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Expedia Group Inc. Is Losing Money Today to Make More of It Tomorrow

By Neha Chamaria - Updated Apr 30, 2018 at 3:45PM

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The online travel giant's first-quarter losses widened, but for a reason.

The market has short memory. It pummeled Expedia Group, Inc. (EXPE -1.05%) shares when the online travel company reported its fiscal 2017 numbers in February. Not much has happened since, except Expedia adding "Group" to its name in a bid to "better reflect the global nature" of its business.

Yet, when Expedia released its first-quarter earnings after market close on April 26, shares surged 8.2% the next day. Expedia's name change may have nothing to do with the stock's rally, but its latest earnings report reflects the contribution of each of the company's brands -- also the core idea behind its rebranding.

Here's what you need to know about Expedia's first quarter and its future plans.

Expedia Q1 results: The raw numbers

The table below gives a snapshot of the key numbers from Expedia's first quarter. While the other metrics are self-explanatory, gross bookings is a key operating metric to gauge the growth of a travel company as it represents the total value of transactions during a period, or simply the total price due for travel by travelers, inclusive of taxes and fees, and adjusted for cancellations and refunds.

It's important to understand that Expedia recognizes revenue only when the travel takes place, which is why the gap between gross bookings and revenue.

Metric Q1 2018 Q1 2017 Year-Over-Year Change
Gross bookings $27.2 billion $23.6 billion 15%
Revenue $2.51 billion $2.19 billion 14.6%
Net income (loss) ($137 million) ($86 million) (59.3%)
Free cash flow $1.48 billion $1.52 billion (2.6%)

Data source: Expedia. Table by author.

The above top- and bottom-line numbers include revenue from Trivago (TRVG -2.89%), a separately listed hotel search company that's majority owned by Expedia and earns it advertising revenue by sending referrals. Revenue from Trivago grew 12% year over year to $319 million.

If you're wondering why Expedia's losses widened despite higher revenue, blame high operating costs. 

Several boards on a road sign with names of different places on them pointing in various directions.

Expedia is busy expanding its portfolio. Image source: Getty Images.

What happened with Expedia this quarter

High operating costs is a new normal in the online travel agency business, thanks to stiff competition and similar offerings that call for aggressive promotions and marketing to stay in the game. 

In the first quarter, Expedia's: 

  • Selling and marketing expenses climbed 19%.
  • Technology and content costs increased 23% on higher spending on e-commerce and cloud migration.
  • General and administrative expenses climbed 26%.

As a result, Expedia's operating costs surpassed revenue, hitting its bottom line. 

What were those expenses for, you may ask? Expedia is expanding at a steady pace, adding 50,000 properties to its global lodging portfolio and 25,000 new HomeAway listings in Q1. With that, Expedia's total property portfolio hit 665,000, up from 590,000 in the fourth quarter. 

While Expedia's core OTA segment -- which comprises most of its brands including Expedia, Hotels.com, Orbitz, Travelocity, Wotif, and CarRentals.com -- is performing well, it is the HomeAway vacation rentals business that's been a significant growth driver in recent quarters. The first quarter was no different, as is evident from the gross bookings numbers below:

Business Segment Q1 2018 Q1 2017 Year-Over-Year Change
Core OTA $21.17 billion $19.11 billion 10.78%
HomeAway $3.95 billion $2.69 billion 46.8%
Egencia $2.08 billion $1.8 billion 15.6%

Data source: Expedia. Chart by author.

Egencia is Expedia's travel services for corporate travelers.

CEO Mark Okerstrom believes it's early days for HomeAway and foresees "tremendous opportunity ahead in the $120 billion alternative-accommodation space."

What management had to say

Okerstrom is excited about Expedia's "good start" in 2018, and he expects the company to continue making progress on strategic initiatives aimed at positioning it "even better to deliver sustained healthy top and bottom-line growth for many years to come."

Some of the immediate initiatives that management highlighted during Expedia's earnings call were accelerating the pace of acquisitions in priority markets, targeting 180,000 property additions to its global lodging portfolio in fiscal 2018, and integrating additional HomeAway properties.

Overall, Okerstrom is confident that Expedia is well-poised "to deliver strong growth and share gains in this huge $1.6 trillion market for many years to come."

Looking forward

Expedia reiterated its full-year adjusted EBITDA growth guidance of 6% to 11%, where adjusted EBITDA is earnings before interest, tax, depreciation, and amortization, adjusted for noncash items such as restructuring and acquisition costs. The company, however, expects a challenging second quarter and foresees all of its adjusted EBITDA growth to come in the second half of the year.

For now, it looks like management is focused on directing efforts to gain market share through acquisitions at the cost of near-term profitability -- a strategy that's likely to pay off in the long run.  

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Stocks Mentioned

Expedia, Inc. Stock Quote
Expedia, Inc.
EXPE
$121.53 (-1.05%) $-1.29
Trivago Stock Quote
Trivago
TRVG
$1.68 (-2.89%) $0.05

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