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Investment Overview for Expedia (NASDAQ:EXPE)
Expedia's Q3 2016 results reflected significant year-on-year growth in all its important parameters namely, gross bookings (21%), revenues (33%), and adjusted EBITDA (42%). Last quarter, Expedia's results were dampened due to the integration issues of its acquired entities (mainly Orbitz) on its platform. However, the integration seemed to have been completed with the company's focus back to the growth of its core OTA segment.
Though the room nights bookings didn't reflect significant improvement in the third quarter, the trend seems to be promising primarily for brands such as Brand Expedia, Hotels.com, and Expedia Affiliate Network. For the full year, the company expects adjusted EBITDA to grow between 35% to 45%, however, profitability might be dampened to some extent by the increased marketing initiatives and the lag between room bookings and the realization of payments.
Expedia seems to be well poised for long-term growth. The company's revenues and adjusted EBITDA growth was boosted post the divestiture of its 60% share in the China based OTA, eLong, last year. It sold 40% of the stake to Ctrip and went into a partnership with the latter. Expedia currently has one of the most extensive network of accommodations on its platform. In 2015, it acquired big players including Travelocity, Orbitz, and HomeAway which helped in the consolidation of the U.S. OTA market. Currently, Expedia and its metasearch arm, Trivago, are exploring for an initial public offering and they aim to complete it by the end of 2016. The company might also be in the search for acquisition targets in the corporate travel sector.
Expedia witnessed a strong 2015 riding on organic and inorganic growth. For the full year 2015 (excluding eLong), Expedia's gross bookings grew by 24% to around $60 billion and its revenues grew by 19% to reach ~$6.6 billion.
The main factors that affected the company’s performance in 2015, were:
- Expedia’s prominent acquisitions in 2014 and in 2015
- In November 2014, Expedia completed its acquisition of Australia-based Wotif Group. Wotif Group is a prominent player in the Asia Pacific market with a host of travel brands under its umbrella, including Wotif.com, lastminute.com.au, travel.com.au, Asia Web Direct, LateStays.com, GoDo.com.au and Arnold Travel Technology. Wotif’s portfolio focuses on hotel and air, offering consumers more than 29,000 bookable properties across the globe.
- Expedia acquired French car rental company, Auto Escape, in June 2014. The acquisition increased its exposure to the $36.9 billion global car rental industry, which is expected to grow at a compounded rate of 13.6% to reach $79.5 billion by 2019, according to Transparency Market Research.
- In January 2015, Expedia acquired Travelocity for $280 million, from its parent company Sabre Corp. The acquisition is a progression from the 2013 strategic agreement between Expedia and Travelocity, wherein Expedia provided content, inventory, customer service, and technology to Travelocity’s U.S. and Canadian websites, while Travelocity focused on brand marketing and received a performance-based marketing fee. The acquisition pertains to Travelocity’s websites in the U.S. and Canada.
- In March 2015, Expedia expanded its existing partnership (initiated in 2002) with Latin American Online Travel leader Decolar.com, Inc., which operates the Portuguese Decolar.com and Spanish Despegar.com branded websites. Expedia made a $270 million minority equity investment and will have access to Decolar’s hotel supplies in Latin America.
- In September 2015, Expedia completed its Orbitz Worldwide acquisition for $1.6 billion, after receiving the regulatory go-ahead. Orbitz is a Chicago-based online travel agency (OTA) responsible for brands like Orbitz.com and Cheaptickets.com. Following its Travelocity acquisition, Orbitz could help Expedia gain almost three-fourths of the U.S. online travel market share.
- Expedia’s December 2015 acquisition, HomeAway – the world’s largest vacation rental marketplace–seemed to be the hot topic of discussion in its Q4 2015 earnings conference call. The management stated that the vacation rental website had performed above expectations in Q4 2015. Now, the next plan for HomeAway seems to be an end to end platform enabling vacation rental and home sharing transactions. Expedia is chalking out ambitious expansion plans for HomeAway. Also, HomeAway’s business model is currently being transitioned from a traditional listing model to a full-fledged online transactional model. The management expects around $350 million in adjusted EBITDA from HomeAway in 2018.
- Expedia might cause a huge stir in the future of hotel booking by introducing its "Accelerator" program. Expedia's market managers have recently started allowing hotels to bid against one another in order to achieve the top spots in Expedia's hotel listing on brands such as Expedia.com and Hotels.com. The program will transform the pages of search results into a marketplace where hotels, vying for the top listings, will compete against one another. Hotels are ready to pay for the top slots because the placement on the search result increases the chances for the hotels of being booked by travelers. The details of the Accelerator program was finalized in Q4 2015. Though it is still in the early stages and has been introduced to only a few markets so far, Expedia's CEO Dara Khosrowshahi mentioned in the fourth quarter earnings call that the participating hotels have given a good response. This bidding model introduced by Expedia can set the norms for the online travel industry at large in the future.
- Expedia’s divestiture of eLong
- In May 2015, Expedia sold its 62% eLong stake to Chinese OTA leader, Ctrip (40% of shares), and other Chinese investors. Currently, Expedia and Ctrip have formed a partnership to share inventory in several geographies, primarily in the air and packaged tours segment.
- Expedia is strengthening Trivago to provide stiff competition to metasearch engines
- Expedia has been gearing up its metasearch engine Trivago with increased direct partnerships with hotels, an updated Hotel Manager platform to attract independent hotels, and a more robust review structure through its Mystery Shopper program. Under the program, hotels compensate certain customers to visit and rate their properties without the property's knowledge. Trivago then shares the ranks of the hotels on the basis of an extensive set of parameters, in order to let its users make more informed choices about their stays.
- Along with the development of the core OTA websites, Expedia is gearing up its metasearch engine in order to gain customers from different avenues – both from Trivago and from its OTA websites. Expedia can compensate for the lack of its visibility on TripAdvisor's Instant Booking platform by featuring more on the Trivago website. The OTA websites can complement the metasearch platform to ensure maximum footfalls and conversion through Expedia.
- Expedia's cross promotion plans
- Excluding Orbitz, Expedia witnesses 7.5 billion air searches annually, and this is expected to increase with time. In September 2015, the company renewed its agreement with the American Airlines Group, due to which the Expedia affiliated websites including Expedia, Travelocity, and Hotwire, would feature flights from US Airways and American Airlines. Along with selling the ancillary air products and fares, the company intends to capitalize on the footfall by attempting to cross-sell its other products such as hotels, vacation rentals, rental cars, tours and activities, etc.
- The company has increased focus on the tours and activities sector and spent around $6.5 million recently on TV ads in the U.S.
- Expedia is also developing a new product related to railway bookings, which is expected to be launched in 2016. Railway is an important mode of transportation in Europe and Asia, and these regions will be primarily targeted in the beginning.
- Expedia’s focus on expansion at the cost of lower commissions
- Expedia added around 27,000 properties to its platform in Q2 2015 (including those from its acquisitions) and now has added more properties in the first half of 2015, than it added in all of 2014. This gives a perspective as to the rate at which Expedia is expanding its network.
- On the flip side, as Expedia is lowering commissions to get new hotels, the contribution per hotel is falling, as more smaller hotels are getting the opportunity to join Expedia’s platform. Expedia’s aggressive spending on loyalty programs is proving to be beneficial as an increased proportion of its business is being generated by repeat customers. Hence, the company’s focus on lowering commissions, spending on loyalty programs, and making investments on technology, seem to be generating a positive impact, though at the cost of less earnings from each hotel.
Below are the key drivers of Expedia's value that present opportunities for upside or downside to the current Trefis price estimate:
- Expedia's Market Share of Occupied Hotel Rooms: We currently forecast Expedia's share of the occupied hotel rooms globally to increase from 6% in 2015 to over 10% by the end of our forecast period. There can be almost 50% downside to the Trefis price estimate if Expedia's market share in hotel bookings remained flat over our forecast horizon.
- EBITDA Margin on Hotel Bookings: We currently forecast EBITDA Margin from Hotel Bookings to remain at around 23% throughout our forecast period. There would be around 30% upside to the Trefis price estimate if the margins were to increase to around 30% over our forecast period.
Egencia Corporate Travel Services
- EBITDA Margin on Egencia Corporate Travel Services: We currently forecast EBITDA Margin for Expedia's Egencia Corporate Travel Services to increase from 17% in 2015 to close to 21% by the end of our forecast period. There would be a marginal downside to the Trefis price estimate if the EBITDA Margins were to decline to the historical levels of 15% by the end of our forecast period.
Expedia (NASDAQ: EXPE) is the second largest online travel service provider in the world, in terms of revenues. It operates online travel portals such as expedia.com, hotels.com, and hotwire.com, that help connect travelers with travel suppliers, such as hotels, airlines, cruises, and car rental companies.
Expedia's corporate travel business, Egencia (egencia.com), provides custom travel products and services to corporate travelers and businesses seeking to optimize travel costs and to improve their employees travel experiences.
While serving as a global travel marketplace, Expedia broadly makes money by either (i) acting as a travel agent and charging a commission (known as the processing fee or the booking fee) on every transaction, or by (ii) acting as a merchant and purchasing the travel inventory (air tickets and hotel stays) from the travel providers (airlines and hotels) in bulk at discounted prices and selling the same to the customers at a premium. In addition to this, Expedia sells advertising on its websites, and companies (mostly travel suppliers-hotels and airlines) either pay-per-click or pay a flat fee for the duration of advertising. Trivago, the meta-search engine acquired by Expedia in 2012, is the primary source of advertising revenues for Expedia.
Expedia's Hotel Bookings business is the primary source of value for the following reason.
Higher Revenue Margins from Hotel Bookings
Revenue margin earned on hotel bookings is significantly higher than the commission earned from airline ticket bookings. Gross bookings for hotels and airline tickets in 2015 were both around $29 million, however the revenue margins (revenue earned by Expedia as a percentage of the size of booking) earned on hotel bookings was almost 10x the commission Expedia earned on airline tickets (16.3% for hotels vs. 1.6% for airline tickets). As a result, Expedia's revenue from hotel bookings was over 10x the revenue from Airline Tickets Bookings, in 2015.
The following factors determine the fate of the online travel industry:
- Due to the discretionary nature of leisure travel, online travel service providers, which earn revenue in the proportion (and as a percentage of) travel bookings, depend entirely on the macroeconomic conditions (employment levels, inflation rates, etc). Corporate travel is, in fact, one of the prime indicators of economic activity and is influenced the most by macroeconomic conditions. During the recessionary times of 2008-2009, both corporate and leisure travel plummeted. Amidst rising unemployment and declining disposable income levels, the consumers cut back on their travel plans first, before making adjustments to other expenses.
- Advertising, which constitutes a significant source of revenue for online travel service providers, depends on the level of business activity. Amidst recessionary times, businesses cut back on media and advertising spending and this translates into lower online advertising revenue for travel portals such as expedia.com and priceline.com.
- Leisure travelers, unlike corporations, do not hedge themselves against foreign exchange fluctuations. Hence, the spot foreign exchange rates determine the consumer demand for international travel. In times of adverse foreign exchange rate movements (such as a depreciating dollar), international travel becomes dearer and the same hotel booking and air tickets cost more dollars, thereby discouraging travel bookings.
- Travel service providers such as Expedia and Priceline, earn revenues from international bookings in foreign currencies, but incur most operating expenses in dollars, and report the earnings in dollars. Thus, adverse foreign exchange movements could erode profits of travel service providers. Since an increasing proportion of bookings are coming from the less penetrated emerging economies, the exposure to foreign exchange is expected to increase in the future.
Significant impact of unforeseen events on travel
- Rising fuel prices has the immediate impact of increasing airfares which discourages travel. This not only impacts air ticket bookings but also negatively impacts hotel bookings and destination services such as car rentals and cruises. Decline in the overall bookings hits travel service providers' revenues.
- With rises in fuel prices, airlines are no longer able to offer significant discounts on bulk bookings to travel agents such as Expedia. As a result, the revenue margins earned by travel service providers (under the merchant model) take a hit. The lower revenue margins translate into lower profit margins for the travel service providers.
- Events which are beyond the control of any travel services provider and can critically impact travel, include terrorist attacks, unusual weather patterns, and natural disasters (hurricanes, tsunamis, volcanic eruptions), travel related health concerns (Influenza H1N1, avian bird flue, SARS), political unrest, and other unpredictable events. Unlike other industries, such events have a very significant impact on travel bookings and consequently on the revenues of travel service providers.
- While the U.S. has over 78% of internet users, the proportion of Europe’s population online is close to 61%, with the internet penetration in Asia being even lower, at 26%.
Hence, the increased internet adoption and rise in e-commerce will favor travel providers such as Expedia and Priceline.
Hotels and Lodging Industry
- Fuel expenses constitute the single largest cost head for airlines, making them vulnerable to hikes in crude oil prices. To reduce vulnerability to fuel price volatility, many airlines engage in fuel price hedging.
- Demand for flights is highly correlated to the global economic growth. Thus, a decline in economic growth, or recession, reduces demand for flights, impacting passenger traffic for airlines. On the contrary, steady growth in the global or U.S. economy, grows demand for air travel, allowing airlines to raise their air fares, occupancy rates, and profits.
- Many airlines are figuring out ways to grow their top lines through ancillary means such as baggage fees, access to onboard WiFi/food/drinks, etc. Accordingly, airlines are investing to enhance their product offerings that include in-flight WiFi and other entertainment options, improved lounge facilities, and extra legroom seats.
- During the past decade, low-cost carriers such as Southwest and JetBlue have gained significant market share in the U.S. Looking ahead, we figure these low-cost carriers to continue to grow their market share, as their lower fares attract passenger traffic.
- The U.S. airline industry has seen many mergers and acquisitions in the last decade including the five big combinations of US Airways and America West, Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways. A more consolidated industry has worked to improve profits of all airlines. Fewer players in the market has made it easier for those remaining airlines to add capacity with restraint. Prior to this consolidation in the airline industry, individual airlines were adding capacity at higher rates in an attempt to grow their market shares. This rapid capacity addition resulted in an oversupply of seats, reducing margin and profits of all carriers. Going forward, we believe as long as airlines add capacity with discipline, the industry will remain profitable overall.
Online travel services is highly competitive niche segment within the travel industry.
- During the recessionary times of 2008-2009, as travel declined, so did hotel occupancy rates (the proportion of hotel rooms occupied per year). To meet the operating expenses (since the hospitality business has a significantly higher proportion of fixed costs), hotel owners resorted to offering discounts and lower tariffs. This led to a drop in the Average Daily Rate (the average rate per night of hotel booking). Hotels bookings took a hit and adversely impacted the revenues for travel service providers.
- At 16.3%, hotel Bookings offer markedly higher revenue margins (revenue earned by the travel service provider as a percentage of the size of booking) compared to air ticket bookings (~2%). Hence, travel service providers make maximum profits from hotel bookings.
- The hotels market in Europe and Asia is much more fragmented with smaller, independent lodgings compared to the U.S., where the hotel market is dominated by large hotel chains. Hotel chains are more likely to offer online bookings through their own websites, while online travel agencies such as Expedia are more appealing to small, independent hotels outside the U.S. Travel agencies stand to make higher revenue margins from independent budget hotels under their merchant business model, hence expansion into the hotel markets in Asia and Eastern Europe presents U.S. based online travel service providers with significant growth opportunities.
Threat from Online Search Engines
- Competition in the U.S. online travel market remains intense and traditional online travel companies are creating new promotions and consumer value features in an effort to gain a competitive advantage.
- In June 2007, Priceline eliminated processing fees for its price-disclosed airline ticket services, and in April 2008, it reduced processing fees for its domestic price-disclosed merchant hotel room service. Starting in March 2009, Expedia and Travelocity also eliminated air booking fees, and in April 2009, Orbitz followed. In April 2009, Expedia and Orbitz reduced booking fees on hotel room reservations. As a result of this, no one player could maintain a price advantage over the others on price-disclosed merchant air tickets and hotel room reservations, and the online travel industry as a whole lost revenues.
- In October 2009, Travelocity announced the waiver of its cancellation and change fees for hotel and vacation packages as well as an expanded hotel guarantee, under which consumers who book a hotel room and then find a lower published rate for the same room anytime before the day of check-in are eligible to receive a refund of the difference.
- Since consumers are now increasingly looking for bargains and discounts, traffic obtained through online advertising has increased as a percentage of total demand since the same consumer visits several websites before making a purchase decision. This increased shopping behavior has reduced advertising efficiency and effectiveness as traffic obtained through online advertising becomes less likely to result in a purchase on the web site. Therefore, online advertising expenses for the company have increased at a faster rate than gross profit, a trend which is expected to continue in the future.
- Large and established internet search engines with substantial resources, and expertise in developing online commerce and facilitating internet traffic, are creating and intend to further create, inroads into online travel, both in the U.S. and internationally.
- Google acquired ITA Software, Inc., a major flight information software company, which could allow it to pursue the creation of a new flight search tool which enables users to find flight information on the Internet without using the services of Expedia or Priceline etc. Google has also invested in HomeAway, a vacation home rental service.
- Google has also launched a travel “meta-search” site to show searchers specific hotels and rates in addition to text advertisements. Microsoft has launched Bing Travel, a “meta-search” site which searches for airfare and hotel reservations online and predicts the best time to purchase them. “Meta-search” sites leverage their search technology to aggregate travel search results for the searcher’s specific itinerary across supplier, travel agent, and other websites, and in many instances, compete directly with online travel service providers for customers.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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