The high-stakes nature of Expedia Inc.'s bet on its new technology platform, dubbed E3, could be seen in the aftermath of its disappointing fourth quarter results.
On the heels of Expedia Worldwide president Scott Durchslag exiting the company in January, CEO Dara Khosrowshahi used words such as "unsatisfactory" to describe "the overall Expedia brand performance," and "poorly" to characterize how airline ticket sales and vacation packages fared in the fourth quarter of 2011.
Expedia Inc.'s revenue increased 7% to $787.1 million on a 19% increase in hotel room nights in the fourth quarter, although a decrease in revenue per room night put a damper on things.
Adjusted EBITDA fell 4% in the quarter to $162.1 million, and content and technology costs, including monies allocated to the tech platform, rose 29% to $98.6 million.
Hotels.com and the Expedia hotel product have been migrated to the new tech platform, the air product will be on board by the end of the first quarter, but vacation packages aren't expected to be transitioned "until the back half of 2012," Khosrowshahi told financial analysts during the company's fourth quarter conference call yesterday.
Khosrowshahi expressed confidence that the new platform will increase conversions and enable Expedia to innovate faster, but he conceded that the company has something to prove and "there are a lot of ifs at this point." He said:
Listen, all other things being equal, when E3 is complete, I would expect to see room night growth accelerate for Expedia, not only standalone room nights but especially packaged room nights that have been a negative factor. And I would hope to see that in the second half of the year. Again, we haven't done it. But that's why we're investing the way that we are on the technology side.
The company says subsidiary Hotels.com, which transitioned to the E3 technology platform in early 2010, "experienced healthy room night growth across all regions during the fourth quarter."
And Hotels.com has continued to maintain ... high room night growth. And hopefully, with execution, we'd expect to see that continue on a go-forward basis. But again, we know that we have to prove that out to you. I think the Q4 room night number was really healthy, and I think it was really healthy without Expedia hitting on all cylinders. So if we can hit on all cylinders, we could see things get better. But those are a lot of ifs at this point.
There were bright spots in the earnings announcement.
Expedia is bullish on its 50-50 AirAsia joint venture, which chipped in with healthy room night and hotel revenue growth in the fourth quarter.
And, Expedia CFO Mark Okerstrom says the company is not feeling any impact from Booking.com's share gains in the US market, where Expedia's hotel share likewise is growing.
Financial analysts offered varying views about Expedia's prospects following the earnings release.
Tom White, an analyst for Macquarie Capital, has a "neutral" rating on Expedia and wonders about the cost of the technology upgrades. White says:
The main question for the stock in our view is not whether the Expedia brand’s tech re-platforming will yield improved conversion rates but when and how much the initiative will ultimately cost. This limited visibility, coupled with the potential for y/y EBITDA declines in 1Q given EXPE’s increased seasonality post the TRIP spin is enough to keep us on the sidelines near-term despite EXPE’s appealing relative valuation. Add to this EXPE’s larger relative exposure to the slower-growth/supplier-friendly U.S. market, and we still view PCLN as the preferred way to play the secular shift of global travel bookings moving online.
And, Mark Mahaney, an analyst for Citi Investment Research & Analysis, also has a "neutral" rating on Expedia's stock, but says the "soft" results for Expedia in the fourth quarter sets the company up for "an excellent 2013."
Either way, with Booking.com growing its hotel business, Expedia has something to prove.