Exhibit 99.1
Expedia, Inc. Reports Third Quarter Results
BELLEVUE, Wash.—November 3, 2005—Expedia, Inc. (Nasdaq: EXPE) today announced financial results for its third quarter ended September 30, 2005.
“Expedia, Inc. delivered solid bookings and profit growth in its foundational quarter as an independent public company,” said Expedia, Inc. Chairman Barry Diller. “With over $15 billion in gross bookings and more than $2 billion in revenue over the last twelve months, the Company has established itself as a premier e-tailer and travel company with truly global aspirations.”
“Our continued investments in improving our customer experience and supplier relationships have paid off this quarter in our fastest merchant hotel revenue growth since the third quarter of 2004,” said Dara Khosrowshahi, Expedia, Inc.’s CEO and President. “We have continued on that path in the second half of 2005 by re-designing our Expedia.com and Hotels.com sites to improve ease of use and launching our biggest holiday promotion ever — our customers save $150 off the vacation they really want to take next year by booking their holiday travel with Expedia.com.”
Financial Summary (figures in $MM’s)
3 Months Ended September 30, 2005 | 3 Months Ended September 30, 2004 | Y / Y Growth | ||||||
Gross bookings | $ | 3,937.2 | $ | 3,265.8 | 21% | |||
Revenue | 584.7 | 503.8 | 16% | |||||
Gross profit | 456.6 | 399.1 | 14% | |||||
Operating income before amortization * | 183.5 | 159.6 | 15% | |||||
Operating income | 148.6 | 80.3 | 85% | |||||
Adjusted net income * | 126.9 | 110.2 | 15% | |||||
Net income | 82.0 | 58.1 | 41% |
* | “Operating income before amortization” and “Adjusted net income” are non-GAAP measures as defined by the Securities and Exchange Commission. Please see “Definitions of Non-GAAP Measures” and “Tabular Reconciliations for Non-GAAP Measures” for an explanation of non-GAAP measures used throughout this release. Please also see “Basis of Presentation” below for additional information on financial results presented throughout this release. |
Discussion of Results
Gross Bookings & Revenue
Gross bookings increased 21% for the third quarter 2005 compared with third quarter 2004, with domestic gross bookings up 16% and international gross bookings up 39% versus the prior year quarter. Our results were impacted by hurricane and terrorist activity during the quarter.
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Revenue grew 16% during the quarter, primarily driven by increased worldwide merchant hotel revenue, acquisitions and growth in our car rental business. Third quarter domestic revenue increased 10%, and international revenue grew 43%.
Worldwide merchant hotel revenue increased 15%, the highest rate of growth since third quarter 2004. The increase was fueled by 13% growth in room nights stayed, including rooms delivered as a component of vacation packages. Revenue per room night increased 2%, resulting from a 7% increase in average daily rates (“ADRs”), partially offset by a decrease in hotel margins (defined as hotel net revenue as a percentage of hotel gross bookings).
Worldwide air revenues increased 3% during the quarter, due to a 13% increase in air tickets sold, partially offset by a 9% decline in revenue per air ticket.
Revenue as a percentage of gross bookings (“revenue margin”) was 14.8% for the third quarter, down 58 basis points compared with third quarter 2004, due primarily to lower domestic air revenue per ticket and lower domestic hotel margins, partially offset by higher margins in our car rental and destination services businesses. In addition, average airfares increased 7% year-over-year, which has the effect of increasing gross bookings without a corresponding increase in our per ticket air revenues.
Revenue margin was up 144 basis points sequentially compared with second quarter 2005 due to seasonality, a higher mix of merchant hotel business, lower airfares and higher margins in our car rental and destination services businesses.
Profitability
Gross profit for the third quarter was $457 million, up $58 million, or 14% from third quarter 2004. Gross margin was down 112 basis points to 78.1%, 92 basis points of which were due to our February 2005 acquisition of a destination services company which historically has had lower gross margins than our core business.
Operating Income Before Amortization (“OIBA”) grew 15% to $184 million, driven by higher revenue and lower sales and marketing expense as a percentage of revenue, partially offset by lower gross margin and higher general and administrative and technology and content expense as a percentage of sales. OIBA growth was 18% excluding the prior year benefit of a $4.4 million net adjustment primarily for the reversal of an excise tax reserve.
Operating income grew 85% during the quarter to $149 million. Operating income growth significantly exceeded OIBA growth primarily due to a $30 million net credit adjustment to non-cash compensation due largely to a change in estimate in our expected forfeiture rate for equity awards and a decrease in non-cash compensation from year-ago levels.
Adjusted net income and net income for the third quarter 2005 compared to the same period in 2004 increased by $17 million and $24 million respectively, both due primarily to increases in operating income and interest income, partially offset by correspondingly higher taxes. Additionally, net income was reduced by $23 million due to a write-off of an investment, partially offset by unrealized gains of $12 million on derivative liabilities. Adjusted EPS was $0.35 for the third quarter, and diluted EPS was $0.23.
For additional information on the adjustment to non-cash compensation, the investment write-off and our derivative liabilities, please see the “Income Statement Notes” and “Balance Sheet Notes” elsewhere in this release.
Cash Flows & Working Capital
For the nine months ended September 30, 2005, net cash provided by operating activities was $944 million. Free cash flow (a non-GAAP measure which equals net cash provided by operating activities less capital expenditures) was $903 million. Both net cash provided by operating activities and free cash flow for the nine months ended September 30, 2005 include $543 million from the change in accounts payable, accrued liabilities and deferred merchant bookings.
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Quarterly Highlights
• | For the first time, worldwide gross bookings for a trailing twelve month period exceeded $15 billion, and revenue exceeded $2 billion. |
• | Expedia, Inc.’s international points of sale in Canada, the United Kingdom, Germany, France, Italy, the Netherlands, China and other countries accounted for 23% of gross bookings and 22% of revenue in the third quarter, up from 19% of gross bookings and 18% of revenue in the prior year period. |
• | Hotels.com continued its ‘hotel expert’ brand evolution, re-launching its U.S. website with a “We know hotels inside and out” bellman logo. The new site design offers customers virtual property tours, guest reviews, advanced filtering and a compare feature to line up hotels side-by-side to compare amenities, location, prices, ratings and more. Gross bookings for Hotels.com increased 9% compared with the third quarter of 2004. |
• | Expedia, Inc. customers worldwide can now book reservations with more than 70,000 hotel properties in 1,500 markets, including over 24,000 merchant hotel properties. More than 5,000 of these properties are fully direct-connected, offering real-time availability, rates and inventory on our websites, benefiting Expedia’s customers and suppliers. |
• | Expedia, Inc. expanded its European hotel selection through global agreements with Hilton International (“HI”) and Golden Tulip Hospitality. Under our agreement, HI may add up to 400 properties to Expedia’s preferred hotel program. The Golden Tulip agreement provides Expedia.com and Hotels.com customers with enhanced access and connectivity to more than 400 properties from Golden Tulip and its alliance partners, including Golden Tulip, Pacific International Suites, Pensione, Plaza Hotels and Grand Pacific hotels. |
• | Expedia.com’s customers have created over 75,000 reviews of actual paid hotel stays covering over 12,000 distinct properties since the feature launched in early 2005. Traveler reviews provide valuable, differentiated content to Expedia.com customers, leveraging Expedia’s scale in traffic and customers. |
• | Expedia Corporate Travel (“ECT”) announced that it intends to launch ECT Canada in the first quarter of 2006. The Canadian site will build upon ECT’s current service footprint in the United States, France, the United Kingdom, Belgium, Netherlands and Luxembourg. ECT also introduced more than 20 powerful and highly configurable new product enhancements to its EPower™ service platform including 3D Fare Display, an on-demand tool that gives travel bookers a broader view of multiple fares as they’re searching for flights, as well as enhancements to EPower’s ™ automated seat search and upgrade features. |
• | TripAdvisor, the leading global travel information and advice destination (www.tripadvisor.com), has increased its travel reviews and opinions by more than 50% since the second quarter to more than 3 million. These reviews and opinions cover more than 300,000 hotels, restaurants and attractions worldwide. Travelers have also submitted over 120,000 photographs covering 14,000 hotels. Expedia, Inc.’s brand portfolio is leveraging TripAdvisor’s content by including reviews and opinions for select properties on Hotels.com’s redesigned website. |
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EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Revenue | $ | 584,653 | $ | 503,793 | $ | 1,624,706 | $ | 1,404,014 | ||||||||
Cost of revenue | 128,072 | 104,722 | 360,474 | 293,952 | ||||||||||||
Gross profit | 456,581 | 399,071 | 1,264,232 | 1,110,062 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling and marketing | 185,421 | 177,863 | 542,173 | 523,999 | ||||||||||||
General and administrative | 58,895 | 39,154 | 146,209 | 113,976 | ||||||||||||
Technology and content | 28,741 | 22,444 | 81,349 | 61,686 | ||||||||||||
Amortization of non-cash distribution and marketing | 5,138 | 3,256 | 9,055 | 13,027 | ||||||||||||
Amortization (recovery) of non-cash compensation | (1,009 | ) | 44,350 | 79,899 | 134,394 | |||||||||||
Amortization of intangibles | 30,756 | 31,743 | 94,204 | 92,520 | ||||||||||||
Operating income | 148,639 | 80,261 | 311,343 | 170,460 | ||||||||||||
Other income (expense): | ||||||||||||||||
Net interest income | 17,968 | 9,303 | 47,479 | 23,611 | ||||||||||||
Write-off of long-term investment | (23,426 | ) | — | (23,426 | ) | — | ||||||||||
Other | 7,379 | 5,398 | 11,889 | 2,906 | ||||||||||||
Total other income, net | 1,921 | 14,701 | 35,942 | 26,517 | ||||||||||||
Earnings before income taxes and minority interest | 150,560 | 94,962 | 347,285 | 196,977 | ||||||||||||
Income tax expense | (69,026 | ) | (37,455 | ) | (143,895 | ) | (77,737 | ) | ||||||||
Minority interest in loss of consolidated subsidiaries | 501 | 585 | 106 | 113 | ||||||||||||
Net income | $ | 82,035 | $ | 58,092 | $ | 203,496 | $ | 119,353 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.24 | $ | 0.17 | $ | 0.61 | $ | 0.36 | ||||||||
Diluted | $ | 0.23 | $ | 0.17 | $ | 0.59 | $ | 0.35 | ||||||||
Shares used in computing earnings per share: | ||||||||||||||||
Basic | 336,409 | 335,540 | 335,833 | 335,540 | ||||||||||||
Diluted | 353,351 | 340,549 | 344,819 | 340,549 |
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EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2005 | December 31, 2004 | |||||
(Unaudited) | (Audited) | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 227,875 | $ | 154,957 | ||
Restricted cash and cash equivalents | 32,800 | 600 | ||||
Marketable securities | 25 | 1,000 | ||||
Accounts and notes receivable, net of allowance of $4,026 and $2,338 | 180,622 | 143,905 | ||||
Receivables from IAC/InterActiveCorp and subsidiaries | — | 1,874,745 | ||||
Deferred income taxes | 8,874 | 8,696 | ||||
Prepaid merchant bookings | 52,868 | 28,151 | ||||
Prepaid expenses | 61,640 | 33,803 | ||||
Total current assets | 564,704 | 2,245,857 | ||||
Property and equipment, net | 85,866 | 81,426 | ||||
Long-term investments and other | 45,717 | 140,432 | ||||
Intangible assets, net | 1,204,757 | 1,279,361 | ||||
Goodwill | 5,875,132 | 5,790,111 | ||||
TOTAL ASSETS | $ | 7,776,176 | $ | 9,537,187 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable, merchant | $ | 650,536 | $ | 429,739 | ||
Accounts payable, trade | 127,908 | 98,666 | ||||
Deferred merchant bookings | 559,051 | 361,199 | ||||
Deferred revenue | 7,847 | 5,353 | ||||
Income tax payable | 7,716 | 421 | ||||
Other current liabilities | 88,148 | 86,801 | ||||
Total current liabilities | 1,441,206 | 982,179 | ||||
Deferred income taxes | 381,463 | 333,696 | ||||
Derivative liabilities | 91,407 | 12,812 | ||||
Other long-term liabilities | 38,450 | 37,436 | ||||
Minority interest | 71,070 | 18,435 | ||||
Commitments and contingencies | ||||||
Total stockholders’ equity | 5,752,580 | 8,152,629 | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 7,776,176 | $ | 9,537,187 | ||
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EXPEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
2005 | 2004 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 203,496 | $ | 119,353 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 37,869 | 32,701 | ||||||
Amortization of non-cash distribution and marketing | 9,055 | 13,027 | ||||||
Amortization of non-cash compensation | 79,899 | 134,394 | ||||||
Amortization of intangibles | 94,204 | 92,520 | ||||||
Amortization of premium on investment securities | — | 161 | ||||||
Deferred income taxes | 29,948 | (25,563 | ) | |||||
Unrealized gain on derivative instruments | (12,000 | ) | — | |||||
Equity in income of unconsolidated affiliates | (870 | ) | (116 | ) | ||||
Minority interest in loss of consolidated subsidiaries | (106 | ) | (113 | ) | ||||
Write-off of long-term investment | 23,426 | — | ||||||
Other | 690 | — | ||||||
Changes in current assets and current liabilities: | ||||||||
Accounts and notes receivable | (28,468 | ) | 10,355 | |||||
Prepaid merchant bookings and prepaid expenses | (39,047 | ) | (32,502 | ) | ||||
Accounts payable and accrued liabilities | 345,909 | 203,461 | ||||||
Deferred merchant bookings | 197,154 | 167,421 | ||||||
Deferred revenue | 2,494 | (3,108 | ) | |||||
Other, net | — | 2,549 | ||||||
Net cash provided by operating activities | 943,653 | 714,540 | ||||||
Cash flows used in investing activities | ||||||||
Acquisitions, net of cash acquired | 11,515 | (261,312 | ) | |||||
Capital expenditures | (40,859 | ) | (37,499 | ) | ||||
Purchase of marketable securities | (30 | ) | (5,015 | ) | ||||
Proceeds from sale of marketable securities | 1,000 | 722,646 | ||||||
Increase in long-term investments and deposits | (2,379 | ) | (56,580 | ) | ||||
Transfers to IAC/InterActiveCorp, net | (766,760 | ) | (1,496,467 | ) | ||||
Other, net | (2,937 | ) | (5,080 | ) | ||||
Net cash used in investing activities | (800,450 | ) | (1,139,307 | ) | ||||
Cash flows used in financing activities | ||||||||
Proceeds from exercise of stock options | 20,458 | — | ||||||
Changes in restricted cash and cash equivalents | (36,462 | ) | — | |||||
Contribution from (distribution to) IAC/InterActiveCorp, net | (52,844 | ) | 401,888 | |||||
Other, net | (2,601 | ) | (1,108 | ) | ||||
Net cash used in financing activities | (71,449 | ) | 400,780 | |||||
Effect of exchange rate changes on cash and cash equivalents | 1,164 | (2,425 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 72,918 | (26,412 | ) | |||||
Cash and cash equivalents at beginning of period | 154,957 | 188,639 | ||||||
Cash and cash equivalents at end of period | $ | 227,875 | $ | 162,227 | ||||
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Income Statement Notes
Revenue
• | Expedia, Inc. makes travel products and services available through two business models: the merchant model and the agency model. |
• | Under the merchant model, we facilitate the booking of travel products and services from our travel suppliers, and serve as the merchant of record. Merchant transactions typically produce a higher level of net revenues per transaction. Merchant revenues are generally recognized when the customer uses the travel product or service, as opposed to when the travel product or service is booked. Merchant revenues are derived from the difference between amounts paid to the travel suppliers and the amounts paid by the consumer. |
• | Under the agency model, Expedia, Inc. acts as agent in the transaction, passing reservations booked by customers to the relevant travel supplier. Expedia, Inc. receives a commission or ticketing fee from the travel supplier for its services under the agency model. In agency transactions the supplier sets the price to be paid by the consumer and the travel supplier appears as merchant of record for the transaction. Agency revenues are typically recognized at the time the reservation is booked. Agency revenues are derived primarily from commissions and ticketing fees from travel suppliers, revenues from GDS’s and fees from leisure and corporate travelers. |
• | Agency gross bookings were 58% of total gross bookings for both the three and nine month periods ended September 30, 2005, compared with 57% for the prior year periods. |
Expense Reclassifications
• | As previously disclosed in our October 25, 2005 8-K/A filing with the SEC, we have reclassified certain expense amounts relating to prior periods’ results to conform to our 2005 presentation of results. The reclassifications did not affect our financial position, cash flows, revenue, operating income, operating income before amortization or net income for any periods. |
Cost of Revenue
• | Cost of revenue consists of: (1) credit card merchant fees; (2) fees paid to our fulfillment vendors for processing of airline tickets and related customer services; (3) reserves and related payments to airlines for tickets purchased with fraudulent credit cards; (4) allocated and direct costs of our data and call centers and (5) costs paid to suppliers for certain destination inventory. |
• | Cost of revenue as a percentage of revenue was 22% for each of the three and nine month periods ended September 30, 2005, compared with 21% for the comparable prior year periods. The increases are largely due to lower gross margin revenues associated with an acquired destination services provider which records its ticketing sales on a gross basis, which we have consolidated as of its acquisition in February 2005. |
Operating Expenses
• | Operating expenses as a percentage of revenue for the three and nine month periods were as follows(differences due to rounding): |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Selling and marketing | 31.7 | % | 35.3 | % | 33.4 | % | 37.3 | % | ||||
General and administrative | 10.1 | % | 7.8 | % | 9.0 | % | 8.1 | % | ||||
Technology and content | 4.9 | % | 4.5 | % | 5.0 | % | 4.4 | % | ||||
Total | 46.7 | % | 47.5 | % | 47.4 | % | 49.8 | % |
• | Operating expenses include depreciation expense of $12 million and $29 million for the three and nine month periods ended September 30, 2005, and $8 million and $23 million for the comparable prior year periods. The remainder of depreciation expense is captured in cost of revenue. |
Selling and Marketing
• | Selling and marketing expenses consist primarily of advertising and distribution expenses as well as personnel-related costs. Our distribution channels include Internet portals, search engines and our private label and affiliate programs. |
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• | While year-to-date sales and marketing expense has increased 3%, we expect a significantly larger year-over-year increase in the fourth quarter as we strategically shift marketing spend later in the year. |
• | While we are focused on optimizing the efficiency of our sales and marketing channels, we expect absolute amounts spent in sales and marketing to increase over time due to continued expansion of our international businesses, which have a higher sales and marketing cost relative to revenue due to their comparatively early stages of development, as well as increases in search-related costs, increased marketing volume and higher costs of traffic acquisition online. |
General and Administrative
• | General and administrative expense consists primarily of (1) personnel-related costs for support functions that include our executive leadership, finance, legal, tax and human resources functions, and (2) fees for professional services that include legal, tax and accounting. |
• | Year-to-date general and administrative expense has increased 28% as we increased our use of professional services and built our executive teams and supporting staff levels largely as a result of becoming a stand-alone public company. We expect absolute amounts spent on corporate personnel and professional service to increase over time as we add headcount and continue incurring incremental costs as a stand-alone public company. |
Technology and Content
• | Technology and content expense includes research and development consisting primarily of product development expenses such as payroll and related expenses for localization, and amortization of website development costs. |
• | Given the increasing complexity of our business, geographic expansion, initiatives in corporate travel, increased supplier integration, service-oriented architecture improvements and other initiatives, we expect absolute amounts spent in technology and content to increase over time. |
Amortization of Non-Cash Compensation Expense
• | Amortization of non-cash compensation expense relates primarily to expense for restricted stock units and stock options. Since February 2003, we have awarded restricted stock units as our primary form of stock-based compensation. Our stock-based awards generally vest over periods between four and five years. |
• | Non-cash compensation contra-expense for the third quarter was $1 million, consisting of $29 million in expense primarily related to stock options expense, offset by a $30 million net credit due to a change in our forfeiture rate assumption for equity awards, partially offset by a modification charge on equity awards related to the Spin-Off. |
• | We refined our forfeiture assumptions based on actual award forfeitures by employees, which was greater than the assumption used in the historical calculation of non-cash compensation expense. While this is an area of significant judgment, we will continually assess our forfeiture assumption in light of actual experience and do not anticipate a change of this magnitude in the future. |
• | Assuming, among other things, that our stock price does not vary widely from present levels, we anticipate quarterly amortization of non-cash compensation expense will decrease from levels recorded in the first two quarters of 2005 as higher value options are amortized and replaced by lower value restricted stock unit expense. |
• | We will adopt SFAS 123(R) (“Share Based Payment”) in the first quarter of 2006. We do not expect 123(R) will have a material effect on our results of operations or financial position. |
• | At September 30, 2005, there were approximately 43.5 million stock-based awards outstanding, consisting of 38 million stock options with a $13.38 weighted average exercise price and a weighted average remaining life of 3.6 years, and 5.5 million restricted stock units. |
• | We granted 30,000 stock awards during the third quarter, consisting of restricted stock units. Year-to-date Expedia, Inc. and IAC/InterActiveCorp. (“IAC”) have granted approximately 7 million stock awards to Expedia employees, consisting of 3.8 million options with a five-year cliff vest granted to our Chairman with a weighted average exercise price of $32.12, and approximately 3 million restricted stock units granted to other employees. |
Net Interest Income
• | The Company’s reduced cash balance versus historical amounts will result in reduced interest income in the near-term compared with what has been recorded in the historical combined statements of income. |
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Income Taxes
• | From January 1, 2005 through the Spin-Off, we were a member of the IAC consolidated tax group. Accordingly, we will file a federal income tax return and certain state income tax returns on a combined basis for this period. IAC will settle the income tax liability related to these filings; as such, these amounts are not included in our income taxes payable. As of September 30, 2005, our current income tax payable represents amounts that we will settle with the Internal Revenue Service and other tax authorities based on our income taxes after the Spin-Off. |
• | We have computed income taxes using our stand-alone tax rate. |
• | The effective tax rate for income from adjusted net income was 36% for the three and nine months ended September 30, 2005 compared to 37% in the prior year periods. Third quarter effective tax rates were higher than the federal statutory rate of 35% principally due to state taxes. |
• | Third quarter 2004 effective tax rates were higher than the federal statutory rate principally due to state taxes and foreign losses for which no tax benefit was recognized. |
Foreign Exchange
• | As Expedia, Inc.’s reporting currency is the U.S. Dollar, reported financial results are impacted from strength or weakness in the U.S. dollar in comparison to the currencies of our international websites. Management believes investors may find it useful to assess 2005 growth rates with and without the impact of foreign exchange. The estimated impact of foreign exchange was as follows (amounts may not add due to rounding): |
Three months ended September 30, Y/Y growth | Y/Y growth rates excluding foreign exchange movements | Impact on Y/Y growth rates from foreign exchange movements | Nine months ended September 30, 2005 Y/Y growth | Y/Y growth rates excluding foreign exchange movements | Impact on Y/Y growth rates from foreign exchange movements | |||||||
Revenue | 16.1% | 16.7% | -0.7% | 15.7% | 15.9% | -0.2% | ||||||
Operating Income | 85.2% | 90.0% | -4.8% | 82.6% | 87.9% | -5.3% | ||||||
Operating Income Before Amortization | 15.0% | 17.4% | -2.4% | 20.5% | 22.7% | -2.2% |
Acquisitions & Investments
• | A number of acquisitions and investments were completed during 2004 and 2005 that impacted financial results during the time periods included in this release, specifically our acquisitions and investments in TripAdvisor, Egencia (ECT Europe), Activity World, WTM (ECT U.K.), eLong and Premier Getaways. |
• | Management believes that investors may find it useful to assess 2005 growth rates with and without the impact of acquisitions and investments. The estimated impact of these acquisitions and investments was as follows: |
Three months ended September 30, Y/Y growth | Y/Y growth rates excluding acquisitions and investments | Impact on Y/Y growth rates from acquisitions and investments | Nine months ended September 30, 2005 Y/Y growth | Y/Y growth rates excluding acquisitions and investments | Impact on Y/Y growth rates from acquisitions and investments | |||||||
Revenue | 16.1% | 13.0% | 3.1% | 15.7% | 11.5% | 4.2% | ||||||
Operating Income | 85.2% | 87.8% | -2.6% | 82.6% | 78.2% | 4.4% | ||||||
Operating Income Before Amortization | 15.0% | 15.8% | -0.8% | 20.5% | 17.4% | 3.1% |
Balance Sheet Notes
Cash, Cash Equivalents, Current Restricted Cash and Marketable Securities
• | Cash, cash equivalents, current restricted cash and marketable securities were $261 million at September 30, 2005. |
• | The $33 million of current restricted cash and cash equivalents primarily relates to agency air revenue transactions. |
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Receivables from IAC/InterActiveCorp.
• | In connection with the Spin-Off, we extinguished all intercompany receivable balances from IAC by recording a distribution to IAC according to the terms of a separation agreement between IAC and Expedia, as explained in further detail in the Company’s Registration Statement on Form S-4, filed on June 17, 2005. |
Accounts & Notes Receivable
• | Accounts and notes receivable include credit card receivables generally due within two to three days from our agency transactions, which are generally due within 30 days from our airlines, global distribution and hotel suppliers. |
• | These receivables generally track with our gross bookings pattern, building throughout the first half of the year and decreasing in the second half as bookings activity subsides. |
Prepaid Expenses
• | Prepaid expenses are primarily composed of prepaid marketing. The increase reflects our decision to weight our marketing spend later in the year. |
Goodwill & Intangible Assets, net
• | Goodwill and intangible assets, net relates primarily to the Company’s acquisitions of Hotels.com, Expedia.com and Hotwire. |
• | Amortization of intangible assets with definite lives was $31 million and $94 million for the three and nine months ended September 30, 2005, compared with $32 million and $93 million for the three and nine month periods ended September 30, 2004. These amounts are generally not deductible for tax purposes. |
Long-Term Investments and Other
• | The reduction in long-term investments at September 30, 2005 versus December 31, 2004 reflects our consolidation of eLong after exercising our warrants to increase our ownership to 59% on an outstanding basis and the Company’s write-off of an investment of $23 million after making a determination that the decline in value of our investment was other than temporary, partially offset by our 50% ownership interest in an aircraft through a capital contribution from IAC/InterActiveCorp. |
Deferred Merchant Bookings and Accounts Payable, Merchant
• | Deferred merchant bookings consist of amounts received from customers who have not yet traveled. Merchant revenue is generally not recognized until travel is initiated. |
• | The payment to suppliers related to these bookings is not made until approximately one week after booking for air travel and, for all other merchant bookings, after the customer’s use and subsequent billing from the supplier. Therefore, especially for merchant hotel, which represents the majority of Expedia’s overall merchant bookings, there is generally some period of time from the receipt of cash from customers to supplier payment. |
• | As long as the merchant hotel business continues to grow positively, as it has historically, and our business model does not change, we expect that the change in working capital will continue to be positive. If this business declines or if the model changes, it would negatively affect our working capital. |
• | For the nine months ended September 30, 2005, the change in deferred merchant bookings and accounts payable and accrued liabilities contributed $543 million to cash flow from operating activities. |
Revolving Credit Facility
• | On July 11, 2005, we entered into a $1 billion five-year unsecured revolving credit facility with a group of lenders. The revolving facility bears interest based on our financial leverage, and is currently at a rate equal to LIBOR plus .50%. The revolving credit facility also contains financial covenants consisting of a leverage ratio and a minimum net worth. As of September 30, 2005 we were in compliance with all covenants. |
• | Expenses associated with the facility were less than $1 million during the third quarter and are classified in net interest income on the statements of income. There was no outstanding balance on the facility at September 30, 2005. We expect to utilize the revolver during the fourth quarter of 2005 as our gross bookings reach their seasonal low and our accounts payable from merchant bookings come due. |
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Derivative Liabilities
• | In connection with IAC’s acquisition of Ask Jeeves, we are obligated to issue shares of Expedia, Inc. common stock (or pay cash in equal value) to holders of Ask Jeeves convertible notes. We estimate that we may be required to issue up to 4.3 million shares of Expedia, Inc. common stock upon conversion. The estimated fair value of this obligation at September 30, 2005 was $88 million, recorded as a derivative liability on our balance sheet. |
• | For the three and nine months ended September 30, 2005, we recorded unrealized gains of $12 million principally related to the Ask Jeeves liability due to the decrease in our share price during the third quarter. These gains are recorded in “other income” on our statements of income. |
• | We anticipate recording a quarterly gain or loss in future quarters as we adjust the fair value of these long-term liabilities due to fluctuations in our stock price. The size or incidence of such gains or losses is not predictable. |
Series A Cumulative Convertible Preferred Stock (“Preferred Stock”)
• | We have fewer than 1,000 shares of preferred stock outstanding with an aggregate face value of less than $20,000. |
Expedia Class B Common Stock
• | There are approximately 26 million shares of Expedia Class B common stock outstanding. |
• | The holders of Class B common stock are entitled to one vote when voting separately as a class, and ten votes when voting together as a single group with the holders of Expedia common stock and Expedia preferred stock. |
• | Our Chairman has general voting authority for the Class B common stock. |
Warrants
• | As of September 30, 2005 Expedia, Inc. had approximately 59 million warrants outstanding, which if exercised in full would entitle their holders to acquire approximately 35 million common shares of Expedia, Inc. for an aggregate purchase price of approximately $775 million (average $22.28 per Expedia, Inc. common share). |
• | There are approximately 32 million warrants related to the Vivendi Universal transaction completed by IAC/InterActiveCorp in 2002. There are two tranches of these warrants, both of which expire in 2012: |
• | Approximately 24 million warrants entitle the holders to acquire 1/2 share of Expedia, Inc. at an exercise price of $12.23. If exercised in full, the warrants would entitle their holders to approximately 12 million Expedia, Inc. common shares. |
• | Approximately 8 million warrants entitle the holders to acquire 1/2 share of Expedia, Inc. at an exercise price of $14.45. If exercised in full, the warrants would entitle their holders to approximately 4 million Expedia, Inc. common shares. |
• | There are approximately 26 million warrants that are publicly-traded on Nasdaq under the ticker symbols “EXPEW” and “EXPEZ.” Both issues expire in February 2009. |
• | There are approximately 15 million EXPEW warrants outstanding. Each warrant entitles the holder to acquire 1/2 share of Expedia, Inc. at an exercise price of $15.61. If exercised in full, the warrants would entitle their holders to approximately 7 million Expedia, Inc. common shares. |
• | There are approximately 11 million EXPEZ warrants outstanding. Each warrant entitles the holder to acquire approximately 0.97 shares of Expedia, Inc. at an exercise price of $11.56. If exercised in full, the warrants would entitle their holders to approximately 11 million Expedia, Inc. common shares. |
• | There are less than 1 million miscellaneous warrants outstanding. |
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Expedia, Inc.
Supplemental Information – Third Quarter 2005
• | The following metrics are intended as a supplement to the financial statements found in this press release and in our filings with the SEC. In the event of discrepancies between amounts in these tables and our historical financial statements, readers should rely on the financial statements in our releases and SEC filings. |
• | As our business evolves and as we integrate our operations, we intend to periodically review and refine the definition, methodology and appropriateness of each of our supplemental metrics. As a result, these metrics are subject to removal and / or change, and such changes could be material. |
• | We have changed our methodology for the allocation of gross bookings by brand. “Expedia” gross bookings constitute bookings from all Expedia-branded properties, including our international sites and our worldwide Expedia Corporate travel businesses. “Other” gross bookings constitute bookings from all brands other than Expedia-branded properties and Hotels.com. In addition, there have been minor adjustments to historical allocation of our revenue between domestic and international. |
• | Metrics, with the exception of revenue items, include 100% of the results of an unconsolidated joint-venture of which we own approximately 49.9%. |
• | These metrics do not include adjustments for one-time items, acquisitions, foreign exchange or other adjustments. Some numbers may not add due to rounding. |
(in $ millions) | 2004 | 2005 | YTD | ||||||||||||||||||
Q3 | Q4 | Q1 | Q2 | Q3 | YTD 2004 | YTD 2005 | |||||||||||||||
Gross Bookings by Geography | |||||||||||||||||||||
Domestic | $ | 2,630 | $ | 2,300 | $ | 3,184 | $ | 3,229 | $ | 3,050 | $ | 8,155 | $ | 9,463 | |||||||
International | 636 | 595 | 902 | 909 | 887 | 1,724 | 2,698 | ||||||||||||||
Total | $ | 3,266 | $ | 2,895 | $ | 4,086 | $ | 4,138 | $ | 3,937 | $ | 9,879 | $ | 12,161 | |||||||
Net Revenue by Geography | |||||||||||||||||||||
Domestic | $ | 414 | $ | 350 | $ | 386 | $ | 440 | $ | 457 | $ | 1,183 | $ | 1,283 | |||||||
International | 89 | 89 | 99 | 115 | 128 | 221 | 342 | ||||||||||||||
Total | $ | 504 | $ | 439 | $ | 485 | $ | 555 | $ | 585 | $ | 1,404 | $ | 1,625 | |||||||
Gross Bookings by Brand | |||||||||||||||||||||
Expedia | $ | 2,525 | $ | 2,310 | $ | 3,251 | $ | 3,191 | $ | 3,047 | $ | 7,567 | $ | 9,489 | |||||||
Hotels.com | 461 | 351 | 483 | 502 | 502 | 1,425 | 1,487 | ||||||||||||||
Other | 280 | 234 | 352 | 445 | 388 | 887 | 1,185 | ||||||||||||||
Total | $ | 3,266 | $ | 2,895 | $ | 4,086 | $ | 4,138 | $ | 3,937 | $ | 9,879 | $ | 12,161 | |||||||
Gross Bookings by Agency/Merchant | |||||||||||||||||||||
Agency | $ | 1,875 | $ | 1,760 | $ | 2,386 | $ | 2,422 | $ | 2,296 | $ | 5,585 | $ | 7,104 | |||||||
Merchant | 1,391 | 1,135 | 1,700 | 1,716 | 1,641 | 4,294 | 5,057 | ||||||||||||||
Total | $ | 3,266 | $ | 2,895 | $ | 4,086 | $ | 4,138 | $ | 3,937 | $ | 9,879 | $ | 12,161 | |||||||
Packages Revenue | $ | 106 | $ | 92 | $ | 114 | $ | 125 | $ | 128 | $ | 304 | $ | 367 | |||||||
Number of Transactions | 9.2 | 7.6 | 9.7 | 10.0 | 10.3 | 25.9 | 30.0 | ||||||||||||||
Merchant hotel room nights | 9.1 | 7.4 | 7.3 | 9.0 | 10.2 | 24.4 | 26.5 |
Notes & Definitions:
Gross Bookings – Total retail value of transactions booked for both agency and merchant transactions, recorded at the time of booking. Bookings include the total price due for travel by customers, including taxes, fees and other charges.
Number of Transactions – Quantity of purchases reported as booked, net of cancellations. Packages purchased using our packages wizard, which by definition include a merchant hotel, are recorded as a single transaction.
Merchant Hotel Room Nights– Worldwide merchant hotel nights, net of cancellations. With the exception of Hotwire, nights are reported as stayed. This metric includes nights stayed on both a package and stand-alone basis.
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Definitions of Non-GAAP Measures
The following measures are defined by the Securities and Exchange Commission as non-GAAP financial measures.
Operating Income Before Amortizationis defined as operating income plus: (1) amortization of non-cash distribution and marketing expense, (2) amortization of non-cash compensation expense, (3) amortization of intangible assets and goodwill impairment, if applicable and (4) certain one-time items, if applicable. Management believes this measure is useful to investors because it represents the combined operating results of Expedia, Inc.’s businesses, taking into account depreciation, which we believe is an ongoing cost of doing business, but excluding the effects of other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to Expedia, Inc.’s statements of income of certain expenses, including non-cash compensation, non-cash payments to partners, and acquisition-related accounting. Due to the high variability and difficulty in predicting certain items that affect net income, such as interest rates and tax rates, Expedia, Inc. is unable to provide reconciliation to net income on a forward-looking basis without unreasonable efforts.
Adjusted Net Income generally captures all items on the statements of income that have been, or ultimately will be, settled in cash and is defined as net income available to common stockholders plus (1) amortization of non-cash distribution and marketing expense, (2) amortization of non-cash compensation expense, (3) amortization of intangible assets and goodwill impairment, if applicable, (4) one-time items, net of related tax, and minority interest, (5) mark to market gains and losses on derivative liabilities and (6) discontinued operations, net of tax. We believe Adjusted Net Income is useful to investors because it represents Expedia, Inc.’s combined results, taking into account depreciation, which management believes is an ongoing cost of doing business, but excluding the impact of other non-cash expenses and items not directly tied to the recurring core operations of our businesses.
Adjusted EPS is defined as Adjusted Net Income divided by weighted fully diluted shares outstanding for Adjusted EPS purposes. We include dilution from options and warrants per the treasury stock method and include all shares relating to restricted stock units (“RSU”) in shares outstanding for Adjusted EPS. This differs from the GAAP method for including RSUs, which treats them on a treasury method basis. Shares outstanding for Adjusted EPS purposes are therefore higher than shares outstanding for GAAP EPS purposes. We believe Adjusted EPS is useful to investors because it represents, on a per share basis, Expedia’s consolidated results, taking into account depreciation, which we believe is an ongoing cost of doing business, as well as other charges which are not allocated to the operating businesses such as interest expense, taxes and minority interest, but excluding the effects of other non-cash expenses not directly tied to the recurring core operations of our businesses. Adjusted Net Income and Adjusted EPS have the same limitations as Operating Income Before Amortization. Therefore, we think it is important to evaluate these measures along with our consolidated statements of income.
Free Cash Flow is defined as net cash flow provided by operating activities less capital expenditures. Management believes Free Cash Flow is useful to investors because it represents the operating cash flow that our operating businesses generate, less capital expenditures but before taking into account other cash movements that are not directly tied to the core operations of our businesses, such as financing activities or certain investing activities. Free Cash Flow has certain limitations in that it does not represent the total increase or decrease in the cash balance for the period, nor does it represent the residual cash flow for discretionary expenditures. Therefore, it is important to evaluate Free Cash Flow along with the consolidated statements of cash flows.
We endeavor to compensate for the limitation of the non-GAAP measures presented by also providing comparable GAAP measures, GAAP financial statements, and descriptions of the reconciling items and adjustments, to derive the non-GAAP measures.
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Tabular Reconciliations for Non-GAAP Measures
(figures in $000s)
Operating Income Before Amortization
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Operating Income Before Amortization | $ | 183,524 | $ | 159,610 | $ | 494,501 | $ | 410,401 | ||||||||
Amortization of non-cash distribution and marketing | (5,138 | ) | (3,256 | ) | (9,055 | ) | (13,027 | ) | ||||||||
Amortization (recovery) of non-cash compensation | 1,009 | (44,350 | ) | (79,899 | ) | (134,394 | ) | |||||||||
Amortization of intangibles | (30,756 | ) | (31,743 | ) | (94,204 | ) | (92,520 | ) | ||||||||
Operating Income | 148,639 | 80,261 | 311,343 | 170,460 | ||||||||||||
Net interest income | 17,968 | 9,303 | 47,479 | 23,611 | ||||||||||||
Write-off of long-term investment | (23,426 | ) | — | (23,426 | ) | — | ||||||||||
Other | 7,379 | 5,398 | 11,889 | 2,906 | ||||||||||||
Income tax expense | (69,026 | ) | (37,455 | ) | (143,895 | ) | (77,737 | ) | ||||||||
Minority interest in loss of consolidated subsidiaries | 501 | 585 | 106 | 113 | ||||||||||||
Net Income | $ | 82,035 | $ | 58,092 | $ | 203,496 | $ | 119,353 | ||||||||
Adjusted Net Income & EPS
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income | $ | 82,035 | $ | 58,092 | $ | 203,496 | $ | 119,353 | ||||||||
Amortization of non-cash distribution and marketing | 5,138 | 3,256 | 9,055 | 13,027 | ||||||||||||
Amortization (recovery) of non-cash compensation | (1,009 | ) | 44,350 | 79,899 | 134,394 | |||||||||||
Amortization of intangibles | 30,756 | 31,743 | 94,204 | 92,520 | ||||||||||||
Write-off of long-term investment | 23,426 | — | 23,426 | — | ||||||||||||
Unrealized gain on derivatives instruments | (12,000 | ) | — | (12,000 | ) | — | ||||||||||
Minority interest | (535 | ) | (219 | ) | (1,448 | ) | (332 | ) | ||||||||
Income tax expense | (863 | ) | (27,040 | ) | (53,345 | ) | (83,923 | ) | ||||||||
Adjusted net income | $ | 126,948 | $ | 110,182 | $ | 343,287 | $ | 275,039 | ||||||||
GAAP diluted weighted average shares outstanding | 353,351 | 340,549 | 344,819 | 340,549 | ||||||||||||
Additional restricted stock units | 4,814 | — | 1,605 | — | ||||||||||||
Adjusted weighted average shares outstanding | 358,165 | 340,549 | 346,424 | 340,549 | ||||||||||||
Diluted earnings per share | $ | 0.23 | $ | 0.17 | $ | 0.59 | $ | 0.35 | ||||||||
Adjusted earnings per share | $ | 0.35 | $ | 0.32 | $ | 0.99 | $ | 0.81 | ||||||||
Free Cash Flow
Nine months ended September 30, | ||||||||
2005 | 2004 | |||||||
Net cash flow provided by operating activities | $ | 943,653 | $ | 714,540 | ||||
Less: capital expenditures | (40,859 | ) | (37,499 | ) | ||||
Free cash flow | $ | 902,794 | $ | 677,041 | ||||
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Conference Call
Expedia, Inc. will audiocast its conference call with investors and analysts discussing its third quarter financial results and certain forward-looking information on Thursday, November 3, 2005 at 2:00 p.m. Pacific Time (PT). The audiocast will be open to the public and available via http://www.expediainc.com/ir.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This press release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance. These forward-looking statements are based on management’s current expectations and assumptions which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. The use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” among others, generally identify forward-looking statements. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements and may include statements relating to future revenues, expenses, margins, profitability, net income, earnings per share and other measures of results of operation and the prospects for future growth of Expedia, Inc.’s business.
Actual results and the timing and outcome of events may differ materially from those expressed or implied in the forward-looking statements for a variety of reasons, including, among others: Expedia, Inc.’s ability to effectively update, automate and integrate disparate financial and accounting systems and approaches among its brands and businesses; adverse changes in senior management; the rate of growth of the Internet and online travel; changes in global economic conditions, consumer spending, the competitive environment, the e-commerce industry and broadband access; world events (including adverse weather, health risks or terrorism); the rate of online migration in the various geographies and markets in which Expedia, Inc. operates; fluctuations in foreign exchange rates; the ability to effectively operate the newly consolidated businesses as an independent entity from IAC/InterActiveCorp; the health of the travel industry, including consumer and business spending on travel; Expedia, Inc.’s ability to expand successfully in international markets; possible one-time charges resulting from, among other events, integration activities, platform migration and shared services efforts; failure to realize cost efficiencies; the successful completion of pending corporate transactions and the integration of acquired businesses; the accuracy, integrity, security and redundancy of systems, including financial and accounting systems, and networks of Expedia, Inc.; and other risks detailed in Expedia, Inc.’s public filings with the Securities and Exchange Commission, including Expedia, Inc.’s amended Registration Statement on Form S-4 (Commission file number 333-124303-01), filed on June 17, 2005. Except as required by law, Expedia, Inc. undertakes no obligation to update any forward-looking or other statements in this press release, whether as a result of new information, future events or otherwise.
Basis of Presentation
On December 21, 2004, IAC announced its plan to separate into two independent public companies in order to better achieve certain strategic objectives of its various businesses. This transaction is referred to as the “Spin-Off.”
On August 9, 2005, Expedia, Inc. became an independent public company and began trading on the Nasdaq under the symbol “EXPE.” These unaudited consolidated financial statements present our results of operations, financial position, stockholders’ equity and cash flows of Expedia, Inc. on a combined basis up through the Spin-Off and on a consolidated basis thereafter. The unaudited financial statements relating to periods prior to August 9, 2005 were prepared on a combined basis because there was no direct ownership relationship among any or all of the businesses that comprised Expedia, Inc. upon Spin-Off.
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About Expedia, Inc.
Expedia, Inc. is one of the world’s leading travel service companies. With its portfolio of leading travel brands, Expedia, Inc. empowers business and leisure travelers with the tools and information they need to easily research, plan, book and experience travel. The Company also provides wholesale travel to offline retail travel agents. Expedia, Inc.’s main companies include: Expedia.com, Hotels.com, Hotwire, Expedia Corporate Travel, TripAdvisor and Classic Vacations. Expedia, Inc.’s companies also operate internationally with sites in Canada, the United Kingdom, Germany, France, Italy, the Netherlands and China, through its investment in eLong. For more information visit www.expediainc.com. (Nasdaq: EXPE).
Contacts
Investor Relations | Communications | |
Stu Haas | Wendy Grover | |
(425) 679-7852 | (425) 679-7874 | |
ir@expedia.com |
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