Leading online travel agency, Expedia (NASDAQ:EXPE), saw its stock price rise by over 15% post its Q3 2013 earnings release on October 30, as the company registered 17% y-o-y increase in revenue, topping $1.4 billion. Like previous quarters, the international segment led the growth with revenue higher by 23% compared to Q3 2012. Worldwide hotel revenue grew 11% y-o-y to over $1 billion, helped by a 20% increase in room nights sold. Air ticket booking revenues increased 16% y-o-y to about $100 million as the company sold 7% more tickets and airfares rose 3%, compared with Q3 2012.  Expedia benefited in the quarter as it increased bidding activity on TripAdvisor, and its Hotwire brand somewhat stabilized after performing poorly in the past few quarters. For insights into Hotwire’s business read our article: Hotwire’s Challenges Are Limiting Expedia’s Growth
In the first half of 2013, high competition in the travel industry had negatively impacted Expedia by weakening the growth in direct type-in traffic, which is the most efficient traffic for customer loyalty and profitability according to the company’s management. The company witnessed some improvement in direct type-in traffic in Q3 as competitive activity in the industry eased, and the company continued to invest in direct marketing channels, such as TV advertising. 
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Declining Revenue Margins Not A Matter Of Concern
Expedia registered a 7% decline in revenue per room night in Q3 2013. This was the result of a plethora of factors, the most important being the rapid adoption of the Expedia Traveler Preference Program (ETP), and the increasing mix of low ADR (Average Daily Rate) room nights in Asia-Pacific via the partnership with eLong. Competitive discounting and a shift to bigger hotel chains with lower margins additionally impacted revenue per room night growth. 
The ETP program offers users the choice to make bookings under the agency or the merchant model. Prior to the roll out of ETP in the back half of 2012, Expedia was predominantly a merchant model based company. The agency model is now gaining preference from hoteliers via the ETP program. Hotels that have converted to ETP are witnessing market share increases since guests prefer to pay at the time of checking out of the hotel. More than 35,000 hotels have signed up for the ETP program since its launch. Consequently, Expedia’s agency model revenues increased 40% y-o-y in Q3 2013, much higher than 4% increase in merchant model revenues. 
Revenue margins under the merchant model are higher as the transaction is completed on Expedia’s website itself, while under the agency model Expedia simply acts as a travel agent and earns a smaller commission on bookings. The shift from the previously dominant merchant model to the ETP model has lowered overall revenue margins for Expedia.
We believe that Expedia’s customers will adopt ETP program at a fast pace as the program is rolled out globally, leading to further increases in revenue contribution from the agency model. Although this will lower revenue margins for the company, we believe that the program will compensate for it by boosting the number of room nights sold by the company.
Mobile Platform Is An Important Driver For Future Growth
Mobile devices are being increasingly used to make last-minute bookings. With high-double to low-triple digit growth rates, Expedia claims that mobile is one of its fastest growing channels. Expedia’s apps have been downloaded over 80 million times across all of its brands and geographic regions. Its hotels.com app is one of the top ranked apps in many countries.
Expedia has identified mobile as a high growth opportunity, and hence, its next focus. It has been aggressively pursuing mobile expansion in Asia via eLong. It is working to improve the responsiveness of its sites to all types of devices. It also plans to launch new apps for Hotels.com, Brand Expedia and Egencia in the near-term. 
With a growing number of people using mobile devices to go online, we believe the mobile platform offers immense growth potential for travel services. Additionally, mobile bookings present an opportunity to generate incremental revenues as they are usually made over shorter booking windows.
We are in the process of updating our $62 price estimate for Expedia based on the recent quarterly results.Notes:
- Expedia, Inc. Reports Third Quarter 2013 Results, Expedia Investor Relations, October 30, 2013 [↩] [↩]
- Expedia Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 30, 2013 [↩] [↩]
- Expedia Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 30, 2013 [↩]