Expedia's Q3 misses mark amid hurricanes and Trivago misstep

Expedia is revising its expectations for Trivago in 2018.

On Expedia’s Q3 2017 earnings call, the company reported some rare negative news. Newly appointed president and CEO Mark Okerstrom said the company’s basic operating profit was up less than 10 percent compared to last year, having previously forecast a 15-percent increase.

In Q3 of this year, Expedia’s gross bookings grew 11 percent, revenue grew 15 percent and stayed roomnight growth was up 16 percent year-over-year, slightly down from the 17-percent growth recorded in the first half of the year. Hotel price comparison website Trivago reported revenue growth deceleration of 22 percent year-over-year. Some good news came from the company’s home-sharing venture, HomeAway, which recorded transactional revenue last quarter that exceeded 75 percent of HomeAway’s total revenue—a first for the company. HomeAway’s gross bookings grew 44 percent, while revenue grew 45 percent to $305 million.

“Given solid progress at HomeAway, we plan to lean even more heavily than anticipated earlier this year into paid marketing channels, a trend we expect to continue through 2018,” Alan Pickerill, EVP and COO at Expedia, said during Expedia’s earnings call.

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So where did Expedia slip up? According to Pickerill, the company grappled with the same external factors that much of the hospitality industry endured last quarter, most notably hurricanes Harvey and Maria, which battered Texas, Florida and the Caribbean. Expedia’s stayed property night growth for Q3 was recorded at 36 percent, and Okerstrom said it would have been much higher had the hurricanes not deterred travel. Expedia’s third-quarter transactional revenue also grew by 116 percent, and peaked for the year at $236 million.

Trivago, however, performed substantially worse than Expedia forecasted earlier this year, reporting an $8-million loss on 22 percent revenue growth. Okerstrom said Trivago is struggling against negative trends in the advertisement landscape, resulting in much of the loss. Total selling and marketing expenses for Expedia grew 21 percent year-over-year, driven mainly by a 22-percent increase in direct expenses, partly from a $17-million cloud computing spend that Okerstrom said is expected to “ramp significantly” in 2018. He later clarified that it may be more than a 50-percent increase year-over-year. Overall, Expedia suspects it will spend $100 million on the cloud in 2017.

“Despite the headwinds created by the natural disasters, we continued to make aggressive marketing investments across our global brands. Additionally, performance at trivago impacted direct marketing expense growth rates,” Pickerill said.

This past quarter represented a stumble for Expedia, but the company didn’t struggle in any areas where hotels thrived. Both hotel companies and Expedia were left to perform damage control in the wake of natural disasters, resulting in scores of refunds and cancellations through Expedia’s booking channels. However, the weaker-than-expected performance from Trivago remains a bit of a surprise. Okerstrom said in the call that Trivago remains an attractive marketing channel for online travel agencies and hoteliers, but modifications made to the marketplace, such as landing-page scores, have created unforeseen volatility in the platform.

Not even OTAs were safe from Mother Nature last quarter.

Direct Damage

One thing that Okerstrom said had nothing to do with Expedia’s Q3 performance was efforts from hotels to push direct bookings. When asked to describe the effect the hotel industry’s push for direct business is having on Expedia, Okerstrom said he isn’t seeing any impact at all.

“We have seen no direct impact on our marketing efficiencies from anything they've been doing. We've seen no real impact on our conversion rates, our marketplace from the discounting they've been doing. So we're just not seeing it,” Okerstrom said. “I think as it relates to their overall push direct, listen, it makes a ton of sense to me. We do the exact same thing, which is bring customers onto our platforms, try to give them amazing experiences, and try to have them come back to us directly. So we think it makes strategic sense.”

He clarified that both hotels and OTAs are competing for repeat customers, and that the best way to earn those customers is through differentiation and improving customer experiences. He pointed out that hotel guests today are brand agnostic—the constant discounting of hotel rates for loyalty members proves this, to him.

“So the question is, how do they compete in that world? Well, the best way to compete in that world is the way that we compete, again, for our repeat customers is give them an amazing experience. And it's not through a television advertisement. It's not through rewards points. It's not through a discount. It's actually through giving them an amazing experience on property,” Okerstrom said. “But even if they don't come back to them again and again, customers that ultimately choose that hotel the next time they're shopping on Expedia or Hotels.com, and that's where I hope we can shift the dialogue. But I think [with] booked direct, overall… I think it makes a lot of sense.”

What’s to Come

In looking toward 2018, Pickerill said Expedia is lowering its expectations for Trivago, and is doubling down on HomeAway. The home-sharing company is in the midst of a cloud migration, which will result in $30 million in additional direct cloud expenses for the year to come. Okerstrom described HomeAway’s integration into Expedia as “Phase 1,” with an eventual goal of expanding its operations internationally.

“It's hard for me to give you a timing on… when that will be a meaningful push for them,” Okerstrom said. “I think it'll be a little bit more gradual here through 2018, at least from what we see now.”

Natural disasters blindsided hotels and OTAs equally last quarter, but more telling is the effect unforeseen changes to the digital landscape can have on a tech giant like Expedia.

“In closing, though we are not at all satisfied with our Q3 performance, our sights are clearly aimed at the longer-term opportunity ahead,” Okerstrom said. “I am extremely optimistic about what we can achieve with our greater focus on becoming locally relevant globally, becoming much more customer centric and moving much faster as an organization.”