Expedia Group, Inc. - Q1 2009 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended March 31, 2009. Expedia, Inc. operates a global travel marketplace offering products and services through brands including Expedia.com, hotels.com, Hotwire.com, TripAdvisor Media Network, and Egencia. The company reorganized its reporting segments in Q1 2009 from geographic regions (North America, Europe) to three reportable segments: Leisure, TripAdvisor Media Network, and Egencia.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenue | $635,712 | $687,817 |
| Gross Profit | $492,199 | $535,557 |
| Operating Income | $92,947 | $89,998 |
| Net Income (Attributable to Expedia) | $39,384 | $51,306 |
| Diluted EPS | $0.14 | $0.17 |
| Operating Cash Flow | $502,004 | $563,779 |
| Cash & Equivalents (End of Period) | $475,234 | $697,868 |
| Long-Term Debt | $894,678 | $1,544,548 |
Note: Q1 2008 figures have been reclassified to conform to current period presentation regarding technology and content expenses.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 8% year-over-year, driven by a 10% drop in hotel revenue (due to an 18% decline in Average Daily Rates) and a 17% drop in air revenue (due to lower commissions and a 14% decline in revenue per ticket).
- Cost Management: Selling and marketing expenses decreased 18% to $235.9 million, significantly offsetting revenue declines. Amortization of intangible assets dropped 50% to $9.1 million due to the completion of amortization on certain assets.
- Restructuring: The company incurred $8.7 million in restructuring charges in Q1 2009 related to business reorganization, compared to none in Q1 2008.
- Debt Reduction: Expedia repaid $650 million in borrowings under its revolving credit facility during the quarter, reducing total indebtedness from $1.54 billion to $895 million.
- Segment Performance: The TripAdvisor Media Network segment saw third-party revenue increase 9% to $51.5 million, while Leisure and Egencia revenues declined 9% each.
Outlook, Risks, and Management Commentary
- Economic Environment: Management cites worsening global economic conditions since September 2008, leading to reduced discretionary spending on travel. Visibility remains limited with no near-term improvement expected.
- Swine Flu: An outbreak of swine influenza acknowledged by the WHO in April 2009 poses a risk of decreased or delayed demand for travel services, particularly to Mexico.
- Airline Sector: Reduced airline capacity and aggressive cost-cutting by carriers continue to pressure Expedia's air revenue. A promotional removal of booking fees in Q1 2009 contributed to a 14% decline in revenue per ticket.
- Legal Contingencies: The company faces ongoing litigation regarding hotel occupancy taxes in numerous jurisdictions. A reserve of $21 million was established as of March 31, 2009. Management continues to defend these claims vigorously.
- Liquidity: Despite a working capital deficit of $950 million (due to the timing of merchant bookings and debt repayment), management believes available cash, operating cash flows, and the remaining $949 million capacity on its credit facility are sufficient to meet foreseeable needs.
Investor Verification Checklist
- Revenue Mix Shift: Verify the sustainability of the increased revenue margin (12.2% vs 11.7% prior year) driven by advertising/media revenue amidst declining transaction volumes.
- ADR Trends: Monitor the trajectory of Average Daily Rates (ADRs), which declined 18% year-over-year, as this directly impacts hotel revenue per room night.
- Debt Covenant Compliance: Confirm ongoing compliance with the amended credit facility covenants, specifically the new minimum interest coverage covenant and tightened leverage ratio.
- Tax Litigation Exposure: Assess the potential for the $21 million tax reserve to be insufficient given the "pay to play" dynamics in various jurisdictions and the volume of pending lawsuits.
- Booking Fee Promotion: Evaluate the long-term impact of the Q1 2009 booking fee promotion on future air revenue per ticket if extended or made permanent.