Expedia Together With Dodgy Accounting
February 13, 2018
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I took a quick aspect at Expedia (EXPE US) concluding black (yes, this is indeed how I similar to pass many of my Sat evenings). Expedia is ane of the world's largest online go agents (OTAs), together with owns a bunch of lodging platform websites you've in all likelihood heard of/used - both its namesake expedia.com, every bit good every bit hotels.com, Travelocity, Orbitz, Wotif, together with HomeAway, every bit good every bit air ticket, rental car, together with cruise ticket booking operations, together with go media site Trivago. The company's primary challenger is Priceline (owner of booking.com together with diverse other sites), every bit good every bit - to a lesser extent - AirBnB together with TripAdvisor.
I maiden of all looked at the stock concluding yr when it was trading at close US$140, but it at nowadays looked likewise expensive for my tastes - especially amongst contest on the rising together with increment starting to moderate - so I passed together with moved on. However, the fellowship reported an earnings missy after-house on Thursday, which sent the stock downward (for the 2nd fourth dimension inwards vi months) nearly 20% to US$104. A friend forwarded me a Deutsche Bank question Federal Reserve notation suggesting I receive got a look, together with ii things caught my eye: (1) the stock was downward partly because the fellowship guided downward 2018 earnings, but to a large extent this was due to a ramp-up inwards increment investments which would potentially yield additional revenues/market part long term; together with (2) the analysts claimed the stock was on a frontwards EV/EBITDA of simply 7-8x.
That seemed likewise cheap. Travel booking websites are networked businesses together with are real profitable together with cash generative. 7-8x EBITDA sounded likewise low. True, contest is heating upward (TripAdvisor is moving from pure metasearch into directly hotel bookings, together with every bit the marketplace is starting to mature, Priceline together with Expedia receive got started to compete amongst each other to a greater extent than vigorously inwards an endeavour to hold increment rates). However, the fellowship was probable to rest real profitable; the stock was at nowadays 30-40% off its highs amongst deflated expectations for 2018; together with according to DB, the company's multiples were at nowadays at intriguingly depression levels. Was in that location a potential chance here?
It took close 10 minutes reading the company's 4Q17 earnings loose together with skimming its 10-K to chop-chop dispel that notion, together with uncover the issue: a combination of dodgy accounting, together with a shocking lack of critical thinking/scrutiny past times the DB analysts. In fact, the valuation is soundless extremely high (about 40x 2017 earnings), together with the stock soundless looks similar a clear avoid to me at electrical flow prices, given a like shooting fish in a barrel maturing market; rising competition; accelerating cost growth; 4Q17 EPS printing simply US$0.35 (well below the company's overall 2017 run-rate); together with the ever-present threat that deep-pocketed tech giants amongst large user bases (e.g. Google, Amazon, or Facebook) could ane solar daytime determine to force into the segment.
There are iii telephone commutation issues amongst the company's (headline) accounting: (1) the adding-back of stock-based compensation; (2) the adding dorsum of non-goodwill intangibles amortisation; together with (3) the capitalisation of software evolution costs, coupled amongst the focus on EBITDA. And the company's handling of some of these items is - frankly - downright dishonest. If these adjustments are non made, the company's earnings multiples around double. Specifically, for 2017, 'adjusted EPS' was US$4.30/share, but actual reported GAAP EPS was alone US$2.42 - almost 50% less. In addition, for 4Q17, 'adjusted EPS' of US$0.84 (down 28% YoY) was to a greater extent than than twice reported EPS of US$0.35 (down 33% YoY). The maiden of all ii items inwards a higher house accounted for the bulk of the disparity.
I wrote close the reprehensible practise of adding dorsum stock-based compensation here, together with Expedia is an archetypal example. The fellowship claims these expenses to live on 'non-cash', together with added dorsum a US$149m non-cash stock based compensation accuse taken during 2017 to adjusted earnings. However, the fellowship spent US$294m inwards mutual coldness difficult cash buying dorsum shares during 2017 on marketplace to offset the dilution, together with yet soundless ended the yr amongst a higher part count than at the showtime (138.9m vs. 137.2m). Buying dorsum shares on marketplace amongst existent cash to offset dilution from 'non-cash' stock compensation makes the compensation aspect real 'cashy' to me. This has non deterred the fellowship from trying to mislead investors close the truthful grade of its profitability, however.
Furthermore, the fellowship added dorsum US$275m inwards non-goodwill intangibles amortisation during 2017, together with yet the residuum sail carrying value of its non-goodwill intangibles declined past times less than US$140m. What this agency is that the fellowship capitalised to a greater extent than than US$135m of cash expenditure on intangibles during the yr (across a multifariousness of categories such every bit 'customer relationships', 'supplier relationships', 'technology', 'domain names', together with 'other'). Some of these intangibles are acquired rather than internally-generated, but they are soundless finite-life assets that cost existent cash to instruct (acquisitions are to some extent aught to a greater extent than than outsourced R&D). These cash costs never go through the adjusted earnings delineate - ever - despite the fact that they cost existent cash to acquire, together with are semi-recurring inwards nature.
Software evolution costs are are also capitalised past times the fellowship into fixed assets together with and so depreciated every bit well. For this reason, 'EBITDA' is truly a fundamentally misleading representation of the company's underlying cash generation ability, because software evolution costs are a recurring cash expense. The ruse hither is to capitalise the cash costs every bit incurred so every bit to exclude them from EBITDA, together with and so to debate that the subsequent depreciation is 'non-cash' inwards nature, together with hence ought to live on ignored. That would live on less cynical if the fellowship had incurred all of its costs upfront together with were no long spending cash on a recurring footing to snuff it on its online properties up-to-date, but that is non the case: software evolution costs are a major together with recurring cash cost for companies similar Expedia. Recurring software evolution cash expenditure is thence never included inwards reported EBITDA (let lone adjusted EBITDA) - ever.
I notice this form of dishonest accounting extremely loathsome - possibly exceeded inwards intensity alone past times the disrespect I receive got for the professional person safety analysts that do non telephone weep upward the fellowship out on it or include stock-based compensation inwards their earnings forecasts, valuations, or multiple-based toll targets, together with run around proverb 'Expedia is inexpensive at 7x EBITDA' (often neglecting to cite that this is 'adjusted' EBITDA). The standards of (some) fellowship reporting together with safety analysis rest woefully depression together with need to improve.
LT3000
I maiden of all looked at the stock concluding yr when it was trading at close US$140, but it at nowadays looked likewise expensive for my tastes - especially amongst contest on the rising together with increment starting to moderate - so I passed together with moved on. However, the fellowship reported an earnings missy after-house on Thursday, which sent the stock downward (for the 2nd fourth dimension inwards vi months) nearly 20% to US$104. A friend forwarded me a Deutsche Bank question Federal Reserve notation suggesting I receive got a look, together with ii things caught my eye: (1) the stock was downward partly because the fellowship guided downward 2018 earnings, but to a large extent this was due to a ramp-up inwards increment investments which would potentially yield additional revenues/market part long term; together with (2) the analysts claimed the stock was on a frontwards EV/EBITDA of simply 7-8x.
That seemed likewise cheap. Travel booking websites are networked businesses together with are real profitable together with cash generative. 7-8x EBITDA sounded likewise low. True, contest is heating upward (TripAdvisor is moving from pure metasearch into directly hotel bookings, together with every bit the marketplace is starting to mature, Priceline together with Expedia receive got started to compete amongst each other to a greater extent than vigorously inwards an endeavour to hold increment rates). However, the fellowship was probable to rest real profitable; the stock was at nowadays 30-40% off its highs amongst deflated expectations for 2018; together with according to DB, the company's multiples were at nowadays at intriguingly depression levels. Was in that location a potential chance here?
It took close 10 minutes reading the company's 4Q17 earnings loose together with skimming its 10-K to chop-chop dispel that notion, together with uncover the issue: a combination of dodgy accounting, together with a shocking lack of critical thinking/scrutiny past times the DB analysts. In fact, the valuation is soundless extremely high (about 40x 2017 earnings), together with the stock soundless looks similar a clear avoid to me at electrical flow prices, given a like shooting fish in a barrel maturing market; rising competition; accelerating cost growth; 4Q17 EPS printing simply US$0.35 (well below the company's overall 2017 run-rate); together with the ever-present threat that deep-pocketed tech giants amongst large user bases (e.g. Google, Amazon, or Facebook) could ane solar daytime determine to force into the segment.
There are iii telephone commutation issues amongst the company's (headline) accounting: (1) the adding-back of stock-based compensation; (2) the adding dorsum of non-goodwill intangibles amortisation; together with (3) the capitalisation of software evolution costs, coupled amongst the focus on EBITDA. And the company's handling of some of these items is - frankly - downright dishonest. If these adjustments are non made, the company's earnings multiples around double. Specifically, for 2017, 'adjusted EPS' was US$4.30/share, but actual reported GAAP EPS was alone US$2.42 - almost 50% less. In addition, for 4Q17, 'adjusted EPS' of US$0.84 (down 28% YoY) was to a greater extent than than twice reported EPS of US$0.35 (down 33% YoY). The maiden of all ii items inwards a higher house accounted for the bulk of the disparity.
I wrote close the reprehensible practise of adding dorsum stock-based compensation here, together with Expedia is an archetypal example. The fellowship claims these expenses to live on 'non-cash', together with added dorsum a US$149m non-cash stock based compensation accuse taken during 2017 to adjusted earnings. However, the fellowship spent US$294m inwards mutual coldness difficult cash buying dorsum shares during 2017 on marketplace to offset the dilution, together with yet soundless ended the yr amongst a higher part count than at the showtime (138.9m vs. 137.2m). Buying dorsum shares on marketplace amongst existent cash to offset dilution from 'non-cash' stock compensation makes the compensation aspect real 'cashy' to me. This has non deterred the fellowship from trying to mislead investors close the truthful grade of its profitability, however.
Furthermore, the fellowship added dorsum US$275m inwards non-goodwill intangibles amortisation during 2017, together with yet the residuum sail carrying value of its non-goodwill intangibles declined past times less than US$140m. What this agency is that the fellowship capitalised to a greater extent than than US$135m of cash expenditure on intangibles during the yr (across a multifariousness of categories such every bit 'customer relationships', 'supplier relationships', 'technology', 'domain names', together with 'other'). Some of these intangibles are acquired rather than internally-generated, but they are soundless finite-life assets that cost existent cash to instruct (acquisitions are to some extent aught to a greater extent than than outsourced R&D). These cash costs never go through the adjusted earnings delineate - ever - despite the fact that they cost existent cash to acquire, together with are semi-recurring inwards nature.
Software evolution costs are are also capitalised past times the fellowship into fixed assets together with and so depreciated every bit well. For this reason, 'EBITDA' is truly a fundamentally misleading representation of the company's underlying cash generation ability, because software evolution costs are a recurring cash expense. The ruse hither is to capitalise the cash costs every bit incurred so every bit to exclude them from EBITDA, together with and so to debate that the subsequent depreciation is 'non-cash' inwards nature, together with hence ought to live on ignored. That would live on less cynical if the fellowship had incurred all of its costs upfront together with were no long spending cash on a recurring footing to snuff it on its online properties up-to-date, but that is non the case: software evolution costs are a major together with recurring cash cost for companies similar Expedia. Recurring software evolution cash expenditure is thence never included inwards reported EBITDA (let lone adjusted EBITDA) - ever.
I notice this form of dishonest accounting extremely loathsome - possibly exceeded inwards intensity alone past times the disrespect I receive got for the professional person safety analysts that do non telephone weep upward the fellowship out on it or include stock-based compensation inwards their earnings forecasts, valuations, or multiple-based toll targets, together with run around proverb 'Expedia is inexpensive at 7x EBITDA' (often neglecting to cite that this is 'adjusted' EBITDA). The standards of (some) fellowship reporting together with safety analysis rest woefully depression together with need to improve.
LT3000