- Expedia earnings Q3 2015 were a mixed bag, missing top line expectations but exceeding bottom line estimates.
- Notably, Expedia returned to profitability after several quarters of losses.
- Can Expedia maintain its profitability momentum?
Leading OTA Expedia (NASDAQ:EXPE) has reported mixed third quarter results. Expedia reported revenue of $1.94 billion, good for 13.5% YoY growth, as well as income of $283 million and non-GAAP income, or non-GAAP EPS of $2.07, up 10% YoY. The revenue missed expectations by $20 million while EPS exceeded estimates by $0.05.
Expedia reported that gross bookings rose 21% to $15.4 billion excluding the eLong stake that Expedia divested during the second quarter.
Expedia shares surged 6.5% as investors celebrated the healthy rise in profits after a string of losses extending back to several quarters.
Orbits Buyout and eLong Sale Boost Expedia Earnings
Expedia attributed its profit swing to its $1.3 billion buyout of Orbitz and the resulting cost synergies. Expedia CFO Mark Okerstrom said that Expedia would realize significant cost savings of more than $75 million per year from the integration by cutting staff and legal services that Orbitz no longer needs. Those savings will, however, be partly offset by the $30 million and $50 million restructuring charges the company will incur during the fourth quarter and fiscal 2016, respectively.
But perhaps the biggest reason why Expedia was able to return to profitability during the quarter can be chalked up to the company’s sale of majority stake in eLong as I discussed in my Expedia earnings preview. Expedia sold a 62.4% stake in eLong to an unnamed party during the second quarter. eLong had become a huge drain on Expedia’s resources due to its mounting losses. During the previous quarter, Expedia said that it would have realized a 4% growth in EPS as opposed to the loss it reported. Although the remaining 37.6% stake in the Chinese company will continue to negatively impact Expedia’s bottom line, the effect will be much softer going forward.
Expedia discussed about the impact of its two chief rivals that investors have been fearing might put the company under excessive competitive pressure: TripAdvisor (NASDAQ:TRIP) and AirBnB. Expedia shares recently sold off quite heavily after TripAdvisor announced that Priceline (NASDAQ:PCLN) had agreed to make its extensive Booking.com properties available on TripAdvisor’s new booking platform, Instant Booking. Instant Booking is a relatively new feature on TripAdvisor’s website that allows its users to book hotels directly without having to navigate to OTAs. TripAdvisor sends a lot of traffic to both Expedia and Priceline. Once people read hotel reviews on its site, they then proceed to the two OTAs to do their booking. About 10% of TripAdvisor’s traffic ends up visiting the two OTAs. Instant bookings makes the booking process easier for users, but undercuts both Expedia and Priceline.
Both Expedia and Priceline had initially refused to make their inventory available on the new platform due to the obvious competitive implications. About 9% of Expedia’s revenue is linked to the traffic the company receives from TripAdvisor. TripAdvisor openly admitted that Priceline’s participation on Instant Booking would accelerate its growth which would put pressure on the amount of traffic Priceline receives from TripAdvisor. But Expedia added that TripAdvisor is one of the company’s lower margin channels, so the effect on profitability would be muted.
Expedia also talked about AirBnB, a home rentals company that operates much like HomeAway (NASDAQ:AWAY). AirBnB has been growing like a weed, and saw its listed properties double in 2014 to almost a million. AirBnB has become very popular due to its superior flexibility compared to HomeAway. By encouraging people to rent other people’s homes instead of staying at hotels, AirBnB presents a real threat to OTAs. Both Expedia and Priceline also have their own home rental units, though they tend to do more business with property management companies as opposed to individual homeowners the way AirBnB does.
But Expedia said that AirBnB’s impact on Expedia’s business had been immaterial, though excessive inventory had been leading to pricing pressure in some markets.
Lower FX Impact
Part of the reason why Expedia has continued to show admirable growth while its chief rival Priceline falters is due to the company’s much lower exposure to international markets. Only about 45% of Expedia’s revenue comes from international markets compared to more than 86% for Priceline. The strong dollar has been decimating growth for many companies with huge international exposure. Luckily for Expedia, the effect is rather muted.
Expedia’s return to profitability after many quarters of losses is a great step in the right direction. The company’s management has aptly demonstrated that it can make strategic decisions that achieve the desired outcome. Meanwhile, Expedia’s growth has not been as badly impacted by the strong dollar. Expedia shares are surprisingly much cheaper than Priceline’s even after the company’s strong rally this year. I believe the large gap between the two companies will close significantly as Expedia continues to outperform Priceline thus giving Expedia shares a significant upside potential.