Expedia's leadership shakeup leaves analysts surprised and skeptical

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Expedia Group chairman Barry Diller speaks with TV personality Robin Roberts at Expedia's Explore 19 conference.

Analysts said last week they had been blindsided by the abrupt forced departure of Expedia Group CEO Mark Okerstrom, and some voiced skepticism that his firing would turn the company's fortunes around.

Lorraine Sileo, senior vice president for research and business operations at Phocuswright, said, "Considering Mark was just onstage at the Phocuswright conference a few weeks ago and chatting about the company's plans, I'd certainly call this an industry surprise. We hadn't heard any rumors or rumblings or any other big warning signs."

Expedia announced on Dec. 4 that Okerstrom, along with CFO Alan Pickerill, would be stepping down immediately. 

At the same time, it announced that Expedia chairman Barry Diller and vice chairman Peter Kern had jointly taken over management of Expedia's executive team and day-to-day operations, while Expedia chief strategy officer Eric Hart had been tapped to serve as interim CFO.

In a statement, Diller attributed both departures to a disagreement between senior management and the board over strategy.

"Earlier this year, Expedia embarked on an ambitious reorganization plan, with the goal of bringing our brands and technology together in a more efficient way," Diller wrote. "This reorganization, while sound in concept, resulted in a material loss of focus on our current operations, leading to disappointing third-quarter results and a lackluster near-term outlook. The board disagreed with that outlook as well as the departing leadership's vision for growth, strongly believing the company can accelerate growth in 2020. That divergence necessitated a change in management."

For the third quarter, Expedia reported a 22% decrease in net income, to $409 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was flat, at $912 million. While revenue was up a solid 9%, to $3.6 billion, that result was about $10 million less than analysts had forecast.

According to Sileo, however, those results were somewhat in line with the challenging environment that online travel agencies are currently facing.

"We all know that all OTAs are under pressure," Sileo said. "They're under huge competitive pressure, and Expedia in particular has been challenged to grow internationally, to grow its Vrbo business as Airbnb continues to expand and to grow tours and activities, which is a business opportunity some competitors have been a little more aggressive toward."

There's also the issue of Google and its domination of the online search ecosystem, which Okerstrom had blamed in part for Expedia’s more recent woes. 

Google's move to place more paid ads above organic search results has translated into Expedia needing to spend more on search engine optimization (SEO) to drive traffic. Additionally, the search giant has steadily encroached on OTA territory of late, making it look increasingly like a direct competitor.

While onstage at the company’s recent Explore 19 conference, held Nov. 13 and 14 in Las Vegas, Okerstrom said, "SEO has been a headwind for a very long time, obviously. Everything we've been doing around relevancy and customer centricity has really been about building strong direct customer relationships. As always, you hit bumps in the road, and we will absolutely move through this. The strategy is set on actually making sure we continue to grow ... and we get through this bump."

Whether an immediate turnaround for Expedia is likely, however, remains up for debate.

"I don’t know if Diller's maybe expecting the growth the company was seeing 10 years ago, but Expedia's now a mature business," Sileo said. "And while the third-quarter results were unexpected, if you look at Expedia’s top-line growth, it's faster than any growth you might see for a mature travel business. To expect double-digit growth now is likely unrealistic.

"And it's also important to keep in mind that the company grew a lot through acquisition," she added. "Expedia is now facing this need to grow organically, and that’s a lot more challenging."

Sileo said she expects that Expedia's new leadership will take an even more aggressive approach to building direct business and becoming less reliant on Google search. 

In a note, Cowen managing director and research analyst Kevin Kopelman also predicted that the company might have to significantly cut costs in the coming year.

"Given the board's stated goal of acceleration, ... we believe some cost cuts are likely," Kopelman said. "Expedia has a large base of overhead costs and very low margins, implying a large ability to drive margin expansion via cost-cutting."

Meanwhile, Diller appeared to remain confident about Expedia’s upside. Concurrent with the executive shake-up, he announced he would be "purchasing additional shares in the company as a tangible sign of my faith in and commitment to Expedia’s long-term future."

In a letter to Expedia employees, Diller also said, "We need to concentrate on the tasks at hand and get back to business. [My] and Peter’s energy will go into bringing more acute focus to our day-to-day operations, building on our iconic brands and getting Expedia back to the growth we all expect."

Diller’s email concluded: "I've spent a great deal of time with our leadership team, have great confidence in each of them individually and have the greatest confidence that, collectively, we’ll set new goals and strategies that will quickly build back momentum both internally and externally."

Okerstrom, 46, was named Expedia's CEO in August 2017 following the departure of Dara Khosrowshahi to become CEO of Uber. Khosrowshahi remains an Expedia director. 

Prior to being named CEO, the Canadian-born Okerstrom had negotiated Expedia's investment in Trivago and had led the acquisitions of Travelocity and Wotif. He holds both a law degree and an MBA.

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