Expedia Group, Inc. (Expedia, Inc.) - Q1 2008 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2008. Expedia, Inc. operates a global online travel marketplace offering products and services through brands including Expedia.com, Hotels.com, Hotwire.com, TripAdvisor Media Network, and eLong. The company serves leisure and corporate travelers in North America, Europe, and Asia Pacific.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 | Change |
|---|---|---|---|
| Revenue | $687.8 million | $550.5 million | +25% |
| Gross Profit | $535.9 million | $429.2 million | +25% |
| Gross Margin | 77.9% | 78.0% | -0.1% |
| Operating Income | $90.0 million | $67.3 million | +34% |
| Net Income | $51.3 million | $34.8 million | +47% |
| Diluted EPS | $0.17 | $0.11 | +55% |
| Operating Cash Flow | $563.8 million | $538.1 million | +5% |
| Cash & Equivalents | $697.9 million | $617.4 million (Dec 2007) | +13% |
| Long-Term Debt | $500.0 million | $500.0 million | 0% |
| Credit Facility Borrowed | $240.0 million | $585.0 million (Dec 2007) | -59% |
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 22% increase in worldwide merchant hotel revenue (due to a 23% rise in room nights) and an 18% increase in air revenue (11% more tickets sold).
- Expense Increases: Selling and marketing expenses rose 29% to $287.1 million, primarily due to increased direct online search spend and brand investment. Technology and content expenses increased 24% due to personnel growth and software amortization.
- Debt Reduction: The company repaid $345 million on its revolving credit facility during the quarter, reducing outstanding borrowings from $585 million to $240 million.
- Acquisitions: Expedia acquired three companies for $82 million in cash, recording $54 million in goodwill and $24 million in intangible assets.
- Segment Performance: North America revenue grew 22% and Europe revenue grew 33%. Operating Income Before Amortization (OIBA) increased 21% to $125.9 million.
Outlook, Risks, and Management Commentary
- Industry Trends: Management notes high crude oil prices and airline capacity reductions have led to higher fares, which may negatively impact traveler demand. Hotel occupancy rates are leveling off, and ADR growth slowed to 3% in Q1 2008 from 7% in 2007.
- Capital Expenditures: Total capital expenditures for 2008 are expected to be between $140 million and $150 million, driven by infrastructure improvements and office relocations.
- Liquidity: The company maintains a $1 billion credit facility with $694 million available. Management believes cash flows and available borrowings are sufficient for foreseeable needs.
- Legal Contingencies: Expedia is involved in litigation regarding hotel occupancy taxes in 39 cities/counties. A reserve of $19 million has been established for potential settlements. Management does not expect these to have a material adverse effect.
- Derivatives: The company holds derivative liabilities related to Ask Jeeves Notes ($10 million) and cross-currency swaps ($26 million).
Key Facts for Investor Verification
- Verify the sustainability of the 25% revenue growth given the headwinds of rising airfares and slowing hotel ADR growth.
- Monitor the impact of increased selling and marketing spend (41.7% of revenue) on future operating margins.
- Review the status of hotel occupancy tax litigation and the adequacy of the $19 million reserve.
- Assess the integration and performance of recent acquisitions totaling $82 million.
- Track the company's ability to maintain strong operating cash flows ($563.8 million) while funding significant capital expenditures and potential future acquisitions.