certainly can scare away investors who haven't done the work. but there is an boeing 737 amount of nuance here. Also its important to remember edreams and ryanair have had a bad relationship for over a decade. has not made an iota of difference to edreams numbers.
Thanks for your thoughts. I have heard it claimed that eDreams used Booking Holdings white label product. Do you know if this is the case and is there any scenario why this should concern us?
That is false. In flights, EDreams has been the leader for years in Europe. Booking has no internal flight capabilities - they white label etravelii. Booking tried to buy them but regulators said no, which widens EDreams’ moat imo. In hotels, EDreams gives away their booking fees to Prime customers, which allows them underprice Booking. There’s no way Booking would participate in that.
Thank you for these great answers. I like the idea hence my questions.
I have one final question. What is your response to comment 30 here: https://www.valueinvestorsclub.com/idea/eDreams_ODIGEO/7732249010#messages? In short the comments about how significant the savings on flights are and that people do not realise they are signing up for prime. I have answers in part for these comments but would like to get your take particularly on the savings (for eg regarding signing up for prime, it is very clear to me whether you are opting for prime or not so at worst this issue was only an issue in the past and is no longer an issue.)
so I'll say a couple things (but 310 may have access to VIC so can respond better)>
- on the bookings, i do believe edreams uses to use them for hotel products (never flights) but now edreams is really building out their own hotels product (and my last convo with Dana he told me they were getting really good nps scores on their europe hotel business)
- On savings: I think if you're booking just the flight you will save money almost every time. if you add ancillaries the company says they are still cheaper 60-70% of the time. That said apparently people only add ancillaries 30% of the time. However, I do think that eDreams needs to get more competitive on ancillaries and it is a work in progress
- on not realizing singing up for prime... i really don't get this one, its quite clear as you go through the funnel. but the company understands how there could be edge cases where the customer has not realized and if you read through trust pilot reviews there are cases where company has refunded prime even after the 30 days free trial and let the customer keep the discount. second if everyone was 'tricked' there is no way they would have any retention in year 2 and year 3. and ithey didn't have retention in year 2 or 3 you woudn't see the operating leverage kick in like it has . further prime has an NPS score of over 50. the main reason is not price. its actually service.
Not sure if ive answered your questions (sorry not on VIC) but hope it helps. I'm sure 310 has better answers.
I'd add that the Prime savings for flight increases as the flight's price and complexity increases. Cherry picking a short, point-to-point flight that is well serviced by ultra-low-cost carriers is not something that is indicative of the entire market.
With respect to hotels, it is important to remember that for Prime customers, eDreams makes money off its subscription fee. The booking fee is given back to Prime subscribers in the form of discounts. It will be tough to beat pricing in this business model if your business is based on capturing a take rate.
34.2% of shares subscribed to the tender. Interesting as this suggests there is massive liquidity when it comes to tendering for as low as 6.90 but in general it is said there isn't much liquidity in the stock.
If they have some spare cash then they may as well do another tender offer ASAP at 6.90?
I have been doing further work on this and like the idea. One query (which is not a concern, just a curiosity) is, why aren't they going into the 34 countries that they are already in on a transaction basis with prime quicker? It may lower their margins temporarily but in theory it should speed up growth dramatically. They are already in the country on a transaction basis so there presumably isn't much work needed to go in with prime, especially in European countries where they clearly can already provide a full service as they do so in other European countries.
I think its resource prioritization and what hotels means to them in Europe. Hotels is a massive opportunity for them to grow Prime within Europe and perhaps extract more pricing via Prime via an tiered pricing system. They increased their headcount ~17% last year and they are still hiring (mostly developers). I think that area is taking up most of the resources. At some point, they will focus on other markets. They will probably start in the US. It's worth noting that last year they hired a relationship manager to deal with the US airlines. That's a harbinger that the US will begin to be more of a focus for them. Also, while I am a fan of them remaining public for a long time. If they were to sell to a strategic, some of the more likely buyers are US firms, so it would be good for them to have some personal exposure to eDreams.
Thanks for the response. I noticed yesterday that its brand for the Nordics, travellink (where it has not yet entered with Prime) is scored very poorly on Trustpilot. This may be hindering them for expansion into these countries for now
I doubt it. No one leaves a good review for a flight that lands on time, so these skew negative. I’d look at prime growth, margins inflection (indicates low churn), and nps metrics.
What makes me uneasy is their use of cash revenue and cash ebitda. I understand that they collect deferred revenue, which is great, but e.g. COGS will have to be incurred in future when they provide a service for the revenue they collected. Additionally, SBC and one time expenses are excluded from cash ebitda, so they are quite aggressively accounting.
Cogs are already excluded as revenue for them is net, so primarily just booking fees and prime fees. The cash revenue and ebitda is just to pick up the deferred prime revenue as you noted, and is consistent with their debt covenants. Yes, sbc is excluded, but it is fairly de minimis.
Thanks for getting back, I think I expressed my concern on that poorly. Let me retry:
They report cash revenues which I understand as the net revenues plus deferred revenue. For the latter revenues they will incur cogs in the future I would expect... Unless they earn 100% gross margin on those upfront payments (meaning all cogs is booked against other types of revenues that they receive).
I note in TIKR that they have about 30% gross margins, so a naive approach would be to expect the related cogs to then somehow impact proportionally the cash EBITDA.
I understand they want to stress the positive nature of receiving upfront payments, but using adjustments on adjustments to EBITDA makes me uneasy - I think they could disclose the positive aspects differently.
Prime gross margins are just the prime fee less customer acquisition cost (this is expensed as incurred). The cogs are the CAC for Prime. There are no subsequent cogs for the Prime program.
Ok, after a couple of nights sleep I think I can better articulate why I don't like this form of disclosure:
The upfront payments for subscriptions is similar to an industrial company announcing backlog (and some part of prepayment received) and adjusting revenues, earnings, ebitda whatever for that.
Of course it is all disclosed, but still, I feel the adjusted profitability is not really appropriate and should be called backlog.
Except that they receive full payment, not a partial payment. Real churn for them, excluding expired credit card is probably hsd-ldd. What they should do is just reserve 10% at time of booking and let it roll off as the months go by.
Yes I understand - but to stay with the backlog example: an industrial could receive full payment just as well.
I think what I cannot get over that they tinker with a profitability metric to 'look good' and in that course count a portion of next year's EBITDA thus year. They should disclose it as backlog and might brag about it - and even disclose earnings including the interest they earn on prepaid fees...but I think we can agree to disagree.
I doubt it. It’s not having much, or any, impact on their numbers. Liquidity is the issue, which they should solve with a series of tender offers.
Thanks for the article. Do you think the Ryanair commentary is another reason it is cheap? Any thoughts on the commentary in their latest earnings call (go here and search edreams and ota and read the relevant 2 sections, https://app.tikr.com/stock/transcript?cid=413817&tid=2644123&e=1878602970&ts=3134871&ref=1ydie7)?
certainly can scare away investors who haven't done the work. but there is an boeing 737 amount of nuance here. Also its important to remember edreams and ryanair have had a bad relationship for over a decade. has not made an iota of difference to edreams numbers.
Thanks for your thoughts. I have heard it claimed that eDreams used Booking Holdings white label product. Do you know if this is the case and is there any scenario why this should concern us?
That is false. In flights, EDreams has been the leader for years in Europe. Booking has no internal flight capabilities - they white label etravelii. Booking tried to buy them but regulators said no, which widens EDreams’ moat imo. In hotels, EDreams gives away their booking fees to Prime customers, which allows them underprice Booking. There’s no way Booking would participate in that.
Thank you for these great answers. I like the idea hence my questions.
I have one final question. What is your response to comment 30 here: https://www.valueinvestorsclub.com/idea/eDreams_ODIGEO/7732249010#messages? In short the comments about how significant the savings on flights are and that people do not realise they are signing up for prime. I have answers in part for these comments but would like to get your take particularly on the savings (for eg regarding signing up for prime, it is very clear to me whether you are opting for prime or not so at worst this issue was only an issue in the past and is no longer an issue.)
so I'll say a couple things (but 310 may have access to VIC so can respond better)>
- on the bookings, i do believe edreams uses to use them for hotel products (never flights) but now edreams is really building out their own hotels product (and my last convo with Dana he told me they were getting really good nps scores on their europe hotel business)
- On savings: I think if you're booking just the flight you will save money almost every time. if you add ancillaries the company says they are still cheaper 60-70% of the time. That said apparently people only add ancillaries 30% of the time. However, I do think that eDreams needs to get more competitive on ancillaries and it is a work in progress
- on not realizing singing up for prime... i really don't get this one, its quite clear as you go through the funnel. but the company understands how there could be edge cases where the customer has not realized and if you read through trust pilot reviews there are cases where company has refunded prime even after the 30 days free trial and let the customer keep the discount. second if everyone was 'tricked' there is no way they would have any retention in year 2 and year 3. and ithey didn't have retention in year 2 or 3 you woudn't see the operating leverage kick in like it has . further prime has an NPS score of over 50. the main reason is not price. its actually service.
Not sure if ive answered your questions (sorry not on VIC) but hope it helps. I'm sure 310 has better answers.
I'd add that the Prime savings for flight increases as the flight's price and complexity increases. Cherry picking a short, point-to-point flight that is well serviced by ultra-low-cost carriers is not something that is indicative of the entire market.
With respect to hotels, it is important to remember that for Prime customers, eDreams makes money off its subscription fee. The booking fee is given back to Prime subscribers in the form of discounts. It will be tough to beat pricing in this business model if your business is based on capturing a take rate.
34.2% of shares subscribed to the tender. Interesting as this suggests there is massive liquidity when it comes to tendering for as low as 6.90 but in general it is said there isn't much liquidity in the stock.
If they have some spare cash then they may as well do another tender offer ASAP at 6.90?
I have been doing further work on this and like the idea. One query (which is not a concern, just a curiosity) is, why aren't they going into the 34 countries that they are already in on a transaction basis with prime quicker? It may lower their margins temporarily but in theory it should speed up growth dramatically. They are already in the country on a transaction basis so there presumably isn't much work needed to go in with prime, especially in European countries where they clearly can already provide a full service as they do so in other European countries.
I think its resource prioritization and what hotels means to them in Europe. Hotels is a massive opportunity for them to grow Prime within Europe and perhaps extract more pricing via Prime via an tiered pricing system. They increased their headcount ~17% last year and they are still hiring (mostly developers). I think that area is taking up most of the resources. At some point, they will focus on other markets. They will probably start in the US. It's worth noting that last year they hired a relationship manager to deal with the US airlines. That's a harbinger that the US will begin to be more of a focus for them. Also, while I am a fan of them remaining public for a long time. If they were to sell to a strategic, some of the more likely buyers are US firms, so it would be good for them to have some personal exposure to eDreams.
Thanks for the response. I noticed yesterday that its brand for the Nordics, travellink (where it has not yet entered with Prime) is scored very poorly on Trustpilot. This may be hindering them for expansion into these countries for now
I doubt it. No one leaves a good review for a flight that lands on time, so these skew negative. I’d look at prime growth, margins inflection (indicates low churn), and nps metrics.
Thanks for your articles on EDR.
What makes me uneasy is their use of cash revenue and cash ebitda. I understand that they collect deferred revenue, which is great, but e.g. COGS will have to be incurred in future when they provide a service for the revenue they collected. Additionally, SBC and one time expenses are excluded from cash ebitda, so they are quite aggressively accounting.
Cogs are already excluded as revenue for them is net, so primarily just booking fees and prime fees. The cash revenue and ebitda is just to pick up the deferred prime revenue as you noted, and is consistent with their debt covenants. Yes, sbc is excluded, but it is fairly de minimis.
Thanks for getting back, I think I expressed my concern on that poorly. Let me retry:
They report cash revenues which I understand as the net revenues plus deferred revenue. For the latter revenues they will incur cogs in the future I would expect... Unless they earn 100% gross margin on those upfront payments (meaning all cogs is booked against other types of revenues that they receive).
I note in TIKR that they have about 30% gross margins, so a naive approach would be to expect the related cogs to then somehow impact proportionally the cash EBITDA.
I understand they want to stress the positive nature of receiving upfront payments, but using adjustments on adjustments to EBITDA makes me uneasy - I think they could disclose the positive aspects differently.
Prime gross margins are just the prime fee less customer acquisition cost (this is expensed as incurred). The cogs are the CAC for Prime. There are no subsequent cogs for the Prime program.
Thanks for clarifying.
Ok, after a couple of nights sleep I think I can better articulate why I don't like this form of disclosure:
The upfront payments for subscriptions is similar to an industrial company announcing backlog (and some part of prepayment received) and adjusting revenues, earnings, ebitda whatever for that.
Of course it is all disclosed, but still, I feel the adjusted profitability is not really appropriate and should be called backlog.
Except that they receive full payment, not a partial payment. Real churn for them, excluding expired credit card is probably hsd-ldd. What they should do is just reserve 10% at time of booking and let it roll off as the months go by.
Hi thanks, again.
Yes I understand - but to stay with the backlog example: an industrial could receive full payment just as well.
I think what I cannot get over that they tinker with a profitability metric to 'look good' and in that course count a portion of next year's EBITDA thus year. They should disclose it as backlog and might brag about it - and even disclose earnings including the interest they earn on prepaid fees...but I think we can agree to disagree.
good luck for them and your investment