Expedia, Inc. Reports Third Quarter Results
BELLEVUE, Wash., Nov. 3 /PRNewswire-FirstCall/ — Expedia, Inc. (NASDAQ: EXPE) today announced financial results for its third quarter ended September 30, 2005.
“Expedia, Inc. delivered solid bookings and profit growth in its foundational quarter as an independent public company,” said Expedia, Inc. Chairman Barry Diller. “With over $15 billion in gross bookings and more than $2 billion in revenue over the last twelve months, the Company has established itself as a premier e-tailer and travel company with truly global aspirations.”
“Our continued investments in improving our customer experience and supplier relationships have paid off this quarter in our fastest merchant hotel revenue growth since the third quarter of 2004,” said Dara Khosrowshahi, Expedia, Inc.’s CEO and President. “We have continued on that path in the second half of 2005 by re-designing our Expedia.com and Hotels.com sites to improve ease of use and launching our biggest holiday promotion ever — our customers save $150 off the vacation they really want to take next year by booking their holiday travel with Expedia.com.”
Financial Summary (figures in $millions)
::::::::::::::_
3 Months Ended 3 Months Ended Y / Y
Sept. 30, 2005 Sept. 30, 2004 Growth
::::::::::::::_
Gross bookings $3,937.2 $3,265.8 21%
::::::::::::::_
Revenue 584.7 503.8 16%
::::::::::::::_
Gross profit 456.6 399.1 14%
::::::::::::::_
Operating income
before amortization * 183.5 159.6 15%
::::::::::::::_
Operating income 148.6 80.3 85%
::::::::::::::_
Adjusted net income * 126.9 110.2 15%
::::::::::::::_
Net income 82.0 58.1 41%
::::::::::::::_
* “Operating income before amortization” and “Adjusted net income” are non-GAAP measures as defined by the Securities and Exchange Commission. Please see “Definitions of Non-GAAP Measures” and “Tabular Reconciliations for Non- GAAP Measures” for an explanation of non-GAAP measures used throughout this release. Please also see “Basis of Presentation” below for additional information on financial results presented throughout this release.
Discussion of Results Gross Bookings & Revenue
Gross bookings increased 21% for the third quarter 2005 compared with third quarter 2004, with domestic gross bookings up 16% and international gross bookings up 39% versus the prior year quarter. Our results were negatively affected by hurricane and terrorist activity during the quarter.
Revenue grew 16% during the quarter, primarily driven by increased worldwide merchant hotel revenue, acquisitions and growth in our car rental business. Third quarter domestic revenue increased 10%, and international revenue grew 43%.
Worldwide merchant hotel revenue increased 15%, the highest rate of growth since third quarter 2004. The increase was fueled by 13% growth in room nights stayed, including rooms delivered as a component of vacation packages. Revenue per room night increased 2%, resulting from a 7% increase in average daily rates (“ADRs”), partially offset by a decrease in hotel margins (defined as hotel net revenue as a percentage of hotel gross bookings).
Worldwide air revenues increased 3% during the quarter, due to a 13% increase in air tickets sold, partially offset by a 9% decline in revenue per air ticket.
Revenue as a percentage of gross bookings (“revenue margin”) was 14.8% for the third quarter, down 58 basis points compared with third quarter 2004, due primarily to lower domestic air revenue per ticket and lower domestic hotel margins, partially offset by higher margins in our car rental and destination services businesses. In addition, average airfares increased 7% year-over- year, which has the effect of increasing gross bookings without a corresponding increase in our per ticket air revenues.
Revenue margin was up 144 basis points sequentially compared with second quarter 2005 due to seasonality, a higher mix of merchant hotel business, lower airfares and higher margins in our car rental and destination services businesses.
Profitability
Gross profit for the third quarter was $457 million, up $58 million, or 14% from third quarter 2004. Gross margin was down 112 basis points to 78.1%, 92 basis points of which were due to our February 2005 acquisition of a destination services company which historically has had lower gross margins than our core business.
Operating Income Before Amortization (“OIBA”) grew 15% to $184 million, driven by higher revenue and lower sales and marketing expense as a percentage of revenue, partially offset by lower gross margin and higher general and administrative and technology and content expense as a percentage of sales. OIBA growth was 18% excluding the prior year benefit of a $4.4 million net adjustment primarily for the reversal of an excise tax reserve.
Operating income grew 85% during the quarter to $149 million. Operating income growth significantly exceeded OIBA growth primarily due to a $30 million net credit adjustment to non-cash compensation due largely to a change in estimate in our expected forfeiture rate for equity awards and a decrease in non-cash compensation from year-ago levels.
Adjusted net income and net income for the third quarter 2005 compared to the same period in 2004 increased by $17 million and $24 million respectively, both due primarily to increases in operating income and interest income, partially offset by correspondingly higher taxes. Additionally, net income was reduced by $23 million due to a write-off of an investment, partially offset by unrealized gains of $12 million on derivative liabilities. Adjusted EPS was $0.35 for the third quarter, and diluted EPS was $0.23.
For additional information on the adjustment to non-cash compensation, the investment write-off and our derivative liabilities, please see the “Income Statement Notes” and “Balance Sheet Notes” elsewhere in this release.
Cash Flows & Working Capital
For the nine months ended September 30, 2005, net cash provided by operating activities was $944 million. Free cash flow (a non-GAAP measure which equals net cash provided by operating activities less capital expenditures) was $903 million. Both net cash provided by operating activities and free cash flow for the nine months ended September 30, 2005 include $543 million from the change in accounts payable, accrued liabilities and deferred merchant bookings.
Quarterly Highlights
-- For the first time, worldwide gross bookings for a trailing twelve
month period exceeded $15 billion, and revenue exceeded $2 billion.
-- Expedia, Inc.'s international points of sale in Canada, the United
Kingdom, Germany, France, Italy, the Netherlands, China and other
countries accounted for 23% of gross bookings and 22% of revenue in the
third quarter, up from 19% of gross bookings and 18% of revenue in the
prior year period.
-- Hotels.com continued its 'hotel expert' brand evolution, re-launching
its U.S. website with a "We know hotels inside and out" bellman logo.
The new site design offers customers virtual property tours, guest
reviews, advanced filtering and a compare feature to line up hotels
side-by-side to compare amenities, location, prices, ratings and more.
Gross bookings for Hotels.com increased 9% compared with the third
quarter of 2004.
-- Expedia, Inc. customers worldwide can now book reservations with more
than 70,000 hotel properties in 1,500 markets, including over 24,000
merchant hotel properties. More than 5,000 of these properties are
fully direct-connected, offering real-time availability, rates and
inventory on our websites, benefiting Expedia's customers and
suppliers.
-- Expedia, Inc. expanded its European hotel selection through global
agreements with Hilton International ("HI") and Golden Tulip
Hospitality. Under our agreement, HI may add up to 400 properties to
Expedia's preferred hotel program. The Golden Tulip agreement provides
Expedia.com and Hotels.com customers with enhanced access and
connectivity to more than 400 properties from Golden Tulip and its
alliance partners, including Golden Tulip, Pacific International
Suites, Pensione, Plaza Hotels and Grand Pacific hotels.
-- Expedia.com's customers have created over 75,000 reviews of actual paid
hotel stays covering over 12,000 distinct properties since the feature
launched in early 2005. Traveler reviews provide valuable,
differentiated content to Expedia.com customers, leveraging Expedia's
scale in traffic and customers.
-- Expedia Corporate Travel ("ECT") announced that it intends to launch
ECT Canada in the first quarter of 2006. The Canadian site will build
upon ECT's current service footprint in the United States, France, the
United Kingdom, Belgium, Netherlands and Luxembourg. ECT also
introduced more than 20 powerful and highly configurable new product
enhancements to its EPower™ service platform including 3D Fare
Display, an on-demand tool that gives travel bookers a broader view of
multiple fares as they're searching for flights, as well as
enhancements to EPower's ™ automated seat search and upgrade
features.
-- TripAdvisor, the leading global travel information and advice
destination (http://www.tripadvisor.com/), has increased its travel reviews and
opinions by more than 50% since the second quarter to more than 3
million. These reviews and opinions cover more than 300,000 hotels,
restaurants and attractions worldwide. Travelers have also submitted
over 120,000 photographs covering 14,000 hotels. Expedia, Inc.'s brand
portfolio is leveraging TripAdvisor's content by including reviews and
opinions for select properties on Hotels.com's redesigned website.
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
:::____ ::::ampersand_lt;br /> 2005 2004 2005 2004
:: :: :: ::
Revenue $584,653 $503,793 $1,624,706 $1,404,014
Cost of revenue 128,072 104,722 360,474 293,952
:: :: :: ::
Gross profit 456,581 399,071 1,264,232 1,110,062
Operating expenses:
Selling and marketing 185,421 177,863 542,173 523,999
General and administrative 58,895 39,154 146,209 113,976
Technology and content 28,741 22,444 81,349 61,686
Amortization of non-cash
distribution and marketing 5,138 3,256 9,055 13,027
Amortization (recovery)
of non-cash compensation (1,009) 44,350 79,899 134,394
Amortization of intangibles 30,756 31,743 94,204 92,520
:: :: :: ::
Operating income 148,639 80,261 311,343 170,460
Other income (expense):
Net interest income 17,968 9,303 47,479 23,611
Write-off of
long-term investment (23,426) — (23,426) —
Other 7,379 5,398 11,889 2,906
:: :: :: ::
Total other income, net 1,921 14,701 35,942 26,517
:: :: :: ::
Earnings before
income taxes and
minority interest 150,560 94,962 347,285 196,977
Income tax expense (69,026) (37,455) (143,895) (77,737)
Minority interest
in loss of
consolidated subsidiaries 501 585 106 113
:: :: :: ::
Net income $82,035 $58,092 $203,496 $119,353
========== ========== ========== ==========
Earnings per share:
Basic $0.24 $0.17 $0.61 $0.36
Diluted $0.23 $0.17 $0.59 $0.35
Shares used in computing earnings per share:
Basic 336,409 335,540 335,833 335,540
Diluted 353,351 340,549 344,819 340,549
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2005 2004
::__ ::__
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $227,875 $154,957
Restricted cash and cash equivalents 32,800 600
Marketable securities 25 1,000
Accounts and notes receivable,
net of allowance of $4,026 and $2,338 180,622 143,905
Receivables from
IAC/InterActiveCorp and subsidiaries — 1,874,745
Deferred income taxes 8,874 8,696
Prepaid merchant bookings 52,868 28,151
Prepaid expenses 61,640 33,803
:: ::
Total current assets 564,704 2,245,857
Property and equipment, net 85,866 81,426
Long-term investments and other 45,717 140,432
Intangible assets, net 1,204,757 1,279,361
Goodwill 5,875,132 5,790,111
:: ::
TOTAL ASSETS $7,776,176 $9,537,187
========== ==========
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, merchant $650,536 $429,739
Accounts payable, trade 127,908 98,666
Deferred merchant bookings 559,051 361,199
Deferred revenue 7,847 5,353
Income tax payable 7,716 421
Other current liabilities 88,148 86,801
:: ::
Total current liabilities 1,441,206 982,179
Deferred income taxes 381,463 333,696
Derivative liabilities 91,407 12,812
Other long-term liabilities 38,450 37,436
Minority interest 71,070 18,435
Commitments and contingencies
Total stockholders’ equity 5,752,580 8,152,629
:: ::
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $7,776,176 $9,537,187
========== ==========
EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Nine Months
Ended September 30,
::::
2005 2004
:: ::
Cash flows from operating activities
Net income $203,496 $119,353
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 37,869 32,701
Amortization of non-cash
distribution and marketing 9,055 13,027
Amortization of non-cash compensation 79,899 134,394
Amortization of intangibles 94,204 92,520
Amortization of premium
on investment securities — 161
Deferred income taxes 29,948 (25,563)
Unrealized gain on derivative instruments (12,000) —
Equity in income of unconsolidated affiliates (870) (116)
Minority interest in loss
of consolidated subsidiaries (106) (113)
Write-off of long-term investment 23,426 —
Other 690 —
Changes in current assets and current liabilities:
Accounts and notes receivable (28,468) 10,355
Prepaid merchant bookings
and prepaid expenses (39,047) (32,502)
Accounts payable and accrued liabilities 345,909 203,461
Deferred merchant bookings 197,154 167,421
Deferred revenue 2,494 (3,108)
Other, net — 2,549
:: ::
Net cash provided by operating activities 943,653 714,540
:: ::
Cash flows used in investing activities
Acquisitions, net of cash acquired 11,515 (261,312)
Capital expenditures (40,859) (37,499)
Purchase of marketable securities (30) (5,015)
Proceeds from sale of marketable securities 1,000 722,646
Increase in long-term investments and deposits (2,379) (56,580)
Transfers to IAC/InterActiveCorp, net (766,760) (1,496,467)
Other, net (2,937) (5,080)
:: ::
Net cash used in investing activities (800,450) (1,139,307)
:: ::
Cash flows used in financing activities
Proceeds from exercise of stock options 20,458 —
Changes in restricted
cash and cash equivalents (36,462) —
Contribution from (distribution to)
IAC/InterActiveCorp, net (52,844) 401,888
Other, net (2,601) (1,108)
:: ::
Net cash used in financing activities (71,449) 400,780
Effect of exchange rate changes
on cash and cash equivalents 1,164 (2,425)
:: ::
Net increase (decrease)
in cash and cash equivalents 72,918 (26,412)
Cash and cash equivalents
at beginning of period 154,957 188,639
:: ::
Cash and cash equivalents at end of period $227,875 $162,227
========== ==========
Income Statement Notes
Revenue
— Expedia, Inc. makes travel products and services available through two
business models: the merchant model and the agency model.
— Under the merchant model, we facilitate the booking of travel products
and services from our travel suppliers, and serve as the merchant of
record. Merchant transactions typically produce a higher level of net
revenues per transaction. Merchant revenues are generally recognized
when the customer uses the travel product or service, as opposed to
when the travel product or service is booked. Merchant revenues are
derived from the difference between amounts paid to the travel
suppliers and the amounts paid by the consumer.
— Under the agency model, Expedia, Inc. acts as agent in the transaction,
passing reservations booked by customers to the relevant travel
supplier. Expedia, Inc. receives a commission or ticketing fee from the
travel supplier for its services under the agency model. In agency
transactions the supplier sets the price to be paid by the consumer and
the travel supplier appears as merchant of record for the transaction.
Agency revenues are typically recognized at the time the reservation is
booked. Agency revenues are derived primarily from commissions and
ticketing fees from travel suppliers, revenues from GDS’s and fees from
leisure and corporate travelers.
— Agency gross bookings were 58% of total gross bookings for both the
three and nine month periods ended September 30, 2005, compared with
57% for the prior year periods.
Expense Reclassifications
— As previously disclosed in our October 25, 2005 8-K/A filing with the
SEC, we have reclassified certain expense amounts relating to prior
periods’ results to conform to our 2005 presentation of results. The
reclassifications did not affect our financial position, cash flows,
revenue, operating income, operating income before amortization or net
income for any periods.
Cost of Revenue
— Cost of revenue consists of: (1) credit card merchant fees; (2) fees
paid to our fulfillment vendors for processing of airline tickets and
related customer services; (3) reserves and related payments to
airlines for tickets purchased with fraudulent credit cards;
(4) allocated and direct costs of our data and call centers and
(5) costs paid to suppliers for certain destination inventory.
— Cost of revenue as a percentage of revenue was 22% for each of the
three and nine month periods ended September 30, 2005, compared with
21% for the comparable prior year periods. The increases are largely
due to lower gross margin revenues associated with an acquired
destination services provider which records its ticketing sales on a
gross basis, which we have consolidated as of its acquisition in
February 2005.
Operating Expenses
— Operating expenses as a percentage of revenue for the three and nine
month periods were as follows (differences due to rounding):
Three months Nine months
ended September 30, ended September 30,
:::: ::::
2005 2004 2005 2004
:_ :_ :_ :_
Selling and marketing 31.7% 35.3% 33.4% 37.3%
General and administrative 10.1% 7.8% 9.0% 8.1%
Technology and content 4.9% 4.5% 5.0% 4.4%
:_ :_ :_ :_
Total 46.7% 47.5% 47.4% 49.8%
— Operating expenses include depreciation expense of $12 million and
$29 million for the three and nine month periods ended
September 30, 2005, and $8 million and $23 million for the comparable
prior year periods. The remainder of depreciation expense is captured
in cost of revenue.
Selling and Marketing
o Selling and marketing expenses consist primarily of advertising and
distribution expenses as well as personnel-related costs. Our
distribution channels include Internet portals, search engines and
our private label and affiliate programs.
o While year-to-date sales and marketing expense has increased 3%, we
expect a significantly larger year-over-year increase in the fourth
quarter as we strategically shift marketing spend later in the year.
o While we are focused on optimizing the efficiency of our sales and
marketing channels, we expect absolute amounts spent in sales and
marketing to increase over time due to continued expansion of our
international businesses, which have a higher sales and marketing
cost relative to revenue due to their comparatively early stages of
development, as well as increases in search-related costs, increased
marketing volume and higher costs of traffic acquisition online.
General and Administrative
o General and administrative expense consists primarily of
(1) personnel-related costs for support functions that include our
executive leadership, finance, legal, tax and human resources
functions, and (2) fees for professional services that include
legal, tax and accounting.
o Year-to-date general and administrative expense has increased 28% as
we increased our use of professional services and built our
executive teams and supporting staff levels largely as a result of
becoming a stand-alone public company. We expect absolute amounts
spent on corporate personnel and professional service to increase
over time as we add headcount and continue incurring incremental
costs as a stand-alone public company.
Technology and Content
o Technology and content expense includes research and development
consisting primarily of product development expenses such as payroll
and related expenses for localization, and amortization of website
development costs.
o Given the increasing complexity of our business, geographic
expansion, initiatives in corporate travel, increased supplier
integration, service-oriented architecture improvements and other
initiatives, we expect absolute amounts spent in technology and
content to increase over time.
Amortization of Non-Cash Compensation Expense
— Amortization of non-cash compensation expense relates primarily to
expense for restricted stock units and stock options. Since
February 2003, we have awarded restricted stock units as our primary
form of stock-based compensation. Our stock-based awards generally vest
over periods between four and five years.
— Non-cash compensation contra-expense for the third quarter was
$1 million, consisting of $29 million in expense primarily related to
stock options expense, offset by a $30 million net credit due to a
change in our forfeiture rate assumption for equity awards, partially
offset by a modification charge on equity awards related to the
Spin-Off.
— We refined our forfeiture assumptions based on actual award forfeitures
by employees, which was greater than the assumption used in the
historical calculation of non-cash compensation expense. While this is
an area of significant judgment, we will continually assess our
forfeiture assumption in light of actual experience and do not
anticipate a change of this magnitude in the future.
— Assuming, among other things, that our stock price does not vary widely
from present levels, we anticipate quarterly amortization of non-cash
compensation expense will decrease from levels recorded in the first
two quarters of 2005 as higher value options are amortized and replaced
by lower value restricted stock unit expense.
— We will adopt SFAS 123® (“Share Based Payment”) in the first quarter
of 2006. We do not expect 123® will have a material effect on our
results of operations or financial position.
— At September 30, 2005, there were approximately 43.5 million
stock-based awards outstanding, consisting of 38 million stock options
with a $13.38 weighted average exercise price and a weighted average
remaining life of 3.6 years, and 5.5 million restricted stock units.
— We granted 30,000 stock awards during the third quarter, consisting of
restricted stock units. Year-to-date Expedia, Inc. and
IAC/InterActiveCorp. (“IAC”) have granted approximately 7 million stock
awards to Expedia employees, consisting of 3.8 million options with a
five-year cliff vest granted to our Chairman with a weighted average
exercise price of $32.12, and approximately 3 million restricted stock
units granted to other employees.
Net Interest Income
— The Company’s reduced cash balance versus historical amounts will
result in reduced interest income in the near-term compared with what
has been recorded in the historical combined statements of income.
Income Taxes
— From January 1, 2005 through the Spin-Off, we were a member of the IAC
consolidated tax group. Accordingly, we will file a federal income tax
return and certain state income tax returns on a combined basis for
this period. IAC will settle the income tax liability related to these
filings; as such, these amounts are not included in our income taxes
payable. As of September 30, 2005, our current income tax payable
represents amounts that we will settle with the Internal Revenue
Service and other tax authorities based on our income taxes after the
Spin-Off.
— We have computed income taxes using our stand-alone tax rate.
— The effective tax rate for income from adjusted net income was 36% for
the three and nine months ended September 30, 2005 compared to 37% in
the prior year periods. Third quarter effective tax rates were higher
than the federal statutory rate of 35% principally due to state taxes.
— Third quarter 2004 effective tax rates were higher than the federal
statutory rate principally due to state taxes and foreign losses for
which no tax benefit was recognized.
Foreign Exchange
— As Expedia, Inc.’s reporting currency is the U.S. Dollar, reported
financial results are impacted from strength or weakness in the U.S.
dollar in comparison to the currencies of our international websites.
Management believes investors may find it useful to assess 2005 growth
rates with and without the impact of foreign exchange. The estimated
impact of foreign exchange was as follows (amounts may not add due
to rounding):
Impact Nine Impact
Y/Y on Y/Y months Y/Y on Y/Y
Three growth growth ended growth growth
months ended rates rates Sept. 30, rates rates
Sept. 30, 2005 excluding from 2005 Y/Y excluding from
Y/Y growth foreign foreign growth foreign foreign
rates exchange exchange rates exchange exchange
movements movements movements movements
::::::____ ::::::
Revenue 16.1% 16.7% -0.7% 15.7% 15.9% -0.2%
Operating Income 85.2% 90.0% -4.8% 82.6% 87.9% -5.3%
Operating Income
Before
Amortization 15.0% 17.4% -2.4% 20.5% 22.7% -2.2%
Acquisitions & Investments
— A number of acquisitions and investments were completed during 2004 and
2005 that impacted financial results during the time periods included
in this release, specifically our acquisitions and investments in
TripAdvisor, Egencia (ECT Europe), Activity World, WTM (ECT U.K.),
eLong and Premier Getaways.
— Management believes that investors may find it useful to assess 2005
growth rates with and without the impact of acquisitions and
investments. The estimated impact of these acquisitions and investments
was as follows:
Impact Impact
Y/Y on Y/Y Y/Y on Y/Y
growth growth growth growth
rates rates Nine rates rates
excluding from months excluding from
Three acqui- acqui- ended acqui- acqui-
months ended sitions sitions Sept. 30, sitions sitions
Sept. 30, 2005 and and 2005 Y/Y and and
Y/Y growth invest- invest- growth invest- invest-
rates ments ments rates ments ments
::::::____ ::::::
Revenue 16.1% 13.0% 3.1% 15.7% 11.5% 4.2%
Operating Income 85.2% 87.8% -2.6% 82.6% 78.2% 4.4%
Operating Income
Before
Amortization 15.0% 15.8% -0.8% 20.5% 17.4% 3.1%
Balance Sheet Notes
Cash, Cash Equivalents, Current Restricted Cash and Marketable Securities
— Cash, cash equivalents, current restricted cash and marketable
securities were $261 million at September 30, 2005.
— The $33 million of current restricted cash and cash equivalents
primarily relates to agency air revenue transactions.
Receivables from IAC/InterActiveCorp.
— In connection with the Spin-Off, we extinguished all intercompany
receivable balances from IAC by recording a distribution to IAC
according to the terms of a separation agreement between IAC and
Expedia, as explained in further detail in the Company’s Registration
Statement on Form S-4, filed on June 17, 2005.
Accounts & Notes Receivable
— Accounts and notes receivable include credit card receivables generally
due within two to three days from our agency transactions, which are
generally due within 30 days from our airlines, global distribution and
hotel suppliers.
— These receivables generally track with our gross bookings pattern,
building throughout the first half of the year and decreasing in the
second half as bookings activity subsides.
Prepaid Expenses
— Prepaid expenses are primarily composed of prepaid marketing. The
increase reflects our decision to weight our marketing spend later in
the year.
Goodwill & Intangible Assets, net
— Goodwill and intangible assets, net relates primarily to the Company’s
acquisitions of Hotels.com, Expedia.com and Hotwire.
— Amortization of intangible assets with definite lives was $31 million
and $94 million for the three and nine months ended September 30, 2005,
compared with $32 million and $93 million for the three and nine month
periods ended September 30, 2004. These amounts are generally not
deductible for tax purposes.
Long-Term Investments and Other
— The reduction in long-term investments at September 30, 2005 versus
December 31, 2004 reflects our consolidation of eLong after exercising
our warrants to increase our ownership to 59% on an outstanding basis
and the Company’s write-off of an investment of $23 million after
making a determination that the decline in value of our investment was
other than temporary, partially offset by our 50% ownership interest in
an aircraft through a capital contribution from IAC/InterActiveCorp.
Deferred Merchant Bookings and Accounts Payable, Merchant
— Deferred merchant bookings consist of amounts received from customers
who have not yet traveled. Merchant revenue is generally not recognized
until travel is initiated.
— The payment to suppliers related to these bookings is not made until
approximately one week after booking for air travel and, for all other
merchant bookings, after the customer’s use and subsequent billing from
the supplier. Therefore, especially for merchant hotel, which
represents the majority of Expedia’s overall merchant bookings, there
is generally some period of time from the receipt of cash from
customers to supplier payment.
— As long as the merchant hotel business continues to grow positively, as
it has historically, and our business model does not change, we expect
that the change in working capital will continue to be positive. If
this business declines or if the model changes, it would negatively
affect our working capital.
— For the nine months ended September 30, 2005, the change in deferred
merchant bookings and accounts payable and accrued liabilities
contributed $543 million to cash flow from operating activities.
Revolving Credit Facility
— On July 11, 2005, we entered into a $1 billion five-year unsecured
revolving credit facility with a group of lenders. The revolving
facility bears interest based on our financial leverage, and is
currently at a rate equal to LIBOR plus .50%. The revolving credit
facility also contains financial covenants consisting of a leverage
ratio and a minimum net worth. As of September 30, 2005 we were in
compliance with all covenants.
— Expenses associated with the facility were less than $1 million during
the third quarter and are classified in net interest income on the
statements of income. There was no outstanding balance on the facility
at September 30, 2005. We expect to utilize the revolver during the
fourth quarter of 2005 as our gross bookings reach their seasonal low
and our accounts payable from merchant bookings come due.
Derivative Liabilities
— In connection with IAC’s acquisition of Ask Jeeves, we are obligated to
issue shares of Expedia, Inc. common stock (or pay cash in equal value)
to holders of Ask Jeeves convertible notes. We estimate that we may be
required to issue up to 4.3 million shares of Expedia, Inc. common
stock upon conversion. The estimated fair value of this obligation at
September 30, 2005 was $88 million, recorded as a derivative liability
on our balance sheet.
— For the three and nine months ended September 30, 2005, we recorded
unrealized gains of $12 million principally related to the Ask Jeeves
liability due to the decrease in our share price during the third
quarter. These gains are recorded in “other income” on our statements
of income.
— We anticipate recording a quarterly gain or loss in future quarters as
we adjust the fair value of these long-term liabilities due to
fluctuations in our stock price. The size or incidence of such gains or
losses is not predictable.
Series A Cumulative Convertible Preferred Stock (“Preferred Stock”)
— We have fewer than 1,000 shares of preferred stock outstanding with an
aggregate face value of less than $20,000.
Expedia Class B Common Stock
— There are approximately 26 million shares of Expedia Class B common
stock outstanding.
— The holders of Class B common stock are entitled to one vote when
voting separately as a class, and ten votes when voting together as a
single group with the holders of Expedia common stock and Expedia
preferred stock.
— Our Chairman has general voting authority for the Class B common stock.
Warrants
— As of September 30, 2005 Expedia, Inc. had approximately 59 million
warrants outstanding, which if exercised in full would entitle their
holders to acquire approximately 35 million common shares of Expedia,
Inc. for an aggregate purchase price of approximately $775 million
(average $22.28 per Expedia, Inc. common share).
— There are approximately 32 million warrants related to the Vivendi
Universal transaction completed by IAC/InterActiveCorp in 2002. There
are two tranches of these warrants, both of which expire in 2012:
o Approximately 24 million warrants entitle the holders to acquire
1/2 share of Expedia, Inc. at an exercise price of $12.23. If
exercised in full, the warrants would entitle their holders to
approximately 12 million Expedia, Inc. common shares.
o Approximately 8 million warrants entitle the holders to acquire
1/2 share of Expedia, Inc. at an exercise price of $14.45. If
exercised in full, the warrants would entitle their holders to
approximately 4 million Expedia, Inc. common shares.
— There are approximately 26 million warrants that are publicly-traded on
Nasdaq under the ticker symbols “EXPEW” and “EXPEZ.” Both issues expire
in February 2009.
o There are approximately 15 million EXPEW warrants outstanding. Each
warrant entitles the holder to acquire 1/2 share of Expedia, Inc. at
an exercise price of $15.61. If exercised in full, the warrants
would entitle their holders to approximately 7 million Expedia, Inc.
common shares.
o There are approximately 11 million EXPEZ warrants outstanding. Each
warrant entitles the holder to acquire approximately 0.97 shares of
Expedia, Inc. at an exercise price of $11.56. If exercised in full,
the warrants would entitle their holders to approximately 11 million
Expedia, Inc. common shares.
— There are less than 1 million miscellaneous warrants outstanding.
Expedia, Inc.
Supplemental Information – Third Quarter 2005
— 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 the financial
statements in our releases and SEC filings.
— As our business evolves and as we integrate our operations, 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.
— We have changed our methodology for the allocation of gross bookings by
brand. “Expedia” gross bookings constitute bookings from all Expedia-
branded properties, including our international sites and our worldwide
Expedia Corporate travel businesses. “Other” gross bookings constitute
bookings from all brands other than Expedia-branded properties and
Hotels.com. In addition, there have been minor adjustments to
historical allocation of our revenue between domestic and
international.
— Metrics, with the exception of revenue 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.
(in $ millions) 2004 2005 YTD
::__ :::: ::___
YTD YTD
Q3 Q4 Q1 Q2 Q3 2004 2005
: : : : : : :
Gross Bookings by Geography
Domestic $2,630 $2,300 $3,184 $3,229 $3,050 $8,155 $9,463
International 636 595 902 909 887 1,724 2,698
:_ :_ :_ :_ :_ :_ :__
Total $3,266 $2,895 $4,086 $4,138 $3,937 $9,879 $12,161
Net Revenue by Geography
Domestic $414 $350 $386 $440 $457 $1,183 $1,283
International 89 89 99 115 128 221 342
:_ :_ :_ :_ :_ :_ :__
Total $504 $439 $485 $555 $585 $1,404 $1,625
Gross Bookings by Brand
Expedia $2,525 $2,310 $3,251 $3,191 $3,047 $7,567 $9,489
Hotels.com 461 351 483 502 502 1,425 1,487
Other 280 234 352 445 388 887 1,185
:_ :_ :_ :_ :_ :_ :__
Total $3,266 $2,895 $4,086 $4,138 $3,937 $9,879 $12,161
Gross Bookings by Agency/Merchant
Agency $1,875 $1,760 $2,386 $2,422 $2,296 $5,585 $7,104
Merchant 1,391 1,135 1,700 1,716 1,641 4,294 5,057
:_ :_ :_ :_ :_ :_ :__
Total $3,266 $2,895 $4,086 $4,138 $3,937 $9,879 $12,161
Packages Revenue $106 $92 $114 $125 $128 $304 $367
Number
of Transactions 9.2 7.6 9.7 10.0 10.3 25.9 30.0
Merchant
hotel room nights 9.1 7.4 7.3 9.0 10.2 24.4 26.5
Notes & Definitions:
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 by customers, including taxes, fees and other charges.
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.
Merchant Hotel Room Nights — Worldwide merchant hotel nights, net of cancellations. With the exception of Hotwire, nights are reported as stayed. This metric includes nights stayed on both a package and stand-alone basis.
Definitions of Non-GAAP Measures
The following measures are defined by the Securities and Exchange Commission as non-GAAP financial measures.
Operating Income Before Amortization is defined as operating income plus: (1) amortization of non-cash distribution and marketing expense, (2) amortization of non-cash compensation expense, (3) amortization of intangible assets and goodwill impairment, if applicable and (4) certain one-time items, if applicable. Management believes this measure is useful to investors because it 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. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to Expedia, Inc.’s statements of income of certain expenses, including non-cash compensation, non-cash payments to partners, and acquisition-related accounting. Due to the high variability and difficulty in predicting certain items that affect net income, such as interest rates and tax rates, Expedia, Inc. is unable to provide 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 common stockholders plus (1) amortization of non-cash distribution and marketing expense, (2) amortization of non-cash compensation expense, (3) amortization of intangible assets and goodwill impairment, if applicable, (4) one-time items, net of related tax, and minority interest, (5) mark to market gains and losses on derivative liabilities and (6) discontinued operations, net of tax. 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 recurring 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 restricted stock units (“RSU”) 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 other non-cash expenses not directly tied to the recurring core operations of our businesses. Adjusted Net Income and Adjusted EPS have the same limitations as Operating Income Before Amortization. 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 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.
We endeavor to compensate for the limitation of the non-GAAP measures presented by also providing comparable GAAP measures, GAAP financial statements, and descriptions of the reconciling items and adjustments, to derive the non-GAAP measures.
Tabular Reconciliations for Non-GAAP Measures (figures in $000s)
Operating Income Before Amortization
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
:::____ ::::
Operating Income
Before Amortization $183,524 $159,610 $494,501 $410,401
Amortization of non-cash
distribution and marketing (5,138) (3,256) (9,055) (13,027)
Amortization (recovery) of
non-cash compensation 1,009 (44,350) (79,899) (134,394)
Amortization of intangibles (30,756) (31,743) (94,204) (92,520)
:____ :____ :____ ::ampersand_lt;br /> Operating Income 148,639 80,261 311,343 170,460
Net interest income 17,968 9,303 47,479 23,611
Write-off of
long-term investment (23,426) — (23,426) —
Other 7,379 5,398 11,889 2,906
Income tax expense (69,026) (37,455) (143,895) (77,737)
Minority interest in loss of
consolidated subsidiaries 501 585 106 113
:____ :____ :____ ::ampersand_lt;br /> Net Income $82,035 $58,092 $203,496 $119,353
========= ========= ========= =========
Adjusted Net Income & EPS
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
:::____ ::::
Net income $82,035 $58,092 $203,496 $119,353
Amortization of non-cash
distribution and marketing 5,138 3,256 9,055 13,027
Amortization (recovery) of
non-cash compensation (1,009) 44,350 79,899 134,394
Amortization of intangibles 30,756 31,743 94,204 92,520
Write-off of
long-term investment 23,426 — 23,426 —
Unrealized gain on
derivatives instruments (12,000) — (12,000) —
Minority interest (535) (219) (1,448) (332)
Income tax expense (863) (27,040) (53,345) (83,923)
:____ :____ :____ ::ampersand_lt;br /> Adjusted net income $126,948 $110,182 $ 343,287 $275,039
========= ========= ========= =========
GAAP diluted weighted
average shares outstanding 353,351 340,549 344,819 340,549
Additional restricted
stock units 4,814 — 1,605 —
:____ :____ :____ ::ampersand_lt;br /> Adjusted weighted
average shares outstanding 358,165 340,549 346,424 340,549
========= ========= ========= =========
Diluted earnings per share $0.23 $0.17 $0.59 $0.35
========= ========= ========= =========
Adjusted earnings per share $0.35 $0.32 $0.99 $0.81
:____ :____ :____ ::ampersand_lt;br />
Free Cash Flow
Nine months ended September 30,
2005 2004
::::::_
Net cash flow provided by operating activities $943,653 $714,540
Less: capital expenditures (40,859) (37,499)
:____ ::ampersand_lt;br /> Free cash flow $902,794 $677,041
:____ ::ampersand_lt;br />
Conference Call
Expedia, Inc. will audiocast its conference call with investors and analysts discussing its third quarter financial results and certain forward-looking information on Thursday, November 3, 2005 at 2:00 p.m. Pacific Time (PT). The audiocast will be open to the public and available via http://www.expediainc.com/ir.
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 current expectations and assumptions which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. The use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” 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: Expedia, Inc.’s ability to effectively update, automate and integrate disparate financial and accounting systems and approaches among its brands and businesses; adverse changes in senior management; the rate of growth of the Internet and online travel; changes in global economic conditions, consumer spending, the competitive environment, the e-commerce industry and broadband access; world events (including adverse weather, health risks or terrorism); the rate of online migration in the various geographies and markets in which Expedia, Inc. operates; fluctuations in foreign exchange rates; the ability to effectively operate the newly consolidated businesses as an independent entity from IAC/InterActiveCorp; the health of the travel industry, including consumer and business spending on travel; Expedia, Inc.’s ability to expand successfully in international markets; possible one-time charges resulting from, among other events, integration activities, platform migration and shared services efforts; failure to realize cost efficiencies; the successful completion of pending corporate transactions and the integration of acquired businesses; the accuracy, integrity, security and redundancy of systems, including financial and accounting systems, and networks of Expedia, Inc.; and other risks detailed in Expedia, Inc.’s public filings with the Securities and Exchange Commission, including Expedia, Inc.’s amended Registration Statement on Form S-4 (Commission file number 333-124303-01), filed on June 17, 2005. 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.
Basis of Presentation
On December 21, 2004, IAC announced its plan to separate into two independent public companies in order to better achieve certain strategic objectives of its various businesses. This transaction is referred to as the “Spin-Off.” On August 9, 2005, Expedia, Inc. became an independent public company and began trading on the Nasdaq under the symbol “EXPE.” These unaudited consolidated financial statements present our results of operations, financial position, stockholders’ equity and cash flows of Expedia, Inc. on a combined basis up through the Spin-Off and on a consolidated basis thereafter. The unaudited financial statements relating to periods prior to August 9, 2005 were prepared on a combined basis because there was no direct ownership relationship among any or all of the businesses that comprised Expedia, Inc. upon Spin-Off.
About Expedia, Inc.
Expedia, Inc. is one of the world’s leading travel service companies. With its portfolio of leading travel brands, Expedia, Inc. empowers business and leisure travelers with the tools and information they need to easily research, plan, book and experience travel. The Company also provides wholesale travel to offline retail travel agents. Expedia, Inc.’s main companies include: Expedia.com, Hotels.com, Hotwire, Expedia Corporate Travel, TripAdvisor and Classic Vacations. Expedia, Inc.’s companies also operate internationally with sites in Canada, the United Kingdom, Germany, France, Italy, the Netherlands and China, through its investment in eLong. For more information visit http://www.expediainc.com/. (NASDAQ: EXPE).
SOURCE: Expedia, Inc.
CONTACT: Stu Haas, Investor Relations, +1-425-679-7852, or
ir@expedia.com, or Wendy Grover, Communications, +1-425-679-7874, both of
Expedia Inc.</br/></br/>
Web site: http://www.expedia.com/