With over $1 billion in Q1 2013 revenues (a 24% y-o-y increase), leading online travel agency Expedia (NASDAQ:EXPE) made a promising start to fiscal 2013. Barring Hotwire, which has been facing some challenges since the last few quarters, all of Expedia’s brands continued to grow at a healthy rate despite macro headwinds. Consistent with past trends, the robust growth in hotel room nights, especially in international markets, was the key driver behind Expedia’s growth. Global hotel room nights booked increased by 28% y-o-y in Q1 2013.
On account of its acquisitions and continued marketing efforts to build its brand internationally, Expedia’s cost of revenue and marketing expenses increased faster than revenues in Q1 2013, which contributed to a marginal annual decline in net income. Backed by the acquisition of VIA Travel, the company witnessed a 14% y-o-y increase in air ticket revenues though it does not anticipate the positive trend to continue in the future. Additionally, the U.S. car rental business came under pressure from fleet constraints and associated efforts by rental car companies to drive up pricing.
Increasing competition in the online travel space, both domestic and international, continues to limit Expedia’s growth. Nevertheless, the company aims to focus on innovating and improving its products and services by investing in new technologies to drive growth across geographical segments. We believe that with an expanding international presence, the robust growth in hotel bookings and a focus on developing its mobile platform, it is well-equipped to leverage growth in the global online travel market.
Stronger Hotel Portfolio To Contribute To Future Growth
Despite a 3% decline in average revenue per room night, Expedia’s hotel revenues increased by 24% y-o-y backed by strong growth in the number of room nights booked (28% y-o-y). While the domestic room nights grew by 15%, international bookings marked 43% y-o-y growth. Though Expedia faced some weakness in demand from Southern Europe, its global performance remains strong.
In addition to accounting for the majority of its revenues (>70%), hotel bookings is also the most profitable division with revenue margins of approximately 20% compared to 2% and 9% from airline booking and car rentals & cruise bookings, respectively.
Expedia’s Hotels.com currently offers an inventory of only 145,000 hotels globally and it continues to work towards building its global portfolio. With more than 70% contribution to Expedia’s valuation, as per our estimate, we believe that the hotel portfolio will remain a key driver for Expedia’s growth in the future as well.
Some steps taken by Expedia in the recent past that reiterate our belief:
1. Acquisition of Trivago - Expedia completed its acquisition of Trivago in March this year. Trivago has over 600,000 hotels across 140 booking sites in 30 countries. It has a significant presence in many European countries which is of strategic importance for Expedia’s international business. Expedia claims that it intends to expand the Trivago brand in other geographies in the future. In Q1 2013, the inclusion of Trivago for less than a month added more than 1.5% to Expedia’s global revenue growth.  (Read: Can Expedia Take More Share In The European Hotel Market With Trivago Deal?)
2. International Expansion – Expedia’s international revenue contribution has nearly doubled in the past five years from 24% in 2007 to over 40% in 2012, and it claims to be gaining additional market share in the $1 trillion global travel market.  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.
Strong global growth in Hotels.com, international expansion of Hotwire, the acquisition of VIA Travel by Egencia, the Air-Asia Expedia joint venture, the collaboration with Fotopedia Paris & Fotopedia Japan, and the eLong partnership to expand presence in China are factors that have contributed to Expedia’s growth in international hotel bookings. We believe these will continue to be the guiding factors for future growth as well.
3. Expedia Traveler Preference (ETP) Program – The ETP program is a new business model recently introduced by Expedia that provides customers with an option to choose between paying immediately or at the time of checking out of the hotel. The model helps the company better compete with leading agency model players and hotel direct booking channels. Expedia has approximately 25,000 hotels signed up for the program with over half currently live in production. It claims that some of these hotels have witnessed over 5% higher booking rate compared to when the payment choice option was not enabled. Expedia intends to roll out the program globally in the future. Though this could result in lower hotel revenue margins, it will increase the conversion rates and unit growth over time.
Increasing Progress In The Mobile Platform
In order to rapidly expand its mobile user base, Expedia has launched a number of applications for iPhone and Android users over the years. The latest feature, launched last month, provides users with up-to-date information at every stage of their travel using a set of visual cues.
In Q1 2013, Expedia crossed the 30 million global app download milestone across its major brands and claims that its mobile booking mix continues to increase. Offering bookings on over 200 airlines and 140,000 hotel properties, the Expedia application has witnessed an increasing proportion of its traffic moving to the mobile platform with 10% of its customer engaging in mobile at present. 
With the rapid adoption of smartphones and tablets, mobile devices are increasingly becoming the preferred and more convenient option for accessing the web. The mobile platform poses a number of challenges in terms of design and developments, which require significant investments. Additionally, the conversion rate (percentage of people browsing its website who actually make a booking) for mobile is much lower compared to PCs. However, Expedia is investing to make its platform more responsive which it feels can improve the conversion rate on mobile in the future. With continuous investing in building its mobile platform, we anticipate Expedia’s mobile penetration to increase in the future.
- 2013 effective tax rate of 25%
- Low double digit growth for adjusted EBITDA
- Annual adjusted EBITDA dollar growth to come in the back half of the year
We will update our current price estimate of $68.29 for Expedia after the Q1 2013 earnings release.Notes:
- Expedia Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 25, 2013 [↩]
- Expedia Management Discusses Q4 2012 Results – Earnings Call Transcript, February 5, 2012 [↩]
- Expedia Mobile Takes Flight: New App Update Combines Simplicity of Mobile with Robust Flight and Hotel Booking Intelligence, Expedia Media Room, November 14, 2012 [↩]