Expedia Inc. (EXPE Quick QuoteEXPE - Free Report) shares lost 6.35% in extended trading yesterday, as quarterly revenue results fell short of the Zacks Consensus Estimate.

The company has been making a large number of acquisitions and integration of these companies into its core platforms is currently on (Orbitz was substantially completed in the last quarter and contributed significantly to volumes).

At the same time, management announced that they intend to raise more funds for trivago, which has generated over $660 million in revenue on a trailing 12-month basis. The company will not be selling any shares it currently holds but will raise fresh capital through an IPO. 

Management said going into the year that full-year ex-eLong adjusted EBITDA will be up 35-45%, although the first half will be weak, likely because of ongoing integrations. Both Orbitz and HomeAway are expected to make a nice contribution.

The company has increased spend on Facebook (FB) with the engineering teams of the two companies working together. Management said that they had found “veins, traffic and conversion veins that are awfully interesting”.

So let’s take a look at the numbers-

Revenue

Revenue for the quarter was $2.20 billion, up 15.3% sequentially, up 32.1% year over year short of the Zacks Consensus Estimate by 2.0%.

Revenue by Segment

Core OTA segment revenue was up 14.6% sequentially and 20.6% year over year.

trivago was up 14.2% sequentially and 40.6% from last year. Management will not be providing additonal commentary on this business in the next few months as the company prepares for an IPO of this business.

Egencia grew 13.6% on a sequential basis and 23.8% year over year. Orbitz For Business clients were migrated onto the Egencia platform last quarter, which contributed to the strength in the last quarter. Egencia still has a large business in Europe, especially the Nordic region because of the integration of Via. Management said that while organic volumes held up well, pricing remained weak. Having made significant investments in the business, they are now looking for a stronger second half.

HomeAway, which was added In the December quarter, jumped 21.1% sequentially from $142 million to $172 million.

Core OTA, trivago, Egencia and HomeAway contributed 78%, 9%, 5% and 8% of gross revenue (before inter-company eliminations), respectively.

Revenue by Channel

Around 55% of total revenue was generated through the merchant business (direct sales), another 28% came through the agency model (where Expedia operates as an agent of the supplier), roughly 9% came from Advertising and Media with HomeAway accounting for the remaining 8%. The three channels were up 13.6%, 17.0% and 16.1%, respectively from the March quarter of 2016. Growth from the year-ago quarters were 14.2%, 35.4% and 41.3%, respectively.

Revenue by Geography

Around 58% of Expedia’s quarterly revenue was generated domestically, with the remaining 42% coming from international sources. The domestic business grew 14.0% sequentially and 39.7% from a year ago. The international business grew 17.1% sequentially and 24.0% from last year.

Revenue by Product Line

Hotel and Air, the two main product lines grew 14% and 50%, respectively from the year-ago quarter. The increase in Hotel revenue came from a 20% increase in room nights (Orbitz contributed 8 percentage points of this growth). But this was offset by a 1% decline in the average daily rate (“ADR”). Revenue per night dropped 5%.

In the last quarter, domestic room night growth of 22% trumped the international room night growth of 18%. 

While management doesn’t break out car volume yet, they mentioned on the call that car days were up 36%. Orbitz contributed 24 percentage points to car volume growth.

The 50% increase in ticket revenue was attributable to a 45% increase in ticket volumes, offset by an 8% decline in airfares. Revenue per ticket grew 3%. Orbitz contributed 30 percentage points to air volume growth.  

Bookings and Revenue Margin

Gross bookings were $18.86 billion in the last quarter, down 0.1% sequentially and up 25.2% year over year. The revenue margin was 11.6%, up 156 bps sequentially and 66 bps above the year-ago level.

Conversions were weaker year over year in Core OTA but stronger sequentially. The rest of the business was strong. Merchant conversions were weaker on a year-over-year basis but stronger sequentially. Agency conversions strengthened both sequentially and year over year. Both domestic and international conversions grew from last year although international conversions were stronger.

Margins

The pro forma gross margin for the quarter was 81.5%, up 265 bps sequentially and up 81 bps year over year. The year-over-year expansion in gross margin was because of higher volumes which offset related costs of customer operation, data center operation, credit card processing as well as acquisitions. This led to a 33.4% year-over-year increase in gross profit dollars.

The operating expenses of $1.67 billion were up 12.1% sequentially and 37.3% from last year. The operating margin expanded 484 bps sequentially and shrank 208 bps year over year to 5.6%, with all expended declining sequentially as a percentage of sales and only technology & content growing (by 326 bps) from the year-ago quarter.   

Adjusted EBITDA as reported by the company was $330.9 million, up 31% (18% excluding eLong) from the year-ago quarter.

Net Income

On a pro forma basis, Expedia generated a net income of $62.7 million, or 2.9% of sales compared to net loss of $25.6 million, or 1.3% in the previous quarter and income of $42.8 million or 2.6% in the same quarter last year.

Our pro forma estimate excludes intangibles amortization charges, restructuring charges and other charges on a tax-adjusted basis but includes deferred stock compensation. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

Including the above special items, as well as non controlling interests, the GAAP income attributable to Expedia shareholders was $31.6 million ($0.21 a share)  in the last quarter compared to loss of $121.9 million ($0.81 a share) in the previous quarter and income of $449.6 million ($0.38 a share) in the year-ago quarter.

Balance Sheet

Cash and short term investments totaled $2.34 billion at quarter-end, up $243.1 million during the quarter. Days sales outstanding (DSOs) went from 65 to 60. We note that nearly 48% of assets is goodwill (not a real asset).

The net debt balance was $861.8 million, compared to net debt of $1.12 billion going into the quarter. Including long term liabilities, the debt to total capital ratio was 54.4%.

In the last quarter, Expedia generated $626.8 billion of cash from operations and spent $212.4 million on capex, $35.8 million on dividends and $141.3 million on share repurchases.

Recommendation

Expedia shares currently have a Zacks Rank #3 (Hold). Better-ranked stocks in the technology sector are PetMed Express (PETS Quick QuotePETS - Free Report) and Stamps.com Corp. , which carry a Zacks Rank #1 (Strong Buy) or even Evine Live (EVLV Quick QuoteEVLV - Free Report) , which has a Zacks Rank #2 (Buy).

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