Online travel agency Expedia (NASDAQ: EXPE) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 18.5% year on year to $2.67 billion. Expedia made a GAAP loss of $140 million, down on its loss of $123 million, in the same quarter last year.
Expedia (EXPE) Q1 FY2023 Highlights:
- Revenue: $2.67 billion vs analyst estimates of $2.66 billion (small beat)
- EPS (non-GAAP): -$0.26 vs analyst estimates of $0.03 (-$0.29 miss)
- Free cash flow of $2.92 billion, up from negative free cash flow of $359 million in previous quarter
- Gross Margin (GAAP): 84.5%, up from 83.5% same quarter last year
- Booked Room Nights: 94.5 million, up 17.5 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).
Expedia's revenue growth over the last three years has been very strong, averaging 37.9% annually. This quarter, Expedia reported a moderate 18.5% year on year revenue growth, in line with analysts' expectations.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 8.65% over the next twelve months.
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 25.9% annually to 94.5 million. This is a fast growth for a consumer internet company.
In Q1 the company added 17.5 million nights booked, translating to a 22.7% growth year on year.
Revenue Per Booking
Average revenue per booking (ARPB) 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 ARPB growth has been decent over the last two years, averaging 8.57%. The ability to increase price while still growing its nights booked shows the value of Expedia’s platform. This quarter, ARPB shrank 3.45% year on year, settling in at $28.20 for each of the nights booked.
User Acquisition Efficiency
Consumer internet businesses like Expedia grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.
It is very expensive for Expedia to acquire new users, with the company spending 62.9% 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 came in at $185 million this quarter, which translated to a 6.94% margin. Over the last four quarters Expedia has demonstrated a very strong profitability with average EBITDA margins of 18.6%.
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's free cash flow came in at $2.92 billion in Q1, roughly the same as last year.
Expedia has generated $2.87 billion in free cash flow over the last twelve months, an impressive 23.7% of revenues. This robust FCF margin is a result of Expedia asset lite business model and scale advantages 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 Q1 Results
Sporting a market capitalization of $13.5 billion, more than $5.95 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.
We enjoyed seeing Expedia’s strong user growth this quarter. That feature of these results really stood out as a positive. Gross bookings also beat although operating profit missed. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 4.62% on the results and currently trades at $93.28 per share.
Is Now The Time?
When considering Expedia, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Expedia is a good 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 powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its user growth has been strong.
At the moment Expedia trades at next twelve months EV/EBITDA 4.9x. There is definitely a lot of 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 $131.9 per share right before these results, implying that they saw upside in buying Expedia even in the short term.
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