5 Things Expedia’s Management Wants You to Know

Expedia delivered impressive financial performance for the second quarter in 2014. Let´s go through the company´s latest earnings conference call and highlight the main risks and opportunities for investors in the company.

Aug 27, 2014 at 9:36AM

Expe Image

Source: Expedia.

Online travel agency Expedia (NASDAQ:EXPE) reported remarkably strong earnings for the second quarter of 2014, and the company seems positioned to continue delivering sound performance. Given its strong results, let's go over Expedia´s latest earnings conference call and highlight a few important takeaways for investors.

Three main growth drivers
Expedia is benefiting from three main growth drivers: Travel demand is growing strongly, and an increasingly bigger part of that demand is happening online and via mobile devices, so the size of the market opportunity is getting bigger for online travel players such as Expedia and its main competitor Priceline (NASDAQ:PCLN).

Unlike Priceline, which has always done most of its business in international markets, Expedia has traditionally been more focused on the U.S. But the company is now expanding more aggressively on the global front, and this is having positive implications on overall growth rates. According to CEO Dara Khosrowshahi:

Travel spend, in general, is growing nicely faster than GDP. And then we've got the online tailwind behind us. And then we've been growing pretty aggressively internationally, as you know. So you kind of have 3 tailwinds behind you: you're in a good category, more is going online and mobile is accelerating. And for us, international remains a great opportunity that's very, very underpenetrated.

Volume expansion is a priority over revenue per unit
Expedia is focused on expanding its volume and consolidating its competitive position in the online travel industry, even if this comes at the expense of falling revenue per unit. Revenue growth is still quite impressive, with a 24% increase in sales during the last quarter, but investors may want to watch the volume versus price dynamics in the coming quarters in order to evaluate overall growth prospects.  

Per Mark Okerstrom, chief financial officer and executive vice president:

Aided by 2 percentage points of growth in average daily rates this quarter, revenue per room night was down 4% year-over-year. Notably, this quarter, the revenue per room night decline was driven primarily by inventory expansion efforts and the impact of our loyalty programs and discounting, with no real impact from the international mix component that we've been noting for a while.

We believe that global size and scale drive real competitive advantages in online travel. And given the size of the global opportunity ahead of us, we'll be happy to continue to trade unit economics for greater volume over the long term.

Competitive pressure is on the rise
The competitive landscape is getting tougher as rivals such as Priceline, the owner of Booking.com, and TripAdvisor increase their spending in marketing and advertising, both online and in traditional media. This means Expedia will need to invest actively and execute efficiently in order to continue thriving.

Khosrowshahi said:

Well, I think the competitive dynamic that we've seen in the business has been pretty consistent over the last year or two, especially -- and I think it ratcheted up, especially with Booking.com and TripAdvisor spending dollars offline, where they hadn't in the past. So you're in a situation where there are more voices competing for the consumer attention. And you just have to execute better than you have in the past. And we've invested pretty aggressively in technology, product, etcetera. And I think it's those investments that are helping us compete in this marketplace. In general, we are seeing the price of reaching the online consumer, in particular, increasing on a year-on-year basis.

Increasing profitability

Despite selling and advertising spending rising by 26% in the last quarter, the company delivered expanding profitability, as adjusted EBITDA margin increased to 17.3% of revenue from 15.9% of sales in the same quarter last year.

Management believes revenue growth should translate into healthy profitability in the future. This bodes well for Expedia investors, since growing sales in combination with an expanding profit margin should provide a double boost to earnings growth.

According to Okerstrom:

Over the past couple of years, we worked very hard to position the business to have strong discipline in our fixed costs to fund aggressive investments in selling and marketing.

In this structure, revenue outperformance tends to have strong flow-through to profitability, and that's exactly what we saw this quarter.

The integration of trivago is going well

Expedia completed the acquisition of Germany-based hotel metasearch company trivago in March of last year. Expansion into this area is a crucial strategic move for Expedia, not only as a business opportunity on its own merits, but also because it reduces dependency on Google when it comes to search. According to Okerstrom, the integration of trivago is going quite smoothly.

Q2 is our first completely clean comp on the trivago acquisition. In this quarter, we posted growth in advertising and media revenue of 54% on continued strength for trivago and our media solutions group. And on a gross basis, including intercompany revenue, trivago grew revenue robustly at similar rates to what we've seen since we made the acquisition. trivago continues to grow in importance as a traffic acquisition channel for travel advertisers across the globe.

Importantly, our own online travel brands are finding trivago to be an excellent source of leads and are happy to participate in the significant clip volume growth that trivago is generating.

Key takeaways
Falling revenue per room and an increasingly competitive industry landscape are relevant risks to watch. On the other hand, Expedia is benefiting from strong growth drivers, and growing sales in combination with expanding profitability should allow the company to sustain energetic earnings growth. All things considered, Expedia has what it takes to continue delivering sound performance for investors in the years ahead.

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Andrés Cardenal owns shares of Priceline Group. The Motley Fool recommends Priceline Group. The Motley Fool owns shares of Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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