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Shares of Expedia (EXPE) ended last trading week on a bad note. The online travel company reported a disappointing set of first quarter earnings results on Thursday after the close. The report and accompanying soft guidance for the second quarter sent shares tumbling in Friday's trading session.

First Quarter Results

Expedia generated first quarter revenues of $1.01 billion, up 24% on the year before. The strong revenue growth rate is surprising given that gross bookings rose by merely 16% to $9.78 billion. Revenues comfortably beat consensus estimates of $966 million.

On average Expedia took a $10.40 commission on every $100 spent on hotels and related travels by consumers booking through its websites. In comparison, last year the company took an average commission of $9.75 for every $100 spent.

The company reported a net loss of $104.2 million, compared to a $20.6 million profit last year. Earnings were impacted by $66 million in stock based compensation related to the acquisition of Trivago GmbH, as well as a $60 million charge related to a Hawaii tax court ruling.

Adjusted earnings fell by 4% to $35.3 million, coming in at $0.25 per share which is a penny below last year's level. Adjusted earnings beat consensus estimates of $0.23 per share, but the size and nature of the one-time charges took investors by surprise.

Looking Through The Numbers

Gross bookings rose 16% over the past quarter, and were aided by the acquisition of VIA Travel which added roughly 4%. Bookings were particularly strong in the hotel segment, as they were up by 28%, while air tickets bookings increased by merely 9%.

Revenue growth was further driven by the international operations which reported a 36% revenue growth, compared to 16% in the US. In total some 45% of revenues were generated internationally, bringing the company on track to derive the majority of revenues from abroad next year.

Hotel revenues, which now make up 70% of Expedia's revenues, increased by 24% as hotel nights were up by 28% partially offset by a 3% decline in revenues.

The favorable effect of higher revenues and increasing gross margins was completely undone by a 295 basis point increase in selling and marketing expenses, which came in at 48.6% of total revenues. Higher expenses were driven by online and offline marketing efforts.

Valuation

Expedia ended its first quarter with $2.1 billion in cash, equivalents and short-term investments. The company operates with $1.27 billion in short and long-term debt, for a net cash position of approximately $800 million.

For the full year of 2012, Expedia generated annual revenues of $4.03 billion on which the firm net earned $280 million. At this rate, the company is on track to generate annual revenues of approximately $5 billion in 2013, on earnings of roughly $200 million after the charges in the first quarter.

Factoring in Friday's 10% decline, and the market values Expedia around $7.9 billion. Excluding the net cash position, operating assets are valued a little above $7 billion. This values operating assets at approximately 1.4 times annual revenues and 35 times annual earnings.

Expedia currently pays a quarterly dividend of $0.13 per share for an annual dividend yield of 0.9%.

Some Historical Perspective

Long-term shareholders in Expedia have most certainly enjoyed their investment in the company. Shares were trading in their low 30s back in 2007, before hitting lows of $7 during the financial crisis in 2009. From that point in time, shares have steadily recovered, a recovery which accelerated in 2012. Shares did manage to peak at $68 earlier in 2013, and have lost some 15% from that point in time, currently exchanging hands around $58 per share.

Between 2009 and 2012, Expedia has managed to grow its revenues by roughly 50% from $2.74 billion in 2009 to $4.03 billion over the past year. Net income actually fell slightly from $300 to $280 million in the meantime.

Increased Competition

The main takeaway from Expedia's last earnings report is the increased competition in the online travel industry. According to researcher comScore, the US online travel industry grew by 9% in 2012, thereby surpassing the $100 billion mark. Expedia, with a 31.6% market share in the industry, based upon pageviews, holds a greater share compared to two of its main competitors Priceline.com (PCLN) and Orbitz Worlwide (OWW).

Fortunately for Expedia, the company has already focused early on international markets. International revenues merely made up a quarter of total revenues back in 2007, a ratio which today stands around 45% as the company is on track to generate the majority of its revenues abroad in the coming year.

The foreign operations received a boost from the acquisition of Trivago GmbH announced back in December of 2012. The $564 million deal, under which Expedia acquired a 61.6% stake in the German company, will boost Expedia's annual revenues by some $130 million, based on 2012's performance. The company has doubled its annual revenues every year since 2008, and is thereby expected to boost the international growth profile of Expedia.

Selling and marketing expenses grew relative to revenues due to product support for the main brands, especially internationally as competition is increasing. Notably online advertising, on platforms like Google (GOOG), is increasing the costs related to affiliated advertising programs.

Investment Thesis

Besides making acquisition to boost the growth profile of the foreign operations, Expedia has invested a lot for its shareholders. Over the past quarter, it repurchased some 2.0 million shares for $127 million, thereby retiring its share base by 6% per annum.

The investments in mobile applications are paying off as well, as Expedia's app has been downloaded over 30 million times across its brands. The initiatives on its Expedia Traveler Preference program are moving according to plan with roughly 25,000 hotels having signed up. Participating hotels have seen much higher room nights growth following the participation in the plan.

Still investors are disappointed. One-time charges depressed profitability in the first quarter, and increased marketing expenses are to blame. Expedia furthermore sees second quarter headwinds due to the early Easter weekend in 2013. The problems at the Hotwire business which materialized after Hurricane Sandy have actually intensified during the first quarter.

When Expedia announced the acquisition of Trivago back in December, I concluded to remain on the sidelines. While I applaud the strong financial position and the strong revenue growth, shares were trading at fair multiples around 20 times 2012's annual earnings. The increased competition in the industry, which I predicted, seems to have materialized as Expedia is boosting marketing efforts to maintain growth.

Today I reiterate my stance. While the long-term prospects of the online travel industry remain good, I see short to medium pressures on profitability and the higher valuation makes the stock vulnerable to a setback.

Source: Expedia's Shareholders Are Disappointed As Competition Intensifies