Online travel agency Expedia (NASDAQ: EXPE) missed analyst expectations in Q4 FY2022 quarter, with revenue up 14.9% year on year to $2.62 billion. Expedia made a GAAP profit of $175 million, down on its profit of $395 million, in the same quarter last year.
Expedia (EXPE) Q4 FY2022 Highlights:
- Revenue: $2.62 billion vs analyst estimates of $2.7 billion (3.04% miss)
- EPS (non-GAAP): $1.24 vs analyst expectations of $1.69 (26.6% miss)
- Free cash flow was negative $359 million, compared to negative free cash flow of $1.17 billion in previous quarter
- Gross Margin (GAAP): 84.3%, up from 82.7% same quarter last year
- Stayed Room Nights: 74.6 million, up 11.7 million year on year
Originally founded as a part of Microsoft, Expedia (NASDAQ: EXPE) is one of the world’s leading online travel agencies.
Expedia owns a wide portfolio of online travel brands, and owns stakes in many others. Its core Expedia site is a full service online travel agency (OTA) featuring airfare, lodging, car rentals, cruises, and insurance. Hotels.com is focused exclusively on hotels globally, Vrbo (previously HomeAway) is Expedia’s alternative accommodations property. Other properties include Orbitz, CheapTickets, Travelocity and business travel unit Egencia. Expedia also owns a majority stake in trivago, a hotel metasearch company, that generates revenues through advertising.
For consumers, Expedia simplifies planning travel, by aggregating supply of hotels, flights, and experiences and using its scale and rewards programs to offer the best prices, while for suppliers, Expedia delivers one of the largest audiences of travel shoppers online.
Historically, Expedia has held its largest market share in North America, specifically in Hotels, while it has long sought to take market share from market leader Booking.com and Priceline in Europe. It acquired HomeAway in recent years and has begun building up an alternative accommodations business to compete with AirBnB.
Because of the enormous number of flights, hotels, and accommodations available, travel is a natural fit for marketplaces that aggregate suppliers, simplifying the shopping process for consumers. Online travel platforms today make up over 50% of the industry’s bookings, a percentage that has been rising for 20 years, and will likely continue in the years ahead.
Expedia (NASDAQ: EXPE) competes with a range of online travel companies such as Booking Holdings (NASDAQ: BKNG), Airbnb (NASDAQ: ABNB), TripAdvisor (NASDAQ:TRIP), Trivago (NASDAQ:TRIV) and Alphabet (NASDAQ: GOOG.L).
Sales Growth
Expedia's revenue growth over the last three years has been very strong, averaging 35.1% annually. The initial impact of the pandemic was negative for Expedia's revenue, but growth rates subsequently normalized.
This quarter, Expedia reported a mediocre 14.9% year on year revenue growth, and this result fell short of what analysts were expecting.
Usage Growth
As an online travel company, Expedia generates revenue growth by a combination of increasing the number of stays (or experiences) booked, as well as the level of commission charged on those bookings.
Over the last two years the number of Expedia's nights booked, a key usage metric for the company, grew 51.5% annually to 74.6 million users. This is among the fastest growth of any consumer internet company, indicating that users are excited about the offering.
In Q4 the company added 11.7 million nights booked, translating to a 18.6% growth year on year.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Expedia it measures revenue per each of the nights booked, a function of the cost of the service and the commission Expedia's charges.
Expedia’s ARPU growth has been decent over the last two years, averaging 15.4%. The ability to increase price while still growing its user base shows the value of Expedia’s platform. This quarter, ARPU shrank 3.14% year on year, settling in at $35.09 for each of the nights booked.
User Acquisition Efficiency
Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Expedia grow by a combination of product virality, paid advertisement or incentives.
It is very expensive for Expedia to acquire new users, with the company spending 62.1% of its gross profit on marketing over the last year. This low level of sales and marketing efficiency indicates a highly competitive environment, with little differentiation between Expedia and its peers.
Earnings & Free Cash Flow
Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.
Expedia's EBITDA was $449 million this quarter, which translates to a 17.2% margin. Over the last four quarters Expedia has demonstrated a very strong profitability with average EBITDA margins of 18.8%.
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Expedia burned through $359 million in Q4, with cash flow turning negative year on year.
Expedia has generated $2.78 billion in free cash flow over the last twelve months, an impressive 23.8% of revenues. This extremely high FCF margin is a result of Expedia asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Expedia's Q4 Results
Sporting a market capitalization of $18.6 billion, more than $4.14 billion in cash and with positive free cash flow over the last twelve months, we're confident that Expedia has the resources it needs to pursue a high growth business strategy.
It was great to see that Expedia’s user base is growing. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Expedia missed analysts' revenue expectations and the revenue growth was quite weak. Overall, this quarter's results were not the best we've seen from Expedia. The company is down 7% on the results and currently trades at $109.5 per share.
Is Now The Time?
Expedia may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Expedia is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been impressive, over the last three years. And while its sales and marketing spend is very high compared to other consumer internet businesses, the good news is its user growth has been strong, and its strong free cash generation allows it to sustainably invest in growth initiatives.
At the moment Expedia trades at next twelve months EV/EBITDA 6.7x. There are definitely things to like about Expedia and looking at the consumer internet landscape right now, it seems that the company trades at a pretty interesting price point.
The Wall St analysts covering the company had a one year price target of $130.2 per share right before these results, implying that they saw upside in buying Expedia even in the short term.
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