Expedia, Inc. Reports Third Quarter 2007 Results
Global Presence Expands as European Bookings Grow 47% and International Sites Hit Record 33% of Revenue
BELLEVUE, Wash., Nov. 7 /PRNewswire-FirstCall/ — Expedia, Inc. (NASDAQ: EXPE) today announced financial results for its third quarter ended September 30, 2007.
“Expedia succeeded on almost every financial metric during the third quarter,” said Barry Diller, Expedia, Inc.’s Chairman and Senior Executive. “These are good results, and our ability to keep them coming depends on the right balance of investment and profitable growth — and I think we’ve shown our ability to be in proper cadence with those levers throughout this year.”
“Thanks to the continued hard work of our employees around the globe, Expedia’s brand portfolio delivered record revenue and OIBA in the third quarter,” said Dara Khosrowshahi, Expedia Inc.’s CEO and President. “While we’re particularly encouraged by 16% worldwide transaction growth and 47% European bookings growth, we are by no means satisfied with our progress, and believe there remain significant investment and growth opportunities ahead for Expedia.”
Financial Summary & Operating Metrics (figures in $MM’s, except per share amounts)
3 Months 3 Months Y / Y
Metric Ended 9.30.07 Ended 9.30.06 Growth
Gross bookings $5,146.9 $4,261.0 21%
Revenue 759.6 613.9 24%
Revenue margin 14.76% 14.41% +35bps
Gross profit 608.5 480.8 27%
Operating income before
amortization* (“OIBA”) 212.8 180.0 18%
Operating income 179.8 89.3 101%
Adjusted net income * 123.1 117.2 5%
Net income 99.6 59.0 69%
Adjusted EPS * $0.39 $0.34 15%
Diluted EPS $0.32 $0.17 88%
Free cash flow * 24.1 (18.9) N/A
* “Operating income before amortization,” “Adjusted net income,”
“Adjusted EPS,” and “Free cash flow” are non-GAAP measures as defined
by the Securities and Exchange Commission (the “SEC”). Please see
“Definitions of Non-GAAP Measures” and “Tabular Reconciliations for
Non-GAAP Measures” on pages 15-18 herein for an explanation of non-GAAP
measures used throughout this release.
Discussion of Results
Gross Bookings & Revenue
Gross bookings increased 21% for the third quarter of 2007 compared with the third quarter of 2006. North America bookings increased 13%, Europe bookings increased 47% (39% excluding the impact of foreign exchange) and Other bookings (primarily Expedia® Corporate Travel and our Asia Pacific operations) increased 27%.
Revenue increased 24% for the third quarter, primarily driven by increased worldwide merchant hotel revenue and advertising and media revenue. North America revenue increased 19%, Europe revenue increased 37% (30% excluding foreign exchange) and Other revenue increased 41%.
Worldwide merchant hotel revenue increased 22% for the third quarter due to a 16% increase in room nights stayed, including rooms delivered as a component of vacation packages, and a 5% increase in revenue per room night. Revenue per room night increased due to a 5% increase in worldwide average daily rates (“ADRs”), partially offset by a 37 basis point decline in hotel raw margin.
Worldwide air revenue increased 9% for the third quarter due to a 15% increase in air tickets sold, partially offset by a 5% decrease in revenue per air ticket. The decrease in revenue per air ticket primarily reflects reduced air service fees, and to a lesser extent, decreased compensation from air carriers and global distribution system (“GDS”) providers versus the prior year period.
Worldwide revenue from products and services other than merchant hotel and air (including advertising and media, car rentals, destination services and cruises), increased 40% for the third quarter due primarily to increased advertising and media revenues and car rental revenues.
Package revenue increased 12% compared with the prior year period primarily due to higher European package bookings and increased revenue margin on North American package bookings compared with the prior year period in which we pursued aggressive package discounting.
Revenue as a percentage of gross bookings (“revenue margin”) was 14.76% for the third quarter, an increase of 35 basis points. North America revenue margin increased 68 basis points to 15.19%, Europe revenue margin decreased 116 basis points to 15.73%, and Other revenue margin increased 90 basis points to 9.08%. The third quarter increase in worldwide and North America revenue margin was primarily due to an increased mix of advertising and media revenues as compared to third quarter 2006. Europe revenue margin decreased primarily due to lower revenue from more competitive hotel pricing and lower air booking fees.
Profitability
Gross profit for the third quarter of 2007 was $609 million, an increase of 27% compared with the third quarter of 2006 primarily due to increased revenue and a 179 basis point improvement in gross margin to 80.11%. The gross margin increase was due to cost reductions from our various efficiency initiatives and an increased mix of advertising and media revenue.
OIBA for the third quarter increased 18% to $213 million, driven primarily by higher revenue. OIBA as a percentage of revenue decreased 131 basis points to 28.02%, primarily reflecting a higher growth in sales and marketing expenses excluding stock-based compensation as a percentage of revenue, partially offset by a higher gross margin. Operating income increased 101% to $180 million primarily due to an intangible asset impairment in the prior year period, the same factors driving OIBA growth, and lower intangible amortization.
Adjusted net income for the third quarter increased $6 million due to higher OIBA, partially offset by net losses from foreign currency and higher net interest expense. Net income increased $41 million reflecting higher operating income, partially offset by a higher tax provision, an increase in net losses from foreign currency and higher net interest expense compared with the prior period. Third quarter adjusted EPS and diluted EPS were $0.39 and $0.32, respectively. These measures increased 15% and 88% due to the same factors impacting adjusted net income and net income, as well as lower net share counts from share repurchase activity since the prior year period.
Cash Flows & Working Capital
For the nine months ended September 30, 2007, net cash provided by operating activities was $965 million and free cash flow was $908 million. Both measures include $597 million of benefit from net changes in operating assets and liabilities, primarily driven by seasonal receipt of cash related to our merchant hotel business. Free cash flow for the third quarter increased $43 million primarily due to higher OIBA, greater benefit from net changes in operating assets and liabilities and lower capital expenditures.
Recent Highlights
Global Presence
— Gross bookings from Expedia, Inc.’s international points of sale in
Canada, China, France, Germany, Italy, the United Kingdom and other
countries were $1.67 billion, accounting for 32% of worldwide
bookings, up from 27% in the prior year period. International revenue,
including the TripAdvisor international websites beginning in 2007,
was $252 million or 33% of worldwide revenue, up from 29% in the prior
year period.
— Expedia® Corporate Travel (“ECT”) launched its sixth European point
of sale in Spain, added JetBlue Airways® and AirTran Airways®
content in North America and has generated year-to-date gross bookings
of nearly $1 billion.
— Expedia, Inc. launched its 14th and 15th Expedia®-branded points of
sale in Austria (http://www.expedia.at/) and New Zealand
(http://www.expedia.co.nz/).
— Expedia, Inc. and Freeborders Inc. announced a partnership to create a
technology development center for Expedia in China. The expansion of
Expedia’s global development resources will speed product and service
delivery, provide for flexible staffing and enable access to the Asia
Pacific region’s top talent.
Brand Portfolio
— Expedia.com and Citi expanded their partnership with the launch of the
new Citi PremierPass®/Expedia.com® Card. The Card follows the
successful introduction of ThankYou Rewards on Expedia.com, where over
one million Expedia customers have become ThankYou members in less
than a year. With the new Card travelers earn ThankYou points for
everyday purchases, eligible travel booked on Expedia.com and miles
flown on any airline.
— Hotels.com®, the expert in booking hotels online and on the phone,
launched a new comprehensive website dedicated to Spanish-speaking
travelers, espanol.hotels.com. In addition to the website, hotels.com
offers a dedicated 1-800 sales center for those preferring to book
their hotels over the phone in Spanish.
— TripAdvisor®, the world’s largest travel community, was named one of
the “Top 25 Travel Milestones” by USA Today. Picked by the USA Today
travel team, the list features the top “25 pivotal changes that
transformed the way we travel.” TripAdvisor was the only company to be
singled out as a milestone on the list of 25, joining such
groundbreaking innovations as smoke-free flights and the rolling
suitcase.
Content & Innovation
— Expedia.com began beta testing its TravelAds platform, enabling
merchant hotels to dynamically bid for premium placement in hotel
search results on Expedia.com.
— Hotwire.com™ unveiled a new Airfare Savings Hub, making it even
easier for flexible travelers to save money with proactive, real-time
recommendations for alternative airports and dates of travel. With the
Airfare Savings Hub, Hotwire® has offered travelers an average
savings of 25% with its deal recommendations.
— Hotels.com added its 1,000th bed and breakfast property, addressing
U.S. travelers who make more than five million trips to B&B’s each
calendar year. Hotels.com offers a dedicated “Condos, B&B” tab on its
homepage to enable easy discovery of its extensive bed and breakfast
inventory.
Partner Services Group (“PSG”)
— Expedia, Inc. reached new strategic agreements with British Airways®
and AirFrance/KLM®, ensuring multi-year availability of these
carriers’ fares, schedules and inventory.
— Expedia, Inc. signed multi-year agreements with Harrah’s® and
Extended Stay America®, ensuring availability of these hotel chains
rooms and pricing across the Company’s worldwide points of sale.
EXPEDIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
—————– ———————
2007 2006 2007 2006
——– ——– ———- ———-
Revenue $759,596 $613,942 $2,000,030 $1,706,298
Cost of revenue (1) 151,053 133,094 415,997 380,857
——– ——– ———- ———-
Gross profit 608,543 480,848 1,584,033 1,325,441
Operating expenses:
Selling and marketing (1) 279,341 215,086 757,514 614,778
General and administrative
(1) 83,365 66,156 235,261 210,570
Technology and content (1) 47,452 36,034 131,215 104,866
Amortization of intangible
assets 18,613 26,569 59,312 86,860
Impairment of intangible
asset – 47,000 – 47,000
Amortization of non-cash
distribution and marketing – 711 – 9,578
——- ——– ——— ——–
Operating income 179,772 89,292 400,731 251,789
Other income (expense):
Interest income 12,888 9,697 30,709 20,332
Interest expense (13,940) (4,857) (35,018) (7,230)
Other, net (13,894) 2,926 (13,453) 17,049
——- ——– ——— ——–
Total other income (expense),
net (14,946) 7,766 (17,762) 30,151
——- ——– ——— ——–
Income before income taxes and
minority interest 164,826 97,058 382,969 281,940
Provision for income taxes (65,542) (37,707) (153,230) (103,523)
Minority interest in (income)
loss of consolidated
subsidiaries, net 311 (374) 768 (623)
——- ——– ——— ——–
Net income $99,595 $58,977 $230,507 $177,794
======= ======== ========= ========
Net earnings per share
available to common
stockholders:
Basic $0.34 $0.18 $0.77 $0.52
Diluted 0.32 0.17 0.72 0.50
Shares used in computing
earnings per share:
Basic 292,171 330,359 300,959 340,660
Diluted 312,756 341,137 318,848 355,075
(1) Includes stock-based
compensation as follows:
Cost of revenue $550 $1,816 $2,079 $6,627
Selling and marketing 2,729 2,968 8,768 11,665
General and administrative 7,683 7,043 22,356 25,483
Technology and content 3,455 4,612 11,046 13,772
——- ——– ——— ——–
Total stock-based
compensation $14,417 $16,439 $44,249 $57,547
======= ======== ========= ========
EXPEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, December 31,
2007 2006
———— ————
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $836,531 $853,274
Restricted cash and cash equivalents 20,748 11,093
Accounts and notes receivable, net
of allowance of $5,226 and $4,874 317,901 211,430
Prepaid merchant bookings 71,986 39,772
Deferred income taxes, net 275 4,867
Prepaid expenses and other current assets 71,279 62,249
———— ————
Total current assets 1,318,720 1,182,685
Property and equipment, net 152,941 137,144
Long-term investments and other assets 89,006 59,289
Intangible assets, net 988,525 1,028,774
Goodwill 5,912,934 5,861,292
———— ————
TOTAL ASSETS $8,462,126 $8,269,184
============ ============
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, merchant $823,351 $600,192
Accounts payable, other 185,868 120,545
Deferred merchant bookings 818,474 466,474
Deferred revenue 13,765 10,317
Income taxes payable 52,522 30,902
Other current liabilities 196,858 171,695
———— ————
Total current liabilities 2,090,838 1,400,125
Long-term debt 500,000 500,000
Credit facility 500,000 –
Deferred income taxes, net 362,398 369,297
Other long-term liabilities 104,052 33,716
Minority interest 62,590 61,756
Commitments and contingencies
Stockholders’ equity:
Preferred stock $.001 par value – –
Authorized shares: 100,000,000
Series A shares issued and
outstanding: 776 and 846
Common stock $.001 par value 333 328
Authorized shares: 1,600,000,000
Shares issued: 332,539,633 and
328,066,276
Shares outstanding: 255,005,709
and 305,901,048
Class B common stock $.001 par value 26 26
Authorized shares: 400,000,000
Shares issued and outstanding:
25,599,998 and 25,599,998
Additional paid-in capital 5,996,099 5,903,200
Treasury stock – Common stock, at cost (1,717,922) (321,155)
Shares: 77,533,924 and 22,165,228
Retained earnings 536,847 309,912
Accumulated other comprehensive income 26,865 11,979
———— ————
Total stockholders’ equity 4,842,248 5,904,290
———— ————
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY $8,462,126 $8,269,184
============ ============
EXPEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
September 30,
————————-
2007 2006
——– ———
Operating activities:
Net income $230,507 $177,794
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 43,381 35,834
Amortization of intangible assets, non-cash
distribution and marketing and stock-based
compensation 103,561 153,985
Deferred income taxes (3,297) (31,702)
Unrealized (gain) loss on derivative
instruments, net 5,938 (11,609)
Equity in (income) loss of
unconsolidated affiliates 3,848 (2,331)
Minority interest in income (loss)
of consolidated subsidiaries, net (768) 623
Impairment of intangible asset – 47,000
Foreign exchange gain on cash and
cash equivalents, net (18,669) (23,274)
Other 3,362 785
Changes in operating assets and
liabilities, net of effects from
acquisitions:
Accounts and notes receivable (94,431) (39,767)
Prepaid merchant bookings and
prepaid expenses (38,674) (30,178)
Accounts payable, other and other
current liabilities 154,180 103,189
Accounts payable, merchant 221,084 122,307
Deferred merchant bookings 351,969 216,911
Deferred revenue 3,365 4,001
——– ——-
Net cash provided by operating activities 965,356 723,568
——– ——-
Investing activities:
Capital expenditures (57,620) (67,580)
Acquisitions, net of cash acquired (59,622) (29,830)
Increase in long-term investments
and deposits (29,677) (1,820)
——– ——-
Net cash used in investing activities (146,919) (99,230)
——— ——-
Financing activities:
Credit facility borrowings 650,000 –
Credit facility repayments (150,000) (230,649)
Proceeds from issuance of long-term
debt, net of issuance costs – 495,682
Changes in restricted cash and cash
equivalents (10,630) (2,604)
Proceeds from exercise of equity awards 45,398 29,360
Excess tax benefit on equity awards 2,676 781
Treasury stock activity (1,396,012) (295,105)
Other, net (844) –
———– ——–
Net cash used in financing activities (859,412) (2,535)
Effect of exchange rate changes on
cash and cash equivalents 24,232 26,473
——- ——-
Net increase (decrease) in cash and
cash equivalents (16,743) 648,276
Cash and cash equivalents at
beginning of period 853,274 297,416
——- ——-
Cash and cash equivalents at end of period $836,531 $945,692
=========== ========
Supplemental cash flow information
Cash paid for interest $41,381 $3,796
Income tax payments, net 69,751 63,955
Income Statement Notes
Gross Bookings / Revenue
— Expedia, Inc. makes travel products and services available on a
merchant and agency basis. Merchant transactions typically produce a
higher level of net revenue per transaction and are generally
recognized when the customer uses the travel product or service.
Agency revenues are generally recognized at the time the reservation
is booked.
— Merchant bookings accounted for 44% of total gross bookings for the
third quarter of 2007 compared with 42% in the prior year period,
primarily driven by an increase in our European merchant bookings.
Cost of Revenue
— Cost of revenue primarily consists of: (1) costs of our call and data
centers, including telesales expense; (2) credit card merchant fees;
(3) fees paid to fulfillment vendors for processing airline tickets
and related customer services; (4) costs paid to suppliers for certain
destination inventory; and (5) reserves and related payments to
airlines for tickets purchased with fraudulent credit cards.
— Cost of revenue was 19.9% of revenue for the third quarter of 2007 and
21.7% for the prior year period. Excluding stock-based compensation,
cost of revenue was 19.8% of revenue for the third quarter of 2007 and
21.4% for the prior year period. Cost of revenue excluding stock-based
compensation decreased 157 basis points as a percentage of revenue due
to our various efficiency initiatives and an increased mix of
advertising and media revenue.
— Cost of revenue includes depreciation expense of $4 million for the
third quarter of 2007, and $3 million for the comparable 2006 period.
Operating Expenses (non-GAAP)
(Stock-based compensation expense has been excluded from all calculations
and discussions below)
— Operating expenses in millions and as a percentage of revenue for the
third quarters of 2007 and 2006 were as follows (some numbers may not
add due to rounding):
Three months Three months
ended September 30, ended September 30,
———————— —————————-
2007 2006 Growth 2007 2006 change in bps
——– —— ——- —— ——- ————-
Selling and
marketing $276.6 $212.1 30% 36.4% 34.6% 187
General and
administrative 75.7 59.1 28% 10.0% 9.6% 34
Technology and
content 44.0 31.4 40% 5.8% 5.1% 67
——– ——- ——- —— ——- ———
Total operating
expenses $396.3 $302.7 31% 52.2% 49.3% 287
— Operating expenses include depreciation expense of $11 million in the
third quarter of 2007 and $10 million in the prior year period.
Selling and Marketing (non-GAAP)
— Selling and marketing expense primarily relates to direct advertising
expense, including television, radio and print spending, as well as
traffic generation costs from internet portals, search engines and our
private label and affiliate programs.
— Approximately 21% of selling and marketing expense in the third
quarter of 2007 and 20% for the prior year period relate to indirect
costs including personnel in PSG, TripAdvisor, ECT and destination
services.
— The increase in selling and marketing expense was primarily due to
increased direct online and brand spend to support our worldwide
points of sale, including spend at Hotels.com and Expedia sites in
Europe, our TripAdvisor network, our European private label and
affiliate channels, Hotels.com, Hotwire and Expedia.com, as well as
increased personnel costs related to TripAdvisor, destination
services, PSG and other teams.
— We expect selling and marketing expense to increase as a percentage of
revenue in 2007 as we aggressively support our established brands and
geographies, grow our earlier stage international markets, increase
our use of brand spend as markets reach scale, invest in our global
advertising and media businesses and expand our corporate travel
sales, destination services and market management teams.
General and Administrative (non-GAAP)
— General and administrative expense consists primarily of
personnel-related costs for support functions that include our
executive leadership, finance, legal, tax, technology and human
resources functions, and fees for professional services that include
legal, tax and accounting.
— The increase in general and administrative expense was primarily due
to increased incentive accruals, personnel costs related to expansion
of our corporate IT functions and our European businesses, and
increased legal expenses.
— We expect general and administrative expense to increase in absolute
dollars but decrease as a percentage of revenue in 2007 as compared to
the prior year.
Technology and Content (non-GAAP)
— Technology and content expense includes product development expenses
principally related to payroll and related expenses, hardware and
software expenditures and software development cost amortization.
— The increase in technology and content expense was due to increased
personnel costs and amortization of capitalized software costs, a
significant amount of which we began putting into service beginning
with the fourth quarter of 2006.
— Given our historical and ongoing investments in our enterprise data
warehouse, re-platforming, geographic expansion, data centers,
redundancy, call center technology, site merchandising, content
management, site monitoring, networking, corporate travel, supplier
integration and other initiatives, we expect technology and content
expense to increase in absolute dollars and as a percentage of revenue
in both 2007 and 2008.
Stock-Based Compensation Expense
— Stock-based compensation expense relates primarily to expense for
stock options and restricted stock units (“RSUs”). Since February 2003
we have awarded RSUs as our primary form of employee stock-based
compensation. Our stock-based awards generally vest over five years.
— Third quarter stock-based compensation expense was $14 million,
consisting of $11 million in expense related to RSUs and other equity
compensation and $3 million in stock option expense.
— Third quarter stock-based compensation decreased $2 million compared
to the prior year period primarily due to completed vesting of
previous option awards, partially offset by higher expense related to
RSU grants.
— Assuming, among other things, no modification of existing awards,
significant incremental award grants, adjustments to forfeiture
estimates or meaningful changes in our stock price, we expect annual
stock-based compensation expense will be approximately $65 million in
2007 and 2008.
Other, Net
— The $17 million decrease in other, net for the third quarter primarily
relates to a $12 million net foreign exchange loss in the third
quarter of 2007, compared with a $2 million gain in the prior year
period.
Income Taxes
— The effective tax rate on GAAP pre-tax income was 39.8% for the third
quarter 2007 compared with 38.8% in the prior year period. The
effective tax rate on pre-tax adjusted income was 38.6% for the third
quarter 2007 compared with 37.5% in the prior year period. The
effective rates for both GAAP and pre-tax adjusted income increased
primarily due to tax return adjustments in the prior year period. Both
third quarter 2007 rates were higher than the statutory rate
principally due to state income taxes and tax reserves.
— Cash paid for income taxes for the nine months ended September 30,
2007 was $70 million, an increase of $6 million from the prior year
period. We anticipate tax-related payments for full-year 2007 will
decrease compared with 2006 due to higher stock-based deductions
related to recent increases in our stock price.
Foreign Exchange
— As Expedia’s reporting currency is the U.S. Dollar (“USD”), reported
financial results are affected by the strength or weakness of the USD
in comparison to our international operations’ functional currencies.
Management believes investors may find it useful to assess growth
rates with and without the impact of foreign exchange.
— The estimated impact on worldwide and Europe growth rates from foreign
exchange in the third quarter was as follows (some numbers may not add
due to rounding):
Worldwide
Y/Y growth rates Impact on Y/Y growth
excluding foreign rates from foreign
Y/Y growth rates exchange movements exchange movements
Gross Bookings 20.8% 18.7% 2.1%
Revenue 23.7% 21.4% 2.4%
Europe
Y/Y growth rates Impact on Y/Y growth
excluding foreign rates from foreign
Y/Y growth rates exchange movements exchange movements
Gross Bookings 46.8% 38.7% 8.1%
Revenue 36.7% 29.8% 7.0%
— The positive impact of foreign exchange on our cash balances
denominated in foreign currency was $14 million in the third quarter
of 2007, and is included in “effect of exchange rate changes on cash
and cash equivalents” on our statements of cash flows. This amount
reflects a net increase of $4 million as compared to the prior year
period primarily due to a higher net gain from holding or converting
foreign currencies in the third quarter of 2007 as compared to the
prior year period.
Acquisitions
— Acquisitions increased third quarter 2007 gross bookings growth by
0.1%, revenue growth by 1.8% and OIBA growth by 1.2%. These
acquisitions increased year-to-date gross bookings growth by 0.1%,
revenue growth by 1.7% and OIBA growth by 1.7%. These acquisitions
were primarily related to media content businesses.
Balance Sheet Notes
Cash, Cash Equivalents and Restricted Cash
— Cash, cash equivalents and restricted cash totaled $857 million at
September 30, 2007. This amount includes $21 million in restricted
cash and cash equivalents primarily related to merchant air revenue
transactions, and $159 million of cash at eLong, whose results are
consolidated in our financial statements due to our controlling voting
and economic ownership position.
— The decrease in cash, cash equivalents and restricted cash for the
nine months ended September 30, 2007 principally relates to
$1.4 billion in treasury stock activity primarily related to tender
offer repurchases of 55 million common shares, $89 million in
acquisitions, long-term investments and deposits, $70 million in cash
tax payments and $58 million of capital expenditures, partially offset
by a $597 million net benefit from changes in operating assets and
liabilities, $504 million in OIBA, $500 million in revolver borrowings
and $45 million in proceeds from equity award exercises.
Accounts and Notes Receivable
— Accounts receivable include credit card receivables generally due
within two to three days from credit card agencies, receivables from
agency transactions generally due within 30 days after booking, and
receivables from global distribution system partners generally due
within 60 to 120 days after booking.
— Accounts and notes receivable increased $106 million from December 31,
2006 due to growth in our various lines of business.
Prepaid Merchant Booking, Prepaid Expenses and Other Current Assets
— Prepaid merchant bookings primarily relate to our merchant air
business and reflect prepayments to our airline partners for their
portion of the gross booking, prior to the travelers’ dates of travel.
The $32 million increase in prepaid merchant bookings from
December 31, 2006 is due in part to increased air bookings at Hotwire.
— Prepaid expenses and other current assets are primarily composed of
prepaid marketing, prepaid merchant fees, prepaid license and
maintenance agreements and prepaid insurance.
Long-Term Investments and Other Assets
— Long-term investments and other assets include transportation
equipment, collateral deposits related to our cross-currency swap
agreements, equity investments and capitalized debt issuance costs.
— Long-term investments and other assets increased $30 million from
December 31, 2006 primarily due to a first quarter equity investment
in a travel company.
Goodwill and Intangible Assets, Net
— Goodwill and intangible assets, net primarily relates to the
acquisitions of Hotels.com, Expedia.com and Hotwire.com.
— Goodwill increased $52 million from acquisitions completed since
December 31, 2006.
— $867 million of intangible assets, net relates to intangible assets
with indefinite lives, which are not amortized, principally related to
acquired trade names and trademarks.
— $121 million of intangible assets, net relates to intangible assets
with definite lives, which are generally amortized over a period of
two to ten years. The majority of this amortization is not deductible
for tax purposes.
— Amortization expense related to definite lived intangibles was
$19 million for the third quarter, compared with $27 million for the
prior year period. The decrease was primarily due to the completed
amortization of certain technology and supplier intangible assets over
the past year. Assuming no impairments or additional acquisitions, we
expect amortization expense for definite lived intangibles of
$78 million in 2007 and $57 million in 2008.
Accounts Payable, Other
— Accounts payable, other primarily consists of payables related to the
day-to-day operations of our business.
— Accounts payable, other increased $65 million from December 31, 2006
primarily due to accrued marketing expenses related to increased
marketing efforts at our various points of sale, as well as an
increase in corporate accounts payable in keeping with the growth of
our business.
Deferred Merchant Bookings and Accounts Payable, Merchant
— Deferred merchant bookings consist of amounts received from travelers
who have not yet traveled and the balances generally mirror the
seasonality pattern of our gross bookings. The payment to suppliers
related to these bookings is generally made within two weeks after
booking for air travel and, for all other merchant bookings, after the
customer’s use of services and subsequent billing from the supplier,
which billing is reflected as accounts payable, merchant on our
balance sheet. Therefore, especially for merchant hotel, there is a
significant period of time from the receipt of cash from our travelers
to supplier payment.
— As long as the merchant hotel business continues to grow and our
business model does not meaningfully change, we expect that changes in
working capital related to this business will continue to be a
positive contributor to operating and free cash flow. If this business
declines or if the model changes significantly, it would negatively
affect our working capital.
— For the nine months ended September 30, 2007, the change in deferred
merchant booking and accounts payable, merchant contributed
$573 million to net cash provided by operating activities, primarily
related to seasonality associated with, and growth in, our merchant
hotel business.
Income Taxes Payable
— Income taxes payable increased $22 million from December 31, 2006
reflecting an increase in our taxes due primarily to taxable income
generated during the first nine months of the year.
Other Current Liabilities
— Other current liabilities principally relate to accruals for cost of
service related to our call center and internet services, accruals for
service, bonus, salary and wage liabilities, a reserve related to
occupancy taxes, and accrued interest on our Notes and credit
facility.
— Other current liabilities includes $30 million related to our tax
sharing agreement with Microsoft and the fair value of our Ask
derivative, which relates to notes which are due June 1, 2008 (see
“Ask Derivative Liability”).
— Other current liabilities increased $25 million from December 31, 2006
primarily due to the reclassification of $15 million from other
long-term liabilities related to our Ask derivative.
Ask Derivative Liability
— In connection with IAC/Interactive Corp’s acquisition of Ask, we
issued 4.3 million shares of Expedia, Inc. common stock into an escrow
account, which shares (or cash in equal value) were due to holders of
Ask convertible notes upon conversion. These shares have been included
in diluted shares from the date of our spin-off from IAC.
— During the third quarter of 2007 notes were converted for less than
10,000 common shares, which when combined with prior conversions of
3.8 million shares, leaves 0.5 million shares of Expedia common stock
(or cash in equal value) due to Ask convertible note holders upon
conversion. The Ask notes are due June 1, 2008; upon maturity our
obligation to satisfy demands for conversion ceases.
— The estimated fair value of the Ask derivative at September 30, 2007
was $15 million, and is recorded in other current liabilities on our
consolidated balance sheet.
— For the third quarter we recorded a net unrealized loss of $1 million
related to the Ask derivative due to the increase in our share price
at the end of the third quarter of 2007 compared with the end of the
second quarter of 2007. This loss is reflected as an increase in other
current liabilities, is recorded in other, net on our consolidated
statements of income and is excluded from both our OIBA and adjusted
net income calculations.
— We anticipate recording a quarterly unrealized gain or loss in future
quarters related to any remaining liability as we adjust the fair
value for changes in our stock price, as measured at subsequent
quarter-ends compared with the prior quarter-end.
Borrowings
— Expedia, Inc. maintains a $1 billion unsecured revolving credit
facility, which expires in August 2010. As of September 30, 2007, we
had $500 million in borrowings outstanding under our revolver, which
amount was drawn in conjunction with the August 2007 funding of our
25 million share tender offer.
— Outstanding borrowings bear interest based on our financial leverage,
which based on our September 30, 2007 financials would equate to a
base rate plus 62.5 basis points. At our discretion we can choose a
base rate equal to (1) the greater of the Prime rate or the Federal
Funds Rate plus 50 basis points or (2) various durations of LIBOR. The
base rate is currently 1-month LIBOR of 5.13%, and is due to re-price
on November 15.
— As of September 30, 2007 we were in compliance with our leverage and
net worth covenants under the credit facility. Outstanding letters of
credit under the facility as of that date were $52 million, which
balance reduces our available borrowing capacity.
— Long-term debt relates to $500 million in registered 7.456% Senior
Notes (the “Notes”) due 2018, which were issued in August 2006. The
Notes are repayable in whole or in part on August 15, 2013 at the
option of the note holders. We may redeem the Notes at any time at our
option.
— Semi-annual interest expense related to the Notes is $19 million, paid
on February 15 and August 15 of each year. Accrued interest related to
the notes was $5 million at September 30, 2007 and $13 million at
December 31, 2006, and such amounts are classified as other current
liabilities on our balance sheet.
Other Long-Term Liabilities
— Other long-term liabilities include $74 million in uncertain tax
positions recorded under FIN 48. Prior to the adoption of FIN 48 on
January 1, 2007 these amounts were classified as taxes payable in
current liabilities.
— Other long-term liabilities also includes $21 million of derivative
liabilities, primarily related to cross-currency swaps, which
increased $8 million from December 31, 2006 primarily due to the
weakening of the USD compared with the Euro.
Minority Interest
— Minority interest primarily relates to the minority ownership position
in eLong, an entity in which we own a 56% interest (52% fully-diluted)
and results for which are consolidated for all periods presented.
Purchase Obligations and Contractual Commitments
— At September 30, 2007 we have agreements with certain vendors under
which we have future minimum obligations of $21 million for the
remainder of 2007, $9 million in 2008 and $8 million in 2009. These
minimum obligations for telecom, loyalty, software and other support
services are less than our projected use for those periods, and we
expect payment to be more than the minimum obligations based on our
actual use. In addition, if certain obligations are met by our
counterparties, our obligations will increase. These obligations are
not reflected on our consolidated balance sheets herein.
— In conjunction with our investment in a travel company, we have
entered into a commitment to provide a $10 million revolving operating
line of credit and a credit facility for up to $20 million. No amounts
were drawn on the line of credit or credit facility as of
September 30, 2007.
— In conjunction with one of our acquisitions we are obligated to pay an
additional purchase price ranging from $0 to approximately
$100 million based on the 2007 and 2008 financial performance of the
acquired company. Such amount (if any) would be payable in the first
half of 2008 and/or 2009.
— In June 2007, we entered into a lease for new headquarters office
space located in Bellevue, Washington. The ten-year term and cash
payments related to this lease are expected to begin in November 2008.
— Our estimated future minimum rental payments under operating leases
with noncancelable lease terms that expire after September 30, 2007
are $7.0 million for the remainder of 2007, $29.0 million for 2008,
$28.7 million for 2009, $26.1 million for 2010, $24.8 million for 2011
and $116.7 million for 2012 and thereafter.
Common Stock
— In August 2007 we completed a tender offer to purchase 25 million
shares of Expedia, Inc. at a price of $29.00 for a total cost of
$725 million excluding fees and expenses. The Company used
$500 million in available borrowings under its revolving credit
facility and approximately $225 million in cash to fund the tender
offer. The Company’s directors and executive officers and Liberty
Media Corporation did not tender any shares.
— In August 2006 our Board of Directors authorized the repurchase of up
to 20 million common shares. There is no fixed termination date for
the authorization, and as of the date of this release we have not
repurchased any shares under this authorization. This authorization
was not impacted by the above tender offer and remains outstanding.
Class B Common Stock
— There are approximately 26 million shares of Expedia Class B common
stock outstanding, owned by Liberty Media Corporation and its
subsidiaries (“Liberty”). Class B shares are entitled to ten votes per
share when voting on matters with the holders of Expedia common and
preferred stock.
— Through the common stock our Chairman and Senior Executive, Barry
Diller, owns directly, as well as the common stock and Class B stock
for which he has been assigned an irrevocable proxy from Liberty, Mr.
Diller had a controlling 60% voting interest in Expedia, Inc. as of
October 12, 2007.
Warrants
— As of September 30, 2007 we had 58.5 million warrants outstanding,
which, if exercised in full, would entitle holders to acquire
34.6 million common shares of Expedia, Inc. for an aggregate purchase
price of approximately $774 million (representing an average of
approximately $22 per Expedia, Inc. common share).
— 32.2 million of these warrants are privately held and expire in 2012,
and 26.0 million warrants are publicly-traded and expire in 2009.
There are 0.3 million other warrants outstanding.
Shelf Registration
— In October we filed a shelf registration statement with the SEC, under
which we may offer from time to time debt securities, guarantees of
debt securities, preferred stock, common stock or warrants. The shelf
registration statement expires in October 2010.
Stock-Based Awards
— At September 30, 2007 we had 28.3 million stock-based awards
outstanding, consisting of stock options to purchase 19.9 million
common shares with a $16.66 weighted average exercise price and
weighted average remaining life of 2.6 years, and 8.4 million RSUs.
— During the third quarter 2007 we granted 0.4 million RSUs, primarily
related to new hire grants.
— Through September 30, 2007 total equity grants were 3.6 million, or
2.1 million net of cancellations, expirations and forfeitures.
— On October 8, 2007 Expedia’s Chairman and Senior Executive exercised
options to purchase 9.5 million shares, which options would have
otherwise expired on October 19, 2007, following their 10-year term.
2.3 million shares were withheld by Expedia to cover the exercise
price of $8.59 per share and 3.5 million shares were withheld to cover
tax obligations, with a net delivery to Mr. Diller of 3.7 million
shares. Mr. Diller intends to hold the shares issued to him upon
exercise of the options.
— Expedia cancelled all withheld shares and made the required tax
payments of $121 million in connection with Mr. Diller’s exercise.
These tax payments will appear in “Financing Activities” on our
Statement of Cash Flows for the year ended December 31, 2007.
— Following the October 2007 option exercise, we had 10.4 million
options remaining outstanding with a weighted average exercise price
of $24.05 and a weighted average remaining life of 4.9 years.
Basic, Fully Diluted and Adjusted Diluted Shares
— Weighted average basic, fully diluted and adjusted diluted share
counts are as follows (in 000’s; some numbers may not add due to
rounding):
3 Months 3 Months 3 Months
Ended Ended Ended
Shares 9.30.07 12.31.06 9.30.06
—————————— ——– ——– ——-
Basic shares 292,171 330,294 330,359
—————————— ——– ——– ——-
Options 9,264 7,339 6,351
Warrants 8,528 3,756 2,288
Derivative liabilities 469 867 1,300
RSUs 2,324 1,323 827
Other – 7 13
—————————— ——– ——– ——-
Fully diluted shares 312,756 343,586 341,137
Additional RSUs, Adjusted Income
method 6,159 5,849 6,761
—————————— ——– ——– ——-
Adjusted diluted shares 318,915 349,435 347,898
—————————— ——– ——– ——-
— The decrease in basic, fully diluted and adjusted diluted shares as
compared to the end of 2006 and the prior year quarter primarily
relates to the completion of our tender offers for 30 million common
shares in January and 25 million common shares in August 2007.
— This decrease in diluted share counts was partially offset by dilution
from warrants, options and RSUs related to the increase in our stock
price and the accompanying impact of such increase on the treasury
method calculation for dilutive securities.
Expedia, Inc.
Operational Metrics – Third quarter 2007
(All figures in millions)
— The following metrics are intended as a supplement to the financial
statements found in this press release and in our filings with the
SEC. In the event of discrepancies between amounts in these tables and
our historical financial statements, readers should rely on our
filings with the SEC and financial statements in our most recent
earnings release.
— We intend to periodically review and refine the definition,
methodology and appropriateness of each of our supplemental metrics.
As a result, these metrics are subject to removal and/or change, and
such changes could be material.
— “Expedia” gross bookings constitute bookings from all Expedia-branded
properties, including our international sites and our worldwide ECT
businesses. “Other” gross bookings constitute bookings from all brands
other than Expedia and Hotels.com.
— Metrics, with the exception of revenue and OIBA items, include 100% of
the results of an unconsolidated joint-venture of which we own
approximately 49.9%.
— These metrics do not include adjustments for one-time items,
acquisitions, foreign exchange or other adjustments.
— Some numbers may not add due to rounding.
2005 2006
Q3 Q4 Q1 Q2 Q3 Q4
—— —— —— —— —— ——
Number of Transactions 10.3 8.7 10.5 10.6 10.4 8.9
Gross Bookings by Segment
North America $3,044 $2,624 $3,522 $3,445 $3,104 $2,666
Europe 644 510 780 752 792 677
Other 249 262 347 368 365 344
—— —— —— —— —— ——
Total $3,938 $3,395 $4,648 $4,565 $4,261 $3,687
Gross Bookings by Brand
Expedia $3,096 $2,707 $3,700 $3,614 $3,369 $2,984
Hotels.com 502 407 582 621 600 456
Other 340 281 367 330 293 246
—— —— —— —— —— ——
Total $3,938 $3,395 $4,648 $4,565 $4,261 $3,687
Gross Bookings by
Agency/Merchant
Agency $2,276 $2,068 $2,695 $2,728 $2,473 $2,253
Merchant 1,662 1,327 1,953 1,837 1,788 1,433
—— —— —— —— —— ——
Total $3,938 $3,395 $4,648 $4,565 $4,261 $3,687
Revenue by Segment
North America N/A N/A $382 $456 $450 $379
Europe N/A N/A 85 112 134 121
Other N/A N/A 27 30 30 32
—— —— —— —— —— ——
Total N/A N/A $494 $598 $614 $531
Packages Revenue $128 $106 $114 $131 $125 $107
Advertising and
Media Revenue $19 $19 $21 $22 $25 $27
OIBA by Segment
North America N/A N/A $147 $212 $204 $172
Europe N/A N/A 15 40 48 55
Other N/A N/A (74) (68) (72) (81)
—— —— —— —— —— ——
Total N/A N/A $89 $184 $180 $146
Worldwide Merchant Hotel
Room Nights 10.0 8.1 8.1 10.1 11.1 8.7
Room Night Growth 10% 10% 7% 13% 11% 8%
ADR Growth 9% 6% 3% 7% 4% 8%
Revenue per
Night Growth 4% -1% -4% 4% 2% 7%
Revenue Growth 15% 9% 3% 17% 14% 15%
Worldwide Air (Merchant & Agency)
Tickets Sold Growth 14% 8% 3% -4% -6% 1%
Airfare Growth 7% 7% 9% 13% 11% 4%
Revenue per
Ticket Growth -10% -11% -9% -10% -17% -15%
Revenue Growth 3% -4% -7% -13% -23% -14%
2007 Q3 Y/Y YTD Y/Y
Q1 Q2 Q3 Growth Growth
—— —— —— —- —-
Number of Transactions 11.0 12.0 12.1 16% 12%
Gross Bookings by Segment
North America $3,559 $3,723 $3,519 13% 7%
Europe 1,032 1,035 1,163 47% 39%
Other 425 466 465 27% 26%
—— —— —— —- —-
Total $5,016 $5,224 $5,147 21% 14%
Gross Bookings by Brand
Expedia $4,039 $4,130 $3,976 18% 14%
Hotels.com 612 696 730 22% 13%
Other 365 399 441 51% 22%
—— —— —— —- —-
Total $5,016 $5,224 $5,147 21% 14%
Gross Bookings by
Agency/Merchant
Agency $2,910 $3,025 $2,866 16% 11%
Merchant 2,106 2,199 2,281 28% 18%
—— —— —— —- —-
Total $5,016 $5,224 $5,147 21% 14%
Revenue by Segment
North America $406 $505 $534 19% 12%
Europe 110 145 183 37% 32%
Other 34 39 42 41% 33%
—— —— —— —- —-
Total $551 $690 $760 24% 17%
Packages Revenue $111 $132 $140 12% 4%
Advertising and
Media Revenue $37 $44 $51 106% 94%
OIBA by Segment
North America $164 $227 $239 17% 12%
Europe 26 43 68 43% 33%
Other (85) (83) (94) NM NM
—— —— —— —- —-
Total $104 $187 $213 18% 11%
Worldwide Merchant Hotel
Room Nights 8.4 11.1 12.9 16% 11%
Room Night Growth 3% 10% 16% 16% 11%
ADR Growth 9% 5% 5% 5% 6%
Revenue per Night Growth 13% 4% 5% 5% 7%
Revenue Growth 17% 14% 22% 22% 18%
Worldwide Air (Merchant & Agency)
Tickets Sold Growth 5% 14% 15% 15% 11%
Airfare Growth 1% -3% 2% 2% 0%
Revenue per
Ticket Growth -20% -19% -5% -5% -15%
Revenue Growth -16% -7% 9% 9% -6%
Notes & Definitions:
Number of Transactions — Quantity of purchases reported as booked, net of cancellations. Packages purchased using our packages wizard, which by definition include a merchant hotel, are recorded as a single transaction.
Gross Bookings — Total retail value of transactions booked for both agency and merchant transactions, recorded at the time of booking. Bookings include the total price due for travel, including taxes, fees and other charges, and are generally reduced for cancellations and refunds.
North America — Reflects results for travel products and services provided to customers in the United States, Canada, Mexico and Latin America. Includes 100% of TripAdvisor as it is managed in North America.
Europe — Reflects results for travel products and services provided through localized Expedia websites in Austria, Denmark, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden and the United Kingdom and localized versions of Hotels.com in various European countries.
Other — Includes Expedia Corporate Travel, Asia Pacific and unallocated corporate functions and expenses.
Merchant Hotel Room Nights — Worldwide merchant hotel nights, net of cancellations. With the exception of Hotwire, which records room nights upon booking, nights are reported as stayed. This metric includes nights stayed on both a package and stand-alone basis.
Definitions of Non-GAAP Measures
Expedia, Inc. reports Operating Income Before Amortization, Adjusted Net Income, Adjusted EPS, Free Cash Flow and non-GAAP operating expense (non-GAAP selling and marketing, non-GAAP general and administrative and non-GAAP technology and content), all of which are supplemental measures to GAAP and are defined by the SEC as non-GAAP financial measures. These measures are among the primary metrics by which management evaluates the performance of the business, on which internal budgets are based and by which management is compensated. Management believes that investors should have access to the same set of tools that management uses to analyze our results. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP. We endeavor to compensate for the limitation of the non-GAAP measures presented by also providing the most directly comparable GAAP measures and descriptions of the reconciling items and adjustments to derive the non-GAAP measures.
Operating Income Before Amortization (“OIBA”) is defined as operating income plus: (1) amortization of non-cash distribution and marketing expense, (2) stock-based compensation expense, (3) amortization of intangible assets and goodwill and/or intangible asset impairment, if applicable and (4) certain one-time items, if applicable. OIBA represents the combined operating results of Expedia, Inc.’s businesses, taking into account depreciation, which we believe is an ongoing cost of doing business, but excluding the effects of other non-cash expenses that may not be indicative of our core business operations. Management believes this measure is useful to investors because it corresponds more closely to the cash operating income generated from our core operations by excluding significant non-cash operating expenses such as stock- based compensation, and because it provides greater insight into management decision making at Expedia, Inc. as OIBA is our primary internal metric for evaluating the performance of our businesses. OIBA has certain limitations in that it does not take into account the impact of certain expenses to Expedia, Inc.’s statements of income, including stock-based compensation, non-cash payments to partners, acquisition-related accounting and certain one-time items, if applicable. Due to the high variability and difficulty in predicting certain items that affect net income, such as tax rates, stock price and interest rates, Expedia, Inc. is unable to provide a reconciliation to net income on a forward-looking basis without unreasonable efforts.
Adjusted Net Income generally captures all items on the statements of income that have been, or ultimately will be, settled in cash and is defined as net income available to stockholders plus net of tax (1) amortization of non-cash distribution and marketing expense, (2) stock-based compensation expense, (3) amortization of intangible assets, including as part of equity-method investments, and goodwill and/or intangible impairment, if applicable, (4) one-time items, (5) mark to market gains and losses on derivative liabilities, (6) discontinued operations and (7) the minority interest impact of the aforementioned adjustment items. We believe Adjusted Net Income is useful to investors because it represents Expedia, Inc.’s combined results, taking into account depreciation, which management believes is an ongoing cost of doing business, but excluding the impact of other non-cash expenses and items not directly tied to the core operations of our businesses.
Adjusted EPS is defined as Adjusted Net Income divided by weighted fully diluted shares outstanding for Adjusted EPS purposes. We include dilution from options and warrants per the treasury stock method and include all shares relating to RSUs in shares outstanding for Adjusted EPS. This differs from the GAAP method for including RSUs, which treats them on a treasury method basis. Shares outstanding for Adjusted EPS purposes are therefore higher than shares outstanding for GAAP EPS purposes. We believe Adjusted EPS is useful to investors because it represents, on a per share basis, Expedia’s consolidated results, taking into account depreciation, which we believe is an ongoing cost of doing business, as well as other charges which are not allocated to the operating businesses such as interest expense, taxes and minority interest, but excluding the effects of non-cash expenses not directly tied to the core operations of our businesses. Adjusted Net Income and Adjusted EPS have similar limitations as OIBA. In addition, Adjusted Net Income does not include all items that affect our net income and net income per share for the period. Therefore, we think it is important to evaluate these measures along with our consolidated statements of income.
Free Cash Flow is defined as net cash flow provided by operating activities less capital expenditures. Management believes Free Cash Flow is useful to investors because it represents the operating cash flow that our operating businesses generate, less capital expenditures but before taking into account other cash movements that are not directly tied to the core operations of our businesses, such as financing activities, foreign exchange or certain investing activities. Free Cash Flow has certain limitations in that it does not represent the total increase or decrease in the cash balance for the period, nor does it represent the residual cash flow for discretionary expenditures. Therefore, it is important to evaluate Free Cash Flow along with the consolidated statements of cash flows.
Non-GAAP cost of revenue, selling and marketing, general and administrative and technology and content expenses excluding stock-based compensation exclude stock-based compensation related to expenses for stock options, restricted stock units and other equity compensation under FAS 123®. Expedia, Inc. excludes stock-based compensation expenses from these measures primarily because they are non-cash expenses that we do not believe are necessarily reflective of our ongoing cash operating expenses and cash operating income. These expenses are also likely to decline in the near future as we no longer award options as our primary form of equity compensation. In addition, due to historical accounting charges and credits related to our spin-off from IAC, changes in forfeiture estimates and other events, stock-based compensation has been highly variable in some historical quarters, impairing year-on-year and quarter-to-quarter comparability. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use when adopting FAS 123®, management believes that providing non-GAAP financial measures that exclude stock-based compensation allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies, as well as providing management with an important tool for financial operational decision making and for evaluating our own recurring core business operating results over different periods of time. There are certain limitations in using financial measures that do not take into account stock-based compensation, including the fact that stock-based compensation is a recurring expense and a valued part of employees’ compensation. Therefore it is important to evaluate both our GAAP and non-GAAP measures. See the Note to the Consolidated Statements of Income for stock-based compensation by line item.
Tabular Reconciliations for Non-GAAP Measures
Operating Income Before Amortization
Three months ended Nine months ended
September 30, September 30,
—————– —————–
2007 2006 2007 2006
——- ——- ——- ——-
(In thousands)
OIBA $212,802 $180,011 $504,292 $452,774
Amortization of intangible assets (18,613) (26,569) (59,312) (86,860)
Impairment of intangible asset – (47,000) – (47,000)
Stock-based compensation (14,417) (16,439) (44,249) (57,547)
Amortization of non-cash
distribution and marketing – (711) – (9,578)
——- ——- ——- ——-
Operating income 179,772 89,292 400,731 251,789
Interest income (expense), net (1,052) 4,840 (4,309) 13,102
Other, net (13,894) 2,926 (13,453) 17,049
Provision for income taxes (65,542) (37,707) (153,230) (103,523)
Minority interest in (income) loss
of consolidated subsidiaries, net 311 (374) 768 (623)
——- ——- ——- ——-
Net income $ 99,595 $58,977 $230,507 $177,794
======= ======= ======== ========
Adjusted Net Income & Adjusted EPS
Three months ended Nine months ended
September 30, September 30,
—————– —————–
2007 2006 2007 2006
——- ——- ——- ——-
(In thousands, except per share data)
Net income $ 99,595 $ 58,977 $230,507 $177,794
Amortization of intangible assets 18,613 26,569 59,312 86,860
Impairment of intangible asset – 47,000 – 47,000
Stock-based compensation 14,417 16,439 44,249 57,547
Amortization of non-cash
distribution and marketing – 711 – 9,578
Federal excise tax refunds – – (12,058) –
Unrealized (gain) loss on
derivative instruments, net 1,394 603 5,938 (11,609)
Amortization of intangible assets
as part of equity method
investments 934 – 1,485 –
Minority interest (109) (185) (511) (720)
Provision for income taxes (11,705) (32,930) (32,457) (74,068)
——- ——- ——- ——-
Adjusted net income $123,139 $117,184 $296,465 $292,382
======= ======= ======= =======
GAAP diluted weighted average
shares outstanding 312,756 341,137 318,848 355,075
Additional restricted stock units 6,159 6,761 6,403 6,303
——- ——- ——- ——-
Adjusted weighted average shares
outstanding 318,915 347,898 325,251 361,378
======= ======= ======= =======
Diluted earnings per share $ 0.32 $ 0.17 $ 0.72 $ 0.50
======= ======= ======= =======
Adjusted earnings per share $ 0.39 $ 0.34 $ 0.91 $ 0.81
——- ——- ——- ——-
Free Cash Flow
Three months ended Nine months ended
September 30, September 30,
—————– ——————
2007 2006 2007 2006
——- —— ——- ——-
(In thousands)
Net cash provided by operating
activities $ 42,743 $ 14,655 $965,356 $723,568
Less: capital expenditures (18,646) (33,551) (57,620) (67,580)
——- ——- ——- ——-
Free cash flow $ 24,097 $(18,896) $907,736 $655,988
——- ——- ——- ——-
Non-GAAP cost of revenue, selling and marketing, general and administrative and technology and content expenses excluding stock-based compensation
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
2007 2006 2007 2006
------- ------- ------- -------
(in thousands)
Cost of revenue $151,053 $133,094 $415,997 $380,857
Less: stock-based compensation (550) (1,816) (2,079) (6,627)
------- ------- ------- -------
Cost of revenue excluding stock-
based compensation $150,503 $131,278 $413,918 $374,230
Selling and marketing expense $279,341 $215,086 $757,514 $614,778
Less: stock-based compensation (2,729) (2,968) (8,768) (11,665)
——- ——- ——- ——-
Selling and marketing expense
excluding stock-based
compensation $276,612 $212,118 $748,746 $603,113
General and administrative expense $ 83,365 $ 66,156 $235,261 $210,570
Less: stock-based compensation (7,683) (7,043) (22,356) (25,483)
——- ——- ——- ——-
General and administrative expense
excluding stock-based compensation $75,682 $ 59,113 $212,905 $185,087
Technology and content expense $47,452 $ 36,034 $131,215 $104,866
Less: stock-based compensation (3,455) (4,612) (11,046) (13,772)
——- ——- ——- ——-
Technology and content expense
excluding stock-based compensation $43,997 $ 31,422 $120,169 $ 91,094
Conference Call
Expedia, Inc. will audiocast a conference call to discuss third quarter 2007 financial results and certain forward-looking information on Wednesday, November 7, 2007 at 8:00 a.m. Pacific Time (PT). The audiocast will be open to the public and available via http://www.expediainc.com/ir. Expedia, Inc. expects to maintain access to the audiocast on the IR website for approximately three months subsequent to the initial broadcast.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This press release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance. These forward-looking statements are based on management’s expectations as of November 7, 2007 and assumptions which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. The use of words such as “intends” and “expects” among others, generally identify forward-looking statements. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements and may include statements relating to future revenues, expenses, margins, profitability, net income, earnings per share and other measures of results of operation and the prospects for future growth of Expedia, Inc.’s business.
Actual results and the timing and outcome of events may differ materially from those expressed or implied in the forward-looking statements for a variety of reasons, including, among others: changes in Expedia, Inc.’s relationships and contractual agreements with travel suppliers or GDS partners, our ability to effectively update, automate and integrate disparate financial and accounting systems and approaches among our brands and businesses; adverse changes in senior management; the rate of growth of the internet and online travel; our inability to recognize the benefits of our investment in technologies; changes in the competitive environment, the e- commerce industry and broadband access; declines or disruptions in the travel industry (including those caused by decreased consumer and business spending, adverse weather, bankruptcies, health risks, war, terrorism and/or general economic downturns); the rate of online migration in the various geographies and markets in which Expedia, Inc. operates, including Asia; fluctuations in foreign exchange rates; changing laws, rules and regulations and legal uncertainties relating to our business; Expedia, Inc.’s ability to expand successfully in international markets; possible charges resulting from, among other events, platform migration; failure to realize cost efficiencies; the successful completion of any future corporate transactions or acquisitions; and the integration of current and acquired businesses; and other risks detailed in Expedia, Inc.’s public filings with the SEC, including Expedia, Inc.’s annual report on Form 10-K for the year ended December 31, 2006.
Except as required by law, Expedia, Inc. undertakes no obligation to update any forward-looking or other statements in this press release, whether as a result of new information, future events or otherwise.
About Expedia, Inc.
Expedia, Inc. is the world’s leading online travel company, empowering business and leisure travelers with the tools and information they need to easily research, plan, book and experience travel. Expedia, Inc. also provides wholesale travel to offline retail travel agents and in-destination concierge service and activity desks for travelers. The Expedia, Inc. portfolio of brands includes: Expedia.com®, hotels.com®, Hotwire®, Expedia® Corporate Travel, TripAdvisor®, Expedia Local Expert™, Classic Vacations® and eLong™. Expedia, Inc.’s companies operate more than 50 global points of sale with sites in North America, South America, Latin America, Europe, Middle East, Africa and Asia Pacific. Expedia, Inc. was recently added to the S&P 500 index. For more information, visit http://www.expediainc.com/ (NASDAQ: EXPE).
Expedia and Expedia.com are either registered trademarks or trademarks of Expedia, Inc. in the U.S. and/or other countries. Classic Vacations is either a trademark or registered trademark of Classic Vacations, LLC in the U.S. and/or other countries. hotels.com is either a trademark or registered trademark of hotels.com, L.P., a subsidiary of hotels.com in the U.S. and/or other countries. Hotwire is either a trademark or registered trademark of Hotwire, Inc. in the U.S. and/or other countries. TripAdvisor is either a trademark or registered trademark of TripAdvisor, LLC in the U.S. and/or other countries. Other logos or product and company names mentioned herein may be the property of their respective owners.
SOURCE: Expedia, Inc.
CONTACT: Investor Relations, +1-425-679-3555, ir@expedia.com, or
Communications, +1-425-679-4317, press@expedia.com, both of Expedia, Inc.</br/>
Web site: http://www.expedia.com/