KEY POINTS
- 2Q DETAIL IS TELLING: Mgmt attributed the massive slowdown in room-nights (RN) growth to a combination of calendar shifts and self-inflicted wounds on the part of technical issues around the OWW acquisition (see first note below). Mgmt specifically called out meta-search channels (TripAdvisor & Trivago) as the sources of pressure, suggesting that it pulled back on its marketing spend since the technical issues mentioned above were inhibiting conversion. However, EXPE’s 2Q results suggested the bulk of that pressure occurred within Trivago. First, RN growth decelerated at a higher rate internationally; -26 percentage points to 18% y/y growth. Second, we estimate that EXPE’s marketing spend on Trivago decelerated in terms of both of absolute growth and Trivago share since EXPE’s reported revenue eliminations are primarily the portion of Trivago revenue coming from EXPE.
- FIXING ITS HOUSE? EXPE has suggested that EU hotel shoppers are more price sensitive than that of the US, suggesting EXPE can win back room-nights share in the EU if it’s willing to bid away more of its take to undercut its competition on ADR (price). Remember that EXPE’s EBITDA is largely a cost story (see second note below); EXPE’s 2Q results reinforce this point given the EBITDA beat (12%) despite the considerable miss in RN growth. That said, EXPE likely has enough breathing room on EBITDA to give on its take-rate while still beating consensus 3Q EBTIDA estimates. Further, EXPE owns Trivago, which means EXPE can conceivably adjust its meta rates real-time to undercut the competition. That said, we suspect that EXPE has been doing exactly that. We have been passively monitoring trivago’s metasearch results, which generally have been favoring EXPE properties in search results as the lowest-cost booking option. Unfortunately, we do not have the historical context from 2Q to quantify this impact (hence the “?” in the title), but we will be monitoring this dynamic moving forward.
- OTHER THOUGHTS INTO THE PRINT: Consensus is already baking in a meaningful reacceleration for 3Q RN estimates, which is giving us some pause as the sell side is already there. However, sentiment might not be as aggressive as the RN estimates suggest thanks to a gift from the research provider that called for another deceleration in 3Q RN growth, which likely rebased whisper expectations somewhat into the print. All things considered, we suspect that if EXPE shows further improvement on the first two parts of our thesis (OWW + AWAY), the stock will work as long as we do not see another deceleration in RN growth into 3Q. We don’t think we will see a deceleration and here’s why. First, remember that EXPE reports room nights-growth based on the stay not the booking, which means that there is a good chance that EXPE already saw the reacceleration in RN bookings growth when they suggested that RN growth would rebound in 2H16; especially since EXPE generally takes caution in managing expectations. Second, we expect EXPE to further increase its Trivago marketing spend on the eve of its IPO, especially since that spend is netted out of its reported financials.
EXPE | Fair Trade (2Q16)
07/29/16 09:30 AM EDT
[click here]
EXPE | “It’s Largely a Cost Story”
06/28/16 08:29 AM EDT
[click here]
Let us know if you have any questions or would like to discuss in more detail.
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
