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Expedia Susquetta Initiating Coverage

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  • 8/13/2019 Expedia Susquetta Initiating Coverage

    1/19

    JULY 10, 20

    InternetINITIATING COVERAGE

    Expedia, Inc.

    Symbol EXPE

    Rating Neutral

    Price $63.02

    Price target $65.00

    Downside risk $55.00

    Company market data

    52 week range $68.09-$43.07

    Shares out. 135.136mm

    Market cap. 8,516mm

    Average daily trading volume 2,741,606

    Beta 1.01 PT Upside/Downside ratio: 0.25:1

    Calendar year December2012 2013e 2014e

    EPS Actual Prior Current Prior CurrentQ1 0.26 0.25A 0.13Q2 0.89 0.84 1.08Q3 1.32 1.43 1.79Q4 0.63 0.74 0.80CY EPS 3.10 3.25 3.79Revs 4,030 4,870 5,605EBITDA ($) 803 908 1,008

    Derivatives Volume (contracts) 3,856

    Skew rank (2yr %-tile) 6.95

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    Implied, Realized volatilityShare price

    Expedia, Inc.: Solid in Mobile,But is Desktop Safe? Initiatewith Neutral RatingCall to action

    We are initiating coverage of Expedia with a Neutralrating and $65 price target.

    Brian [email protected]

    Michael [email protected]

    HIGHLIGHTS

    We like EXPE's mobile positioning as the OTA with the largest mobile audience and areencouraged by improvements in conversion. That said, we are wary of recent U.S. desktop

    traffic trends and the growing threat of Booking.com.

    Entrenched on Mobile Beach-Front...EXPE has the largest mobile audience of any travelcompany with 1.3X to 4.1X more users than other OTAs . This first mover position is valuable,and over the long-term should lead to share gains as travel activity migrates to mobile andusers concentrate their app use, moving toward 1 or 2 go-to apps within each vertical.

    ...But U.S. Desktop Traffic More Troubling: But desktop trends are more worrying...withvisitors declining 4% year-to-date. There is evidence it is due to rising competition, asBooking.com traffic has accelerated thru its recent TV ad campaign. In our view, long-termtraffic trends and reach matter in market share battles and we see EXPE's unique travelerreach advantage over PCLN has fallen from 23% to now only 9%. Booking.com is growing itsbrand in the U.S., which is worth monitoring given the U.S. remains EXPE's largest region.

    Ad Efficiency Analysis Shows Upside Potential: Our ad spend efficiency analysis underscoreshow EXPE is managing its core ad spending as it grows and is not becoming materially lessefficient. Further, it also highlights that EXPE still spends ~2x more ad dollars per room nightthan PCLN. While we don't expect EXPE to achieve parity, this gap speaks to the opportunityfor continued improvements and leverage.

    14% Forward Room Night Growth: Weighing the pluses - mobile, share gains, betterconversion - with the minuses - Booking.com in the U.S. - we see EXPE posting 14% globalforward room night growth, a ~570bp decel from the past 3 years. We attribute this slowdown to growing competition in the U.S. and laws of large numbers in Europe and APAC.

    Initiating Coverage with Neutral Rating and $65 PT: It is important the OTAs post upwardearnings revisions as they grow. That said, we find ourselves -2% and -4% below the Street

    EPS in '13 and '14, respectively. As such, we initiate with a Neutral rating. We like EXPE'ssecular positioning, but await more clarity around the U.S. trends or signs of better thanexpected leverage before looking to get positive.

    Continued on the next page

    Catalysts

    2Q:13 earnings results are a potential catalyst for Expedia.

    Downside risk

    We calculate downside risk to $55 using a 105% target S&P 500 relative forward multiple toour '14E EPS. This is 1 std dev below EXPE's median tradin mult.

    IMPORTANT DISCLOSURES AND CERTIFICATIONS.

    Susquehanna International Group, LLP (SIG) is comprised of affiliated entities, including Susquehanna Financial Group, LLLP (SFG). SFG is a provider of research and executionservices. SFG is a member of FINRA. SFG does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may havea conflict of interest that could affect the objectivity of this report. Please see important disclosures on pages 18-19.

  • 8/13/2019 Expedia Susquetta Initiating Coverage

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    HIGHLIGHTS

    Continued from previous page

    Please click on the links below for our macro U.S. Online Advertising, U.S. Online Travel and individual companyreports also published today.

    Online Advertising

    Macro: U.S. Online Advertising: Search Disruption and The Lost Decade

    Google: Mobile Arrows Set to Fly, Initiate with Positive Rating

    Facebook: Just Give Me a Reason, Initiate with Neutral Rating

    Linkedin: ROI Says It All, Initiate with Positive Rating

    Yahoo : Whole Merely Sum of Parts, Initiate with Neutral Rating

    Pandora: They Built It...Now They'll Come, Initiate with Positive Rating

    E-Commerce

    Amazon: Triple Threat, Initiate with Positive Rating

    eBay: Mobile, BRICs and the PoS Optionality

    Online Travel

    Macro: U.S. OTAs: Smart Spenders with Beach-Front Property

    Priceline: More Globetrotting and Beats Ahead, Initiate Positive

    Orbitz: PL Brought Lift, but Decel Coming, Initiate with Neutral Rating

    TripAdvisor: Day Tripper, Initiate with Negative Rating

    EXPEDIA, INC. INITIATING COVERAGE JULY 10, 2013 2

    Susquehanna Financial Group, LLLP

    https://sig.bluematrix.com/docs/pdf/f4ecebe6-e0d4-46d6-906e-131cbdace61a.pdfhttps://sig.bluematrix.com/docs/pdf/793d349d-c786-49dc-9355-b0d128f6b045.pdfhttps://sig.bluematrix.com/docs/pdf/9aafab4c-abfa-4954-852d-3fa7b64785be.pdfhttps://sig.bluematrix.com/docs/pdf/dd5834e9-153e-4ce8-be39-a54d2a5fda7b.pdfhttps://sig.bluematrix.com/docs/pdf/b3387b23-1e21-4c88-8709-c7ca41e25790.pdfhttps://sig.bluematrix.com/docs/pdf/4924e6e5-1884-4f0b-8a71-00c0eeb2d8de.pdfhttps://sig.bluematrix.com/docs/pdf/4820b1cf-e8d7-4477-9d91-d9e7f8b23596.pdfhttps://sig.bluematrix.com/docs/pdf/fe48d04e-aba1-463d-8c6f-13ebf910de29.pdfhttps://sig.bluematrix.com/docs/pdf/778a7a4c-294d-4ca7-ac21-0bc02da3bcaf.pdfhttps://sig.bluematrix.com/docs/pdf/2ce9d850-95e2-4440-8f7c-4c875bdac417.pdfhttps://sig.bluematrix.com/docs/pdf/d56e3f7a-6150-4f63-b0d9-c855969de709.pdfhttps://sig.bluematrix.com/docs/pdf/63313917-0992-4c18-af4a-3cdfb8663fdf.pdf
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    We Like Expedias Mobile Positioning

    As explained in our accompanying online travel macro note (U.S. OTAs: Smart Spenders with Beach-FrontProperty ), we believe the global growth of mobile favors the travel intermediaries with established beach-front property on users mobile screens. As mobile grows, it is extending the travel intermediaries userreach advantage vs. traditional travel companies. As shown in Fig 1, the major online travel intermediaries

    have sizable mobile audience advantages vs. the traditional hotels.

    Fig 1: OTA U.S. Mobile Traffic vs. Traditional Hotel Chains February 2013

    Note: U.S. data, Total mobile (smartphone + tablet)Units in thousands of unique visitors (000)Source: Comscore, SFG Research

    As of February 2013, Expedia has the largest mobile audience of any travel related company, with nearly

    10mn unique visitors. TripAdvisor has the second largest mobile user base (at 9.2mn uniques) followed byPriceline (at 7.6mn uniques). The median travel intermediary draws ~5.6mn unique visitors while the OTAsdraw a median of 3.6mn per month.

    But even more important, in our view, is how large the OTAs audiences are relative to the hotels mobile userbases. That is, the hotels mobile properties only draw between 148k to ~2.5mn monthly unique visitors, witha median number of roughly 1.2mn monthly mobile users. This implies that the median OTA draws ~3X morepeople than the median hotel mobile property. The Big 2 OTAs (Expedia and Priceline) attract 4X and 3Xmore mobile users than the top performing hotel site (Hilton), respectively.

    As in any business, reach and attracting eyeballs matter to overall share shifts. As a result, the travelintermediaries larger mobile audiences position them to take an even bigger share of the overall online hotelpie as the business migrates from desktop to mobile. Expedia (with the largest mobile audience of the OTAs)

    is well positioned to benefit from and drive this trend.

    Balanced Across Apps and Browser

    Note too that Expedias leading mobile position is balanced, as the company has the largest mobile browserand mobile app presence of any OTA (See Fig 2). Only TripAdvisor in the intermediary category has a largermobile presence than Expedia. Expedias mobile browser traffic is anywhere from 1.4X to 4X larger than theother OTAs and its app has anywhere from 1.5X to 10.5X more users than its OTA competitors. Thecompanys edge over the hotels is even more pronounced as none of the major hotels in our sample evenreport app traffic, either because they have not developed an app yet, or because their app traffic is too smallto be measured.

    T rav el C o . F eb-13 H o t el F eb-13

    In t erm edia r ies M o bi le UVs (000) C hains M o bi le UVs (000)

    Expedia Inc . 9 ,896 Hilton Hotels 2,531

    TripAdvisor Inc. 9,185 M arriott 2,284

    Priceline.com Incorporated 7,608 Choice Hotels International 1,431

    Orbitz Worldwide 3,623 Wyndham Worldwide 1,393

    Kayak.com Network 3,230 Intercontinental Hotels Group 1,237

    Travelocity 2,389 Starwood Hotels And Resorts 881

    T rav el In t . M edian 5,616 Global Hyatt Corporation 610

    OT A M edia (ex T ripA dv is o r) 3 ,623 BestWestern Hotels 394

    Acco r 148

    H o t el M edian 1,237

    OT A R eac h A dv ant age 2.9X

    EXPEDIA, INC. INITIATING COVERAGE JULY 10, 2013 3

    Susquehanna Financial Group, LLLP

    https://sig.bluematrix.com/docs/pdf/dd5834e9-153e-4ce8-be39-a54d2a5fda7b.pdfhttps://sig.bluematrix.com/docs/pdf/dd5834e9-153e-4ce8-be39-a54d2a5fda7b.pdfhttps://sig.bluematrix.com/docs/pdf/dd5834e9-153e-4ce8-be39-a54d2a5fda7b.pdfhttps://sig.bluematrix.com/docs/pdf/dd5834e9-153e-4ce8-be39-a54d2a5fda7b.pdfhttps://sig.bluematrix.com/docs/pdf/dd5834e9-153e-4ce8-be39-a54d2a5fda7b.pdf
  • 8/13/2019 Expedia Susquetta Initiating Coverage

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    Fig 2: Travel Intermediarie s vs. Hotel Chains U.S. Mobile Traffic, Browser vs. App February 2013

    Note: U.S. data, Smartphone only (iPhone + Android)Units in thousands of unique visitors (000)Source: Comscore, SFG Research

    Expedias first mover mobile edge is important, as the company has entrenched itself one thumb-press away

    on millions (and growing) of mobile devices. Over time, we believe this will lead to further share gains astravel activity migrates from the desktop to mobile. Because although the total number and variety of appsthat people download is still rapidly expanding, in the long run, we expect to see more category-level appconcentration. In other words, we expect users to treat apps like television channels, where the averageperson has hundreds of channels available on their TV set, but only watches an average of 15-20 of them eachmonth. In addition, we also expect users to migrate toward the one or two top go-to mobile apps withineach vertical (travel, sports, shopping, etc.). Expedia is already entrenched on the handsets and in the leaderslot. As long as the company continues innovating and investing, it will make it hard for the hotels and otherOTAs to catch up and knock them off their perch.

    But Desktop Trends Are More Troubling

    While mobile trends are moving in Expedias favor, desktop user trends are more troubling, as we seeExpedias desktop unique visitors in steady decline all year after improvements throughout 2012 (See Fig 3).In addition, there is evidence this could be Expedia-specific or competition related, as we see that Pricelinestraffic growth has held steady, and in the case of Booking.com, notably accelerated (See Fig 3). This issomething to monitor given: 1) Expedias high exposure to the U.S. (still 53% of total annual room nights), and2) Pricelines aggressive push into the market to grow Booking.com (including the recent Booking.com TV adcampaign).

    T rav el C o . B r o ws er H o t el B ro ws er

    In t erm ediar ies M o bi le B ro ws er M o bil e A pp v s . A pp C hains M o bi le B ro ws er M o bi le A pp v s . A pp

    Expedi a Inc . 7,517 4,115 1.8X Hilton Hotels 2,511 na na

    Priceline.com Incorporated 5,462 2,764 2.0X M arriott 2,094 na na

    Kayak.com Network 1,885 1,444 1.3X Choice Hotels International 1,431 na na

    Orbitz Worldwide 3,456 553 6.2X Wyndham Worldwide 1,393 na na

    TripAdvisor Inc. 9,081 454 20.0X Intercontinental Hotels Group 1,175 na na

    Travelocity 2,160 391 5.5X Starwood Hotels And Resorts 846 na na

    T rav el In t . M edian 4,459 999 4.5X Global Hyatt Corporation 610 na na

    OT A M edian (ex T r ipA dv i s o r ) 3,456 1,444 2.4X BestWestern Hotels 392 na na

    Acc or 148 na na

    H o t el M edian 1,175 na na

    OT A R eac h A dv ant age 2.9X na na

    Unique Vi s i t o rs ( F eb-2013) Unique Vis i t o rs (F eb-2013)

    EXPEDIA, INC. INITIATING COVERAGE JULY 10, 2013 4

    Susquehanna Financial Group, LLLP

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    Fig 3: U.S. Online Desktop Traffic, Expedia Brands (left) vs. Priceline Brands (right) 1Q:10-2Q:13 to date

    2Q:13 to date = April and May 2013Source: Comscore, SFG Research

    Because although Expedia is still the largest OTA in the U.S. market, over the long-term, the ability to reachmore travelers will matter to market share. And in this case, we see Priceline steadily gaining on Expediastotal number of unique travelers reached. That is, as of May 2013, Expedias major U.S. brands (Expedia.comand Hotels.com) only reach ~9% more people than Pricelines major U.S. brands (Priceline.com and

    Booking.com) (See Fig 4). And this metric has been in steady decline over the past 2 years falling from a27% reach advantage to now only high single digits (See Fig 5).

    Fig 4: Expedia Brands Still Have a Reach Advantage vs. Priceline Brands (left)But That Gap Has Been Closing (right)

    Source: Comscore, SFG Research

    Priceline (with Booking.com) is aggressively attacking the U.S. and these web metrics showcase how they aregaining reach and brand awareness. These trends bear monitoring and act as potential cautionary signals, asevery 2% decline in U.S. room night growth equates to a 1% hit to Expedia 2014E EPS.

    Fig 5: Sensitivity of Expedia EPS to U.S. Room Night Growth 2014E

    Source: SFG estimates

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    U.S . M a y 2 013 U.S . M ay 2013

    Boo king.com Traffic 6,273 Hotels.co m traffic 6,157

    less overlap* 2,189 less o verlap*** 3,011

    T o t a l B o o k i n g. co m u ni q ue t ra f f ic 4 ,0 84 T o t a l H o t e ls .c o m u ni q ue t r af f i c 3 ,14 6

    Priceline.com traffic 11,415 Expedia.com traffic 14,420

    less overlap** 2,192 less o verlap**** 3,014

    T o t a l P r ic e li n e. co m u n i qu e t ra f f ic 9 ,2 23 To t a l E xp e d ia . co m u n i qu e t r a f f ic 11, 4 07

    T o tal P CLN Uni que T raf fc 13,307 T ot al EX PE Uni qu e T raf fi c 14,553

    P C L N U n i q u e Tr a f f i c i s ( 8 . 6 %) S m a l l e r T h a n E XP E U n i q ue Tr a f f i c

    *unique visitors that also visted Priceline.com

    **unique visitors that also visted Bo oking.com

    ***unique visitors that also visted Expedia.com

    ****unique visitors that also visted Hotels.com

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    Expedia 2014E SF G Es t .

    U .S . Roo m Nigh t Growth 6.0% 8.0% 10.0% 12.0% 14.0%

    bp Change -400 bp -200 bp 200 bp 400 bp

    EP S $3.72 $3.75 $3 .79 $3.83 $3.87

    % Change (1.9%) (1.1%) 1.1% 2.1%

    Abs. Change -$0.07 -$0.04 $0.04 $0.08

    EXPEDIA, INC. INITIATING COVERAGE JULY 10, 2013 5

    Susquehanna Financial Group, LLLP

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    Weighing Puts and Takes, Expecting Favorable Secular Trends and Conversion Improvements toEnable Expedia to Post 10% Forward Domestic Room Night Growth

    While recent traffic trends bear monitoring, for now, we are still expecting Expedia to be able to grow itsdomestic room nights 13% this year and 10% next year. As mentioned above, the secular mobile trends aregoing in their favor, and we expect the company to continue to benefit from its platform migration and

    subsequent improvements in visitor conversion.

    As a rough proxy for conversion, in Fig 6, we monitor Expedias and Pricelines gross bookings per averageunique visitor. As shown, Expedias conversion has been noticeably improving over the past 5 quarters,outpacing Priceline for the first time since 3Q:09. While we acknowledge this analysis is not perfect itdoesnt take into account profitability (hotel bookings are more profitable than air bookings) we believe itcan be used as a rough proxy for how well each of the companies is converting its traffic and for Expediasprogress in improving its dollars generated per user.

    Fig 6: Gross Bookings per Average Unique Visitor and YoY % Growth 1Q:08-1Q:13

    Source: Comscore, Company data, SFG Research

    As shown in Fig 7, in all, we see Expedias domestic room nights growing at a 10% forward CAGR, slower thanthe share-gaining Priceline, but still faster than the smaller OTAs and brand.com websites. Note that webelieve the brand.com websites (Marriott.com, Starwood.com, etc.) will be among the biggest share losers inthe U.S. as the hotels, in our view, will struggle to produce outsized growth given the growth of mobile andmeta channel use. For more on this, please see our macro online travel note, U.S. OTAs: Smart Spenderswith Beach-Front Property.

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    Expediaimprovingconversion

    EXPEDIA, INC. INITIATING COVERAGE JULY 10, 2013 6

    Susquehanna Financial Group, LLLP

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    Fig 7: U.S. Online Hotel Market, Bottom-Up Estimates 2009, 2012, 2017E

    Source: PhoCusWright, STR, Company data, SFG estimates

    Share Gains Extending Across Pond and to Asia as Well

    Expedias secular tailwinds and platform improvements extend across the pond as well, and so we expect thecompany to continue to make strides in Europe, growing room nights at a 13% forward CAGR and taking anaverage of ~55bp of share within the online hotel market per year.

    In all, we see Expedia making up 20% of forward European online room night growth, growing from 11.5% to~14% of the overall online hotel market (See Fig 8). That said, in our view, Priceline will continue to be theentrenched leader of the European hotelier business, and even in 2017, we believe Priceline will be ~4.4Xlarger than Expedia in Europe. Smaller OTAs will continue to feel the pain, as we believe there is room forboth Expedia and Priceline to grow and take share in the fragmented European hotel market.

    09-12 12-17Ein millions of room nights 09-12 C o nt r ib . t o 12-17E C o nt r ib . t oU.S . 2009 2012 2017E C A GR Online Gro wt h C A GR Onl ine Gro wt h

    T o t al D em and 985 .1 1,153.3 1,285.9 5% 2%YoY % Growth 3% 2%

    T o t al Online 255.8 353.2 520.1 11% 100% 8% 100%Online % Penetration 26.0% 30.6% 40.4%

    YoY Change (in bp) 222 bp 175 bp

    P ri c el ine 19.1 30.7 65.9 17% 12% 17% 21%YoY % Growth 12% 14%% Penetration of Online 7.5% 8.7% 12.7%

    YoY Change (in bp) 8 bp 81bp

    Expedia 45 .8 62.6 98.6 11% 17% 10% 22%YoY % Growth 17% 8%% Penetration of Online 17.9% 17.7% 19.0%

    YoY Change (in bp) 94 bp 16 bp

    Ot her OT A s 32.6 52.7 67.6 17% 21% 5% 9%YoY % Growth 12% 1%% Penetration of Online 12.7% 14.9% 13.0%

    YoY Change (in bp) 15 bp -66 bp

    T o t al OT A s 97.5 145.9 232.1 14% 50% 10% 52%YoY % Growth 14% 7%% Penetration of Online 38.1% 41.3% 44.6%

    YoY Change (in bp) 117 bp 31bp

    H o t el s (brand.c o m ) 158.2 207.3 288.0 9% 50% 7% 48%YoY % Growth 9% 6%% Penetration of Online 61.9% 58.7% 55.4%

    YoY Change (in bp) -117 bp -31bp

    EXPEDIA, INC. INITIATING COVERAGE JULY 10, 2013 7

    Susquehanna Financial Group, LLLP

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    Fig 8: Europe Online Hotel Market, Bottom-Up Estimates 2009, 2012, 2017E

    Source: PhoCusWright, STR, Company data, SFG estimates

    Lastly, while APAC is a competitive market, eLong continues growing healthily, and in all, we expectExpedias APAC business (including eLong) to grow at a 25% CAGR, going from ~3% to 7% of the total hotelmarket in APAC (See Fig 9).

    Fig 9: Expedias % Share of APAC Online Hotel Room Nights 2012-2017E

    Source: PhoCusWright, STR, Company data, SFG estimates

    09-12 12-17Ein millions of room nights 09-12 C o nt r ib . t o 12-17E C o n t r ib . t oEuro pe 2009 2012 2017E C A GR Online Gro wt h C A GR Online Gro wt h

    T o t a l D em and 8 84 .9 996.9 1,052.9 4% 1%Yo Y % Growth 1% 1%

    T o t a l On l ine 168.1 311.2 465.6 23% 100% 8% 100%Online % Penetration 19.0% 31.2% 44.2%

    YoY Change (in bp) 400 bp 200 bp

    P ric e li ne 38 .4 129.3 291.5 50% 64% 18% 105%Yo Y % Growth 38% 10%% Penetration of Online 22.9% 41.5% 62.6%

    YoY Change (in bp) 649 bp 229 bp

    Expedi a 17 .4 35.6 65.9 27% 13% 13% 20%Yo Y % Growth 26% 7%% Penetration of Online 10.4% 11.5% 14.2%

    YoY Change (in bp) 87 bp 17 bp

    Ot he r OT A s 52 .5 49.7 33.5 (2%) (2%) (8%) (10%)Yo Y % Growth (12%) 14%% Penetration of Online 31.3% 16.0% 7.2%

    YoY Change (in bp) -517 bp 54 bp

    T o t a l OT A s 108 .4 214.6 390.9 26% 74% 13% 114%Yo Y % Growth 20% 10%% Penetration of Online 64.5% 69.0% 84.0%

    YoY Change (in bp) 219 bp 300 bp

    H o t els ( br and.c o m ) 59 .7 96.6 74.6 17% 26% (5%) (14%)Yo Y % Growth 9% (11%)% Penetration of Online 35.5% 31.0% 16.0%

    YoY Change (in bp) -219 bp -300 bp

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    Expedia APAC Business % Share of Total APAC HotelRoom Night Demand (Online + Offline)

    2012-2017E CAGR: 25

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    Becoming More Global

    Through it all, while Expedia is traditionally characterized as a domestic OTA, by the end of 2013, over 50%of the companys room nights will come from outside of the U.S. From a growth perspective, Expediasglobalization is even more pronounced as 67% of forward room night growth will come from outside of theU.S. (See Fig 10). As mentioned above, the domestic traffic trends and competitive traffic share losses to

    Priceline warrant monitoring, but in all, we believe Expedia will still be able to post 14% forward global roomnight growth.

    Fig 10: Expedia Room Night Mix and Growth 2009, 2012, 2017E

    Source: PhoCusWright, STR, Company data, SFG estimates

    Diving into Core Ad Spend Efficiency

    As detailed in our macro online travel agency launch, U.S. OTAs: Smart Spenders with Beach-Front Property,OTA ad spending efficiency and the long-term profitability of this business remains an oft-debated topic.While there is no denying Priceline and Expedia are increasing their ad spending, we do not agree with thenotion that the companies core ad spending efficiency is materially decreasing or that they are spending onpaid search to the point of value destruction.

    It is also important to remember that the biggest part of the OTAs ad spend is still variable marketing paidsearch. As a result, the OTAs business model (and advertising leverage and de-leverage) revolves aroundtheir ability to drive conversion (aka room nights) from hotel shoppers clicks. The business model works aslong as the OTAs dont spend too many incremental ad dollars for each incremental room night. Putting onour media analyst hatsconversion and advertising efficiency matter.

    With Ad Spend per Room Night

    In order to better understand Expedia and Pricelines core ad spend efficiency, we have begun to analyze thecompanies ad dollars spent per room night. In our analysis, we define ad spend per room night as thetrailing six months of advertising spend divided by the trailing three months of room nights stayed, as webelieve this most accurately matches the advertising costs associated with reported room nights stayed.

    Through this lens, we do not see signs that Priceline and Expedia are becoming materially less efficient atspending on advertising and acquiring traffic. As shown in Fig 11, despite concerns about an emergingsearch advertising Cold War in 2012, Priceline and Expedias ad spend per room night actually fellthroughout the year.

    in millions 09-12 12-17E

    Expedia 09-12 C o nt r ib . 12-17E C o nt r ib .

    R o o m N igh t s 2009 2012 2017E C A GR t o Gro wt h C A GR t o Gro wt h

    U.S. 46 63 99 11% 34% 10% 33%

    Europe 17 36 66 27% 37% 13% 28%

    APA C 6 20 62 48% 29% 25% 38%

    LatAm 0 1 2 46% 1% 31% 2%

    T o t al 70 119 229 20% 100% 14% 100%

    R o o m N igh t M ix 2010 2012 2017E

    U.S. 65.7% 52.5% 43.1% 34% 33%

    Non-U.S. 34.3% 47.5% 56.9% 66% 67 %

    T o t al 100 .0% 100.0% 100.0%

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    Said another way, the OTAs ad spending actually became more efficient throughout the year. We areencouraged by Expedias double-digit improvements as these data show the benefits of the companysplatform and ad efficiency focus in 2011 and into 2012. While we acknowledge some of this fall-off is due tothe companys dialing back on TV spending in 1H:12 during the platform build, in general, we see positivetrends in the required ad spending per room night.

    Fig 11: Advertising Spend Per Room Night, Year-on-Year Change, Priceline vs. Expedia 1Q:10-1Q:13

    *Advertising Spend Per Room Night = trailing 6 month advertising spend per room night in quarter**Organic growth excluding incremental Offline TV for Priceline = +3.1%**Organic growth excluding Trivago for Expedia = 0.0%Source: Company data, SFG estimates

    Near-term Trends Messy with Trivago, But Still Not Expecting Deterioration in Core Ad Efficiency

    The trend reversed in 1Q:13, with Expedias total ad spending per room night rising 2.5% year-on-year, butwe estimate that 100% of this growth was driven by Trivago, and that excluding Trivago, Expedias adspending per room night would have been roughly flat year-on-year.

    We are bullish about the long-term strategy behind the Trivago investment, as it gives Expedia control over arapidly-growing meta shopper channel. Further it also gives the company a long-term hedge against Google(if the channel becomes exorbitantly expensive) and Priceline (if the company takes more aggressive tactics topromote its own businesses through Kayak).

    That said, in the near-term, Trivago is going to lead to higher ad spending without an accompanying up-tickin room nights. As shown in Fig 12, we expect Trivago to generate $150mn of revenue this year and $35mn ofEBITDA (slightly above Expedias 1Q:13 commentary for Trivago to add $20mn-$30mn of EBITDA in 2013).

    Advertising is Trivagos largest expense line, which means that we expect Trivago to add $103mn toExpedias total ad spend in 2013with particular step-ups in 2Q and 3Q as the company increases ad spendto brand build.

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    Improving adspend efficiency

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    Fig 12: Trivago Estimates, 2013E

    Source: SFG estimates

    As a result, in the near-term it will be particularly important to dissect the drivers of Expedias advertisingspending separately between the core business and Trivago one-time step-ups. As shown in Fig 13, we aremodeling Trivago to add between ~450bp and ~920bp to overall ad spend per room night growth over thenext three quarters.

    Fig 13: Expedia Ad Spend Per Room Night Drivers 1Q:12-4Q:13E

    Source: Company data, SFG estimates

    That said, we do not expect the companys core ad spending to become materially less efficient. Excludingthe Trivago step-up, we are assuming that core ad spending per room night rises in the low single digits forthe rest of 2013 (after being flat in 1Q:13). And looking into 2014, we expect Expedias core ad spend perroom night to decline roughly 1-2% in-line with the long-term historical average (See Fig 14).

    in $ millions

    T riv ago 2013E

    Revenue 150

    Cost of Goods Sold 8

    Gross P ro fit 143

    Gross M argin % 95%

    Adv ertising Spend 103

    Other Opex 5

    EBITDA 35

    EBITDA M argin % 23%

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    Fig 14: Advertising Spend Per Room Night, Expedia vs. Priceline 1Q:09-1Q:13

    Source: Company data, SFG estimates

    Ad Spend per Room Night Also Shows Existing Room for Expedia to Improve

    And despite the ad spend per room night improvements Expedia has seen over the past ~1.5 years, it is

    important to keep in mind that the company still spends ~2X more ad dollars per room night than Priceline(See Fig 15). While we do not expect Expedia to be able to achieve parity with Priceline (because ofExpedias higher use of TV advertising and Pricelines still-existing conversion advantage), this gap speaks tothe existing opportunity for Expedia to continue improving the efficiency of its overall ad spending.

    Fig 15: Advertising Spend Per Room Night, Expedia vs. Priceline 1Q:10-1Q:13

    Source: Company data, SFG Research

    A d Sp en d P er 09 -13

    R o o m N ight 1Q:09 1Q:10 1Q:11 1Q:12 1Q:13* C A GR

    P ric el ine $ 11.14 $ 11.12 $ 10.79 $ 11.16 $ 11.50 0.8%

    YoY % Change (0.2%) (3.0%) 3.5% 3.1%

    Expedia $ 23 .70 $ 22.77 $ 25.25 $ 22.25 $ 22.28 (1.5%)

    YoY % Change (4.0%) 10.9% (11.9%) 0.1%

    *Organic growt h excluding incremental Off line TV for Priceline and Trivago fo r Expedia

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    This is one potential source of upside in our model, as we show that every 1% improvement (decline) inExpedias 2014 ad spend per room night leads to 3% upside to our 2014E EPS (See Fig 16).

    Fig 16: Sensitivity of Change in Advertising Spend per Room Night to EPS 2014E

    Source: SFG estimates

    Initiating 4% Below Consensus with a 65 Price Target

    In our view, the ability for the large OTAs to manage profitability and post upward revisions as they grow willbe important to driving the stocks. That said, we are initiating coverage of Expedia with EPS estimates -2%below and -4% below the Street in 2013 and 2014, respectively (see Fig 17), as we believe the Street, isoverestimating Expedias ability to get positive leverage next year. As a result, we initiate coverage ofExpedia with a Neutral rating and $65 PT.

    Fig 17: SFG vs. Consensus Estimates 2013E, 2014E

    Source: FactSet, SFG estimates

    We value Expedia at 17X 2014E earnings, which implies a slight premium to its ~120% historical relative P/Emultiple. We apply this premium given Expedias recent progress in improving its hotel room night growthand strong mobile positioning. Applying this multiple to our 2014E EPS estimate of $3.79, we arrive at our$65 price target (4% upside).

    2014E SF G

    Exped ia Es t

    A v g. A d Sp en d per R o o m N ig h t $ 22 .5 9 $ 22. 82 $ 23 .0 5 $ 23 .2 8 $ 23 .5 1

    % Change (2.0%) (1.0%) 1.0% 2.0%

    N o n-GA A P EP S $ 4.04 $ 3 .91 $ 3.79 $ 3.67 $ 3.56

    % Var. 6% 3% (3%) (6%)

    Abs . $ Var. $0.24 $0.12 ($0.12) ($0.23)

    in $ millions, except per share data SIG C o ns ens us

    2013E Es t . Es t . Varianc e

    Net Revenue 4,870 4,829 1%

    EBITDA 907 901 1%

    M argin 18.6% 18.7% -2 bp

    Adjus ted EPS $3.25 $3.33 -2%

    in $ millions, except per share data SIG C o ns ens us

    2014E Es t . Es t . Varianc e

    Net Revenue 5,605 5,467 3%

    EBITDA 1,008 1,037 -3%

    M argin 18.0% 19.0% -99 bp

    Adjus ted EPS $3.79 $3.95 -4%

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    Fig 18: Expedia Valuation Methodology

    Source: FactSet, SFG estimates

    Looking Ahead to 2Q:13

    The next data point we will get from Expedia will be when they report 2Q:13 earnings (likely on July 25th),after the market close. We are modeling a beat, 1% above the Street on revenue and 5% above on EPS (SeeFig 19).

    Fig 19: SFG vs. Consensus Estimates 2Q:13E

    Source: FactSet, SFG estimates

    Exped ia 2014E

    N o n-GA A P EP S $ 3.79

    Target Relative M ultiple 125%M arket M ultiple 13.8x

    T arget M ul t ipl e 17.2x

    Implied Target P rice $65.37

    R o unded T arget P r ic e $ 65.00

    C urrent S t o c k P ri c e* $ 62.40

    Upside/(Downside) 4.2%

    *as of 7/8 /13 market close

    in $ millions, except per share data SIG C o ns ens us

    2Q13E Es t . Es t . Varianc e

    Net Revenue 1,265 1,257 1%

    EBITDA 228 219 4%

    M argin 18.0% 17.4% 61bp

    Adjus ted EPS $0.84 $0.81 5%

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    Fig 20: Expedia Annual Income Statement 2012-2017E

    Source: Company data, SFG estimates

    12-17Ein $ millions, except per share data 2012 2013E 2014E 2015E 2016E 2017E CAGRIncome Statement

    Merchant Bookings 15,600 17,802 19,997 21,850 23,780 25,579 10.4% Agency Bookings 18,359 20,129 21,927 23,490 25,048 26,416 7.5%

    Gross bookings 33,959 37,930 41,924 45,340 48,828 51,995 8.9%

    Revenue 4,030.3 4,870.0 5,605.4 6,247.6 6,848.3 7,399.8 12.9%Net Revenue Take 11.9% 12.8% 13.4% 13.8% 14.0% 14.2%

    Cost of Revenue 895.3 1,078.6 1,230.8 1,365.3 1,488.4 1,600.1

    Gross Profit 3,135.0 3,791.3 4,374.6 4,882.3 5,359.9 5,799.7 13.1% Gross Margin 77.8% 77.9% 78.0% 78.1% 78.3% 78.4%

    Operating ExpensesSales and Marketing 1,707.6 2,179.3 2,547.2 2,839.7 3,111.5 3,362.4

    ec no ogy an on en . . . . . . enera an m n s ra ve . . . . . .

    Stock Based Compensation 64.6 124.2 72.3 77.5 83.3 89.7 Amortization of Intangibles 31.7 40.9 40.9 40.9 40.9 40.9 Merger and Restructuring/Other 117.0 128.0 0.0 0.0 0.0 0.0

    Total Operating Expenses (Reported) 2,703.3 3,393.2 3,703.9 4,109.1 4,490.2 4,841.4 12.4%

    evenue e ges ga ns osses . . . . . .

    Operating expense (Adjusted) 2,496.4 3,097.3 3,590.8 3,990.7 4,366.1 4,710.9

    Operating In come (GAAP) 431.7 398.1 670.7 773.2 869.7 958.3 Operating Margin 10.7% 8.2% 12.0% 12.4% 12.7% 13.0%

    Operating Income (Adjusted) (OIBA) 638.6 694.0 783.8 891.6 993.8 1,088.8 11.3%Operating Margin 15.8% 14.3% 14.0% 14.3% 14.5% 14.7%

    Depreciation 164.2 213.5 224.1 235.3 247.1 259.5

    Adj usted EBITDA 802.9 907.5 1,008.0 1,127.0 1,240.9 1,348.3 10.9% marg n . . . . . . ncremen a marg n . . . . . .

    Other (expense) incomeInterest Income 26.4 17.2 17.2 17.2 18.9 20.8Interest Expense (87.8) (87.8) (86.9) (86.0) (85.2) (84.3)Net Interest Expense (61.4) (70.6) (69.8) (68.9) (66.3) (63.6)Revenue hedges gains/(losses) 6.4 (2.9) 0.0 0.0 0.0 0.0Other (Expense) Income (17.1) (1.7) (1.7) (1.7) (1.7) (1.7)

    Total Other (72.0) (75.2) (71.5) (70.6) (68.0) (65.3)

    Income (Loss) Before Taxes 566.6 618.8 712.3 821.0 925.8 1,023.5

    rovs on or ncome axes . . . . . . ax a e . . . . . .

    Minority Interest (2.5) (9.5) (14.7) (18.3) (22.0) (25.3) Discontinued Ops, net na na na na na na

    Net Income 438.5 458.0 519.6 597.4 672.3 742.3 11.1%Net Income from continuing ops 438.5 458.0 519.6 597.4 672.3 742.3

    us e vg u e ares u s an ng . . . . . .

    Adj usted EPS $3.10 $3.25 $3.79 $4.46 $5.09 $5.65 12.7%

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    Fig 21: Expedia Quarterly Income Statement 2Q:13E

    Source: Company data, SFG estimates

    YoY %/bp2Q:12 2Q:13E C hange

    in $ millions, except per share dataGro s s bo o k ings 8,957 10,046 12.2%

    R ev enue 1,040.0 1,264.9 21.6%YoY Growth 1.6% 21.6% 2003 bpNet Revenue Take 11.6% 12.6% 98 bp

    Cost of Revenue (ex SBC) 228.9 276.5 20.8%

    Gro s s P ro f i t 811.0 988.4 21.9% Gross M argin 78.0% 78.1% 16 bp

    Operat ing ExpensesSales and M arketing (ex SBC) 441.3 591.7 34.1%Technology and Content (Ex SBC) 112.2 135.1 20.5%General and Administrative (ex SBC) 74.5 85.6 14.8%Stock Based Compensation 16.6 16.4 (1.4%)

    Amo rtization of Intangibles 8.6 8.6 0.0%M erger and Restructuring/Other 3.4 0.0 na

    T o t a l Opera t ing Expens es (R epo rt ed) 656.6 837.4 27.5%

    Revenue hedges gains/(losses) (1.2) 0.0 (100.0%)

    Operating expense (Adjusted) 626.8 812.4 29.6%

    Operating Income (GAAP) 154.4 151.0 (2.2%)Operating M argin 14.9% 11.9% -291bp

    Operating Income (Adjusted) (OIBA) 184.2 176.0 (4.5%)Operating M argin 17.7% 13.9% -380 bp

    Depreciation 38.7 51.9 34.1%

    A dj us t ed EB IT D A 22 2. 9 227.9 2.2%YoY Growth 17.9% 2.2% -1570 bp EBITDA margin 21.4% 18.0% -342 bp Incremental EBITDA margin 36.6% 2.8% -3377 bp

    Interest Income 7.1 3.5 (50.5%)Interest Expense (22.0) (21.9) (0.2%)Net Interest Expense (14.9) (18.4) 23.7%Revenue hedges gains/(losses) (1.2) 0.0 naOther (Expense) Income (4.4) - na

    Total Other (20.5) (18.4) (10.1%)

    Income (Loss) Before Taxes 163.7 157.6 (3.8%)

    Provision for Income Taxes (37.4) (41.0) 9.4%Tax Rate 22.9% 26.0% 313 bp

    M inority Interest (1.5) 2.8 (283.7%)

    N et Inc o m e 124.8 119.4 (4.3%)

    Adjusted A vg Diluted Shares Out 139.7 141.5 1.3%

    A dj us t ed D i lu t ed EP S $ 0. 89 $ 0. 84 (5 .5 %)

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    Price target valuation and risks

    Expedia, Inc.(EXPE, Price: $63.02, Price Target: $65.00):

    We value Expedia at 17X 2014E earnings, which implies a 125% relative multiple (a 5% premium to its 120% historicalrelative P/E multiple). In applying this multiple to our 2014E EPS estimate of $3.79, we arrive at our $65 price target.

    Downside risks to achieving our price target include: share erosion in the core U.S. market. Upside risks to achievingour price target include: signs of further acceleration in European growth.

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    Susquehanna Financial Group, LLLP

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    Analyst CertificationI, Brian Nowak, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subjectsecurities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or viewexpressed in this research report.

    Important DisclosuresSFG is a market maker in the securities of Expedia, Inc. (EXPE).Susquehanna International Group, LLP (SIG) is comprised of a number of trading and investment related entities under common control, including Susquehanna FinancialGroup, LLLP (SFG). SIG, its affiliates and/or its principals may have long or short positions in securities or related issues mentioned here. SIG, in its capacity as specialist and/

    or market maker may execute orders on a principal basis in the subject securities. Information presented is from sources believed to be reliable, but is not guaranteed to beaccurate or complete. Past performance should not be taken as an indication or guarantee of future results. Hyperlinks provided in this report are for your convenience. Pleasebe aware that the products and information supplied on these hyperlinked pages are not endorsed or approved by SFG.

    The following data elements on this report were sourced from Bloomberg LP: Price (yesterdays close), 52-week high, 52-week low, Shares outstanding, Average daily tradingvolume, Volume (contracts). Any others will be specifically sourced.

    SFG employs the following rating system:

    Positive: We expect this stock to appreciate by at least 15% over the next 12 months. Upon the initiation of a Positive rating, we expect this stock to appreciate by at least 20%over the next 12 months.

    Neutral: We expect this stock to perform within a range of +/-15 percentage points over the next 12 months.

    Negative: We expect this stock to depreciate by at least 15% over the next 12 months. Upon the initiation of a Negative rating, we expect this stock to depreciate by at least20% over the next 12 months.

    Suspended: The previously published rating and/or estimates are currently suspended and under review.

    Defined Credit Terms

    Gross debt + preferred TEV : (Gross Debt + Preferred) / Total Enterprise Value (expressed as a %).

    Net debt/EBITDA : Net Debt (gross debt less cash on hand) / EBITDA = forward year EBITDA estimate.Free cash flow : Forward EBITDA estimate less cash taxes less cash interest less total capex.

    FCF yield: FCF Yield ((FCF/ Fully Diluted shares outstanding/current share price) (expressed as a %)).

    YTM: Yield-to-maturity (YTM) implied by any of its bonds outstanding that are due in 5 years ((or closest to)(expressed as a %)).

    5-yr treasury yield : 5-year US Treasury yield (expressed as a %).

    Volatility Definitions

    Volume: The 20-day average option contract volume for the symbol.

    Skew Rank: The current day's Skew values compared to the past year's worth of skew values and then rank the current day's value. Past year in the calculation is 252 previoustrading days which includes the last trading day.

    Implied Volatility: Implied Volatility is the at-the-forward volatility level implied by market option prices for 90 days. While implied volatility is specific to the time frameselected, it is always presented as an annualized standard deviation.

    Realized Volatility: It is the Realized Volatility of a financial instrument over 90 days. Generally, this measure is calculated by determining the average deviation from theaverage price of a financial instrument in the given time period. This measure is frequently compared with implied volatility to determine if options prices are over- orundervalued. It is also known as historical volatility.

    Ratings Distribution & Investment Banking DisclosureCovered companies in each Category Investment banking cli ent in each categoryPositive (Buy) 44.69% (122) Positive (Buy) 0.00% (0)Neutral (Hold) 50.18% (137) Neutral (Hold) 0.00% (0)Negative (Sell) 5.13% (14) Negative (Sell) 0.00% (0)This is a proprietary SFG product prepared, and intended, solely for the use of sophisticated and professional institutional traders and managers and not for the generalinvesting public. Unauthorized redistribution of this report, by any means, represents a violation of US copyright laws and could result in legal action and the suspension of the intended recipient's privileges. If you have any questions regarding this transmission please contact [email protected] . The information in this communicationis not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or whichwould subject Susquehanna Financial Group, LLLP or its affiliates to any registration requirement within such jurisdiction or country. In the European Union this report isapproved and/or communicated by Susquehanna International Securities Ltd (SIS). SIS is authorized by the Central Bank of Ireland. For more information contact JohnKeogh +353-1-8028082. In the UK, this communication is issued and approved for distribution only to, and directed at, (a) persons who have professional experience inmatters relating to investments falling within Article 19(1) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (the Order); or (b) high networth entities, and other persons to whom it may otherwise lawfully be communicated, falling within Article 49(1) of the Order (all such persons together being referred toas relevant persons). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which thiscommunication relates is only available to relevant persons and will be engaged in only with relevant persons.

    Copyright 2013 Susquehanna Financial Group, LLLP. All rights reserved.

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    Susquehanna Financial Group, LLLP

    mailto:[email protected]
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