Backed by continued acceleration in hotel bookings and higher international revenues, leading online travel agency Expedia (EXPE) posted yet another quarter of solid growth despite a weak macro environment. The company closed its fiscal 2012 with $4.03 billion in annual revenues, a 17% increase compared to 2011, and marked 24% year-over-year growth in Q4 2012 earnings.
Owing to higher bonus funding, the year-over-year impact of the VIA acquisition and professional fees associated with the Trivago transaction, Expedia's general and administrative expenditures in Q4 2012 increased in proportion to its revenue growth. Additionally, the company incurred a $110 million charge related to an unfavorable Hawaii tax court ruling, which it intends to appeal. Excluding the charge, Expedia posted a 10% year-over-year increase in Q4 2012 net income.
With a goal of growing its user base, Expedia aims to continue investing in developing its technology and content to improve its product offerings and expand its presence across geographical segments. While it remains positive about its long-term growth potential, it is wary of increasing competition in international as well as domestic markets. Nevertheless, we believe that with an expanding international presence, robust growth in hotel bookings, and a focus on developing its mobile platform Expedia is well-positioned to leverage growth in the online travel market.
Higher Revenue Contribution From International Markets
Much of Expedia's revenue growth was driven by a 33% annual increase in global room night booked in Q4 2012, which translated to a 15% year-over-year increase in hotel revenues. While domestic hotel bookings increased by 19%, international room bookings' annual growth accelerated to 49% in Q4 2012 compared to 38% in Q3 2012. Expedia's revenue contribution from international markets has nearly doubled in the past five years and the company claims to be gaining additional market share in the $1 trillion global travel market.
The fragmented European hotel market and rising per capita income in emerging economies provide tremendous growth opportunities for travel agencies. Additionally, Internet penetration in these economies is relatively low but is expected to grow at a rapid pace, which leaves immense potential for growth for the online travel industry as a whole.
Strong global growth in Hotels.com, international expansion of Hotwire, the acquisition of VIA Travel by Egencia, the Air-Asia Expedia joint venture, the collaboration with Fotopedia Paris and Fotopedia Japan, and the eLong partnership to expand presence in China are factors that have contributed to Expedia's growth in international hotel bookings, and we believe these will continue to be the guiding factors for future growth as well.
Increasing Threat From Priceline in the U.S. Market
Expedia continues to account for the highest market share of the agency model in U.S. Under the agency model, an OTA like Expedia acts as the agent in the transaction, passing reservations booked by travelers to the relevant airline, hotel, car rental company or cruise lines. While Expedia accounts for 14.23% of the market, Priceline (PCLN) has 11.6% market share.
Over the years Priceline has been successful in narrowing the market share gap in the domestic (U.S.) market with Expedia. After Priceline's acquisition of meta-search engine Kayak, Expedia anticipates the competition from Priceline to intensify in the domestic market. The acquisition of Kayak could increase traffic to Priceline's website in turn increasing booking transactions. In addition, Priceline recently introduced an aggressive advertising compaction for the U.S. market, which shows its commitment to increase its market share.
Trivago Acquisition Expands Expedia's Hotel Presence in Europe
In December 2012, Expedia announced its acquisition of Trivago, one of the leading meta-search engines for hotel bookings in Europe. The two companies have signed a definitive agreement wherein Expedia will acquire a 61.6% share in Trivago for an estimated price of 477 million euros.
Trivago is one of the leading meta-search engines for hotel bookings in Europe. Established in 2005, the website now has over 600,000 hotels across 140 booking sites in 30 countries. Expedia claims that Trivago has a significant presence in many European countries, which is of strategic importance for its international business.
Priceline has a larger presence in the European hotel market, which has contributed to its robust growth over the years. We feel that apart from marking Expedia's entry in the meta-search space, Trivago will help fuel the company's strategy to leverage growth in the European hotel market (see "Trivago's Acquisition Expands Expedia's Hotel Portfolio In Europe").
Outlook for 2013
- Adjusted EBITDA to grow by low double digits
- Cost of revenue and general and administrative expenses to increase slower than overall revenue
- Selling and marketing expenses to grow faster than revenue
- Technology and content expense to grow faster than revenue
- Effective tax rate: 25% to 27%
We are in the process of updating our current price estimate of $63.12 for Expedia.
Disclosure: No positions.