Expedia Group Inc (EXPE) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Expedia Inc second quarter earnings conference call.

During today's presentation, all parties will be in a listen only mode.

Following the presentation, the conference will be opened for questions.

(Operator Instructions)

I would now like to turn the conference over to Alan Pickerill.

Please go ahead.

Thank you.

Good afternoon and welcome to Expedia Inc's financial results conference call for the second quarter ended June 30, 2012.

I am pleased to be joined on the call today by Dara Khosrowshahi, Expedia's CEO and President, and Mark Okerstrom, our CFO.

The following discussion, including responses to your questions, reflects Management's views as of today, July 26, 2012, only, and we do not undertake any obligation to update or revise this information.

As always some of the statements made on today's call are forward looking, typically proceeded by words such as we expect, we believe, we anticipate or similar statements.

Please refer to today's press release and the Company's filings with the SEC for information about factors which could cause our actual results to differ materially from these forward looking statements.

You will find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release which is posted on the Company's IR website at www.Expediainc.com/IR.

I encourage you to periodically visit our Investor Relations site for important content including today's earnings release.

Finally, unless otherwise stated, all references to cost of revenue, selling and marketing expense, general and administrative expense, and technology and content expense exclude stock based compensation and all comparisons on this call will be against our results for the comparable period of 2011.

With that, let me turn the call over to Dara.

Thanks, Alan.

Expedia's second quarter proved to be another good one coming in ahead of our expectations.

On the top line gross bookings growth of 13% and revenue growth up 14% were driven by primarily by strength in our hotel business, with global room nights growing a robust 22%.

24% including the AirAsia Expedia joint venture.

Adjusted EBITDA grew 18% to $223 million aided by better than expected top line and lower than expected expenses.

It is worth noting that second quarter results were helped by that acquisition of VIA Travel which we completed in late April and contributed roughly 2 percentage points of growth in gross bookings and revenue and three points of adjusted EBITDA growth for the quarter.

VIA Travel is leading travel management company in the Nordic and we are happy to have them as part of Egencia team.

In addition, we had an out of period adjustment of $8 million that helped both revenue and adjusted EBITDA that Mark will explain in his remarks.

We continue to see healthy results across virtually all of our brands with brand Expedia also improving sequentially, but still down year-on-year.

Our technology migration remains on track and stand alone hotel room nights for brand Expedia accelerated again and grew faster than 10% on a book basis for Q2 compared to mid single digit growth in Q1.

The air product has been moved to the new platform as planned and work continues on the packages path which should be substantially complete by year end.

You will see more product innovation from us in the hotel and aircraft in the second half of the year, and we'll be ready to roll out packages as we move into 2013.

As previously indicated, we plan to increase selling and marketing for brand Expedia as we move further along the technology migration and just recently launched brand marketing campaign in the US called Find Yours featuring 100% user generated content from consumers explaining how travel has transformed them.

It is very early for the campaign, but initial response has been quite good.

To be clear, brand Expedia continues to face certain environmental challenges outside of our control.

Airline load factors and air ticket prices continue to grow year-over-year which is not good for the leisure traveler.

Hotels continue to report tighter occupancies and higher rates which makes it more difficult for us to grow our package business.

These factors are likely to remain as headwinds for air and package products for the foreseeable future.

Over the past few years, we have talked about our key brand re-platforming efforts.

In addition to these efforts, we are also actively improving our entire technology staff from front end to middle wear to supply services to customer service as well as our financial systems.

Part of these efforts will allow us to introduce new technology to our hotel supply partners which will enable much closer integration of the agency hotel product with a core merchant offering.

Specifically, for participating hotels, we'll be able to offer customers the choice of whether to pay Expedia in advance or pay at the hotel at the time of the stay.

So far the reaction from our suppliers has been positive, and our initial testing indicates that customers really like this flexibility.

We believe that these innovations, if and when rolled out on a broad basis, would be likely to draw us back to growth in our agency hotel business, which could result in our blended hotel margins as well as our merchant hotel flow trending down over time.

With that said, we remind you that in general our suppliers pay us based on the considerable scale and breadth of our distribution platform and not based on the specific model under which we do business.

As we introduce further innovation into the global hotel business, we expect the current bright line between agency model and the merchant model to blur over time.

Before handing it over to Mark, a bit about what we are seeing in Europe.

We can see incremental weakness in Southern Europe relative to what we saw last quarter.

Broadly, we see Europeans traveling to the US less and traveling to European destinations more.

We see some evidence of shortening lengths of stay and in some markets shorter booking windows, all of which could be attributed to market conditions.

We'll keep a close eye on these trends, but for now, our growth rate in Europe is still healthy, and we believe we can continue to grow in the economic environment.

Mark.

Thanks, Dara.

From a financial perspective, the second quarter came in better than we expected and was driven by the underlying strength in our global hotel business.

As Dara mentioned, we were helped by the addition of VIA Travel as well as an $8 million out of period hotel revenue adjustment that we made in the quarter related to the reversal of an over accrual for certain local taxes.

Excluding the VIA acquisition in this adjustment, adjusted EBITDA grew 11% for the quarter.

As expected, foreign exchange was a headwind this quarter, and hit us harder than anticipated given the strength of the dollar relative to the Euro.

In total, we estimate that foreign currency cost us 300 to 400 basis points of growth in gross bookings, revenue and adjusted EBITDA.

This was 100 to 200 basis points worse than we expected when we talked to you last quarter.

Hotel revenue represented 74% of total revenue for the quarter and grew 16%.

Room night growth continued to be healthy at 22% for the quarter, 24% including the results from the AirAsia Expedia joint venture.

Domestic room night growth remained strong at 16%, while international room nights grew 29% or 35% including the AirAsia Expedia joint venture.

ADRs were down 1% for the quarter while revenue per room night was down 5%.

The decrease in revenue per room night was again driven by hotel product mix, the impact from foreign currency, discounting at Hotwire, and the loyalty program accrual comparables.

As we noted last quarter, we have a very fast growing hotel business in the Asia Pacific region where ADRs and revenue per room night are much lower than other geographies.

Of course we are happy to take the lower per unit economics in APAC given the shear volume growth prospects for that region.

Consistent with Q1, Asia Pacific represented a high teens percentage share of the global room night mix in the second quarter.

Revenue from our air business represented 9% of our total revenue for the quarter and was down 8% year-over-year.

Ticket volume grew 3% for the quarter helped by the VIA Travel acquisition.

Revenue per ticket was down 11%, due primarily to lower net supplier economics.

We continue to expect revenue per ticket to be down year-over-year for the duration of 2012 with the impact easing as we move through the year.

Other revenue grew 17% for the quarter on growth in corporate travel fees and advertising revenue.

Running through key expense categories -- cost of revenue grew faster than revenue in the quarter due almost entirely of the addition of VIA Travel.

Excluding that business, cost of revenue grew largely in line with revenue on higher costs associated with the growth of our merchant hotel business and additional head counts to support our global customer operations.

These were partially offset by lower debit card fees and higher credit card rebates.

Leverage in selling and marketing expense was driven by a combination of factors including the addition of VIA Travel as they have very low selling and marketing expense as a percentages of revenue as well as some deferred spend for both brand Expedia and Hotels.com.

Looking forward, we expect selling and marketing to grow quite a bit faster and deleverage significantly in Q3 and to a slightly lesser extent in Q4 as Expedia and Hotels.com increase their spending, and as we invest more in Asia Pacific and emerging markets.

Technology and content grew 24% which was a bit lighter than our expectations.

Looking forward, including the addition of VIA Travel, we now expect Q3 and Q4 growth rates to accelerate compared to the first half of the year.

General administrative expenses grew 13%.

As we have said in the past we will continue to look for leverage in G&A over the long term.

Lastly in terms of capital allocation, on a year-to-date basis, we have deployed over $520 million against a combination of share repurchases, M&A and our dividend.

I am pleased to say that we have decided to increase our dividend to $0.13 per share for the next quarterly payout as a sign of our continued confidence in the long term prospects for our business.

In terms of our financial expectations for full year 2012, we are now expecting adjusted EBITDA growth in the high single digits with a possibility of low double digit growth.

Key changes since last quarter include the addition of VIA Travel and the second quarter of performance partially offset by a much larger headwind from foreign currency, some additional marketing spend we have decided to deploy in Asia Pacific, and some slow down in certain European markets due to the tenuous global economic environment.

With that, let's turn to questions.

Operator, would you please remind listeners how to ask a question.

Thank you.

We will now begin the question and answer session.

(Operator Instructions)

Tom White, Macquarie.

I guess I was hoping you could give more color behind the decision to cross promote the agency inventory with your merchant stuff.

Is that in response to stuff you were hearing from your suppliers, or is that in response to some competitive dynamics you are experiencing or expect to experience?

And maybe a little bit more color on VIA Travel -- if you can give us color as to what that business is growing at.

It looks like revenue take rate might be a little bit higher than Egencia.

Is that sustainable?

Any color you can give there as well as was there any contribution to the hotel room night growth from VIA in the quarter.

Thanks.

Sure.

On the first on agency and merchant -- what we are doing is responding to the market place and responding to consumer behavior.

Obviously the European markets are very important to us.

They are quite fragmented.

The European travel markets are actually larger than that of the US.

We have seen that in Europe the agency model's quite popular which is what lead us to acquisition of Venere a few years ago.

And we have been working in and integrating agency inventory along with our merchant inventory, but what we really wanted to come up with is a product that was better.

There are certain consumers who like to buy merchant.

They like to pay up front.

They want to pay in their local currency.

They don't want to leave their credit card with a small hotel, etc., at the front desk.

And there are some consumers who do like to pay at the hotel.

And we are just simply following that consumer behavior.

We think that giving consumers the flexibility to choose is a good thing.

We have tested it, and consumers seem to like it.

What we'll do is carefully roll out this program on a worldwide basis.

This is a roll-out that we can measure, and we will -- our intention is to roll it out pretty quickly.

But we can pull back on the roll out, etc., based on the results that we see.

Mark, you want to talk about the second question VIA?

Sure.

VIA is a leader in the Nordic markets.

It is much more of a traditional corporate travel business than certainly Egencia is.

Traditional corporate travel businesses generally charge higher fees to consumers and take more phone calls offline than certainly Egencia does.

So that results in essentially a different P&L structure from that which you see at Egencia, which is higher growth.

Egencia is doing to corporate travel what Expedia business did to leisure traveller -- travel back in the late 90s.

Is they are a higher growth business, higher spend on technology, but a much lower cost business from the perspective of the clients in that they don't have to pay fees and they're able to transact online.

So, over time, I would expect that combined business and the Egencia business as we build it to continue to scale and to continue to drive meaningful growth to our business.

But the P&L will start to merge to be a combination of essentially those two P&Ls.

Stephen Ju, Credit Suisse.

ADRs being down 1% year-over-year is a bit outside expectations.

Is that purely due to a increasing mix from ELong, or are there other factors that weigh there that is not currency?

Second in terms of revenue per room night -- it looks like year-over-year decline moderated a bit during this quarter.

Is that a trend you expected to continue?

I guess the real question I am asking is whether you think the loyalty programs and couponing get you better ROI versus straightforward marketing expenses?

This is the second quarter in a row that you are demonstrating leverage on the marketing line.

Thanks.

With respect to ADRs, there is a couple factors there.

The biggest one -- the biggest two are probably ELong/Asia business and foreign exchange.

You know, domestic ADRs continue to be healthy.

I think that our ADRs would be consistent with what -- broadly consistent with what you would see in the larger domestic market.

With respect to the delta between ADRs and revenue per room night, we did see a little bit of moderating this quarter.

As I said last quarter, we are -- we did start to comp over competitive pricing or discounting that Hotwire was doing.

That's what you are starting to see in those numbers.

Q3 should be largely a clean comp on the Hotwire piece.

So that impact should lessen.

Then we will also start in Q3 to comp over the Expedia loyalty launch.

There was a little bit of help from that this quarter, but not much.

You will see that abate more so in Q3.

Then you had a second question.

Think that was my second question.

That was it.

Okay.

Just if you're seeing better ROI from I guess group holiday and Loyalty programs verses straightforward marketing.

Right.

Okay.

Well, yes, I don't want to comment on specifically the ROI we see for specific programs.

Obviously we are looking to grow our loyalty programs at both Expedia and Hotels.com.

We think they're great programs for consumers on both brands, and we'll look to drive membership in those programs going forward.

Heath Terry, Goldman Sachs.

I was wondering if you could give a sense of what you are seeing specifically in the mobile area in terms of traffic and conversions and how that might be trending.

And if, to any degree, that kind of usage is affecting the leverage that you're getting on marketing?

On mobile, it continues to grow very quickly, triple-digit growth rates for essentially all of our brands.

The mobile transactions are starting to become a bit more diversified.

They used to be essentially iPhone only, iOS only.

We are seeing significant iOS; we are seeing significant mobile web.

Tablet is starting to become a big player in our mobile transactions and traffic as well.

So the traffic is broadening a bit.

The handset business tends to be short window of 70% or so of the transactions are within a day.

The tablet transactions look more like desktop behavior; they are not necessarily short window.

And, as far as marketing goes, we are still at the point where we're trying to establish an install base for mobile, and, typically, when we market for an app download, it takes six to 12 months for the download of that app to essentially pay for itself in transactions over that app.

So, as long as the app down loads are growing for us, and they're growing very quickly, you tend to pay more in marketing upfront, and then you tend to get that marketing money back over time.

We are at that growth stage right now where we are really not seeing any marketing efficiency as a result of mobile.

And I think we're going to be in that stage for a couple of years.

I think we are going to be net investors in mobile over a period of time.

We want to establish a user base in mobile, in loyalty so we get users coming direct to us as well as through indirect channels like Google, TripAdvisor, Metasearch as well.

Great.

Thank you very much.

Doug Anmuth, JPMorgan.

This is Shelby Taffer calling in for Doug.

Can you give us the Hotels.com room night growth and also just some color on the performance by region specifically in Europe and APAC.

Thanks.

Sure.

I'd just say that Hotels.com room night growth continues to be healthy.

We did see some impact from Southern Europe on their growth, and, of course, they did defer a little bit of marketing spend this quarter into the third quarter.

So it moderated somewhat, but it continues to be very healthy.

On a regional basis, I think, you can see the numbers.

We -- this quarter posted 16% year-on-year room night growth domestically which was pretty strong, 18% last quarter.

The delta between those could be explained entirely by Leap Year.

We continue to see strong growth domestically.

As we mentioned there is a little bit softness in Europe, and APAC continues to be strong.

Across the board, we are feeling pretty good about what we are seeing globally.

Great.

Thanks.

Michael Millman, Millman Research.

Could you talk a little bit about the sequential decline in leisure from 15% last quarter to release from the first quarter at 10% in the second quarter?

And also on car rentals, a couple things.

You signed some new contracts with ERAC and Hertz.

Could you talk about to what extent they might differ from existing?

And then, we're now at peak season, peak travel season at least in the US and probably in Europe as well, can you talk about car rental business, what the peak looks like in terms of availability, in terms of revenue, and in terms of fleet?

Thank you.

Mark, you want to take on leisure first?

Sure.

Now I am not clear what you are talking about specifically in terms of the 15% to 10%.

But if you are talking about top-line growth, we did again -- we saw some impact from FX in the quarter.

It was more significant than what we'd seen in the past.

But again on an FX adjusted basis we are seeing pretty consistently nice growth there as well.

Again, that's looking at the gross bookings line.

I think most of the gross bookings line, the delta that you see there is really air trends.

Air tends to drive gross bookings.

You can see the tickets sold growth was 3% in Q2 verses 5% in Q1 so that might have been the difference.

As far as the car business, you know, the deals that we have signed with our supply partners tend to be broadly in line with the deals that we have signed historically.

So not much is changed there.

In terms of fleets, etc, we are seeing the car rental companies compressing their fleet this summer.

Fleet sizes are tight.

But we are not seeing retail pricing increase quite as much as we expected.

So, that's good for the leisure customer, but, in general, availability is a bit lower than what we want it to be.

When fleet inventories get tight, the percentage of transactions that we process through Opaque tends to be lower, and our retail part of the business tends to grow faster.

So we're certainly watching the retail verses Opaque balance as well.

Lloyd Walmsley, Deutsche Bank.

Thanks.

I was just wondering if you can comment, now that the air business in the US is fully transitioned to the new platform, on what you are seeing in terms of improved conversions and up sales hotel/car packages.

And coming off yet another transition on the platform side, you feel like when you finally get the packages done that the improvements you drive can be done faster than perhaps your typical guidance for that six to nine months I think you have said in the past lag on conversion improvements?

Yes.

I think on the air side we are encouraged by the early trends that we are seeing.

We have launched what we call our air end-to-end platform in the US, and we are cyclically launching it internationally as well.

The first conversion, the early conversion improvements that we are seeing are in the up sell to hotels, cars, etc.

So we are seeing good numbers there, and we hope to keep that going.

And in a couple of weeks to a month hopefully you will see a new -- a pretty new user interface for our air products.

It's going to look pretty different from what it's looked like historically.

We think it's absolutely great, but we'll let our users decide.

We roll out this stuff.

We test it with users.

Then, based on user reactions, we'll roll out the things that work globally.

I think by the end of the year you are going to see pretty different air product for Expedia than what you have now.

I think it will be pretty different and much better.

As far as package pass goes, it's hard to predict.

Our package business and the package technology in general is more complex than any other technology that we have on the site.

So, while we are getting better at these roll outs, we learn from our mistakes, and, in general, the speed of iteration of the business is increasing.

I never underestimate the complexity of the package product.

And so what I will count on is what you see now which is gradual improvement, every quarter getting better.

And if we keep that going, I think we'll have good results for 2013.

Tracy Young, Evercore Partners.

Two questions.

One, can you just confirm when the -- when you expect the packages vertical to be completed?

Also, I have noticed in some of the trades some comments about your ad agencies that you have made some changes.

Would you say that some of the difference that we are seeing in the advertising margin is related to some changes that you have been making on the advertising side?

Or is it mostly related to Expedia.com?

Thanks.

As far as packages goes, we think that we will be rolling over to the new package platform essentially towards the end of the year.

It might be plus a month, minus a month.

As I have said before, a new platform is just that.

Then you've got to start iterating on the front end and changing the user experience, and that is really going to get started in the first quarter of 2013.

It will essentially roll forward throughout the year.

We'll make small changes.

We'll make big changes.

We'll do lots of testing and learning, and I think we'll wind up with a much better package product.

So 2013 will have a platform that we can play with and then -- sorry -- end of 2012 will have a platform we can work with, and then it will be rolling traffic in 2013.

As far as the ad agency, etc, we did change ad agencies at Expedia.

We have launched a new campaign that we're really excited about.

But I think it's far too early for that campaign to have had material impact on our results.

So I think to the extent that we see material impacts, we'll be seeing that in Q3 and Q4.

Great.

Thank you.

Herman Leung, Susquehanna Financial.

This is Deepak actually sitting in for Herman.

I have a question about hotel additions.

I noticed that in the second quarter you added about 5,000 hotels to the portfolio.

I was wondering if you could discuss about what we could do probably to add more hotels going forward probably that would help the room nights growth.

What's the company's general strategy around increasing hotel supply portfolio.

We did add about 5,000 hotels.

We are up to just over 155,000 now.

I would just say generally that adding hotels for us is not a significant barrier.

We are pretty strategic in where we add hotels.

We are pretty deliberate where we do it.

And it really depends on what we are seeing around demand on our websites from our users, and where they're looking to go, where we are under supplied relative to the demand we are seeing on our website, and where we can benefit from adding more product for our consumers.

You know, you could imagine where those hotels are coming from, it is in fast growing regions like Asia Pacific, to some extent in Europe as well.

And we are always looking to do infill in North America as well.

Great.

Thank you very much.

Mike Olson, Piper Jaffray.

This is Andrew Connor in for Mike.

We'd just like to hear from about what stage you see us in the travel recovery.

Specifically within the US, we have been seeing RevPAR growth for two years now.

I am just curious how important is RevPAR growth to your model, and are we approaching a ceiling in terms of occupancy or ADR rates?

Thanks.

As far as RevPARs go, you are right.

The numbers have been quite healthy.

The occupancy rates are starting to hit peak season, the 70% range, which is pretty high from a historical standpoint.

I think our model is a model that performs quite well in up and down markets.

We tend to be a little bit more counter-cyclical than the market in a poor economy/poor market we tend to gain share quickly.

We get hit by ADR weakness.

In an up market we tend to get the benefit of ADRs and some of the suppliers who can fill up their rooms directly do so more aggressively.

As far as where the market is and where we think it can go forward, we do think that supply certainly does seem to be tightening up.

And, at this point, we're not feeling like we're hitting a ceiling one way or the other.

We think our inventory quality in the US is really good.

The deals that we have signed with our strategic partners provide very strong inventory for us.

And we think as long as the inventory is out there, we'll be able to sell it.

We've got products that can sell the inventory in very long lead times like packages.

Then we've got products that can sell inventory in short lead time such as the Opaque model and with Hotwire and also the mobile channel as well.

So we're pretty comfortable with our product.

We think some of the technology investments that we made are going to give us returns above market, which is certainly what we're gunning for and hopefully we can keep showing those returns going forward.

Long-winded answer, I apologize.

No.

Great.

Thank you.

And I am showing no further questions at this time.

I would like to hand over to Alan Pickerill for any closing remarks.

Okay.

Thank you very much.

I appreciate everybody jumping on the call today and for all your questions.

The replay will be on the IR website as usual shortly after we finish the call.

I appreciate your interest in Expedia.

And we'll talk to you again next quarter.

Dara do you have any closing remarks?

No.

Thank you for your interest, and thanks to all Expedia employees for a good quarter.

And we'll talk to you next quarter.

Ladies and gentlemen, this concludes the conference call for today.

We thank you for your participation.

And you may now disconnect.