Expedia's Q1 earnings down 13.9% year-over-year to US$52.2M on lower operating income; revenue climbs 15%, driven by 15% growth in hotel room nights, strong growth in company's advertising, media business
April 29, 2011
– Expedia, Inc. (NASDAQ: EXPE) today announced financial results for its first quarter ended March 31, 2011.
-- Revenue grew 15% for the quarter driven by 15% growth in hotel room nights and strong growth in the company’s advertising and media business. International revenue growth accelerated to 31% during the first quarter.
-- Operating income before amortization (OIBA) declined 9% due to increased expenses as we make strategic investments in next generation technology and international expansion.
-- Free cash flow increased 15% year-over-year driven by growth in our merchant hotel business.
-- During the first quarter, we repurchased 2 million common shares for an aggregate purchase price of $41
million and paid approximately $19 million in dividends; returning $60 million total to shareholders.
Subsequent to quarter-end, we announced our intention to separate Expedia, Inc. into two publicly traded companies, whereby TripAdvisor® and all the domestic and international operations associated with TripAdvisor Media Group would become an independent entity. TripAdvisor is the unquestioned leader in the travel media space, with more than 50 million monthly unique users in 29 countries and 20 languages. Expedia® will move forward as the world’s largest online travel agency, driving more than $26 billion in annual travel bookings to suppliers all over the world.
We also announced a new joint venture with AirAsia representing the first partnership ever between a low cost carrier and an online travel agency. The joint venture company will focus on Asia and have the exclusive online third-party distribution rights in the region for AirAsia and AirAsiaX flights and travel packages.
Gross Bookings, Revenue & Revenue Margins
Gross bookings increased 10% (9% excluding the estimated impact from year on year changes in foreign exchange rates) for the first quarter of 2011 compared with the first quarter of 2010, driven primarily by a 13% increase in average airfares, 8% growth in transactions and a 3% increase in hotel average daily rates. Domestic bookings increased 4% and international bookings increased 20% (19% excluding foreign exchange). International bookings totaled $2.9 billion, accounting for 39% of worldwide bookings. A summary of hotel gross bookings growth for certain of our brands follows.
Revenue increased 15% (13% excluding foreign exchange) for the first quarter, primarily driven by an increase in hotel revenue and advertising and media revenue. Domestic revenue increased 6% while international revenue increased 31% (25% excluding foreign exchange). International revenue equaled $327 million, representing 40% of worldwide revenue.
Revenue as a percentage of gross bookings (―revenue margin‖) was 11.3% for the first quarter, an increase of 45 basis points compared to the first quarter of 2010. The primary drivers include a shift to higher margin products and growth in advertising and media revenue, partially offset by rising average air ticket prices.
Product & Services Detail
As a percentage of total worldwide revenue in the first quarter of 2011, hotel accounted for 59%, advertising and media accounted for 15%, air accounted for 13% and all other revenue accounted for the remaining 13%. Merchant transactions accounted for 43% of total gross bookings and 63% of revenue in the first quarter, relatively consistent with the prior year period.
Worldwide hotel revenue increased 16% for the first quarter driven by a 15% increase in room nights stayed. Revenue per room night increased 1%.
Worldwide air revenue increased 6% for the first quarter, primarily due to an 18% increase in revenue per ticket, partially offset by a decline in ticket volume of 10%. The increase in revenue per ticket was primarily due to increasing average air ticket prices, acceleration of merchant air revenue and performance-based incentives. The decrease in ticket volume was partially due to a 13% increase in average air ticket prices and lack of American Airlines content for the duration of first quarter 2011. Expedia and Hotwire® sites worldwide added back American Airlines content on April 4, 2011 pursuant to a memorandum of understanding reached with American Airlines.
Advertising and media revenue increased 23% for the first quarter, driven by a 32% increase in third-party revenue for TripAdvisor. TripAdvisor experienced robust growth in its three main revenue categories during first quarter 2011 including cost per click (CPC) based revenue, display advertising revenue and triple digit growth in other revenue, generally comprised of subscription-based products.
All other revenue (primarily car rentals, destination services and insurance) increased 7% for the first quarter.
Costs and Expenses
(Stock-based compensation expenses of $17 million for first quarter 2011 and $19 million for first quarter 2010 have been excluded from all calculations and discussions below; some numbers may not add due to rounding.)
Cost of revenue (non-GAAP)
-- Cost of revenue increased 13% for the first quarter primarily due to higher personnel expenses within supply and customer service operations, higher net credit card processing costs related to our merchant transaction growth and acceleration of non-refundable, merchant fees on certain products.
OIBA for the first quarter decreased 9% (7% excluding foreign exchange) to $129 million primarily due to increased costs and expenses, partially offset by increased revenue. OIBA decreased 413 basis points as a percentage of revenue to 16% due to growth in selling and marketing expenses, technology and content expenses as well as general and administrative expenses in excess of revenue growth.
Operating income decreased 4% primarily due to the same factors impacting OIBA. The smaller year-over-year variance in operating income versus OIBA stems from a realized loss on revenue hedges in first quarter 2011 versus a realized gain on revenue hedges recorded in the prior year.
Interest expense increased $10 million for first quarter 2011 as compared to the prior year period primarily due to the $750 million of additional debt issued in August 2010. Other, net represented a loss of $6 million in first quarter 2011 primarily comprised of foreign exchange losses offsetting book-to-stay gains related to revenue earned in foreign currencies.
The effective tax rates on GAAP pre-tax income were 29.6% for the first quarter 2011 compared with 34.2% in the prior year period. The effective tax rate on pre-tax adjusted net income (―ANI‖) was 29.6% for the first quarter 2011 compared with 33.8% in the prior year period. The lower rate in the first quarter 2011 was primarily driven by an increase in estimated earnings in jurisdictions outside the United States.
Adjusted net income for the first quarter decreased $6 million compared to the prior year period primarily due to lower OIBA, higher interest expense and other net losses. Net income decreased $7 million compared to the prior year period primarily due to lower operating income and the same factors impacting adjusted net income. Adjusted EPS decreased 4% to $0.25 and diluted EPS decreased 5% to $0.19.
The results for the first quarter of 2011 include EveryTrail®, which was acquired during the quarter, as well as Holiday LettingsTM and MobiataTM which were acquired during the second quarter of 2010 and fourth quarter of 2010, respectively. The impact on first quarter 2011 was not meaningful.
Foreign currency rate fluctuations positively impacted our first quarter revenue growth rates primarily due to year-over- year appreciation in the Pound, Nordic currencies and Canadian dollar.
Our revenue hedging program is designed to offset the book-to-stay impact on merchant hotel revenue. In the first quarter of 2011 we realized a loss from our hedging program of $5 million, which more than offset the book-to-stay gain. In the first quarter of 2010 we realized a gain from our hedging program of $2 million, which partially offset the book-to-stay loss in that quarter. We include any realized gains or losses from our revenue hedging program in our calculation of OIBA.
Balance Sheet, Cash Flows and Capitalization
Cash, cash equivalents, restricted cash and short-term investments totaled $1.8 billion at March 31, 2011. Of this amount, $162 million is held by our majority-owned subsidiaries. We consolidate such amounts in our financial statements, but we do not consider this cash available for our working capital purposes.
The total available under our $750 million unsecured revolving credit facility was $723 million. The only amounts applied to the revolver are outstanding letters of credit totaling $27 million. Long-term debt totaled $1.6 billion.
For the quarter ended March 31, 2011, net cash provided by operating activities was $729 million and free cash flow was $678 million. Both measures include $625 million from net changes in operating assets and liabilities, primarily driven by a working capital benefit from our merchant hotel business. Free cash flow increased $88 million compared to the prior year primarily due to an increase in our working capital benefit offset by higher interest payments, higher capital expenditures and lower OIBA.
At March 31, 2011, we had stock-based awards outstanding representing approximately 27 million shares of our common stock, consisting of stock options to purchase 23 million common shares with an $18.56 weighted average exercise price and weighted average remaining life of 5.4 years, and 3 million restricted stock units (RSUs). During first quarter 2011, we granted 6 million stock options as part of our annual employee award process.
Under our current share repurchase program, we repurchased 2 million common shares for an aggregate purchase price of $41 million excluding transaction costs ($20.40 per-share) during the quarter. After these purchases, we currently have 17.4 million shares of repurchase capacity available.
On March 31, 2011 we paid a quarterly dividend of $19 million ($0.07 per common share). In addition, the Executive Committee of Expedia’s Board of Directors declared a cash dividend of $0.07 per share of outstanding common stock to be paid to stockholders of record as of the close of business on May 27, 2011, with a payment date of June 17, 2011. Based on our current shares outstanding we estimate the total payment for this quarterly dividend will be approximately $19 million. Future declaration of dividends and the establishment of future record and payment dates are subject to the final determination of Expedia’s Board of Directors.
-- Expedia announced a joint venture agreement with AirAsia, one of the most prominent low-cost airlines in the world. Through a separate distribution agreement, Expedia brands will also become the exclusive third-party online distributor for AirAsia and AirAsiaX inventory outside of the joint venture. Expedia extended its global reach to 22 countries with the launch of localized sites in Thailand and Malaysia.
-- Egencia announced the acquisition of leading Australia and New Zealand travel management company TravelForceTM, enhancing its travel offerings and services for corporate clients in Australia and New Zealand. Egencia also reached $2 billion in gross bookings over the previous twelve months, surpassing a significant milestone.
-- Hotels.com® grew its worldwide gross bookings nearly 40%, with room night growth accelerating in North America, Europe and Asia Pacific.
-- Hotwire launched travel booking sites in the U.K. and Ireland, giving travelers in those countries access to deeply discounted rates on hotel bookings.
-- TripAdvisor launched localized sites in Taiwan and Malaysia, extending TripAdvisor’s global footprint to 29 countries and 20 languages. Recently, TripAdvisor also announced it achieved 45 million reviews and opinions on its flagship site, growing from 40 million in October 2010.
Traveler Value Proposition and Innovation
-- Expedia, Inc. brands Expedia, Hotels.com, Hotwire and TripAdvisor all announced new mobile applications or enhancements to existing applications. An Expedia, Hotels.com or TripAdvisor travel app is downloaded every 2 seconds.
-- Egencia introduced expedited Amtrak booking functionality, offering Egencia travelers a faster way to book published- and client-negotiated rates on Amtrak routes throughout the U.S.
-- Expedia launched its new loyalty program Expedia RewardsTM, enabling participating travelers to earn points on all hotel, flight, package and activities bookings made on Expedia.com. Rewards points can be redeemed for travel on more than 140 airlines and at more than 70,000 hotels worldwide.
-- Expedia and its partners launched ExpediaFriendTripsTM, the largest-ever sweepstakes hosted on Facebook that will give away more than $1 million dollars in luxury travel.
-- Hotels.com rolled out its exclusive FIVESTARTM loyalty program in North America. Members receive access to a dedicated travel service team and exclusive deals and promotions.
-- TripAdvisor also announced it will power traveler review content for the Eurostar website in Europe.
Media, Advertising and Distribution
-- Expedia® Affiliate Network (EAN) signed agreements to power online travel bookings for a number of affiliates worldwide, including Easytobook.com, an Amsterdam-based OTA; Holiday Planet Group, one of the largest privately-owned online travel companies in Australia; TravelWizard and Directrooms.com, a leading Thai discount online travel company. EAN also signed an agreement with the Puerto Rico Tourism Company, the official tourist board of Puerto Rico.
-- TripAdvisor expanded its mobile travel offering with the acquisition of EveryTrail, enabling travelers to access destination walking tours, city guides and hiking trails directly from their smartphones.
-- Expedia PSG renewed partnership agreements with AirTran Airways, one of the largest low-cost scheduled airlines in the U.S.; the world’s largest rental car operator, Enterprise Holdings, Inc. which includes Enterprise Rent A Car, Alamo Rent A Car and National Car Rental; and Caesar’s Entertainment Corporation, the world’s largest casino entertainment company.
-- Expedia and American Airlines signed a memorandum of understanding to make available American Airlines’ published fares and schedules on Expedia and Hotwire sites worldwide.
-- The Cornell Center for Hospitality Research published the second installment of its Billboard Effect Study, with findings estimating that the exposure received from a hotel listing on Expedia will generate 3 to 9 reservations via its direct site for each reservation made on Expedia.
-- At quarter end, Expedia global websites featured over 135,000 bookable properties, with over 55% operating under our merchant model and 26% representing agency properties where we have direct relationships. Expedia sites offer over 80,000 hotels in EMEA and APAC countries.
Industry Intelligence Editor's Note: In an omitted table, Expedia reported first quarter net income of US$52.2 million, compared with earnings of US$60.6 million in the year-ago quarter.