Expedia faces a novel coronavirus challenge: ‘How long can they operate at near zero revenue?’

by Milani Frances

Caught in the headwinds of world-wide coronavirus shutdowns and travel restrictions, Expedia missed earnings estimates for the 1st quarter, reporting a loss of $1.83 per share (versus consensus estimates of a $1.29 loss per share), while posting sales of $2.2 billion for the quarter (down 15% from the year-ago quarter, its first quarterly decline in eight years) as the travel industry has been pummeled.

Investors seemingly weren’t too surprised: the stock was up 3% in after-hours trading on Wednesday following a brief drop. “Ultimately, investors are well aware of how bad the numbers are going to be both in Q1 and Q2,” Evercore ISI’s Lee Horowitz told Fortune.

Like its peers, the coronavirus has proved “painful,” Expedia Group executives said on an earnings call. The group, which owns the likes of Hotels.com, Vrgo, Travelocity, (and, of course, Expedia) among other brands, took a beating in the 1st quarter. The company reported meaningful declines and “unprecedented” cancellations—lodging revenue fell 10% in the 1st quarter of 2020 on a 14% decrease in room nights stayed, which the company said was partly offset by a 5% increase in revenue per room night, while total gross bookings fell 39% from the year-ago quarter to $17.9 billion. In air travel, cancellation inquiries for air travel managed without an agent increased from 65% in February to over 95% in April, the company said.

Yet Expedia had been struggling before the crisis—execs called attention to cost-saving measures (which have included cutting 3,000 jobs in February) that were in place before the coronavirus hit: “Fortunately, we were ahead of the game having implemented cost savings measures earlier this year, and with the added pressure from COVID-19 we accelerated and expanded our ambition on improving our long-term cost structure,” vice chairman and CEO Peter Kern (who became CEO in April) said in a statement.

Kern told analysts on a call that the progression of its cost-cutting measures, which had initially been in a range up to $500 million for the full year, have now been intensified and sped up: “Our ambition has increased significantly and our speed has increased significantly,” Kern said, but declined to provide updated numbers on the cost-cutting.

Expedia’s big challenge this year: operating on trickling (if not dried up) revenues. The focus for some analysts including Morningstar’s Dan Wasiolek has been the company’s plan of shoring up liquidity—”namely, how long they can operate at near zero revenue,” he told Fortune in a note. The company has been proactive in raising both debt and equity amid the pandemic—it sold a $1.2 billion equity stake to Silver Lake and Apollo Global Management in April, and raised $2.8 billion in debt financing. The measures should “strengthen our liquidity position as we navigate this disruption and position the business for recovery,” the company said in its earnings report.

Yet the travel industry’s woes may last much longer than quarantines do. Analysts at RBC Capital Markets are “not expecting a recovery in global leisure travel until well in 2021,” according to a recent note. But analysts at Jefferies believe Street estimates of travel recovery by 2023 are still too optimistic: “We recommend a patient approach to owning travel, as past cycles show it can take 3-5+ years for fundamentals to fully recover,” Jefferies’ Brent Thill wrote Tuesday.  

Like many companies right now, the 2nd quarter is going to show the “biggest carnage,” notes Evercore ISI’s Horowtiz, as March and April will likely prove the toughest months.

Some analysts aren’t quite so bearish. “While our forecasts head lower, we do see some signs of encouragement in the macro backdrop, as states begin to reopen and third-party data providers continue to report improving U.S. hotel data, with occupancy exceeding 30% in the first week of May (though we caution that non-tourist demand generators such as government-contracted rooms for essential workers and the homeless are likely driving some of the reported occupancy recovery),” Wells Fargo’s Brian Fitzgerald wrote in a note to clients Monday.

Expedia’s stock has been pummeled in recent months, trading down nearly 30% year-to-date. Expedia’s stock closed up 4% on Wednesday, and extended its rally in after-hours trading. The Seattle-based company withdrew its full-year forecast in March just as lockdowns were beginning to affect travel and flights worldwide.

In the meantime, Expedia’s Kern advises cautious optimism as the company sees encouraging growth in May: “We’ve seen … green shoots in the areas you would expect, places where movement has become possible and people can start to think about their summer holidays,” but notes, “I would not get overly excited about it.” CFO Eric Hart added: “we’re not out of the woods yet.”

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