Business Context and Reporting Period
Company: Expedia, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Expedia is a global online travel company operating a portfolio of brands including Expedia.com, hotels.com, Hotwire.com, TripAdvisor Media Network, Egencia, and eLong. The company facilitates travel bookings for leisure and corporate travelers through merchant and agency business models. As of December 31, 2008, the company employed approximately 8,050 people.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Revenue | $2,937 million | $2,665 million |
| Operating Income (Loss) | $(2,429) million | $529 million |
| Net Income (Loss) | $(2,518) million | $296 million |
| Diluted EPS | $(8.63) | $0.94 |
| Operating Cash Flow | $521 million | $712 million |
| Long-Term Debt | $1,545 million | $1,085 million |
| Cash and Cash Equivalents | $665 million | $617 million |
| Working Capital (Deficit) | $(367) million | $(729) million |
Note: The 2008 results include a non-cash impairment charge of approximately $3 billion related to goodwill, intangible, and other long-lived assets.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 10% year-over-year to $2.94 billion, driven by a 6% increase in worldwide hotel revenue and a 55% increase in advertising and media revenue.
- Profitability Decline: The company reported a significant operating loss of $2.43 billion in 2008 compared to an operating income of $529 million in 2007. This reversal was primarily due to the $3 billion impairment charge.
- Debt Increase: Long-term indebtedness rose to $1.545 billion from $1.085 billion, reflecting the issuance of $400 million in 8.5% senior notes in June 2008 and increased borrowings under the revolving credit facility.
- Stock Performance: The stock price declined significantly, trading at a low of $6.00 in the fourth quarter of 2008, compared to a high of $31.88 in the first quarter.
Guidance, Outlook, and Risks
Management Commentary: Management noted that the global economic downturn beginning in September 2008 pressured discretionary spending on travel and advertising. While gross bookings increased 8% in 2008, the company faces challenges from declining Average Daily Rates (ADRs) in the hotel sector and reduced airline capacity. Management expects to reorganize reporting segments from a geographic basis to a global brand basis starting in the first quarter of 2009.
Key Risks and Contingencies:
- Hotel Occupancy Tax Litigation: The company is involved in numerous lawsuits and audits with various municipalities regarding hotel occupancy taxes. A reserve of $20 million was established for potential settlements. Specific assessments include approximately $8.2 million in taxes plus penalties from the City of Anaheim.
- Liquidity and Credit Facilities: The company's $1 billion revolving credit facility expires in August 2010. In February 2009, the facility was amended to tighten leverage ratios and increase borrowing costs by 200 basis points due to credit market conditions.
- Foreign Exchange: Significant volatility in foreign exchange rates resulted in a net loss of $47 million in 2008, impacting results of operations.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used in the $3 billion goodwill and intangible asset impairment, specifically regarding the fair value of reporting units and the impact of the stock price decline.
- Tax Liability Exposure: Assess the potential financial impact of ongoing hotel occupancy tax litigation and the "pay to play" assessments in California and other jurisdictions.
- Debt Covenants: Review the amended credit facility terms (February 2009) to ensure compliance with the new minimum interest coverage covenant and tightened leverage ratio.
- Working Capital Trends: Monitor the trend in working capital, which remains in deficit, and the company's ability to manage cash flows given the shift in business models and payment terms with suppliers.