Business Context and Reporting Period
Company: Expedia, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Expedia operates a global travel marketplace offering products and services to leisure and corporate travelers through a portfolio of brands including Expedia.com, hotels.com, Hotwire.com, TripAdvisor Media Network, and Egencia. The company reorganized its reporting segments in Q1 2009 to align with global brands (Leisure, TripAdvisor Media Network, and Egencia).
Key Financial Metrics
| Metric (in millions) | Q3 2009 | Q3 2008 | YTD 9M 2009 | YTD 9M 2008 |
|---|---|---|---|---|
| Revenue | $852.4 | $833.3 | $2,257.9 | $2,316.2 |
| Operating Income | $223.0 | $199.6 | $430.6 | $460.1 |
| Net Income (Attributable to Expedia) | $117.0 | $94.8 | $197.3 | $242.2 |
| Diluted EPS | $0.40 | $0.33 | $0.68 | $0.83 |
| Operating Margin | 26.2% | 24.0% | 19.1% | 19.9% |
| Cash & Equivalents (Balance Sheet) | $838.6 (as of Sep 30, 2009) | |||
| Long-Term Debt | $894.9 (as of Sep 30, 2009) | |||
| Operating Cash Flow (YTD) | $820.3 | $767.5 |
Material Changes vs. Prior Period
- Revenue Growth: Q3 2009 revenue increased 2% year-over-year, driven by a 3% increase in the Leisure segment (higher hotel and car rental revenue) offset by an 8% decline in air revenue. YTD revenue decreased 3% due to lower airfares and hotel ADRs.
- Profitability: Operating income increased 12% in Q3 2009 due to improved expense management (lower selling/marketing and cost of revenue as a % of revenue) despite restructuring charges. YTD operating income declined 6% primarily due to significant legal and tax reserves.
- Debt Reduction: The company repaid the full $650 million balance on its revolving credit facility in Q1 2009. Total long-term debt stands at approximately $895 million (consisting of 8.5% notes due 2016 and 7.456% notes due 2018).
- Segment Performance:
- Leisure: Gross bookings increased 11% in Q3 but declined 2% YTD. Revenue margin decreased to 13.8% in Q3 (from 14.9%) due to fee eliminations and lower ADRs.
- Airline Sector: Revenue per air ticket dropped 28% in Q3 and 24% YTD due to the elimination of consumer booking fees and lower ticket prices, though ticket volumes increased.
- Hotel Sector: Average Daily Rates (ADRs) declined 17% YTD, reducing revenue per room night by 20%, partially offset by a 23% increase in room nights stayed.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items & Reserves:
- Restructuring: Recognized $13.8 million in Q3 and $28.6 million YTD related to brand reorganization and centralization. Total expected charges are less than $35 million.
- Legal & Tax Reserves: Recorded $74.2 million YTD for occupancy tax assessments and legal reserves. This includes $35 million paid to San Francisco and $19 million accrued for a consumer class action settlement (range estimated at $19M–$134M).
- Outlook & Risks:
- Macroeconomic Environment: Continued global economic downturn pressures discretionary travel spending.
- H1N1 Pandemic: Potential impact on travel demand, particularly to Mexico and in APAC regions, though specific magnitude is unpredictable.
- Airline Capacity: Reduced airline seat capacity and aggressive cost-cutting by carriers may limit supply and remuneration.
- Competition: Intense competition from suppliers (direct booking) and meta-search companies.
- Liquidity: The company maintains a $1 billion revolving credit facility with $958 million available. Management believes cash flows and available borrowings are sufficient for foreseeable needs.
Key Facts for Investor Verification
- Class Action Settlement: Verify the final approval status and exact payout amount of the consumer class action lawsuit (preliminarily approved Aug 2009, final hearing Dec 2009).
- Occupancy Tax Litigation: Monitor ongoing litigation in multiple jurisdictions (e.g., San Francisco, Los Angeles, San Diego) regarding hotel occupancy taxes, which could result in additional "pay-to-play" assessments or liability.
- Airline Remuneration: Assess the long-term impact of eliminating booking fees on air revenue per ticket and the company's ability to negotiate favorable terms with airlines and GDS providers in 2010-2011.
- Hotel ADR Trends: Track the recovery of Average Daily Rates (ADRs) and occupancy levels, as these are primary drivers of the company's largest revenue segment.
- Debt Covenants: Review the amended credit facility terms (Feb 2009) regarding the new minimum interest coverage covenant and leverage ratio requirements.