EXPE

Expedia Group, Inc. 2007 Annual Report (10-K) Summary

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 2007. Expedia, Inc. operates as a global online travel marketplace, offering travel products and services through a portfolio of brands including Expedia.com, Hotels.com, Hotwire.com, TripAdvisor, and Expedia Corporate Travel (ECT). The company utilizes both merchant (merchant of record) and agency business models to facilitate bookings for airlines, hotels, car rentals, and destination services. As of December 31, 2007, the company employed approximately 7,150 people.

Key Financial Metrics

Note: Working capital deficit is primarily driven by the merchant business model where cash is collected from travelers prior to payment to suppliers.

Material Changes vs. Prior Period

• Revenue Growth: Driven primarily by a 19% increase in worldwide merchant hotel revenue (due to higher room nights and revenue per room) and a 38% increase in other revenue (advertising, media, car rental). Worldwide air revenue declined 2% due to reduced compensation from carriers.
• Operating Income: Significant improvement due to higher gross profit, the absence of the $47.0 million Hotwire intangible asset impairment charge recorded in 2006, and reduced amortization of intangibles.
• Share Repurchases: The company repurchased 55 million shares of common stock in 2007 via two tender offers for a total cost of $1.385 billion, significantly reducing cash balances and increasing treasury stock.
• Debt Levels: Long-term debt increased to $1.085 billion, reflecting the $500 million senior notes issued in 2006 and a $500 million draw on the revolving credit facility in 2007 to fund share repurchases.

Guidance, Outlook, and Risks

Outlook and Strategy: Management expects selling and marketing expenses to increase as a percentage of revenue in 2008 due to investments in international markets and brand spend. Technology and content expenses are also expected to rise due to investments in a new scalable platform and enterprise data warehouse. Capital expenditures for 2008 are projected between $140 million and $150 million.

Key Risks and Contingencies:

• Hotel Occupancy Tax Litigation: The company faces numerous lawsuits from municipalities and consumers alleging improper collection and remittance of hotel occupancy taxes. A reserve of $19.0 million was established as of December 31, 2007. Management believes the claims lack merit but acknowledges the ultimate resolution could vary significantly.
• Supplier Relationships: Continued downward pressure on remuneration from airlines and hotels, and the shift of suppliers toward direct distribution channels, poses a risk to revenue per transaction.
• Competition: Intense competition from other online travel agencies, supplier direct websites, and meta-search engines.
• Foreign Exchange: Significant exposure to currency fluctuations (Euro, British Pound, Chinese Renminbi), resulting in a $22.0 million net foreign exchange loss in 2007.

Investor Verification Checklist

• Share Repurchase Impact: Verify the dilution effect of the 55 million shares repurchased and the remaining authorization for 20 million shares.
• Tax Litigation Exposure: Review the status of the 39 municipality lawsuits and 5 consumer lawsuits regarding hotel occupancy taxes to assess if the $19.0 million reserve is sufficient.
• Air Revenue Trends: Monitor the trend of declining air revenue per ticket and the company's ability to offset this with growth in hotel and advertising revenue.
• Debt Covenants: Confirm compliance with debt covenants, specifically the leverage ratio and minimum net worth requirements under the credit facility and senior notes.
• Technology Migration: Assess the progress and cost implications of migrating to the new scalable, service-oriented technology platform.