AMZN, which shares the same rank; Groupon GRPN and Petmed Express PETS, both of which have a Zacks Rank #2 (Buy).
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