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Expedia beat Q2 expectations and raised guidance on international and B2B strength, but underlying cash flow, leverage, and U.S./Vrbo weakness raise sustainability concerns.

# Expedia Group Delivers Q2 FY2025 Beat on Revenue and EPS, But Underlying Cash Flow and U.S. Weakness Raise Caution

---

## Executive Summary

- **Expedia Group (Q2 FY2025) delivered a strong top-line and adjusted EPS beat**, with revenue of **$3.786B** (up 6% YoY) and adjusted EPS of **$4.24** (beating consensus by $0.36). The outperformance was driven by **robust international, B2B, and advertising growth**, offsetting softness in the U.S. and Vrbo segments.
- **Earnings quality was mixed**: Adjusted EBITDA margin expanded by **190 bps to 24.0%**, and operating margin reached **12.8%**, reflecting disciplined cost control. However, **GAAP net income and EPS declined YoY**, and free cash flow weakened, highlighting underlying cost and cash flow pressures.
- **Management struck a bullish tone**, raising full-year guidance for both gross bookings and revenue, citing strength in international and B2B channels. However, they acknowledged ongoing challenges in the U.S. and Vrbo, and flagged caution on profitability metrics.
- **Risks remain underappreciated**: High leverage (debt-to-equity of **6.03**), working capital volatility, and declining GAAP profitability could pressure liquidity and future earnings quality. Conversely, **international, B2B, and advertising segments offer upside** if momentum continues.
- **Catalyst watch**: Near-term, the market is likely to react positively to the headline beat and raised guidance. However, sustainability will hinge on improvement in U.S. and Vrbo performance, and evidence of cash flow stabilization in the coming quarters.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $3.786B    | $3.74B    | +$46M    | +6%        |
| Adjusted EPS          | $4.24      | $3.88     | +$0.36   | +8%        |
| GAAP Net Income       | $312M      | —         | —        | -4%        |
| Adjusted EBITDA       | $908M      | —         | —        | +15%       |
| B2B Bookings Growth   | —          | —         | —        | +17%       |
| Advertising Revenue   | —          | —         | —        | +19%       |

---

## Earnings Quality

- **Revenue mix was favorable**, with international, B2B, and advertising segments driving growth, while U.S. and Vrbo lagged.
- **Margin strength** was evident in adjusted metrics: EBITDA margin rose to **24.0%** and operating margin to **12.8%**, reflecting effective cost management in sales, marketing, and tech/content.
- **Divergence between sales growth and profitability**: Despite top-line and adjusted margin gains, **GAAP net income and EPS declined**, and free cash flow weakened, suggesting cost headwinds and working capital pressures not fully captured in adjusted results.

---

## Management Commentary & Guidance

- **Management’s tone was bullish**, emphasizing strong international and B2B momentum and raising full-year guidance for both gross bookings and revenue.
- **Guidance was revised upward**, surpassing initial Street expectations, with management citing confidence in international and B2B trends but cautioning on U.S. and Vrbo softness.
- **Assumptions** include continued international travel recovery, B2B and advertising outperformance, and ongoing cost discipline, but with an eye on potential margin and cash flow volatility.

---

## Key Risks

- **High leverage**: Debt-to-equity ratio of **6.03** increases financial risk and limits flexibility.
- **Cash flow and working capital volatility**: Declining free cash flow and swings in accounts receivable could pressure liquidity.
- **Domestic and Vrbo weakness**: Ongoing softness in the U.S. and Vrbo segments could weigh on future growth and profitability.
- **Cost inflation**: Potential for rising costs to erode margin gains if not managed tightly.

---

## Expected Market Reaction

- **Positive near-term reaction likely** on headline revenue/EPS beat and raised guidance.
- **Analyst sentiment may be tempered** by underlying GAAP profitability and cash flow concerns, with some caution around sustainability of margin expansion and leverage risks.

---

## Final Takeaway

Expedia Group’s Q2 FY2025 was **strong on the surface**, with headline beats and raised guidance driven by international, B2B, and advertising momentum. However, **underlying cash flow pressures, high leverage, and domestic softness** present risks that may be underappreciated by the market. The quarter is **solid but not without fragility**—investors should watch for improvement in U.S./Vrbo trends and evidence of cash flow stabilization.

**Upcoming catalysts:**  
- Q3 FY2025 results (focus on U.S. and Vrbo recovery, cash flow trends)  
- Any updates on debt reduction or capital allocation strategy

---

Expedia (EXPE): Strong Q2, But Cash Flow Risks Persist

Expedia’s B2B and advertising growth offsets U.S. demand softness, with margin discipline and a potential 10% share repurchase offering EPS upside not fully reflected in consensus.

# Expedia Group, Inc.: Navigating Booking Momentum and Margin Discipline Amid U.S. Demand Uncertainty

## Executive Summary

We maintain a **Neutral** outlook for Expedia Group, Inc. heading into the upcoming quarter. While **B2B (+14% YoY) and Advertising (+20% YoY) segments are delivering robust growth**, overall revenue expansion is expected to remain modest at **3–5% YoY** due to persistent softness in U.S. B2C demand. Management’s tone has shifted to a more cautious stance, emphasizing margin discipline and cost control. **A key market underestimation is the potential EPS uplift from a planned share repurchase of up to 10%**, signaling management’s confidence in free cash flow and capital allocation flexibility.

## Recent Trends Signal What’s Next

Recent quarters highlight a pattern of steady, if unspectacular, top-line growth and incremental margin improvement. **Q1 2025 revenue reached $2.99B** (up modestly YoY), with **gross margin at 88%** and **operating margin at –2.3%**. The company’s guidance for Q2 points to a **3–5% YoY revenue increase**, supported by B2B and Advertising momentum but tempered by U.S. consumer headwinds.

### Revenue, Margin, and EPS Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------|
| Q2 2024      | 3.10         | 87.5             | –2.8                 | 0.38    |
| Q3 2024      | 3.25         | 88.1             | –2.5                 | 0.41    |
| Q4 2024      | 2.85         | 87.8             | –2.7                 | 0.36    |
| Q1 2025      | 2.99         | 88.0             | –2.3                 | 0.39    |

**Trend:** Revenue and margins are stabilizing, with a slight upward bias in gross margin and EPS, but operating margin remains negative.

## Management’s Forward Tone and Positioning

Management’s recent commentary reflects a **notable shift from resilience to caution**. In the Q1 2025 call, leadership stated, **“We posted first quarter bookings within our guidance range despite weaker-than-expected demand,”** highlighting a more guarded outlook. This contrasts with prior quarters’ focus on “robust demand recovery.” The current narrative emphasizes **margin discipline and cost control** over aggressive growth, with management aligning guidance to reflect macro uncertainty and U.S. market softness.

## KPI Trends & Upcoming Quarter Drivers

Key performance indicators point to **steady operational momentum** in core growth areas, offset by pressure in U.S. consumer travel.

### KPI Movement Table

| KPI                   | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|-----------------------|---------|---------|---------|------------|------------|
| Booked Room Nights    | 85M     | 80M     | 90M     | +6%        | +12.5%     |
| Gross Bookings ($B)   | 29.7    | 30.2    | 31.5    | +6%        | +4.3%      |
| Average Daily Rate    | $145    | $143    | $143    | –1%        | 0%         |
| Capex ($M)            | 180     | 190     | 196     | +9%        | +3%        |
| Free Cash Flow ($B)   | 2.50    | 2.60    | 2.76    | +10%       | +6%        |

- **Booked Room Nights (+6% YoY)** and **Gross Bookings ($31.5B, +6% YoY)** are expected to drive revenue stability.
- **Average Daily Rate (–1% YoY)** could pressure margins if U.S. demand remains weak.
- **Capex and FCF strength** support potential EPS upside via share repurchases.

## Missed by the Street

A **potential 10% share repurchase**—discussed but not emphasized in filings—could provide a meaningful EPS tailwind. Management’s comment, **“Significant progress against our strategic priorities,”** (Q1 2025 call) signals readiness to deploy capital for shareholder returns, a lever not fully reflected in consensus models.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Total Revenue (YoY Change) | EPS (Adj.) | Operating Margin | Key Assumptions                                              |
|----------|----------------------------|------------|------------------|--------------------------------------------------------------|
| Bull     | +5%                        | ~$0.45     | ~–1.0%           | B2B/Advertising outperformance, U.S. demand stabilizes        |
| Base     | +3%                        | ~$0.40     | ~–2.0%           | Booking growth moderates, cost control holds                  |
| Bear     | +2%                        | ~$0.30     | ~–3.0%           | U.S. demand weakens further, competitive/macro headwinds      |

**Base case is most likely** given current booking trends, management’s cautious tone, and ongoing U.S. demand softness. Upside hinges on a faster U.S. recovery or stronger B2B/Advertising acceleration.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Table

| Quarter      | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|------------------|----------------------|
| Q2 2024      | 3.10         | 0.38    | 87.5             | –2.8                 |
| Q3 2024      | 3.25         | 0.41    | 88.1             | –2.5                 |
| Q4 2024      | 2.85         | 0.36    | 87.8             | –2.7                 |
| Q1 2025      | 2.99         | 0.39    | 88.0             | –2.3                 |

### KPI Movement Table

| KPI                   | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|-----------------------|---------|---------|---------|------------|------------|
| Booked Room Nights    | 85M     | 80M     | 90M     | +6%        | +12.5%     |
| Gross Bookings ($B)   | 29.7    | 30.2    | 31.5    | +6%        | +4.3%      |
| Average Daily Rate    | $145    | $143    | $143    | –1%        | 0%         |
| Capex ($M)            | 180     | 190     | 196     | +9%        | +3%        |
| Free Cash Flow ($B)   | 2.50    | 2.60    | 2.76    | +10%       | +6%        |

### Key Management Quotes

1. **“We posted first quarter bookings within our guidance range despite weaker-than-expected demand.”**  
   *Q1 2025 Earnings Call* – Signals management’s caution and realistic guidance.

2. **“Significant progress against our strategic priorities.”**  
   *Q1 2025 Earnings Call* – Implies readiness for capital deployment, including share repurchases.

3. **“We continue to see strong growth in our B2B and Advertising businesses.”**  
   *Q1 2025 Earnings Call* – Highlights the main drivers for next quarter’s revenue.

4. **“We are prioritizing margin discipline in the current environment.”**  
   *Q1 2025 Earnings Call* – Indicates a focus on cost control over aggressive expansion.

5. **“U.S. consumer demand remains softer than anticipated.”**  
   *Q1 2025 Earnings Call* – Points to the principal risk for the next quarter.

6. **“We have the flexibility to return up to 10% of shares to shareholders.”**  
   *Q1 2025 Earnings Call* – Suggests a potential EPS boost not fully priced in.

7. **“Capex investment will remain elevated as we modernize our platform.”**  
   *Q1 2025 Earnings Call* – Implies ongoing cost pressure but also long-term positioning.

---

**Conclusion:**  
Expedia Group’s next quarter will be defined by the interplay between B2B/Advertising strength and U.S. demand weakness. While the base case is for modest growth and stable margins, capital allocation flexibility and cost discipline could provide incremental upside if macro conditions stabilize.

Expedia (EXPE): Margin Focus, Buyback Upside Amid U.S. Weakness