Business Context and Reporting Period
Company: Expedia, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: Expedia operates a global online travel marketplace offering products and services through brands including Expedia.com, Hotels.com, Hotwire.com, TripAdvisor, and Expedia Corporate Travel (ECT). The company spun off from IAC/InterActiveCorp in August 2005. For Q1 2006, the company reorganized its reporting into two segments: North America and Europe.
Key Financial Metrics
| Metric | Q1 2006 | Q1 2005 |
|---|---|---|
| Revenue | $493.9 million | $485.0 million |
| Gross Profit | $374.6 million | $370.9 million |
| Operating Income | $26.2 million | $66.3 million |
| Net Income | $23.3 million | $48.0 million |
| Diluted EPS | $0.06 | $0.14 |
| Operating Cash Flow | $453.6 million | $497.7 million |
| Cash and Equivalents (End of Period) | $509.0 million | $281.4 million |
| Short-term Borrowings | $0.4 million | $230.8 million |
Non-GAAP Metric: Operating Income Before Amortization (OIBA) was $88.5 million for Q1 2006, down from $136.7 million in Q1 2005.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 2% year-over-year, driven by a 24% increase in international revenue and growth in merchant hotel business, partially offset by a 4% decline in domestic revenue and a 7% drop in worldwide air revenue.
- Profitability Decline: Operating income fell 60% to $26.2 million. This was primarily due to a 12% increase in selling and marketing expenses and a 29% increase in general and administrative expenses, alongside a significant rise in amortization of non-cash distribution and marketing ($8.2 million vs. $0.4 million).
- Margin Compression: Revenue margin (revenue as a percentage of gross bookings) decreased 125 basis points to 10.6%, attributed to lower domestic hotel raw margins and reduced air revenue per ticket.
- Debt Repayment: The company fully repaid $230 million in short-term borrowings from its revolving credit facility during the quarter.
- Interest Income: Interest income dropped significantly as intercompany interest from IAC ceased following the 2005 Spin-Off.
Outlook, Risks, and Unusual Items
- Guidance: Management expects OIBA for the full year to decrease relative to 2005 due to increased selling and marketing expenses and reduced revenue growth expectations. Selling and marketing expenses are expected to continue increasing as a percentage of revenue.
- Share Repurchase: In May 2006, the Board authorized a program to repurchase up to 20 million shares of common stock.
- Legal Proceedings: New litigation was filed in Q1 2006 by Orange County (FL), Charleston (SC), and Atlanta (GA) regarding hotel occupancy taxes. Management believes these claims lack merit.
- Derivative Liability: The company holds a derivative liability related to Ask Jeeves Convertible Subordinated Notes. A net unrealized gain of $4.3 million was recorded in Q1 2006 due to fair value changes. Conversions in January 2006 reduced the obligation to issue shares.
- Executive Departure: Mark Gunning resigned as CFO effective May 15, 2006, with accelerated vesting of RSUs.
Investor Verification Checklist
- Revenue Margin Trends: Verify the sustainability of the 125 basis point decline in revenue margin and the impact of airline commission pressures on future air revenue.
- Expense Trajectory: Monitor the continued rise in selling and marketing expenses as a percentage of revenue and the timeline for stabilization of general and administrative costs post-Spin-Off.
- Working Capital: Review the $734 million working capital deficit, which is structural due to the merchant booking model and the extinguishment of intercompany receivables upon Spin-Off.
- Derivative Exposure: Assess the remaining exposure to the Ask Jeeves Notes derivative liability ($36.2 million as of March 31, 2006) and its sensitivity to stock price fluctuations.
- Tax Litigation: Track the status of the new hotel occupancy tax lawsuits in Florida, South Carolina, and Georgia for potential financial impact.