For some background, Argentina-based DESP is the leading online travel company in Latin America, akin to our Expedia.com. It is known by its two brands, Despegar (its global brand), and Decolar (its Brazilian brand). DESP offers a full suite of travel-related products, including airline tickets, packages, and hotels. It provides its network of travel suppliers a technology platform for managing the distribution of their products and access to its users.
DESP believes it has the broadest travel portfolio among online travel agencies in Latin America, with inventory from over 250 airlines and over 300,000 hotels, as well as about 900 car rental agencies. In the six months ended June 30, 2017, it had 2.5 million customers, generating approximately $248.5 million in gross bookings.
The Latin American travel industry is characterized by significant fragmentation in suppliers across airlines and hotels. This fragmentation is compounded by regional complexities, including language, customs, travel preferences, currencies, and regulatory differences. These factors create challenges for suppliers to reach customers, and, therefore, creating a significant market opportunity for DESP.
Total Latin America online travel bookings were projected to be $29.7 billion in 2016 and are expected to grow to approximately $47.6 billion by 2020, equating to an estimated CAGR of 12.5%. Online travel bookings are expected to grow even quicker, by approximately 36% from 2016 to 2020. Factors driving this growth include the increase in internet penetration, further adoption of smartphones and tablets, and a growing middle class with greater access to banking services and credit products.
Looking at its financials, for the six months ended June 30, 2017, revenue increased 28% year/year to $248.5 million. This was driven by an increase in the number of transactions to 4.3 million from 3.3 million in the year ago period. Also, gross bookings grew 46% to $1.4 billion as economic conditions stabilized in Brazil and Argentina. By product line, airline ticket related revenue climbed by 26% while hotel, packages, and other products grew by 29.5%.
Cost of revenue actually decreased by by 1.5% to $66.2 million, reflecting lower fraud expenses, which it believes was due to its implementation of a more restrictive anti-fraud protocol. Gross margin improved sharply to 73.3% from 65.3%. Its largest operating expense is Selling & Marketing, which increased 37% to $78.8 million. The strong revenue growth, coupled with the enhanced gross margin, resulted in a 296% jump in operating profit to $32.9 million.