How to grow without financing? The Expedia Story
By Joe Perfetti and Michael Cichello
The online travel company Expedia is our 2016 Silver Medal winner for the Global Productivity Award for the Internet and Direct Marketing industry with a Financial Cycle Time of -142 days. Financial Cycle Time (FCT) tells investors how much a company has invested in its operations relative to how much revenue those operating assets have generated, or, the average amount of time it takes a company to turn a dollar of investment into a dollar of collected revenue. As an insightful productivity metric, FCT can be used to benchmark companies against peers and over time.
Expedia Uses Customer and Vendor Funds to Drive Growth
Expedia owns brands including Orbitz, Travelocity, Trivago, Homeaway, Hotwire, Cheaptickets and Hotels.com. Their primary business model—the Merchant model—involves buying large blocks of rooms from hotels and reselling them at higher rates to consumers. This segment represents $4.9 billion of the company’s $8.8 billion of total 2016 sales. Typically, customers pay at the time of booking and Expedia pays merchants at the time of travel. As a result, in 2016 Expedia had Deferred Bookings of $2.6 billion on their balance sheet, which represents a floating of funds between the time they collect from customers and the time they pay their travel partners. They also have another source of funds in $2.1 billion of Accounts Payable owed to vendors. These sources of funds are somewhat offset by uses of funds in the form of Property, Plant and Equipment investment of $1.4 billion, $1.3 billion of receivables, $200 million of Prepaid Expenses, and essentially no physical inventory.
| 2016 figures | |
| Property Plant and Equipment | $1.4 billion |
| Accounts Receivable | $1.3 billion |
| Prepaid Expenses | $0.2 billion |
| Core Operating Assets | $2.9 billion |
| Deferred Bookings | $2.6 billion |
| Accounts Payable | $2.1 billion |
| Core Customer and Vendor Financing | $4.7 billion |
| Need for Financing (Core Operating Assets less Core Customer and Vendor Financing) | -$1.8 billion |
Since Expedia gets about $4.7 billion in cash from customers and vendors and has invested only $2.9 billion in core operations, this leads to an extra $1.8 billion of cash available in 2016 and is primarily why their Financial Cycle Time is -142 days. A negative cycle time means that, on net, the company is paid before providing services. It also means that a company does not need debt or equity financing to grow its business. Expedia is expected to grow at 10% or more for the next three years, which might require outside funding for many firms. Not so for Expedia, who creates their own funding with their negative Financial Cycle Time. So, acquiring new customers not only brings additional profit, but also allows Expedia to continue to fund the business without bringing on new debt or equity capital. This gives Expedia an attractive Return on Invested Capital (ROIC), and, as of August 2017, has also meant a 1-year total shareholder return of over 30%.
Key Insights
- By using customer and vendor money, companies can reduce or eliminate the need for external debt and equity financing
- FCT can be used to measure the impact of doing more with less
- Companies can achieve operating leverage by increasing sales much faster than investment by driving asset productivity
- Companies that are more agile and productive can drive competitive advantage relative to peers
- FCT is a key component of ROIC and can enhance the value of firms
Joe Perfetti is an award-winning Lecturer in Finance at the University of Maryland and an educator with Duke Corporate Education, a global provider of customized education. He created Demystifying Finance: Finance for Non-Financial Managers, a digital offering for Duke Corporate Education.
Michael Cichello is a Finance professor at Georgetown University and an educator with Duke Corporate Education, a global provider of customized education. He is also co-author of the 6th edition of McKinsey & Company’s Valuation Workbook.