Expedia (NASDAQ:EXPE), one of the leading online travel agencies (OTAs), managed to post solid quarterly growth in the last two quarters despite economic weakness. It will announce its Q4 2012 and full year earnings Tuesday, February 5, and we expect the company to post another quarter of strong growth. While uncertainty around the fiscal cliff in the US and global macro headwinds could impact growth in the travel industry, Expedia claims not to have had any adverse effect on its brand due to the above factors, which is impressive.
With a goal of growing its user base, the company aims to continue innovating and improving its products and services to drive growth across geographical segments. We believe that with an expanding international presence, robust growth in hotel bookings and a focus on developing its mobile platform, Expedia is well-positioned to leverage growth in the online travel market.
Expanding International Presence To Help Tap Growth In Europe & Asia-Pacific
Backed by a 27% increase in global room nights booked, Expedia’s hotel revenue registered 20% y-o-y growth in Q3 2012. Expedia is the biggest US online travel agency in terms of gross bookings, and the company has been focused on expanding its leadership position in international markets as well. Its revenue contribution from international markets has nearly doubled in the past five years from 24% in 2007 to around 42% at present. For the first time, the international points of sale accounted for 50% of total room nights booked in Q3 2012.
The fragmented European hotel market and rising per capita income in emerging economies provide tremendous growth opportunities for travel agencies. Additionally, Internet penetration in these economies is relatively low but is expected to grow at a rapid pace, which leaves immense potential for growth for the online travel industry as a whole.
The acquisition of VIA travel by Egencia, the Air-Asia Expedia joint venture, the rising popularity of hotel.com, the collaboration with Fotopedia Paris & Fotopedia Japan, and the eLong partnership to expand presence in China – are factors that contributed to Expedia’s growth in international hotel bookings in Q3, and we believe will continue to be the guiding factors for its future growth as well.
In December 2012, Expedia announced its acquisition of Trivago, one of the leading meta-search engines for hotel bookings in Europe. The two companies have signed a definitive agreement wherein Expedia will acquire a 61.6% share in Trivago for an estimated price of 477 million euros. We feel that apart from marking Expedia’s entry in the meta-search space, Trivago will help fuel the company’s strategy to leverage growth in the European hotel market. (Read: Trivago’s Acquisition Expands Expedia’s Hotel Portfolio In Europe)
Hotel Booking Remain The Most Profitable Business
Despite macro headwinds, Expedia posted a 17% increase in domestic hotel bookings while international bookings witnessed robust growth of 38%. Hotel bookings contribute over 66% to Expedia’s valuation, as per our estimate. In addition to accounting for the majority of Expedia’s revenues (>70%), hotel bookings is also the most profitable division with revenue margins of approximately 23% compared to 2.3% and 9.2% from airline booking and car rentals & cruise bookings, respectively.
Despite economic weakness, Expedia registered a 22% increase in global room night bookings last quarter, which we believe is reminiscent of its strength in the hotel business. While the lower revenue per room night from the Asia-Pacific region and intense competition among OTAs put pressure on hotel revenue margins, we believe that Expedia will continue to witness strong growth in hotel gross bookings.
Increasing Traffic From The Mobile Platform
In order to rapidly expand its mobile user base, Expedia launched a number of applications for iPhone and Android users. It received only 4% traffic through mobile bookings in 2011 but aims to increase the proportion in the future by introducing innovative offerings in the mobile segment.
The Expedia application has crossed the 10 million mobile app download milestone across mobile platforms. In Q3 2012, the Hotels.com application launched an updated version for Android and iPad tablets. Expedia claims that the Expedia hotels app has been downloaded approximately 5 million times in 220 different countries and territories and that 10% of its customers today are engaging in mobile. 
Expedia launched a new update and an exclusive feature for its hotel mobile application last year. The recently launched mobile application by Hotwire gets close to 20% of its hotel bookings via mobile devices. We expect Expedia’s mobile penetration to increase in the future.
We will update our current price estimate of $63.12 for Expedia post the Q4 2012 earnings release.Notes:
- Expedia Mobile Takes Flight: New App Update Combines Simplicity of Mobile with Robust Flight and Hotel Booking Intelligence, Expedia Media Room, November 14, 2012 [↩]