10-QPeriod: Q3 FY2014

Expedia Group, Inc. Quarterly Report for Q3 Ended Sep 30, 2014

Filed October 31, 2014For Securities:EXPE

Summary

Expedia Group, Inc. (EXPE) reported strong revenue growth for the nine months ended September 30, 2014, with a 22% increase year-over-year, driven by significant gains in its Leisure segment, particularly in hotel and advertising/media revenue. This growth was supported by a substantial 29% increase in total gross bookings. Despite revenue growth, the company experienced a decrease in its overall revenue margin due to lower revenue per room night and the inclusion of Travelocity-branded websites. However, operating income saw a significant 86% increase for the same period, largely benefiting from the absence of prior-year charges related to litigation and acquisition expenses. The company's financial position strengthened with cash and cash equivalents more than doubling to $2.25 billion by the end of the third quarter of 2014, supported by strong operating cash flows and the issuance of new debt. Expedia also continued its share repurchase program and initiated dividend payments, demonstrating a commitment to returning value to shareholders. However, the company faces ongoing legal challenges, particularly concerning hotel occupancy taxes, which have led to the establishment of a significant reserve and potential future financial impacts.

Financial Highlights

52 data points
Beta

Revenue

$1.71B

82.5% Gross Margin

Net Income

$257.06M

15.0% Net Margin

EPS (Diluted)

$1.94

Total Assets

$9.42B

Cash & Equivalents

$2.25B

Free Cash Flow

$19.39M

Financial Statements
Beta
Revenue$1.71B
Cost of Revenue$299.71M
Gross Profit$1.41B
Operating Income$296.84M
Interest Expense$25.56M
Net Income$257.06M
EPS (Basic)$2.01
EPS (Diluted)$1.94
Shares Outstanding (Basic)127.91M
Shares Outstanding (Diluted)132.27M

Key Highlights

  • 1Revenue increased by 22% to $4.41 billion for the nine months ended September 30, 2014, compared to $3.62 billion in the prior year period.
  • 2Total gross bookings grew by 29% to $39.14 billion for the nine months ended September 30, 2014, driven by strong performance in the Leisure segment.
  • 3Operating income surged by 86% to $423 million for the nine months ended September 30, 2014, compared to $227 million in the prior year, largely due to favorable year-over-year comparisons and revenue growth outpacing expense increases.
  • 4Net income attributable to Expedia, Inc. significantly increased to $332 million for the nine months ended September 30, 2014, from $138 million in the prior year.
  • 5Cash and cash equivalents increased substantially to $2.25 billion as of September 30, 2014, from $1.02 billion as of December 31, 2013.
  • 6The company issued $500 million in new senior unsecured notes in August 2014 to fund general corporate purposes and potential acquisitions.
  • 7Expedia established a reserve of $60 million for potential settlements related to hotel occupancy tax litigation, with a possibility of an additional $25 million for interest payments.

Frequently Asked Questions

Expedia's primary revenue driver is the marketing and distribution of hotel rooms, which accounted for 71% of revenue during the nine months ended September 30, 2014. This segment saw a 19% increase in revenue year-over-year, driven by a 25% increase in room nights stayed. However, revenue per room night decreased due to promotional activities and efforts to expand the global hotel supply portfolio.

Expedia has established a reserve of $60 million as of September 30, 2014, for the potential settlement of hotel occupancy tax issues. While many lawsuits have been dismissed, some significant cases are still ongoing, including in California and Hawaii, with potential for additional payments related to interest. The company believes these ordinances do not apply to its services but continues to defend vigorously.

Expedia completed the acquisition of a European online car rental company for $66 million in July 2014 and entered into an agreement to acquire Wotif.com Holdings Limited for approximately $658 million, expected to close in Q4 2014. In August 2014, the company issued $500 million in senior unsecured notes bearing 4.5% interest, contributing to a significant increase in cash and cash equivalents and strengthening its financial position for corporate purposes and potential future acquisitions.

Key trends include the increasing online penetration of travel expenditures globally, intensified competition from online travel agencies, metasearch companies, and direct distribution by suppliers. Expedia also notes the development of alternative business models, such as the agency hotel model, and pressure on revenue margins. The company is also navigating challenges related to air carrier consolidation, increased marketing spend, and the evolving landscape of mobile bookings.