Company Overview: Expedia, Inc. is an online travel company. The Company operates through four segments: Core Online Travel Agencies (Core OTA), trivago, Egencia and HomeAway. The Company's Core OTA segment provides a range of travel and advertising services to its customers across the world, through a range of brands, including Expedia.com and Hotels.com in the United States, and localized Expedia and Hotels.com Websites throughout the world, Orbitz.com, Expedia Affiliate Network, Hotwire.com, Travelocity, Wotif Group, CarRentals.com and Classic Vacations. The Company's trivago segment sends referrals to online travel companies and travel service providers from its hotel metasearch Websites. Its Egencia segment, which also includes Orbitz Worldwide (Orbitz) for Business, provides managed travel services to corporate customers across the world. The Company's HomeAway segment operates an online marketplace for the vacation rental industry.
 

EXPE Details

With companies in travel industry planning an increase in advertising spending to beat competition, Expedia Inc (NASDAQ: EXPE) is not lagging behind. The group has signaled for ramping up investments in hotel market management sales force and managing performance-based marketing channels, which in turn might put pressure on bottom line performance in near term, but are expected to support growth in the long-term. There is thus some level of certainty with respect to Expedia’s growth opportunity while the group is investing in global supply and geographic expansion, and any slowdown in structural demand looks bleak at the moment.

Rising International Gross bookings: Expedia achieved total gross bookings rise of 11% during the third quarter of 2017 boosted by Brand Expedia, HomeAway, Hotels.com and EAN brands. Domestic gross bookings rose 5% on a year on year (yoy) basis while international gross bookings enhanced 22% (including 3 percentage points of positive foreign exchange impact). International gross bookings reached $8.7 billion and contributed 39% of the worldwide bookings, against 35% in the prior corresponding period. The group’s revenue surged 15% with Domestic revenue and international revenue rising 9% and 23%, respectively. International revenue is now contributing 47% of the worldwide revenue, against 44% in the prior corresponding period. The group’s adjusted EBITDA enhanced 6% on a year-over-year basis during the third quarter, despite trivago's $8 million loss as well as the forecasted negative impact of over $15 million to $20 million from the recent natural disasters.
 

Gross Bookings and Revenue performance (Source: Company reports)
 
Building a strong core portfolio: The group’s global lodging portfolio has over 500,000 properties as of September 2017, comprising over 95,000 HomeAway listings on 28 Brand Expedia, Orbitz, Travelocity, CheapTickets and ebookers points of sale. Expedia, Inc., without HomeAway, reached a milestone in July as more than 1 million net room nights were booked in a single day for the first time ever. They also renewed their supply marketing agreements with airBaltic, Alaska Air Group, American Airlines and TAP Air Portugal. The group launched cruises to Cuba on all of its North American websites, and is currently marketing Cuban sailings on Azamara Club Cruises, Carnival Cruise Line, Holland America Line, Norwegian Cruise Line and Royal Caribbean International. Their Expedia PartnerCentral (EPC) Property Analytics is currently available globally which will leverage the latest property, competitive set and market data to help make informed decisions to maximize demand and revenue. The group also invested in ALICE, which is a hotel technology platform for staff, concierge and guests.
 

Major metrics (Source: Company reports)
 
Strategic alliance with Thomas Cook: The group’s Brand Expedia made a strategic alliance with Thomas Cook, which is Europe's major holiday firm. With this move, the group intends to leverage Thomas Cook's technology, offering consumers with access to thousands of more hotels for Thomas Cook's city and domestic holiday businesses.  Meanwhile, Hotels.com, is deriving over 45% of global transactions and 55% of traffic from their mobile devices. Hotels.com launched collaborations with Avios, whose Travel Rewards members in the UK could collect points while shopping on Hotels.com and also redeem for travel rewards. Expedia® Affiliate Network (EAN) also launched a 'manage my booking' widget which enables partners to integrate and deliver a seamless post-booking experience for their travelers, letting them view, print and amend itineraries. Expedia® Affiliate Network also went live with RoomIt by CWT, which is the new hotel distribution division of Carlson Wagonlit Travel, making EAN's competitive rates and supply available to RoomIt and CWT clients. On the other side, SilverRail made a new technology agreement with Rail Europe, to provide a connectivity and transaction processing layer to all of Rail Europe's train operators' fares and seat inventory.
 
Strong potential from Egencia and HomeAway: The group’s trivago brand acquired the assets of tripl GmbH, to leverage the personalization technology using big data and a traveler-centric approach. trivago optimization on their product for mobile device usage, which contributed to mobile revenue share reached over 60% during the third quarter of 2017. Their HomeAway delivered nearly 1.5 million online bookable listings which are currently instantly bookable. HomeAway launched MarketMaker to owners and property managers, the vacation rental industry’s first revenue management tool to tap into real-time travel data and offer insights into specific markets’ demand and occupancy. HomeAway continues to roll out updates of their secure messaging platform for their North American and European sites, with pre-booking communications currently facilitated via the secure messaging system for over 65% of listings. With regards to Egencia, the brand signed an estimated $385 million pipeline of new clients during the third quarter, while made a new agreement with Domtar, the largest integrated producer of freesheet paper in North America. Egencia also launched the rail product for US travelers in its mobile app.
 
Balance sheet highlights: The group placed over $1 billion in senior notes with a 2028 maturity and a coupon of 3.8% during the quarter. They have cash and cash equivalents of $3.8 billion as at September 30, 2017. Consolidated net cash provided by operating activities reached $1.9 billion during the nine months ended September 30, 2017 while consolidated free cash flow reached $1.4 billion. They declared a dividend of $0.30 per share which would be paid in the fourth quarter. On the other side, the group’s cloud migration project is on track. They spent a total of $29 million on cloud during the third quarter, up from $11 million in the prior year period. In this year-to-date, the group spent $66 million across both cost of revenue and technology and content, and forecasts to spend over $100 million on cloud this year.
 
FY17 guidance: For FY17, the group forecasts an adjusted EBITDA to grow in the mid- to high single-digit percentage range. This guidance includes a lower EBITDA contribution from trivago in the fourth quarter as well as a hangover effect of the natural disasters which is around $10 million. The group continues to focus on managing performance-based marketing channels while enhancing their investments in the hotel market management sales force. The prevailing challenges are, however, expected to lead to slightly sluggish profit growth in near term. 
 
2018 initial forecasts: The group’s Core OTA (Online Travel Agents) business, has been improving while the group’s rapid pace of property addition along with related marketing and infrastructure investments in priority markets  would lead to decent returns over the medium term. As a result, the group is currently in the process of ramping up the required resources. On the other side, the group expects to incur more cloud expenses in 2018, which would impact 2018 profitability to some extent. Moreover, HomeAway is also undertaking its own cloud migration, which would lead to over $30 million of direct cloud expense next year. However, they expect a solid potential at HomeAway and believe the progress would continue. Given the long-term potential the business promises, the group intends to continue to invest in that business. They forecast HomeAway's 2018 EBITDA to be below their earlier target of $350 million. But for trivago segment, they expect the performance to be challenging for 2018. Going forward, the group would be focusing on some major themes. Firstly, they are aiming to become relevant on a global basis. They are also targeting to build market-competitiveness and to be well placed for market-leading offerings in every single market. Accordingly, the group is building their product portfolio and capabilities to match up the long-term prospects. 
 
Stock performance: The shares of Expedia  swooned around 19% in the last four weeks (as of November 15, 2017) at the back of lower than expected third quarter of 2017 performance. Lower than forecasted growth of Orbitz and Travelocity coupled with hurricanes impact impacted the overall performance. The group also expects slightly sluggish growth in 2018. On the other hand, the group continues to focus on managing performance-based marketing channels and is making investments in the hotel market management sales force. They are focusing on Egencia and HomeAway business while expanding the portfolio via acquisitions and strategic partnerships. The incremental non-cloud investments are also aimed at positioning the business for faster growth. We believe investors need to leverage the recent stock fall as a buying opportunity. Given the long-term potential, we put a “Buy” recommendation on the stock at the current price of USD121.17


EXPE Daily Chart (Source: Thomson Reuters)

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