Expedia Inc.'s (EXPE) second quarter earnings beat the Zacks Consensus by 38 cents or 69.1%, on revenue that beat by 5.1%. As a result, Expedia shares were up 3.29% in after-market trading yesterday.

Revenue

Revenue for the quarter was $987.9 million, up 18.5% sequentially and 15.9% year over year. Expedia's results are indicative of secular growth trends in online travel spending, as borne out by all product lines in the last quarter. Currency had a 3 percentage point impact on sequential comparisons.  

Revenue by Segment

Leisure customers remained the largest revenue contributors, generating nearly 83% of revenue. Corporate customers (Egencia) were under 4%, while TripAdvisor brought in the remaining 13%. The three categories grew 20.5%, 11.2% and -2.8%, respectively from the June quarter of 2010. They were up 12.2%, 43.3% and 29.6%, respectively from the year-ago quarter.

Revenue by Channel

Around 68% of total revenue was generated through the merchant business (direct sales), another 20% came through the agency model (where Expedia operates as an agent of the supplier) and roughly 12% came from Advertising and Media. The three channels witnessed 23.4%, 10.1% and 8.3% sequential growth, respectively in the last quarter. Growth rates from the year-ago quarter were 13.4%, 12.0% and 41.0%, respectively.

Revenue by Product Line

Revenue by Geography

Around 60% of Expedia's quarterly revenue was generated from the domestic market, with the remaining 40% coming from international sources. The domestic market grew 10.7% sequentially and 13.0% from a year ago. The international market was much stronger, growing 32.2% sequentially and 20.2% from last year.

Bookings and Revenue Margin

Margins

The pro forma gross margin for the quarter was 80.8%, up 98 bps sequentially and 64 bps year over year. Credit card processing costs, customer services and telesales expenses continued to increase, as the number of transactions increased from 16.9 million in the June quarter to 18.1 million in September. However, volume increases offset the impact in the last quarter and Expedia currently expects the trend to continue.

The operating expenses of $512.9 million were up 10.7% sequentially. However, the operating margin was 28.8% increased 462 bps sequentially, while declining just 6 bps from September last year. All expenses declined as a percentage of sales from the previous quarter. Sales and marketing expenses were up significantly from a year ago.

Operating Income before Amortization (OIBA) increased from $256.4 million in September 2009 to $293.7 million in the last quarter.

Net Income

On a pro forma basis, Expedia generated a net income of $267.5 million, or a 27.1% net income margin compared to a $120.9 million, or 14.5% in the previous quarter and $135.1 million or 15.8% net income margin in the same quarter last year. The fully diluted pro forma earnings per share (EPS) were 93 cents compared to 42 cents in the June 2010 quarter and 46 cents in the prior-year quarter.

Our pro forma estimate excludes intangibles amortization charges on a tax-adjusted basis, but includes deferred stock compensation. Our pro forma calculations may differ from management's presentation due to the inclusion/exclusion of some items that were not considered by management.

Including the special items, the GAAP net income was $257.9 million (90 cents a share) compared to $114.3 million (40 cents a share) in the previous quarter and $117.0 million (40 cents a share) in the year-ago quarter.

Balance Sheet

Cash and short term investments totaled $1.55 billion at quarter-end, up $427.2 million during the quarter. However, Expedia raised debt during the quarter, which resulted in a net debt position of $90.4 million. Including long term liabilities, the debt to total capital ratio was 42.2%, still at very manageable levels. Days sales outstanding (DSOs) went down from 43 to around 38 days.

The company generated $4.4 million of cash from operations and spent $40.2 million on capex, $19.7 million on dividends and $195.9 million on share repurchases.

Our Take

We have a short term Hold rating on Expedia shares, which translates to a Zacks #3 Rank.