Expedia Q1 outlook and travel ban impact analysis

Expedia (Buy, $146 PO) Stock view: 1Q faces tough comps, but should clear way for strength into ‘18 We think 1Q expectations are somewhat muted as Expedia has highlighted several earnings headwinds in early 2017, including incremental cloud migration spend, higher marketing spend and, recently, potential ADR pressure. 1Q’17 earnings will face the toughest room night growth comps, though Expedia expressed optimism on trends through January on the 4Q call. Comps ease during the rest of the year for Expedia, which we see as a positive set up for the stock. We think Expedia will reiterate its 10- 15% EBITDA growth outlook and .Expedia remains our top 2017 summer (2Q/3Q) travel idea. We currently forecast 20% y/y room night growth in 2Q/3Q, though the comp is 1600bps easier vs. 1Q and street growth expectations could be higher. The ongoing benefit of conversion rate improvements, the Easter shift into 2Q (noted as 1% impact in 2Q’16), as well as the benefit of more aggressive marketing spend should aid 2Q growth. Additionally, prior to 1Q’17 earnings, Expedia will begin to disclose HomeAway online bookings and room nights, which we think may drive y/y room night growth 200- 300bps higher (we forecast HomeAway room nights up 50% y/y in 2017 vs. core OTA room nights up 18%). We think investors will also view HomeAway disclosure positively if the data indicates that the HomeAway transition remains on track and provide visibility into potential EBITDA acceleration in 2018. STR data suggests hotel fundamentals deteriorated modestly in the US through initial March readings, but improved slightly in Europe through February. However, Expedia’s CEO commented in a recent interview with the Financial Times that international tourism to the US (Expedia’s key market) has decelerated following the introduction of Trump’s travel bans, which may be a downside risk to 1Q bookings and revenues. This mirrors ForwardKeys data from early March that after Trump’s executive order, foreign tourism bookings to the US fell, then rebounded when the ban was suspended, but declined again when the ban was re-introduced. A few US hotel operators have indicated little impact from travel bans, so data is mixed. Key theme/metric(s) for 1Q: room night growth vs industry and Priceline We expect 1Q organic room night growth to remain steady at 16% y/y, though we note that this does not yet include the contribution from HomeAway, which we think should add 200-300bps to y/y growth. We expect N. America bookings growth of 12% y/y vs. 8% in 4Q, Int’l bookings (FX-neut.) of 14% y/y. Biggest 1Q issues/risks: « Room nights may disappoint on tougher 1Q comps, negatively impacting the acceleration thesis ¢ — Expedia’s CEO commented in a recent interview with the Financia/ Times that international tourism to the US (Expedia’s key market) has decelerated following the introduction of Trump’s travel bans, which may pressure hotel ADRs and be a downside risk to 1Q bookings ¢ Pace of investments, namely cloud IT spend ($110mn in 2017) and marketing ramp « HomeAway EBITDA trends given marketing spend ramp and pressure on subscription revenues. Street has high expectations for the business. ¢ Pressure on hotel take rates given agency mix shift and rewards programs Early 1Q RevPAR data decelerates According to STR, 1Q US RevPAR through initial March readings decelerated 30bps to 3.0% y/y, and European RevPAR through February accelerated 600bps q/q to 3.6% y/y Bankof America Merrill Lynch Internet/e-Commerce | 06 April2017 19 HOUSE_OVERSIGHT_014905