Selling and marketing expense increased 29%, ahead of revenue growth of 25%, translating to 141 basis points of OIBDA margin deleverage, with two key drivers.
- The first being increased personnel cost and higher growth in strategic business areas, including the Trip Advisor network and other advertising teams, as well as expanding staff.
- Expedia added twice as many merchant hotels in this quarter in Europe compared to last quarter.
- The firm has also ramped offline spend in Europe to support the emerging Hotels.com brand, and has seen lower efficiencies from more recent private label deals.
Fiscal 2008 Outlook
- Selling and marketing expense are expected to increase as a percentage of revenue for full year 2008, but less so than the 235 basis points of deleverage in 2007.
- Expedia expect more deleverage from these expenses in the second quarter compared to the first quarter given the absence of Easter stay revenue.
- Despite the economic challenges, full year OIBDA is forecasted to grow in the low double digits in full year 2008 absent any meaningful worsening in the ADR or airfare environment.
- Free cash flow is expected to grow more slowly than OIBDA, given $140 to $150 million in CapEx and a lower working capital benefit.
Key questions and answers from the first quarter fiscal 2008 earnings call as presented by Expedia Inc. (EXPE) on May 1, 2008
Aaron Kessler (Piper Jaffray):
Do you believe Hotwire is somewhat countercyclical, or is it just that people are looking for a better deal?
Dara Khosrowshahi: There are countercyclical elements in Hotwire. The kind of inventory that we are getting in the Hotwire marketplace is actually very good, and there are certainly consumers coming and looking for deals.
We have been able to push up conversion there, which then allows the team to go out and bid higher on terms on search engine marketing terms and also be more aggressive on the marketing side, which leads to higher volume.
This year is going to be a very good year, and it happens to correlate somewhat with the economy. Top line comps are tough for Hotwire because we lost the Travels Gate business, but the business is performing well regardless.
Aaron Kessler (Piper Jaffray):
On the European side, are you seeing similar growth in UK as opposed to continental Europe and any signs of a macro slowdown yet?
Dara Khosrowshahi: We saw a macro slowdown in the UK, but I would not put the slowdown in the business in the UK entirely on the macro environment.
It is a more competitive marketplace, and we proactively took some marketing back on on UK in the first quarter. We are going to market a bit more aggressively in the second quarter, and we are seeing decent volumes in the UK.
The continental European revenue growth is essentially identical on a quarter to quarter basis. We definitely do not see macro signs as far as any effect on travel there as of yet.
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Marianne Wolk (Susquehanna Financial Group):
In the past Trip-Advisor was roughly two-thirds of advertising. Is that still the case, or did some of the benefits that you saw on the Expedia.com site shift that balance?
Dara Khosrowshahi: It still is more than two-thirds of the advertising there. There are seasonal effects there, but we expect it to be more than two-thirds.
With some of the acquisitions that we have added into the Trip-Advisor Media Network, it is going to be well past two-thirds of the revenue there, but organic revenue growth in that whole sector is over 50%, and there is a lot of growth there not only in the US, but especially internationally.
We expect Trip-Advisor to be in Japan and China by the end of the year, just expanding the network, not after revenue growth there.
Marianne Wolk (Susquehanna Financial Group):
On the merchant hotel inventory in Europe, is 15,000 merchant hotels the right property account?
Dara Khosrowshahi: We are at 15,000 hotels in Europe. It is up 1000 this quarter, and we actually expect that pace going forward to accelerate because we are pretty focused on investing not only in people and systems there which should ease the acquisitions of hotels in Europe and Asia Pacific region as well.
Mark Mahaney (Citigroup):
Any comments on ability to gain greater access to hotel inventory in the US in this declining occupancy rate environment?
Dara Khosrowshahi: In the past three years, we have had very good access to inventory in the US, so the availability has not fundamentally changed.
What has changed is access to promotional inventory for the hotels, where to the extent that at least the pattern that we are seeing of the hoteliers in this kind of a market is occupancies are coming down. The percentage of deals and transactions that are happening off promotional inventory is up pretty significantly.
