Expedia’s (EXPE) third quarter earnings beat the Zacks Consensus Estimate by 15 cents. Revenue beat by 2.8%.

Revenue

Revenue for the quarter was $852.4 million, up 10.7% sequentially and 2.3% year over year. Acquisitions had a 1.7 pecentage point positive impact on revenue in the last quarter.

Leisure customers remained the largest revenue contributors, generating 86.1% of revenue. Corporate customers (Egencia) generated 3.0%, while TripAdvisor brought in the remaning 10.9%. The three categories increased 11.4%, 0.0% and 83.0%, respectively from the June quarter of 2009. They also increased 2.7%, 0.0% and 67.2%, respectively from the year-ago quarter.

Around 70% of total revenue was generated through the merchant business, another 20% came from agency and roughly 10% from Advertising and Media. The merchant business grew 12.9% sequentially and 1.7% year over year. The agency business grew 6.1% sequentially and 3.6% year over year. Advertising and Media revenue grew 6.4% sequentially and 5.1% year over year.

The relative strength in advertising was due to lower competition in the online advertising market. The sequential and year-over-year increases in other segments are a clear indication of the company exiting the recession.

Hotel and Air, the two main product lines, experienced mixed results. Compared to the year-ago quarter, hotel room nights grew 27.6%, while air tickets sold grew 27.0%. The higher volumes were primarily on account of various promotions, helped by management’s decision to waive hotel and ticket booking fees, as well as cancellation fees.

However, the higher volumes in hotels were partially offset by a 14% decline in the average daily rate and a 19% decline in revenue per night, which ultimately resulted in a mere 3% year-over-year increase in hotel revenue. The increase in ticket volumes were more than offset by an 18% decline in airfares and 28% decline in revenue per ticket, resulting in an 8% year-over-year decline in ticket revenue.

By geography, around 61% of third quarter revenue was generated from the domestic market, while 39% came from international sources. The sequential increase in revenue from the domestic and international markets were 5.9% and 19.5%, respectively. The lower growth rate in domestic revenue was on account of a greater impact of fee reductions and promotional offers in the U.S.

Bookings

Gross bookings were $5.9 billion in the last quarter, a sequential increase of 5.2% and a year-over-year increase of 9.3%. Acquisitions had a 3.6% positive impact on gross bookings. The percentage of bookings converted to revenue (revenue margin) was 15.1%.

The total revenue margin was up 141 basis points (bps) sequentially, but down 31 bps year over year. All segments except Egencia saw revenue margins increase sequentially and decline year over year. Egencia revenue margin decreased sequentially and increased year over year.

Operating Results

The pro forma gross margin for the quarter was 80.2%, down 56 bps sequentially and up 145 bps year over year. Despite volume increases, fee waivers and other promotions impacted the gross margin negatively compared to both sequential and year-over-year periods.

The operating expenses of $422.6 million were higher than the previous quarter’s $403.7 million. The operating margin was 30.6%, up 230 bps sequentially and 290 bps from the year-ago period. The largest contributor to the sequential increase was the 184 bp decline in selling and marketing expenses (as a percentage of sales).

Lower technology and content expenses (down 84 bps) and general and administrative expenses (down 18 bps) also contributed. These positive changes were partially offset by a 56 bp increase in cost of sales.

On a pro forma basis, EXPE generated a net income of $155.7 million, or an 18.3% net income margin compared to a $145.0 million, or 18.8% in the previous quarter and net income of $125.7 million or 15.1% net income margin in the same quarter last year.

The fully diluted pro forma earnings per share (EPS) was $0.53, compared to $0.50 in the June quarter and $0.43 in the prior-year quarter. Our pro forma estimate excludes restructuring expenses, deferred stock compensation and intangibles amortization charges in the last quarter. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

On a fully diluted GAAP basis, the company recorded a net income of $117.0 million ($0.40 per share) compared to $40.9 million ($0.14 per share) in the previous quarter and $94.9 million ($0.33 per share) in the prior-year quarter.

Balance Sheet

Cash and short-term investments totaled $887 million at quarter-end, down $22.7 million during the quarter, converting the net cash position to a net debt position of $7.5 million. Including long term liabilities, the debt to total capital ratio was 34.2%. The company used $24.2 million of cash in operations. Day sales outstanding (DSOs) went down from 44 to 39 days.

Management did not provide guidance for the next quarter or for 2009.
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