Expedia, Inc. 10-Q Summary: Quarter Ended September 30, 2008
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Expedia, Inc. for the period ended September 30, 2008. Expedia operates a global travel marketplace offering products and services through brands including Expedia.com, hotels.com, Hotwire.com, Egencia, TripAdvisor Media Network, and Venere (acquired in Q3 2008). The company serves leisure and corporate travelers in North America, Europe, and Asia Pacific.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | YTD 9M 2008 | YTD 9M 2007 |
|---|---|---|---|---|
| Revenue | $833.3 million | $759.6 million | $2,316.2 million | $2,000.0 million |
| Net Income | $94.8 million | $99.6 million | $242.2 million | $230.5 million |
| Diluted EPS | $0.33 | $0.32 | $0.83 | $0.72 |
| Operating Income | $199.6 million | $179.8 million | $460.1 million | $400.7 million |
| Gross Margin | 78.8% | 80.1% | 78.5% | 79.2% |
| Cash & Equivalents | $659.7 million (as of Sept 30, 2008) | |||
| Total Debt | $1.14 billion (Long-term debt + Credit facility) | |||
| Operating Cash Flow (9M) | $767.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 10% in Q3 and 16% YTD compared to 2007, driven by growth in merchant hotel revenue and advertising/media revenue. However, management noted a deceleration in revenue growth in September 2008.
- Profitability: Net income decreased slightly in Q3 ($94.8M vs $99.6M) due to higher interest expense and foreign exchange losses, despite a 11% increase in operating income. YTD net income increased 5%.
- Foreign Exchange Impact: Significant foreign exchange losses of $23.5 million in Q3 (vs $12.3 million in Q3 2007) impacted "Other, net" income, largely due to the strengthening U.S. dollar against the British pound and euro.
- Acquisitions: The company acquired Venere and other travel companies in the first nine months of 2008, totaling $458 million in purchase price. This contributed to goodwill and intangible assets.
- Debt Structure: In June 2008, Expedia issued $400 million of 8.5% senior notes due 2016. Total long-term debt increased from $500 million at year-end 2007 to $894.4 million, while credit facility borrowings decreased from $585 million to $250 million.
Guidance, Outlook, and Risks
- Outlook: Management expects slower revenue and gross booking growth to continue into the fourth quarter of 2008 due to worsening global economic conditions and financial market uncertainty.
- Industry Headwinds: The airline sector faces capacity reductions and fare increases, which negatively impact Expedia's air revenue per ticket. The hotel sector is experiencing declining occupancy rates and slower Average Daily Rate (ADR) growth.
- Liquidity Concerns: The company holds $80 million in redemptions from the Reserve Primary Fund, which "broke the buck" due to Lehman Brothers holdings. While an allowance for losses was recorded, the timing of full liquidation is uncertain.
- Capital Expenditures: Total capital expenditures for 2008 are expected to be between $140 million and $150 million.
- Legal Proceedings: Ongoing litigation regarding hotel occupancy taxes in various U.S. jurisdictions. A reserve of $20 million has been established for potential settlements.
Investor Verification Checklist
- Reserve Primary Fund Exposure: Verify the status of the $80 million investment in the Reserve Primary Fund and the likelihood of full recovery given the Lehman Brothers write-down.
- Revenue Deceleration: Monitor Q4 2008 results to confirm if the slowdown in revenue growth noted in September persists.
- Foreign Exchange Sensitivity: Assess the impact of continued U.S. dollar strength on European segment results and future hedging strategies.
- Hotel Occupancy Trends: Track occupancy rates and ADRs in key markets to gauge the health of the core merchant hotel business.
- Debt Servicing: Review the impact of the new 8.5% notes on future interest expense and cash flow requirements.