Why Is Expedia (EXPE) Up 2% Since the Last Earnings Report?
Zacks Equity Research
Updated
It has been about a month since the last earnings report for Expedia, Inc. EXPE. Shares have added about 2% in that time frame, underperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Expedia Q3 Earnings Meet, Revenues Beat Estimates
Expedia Inc. reported third-quarter 2016 adjusted earnings of $2.24, which was in line with the Zacks Consensus Estimate. It was much better than 40 cents reported in the previous quarter and $1.59 in the year-ago quarter.
Revenues were up 17.5% sequentially and 33.2% year over year to $2.58 billion, ahead of the Zacks Consensus Estimate of $2.56 billion. Gross bookings decreased 1.5% sequentially but increased 20.7% year over year to $18.58 billion. The revenue margin was 13.9%, up 220 bps sequentially and 130 bps above the year-ago level.
Revenue by Segment
Core OTA segment revenue was up 18% sequentially and 19.8% year over year to $2.1 billion.
trivago surged 37.3% sequentially and 56.8% from the year-ago quarter to $276 million. Management will not be providing additional commentary on this business in the next few months as the company prepares for an IPO of this business.
Egencia slumped 10.4% on a sequential basis but increased 19.1% on a year-over-year basis. HomeAway jumped 22.1% sequentially to $210 million.
Core OTA, trivago, Egencia and HomeAway contributed 80.7%, 10.7%, 4.3% and 8.1% of gross revenue (before inter-company eliminations), respectively.
Revenue by Channel
Around 55% of total revenue was generated through the merchant business (direct sales), another 28% came through the agency model (where Expedia operates as an agent of the supplier) and roughly 9% came from Advertising & Media with HomeAway accounting for the remaining 8%.
The four channels were up 16.3%, 18.1%, 92.8% and 22.1%, respectively on a sequential basis. On a year-over-year basis, Merchant, Agency and Advertising & Media grew 15.1%, 30.3% and 49.7%, respectively.
Revenue by Geography
Around 56% of Expedia’s quarterly revenue was generated domestically, with the remaining 44% coming from international sources. The domestic business climbed 14.2% sequentially and 38.6% from a year ago. The international business grew 22.3% sequentially and 27% from the year-ago quarter.
Revenue by Product Line
Hotel and Air, the two main product lines advanced 15% and 52%, respectively from the year-ago quarter. The increase in Hotel revenue came from a 17% increase in room nights stayed driven by positive contributions from acquisitions as well as organic growth in Brand Expedia and Hotels.com.
Orbitz contributed almost 6 percentage points of room night growth, which was 20% in the quarter. Average daily rate (“ADR”) inched up 1% year over year, while Revenue per night edged down 2%.
The surge in Air revenue was attributable to a 32% increase in ticket volumes in addition to a 15% increase in revenue per ticket. Orbitz contributed 37 percentage points of air revenue growth and 22 percentage points of air ticket growth in the quarter.
In the last quarter, domestic room night growth of 20% trumped the international room night growth of 15%.
Rental car days surged 34%, with Orbitz adding 19 percentage points to rental car days in the reported quarter.
Operating Details
Adjusted gross margin expanded 240 basis points (bps) on a sequential basis and 80 bps on year-over-year basis to 83.8%.
Adjusted EBITDA soared 101.5% sequentially and 42.2% year over year to $667 million. Core OTA and Homeway EBITDA increased 66.8% and 102.6%, respectively on a sequential basis. On a year-over-year basis Core OTA EBITDA were up 21.2%.
Trivago reported EBITDA of $6 million as compared with $7 million in the previous quarter and ($9) million in the year-ago quarter. Egencia EBITDA plunged 30.8% sequentially but surged 28.6% on a year-over-year basis.
Operating expense as percentage of revenues was 64.8% as compared with 75.8% in the previous quarter and 65.9% in the year-ago quarter.
Selling & Marketing (S&M) expense decreased 590 bps sequentially and 200 bps from the year-ago quarter. Technology & content declined 280 bps from the previous quarter but increased 120 bps from the year-ago quarter as the company continued to strengthen its technology staff bench coupled with the cloud migration initiative.
General & Administrative expense plummeted 230 bps quarter-over-quarter and 30 bps on a year-over-year basis in the reported quarter.
As a result operating margin expanded to 19.1% as compared with 5.6% in the previous quarter and 17.2% in the year-ago quarter.
Balance Sheet
As of Sep 30, cash and short term investments totaled $1.91 billion slightly down from $2.34 billion as of Jun 30. The net debt balance was $1.29 billion, compared to net debt of $861.8 million going into the quarter.
Outlook
Expedia expects revenue per ticket growth to return to a more normalized level in the fourth quarter. The company expects to increase investments in selling & marketing and in product & technology on HomeAway segment going ahead.
The additional spending along with the phasing out of tiered subscription fees and will result in slower adjusted EBITDA growth for HomeAway beginning the fourth quarter. The company plans to rollout consumer fee next year, which will further impact HomeAway profitability.
Nevertheless, Expedia believes that the aggressive level of investment will help the division to achieve its target of $350 million of adjusted EBITDA at HomeAway in 2018.
In terms of technology & content expense, Expedia expects spending to decline to the high 20% to low 30% range in the fourth quarter. The company anticipates further deceleration into 2017.
Expedia stated that expenditure on cloud will more than double in 2017 as compared with this year, as the company continues to transfer significant portions of products and capabilities to the cloud. The related expense for full-year 2016 will be over $30 million, which will impact EBITDA.
However, for full-year 2016, on a consolidated basis Expedia continues to anticipate adjusted EBITDA growth to be in-line with the midpoint of the company’s target range of 35% to 45%.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 477.93% due to these changes.
Expedia, Inc. Price and Consensus
Expedia, Inc. Price and Consensus | Expedia, Inc. Quote
VGM Scores
At this time, Expedia's stock has a subpar Growth Score of 'D', though it is lagging a bit on the momentum front with an 'F'. Following the exact same course, the stock was allocated also a grade of 'D' on the value side, putting it in the bottom 40% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate investors will probably be better served looking elsewhere.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We are expecting a below average return from the stock in the next few months.
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