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Online Travel Gets More Mobile; Q2 Results Vary

It was a week of extremes in the online travel trades.

Shares of travel research website TripAdvisor (TRIP) soared 16% on Thursday, breaking out of a base and grabbing a new high, after a strong second-quarter report. Online travel broker Expedia (EXPE) reported after Thursday's close its Q2 earnings fell well short of analyst expectations. The stock dived 27% Friday, erasing a year's worth of gains.

Both reports point to critical challenges as the industry develops around consumers adapting to online travel venues.

TripAdvisor's Q2 results showed revenue from "click-based" advertising rose 21% during the quarter to $183 million, or 74% of overall sales. Revenue from display ads rose 21%. Subscription and other revenue jumped 68%.

Unique monthly visits swelled 57%, to more than 220 million. More than 79 million of those visits came via smartphones or tablet computers — a 216% increase over year-ago levels, and a key metric across the online travel industry.

Players throughout the online travel trades are directing capital spending strategies into new mobile apps and technology with an aim to boost sales. When that payoff might come is subject to broad debate. But at a base level, aside from the migration toward a mobile audience, the travel industry's fundamentals are arguably sound.

Despite the current uncertainty with macro-economic conditions, revenue across the travel industry is expected to rise more than 5% this year, according to RBC Capital Market estimates.

"Most current metrics of the travel industry are positive and are likely to remain so near term," says Ascendiant Capital Markets analyst Edward Woo in a report initiating coverage on Orbitz Worldwide (OWW).

Woo placed a buy rating on Orbitz, although it is not growing nearly as fast as some rivals.

Market leader Priceline (PCLN), for example, is seen growing sales by nearly 27% to $5.3 billion during 2013, according to analysts polled by Thomson Reuters. Likewise, No. 2 TripAdvisor's sales are expected to take off nearly 23%.

Struggling in the No. 3 slot, projections initially saw Expedia's 2013 revenue up 20%. Analysts are scrambling to recalculate, after the Bellevue, Wash.-based operation's weak report.

Orbitz revenue lags even further behind, seen growing a comparatively mild 6.6% for the year.

"Priceline and TripAdvisor continue to enjoy much stronger growth in unique visitors and visits than Expedia and Orbitz, which saw continuing declines," wrote Jefferies Equity Research analyst Brian Fitzgerald.

Advertising Smackdown

Most online travel companies make the lion's share of their sales through hotel, flight and vacation-package bookings. A growing piece of revenue comes from targeted advertising. And Wall Street is decidedly bullish on the sector — especially Priceline, which is rated as a buy by 25 of the 27 analysts polled by Thomson Reuters.

Analysts are intrigued that the online travel agent group seems to be outpacing the total U.S. online travel industry. That industry's growth — which includes travel booked through online travel agents, as well as travel booked online through hotel websites and other more direct bookings — is actually seen to be slowing to just 7% in 2013, according to research from RBC Capital Markets. That's down from 11% in 2012, and slower than the 8% that's expected in 2014.

Expedia has struggled to hold its position vs. aggressive competition in that slowing market. Its quarterly results showed selling and marketing spending up 33% (although the company said its German travel site Trivago reportedly accounted for about a third of that increase).

Priceline's fixed-price Express Deals service appears to be taking share from Expedia's Hotwire discount site.

Despite the slowing and the battle for market share, Wall Street is betting that the online travel industry has room to grow. Even at its current size, U.S. online travel sales account for just 43% of the overall U.S. travel-sales market, according to RBC. That'll inch up to 44% next year, and there is plenty of elbow room after that.

Where's that growth going to come from? Most companies are betting on consumers' shifting to mobile buying.

"... we expect domestic online travel spending could grow in the high-single to low-double digits in 2013, aided by the ongoing shift to mobile," says Benchmark analyst Daniel Kurnos.

Booking Rooms On The Fly

Despite heavy investment in new mobile websites, apps and search-ad technology, there's little visible evidence that the strategy is so far paying off. When smartphone users go directly to a hotel website, they generally visit about 3.4 pages. That's a shorter stay than the 4.7 pages that a traditional PC visitor makes, according to Adobe Systems data.

Nonetheless, mobile booking is expected to pick up eventually.

"Like everybody else, we are investing in it," Priceline CEO Jeffery Boyd told analysts on a Q1 conference call.

Boyd also says hotel booking on mobile seems to be taking off most easily, and mobile is "driving substantial share" of rooms booked.

That's probably because travelers sometimes need to book a hotel quickly, or at the last minute. There's a whole host of upstart companies battling for that just-in-time business. They include Hotel Tonight and Airbnb, among many others.

Paying The Tab For Mobile

In April, Expedia executives said the company's mobile app had been downloaded by some 30 million users, though they declined to say what percentage of all bookings took place through the app, as opposed to traditional desktop.

"But you've seen the download numbers, and they're very healthy," said CEO and President Dara Khosrowshahi. "Mobile, again, we think, is a great positive for us.

Expedia previously said it was seeking to have 20% of sales through mobile by the end of 2014.

But all that mobile growth has come at a cost. Expedia spent $100 million in 2012 on software and content, up from $73 million in 2011 and $61 million in 2010.

Travelzoo (TZOO) also increased its marketing spending to boost app downloads. More than 2 million users have downloaded that app. And the company's now working to develop a new hotel-booking app, hoping to capitalize on users' growing willingness to book via their smartphones or tablets, says CEO Christopher Loughlin.

That's a change for Travelzoo, which had focused on sending travel deals via email, much in the way that Groupon (GRPN) does with retail deals. Only about 21% of sales made by Travelzoo in Q2 started with a visit to the company's website or mobile website, but the company wants to change that.

"Because email was our primary form of communication, we didn't focus on the product development of our websites and mobile products," Loughlin told analysts on July 18. "Indeed, we saw these as repositories for our (emailed) push deals.

The investment is costing Travelzoo, but it's also bringing the company "closer to when the company can leverage and benefit from its recent investments," wrote analyst Woo.

Growth in mobile use isn't necessarily yet translating into sales boosts, writes RBC Capital Markets analyst Mark Mahaney.

In TripAdvisor's Q1 results, mobile traffic boomed, but most seemed only to be window shopping. Second-quarter results suggested they were getting more serious, but still lagged the desktop crowd.

"Smartphone hotel shoppers grew over 100% year over year, but monetized at about 20% the rate of desktop" shoppers, says Mahaney.

There will likely be a "sizeable delta" between growth and spending as these companies continue to seek out mobile shoppers for "some time to come," that analyst says.

Keeping An Eye On Google

U.S. markets are leading the shift to mobile and to online booking in general. The 43% rate for online bookings in the U.S. easily leads Asia, for example, where only 24% of travel is booked online, writes analyst Woo. But those rates will jump as mobile technology seeps into new countries, the analyst says.

For the last few years, the competitive threat overshadowing much of the travel industry has been Google (GOOG). The search giant tends to dominate any market it enters, and has been gradually assembling a stable of travel-related companies. It has launched, among other services, a hotel search feature and several flight-finding aides.

But it remains immaterial, for now at least, say observers.

"Over the past couple of years, Google has been increasing its travel-related services," says Woo, "but currently does not sell travel products and only directs consumers to other websites.

That "should temper concerns" about Google taking on the industry, at least now, says Woo.

Even at that, Google is a big player in online travel, if only because it "represents a significant source of organic traffic" via Web searches for sites like TripAdvisor, says analyst Mahaney. That's a risk when investing in a travel booker, he wrote in a July 22 research note.

"Google's increased activity in the travel space," Mahaney wrote, "needs to be monitored carefully."