Expedia (NSDQ:EXPE) beat the analyst estimates by reporting an EPS of $0.26 excluding special items such as acquisition costs, depreciation, stock based compensation, interest expense, etc. However, the company posted losses of $3.3 million including special items. The quarterly revenues rose 12% to $816.5 million primarily through hotel business segment which witnessed global room nights growth of 24%.
These exceptional revenues offset the company’s heavy investments in new technology platforms, thereby improving the operating margins by 1.1 point to 5.9%. Going forward, the company is actively pursuing growth opportunities in international revenues. The announcement to acquire VIA travel is another step towards exploring growth prospects in Nordic region of Europe. Expedia competes with other leading online travel agencies such as Priceline (NSDQ:PCLN), Orbitz (NSDQ:OWW) and Travelocity.
International Revenue Growth A Priority
Expedia has performed well on the international front and it aspires for growth continuum through expansion into European and APAC (Asia Pacific) markets. The company’s corporate travel management arm Egencia reported a 25% rise in revenues accompanied by a 0.4% improvement in revenue margins. The company is willing to consume its international cash to be able to grow the Egencia brand, the acquisition of travel management company VIA Travel being one of them.
Online penetration in APAC region is estimated to be over 20% and has tremendous growth potential. Expedia’s APAC hotel business already outpaces other regions. As a result, the company wants to leverage this long term growth opportunity by diversifying into the APAC markets. Some of the initiatives by the company include joint venture with Air Asia, diversification of brands such as eLong, Hotels.com, Egencia, etc. The only concern being that ADR (Average Daily Rate) per hotel room is expected to decline due to lower revenues/room night in APAC region.
Airline Business Margins to Shrink
Expedia managed to improve the operating margins led by robust revenue growth from Hotel Business. However, the airline segment which constitutes 11% of the total revenues is expected to weigh on net operating margins. With the airline industry struggling from fuel price turbulence, most of the airlines have squeezed the volume based incentives for travel agencies. The current quarter saw a downside in revenue/ticket of 20%, and this is expected to go down further this year.
Since the company has capitalized its investments on technology and content, the technology expenditure is expected to maintain a 25% growth across the year due to depreciation and amortization costs. The selling and marketing expense is expected to go broadly in line with revenue.
We have a $33.19 price target on Expedia which represents a 5% upside to its current market price. We are currently revisiting our current price estimate to incorporate this quarter’s earnings and forward guidance.