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  • jeff44293 jeff44293 Aug 15, 2003 12:42 AM Flag

    Expedia & Hotels.com Strong in Hawaii

    http://www.hawaiibusiness.cc/hb62003/default.cfm?articleid=8

    ****
    Castle Resorts & Hotels� Senior Vice President Alan Mattson says his properties are participating with the main online travel sites, too. �There�s Expedia and then there�s everybody else in terms of volume and ease of use,� he says.

    Castle Resorts was the first regional hotel company in the country to launch a private-labeled vacation package in partnership with Expedia. He says online electronic marketing represents about 22 percent of Castle�s total business, a huge jump from 3 percent a year ago.
    *****

    By the way, other hotels which have turned to Expedia's private label vacation package product for their air/car/hotel offerings online include:

    hyattvacations.com
    sheraton.com
    starwoodvacations.com
    wyndhamvacations.com
    whotels.com
    westin.com
    caribbean tourism board -- gocaribbean.com

    Airlines using Expedia's WWTE platform to sell hotels on their own website include:

    delta
    united
    american
    alaska
    hawaiian
    british air
    air france
    airtran
    westjet (canada's #2 airline)
    jetblue
    ...and more

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    • Do the math however you like, but $0.05 in earnings this quarter is 55% of IACI's earnings.

      Add in Hotels.com's profits and it's probably up in the 70% range.

      It also represents the vast majority of that $1.2 billion plus in annual cashflow they will likely do this year.

      I'm just trying to explain why your thesis that margins will be driven down isn't necessarily the case. They don't need every single hotel to participate to win.

      They simply feature prominently those hotels that give them the best cost of goods sold, and there are more than enough competing hotels in any given market for that to maintain itself very well.

      What I would worry about long-term would only be a major (and I mean MAJOR) consolidation of the hotel industry itself. I.e., Marriott buys Hilton and Starwood and Hyatt and Choice Hotels. That might turn the balance of power around.

      Until then, it's Wal-Mart versus consumer goods companies. Colgate-Palmolive might WANT to sell toothpaste to Wal-mart at a higher price, but the presence of P&G keeps them competing.

      Note that even the "major" hotel brands generally don't control more than 5% of the market, and even then, many of them are just franchise companies that license out the brand and DON'T own the underlying hotel.

    • <<Expedia's volume completely FILLS, from completely-empty to completely-full, over 100 large-sized hotels every single night. Let me say that again: Expedia can pack 100 hotels every single night... and consumers and business travelers are relatively indifferent between hotel brands. Expedia did over 3 MILLION room nights last quarter alone. That is a lot of volume.>>

      Sounds great, but we both acknowledge that it amounted to no more than $0.05 this quarter.
      We're in the stock market, not the hotel business.

    • >> You are correct when you indicated that EXPE would have produced almost $0.05 in earnings this quarter on IACI's balance sheet.

      Thanks for acknowledging your error -- you were more than 200% off -- but note that I didn't say that it effects the balance sheet. That's because earnings pertain to the income statement, i.e., the P&L, not the balance sheet. :-)

      >> Travelocity was No. 1 not long ago. All will continue to have their margins cut.

      Expedia overtook them about a year and a half ago and hasn't looked back. Contrary to your thesis, (a) EXPE's lead is widening, not narrowing, (b) EXPE's profitability is much stronger than that of rivals, (c) EXPE's gross operating profit has INCREASED dramatically over the past three years in both real and percentage terms, especially compared with competition. We sure haven't seen evidence yet that EXPE's margins are eroding, despite the fact that you believe it *will* happen, it hasn't yet -- at least as of a month ago. It's also quite likely that even if margins decline a bit, that volume growth will easily swamp it.

      Remember -- Expedia doesn't NEED every single hotel, or every single airline for that matter -- to give it rock-bottom cost of goods sold. It probably only needs 20 or so hotels for any given market for consumers to have a good selection. And the reality of the hotel business is that it is far too fragmented and locally-run right now.

      Expedia's volume completely FILLS, from completely-empty to completely-full, over 100 large-sized hotels every single night. Let me say that again: Expedia can pack 100 hotels every single night... and consumers and business travelers are relatively indifferent between hotel brands. Expedia did over 3 MILLION room nights last quarter alone. That is a lot of volume.

      Now, you are an owner/manager of a hotel in Hawaii, let's say. You see that hotels listed with Expedia Inc. drive a lot of volume. You see that they are sold on sites like hawaiianair.com and united.com and aa.com and via Classic Vacations and also -- as of two days ago -- via telephone travel agents. You see companies like Castle Resorts improve their own revenue by offering WWTE on their own site.

      Your own hotel occupancy has been floundering in the 60-70% range for some time. Do you list with Expedia? Do you give them good rates (i.e., cost of goods sold) to get featured near the top? Do you want to be one of the top 10 choices, if Expedia completely fills 100 hotels every night?

      Probably.

      Multiply that scenario by every single market in the world, by 365 days a year, and that's the potential that some of us longs have been talking about, and which the numbers suggest is definitely emerging.

    • <(The professor) makes the point that over the LONG run, GAAP earnings and cashflow MUST match.>

      Someone once criticized one of John Maynard Keynes theories as not applicable over the long run. In the long run, said Keynes, we're all dead.
      By the same token, the stock market doesn't look ahead more than one year. Go ahead and hype cash flow if that is what you have to offer against negatives such as minimal present and forward earnings, big writeoffs, incl. billions in gooodwill coming soon, and a highly unstable market for your products.
      EXPE, which produces 70% of IACI's earnings, is the most unstable of all. Travelocity was No. 1 not long ago. All will continue to have their margins cut.
      You are correct when you indicated that EXPE would have produced almost $0.05 in earnings this quarter on IACI's balance sheet. But that is nothing to brag about.
      This porker is expected to produce $0.75 this year BEFORE interest, taxes and amortization. The bottom line is much less. Forward P/E nears 100 on GAAP net earnings.
      This current auction by Vivendi that affects IACI adds more uncertainty. It is not going well. Announcements today by Orbitz and US Air are also unpleasant as to EXPE.
      The euphoria that lifted all internet stocks today could be a blowoff top. Disregard me as a loser and gloomer at your peril. The name of the game soon will be reversion to the mean. Tick tock, tick tock. You have between one day and one month to cash in your winnings. Congratulations, but don't be greedy.

    • the only problem PRC has very tiny footprint ouside the U.S.

    • On Wall Street Week this weekend, there was a professor on from the University of Michigan who did a study whose results indicate that companies where cash earnings dramatically exceed GAAP earnings outperform the market over time.


      as long as they're not run by Harvard grads......:)

      http://moneycentral.msn.com/content/p57151.asp

    • I wrote:

      >> On Wall Street Week this weekend, there was a professor on from the University of Michigan who did a study whose results indicate that companies where cash earnings dramatically exceed GAAP earnings outperform the market over time.

      Here's the transcript if you're interested:
      http://www.pbs.org/wsw/tvprogram/

      ...COLVIN: Now when you look at quality of earnings, you are looking at essentially the difference between what a company reports when it reports its earnings, in the way it gets reported in the newspapers, the difference between that and the actual amount of cash that they are able to put in the bank. Right?

      SLOAN: Exactly. It's a concept we call Free Cash Flow. So, what we are actually looking at is the amount of cash that the company is generating from its operating activities. They can use, they can put that cash in the bank, they can pay down debt, they can pay dividends. But it's the earnings relative to the cash that comes out of the operating activities.

      COLVIN: And when you look at it, you look not at just free cash flow, people have been preaching that gospel for a long time, but you compare it to the size of the size of the company overall, and look to see how big that ratio is, yes?

      SLOAN: Yes. It's a simple little metric. It's the difference between the earnings, the free cash flow, and we have to divide it all, by say the total assets of the company. So we can control the differences in the size of the companies.

      COLVIN: And this enables you to spot good companies and also to spot trouble. Have you got some examples of that?

      SLOAN: Sure, a good example that I can give you here, one that most people are probably familiar with, is WorldCom. And to tell you how this works: in the long run earnings and cash flows -- free cash flows -- have to be the same. All the accountants get to do is, in the earnings number, juggle the cash flows between periods. So what happened to WorldCom back in 2000 and 2001 was, the company took some of its cash costs -- they were called line-operating costs -- they had to pay cash to the telephone networks, for using their networks. And instead of charging them off against net income, they put them on the balance sheet as an asset. Now when you do that at some point in the future, all you have to do is take them to the income statement and once that (is done that) asset's no longer got any value.

      So, what we saw during that 2000-2001 period was earnings going up and staying high, but we saw like a big dip in cash flows -- a big dip in the statements of cash flows. And that's how this strategy would have picked out a company like WorldCom in real time.

      COLVIN: In other words, you're saying that your strategy would have said there was a problem here, even before we knew anything about scandals.

      SLOAN: Exactly. Yeah, and there's a very simple metric. And if you go back and crunch the numbers on WorldCom -- we do this all the time with our students -- you'll see it pop out.

      COLVIN: Now, a lot of people, a lot of companies, in fact, virtually every company, has a difference between the earnings they report and the amount of cash it actually has. Does that mean it's doing anything wrong?

      SLOAN: No, exactly. This is the point, you know: we can't say with any certainty with an individual company that there's a problem. But what we can say is across a portfolio of companies, historically we've been pretty much guaranteed that you'll pick something up.

      To give a sense of how it works here, let's say a company has very high earnings, but cash flows that's lower. In theory, what should happen here is the cash flows in the future should rise up to the earnings. What we actually find happens in practice, on average, for the typical company is, the earnings come down and the cash flows come up a bit and meet in the middle. But the a

    • Bravo Jeff, you're working so hard this Sunday night.

      Can't Diller hire at least one more hypster to take some work load off your back?

      Now Barry isn't cheap, is he?

    • phdry, why do you even try to compete here? Every time you walk on the court Jeff schools you. You post "a fact" and then proof is given via a link that proves you wrong. Why don't you pick up your toys, load your little red wagon and go on home. Otherwise, take out your #2 pencil, a clean pad of paper, take some notes and go long.

      IACI, primarily via EXPE and ROOM will continue to gross top line revenue through increased market share, but what you have yet to see leveraged to its fullest potential is the movement of transactions to the online channel and what that does to the per unit cost. Look at Ticketmaster as a prime example. 5 years ago zero transactions were done on the net, now the number approaches 60 percent. In travel the transformation has only just begun.

      Now contemplate the largest cost centers outside of G&A with EXPE, ROOM and TREE. Picture transactions loading up on the net. Each transaction costing less as fewer humans need to touch it. Now, contemplate our compadre, Senior Diller, sitting in his ivory tower demanding higher margins, lower costs, more explosive growth. Can you hear it? To quote our long lost buddy Perrow, can you hear the loud sucking sound to the south? Expedia, Hotels.com, HSN, Ticketmaster, Match.com, Lending Tree all operate call centers. Several outsource their business to teleservicing companies. Which do they choose? Can you say "PRC"? And who owns PRC?

      But wait....there's more.... Do you know how much it costs to operate a call center per hour domestically? The teleservicing companies charge $23-$28 per hour domestically. If a Canadian center handles the traffic the price drops to $18-$22. But what happens when you go to the Philippians? Or perhaps to India? Maybe the Caribbean? or even to Argentina? The price drops to a low of $7/hr and an average of $12/hour. Far fetched? Did you hear the comment on the conf call? Expedia and Room are already sending traffic to PRC. Do you know where PRC operates call centers?

      My bet is that costs are about to drop like the perverbial stone due to strategic leveraging of IACI assets. Never bet against Diller, in the long term, it's a losing venture.

    • phdry, correcting your innacuracies is getting to be a little tiresome.

      First it was that "WWTE wasn't proprietary". (It is.) Then it was that "WWTE wasn't actually powering the air/vacation and hotel bookings for many major hotels and airlines". (They are.) Then, it was that it was "all based on private market softare", which you refused to name. (It isn't. It's proprietary.) Then it was that "EXPE generates $0.02/share in quarterly earnings". (It's more than twice that figure.)

      All posted without any kind of evidence or links for us to fact-check.



      Now, you write:

      >> At that time, they [Forrester] were predicting that the airlines, led by Northwest and KLM, were preparing to put web travel agencies at zero commission.
      It still hasn't happened yet because two congressmen came to the rescue.

      Wrong again.

      Northwest indeed did set commissions to zero, BUT after Expedia turned them off of the site altogether, after about three weeks Expedia and Northwest miraculously came to an agreement. The terms of the agreement were unnamed BUT Expedia indicated that it would be "immaterial" from a profit standpoint. That was over a year ago. During that time, Expedia's earnings have quintupled.

      http://www.usatoday.com/travel/news/2002/2002-10-02-northwest-expedia.htm

      http://www.expedia.com/daily/press/releases/northwest.asp?CCheck=1

      http://www.expedia.com/daily/press/releases/Continental.asp

      (By the way, Continental also tried the same thing -- and, you got it -- came back to EXPE, and EXPE's profits continued to rise.)



      Expedia does more than 100,000 purchase transactions every single day. That is a reasonably strong amount of bargaining leverage. Scale matters.


      With all these innaccuracies WITHOUT evidence, I'd say your credibility is waning fast.

      That's why I say that it's perfectly legitimate to be short (or long) on any given stock. But don't go spouting off rumors or inuendos without at least a little evidence.

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