Expedia Inc.'s (Nasdaq: EXPE) fourth quarter earnings missed the Zacks consensus by 2 cents, or 6.1% on revenue that beat by 0.7%. Expedia beat the Zacks Consensus by an average 9.23% in the preceding four quarters. Therefore, this miss was a big disappointment, reflected in the 12.65% plunge in share prices in after-market trading yesterday.
Revenue for the quarter was $808.4 million, down 18.2% sequentially and up 15.9% year over year. Expedia stated that fourth quarter results were hurt by bad weather, and market trends remained strong. Currency had a 1 percentage point impact on year-over-year comparisons.
Revenue by Segment
Leisure customers remained the largest revenue contributors, generating nearly 83% of revenue. Corporate customers (Egencia) were under 5%, while TripAdvisor brought in the remaining 13%.
Sequential comparisons were mixed at -19.0%, 11.4% and -23.0%, respectively for the three categories. The segments were up 13.3%, 33.8% and 34.5%, respectively from the year-ago quarter.
While the leisure segment is the largest and most important for Expedia, it is clear that the company is gaining ground in the Egencia (corporate) segment. Earlier, management stated that both large companies and small and medium-sized ones had started to increase their traval expenditure.
Expedia appears well positioned to gain from this increase in spend. Egencia has increased at a double-digit year-over-year clip in each of the last five quarters and recent growth trends indicate that the segment is gaining momentum.
The increase from the year-ago quarter in both Leisure and TripAdvisor are also encouraging. However, while Expedia stated that it was gaining share in lodging, we think this is possible, mainly because online bookings are growing strongly at the expense of offline bookings and something that Expedia would gain from.
With a stronger outlook for both leisure and corporate travel, advertisers are also coming. TripAdvisor, in particular, did exceptionally well, recording third-party revenue growth of 48% (100% in the international business). This business is growing at a $500 million annual runrate, with the international portion posting triple-digit year-over-year growth in each of the last 5 quarters.
Revenue by Channel
Around 68% of total revenue was generated through the merchant business (direct sales), another 20% came through the agency model (where Expedia operates as an agent of the supplier) and roughly 12% came from Advertising and Media.
The three channels witnessed 17.3%, 19.1% and 14.5% sequential declines, respectively in the last quarter. Growth rates from the year-ago quarter were 11.7%, 14.9% and 29.9%, respectively.
Revenue by Product Line
Hotel and Air, the two main product lines grew 15% each from the year-ago quarter. The increase in Hotel revenue came from a 15.3% increase in room nights, helped by a 2% increase in the average daily rate ("ADR"). This was the biggest ADR increase since December 2008.
Revenue per night was again flattish, possibly due to the large number of hotel additions in the recent past. The increase in ticket revenue was attributable to a 6% increase in ticket volumes and 9% increase in the revenue per ticket. Airfares were up 5%, indicative of the fact that demand continues to increase.
Expedia witnessed a temporary setback in the last quarter, as bad weather hurt its business. However, the secular drivers of the company's business remain on track.
Aside from growth prospects in the domestic market, which are improving as a result on the economic turnaround, Expedia has tremendous growth opportunities internationally, particularly in the Asia/Pacific market, where online penetration is still low.
The company has responded by steadily increasing its hotel inventory. Additionally, ADRs are also on an upward trend, so profitability may be expected to improve.
That said, the company will continue to face challenges from players like Priceline.com (Nasdaq: PCLN), Orbitz Worldwide (NYSE: OWW) and Travelocity, as well as a growing number of local Chinese players that could make expansion in the fast-growing Chinese market difficult.
Additionally, Google Inc's (Nasdaq: GOOG) venture into the travel market is expected to increase costs for Expedia. Competition aside, Expedia and other online travel agents are fighting the incidence of occupancy taxes, which remains a hotly debated and contested issue today.
We have a Zacks #4 Rank on Expedia shares, which translates to a short-term Sell rating.
Willis Group's Bottom-Line Beats
Willis Group Holdings plc(NYSE: WSH) reported its fourth-quarter 2010 adjusted net income from continuing operations of 57 cents, beating the Zacks Consensus Estimate by 2 cents. Results are ahead of 47 cents earned in fourth-quarter 2009. Adjusted net income from continuing operations was $98 million, up 22% from $80 million in the prior-year quarter.
The beat may likely be attributable to higher commissions and fees coupled with lower operating expenses.
Full-year 2010 adjusted net income from continuing operations of $2.75 per share came in 2 cents above the Zacks Consensus Estimate and 8 cents above the year-ago earnings of $2.67. Adjusted net income from continuing operations increased 4% to $470 million from 2009.
The board of directors declared a quarterly cash dividend of 26 cents per share. The dividend will be paid on April 15, 2011 to shareholders of record as on March 31, 2011. The annualized dividend is $1.04 per share.
Willis expects salaries and benefits expense to increase by $100 million in 2011 from the 2010 level. The increase is expected from incremental expense due to higher amortization of cash retention payments, reinstatement of annual salary reviews for all employees and reinstatement of a 401k match for North American employees. The company also expects $20 million to $25 million from these heads will continue through to 2012 as incremental expense.
Willis will review all businesses to better align its resources with its growth strategies. As a result it expects to incur pre-tax charges of approximately $110 million to $130 million in the first quarter of 2011. Also, the company expects the operational review to result in cost savings of approximately $65 million to $80 million in 2011, reaching annualized savings of approximately $90 million to $100 million in 2012.
With Willis recording new business growth along with high client retention and expanding operating margins by virtue of cost reduction, we expect the company to post solid results with economic recovery gaining pace.
We maintain a "Neutral" recommendation on Willis over the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
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