Expedia
Expedia suffered another setback in Q1 24, as it reported disappointing bookings and downgraded guidance for the year. Our primary area of interest however was the balance sheet where our system identified a number of new flags associated with the 10-Q filing.
Because of its particular business model, sitting between travellers and suppliers, Expedia runs with a large balance sheet relative to its size. With this kind of model, working capital swings can have an outsized impact on cash flow and debt numbers.
The largest single item on the balance sheet is the “Deferred Merchant Bookings” which stood at $11.4bn as at Q1 24. This mostly represents payments that travellers have made for hotel bookings in advance. Expedia collects the cash, then passes it on to the hotel following the traveller’s stay. It therefore sits as a liability against the cash collected and it fluctuates hugely during the year due to seasonal factors. It tends to be high in H1, since bookings exceed stays, then falls back in H2 when most of the stays occur and the cash is passed onto the supplier.
Q1 24 saw this same pattern, as deferred merchant balances jumped from $7.7bn to $11.4bn, resulting in a cash inflow of around $3.7bn in just three months. However, this obscured another significant, albeit smaller, move on the balance sheet: Accounts receivable increased by around $1bn, from $2.8bn to $3.8bn. If we look at the longer term trend in accounts receivable this looks even more concerning (see extract from our automated report below). This now represents nearly 4 months of sales outstanding.
The filing gives little detail on the composition of the accounts receivable, but we expect it relates to commissions due from suppliers (typically airlines and hotels). Unlike the seasonal changes in deferred merchant balances, this looks part of a longer term increase. Investors should be asking why the balance has grown so much. Increasing DSO can mean any number of things, some more concerning than others: Poor cash management, weakness in the financial health of customers or even a sign of aggressive revenue recognition.
While receivables have been growing the allowance against those receivables (as a buffer against bad debts) has been falling as a percentage of receivables. While the allowance was elevated in 2020 and 2021 due to covid, the percentage has continued to decline well beyond 2022. The allowance now represents just 1.4% of receivables versus 3.8% in Q1 22 and a 6% average for peers. We can see the peer group allowance has also been in decline since 2021, but not nearly as sharply as for Expedia. If the allowance returned to Q1 22 levels the impact on earnings would be as much as $90m (or 35% of Q1 adjusted EBITDA).
