Expedia Group, Inc. - Q1 2010 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Expedia, Inc. for the period ended March 31, 2010. Expedia operates a global travel marketplace offering products and services to leisure and corporate travelers through a portfolio of brands including Expedia.com, Hotels.com, Hotwire.com, TripAdvisor Media Network, and Egencia. The company operates three reportable segments: Leisure, TripAdvisor Media Network, and Egencia.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $717.9 million | $635.7 million |
| Operating Income | $112.2 million | $92.9 million |
| Net Income (Attributable to Expedia) | $59.4 million | $39.4 million |
| Diluted EPS | $0.20 | $0.14 |
| Operating Cash Flow | $619.5 million | $502.0 million |
| Cash and Equivalents | $997.5 million | $642.5 million (Dec 31, 2009) |
| Long-Term Debt | $895.2 million | $895.1 million (Dec 31, 2009) |
| Operating Margin | 15.6% | 14.6% |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 13% year-over-year, driven by a 12% increase in worldwide hotel revenue (due to an 18% increase in room nights) and a 39% increase in TripAdvisor Media Network advertising revenue.
- Profitability: Operating income rose 21% to $112.2 million. This improvement was aided by the absence of restructuring charges (which totaled $8.7 million in Q1 2009) and revenue growth outpacing cost increases in certain categories.
- Expense Trends: Selling and marketing expenses increased 19% to $280.8 million, reflecting higher spending to support transaction growth and seasonal demand. Cost of revenue increased 10% to $158.0 million.
- Capital Allocation: The company repurchased 8.4 million shares for $188 million and paid a quarterly dividend of $0.07 per share, marking the first dividend payment in the company's history.
- Debt Structure: In February 2010, Expedia replaced its prior $1 billion credit facility with a new $750 million, three-year unsecured revolving credit facility. No borrowings were outstanding under the new facility as of March 31, 2010.
Outlook, Risks, and Contingencies
- Guidance: Management expects selling and marketing expenses to increase in absolute dollars and as a percentage of revenue for the full year 2010. Cost of revenue is expected to increase in absolute dollars but decrease as a percentage of revenue.
- Market Risks: The company faces pressure from rising airfares (up 9% in Q1 2010) and potential capacity reductions by airlines. Disruptions from the Icelandic volcanic eruption impacted European travel demand in the quarter.
- Legal Contingencies: Expedia is involved in approximately 55 lawsuits regarding hotel occupancy taxes. The company has established a reserve of $21 million for potential settlements. Additionally, a class action settlement liability of $18 million remains, with $12 million expected to be paid in Q2 2010.
- Seasonality: Revenue is typically lowest in the first quarter due to the lag between booking and travel completion in the merchant business model.
Key Investor Verification Points
- Revenue Margin Compression: Verify the sustainability of the revenue margin decline (from 12.2% to 10.8%) driven by lower consumer fees and a higher mix of lower-margin air bookings.
- Occupancy Tax Exposure: Monitor the status of the 55 pending occupancy tax lawsuits and the adequacy of the $21 million reserve, particularly given the "pay-to-play" requirements in some jurisdictions.
- Airline Supply Dynamics: Assess the impact of airline capacity reductions and fare increases on future transaction volumes and revenue per ticket.
- Shareholder Returns: Confirm the impact of the new dividend policy and ongoing share repurchases ($188 million in Q1) on future liquidity and cash flow availability.