Ctrip Trips on Its Outlook

Shanghai-based online travel agent Ctrip.com International (NAS: CTRP) recently posted better-than-expected third-quarter results in the wake of improving demand in the travel and tourism industry. However, the party came to a halt as the company disappointed investors by lowering its expectation for the next quarter below Street estimates.

Touring the quarter
Ctrip saw a strong 20% revenue increase over the previous year, growing to $153 million. Net income rose to $51 million, a mere 2% increase from the previous-year quarter. However, when adjusted for stock-option expenses, this figure grew 9% to $65 million. Earnings per share of $0.43 comfortably beat Street estimates of $0.31 per share.

A good travel industry has uplifted the company's dealing in various travel services. Earlier this month, priceline.com (NAS: PCLN) posted a robust 42% growth in its revenue. Expedia (NAS: EXPE) saw 15% growth in revenue in its last quarter.

Where did the money come from?
There's been an increase in domestic and international travel in China since the 2008 recession. Therefore, more hotel companies are interested in building their brands in this country. Ctrip saw a 17% increase in hotel reservation revenues this quarter. Revenue contributed by this segment increased to $64 million, accounting for 74% of the company's revenue.

Airline ticket booking revenue also increased to $60 million, witnessing a 22% increase driven by higher volumes and increased commission per ticket.

A detour from good news
Unfortunately, there is no happy ending to this story despite these good numbers. Investors are obviously more interested in how well the company will perform in the future. For the next quarter, Ctrip expects a revenue growth rate of 15% to 20%, which is below the market expectation of 25.3%. This weak outlook is not a good sign, given the growing tourism industry.

Issues in the company have led to the soft future outlook. According to analyst Fawne Jiang, China is facing increasing labor cost issues, a trend which is here to stay. She added that the company's 6,500 call-center staff is pressurizing the margins of profitability. Moreover, Ctrip has spent nearly 40% more on marketing activities compared to last year, which also put pressure on its profitability. These expenses explain the 1% fall in gross margin to 77%.

The Foolish bottom line
We can expect Chinese travelers to spend considerably more over the coming years. This paints a brighter future for Chinese travel agencies such as Ctrip and perhaps eLong (NAS: LONG) . However, Ctrip may need to do away with its cost pressures in order to exploit this growing industry. To stay updated on online travel services providers, add them to your free watchlist below:

At the time thisarticle was published

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