Takeaway: We’re giving back 5% for a big reset in room-night estimates; means we can sleep on our long through 2016 given what we saw out of OWW/AWAY

KEY POINTS

  1. 2Q16 = SELF-INFLICTED NOISE: As we mentioned in our last note, most outside of the sell-side were already bracing for decelerating trends, but no one expected this.  Room nights growth decelerated to 20% from 37% in 1Q16.  Mgmt suggested that they were already expecting ~600bps of deceleration largely due to 1Q/2Q calendar shifts, but the incremental deceleration was due to a combination of the recent terrorist attacks and internal mishaps related to the OWW integration, which may have limited to flow of its inventory to meta-search channels due to technichal issues.  The company expects a mild reacceleration in organic room nights in 2H.  EXPE also raised its dividend by to $0.26 from $0.24 (thanks), announced that it is may try to IPO Trivago before year-end, and that it may save up to 50% on the build-out of its +$1B corporate headquarters over the next few years.  All in, mgmt introduced a ton of noise into the story without adequately addressing the progress it's making with the core story; particularly with AWAY.
  2. BUT STILL IN CONTROL: Despite the sudden shock in room nights growth, EXPE still beat consensus EBITDA estimates by 12%; suggesting that its 2016 EBITDA target really is a just cost story.  EXPE’s inorganic expense trajectory declined in absolute dollars across each line item outside of G&A, which saw a notable decrease in the prior quarter.  However on a consolidated basis, total operating costs as a % of revenue did accelerate on a y/y basis due to a continued surge in Tech & Content costs.  But AWAY was the much bigger story, which went under the wire this quarter (see Point 1).  First, 1M bookable listing may be the biggest highlight/sigh-of-relief since the biggest risk to the AWAY model transition was the opt-in; we estimate that 1M bookable listing effectively translates to online bookability penetration of 70%-85% depending on its total listings.  AWAY is also making early progress on monetizing its new model, with 2Q revenue growth up 37% y/y vs. 17% in 1Q; note that AWAY was high-single/low-teens top-line grower as a stadalone company.  Collectively, the progress mentioned above is all about execution, and has nothing to do with the current travel environment.
  3. FAIR TRADE: We expect 3Q to fuel optimism in both the OWW & AWAY stories since the inorganic seasonality impact should optically amplify their results.  First, roughly 40% of OWW’s annual EBITDA is historically concentrated into 3Q.  The 3Q15 OWW purchase accounting headwind effectively means EXPE doesn’t really have an OWW comp from last year, and the early leverage we’ve seen on the cost side YTD will only amplify the y/y impact into 3Q16.  For AWAY, the transition into a transactional model introduces a seasonality component that didn’t really exist last year (subscription model).  Given the early progress we’ve seen in online-bookability opt-in, coupled with another quarter of +200% y/y growth in online bookings transactions in 2Q, AWAY revenue growth will likely accelerate again since most of those 2Q booking will be recognized as revenue on the 3Q stay, and AWAY will have a full quarter's worth of the user fee in effect.  Meanwhile, the risk of softening trends in room nights is already on the table after 2Q mishap, and we only had to give back 5% on the stock that had ripped through July to essentially hedge that risk away.  We should see a big reset in 2016 consensus room night estimates, which basically means we can sleep on the long through 2016 since EXPE is now just an execution story at this point.

EXPE | Fair Trade (2Q16) - EXPE   Inorganic Cost Trajectory 2Q16

EXPE | Fair Trade (2Q16) - EXPE   AWAY online bookability 2Q16

Let us know if you have any questions or would like to discuss in more detail.

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet 

  

Todd Jordan
Managing Director


@HedgeyeSnakeye