Expedia Inc.’s (EXPE) first quarter earnings beat the Zacks consensus by 5 cents, or 11.2%. However, revenues fell short, missing by 1.2%. Shares opened 2.0% higher this morning and are up over 7% since then.
Revenue
Revenue for the quarter was $834.0 million, up 16.2% sequentially and 8.3% year over year. There is a clear revival in travel spending, because management stated that growth was in spite of several negative pressures in the quarter, including the volcano that impacted transatlantic travel, negative foreign exchange movements and escalating airfares. Currency had a negative 2.9% impact on revenue in the last quarter, while acquisitions had a positive 0.3% impact.
Revenue by Segment
Leisure customers remained the largest revenue contributors, generating nearly 82% of revenue. Corporate customers (Egencia) generated a little over 4%, while TripAdvisor brought in the remaning 14%. The three categories grew 16.8%, 9.6% and 5.9%, respectively, from the March quarter of 2010. They were up 3.8%, 135.8% and 33.3%, respectively, from the year-ago quarter.
The strong performance compared to the year-ago quarter was helped by weak comps, as the recession impacted corporate spending on travel and the company made use of promotional and discounted inventories to boost sales. TripAdvisor, in particular, did exceptionally well, as traffic grew very strongly, with click rates soaring both in the U.S. and abroad. Additionally, new business listings subscribers increased to 15,000.
Revenue by Channel
Around 66% of total revenue was generated through the merchant business (direct sales), another 21% came through the agency model (where Expedia operates as an agent of the supplier) and roughly 13% came from Advertising and Media.
The agency business increased 6.0% sequentially and 7.9% year over year. The merchant business jumped 21.3% sequentially and 3.8% from last year. Advertising and Media continued to grow strongly, driven by TripAdvisor. Overall advertising and media revenue increased 10.2% sequentially and 38.5% from last year. with revenue increasing 10.2% sequentially and 13.7% year over year. The company is making strategic investments in this area, which along with a recovering travel market should continue to generate strong growth.
Revenue by Product Line
Although both Hotel and Air — the two main product lines — grew from the year-ago period, growth in air revenue was more robust at 13.0%. Ticket volumes continued to grow, although the 6.0% increase in the last quarter was much lower than in preceding quarters. Airfares were up 17.0%, with revenue per ticket increasing 7.0% from the year-ago quarter.
While hotel room nights continued to grow at a double-digit clip (up 11.5%), the most enocuraging factor was the average daily rate (ADR), which inched up by 1%. The ADR declined throughout 2009, but flattened out in the first quarter of 2010. With the number of hotels increasing rapidly, the revenue per night growth declined 7% from the year-ago period.
Last year, the company decided to reduce and/or waive booking fees, which impacted both revenue and margins. With improving market conditions, we may expect booking fees to return.
Revenue by Geography
Around 64% of second quarter revenue was generated from the domestic market, while 36% came from international sources. Revenue growth came from both domestic and international markets. Although the domestic market grew 13.9% sequentially, the international market was much stronger, growing 20.4%. Both segments increased by over 8% from the year-ago quarter.
Bookings and Revenue Margin
Gross bookings were $6.7 billion in the last quarter, flat sequentially and up 18.9% year over year. Acquisitions had a 1.4% positive impact on gross bookings in the last quarter.
The percentage of bookings converted to revenue (revenue margin) was 13.1%, an increase of 165 bps sequentially and a decline of 57 bps from the year-ago quarter. The international revenue margin was better than the domestic. All segments and channels contributed to both the sequential increase and the year-over-year declines, although the merchant business and leisure segments impacted results more significantly.
Margins
The pro forma gross margin for the quarter was 79.8%, up 180 bps sequentially and down 89 bps year over year. Despite volume increases, fee waivers and other promotions had a negative impact on year-over-year gross margin comparisons. Credit card processing costs and customer operation costs were significantly higher in the last quarter, although the data center costs declined slightly.
The operating expenses of $463.4 million were up 5.6% sequentially. The operating margin was 24.2%, down 734 bps sequentially and down 231 bps from the year-ago period. Expenses as a percentage of sales declined across the board, with G&A declining the most, followed by S&M, cost of sales, and technology and content, in that order.
Net Income
On a pro forma basis, Expedia generated net income of $120.9 million, or a 14.5% net income margin compared to a $66.7 million, or 9.3% in the previous quarter and $102.2 million or 13.3% net income margin in the same quarter last year. The fully diluted pro forma earnings per share (EPS) were $0.43, compared to $0.23 in the March 2010 quarter and $0.35 in the prior-year quarter.
Our pro forma estimate excludes intangibles amortization charges on a tax-adjusted basis, but includes deferred stock compensation. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.
Including the special items, the GAAP net income was $114.3 million ($0.40 a share) compared to $59.4 million ($0.20 a share) in the previous quarter and a $40.9 million ($0.14 a share) in the year-ago quarter.
Balance Sheet
Cash and short-term investments totaled $1.13 billion at quarter-end, up $83.2 million during the quarter, resulting in a net cash position of $231.8 million. Including long term liabilities, the debt to total capital ratio was 34.4%. Days sales outstanding (DSOs) went down from 48 to around 43 days.
The company generated $313.8 million of cash from operations and spent $43.5 million on capex, $19.9 million on dividends and $0.95 million on share repurchases.
We have a Neutral rating on Expedia shares.
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