Expedia (NASDAQ:EXPE) is the world’s largest online travel agency (OTA) by gross bookings. In the second quarter of 2013, increased competitive activity in the off-line (TV advertisements) brand marketing channel from Booking.com, TripAdvisor and Trivago had led to weaker growth in direct type-in traffic at Brand Expedia. Direct type-in traffic is the most efficient traffic for customer loyalty and profitability according to the company’s management. 
TripAdvisor’s transition to meta-display also took a toll on Expedia’s traffic in Q2. TripAdvisor is an important source of traffic for online travel agencies, who advertise on TripAdvisor affiliated websites to attract users. Expedia held up on its advertising spend on TripAdvisor in Q2 as it was wary of the new meta-search platform. Consequently the company lost considerable traffic and room nights growth decelerated from 28% year-over-year in Q1 to 19% in Q2.  To learn more about the impact of TripAdvisor’s meta-display transition on Expedia, read our article A Recap Of Expedia In 2013: Stock Steady After A Rough Patch.
Ramped-up bidding activity on TripAdvisor’s meta platform, broader roll-out of the Expedia Traveler Preference (ETP) program, and rapid growth in advertising and media revenue from the newly acquired Trivago, helped Expedia to regain its momentum in Q3. The company continued to build on the momentum in Q4 as conveyed by its earnings results that were announced on February 6. Hotel revenue increased 14% year on year as room nights growth re-accelerated to 25%. Air revenue was up by 17% since the company sold 13% more tickets than it did in the year-ago period, the highest volume growth in eight quarters. Other revenue also jumped by 37% due to strong growth in advertising and media revenue from Trivago. 
We are in the process of updating our $65 price estimate for Expedia’s stock, based on the fourth quarter and full year 2013 results.
Increased Adoption Of ETP Is Advantageous Even Though It Puts Pressure On Revenue Margins
The Hotel bookings business is the most important division in Expedia’s portfolio. It contributes approximately 65% to the company’s valuation as per our estimate. Expedia registered robust growth in hotel room nights sold in the fourth quarter, on the back of a wider roll-out of its ETP program. Prior to the roll out of ETP in the back half of 2012, Expedia’s hotel business was predominantly based on merchant model. ETP allows travelers to choose between paying for bookings upfront (merchant model), and paying after the stay is completed (agency model). Hotels are adopting ETP at a fast pace since many guests prefer to pay at the time of checking out of the hotel. By the third quarter of 2013, about 35,000 hotels had signed up for ETP. The company added 10,000 hotels to this list in Q4. 
While ETP has provided a boost to Expedia’s hotel business, it has also weighed on the company’s revenue margins. Revenue margins under the agency model are lower as Expedia simply acts as a travel agent and earns a small commission on bookings, while under the merchant model revenue margins are higher as the transaction is completed on Expedia’s website itself. The shift from the previously dominant merchant model to the ETP model has lowered revenue margins for Expedia’s hotel business. The company’s revenue per room night fell by 9% year on year in Q4, registering the worst decline in at least two years.
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, in our view the program will compensate for it by bolstering growth in room nights sold by the company.
Growth In Europe Accelerates
Although Expedia did not mention the absolute growth rate for its European business during the fourth quarter earnings call, it said that it grew faster in the region in Q4 as compared to the last couple of quarters. It also said that the growth was broad-based across different brands and channels. The improvement was mainly driven by disproportionate benefit from the ETP program, strong revenue growth at Trivago, and rising traffic from the TripAdvisor channel. 
PhoCusWright estimates that OTA bookings in Europe rose 10% in 2013 to approximately $58 billion. The travel market research company expects the growth to accelerate to 12% in 2014 and 11% in 2015. This is against the backdrop of less than 4% growth expected in total European travel bookings, during the same periods. 
Priceline’s (NASDAQ:PCLN) booking.com had about 31% share of Europe’s OTA market in 2012 while Expedia’s share was less than half of that.  However, we believe Expedia has geared itself well to leverage future growth in the European travel industry and catch up with booking.com. Its Trivago brand is the leading meta-search engine in Europe and grew revenues by more than 85% in 2013. Trivago also delivered healthy EBITDA growth (according to management) that allowed it to invest back into building new markets. Additionally, Expedia’s ETP program is experiencing higher acceptance by hoteliers in Europe than in North America since European travelers have a greater appetite for agency model bookings.  The company expects this trend to continue in 2014 which should act as a tailwind for it.
- Adjusted EBITDA growth: 13% to 16%.
- Effective tax rate: 25%.
- Stock-based compensation: approx. $90 millionNotes:
- Tripadvisor Inc (TRIP) Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 24, 2013 [↩]
- Expedia, Inc. Reports Fourth Quarter and Full Year 2013 Results, Expedia Investor Relations, February 06, 2014 [↩] [↩] [↩]
- Expedia Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, February 06, 2014 [↩]
- PhoCusWright: Online travel spending on the rise in Europe, Travel Weekly, January 15, 2014 [↩] [↩]
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