Expedia Inc. (EXPE) reported another good quarter, with earnings topping the Zacks Consensus Estimate by 9 cents, or 7.7%. While expenses continued to increase, revenue growth outdid the impact.
The strong results sent share prices soaring 15.5% in after-hours trading (more than offsetting the 1.9% decline during the day).
Revenue for the quarter was $1.20 billion, up 15.3% sequentially, 17.5% year over year and 2.5% higher than consensus expectations of around $1.17 billion.
Revenue by Segment
Leisure customers remained the significantly larger contributors to in the last quarter, generating around 93% of revenue. Corporate customers (Egencia) accounted for the balance. The two segments grew 16.3% and 2.6%, respectively from the previous quarter and were up 14.9% and 77.3%, respectively from the year-ago quarter.
With TripAdvisor gone, Expedia is almost totally dependent on the Leisure segment (although it is beefing up the Egencia segment with acquisitions). Corporate spending on travel has turned a bit cautious in the U.S., but Expedia gained in the last quarter from the acquisition of VIA Travel. VIA’s operations are mostly in Northern Europe, which has done much better than the South.
Revenue by Channel
Around 77% of total revenue was generated through the merchant business (direct sales), another 20% came through the agency model (where Expedia operates as an agent of the supplier) and roughly 3% came from Advertising and Media. The three channels grew 6.8%, 18.2% and 9.4%, respectively from the June quarter of 2012. Growth from the year-ago quarter was 8.8%, 19.7% and 29.6%, respectively.
Revenue by Product Line
Hotel and Air, the two main product lines grew 20% and -10% respectively from the year-ago quarter. The increase in Hotel revenue came from a 27% increase in room nights and a -3% decline in the average daily rate (“ADR”). Revenue per night dropped 6%. In the last quarter, international room night growth of 38% more than doubled the domestic room night growth of 17% and for the first time, made up 50% of total room nights.
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 in the next few quarters. Expedia believes that the added scale of the lower-margin business would more than make up for the negative mix impact going forward.
Air was around 7% of revenue in the last quarter. The decline in ticket revenue was attributable to a 19% decline in the revenue per ticket that offset the 11% increase in ticket volumes and 1% increase in airfare.
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 8.8% sequentially and 13.9% from a year ago. The international business grew 24.1% sequentially and 22.2% from last year. The international business gained from acquisitions and agreements that Expedia has been entering into in the last few quarters.
Bookings and Revenue Margin
Gross bookings were $9.06 billion in the last quarter, up 1.1% sequentially and 18.8% year over year. The revenue margin was 13.2%, up 163 bps sequentially and down 14 bps from a year ago indicating higher conversions on a sequential basis due to strength across segments, channels and geographies. International conversions weakened however, particularly for leisure travel.
The pro forma gross margin for the quarter was 79.7%, up 177 bps sequentially and down 9 bps year over year. Higher costs for credit card processing (due to merchant bookings growth), higher headcount and other costs related to VIA and increased headcount costs to support other operations across the world were partially offset by lower debit card fees credit card rebates. However, gross profit dollars continued to grow from $814.0 million in the year-ago quarter to $955.4 million in the last quarter.
The operating expenses of $716.5 million were up 11.3% sequentially and 22.4% from last year. As a result, the operating margin came in at 19.9%, up from 16.0% in the previous quarter and down from 22.4% a year ago. All expenses declined sequentially as a percentage of sales, with G&A declining the most, followed by cost of sales, technology and content and S&M in that order. All except G&A were however up from last year, with S&M increasing the most.
Adjusted EBITDA as reported by the company was $293.6 million, up 31.7% sequentially and 5.7% from the year-ago quarter.
On a pro forma basis, Expedia generated a net income of $177.9 million, or a 14.8% net income margin compared to $114.5 million, or 11.0% in the previous quarter and $191.4 million or 18.8% net income margin in the same quarter last year. The fully diluted pro forma earnings per share (EPS) were $1.26, compared to 83 cents in the June 2012 quarter and $1.37 cents in the September quarter of 2011.
Our pro forma estimate excludes intangibles amortization charges, legal reserves and occupancy tax assessments 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 discontinued operations and non controlling interests, the GAAP net income available for Expedia shareholders was $171.5 million ($1.21 a share) compared to $105.2 million ($0.76 a share) in the previous quarter and income of $209.5 million ($1.50 a share) in the year-ago quarter.
Cash and short term investments totaled $2.36 billion at quarter-end, down $36.4 million during the quarter. The net cash position of $1.11 billion was also slightly lower than the $1.14 million in net cash going into the quarter. Including long term liabilities, the debt to total capital ratio was 42.3%, still at manageable levels. Days sales outstanding (DSOs) went from 45 to 43. We note that around 40% the assets is goodwill (not a real asset).
Expedia generated $53.3 million of cash from operations in the last quarter. It spent $59.8 million on capex, $18.1 million on dividends and $68.3 million on share repurchases.
Expedia topped both revenue and earnings expectations in the last quarter, helped by a stronger travel market all over the world, a contribution from VIA and strategic expansion in Asia. Online travel booking is particularly buoyant because of the shift from offline channels.
The opportunity in the Asia/Pacific region is significant and 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. An improved technology platform should lead to continued improvement in conversion rates going forward.
The increasing presence in Asia does have a downside with respect to margins given the lower ADRs. While it is true that this as well as technology upgrades will negatively impact margins in the near term, we consider the investment a positive for investors, since Asia is one of the fastest-growing regions that should give Expedia the scale required to generate higher profits over the long term.
Of course, the company will continue to face challenges from players like Priceline.com (PCLN), Orbitz Worldwide (OWW) and Travelocity, as well as a growing number of local Chinese players that could make expansion in the fast-growing Chinese market difficult. Competition aside, Expedia and other online travel agents continue to fight the incidence and collection of occupancy taxes.
Expedia shares carry a Zacks Rank of #3, which translates to a short term Hold rating. We remain Neutral on a long-term basis.
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