Expedia Group, Inc. 2009 Annual Report (10-K) Summary
Business Context and Reporting Period
This report covers the fiscal year ended December 31, 2009. Expedia, Inc. operates as a global online travel marketplace, facilitating bookings for leisure and corporate travelers through a portfolio of brands including Expedia.com, hotels.com, Hotwire.com, TripAdvisor Media Network, and Egencia. The company utilizes both merchant (merchant of record) and agency business models. In 2009, the company reorganized its reporting segments from geographic regions (North America/Europe) to three global brand-based segments: Leisure, TripAdvisor Media Network, and Egencia.
Key Financial Metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total Revenue | $2,955 million | $2,937 million | +1% |
| Operating Income | $571 million | ($2,429 million) | Significant Improvement |
| Net Income (Attributable to Expedia) | $300 million | ($2,518 million) | Significant Improvement |
| Diluted EPS | $1.03 | ($8.80) | N/A |
| Operating Cash Flow | $676 million | $521 million | +30% |
| Long-Term Debt | $895 million | $1,545 million | -$650 million |
| Cash & Equivalents | $643 million | $665 million | -$22 million |
| Working Capital | ($610 million) Deficit | ($367 million) Deficit | Widened |
Note: 2008 results included a non-cash impairment charge of approximately $3 billion related to goodwill and intangible assets.
Material Changes vs. Prior Period
- Profitability Recovery: The company returned to profitability in 2009, contrasting sharply with the 2008 net loss driven by a $3 billion impairment charge. Operating income improved from a loss of $2.4 billion to a profit of $571 million.
- Revenue Composition: While total revenue remained relatively flat (+1%), the mix shifted. Worldwide hotel revenue increased 2% (driven by a 23% increase in room nights), while air revenue decreased 13% due to lower fares and the elimination of consumer booking fees on Expedia.com.
- Debt Reduction: The company repaid $650 million of borrowings under its credit facility, reducing total long-term indebtedness from $1.545 billion to $895 million.
- Segment Reorganization: Reporting shifted to Leisure, TripAdvisor Media Network, and Egencia to better reflect global brand management.
Guidance, Outlook, and Risks
Management Commentary: Management noted that while macroeconomic trends stabilized, unemployment remained high and consumer spending pressured. The company eliminated booking fees on air tickets to remain competitive, which reduced revenue per ticket but increased volume. Advertising and media revenue grew 10% in 2009.
Outlook: The company expects selling and marketing expenses to increase as a percentage of revenue in 2010 due to relocation costs for its lodging supply group. However, cost of revenue and general/administrative expenses are expected to decrease as a percentage of revenue.
Key Risks and Contingencies:
- Hotel Occupancy Tax Litigation: Expedia faces numerous lawsuits from municipalities regarding the collection and remittance of hotel occupancy taxes. In 2009, the company paid $48 million to the City of San Francisco under "pay-to-play" provisions to pursue litigation. A reserve of $21 million was established for potential settlements.
- Consumer Class Action: A settlement was reached regarding a class action lawsuit in Washington alleging breach of contract regarding service fees. The company accrued $19 million for this settlement.
- Competition and Supplier Relations: Risks include intense competition from suppliers selling direct, changes in airline remuneration, and the potential for suppliers to reduce or eliminate payments to intermediaries.
- Foreign Exchange: The company faces exposure to currency fluctuations, particularly the Euro, British Pound, and Chinese Renminbi.
Investor Verification Checklist
- Tax Litigation Exposure: Verify the status of the San Francisco occupancy tax litigation and the potential for "pay-to-play" assessments in other jurisdictions (e.g., Los Angeles, Anaheim).
- Revenue Margin Trends: Monitor the impact of fee eliminations on air revenue and the ability to offset this with growth in hotel and advertising margins.
- Debt Covenants: Review the terms of the new $750 million credit facility (agreed Feb 2010) and the impact of leverage ratios on future borrowing capacity and dividend payments.
- Impairment History: Assess the stability of goodwill and intangible assets given the $3 billion write-down in 2008 and the current economic environment.
- Segment Performance: Analyze the specific performance of the TripAdvisor Media Network segment, which is growing but has different margin characteristics than the transaction-based Leisure segment.