What Marriott's Management Wants Investors to Know

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Marriott International's (NASDAQ: MAR) third-quarter 2018 earnings, released on Nov. 5, were notable for a preliminary 2019 outlook which suggests slightly curbed growth in the upcoming twelve-month period. Below, let's review top-of-mind observations made by management during the company's earnings conference call, which include executives' early thoughts on the company's prospects for next year.

A loyalty integration stumbled, but benefits are starting to accrue

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Marriott completed the long-awaited post-merger integration of the giant Starwood and Marriott loyalty programs on Aug. 18. The switchover wasn't flawless, and complications were widely reported on in the press. The company saw an initial 35% spike in calls to its customer service center, although Sorenson noted that customer service calls are now running just 2% to 3% over normal seasonal volume.

Since the process completed, Marriott asserts, it's been enjoying increased booking volume from loyalty members. The hotel operator also reports higher luxury bookings, and rising bookings through digital direct channels. Shareholders can expect to see material effects of the integration -- positive or negative -- quantified by management in Marriott's next quarterly earnings report.

A focus on direct traffic flows

While online travel agencies play a vital role in filling available hotel inventory, they also represent lower profitability versus direct booking channels owned by Marriott. As a result of the tweak to the company's revenue management software system described above, Sorenson stated that OTAs as a share of Marriott's business were flat year over year in the third quarter, and dipped in North America. This compressed RevPAR (revenue per available room) growth by "a few tenths-percent," but impacted profitability positively.

Generally, the North American business presents the greatest opportunity for Marriott's revenue management system to reduce inventory to OTAs and encourage direct bookings. As Sorenson explained later in the call, leisure markets, particularly in Asia (Bali is an example), rely on OTAs to generate traffic. This is in contrast to the North American market, in which the company sees a higher proportion of business travelers, concentrations of loyalty members, and much higher brand awareness -- all factors which make it easier to sell room nights through direct channels.

North American growth will slow slightly next year

Marriott hasn't issued its guidance for the fiscal 2019 year, but based on preliminary budgeting, the company has apprised investors that it expects systemwide RevPAR to increase 1% to 3% in North America, and 3% to 5% outside North America, for total constant-dollar RevPAR growth of 1% to 2%. As my Fool.com colleague Dan Caplinger points out, this is a rather anemic expansion projection, and it disappointed investors upon Marriott's earnings release.

It's important to note, however, that macroeconomic factors (as described above) are responsible for management's preliminary caution on room-revenue growth. The company's final budgeting process, which incorporates factors Marriott can influence, could shift the outlook in a positive direction. Shareholders should exercise patience and wait for a completed 2019 outlook, due next quarter.

As for the tightening of industry supply growth: Constrained capacity shouldn't evolve into a revenue headwind for at least a year, due to the sheer size of Marriott's room construction backlog, which I described earlier this fall in more detail.

Decreased risk within Marriott's revenue streams

In her prepared conference-call remarks, CFO Leeny Oberg took some time to walk investors through the advantages of the company's capital-light (or "asset-light") business model, which favors the licensing of a broad array of hotel brands and other intangible assets, and the offering of hotel operation services, versus wide-scale ownership of properties.

Oberg reminded investors that Marriott formerly owned a time-share business which once made up one-fifth of its operating income. Since the spin-off of this business into Marriott Vacations Worldwide, the value of time shares to Marriott exists as economic gravy, in the form of a fixed franchise fee the company collects each quarter.

Oberg also broke down Marriott's fee revenue, explaining that most of this income is determined as a portion of hotel revenues. In other words, Marriott earns fees as a slice off the top of hotels' sales -- a much lower risk than deriving revenue based on hotel profitability (that is, net income).

Additionally, incentive fees, which are based on a priority return to hotel owners (and thus are at risk for Marriott in an economic downturn) represent less than 20% of total fee revenue. In short, Oberg illustrated that Marriott's revenue risk profile has decreased considerably over the last few years, a point management wants shareholders to bear in mind should growth indeed decelerate in the coming year.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool owns shares of Marriott Vacations Worldwide. The Motley Fool recommends Marriott International. The Motley Fool has a disclosure policy.