e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51447
EXPEDIA, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-2705720 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
3150 139th Avenue SE
Bellevue, WA 98005
(Address of principal executive office) (Zip Code)
(425) 679-7200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of each of the registrants classes of common stock as
of July 27, 2007 was:
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Common stock, $0.001 par value per share |
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279,331,287 shares |
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Class B common stock, $0.001 par value per share |
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25,599,998 shares |
Expedia, Inc.
Form 10-Q
For the Quarter Ended June 30, 2007
Contents
Part I. Item 1. Consolidated Financial Statements
EXPEDIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenue |
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$ |
689,923 |
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$ |
598,458 |
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$ |
1,240,434 |
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$ |
1,092,356 |
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Cost of revenue (1) |
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143,646 |
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128,449 |
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264,944 |
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247,763 |
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Gross profit |
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546,277 |
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470,009 |
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975,490 |
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844,593 |
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Operating expenses: |
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Selling and marketing (1) |
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255,905 |
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198,666 |
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478,173 |
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399,692 |
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General and administrative (1) |
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75,733 |
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71,053 |
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151,896 |
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144,414 |
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Technology and content (1) |
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41,511 |
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33,288 |
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83,763 |
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68,832 |
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Amortization of intangible assets |
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19,503 |
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30,120 |
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40,699 |
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60,291 |
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Amortization of non-cash distribution and marketing |
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627 |
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8,867 |
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Operating income |
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153,625 |
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136,255 |
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220,959 |
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162,497 |
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Other income (expense): |
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Interest income |
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10,552 |
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7,034 |
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17,821 |
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10,635 |
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Interest expense |
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(9,902 |
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(475 |
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(21,078 |
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(2,373 |
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Other, net |
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5,936 |
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10,466 |
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441 |
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14,123 |
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Total other income (expense), net |
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6,586 |
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17,025 |
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(2,816 |
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22,385 |
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Income before income taxes and minority interest |
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160,211 |
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153,280 |
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218,143 |
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184,882 |
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Provision for income taxes |
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(64,076 |
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(56,158 |
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(87,688 |
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(65,816 |
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Minority interest in (income) loss of consolidated subsidiaries, net |
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1 |
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(1,640 |
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457 |
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(249 |
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Net income |
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$ |
96,136 |
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$ |
95,482 |
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$ |
130,912 |
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$ |
118,817 |
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Net earnings per share available to common stockholders: |
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Basic |
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$ |
0.32 |
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$ |
0.28 |
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$ |
0.43 |
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$ |
0.34 |
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Diluted |
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0.30 |
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0.27 |
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0.41 |
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0.33 |
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Shares used in computing earnings per share: |
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Basic |
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303,035 |
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346,014 |
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305,426 |
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345,896 |
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Diluted |
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320,196 |
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359,090 |
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321,966 |
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362,130 |
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(1) |
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Includes stock-based compensation as follows: |
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Cost of revenue |
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$ |
646 |
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$ |
1,586 |
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$ |
1,529 |
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$ |
4,811 |
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Selling and marketing |
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2,804 |
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3,446 |
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6,039 |
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8,697 |
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General and administrative |
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7,004 |
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8,753 |
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14,673 |
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18,440 |
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Technology and content |
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3,518 |
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3,436 |
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7,591 |
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9,160 |
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Total stock-based compensation |
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$ |
13,972 |
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$ |
17,221 |
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$ |
29,832 |
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$ |
41,108 |
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See accompanying notes.
2
EXPEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
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June 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
1,011,404 |
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$ |
853,274 |
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Restricted cash and cash equivalents |
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21,710 |
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11,093 |
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Accounts and notes receivable, net of allowance of $4,884 and $4,874 |
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313,335 |
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211,430 |
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Prepaid merchant bookings |
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100,380 |
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39,772 |
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Deferred income taxes, net |
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5,145 |
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4,867 |
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Prepaid expenses and other current assets |
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74,410 |
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62,249 |
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Total current assets |
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1,526,384 |
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1,182,685 |
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Property and equipment, net |
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149,048 |
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137,144 |
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Long-term investments and other assets |
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86,723 |
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59,289 |
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Intangible assets, net |
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1,006,146 |
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1,028,774 |
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Goodwill |
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5,907,286 |
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5,861,292 |
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TOTAL ASSETS |
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$ |
8,675,587 |
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$ |
8,269,184 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities: |
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Accounts payable, merchant |
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$ |
779,029 |
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$ |
600,192 |
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Accounts payable, other |
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153,407 |
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120,545 |
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Deferred merchant bookings |
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1,018,183 |
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466,474 |
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Deferred revenue |
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12,798 |
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10,317 |
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Income taxes payable |
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58,520 |
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30,902 |
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Other current liabilities |
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194,802 |
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171,695 |
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Total current liabilities |
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2,216,739 |
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1,400,125 |
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Long-term debt |
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500,000 |
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500,000 |
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Deferred income taxes, net |
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369,954 |
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369,297 |
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Other long-term liabilities |
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90,672 |
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33,716 |
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Minority interest |
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62,655 |
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61,756 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock $.001 par value |
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Authorized shares: 100,000,000 |
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Series A shares issued and outstanding: 846 and 846 |
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Common stock $.001 par value |
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332 |
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328 |
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Authorized shares: 1,600,000,000 |
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Shares issued: 331,592,022 and 328,066,276 |
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Shares outstanding: 279,110,811 and 305,901,048 |
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Class B common stock $.001 par value |
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26 |
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26 |
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Authorized shares: 400,000,000 |
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Shares issued and outstanding: 25,599,998 and 25,599,998 |
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Additional paid-in capital |
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5,970,840 |
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5,903,200 |
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Treasury stock Common stock, at cost |
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(989,173 |
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(321,155 |
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Shares: 52,481,211 and 22,165,228
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Retained earnings |
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437,252 |
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309,912 |
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Accumulated other comprehensive income |
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16,290 |
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11,979 |
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Total stockholders equity |
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5,435,567 |
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5,904,290 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
8,675,587 |
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$ |
8,269,184 |
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See accompanying notes.
3
EXPEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Six months ended |
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June 30, |
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2007 |
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2006 |
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Operating activities: |
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Net income |
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$ |
130,912 |
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$ |
118,817 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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28,050 |
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22,673 |
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Amortization of intangible assets,
non-cash distibution and marketing
and stock-based compensation |
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70,531 |
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110,266 |
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Deferred income taxes |
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722 |
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(5,595 |
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Unrealized (gain) loss on derivative instruments, net |
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4,544 |
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(12,212 |
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Equity in (income) loss of unconsolidated affiliates |
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3,554 |
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(586 |
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Minority interest in income (loss) of consolidated subsidiaries, net |
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(457 |
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249 |
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Foreign exchange gain on cash and cash equivalents, net |
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(4,686 |
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(13,690 |
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Other |
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2,913 |
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479 |
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Changes in operating assets and liabilities, net of effects from acquisitions: |
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Accounts and notes receivable |
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(93,517 |
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(26,514 |
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Prepaid merchant bookings and prepaid expenses |
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(70,854 |
) |
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(51,314 |
) |
Accounts payable, other and other current
liabilities |
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118,734 |
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|
50,854 |
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Accounts payable, merchant |
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|
178,076 |
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|
91,263 |
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Deferred merchant bookings |
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551,691 |
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|
418,720 |
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Deferred revenue |
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2,400 |
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5,503 |
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Net cash provided by operating activities |
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922,613 |
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708,913 |
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Investing activities: |
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Capital expenditures |
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(38,974 |
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(34,029 |
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Acquisitions, net of cash acquired |
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(59,622 |
) |
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(4,891 |
) |
Increase in long-term investments and deposits |
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(29,594 |
) |
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(1,632 |
) |
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Net cash used in investing activities |
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(128,190 |
) |
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(40,552 |
) |
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Financing activities: |
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Short-term borrowings, net |
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(230,668 |
) |
Changes in restricted cash and cash equivalents |
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(11,614 |
) |
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(4,479 |
) |
Proceeds from exercise of equity awards |
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|
34,885 |
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|
23,938 |
|
Excess tax benefit on equity awards |
|
|
1,608 |
|
|
|
781 |
|
Treasury stock activity |
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|
(668,018 |
) |
|
|
(127,195 |
) |
Other, net |
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|
393 |
|
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Net cash used in financing activities |
|
|
(642,746 |
) |
|
|
(337,623 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
6,453 |
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|
|
15,187 |
|
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Net increase in cash and cash equivalents |
|
|
158,130 |
|
|
|
345,925 |
|
Cash and cash equivalents at beginning of period |
|
|
853,274 |
|
|
|
297,416 |
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Cash and cash equivalents at end of period |
|
$ |
1,011,404 |
|
|
$ |
643,341 |
|
|
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Supplemental cash flow information |
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|
Cash paid for interest |
|
$ |
19,775 |
|
|
$ |
3,328 |
|
Income tax payments, net |
|
|
5,888 |
|
|
|
33,055 |
|
See accompanying notes.
4
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 1 Basis of Presentation
Description of Business
Expedia, Inc. and its subsidiaries provide travel products and services to leisure and
corporate travelers in the United States and abroad. These travel products and services are offered
through a diversified portfolio of brands including: Expedia.com®,
Hotels.com®, Hotwire.comtm, our private label programs (Worldwide
Travel Exchange and Interactive Affiliate Network), Classic Vacations, Expedia®
Corporate Travel (ECT), eLongtm, Inc. (eLong) and TripAdvisor®.
In addition, many of these brands have related international points of sale. We refer to Expedia,
Inc. and its subsidiaries collectively as Expedia, the Company, us, we and our in these
consolidated financial statements.
Basis of Presentation
These accompanying financial statements present our results of operations, financial
position and cash flows on a consolidated basis. The unaudited consolidated financial statements
include Expedia, Inc., our wholly-owned subsidiaries, and entities we control, or in which we have
a variable interest and are the primary beneficiary of future cash profits or losses. We have
eliminated significant intercompany transactions and accounts.
We have prepared the accompanying unaudited consolidated financial statements in accordance
with accounting principles generally accepted in the United States (GAAP) for interim financial
reporting. We have included all adjustments necessary for a fair presentation of the results of the
interim period. These adjustments consist of normal recurring items. Our interim unaudited
consolidated financial statements are not necessarily indicative of results that may be expected
for any other interim period or for the full year. These interim unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and
related notes included in our Annual Report on Form 10-K for the year ended December 31, 2006,
previously filed with the Securities and Exchange Commission (SEC).
Accounting Estimates
We use estimates and assumptions in the preparation of our interim unaudited consolidated
financial statements in accordance with GAAP. Our estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the
date of our interim unaudited consolidated financial statements. These estimates and assumptions
also affect the reported amount of net income during any period. Our actual financial results could
differ significantly from these estimates. The significant estimates underlying our interim
unaudited consolidated financial statements include revenue recognition, recoverability of
long-lived and intangible assets and goodwill, income taxes, occupancy tax, stock-based
compensation and accounting for derivative instruments.
Reclassifications
We have reclassified prior period financial statements to conform to the current period
presentation.
In our consolidated statement of cash flows for the six months ended June 30, 2006, we
reclassified net foreign exchange gains and losses on cash of U.S. functional subsidiaries held in
foreign currencies from operating cash flows to effect of exchange rate changes on cash and cash
equivalents to appropriately reflect foreign currency impacts on cash and cash equivalents for the
periods presented.
5
Notes to Consolidated Financial Statements (Continued)
Seasonality
We generally experience seasonal fluctuations in the demand for our travel products and
services. For example, traditional leisure travel bookings are generally the highest in the first
three quarters of the year as travelers plan and book their spring, summer and holiday travel. The
number of bookings typically decreases in the fourth quarter. Because revenue in the merchant
business is generally recognized when the travel takes place rather than when it is booked, revenue
typically lags bookings by several weeks or longer. As a result, revenue is typically the lowest in
the first quarter and highest in the third quarter.
Note 2 Summary of Significant Accounting Policies
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, we record income taxes under the liability method. Deferred tax assets
and liabilities reflect our estimate of the future tax consequences of temporary differences
between the carrying amounts of assets and liabilities for book and tax purposes. We determine
deferred income taxes based on the differences in accounting methods and timing between financial
statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability
for each temporary difference based on the enacted tax rates in effect for the years in which we
expect to realize the underlying items of income and expense. We consider many factors when
assessing the likelihood of future realization of our deferred tax assets, including our recent
earnings experience by jurisdiction, expectations of future taxable income, and the carryforward
periods available to us for tax reporting purposes, as well as other relevant factors. We may
establish a valuation allowance to reduce deferred tax assets to the amount we believe is more
likely than not to be realized. Due to inherent complexities arising from the nature of our
businesses, future changes in income tax law, tax sharing agreements or variances between our
actual and anticipated operating results, we make certain judgments and estimates. Therefore,
actual income taxes could materially vary from these estimates.
For the period January 1, 2005 through the date of our separation from IAC/InterActiveCorp
(IAC) on August 9, 2005 (the Spin-Off), we were a member of the IAC consolidated tax group.
Accordingly, IAC filed a federal income tax return and certain state income tax returns on a
combined basis with us for that period. IAC paid the entire combined income tax liability related
to these filings. As such, our estimated income tax liability for that period was transferred to
IAC upon Spin-Off. Under the terms of the Tax Sharing Agreement, IAC could make certain elections
in preparation of these tax returns, which changed the amount of income taxes owed for the period
before the Spin-Off. We recorded those changes as adjustments to stockholders equity in accordance
with Emerging Issues Task Force No. 94-10, Accounting by a Company for the Income Tax Effects of
Transactions Among or With its Shareholders under FASB Statement 109.
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
(FIN 48). As a result of the adoption of FIN 48, we recognized an approximately $18.9 million
increase in the liability for uncertain tax positions, of which $14.7 million of the increase was
accounted for as an increase to the January 1, 2007 balance of goodwill as the underlying tax
positions related to business combinations and $4.2 million as a reduction to the January 1, 2007
balance of retained earnings. These amounts do not include the federal tax benefit associated with
these positions, which are immaterial.
As of January 1, 2007, we had $65.5 million of liabilities for uncertain tax positions, which
included $14.0 million of positions that, if recognized, would decrease our provision for income
taxes. We recognize interest and penalties related to our liabilities for these positions in
income tax expense. As of January 1, 2007, we had approximately $5.4 million accrued for the
potential payment of estimated interest and penalties. There were no material changes to these
amounts during the six months ended June 30, 2007.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. We are no longer subject to tax examinations by tax authorities for years prior to
1998.
6
Notes to Consolidated Financial Statements (Continued)
Certain Risks and Concentrations
Our business is subject to certain risks and concentrations including dependence on
relationships with travel suppliers, primarily airlines and hotels, dependence on third-party
technology providers, exposure to risks associated with online commerce security and credit card
fraud. In particular, we depend on our overall relationships with the major airlines. We also
depend on global distribution system partners and third-party service providers for certain
fulfillment services, including one third-party service provider for which we accounted for
approximately 47% of its total revenue for the year ended December 31, 2006 and approximately 41%
of its total revenue for the three months ended March 31, 2007.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS 157 applies when another standard requires or
permits assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not require
any new fair value measurements. SFAS 157 is effective in fiscal years beginning after November 15,
2007. We are in the process of determining the impact, if any, of this statement on our results
from operations, financial position or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of SFAS Statement No. 115 (SFAS 159), which is
effective for fiscal years beginning after November 15, 2007. SFAS 159 permits an entity to choose
to measure many financial instruments and certain other items at fair value at specified election
dates. Subsequent unrealized gains and losses on items for which the fair value option has been
elected will be reported in earnings. We are in the process of determining the impact, if any, of
this statement on our results from operations, financial position or cash flows.
Note 3 Debt
Short-term Borrowings
In July 2005, we entered into a $1.0 billion five-year unsecured revolving credit
facility with a group of lenders, which is unconditionally guaranteed by certain Expedia
subsidiaries. The facility bears interest based on our financial leverage; the interest rate is
determined based on market interest rates under the terms of the revolving credit facility
agreement.
The amount of stand-by letters of credit issued under the facility reduces the amount
available to us. As of June 30, 2007 and December 31, 2006, there was $52.5 million and $52.0
million of outstanding stand-by letters of credit issued under the facility. As of June 30, 2007
and December 31, 2006, there were no amounts outstanding under the facility.
Long-term Debt
In August 2006, we privately placed $500.0 million of senior unsecured notes due 2018. In
March 2007, we completed an offer to exchange these notes for registered notes having substantially
the same financial terms and covenants as the original notes (the unregistered and registered notes
collectively, the Notes). The Notes bear a fixed rate interest of 7.456% with interest payable
semi-annually in February and August of each year. The amount of accrued interest related to the
Notes was $14.0 million and $13.4 million as of June 30, 2007 and December 31, 2006. The Notes are
repayable in whole or in part on August 15, 2013, at the option of the holders of such Notes, at
100% of the principal amount plus accrued interest. We may redeem the Notes in accordance with the
terms of the agreement, in whole or in part, at any time at our option.
The Notes are senior unsecured obligations guaranteed by certain domestic Expedia subsidiaries
and rank equally in right of payment with all of our existing and future unsecured and
unsubordinated obligations. For further information, see Note 12 Guarantor and Non-Guarantor
Supplemental Financial Information.
7
Notes to Consolidated Financial Statements (Continued)
Note 4 Derivative Instruments
The fair value of our derivative financial instruments generally represents the estimated
amounts we would expect to receive or pay upon termination of the contracts as of the reporting
date.
As a result of the Spin-Off, we assumed certain obligations of IAC related to IACs Ask Jeeves
Convertible Subordinated Notes (Ask Jeeves Notes). As of June 30, 2007 and December 31, 2006, the
related derivative liability balance was $13.8 million included in other current liabilities and
$15.9 million included in other long-term liabilities on our consolidated balance sheets. During
the six months ended June 30, 2007, certain of these notes were converted and we released
approximately 0.3 million shares of our common stock from escrow with a fair value of $6.3 million
to satisfy the conversion requirements. During the three months ended June 30, 2007 and 2006, we
recognized a net loss of $2.9 million and a net gain of $8.0 million related to these Ask Jeeves
Notes. During the six months ended June 30, 2007 and 2006, we recognized a net loss of $4.2 million
and a net gain of $12.1 million related to these Ask Jeeves Notes.
As of June 30, 2007, we estimate that we could be required to release from escrow up to 0.5
million shares of our common stock (or pay cash in equal value, in lieu of issuing such shares).
The Ask Jeeves Notes are due June 1, 2008; upon maturity of these notes, our obligation to satisfy
demands for conversion ceases.
We enter into cross-currency swaps to hedge against the change in value of certain
intercompany loans denominated in currencies other than the lending subsidiaries functional
currency. These swaps have been designated as cash flow hedges and are re-measured at fair value
each reporting period. As of June 30, 2007 and December 31, 2006, the related derivative liability
balances were $17.9 million and $13.1 million and were included in other long-term liabilities on
our consolidated balance sheets.
Note 5 Stockholders Equity
Share Repurchases
On July 25, 2007, we filed an amended tender offer pursuant to which we offered to
repurchase up to 25,000,000 shares of our common stock in an amended tender offer at a price per
share not less than $27.50 and not greater than $30.00. The shares subject to the tender offer
represent approximately 9% of the number of shares of common stock outstanding and approximately 8%
of the total number of shares of common stock and Class B common stock outstanding as of the
announcement date. The tender offer will expire, unless extended, on August 8, 2007.
During the three months ended March 31, 2007, we completed a tender offer pursuant to which we
acquired 30 million tendered shares of our common stock at a purchase price of $22.00 per share,
for a total cost of $660 million plus fees and expenses relating to the tender offer.
Stock-based Awards
Stock-based compensation expense relates primarily to expense for stock options and
restricted stock units (RSUs). Since February 2003, we have awarded RSUs as our primary form of
employee stock-based compensation. Our stock-based awards generally vest over five years.
As of June 30, 2007, we had stock-based awards outstanding representing approximately 29
million shares of our common stock consisting of approximately 9 million RSUs and stock options to
purchase approximately 20 million common shares with a $16.57 weighted average exercise price and
weighted average remaining life of 2.9 years.
Annual employee RSU grants typically occur during the first quarter of each year. During the
six months ended June 30, 2007, we granted 3.2 million RSUs. Net of cancellations, expirations and
forfeitures occurring during this period, RSUs increased 2.2 million.
8
Notes to Consolidated Financial Statements (Continued)
For the three and six months ended June 30, 2007, stock-based compensation expense was $14.0
million and $29.8 million, consisting of $11.1 million and $23.2 million in expense primarily
related to RSUs and $2.9 million and $6.6 million in stock option expense.
Comprehensive Income
Comprehensive income was $98.8 million and $97.5 million for the three months ended June
30, 2007 and 2006, and $135.2 million and $120.2 million for the six months ended June 30, 2007 and
2006. The primary differences between net income as reported and comprehensive income were foreign
currency translation adjustments and net gains (losses) on cross-currency hedge contracts.
Note 6 Earnings Per Share
The following table presents our basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands, except per share data) |
|
Net income |
|
$ |
96,136 |
|
|
$ |
95,482 |
|
|
$ |
130,912 |
|
|
$ |
118,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share available to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.32 |
|
|
$ |
0.28 |
|
|
$ |
0.43 |
|
|
$ |
0.34 |
|
Diluted |
|
|
0.30 |
|
|
|
0.27 |
|
|
|
0.41 |
|
|
|
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
303,035 |
|
|
|
346,014 |
|
|
|
305,426 |
|
|
|
345,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
8,909 |
|
|
|
7,330 |
|
|
|
8,604 |
|
|
|
8,643 |
|
Warrants to purchase common stock |
|
|
6,084 |
|
|
|
3,189 |
|
|
|
5,541 |
|
|
|
4,178 |
|
Other dilutive securities |
|
|
2,168 |
|
|
|
2,557 |
|
|
|
2,395 |
|
|
|
3,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
320,196 |
|
|
|
359,090 |
|
|
|
321,966 |
|
|
|
362,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Other Income (Expense)
The following table presents the components of other, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Unrealized gain (loss) on derivative instruments, net |
|
$ |
(3,153 |
) |
|
$ |
7,912 |
|
|
$ |
(4,544 |
) |
|
$ |
12,212 |
|
Federal excise tax refunds |
|
|
12,058 |
|
|
|
|
|
|
|
12,058 |
|
|
|
|
|
Foreign exchange rate gains (losses), net |
|
|
(285 |
) |
|
|
1,888 |
|
|
|
(3,185 |
) |
|
|
1,532 |
|
Equity in income (loss) of unconsolidated affiliates |
|
|
(2,259 |
) |
|
|
699 |
|
|
|
(3,554 |
) |
|
|
586 |
|
Other |
|
|
(425 |
) |
|
|
(33 |
) |
|
|
(334 |
) |
|
|
(207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,936 |
|
|
$ |
10,466 |
|
|
$ |
441 |
|
|
$ |
14,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Excise Tax Refunds
During the second quarter of 2007, we recorded refunds based on notification from the
Internal Revenue Service (IRS) totaling $14.7 million related to Federal Excise Tax (FET) taxes
remitted to the IRS but not collected from customers for
9
Notes to Consolidated Financial Statements (Continued)
airline ticket sales by one of our
subsidiaries in the third quarter of 2001 through the third quarter of 2004, plus accrued interest
thereon. We recorded $2.6 million to revenue as that amount relates to taxes remitted on airline
ticket sales subsequent to our acquisition of the subsidiary. We recorded $12.1 million to other,
net as such amount relates to taxes remitted on airline ticket sales prior to the acquisition and
all interest earned on all underlying tax remittances. We have received payment of $13.5 million of
the total refund from the IRS in July 2007.
Note 8 Acquisitions and Other Investments
During the six months ended June 30, 2007, we acquired all or part of four travel-related
companies. The purchase price of these and other acquisition related costs totaled $85.7 million,
all of which we paid in cash and recorded $34.2 million in goodwill and $17.6 million of intangible
assets with definite lives. The results of operations of each of the acquired businesses have been
included in our consolidated results from each transaction closing date forward. The effect of
these acquisitions on consolidated net revenue and operating income during the three and six months
ended June 30, 2007 was not significant. Based on the 2007 and 2008 financial performance of one of
the acquired companies, we are obligated to pay an additional purchase price ranging from $0 to a
maximum of approximately $100 million.
We have also entered into a commitment to provide one of these companies a $10 million
revolving operating line of credit and a credit facility for up to $20 million. As of the end of
2008, any amounts due under the credit facility are convertible, at our option, into shares of the
company at a premium to the then fair market value. No amounts were drawn against either facility
as of June 30, 2007.
Note 9 Commitments and Contingencies
Lease Commitments
We have contractual obligations in the form of operating leases for office space and
related office equipment for which we record the related expense on a monthly basis. Certain leases
contain periodic rent escalation adjustments and renewal options. Operating lease obligations
expire at various dates with the latest maturity in 2018. In June 2007, we entered into a
ten-year lease for approximately 348,000 square feet of office space located in Bellevue,
Washington. Cash payments related to this lease begin in November 2008.
Our estimated future minimum rental payments under operating leases with noncancelable lease
terms that expire after June 30, 2007 are $12.9 million for the remainder of 2007, $24.9 million
for 2008, $22.9 million for 2009, $20.3 million for 2010, $18.9 million for 2011 and $103.3 million
for 2012 and thereafter.
Legal Proceedings
In the ordinary course of business, we are a party to various lawsuits. In the opinion of
management, we do not expect these lawsuits to have a material impact on the liquidity, results of
operations or financial condition of Expedia. We also evaluate other potential contingent matters,
including value-added tax, federal excise tax, transient occupancy or accommodation taxes and
similar matters. We do not believe that the aggregate amount of liability that could be reasonably
possible with respect to these matters would have a material adverse affect on our financial
results.
Litigation Relating to Hotel Occupancy Taxes. Lawsuits have been filed by thirty-seven cities
and counties involving hotel occupancy taxes. In addition, there have been five consumer lawsuits
filed relating to taxes and fees. The municipality and consumer lawsuits are in various stages
ranging from responding to the complaint to discovery. We continue to defend these lawsuits
vigorously. To date, seven of the municipality lawsuits have been dismissed. These dismissals
have been without prejudice and, generally, allow the municipality to seek administrative remedies
prior to pursuing further litigation. As a result of this litigation and other attempts by certain
jurisdictions to levy such taxes, we have established a reserve for the potential settlement of
issues related to hotel occupancy taxes in the amount of $18.2 million and $17.5 million at June
30, 2007 and December 31, 2006, respectively. Our reserve is based on our best estimates and the
ultimate resolution of these issues may be greater or less than the liabilities recorded.
10
Notes to Consolidated Financial Statements (Continued)
Note 10 Related Party Transactions
Commercial Agreements with IAC
Since the Spin-Off, we have continued to work with some of IACs businesses pursuant to a
variety of commercial agreements. These commercial agreements generally include (i) distribution
agreements, pursuant to which certain subsidiaries of IAC distribute their respective products and
services via arrangements with Expedia, and vice versa, (ii) services agreements, pursuant to which
certain subsidiaries of IAC provide Expedia with various services and vice versa and (iii) office
space lease agreements. The distribution agreements typically involve the payment of fees, usually
on a fixed amount-per-transaction, revenue share or commission basis, from the party seeking
distribution of the product or service to the party that is providing the distribution. Net
operating expenses related to these transactions were less than $1 million during the six months
ended June 30, 2007.
Note 11 Segment Information
We have two reportable segments: North America and Europe. We determined our
segments based on how our chief operating decision makers manage our business, make operating
decisions and evaluate operating performance. Our primary operating metric for evaluating segment
performance is Operating Income Before Amortization (defined below), which includes allocations
of certain expenses, primarily cost of revenue and facilities, to the segments. We base the
allocations primarily on transaction volumes and other usage metrics; this methodology is
periodically evaluated and may change. We do not allocate certain shared expenses to reportable
segments such as partner services, product development, accounting, human resources and legal. We
include these expenses in Corporate and Other.
Our North America segment provides a full range of travel services to customers in the United
States, Canada and Mexico. This segment operates through a variety of brands including Classic
Vacations, Expedia.com, Hotels.com, Hotwire.com and TripAdvisor. Our Europe segment provides travel
services primarily through localized Expedia websites
in Denmark, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden and the United
Kingdom, as well as localized versions of Hotels.com in various European countries.
Corporate and Other includes ECT, Expedia Asia Pacific and unallocated corporate functions and
expenses. ECT provides travel products and services to corporate customers in North America and
Europe. Expedia Asia Pacific provides online travel information and reservation services primarily
through eLong in the Peoples Republic of China, localized Expedia websites in Australia and Japan,
as well as localized versions of Hotels.com in various Asian countries. In addition, we record
amortization of intangible assets and any related impairment, as well as stock-based compensation
expense in Corporate and Other.
11
Notes to Consolidated Financial Statements (Continued)
The following table presents our segment information for the three and six months ended June
30, 2007 and 2006. As a significant portion of our property and equipment is not allocated to our
operating segments, we do not report the assets or related depreciation expense as it would not be
meaningful, nor do we regularly provide such information to our chief operating decision makers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Corporate and |
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
Other |
|
|
Total |
|
|
|
(in thousands) |
|
Revenue |
|
$ |
505,379 |
|
|
$ |
145,437 |
|
|
$ |
39,107 |
|
|
$ |
689,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization |
|
$ |
226,796 |
|
|
$ |
42,979 |
|
|
$ |
(82,675 |
) |
|
$ |
187,100 |
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
(19,503 |
) |
|
|
(19,503 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(13,972 |
) |
|
|
(13,972 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
226,796 |
|
|
$ |
42,979 |
|
|
$ |
(116,150 |
) |
|
$ |
153,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Corporate and |
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Revenue |
|
$ |
455,925 |
|
|
$ |
112,036 |
|
|
$ |
30,497 |
|
|
$ |
598,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization |
|
$ |
212,110 |
|
|
$ |
39,826 |
|
|
$ |
(67,713 |
) |
|
$ |
184,223 |
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
(30,120 |
) |
|
|
(30,120 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(17,221 |
) |
|
|
(17,221 |
) |
Amortization of non-cash distribution and marketing |
|
|
(627 |
) |
|
|
|
|
|
|
|
|
|
|
(627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
211,483 |
|
|
$ |
39,826 |
|
|
$ |
(115,054 |
) |
|
$ |
136,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Corporate and |
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Revenue |
|
$ |
911,780 |
|
|
$ |
255,427 |
|
|
$ |
73,227 |
|
|
$ |
1,240,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization |
|
$ |
390,811 |
|
|
$ |
68,625 |
|
|
$ |
(167,946 |
) |
|
$ |
291,490 |
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
(40,699 |
) |
|
|
(40,699 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(29,832 |
) |
|
|
(29,832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
390,811 |
|
|
$ |
68,625 |
|
|
$ |
(238,477 |
) |
|
$ |
220,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Corporate and |
|
|
|
|
|
|
North America |
|
|
Europe |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Revenue |
|
$ |
837,850 |
|
|
$ |
197,304 |
|
|
$ |
57,202 |
|
|
$ |
1,092,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization |
|
$ |
359,284 |
|
|
$ |
55,170 |
|
|
$ |
(141,691 |
) |
|
$ |
272,763 |
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
(60,291 |
) |
|
|
(60,291 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(41,108 |
) |
|
|
(41,108 |
) |
Amortization of non-cash distribution and marketing |
|
|
(8,867 |
) |
|
|
|
|
|
|
|
|
|
|
(8,867 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
350,417 |
|
|
$ |
55,170 |
|
|
$ |
(243,090 |
) |
|
$ |
162,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Notes to Consolidated Financial Statements (Continued)
We have revised certain 2006 revenue and expense allocations between our segments to reflect
current allocations for certain points of sale. There was no impact on total consolidated revenue
or operating income before amortization as a result of these changes.
Definition of Operating Income Before Amortization (OIBA)
We provide OIBA as a supplemental measure to GAAP. We define OIBA as operating income
plus: (1) amortization of non-cash distribution and marketing expense, (2) stock-based compensation
expense, (3) amortization of intangible assets and goodwill and intangible asset impairment, if
applicable and (4) certain one-time items, if applicable.
OIBA is the primary operating metric used by which management evaluates the performance of our
business, on which internal budgets are based, and by which management is compensated. Management
believes that investors should have access to the same set of tools that management uses to analyze
our results. This non-GAAP measure should be considered in addition to results prepared in
accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP. We
endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the
comparable GAAP measures, GAAP financial statements, and descriptions of the reconciling items and
adjustments, to derive the non-GAAP measure. We present a reconciliation of this non-GAAP financial
measure to GAAP below.
OIBA 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 that may not be indicative of our core business operations. We
believe this measure is useful to investors for the following reasons:
|
|
|
It corresponds more closely to the cash operating income generated from our core
operations by excluding significant non-cash operating expenses; |
|
|
|
|
It aids in forecasting and analyzing future operating income as stock-based compensation,
non-cash distribution and marketing expenses and intangible assets amortization, assuming no
subsequent acquisitions, are likely to decline going forward; and |
|
|
|
|
It provides greater insight into management decision making at Expedia, as OIBA is our
primary internal metric for evaluating the performance of our business. |
OIBA has certain limitations in that it does not take into account the impact of certain
expenses to our consolidated statements of income, including stock-based compensation, non-cash
payments to partners, acquisition-related accounting and certain one-time items, if applicable. Due
to the high variability and difficulty in predicting certain items that affect net income, such as
tax rates, stock price and interest rates, we are unable to provide a reconciliation to net income
on a forward-looking basis without unreasonable efforts.
13
Notes to Consolidated Financial Statements (Continued)
Reconciliation of OIBA to Operating Income and Net Income
The following table presents a reconciliation of OIBA to operating income and net income
for the three and six months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
OIBA |
|
$ |
187,100 |
|
|
$ |
184,223 |
|
|
$ |
291,490 |
|
|
$ |
272,763 |
|
Amortization of intangible assets |
|
|
(19,503 |
) |
|
|
(30,120 |
) |
|
|
(40,699 |
) |
|
|
(60,291 |
) |
Stock-based compensation |
|
|
(13,972 |
) |
|
|
(17,221 |
) |
|
|
(29,832 |
) |
|
|
(41,108 |
) |
Amortization of non-cash distribution and marketing |
|
|
|
|
|
|
(627 |
) |
|
|
|
|
|
|
(8,867 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
153,625 |
|
|
|
136,255 |
|
|
|
220,959 |
|
|
|
162,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
650 |
|
|
|
6,559 |
|
|
|
(3,257 |
) |
|
|
8,262 |
|
Other, net |
|
|
5,936 |
|
|
|
10,466 |
|
|
|
441 |
|
|
|
14,123 |
|
Provision for income taxes |
|
|
(64,076 |
) |
|
|
(56,158 |
) |
|
|
(87,688 |
) |
|
|
(65,816 |
) |
Minority interest in (income) loss of consolidated subsidiaries, net |
|
|
1 |
|
|
|
(1,640 |
) |
|
|
457 |
|
|
|
(249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
96,136 |
|
|
$ |
95,482 |
|
|
$ |
130,912 |
|
|
$ |
118,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 12 Guarantor and Non-Guarantor Supplemental Financial Information
Condensed consolidating financial information of Expedia, Inc. (the Parent), our
subsidiaries that are guarantors of the Notes (the Guarantor Subsidiaries), and our subsidiaries
that are not guarantors of the Notes (the Non-Guarantor Subsidiaries) is shown below. The Notes
are guaranteed by certain of our wholly-owned domestic subsidiaries and rank equally in right of
payment with all of our existing and future unsecured and unsubordinated obligations. The
guarantees are full, unconditional, joint and several. In this financial information, the Parent
and Guarantor Subsidiaries account for investments in their wholly-owned subsidiaries using the
equity method.
14
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenue |
|
$ |
|
|
|
$ |
630,896 |
|
|
$ |
148,161 |
|
|
$ |
(89,134 |
) |
|
$ |
689,923 |
|
Cost of revenue |
|
|
|
|
|
|
120,640 |
|
|
|
24,366 |
|
|
|
(1,360 |
) |
|
|
143,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
510,256 |
|
|
|
123,795 |
|
|
|
(87,774 |
) |
|
|
546,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
|
|
|
|
249,668 |
|
|
|
94,080 |
|
|
|
(87,843 |
) |
|
|
255,905 |
|
General and administrative |
|
|
|
|
|
|
56,740 |
|
|
|
18,822 |
|
|
|
171 |
|
|
|
75,733 |
|
Technology and content |
|
|
|
|
|
|
32,002 |
|
|
|
9,611 |
|
|
|
(102 |
) |
|
|
41,511 |
|
Amortization of intangible assets |
|
|
|
|
|
|
17,456 |
|
|
|
2,047 |
|
|
|
|
|
|
|
19,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
154,390 |
|
|
|
(765 |
) |
|
|
|
|
|
|
153,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
pre-tax earnings (loss) of consolidated subsidiaries |
|
|
109,410 |
|
|
|
(1,616 |
) |
|
|
|
|
|
|
(107,794 |
) |
|
|
|
|
Other, net |
|
|
(13,431 |
) |
|
|
19,092 |
|
|
|
916 |
|
|
|
9 |
|
|
|
6,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
95,979 |
|
|
|
17,476 |
|
|
|
916 |
|
|
|
(107,785 |
) |
|
|
6,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
95,979 |
|
|
|
171,866 |
|
|
|
151 |
|
|
|
(107,785 |
) |
|
|
160,211 |
|
Provision for income taxes |
|
|
156 |
|
|
|
(61,914 |
) |
|
|
(2,318 |
) |
|
|
|
|
|
|
(64,076 |
) |
Minority interest in loss of consolidated subsidiaries, net |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
96,135 |
|
|
$ |
109,952 |
|
|
$ |
(2,166 |
) |
|
$ |
(107,785 |
) |
|
$ |
96,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Three Months Ended June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Expedia, Inc. |
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenue |
|
$ |
|
|
|
$ |
556,742 |
|
|
$ |
105,657 |
|
|
$ |
(63,941 |
) |
|
$ |
598,458 |
|
Cost of revenue |
|
|
|
|
|
|
109,809 |
|
|
|
19,984 |
|
|
|
(1,344 |
) |
|
|
128,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
446,933 |
|
|
|
85,673 |
|
|
|
(62,597 |
) |
|
|
470,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
|
|
|
|
200,527 |
|
|
|
60,790 |
|
|
|
(62,651 |
) |
|
|
198,666 |
|
General and administrative |
|
|
|
|
|
|
59,502 |
|
|
|
11,497 |
|
|
|
54 |
|
|
|
71,053 |
|
Technology and content |
|
|
|
|
|
|
25,995 |
|
|
|
7,293 |
|
|
|
|
|
|
|
33,288 |
|
Amortization of intangible assets |
|
|
|
|
|
|
28,133 |
|
|
|
1,987 |
|
|
|
|
|
|
|
30,120 |
|
Amortization of non-cash distribution and marketing |
|
|
|
|
|
|
627 |
|
|
|
|
|
|
|
|
|
|
|
627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
132,149 |
|
|
|
4,106 |
|
|
|
|
|
|
|
136,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in pre-tax earnings of consolidated subsidiaries |
|
|
87,667 |
|
|
|
4,723 |
|
|
|
|
|
|
|
(92,390 |
) |
|
|
|
|
Other, net |
|
|
7,437 |
|
|
|
8,511 |
|
|
|
1,077 |
|
|
|
|
|
|
|
17,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
95,104 |
|
|
|
13,234 |
|
|
|
1,077 |
|
|
|
(92,390 |
) |
|
|
17,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
95,104 |
|
|
|
145,383 |
|
|
|
5,183 |
|
|
|
(92,390 |
) |
|
|
153,280 |
|
Provision for income taxes |
|
|
378 |
|
|
|
(56,812 |
) |
|
|
276 |
|
|
|
|
|
|
|
(56,158 |
) |
Minority interest in income of consolidated subsidiaries, net |
|
|
|
|
|
|
(708 |
) |
|
|
(932 |
) |
|
|
|
|
|
|
(1,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
95,482 |
|
|
$ |
87,863 |
|
|
$ |
4,527 |
|
|
$ |
(92,390 |
) |
|
$ |
95,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Six Months Ended June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenue |
|
$ |
|
|
|
$ |
1,134,435 |
|
|
$ |
277,441 |
|
|
$ |
(171,442 |
) |
|
$ |
1,240,434 |
|
Cost of revenue |
|
|
|
|
|
|
221,257 |
|
|
|
46,141 |
|
|
|
(2,454 |
) |
|
|
264,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
913,178 |
|
|
|
231,300 |
|
|
|
(168,988 |
) |
|
|
975,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
|
|
|
|
471,795 |
|
|
|
175,491 |
|
|
|
(169,113 |
) |
|
|
478,173 |
|
General and administrative |
|
|
|
|
|
|
116,665 |
|
|
|
35,045 |
|
|
|
186 |
|
|
|
151,896 |
|
Technology and content |
|
|
|
|
|
|
65,083 |
|
|
|
18,741 |
|
|
|
(61 |
) |
|
|
83,763 |
|
Amortization of intangible assets |
|
|
|
|
|
|
36,955 |
|
|
|
3,744 |
|
|
|
|
|
|
|
40,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
222,680 |
|
|
|
(1,721 |
) |
|
|
|
|
|
|
220,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in pre-tax earnings (loss) of consolidated subsidiaries |
|
|
156,128 |
|
|
|
(990 |
) |
|
|
|
|
|
|
(155,138 |
) |
|
|
|
|
Other, net |
|
|
(25,977 |
) |
|
|
22,962 |
|
|
|
190 |
|
|
|
9 |
|
|
|
(2,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
130,151 |
|
|
|
21,972 |
|
|
|
190 |
|
|
|
(155,129 |
) |
|
|
(2,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest |
|
|
130,151 |
|
|
|
244,652 |
|
|
|
(1,531 |
) |
|
|
(155,129 |
) |
|
|
218,143 |
|
Provision for income taxes |
|
|
760 |
|
|
|
(87,166 |
) |
|
|
(1,282 |
) |
|
|
|
|
|
|
(87,688 |
) |
Minority interest in loss of consolidated subsidiaries, net |
|
|
|
|
|
|
|
|
|
|
457 |
|
|
|
|
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
130,911 |
|
|
$ |
157,486 |
|
|
$ |
(2,356 |
) |
|
$ |
(155,129 |
) |
|
$ |
130,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Six Months Ended June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenue |
|
$ |
|
|
|
$ |
1,013,543 |
|
|
$ |
208,840 |
|
|
$ |
(130,027 |
) |
|
$ |
1,092,356 |
|
Cost of revenue |
|
|
|
|
|
|
211,839 |
|
|
|
38,114 |
|
|
|
(2,190 |
) |
|
|
247,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
801,704 |
|
|
|
170,726 |
|
|
|
(127,837 |
) |
|
|
844,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
|
|
|
|
402,610 |
|
|
|
124,973 |
|
|
|
(127,891 |
) |
|
|
399,692 |
|
General and administrative |
|
|
|
|
|
|
117,853 |
|
|
|
26,507 |
|
|
|
54 |
|
|
|
144,414 |
|
Technology and content |
|
|
|
|
|
|
53,706 |
|
|
|
15,126 |
|
|
|
|
|
|
|
68,832 |
|
Amortization of intangible assets |
|
|
|
|
|
|
56,513 |
|
|
|
3,778 |
|
|
|
|
|
|
|
60,291 |
|
Amortization of non-cash distribution and marketing |
|
|
|
|
|
|
8,867 |
|
|
|
|
|
|
|
|
|
|
|
8,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
162,155 |
|
|
|
342 |
|
|
|
|
|
|
|
162,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of consolidated subsidiaries |
|
|
108,119 |
|
|
|
2,176 |
|
|
|
|
|
|
|
(110,295 |
) |
|
|
|
|
Other, net |
|
|
9,839 |
|
|
|
12,248 |
|
|
|
298 |
|
|
|
|
|
|
|
22,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
117,958 |
|
|
|
14,424 |
|
|
|
298 |
|
|
|
(110,295 |
) |
|
|
22,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
117,958 |
|
|
|
176,579 |
|
|
|
640 |
|
|
|
(110,295 |
) |
|
|
184,882 |
|
Provision for income taxes |
|
|
859 |
|
|
|
(67,434 |
) |
|
|
759 |
|
|
|
|
|
|
|
(65,816 |
) |
Minority interest in (income) loss of consolidated subsidiaries, net |
|
|
|
|
|
|
(676 |
) |
|
|
427 |
|
|
|
|
|
|
|
(249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
118,817 |
|
|
$ |
108,469 |
|
|
$ |
1,826 |
|
|
$ |
(110,295 |
) |
|
$ |
118,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
975 |
|
|
$ |
1,483,194 |
|
|
$ |
326,428 |
|
|
$ |
(284,213 |
) |
|
$ |
1,526,384 |
|
Investment in subsidiaries |
|
|
6,020,547 |
|
|
|
335,526 |
|
|
|
|
|
|
|
(6,356,073 |
) |
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
958,887 |
|
|
|
47,259 |
|
|
|
|
|
|
|
1,006,146 |
|
Goodwill |
|
|
|
|
|
|
5,614,890 |
|
|
|
292,396 |
|
|
|
|
|
|
|
5,907,286 |
|
Other assets, net |
|
|
5,591 |
|
|
|
144,496 |
|
|
|
85,684 |
|
|
|
|
|
|
|
235,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
6,027,113 |
|
|
$ |
8,536,993 |
|
|
$ |
751,767 |
|
|
$ |
(6,640,286 |
) |
|
$ |
8,675,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
91,546 |
|
|
$ |
2,067,089 |
|
|
$ |
342,317 |
|
|
$ |
(284,213 |
) |
|
$ |
2,216,739 |
|
Long-term debt |
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000 |
|
Other liabilities and minority interest |
|
|
|
|
|
|
445,243 |
|
|
|
78,038 |
|
|
|
|
|
|
|
523,281 |
|
Stockholders equity |
|
|
5,435,567 |
|
|
|
6,024,661 |
|
|
|
331,412 |
|
|
|
(6,356,073 |
) |
|
|
5,435,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
6,027,113 |
|
|
$ |
8,536,993 |
|
|
$ |
751,767 |
|
|
$ |
(6,640,286 |
) |
|
$ |
8,675,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
461,397 |
|
|
$ |
916,216 |
|
|
$ |
267,113 |
|
|
$ |
(462,041 |
) |
|
$ |
1,182,685 |
|
Investment in subsidiaries |
|
|
5,951,961 |
|
|
|
295,989 |
|
|
|
|
|
|
|
(6,247,950 |
) |
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
989,668 |
|
|
|
39,106 |
|
|
|
|
|
|
|
1,028,774 |
|
Goodwill |
|
|
|
|
|
|
5,593,031 |
|
|
|
268,261 |
|
|
|
|
|
|
|
5,861,292 |
|
Other assets, net |
|
|
6,863 |
|
|
|
137,073 |
|
|
|
58,412 |
|
|
|
(5,915 |
) |
|
|
196,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
6,420,221 |
|
|
$ |
7,931,977 |
|
|
$ |
632,892 |
|
|
$ |
(6,715,906 |
) |
|
$ |
8,269,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
|
|
|
$ |
1,598,859 |
|
|
$ |
263,306 |
|
|
$ |
(462,040 |
) |
|
$ |
1,400,125 |
|
Long-term debt |
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000 |
|
Other liabilities and minority interest |
|
|
15,931 |
|
|
|
378,399 |
|
|
|
76,354 |
|
|
|
(5,915 |
) |
|
|
464,769 |
|
Stockholders equity |
|
|
5,904,290 |
|
|
|
5,954,719 |
|
|
|
293,232 |
|
|
|
(6,247,951 |
) |
|
|
5,904,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
6,420,221 |
|
|
$ |
7,931,977 |
|
|
$ |
632,892 |
|
|
$ |
(6,715,906 |
) |
|
$ |
8,269,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Consolidated |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(1,399 |
) |
|
$ |
854,354 |
|
|
$ |
69,658 |
|
|
$ |
922,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net |
|
|
1,399 |
|
|
|
(70,139 |
) |
|
|
(59,450 |
) |
|
|
(128,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
1,399 |
|
|
|
(70,139 |
) |
|
|
(59,450 |
) |
|
|
(128,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock activity |
|
|
(668,018 |
) |
|
|
|
|
|
|
|
|
|
|
(668,018 |
) |
Transfers (to) from related parties |
|
|
664,662 |
|
|
|
(664,662 |
) |
|
|
|
|
|
|
|
|
Other, net |
|
|
3,356 |
|
|
|
7,260 |
|
|
|
14,656 |
|
|
|
25,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
|
|
|
|
(657,402 |
) |
|
|
14,656 |
|
|
|
(642,746 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
5,781 |
|
|
|
672 |
|
|
|
6,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
132,594 |
|
|
|
25,536 |
|
|
|
158,130 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
658,540 |
|
|
|
194,734 |
|
|
|
853,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
791,134 |
|
|
$ |
220,270 |
|
|
$ |
1,011,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Consolidated |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
2,791 |
|
|
$ |
685,955 |
|
|
$ |
20,167 |
|
|
$ |
708,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net |
|
|
(2,791 |
) |
|
|
(31,852 |
) |
|
|
(5,909 |
) |
|
|
(40,552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(2,791 |
) |
|
|
(31,852 |
) |
|
|
(5,909 |
) |
|
|
(40,552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings, net |
|
|
(230,000 |
) |
|
|
|
|
|
|
(668 |
) |
|
|
(230,668 |
) |
Transfers (to) from related parties |
|
|
333,284 |
|
|
|
(333,284 |
) |
|
|
|
|
|
|
|
|
Treasury stock activity |
|
|
(127,195 |
) |
|
|
|
|
|
|
|
|
|
|
(127,195 |
) |
Other, net |
|
|
23,911 |
|
|
|
(13,239 |
) |
|
|
9,568 |
|
|
|
20,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) financing activities |
|
|
|
|
|
|
(346,523 |
) |
|
|
8,900 |
|
|
|
(337,623 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
16,643 |
|
|
|
(1,456 |
) |
|
|
15,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
324,223 |
|
|
|
21,702 |
|
|
|
345,925 |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
151,523 |
|
|
|
145,893 |
|
|
|
297,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
475,746 |
|
|
$ |
167,595 |
|
|
$ |
643,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Part I. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements
reflect the views of our management regarding current expectations and projections about future
events and are based on currently available information. Actual results could differ materially
from those contained in these forward-looking statements for a variety of reasons, including, but
not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31,
2006, Part I, Item 1A, Risk Factors, as well as those discussed elsewhere in this report. Other
unknown or unpredictable factors also could have a material adverse effect on our business,
financial condition and results of operations. Accordingly, readers should not place undue reliance
on these forward-looking statements. 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. These forward-looking statements are
inherently subject to uncertainties, risks and changes in circumstances that are difficult to
predict. We are not under any obligation and do not intend to publicly update or review any of
these forward-looking statements, whether as a result of new information, future events or
otherwise, even if experience or future events make it clear that any expected results expressed or
implied by those forward-looking statements will not be realized. Please carefully review and
consider the various disclosures made in this report and in our other reports filed with the
Securities and Exchange Commission (SEC) that attempt to advise interested parties of the risks
and factors that may affect our business, prospects and results of operations.
The information included in this managements discussion and analysis of financial condition
and results of operations should be read in conjunction with our consolidated financial statements
and the notes included in this Quarterly Report, and the audited consolidated financial statements
and notes and Managements Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for the year ended December 31, 2006.
Overview
Expedia, Inc. is an online travel company, empowering business and leisure travelers with
the tools and information they need to efficiently research, plan, book and experience travel. We
have created a global travel marketplace used by a broad range of leisure and corporate travelers
and offline retail travel agents as well as travel service providers. We make available, on a
stand-alone and package basis, travel products and services provided by numerous airlines, lodging
properties, car rental companies, destination service providers, cruise lines and other travel
product and service companies.
Our portfolio of brands includes Expedia.com®, Hotels.com®,
Hotwire.comtm, our private label programs (Worldwide Travel Exchange and
Interactive Affiliate Network), Classic Vacations, Expedia® Corporate Travel (ECT),
eLongtm and TripAdvisor®. In addition, many of these brands have
related international points of sale. For additional information about our portfolio of brands, see
Portfolio of Brands in Part I, Item 1, Business, in our Annual Report on Form 10-K for the year
ended December 31, 2006.
Industry Trends
The travel industry, including offline and online travel agencies, as well as suppliers
of travel products and services, has been characterized by rapid and significant change.
The U.S. airline sector in particular has experienced significant turmoil in recent years,
with oil prices hitting all-time highs, the shift of capacity to low-cost carriers (LCCs)
offering no frills flights at discounted prices and the entry and subsequent emergence of several
of the largest traditional carriers from the protection of Chapter 11 bankruptcy proceedings.
19
The traditional carriers need to rationalize high fixed cost structures to better compete in
this environment has caused them to consider consolidation opportunities to better share fixed
costs and reduce redundant flight routes. These attempts have generally been unsuccessful either
due to antitrust concerns or reluctance among target companies to consummate mergers. Carriers have
also aggressively pursued cost reductions in every aspect of their operations, including
distribution costs. Airlines have successfully pursued distribution cost reductions in a number of
ways, including negotiating lower (or in some cases eliminating) travel agent commissions and
overrides, increasing direct distribution through their proprietary websites, and reducing payments
to global distribution system (GDS) intermediaries as contracts with the GDSs expired in
mid to late 2006. These GDS reductions, in turn, impacted travel agents as large agencies,
including Expedia, have historically received a meaningful portion of their air remuneration from
GDS providers.
Through the end of 2006, the U.S. airline industry enjoyed increasing load factors and rapidly
escalating ticket prices. At the same time, the carriers which participate in the Expedia
marketplace have been reducing their share of total air seat per mile capacity; while the LCCs,
which have increased their relative capacity, have not generally participated in the Expedia
marketplace. These trends have impacted our ability to obtain supply in our agency and merchant air
businesses, reduced discounts for merchant air tickets and limited supply of merchant air tickets
for use in our package travel offerings. As a result of these industry dynamics and reduced
economics relating to recently negotiated GDS and airline agreements, our revenue per air ticket
has declined significantly since the fourth quarter of 2004, and we anticipate it will continue to
decline further in 2007. However, as of June 30, 2007, we have successfully completed agreements
with nine of the top ten domestic carriers, which we believe will result in more stabilized
economics into 2008.
Additionally, the U.S. airline industry has recently seen load factors steadying and airfare
increases have moderated, which is generally positive for our business. In addition, we have been
successful in increasing our selection of content from LCCs, including AirTran Airways, Frontier
Airlines, and JetBlue Airways.
The hotel sector has recently been characterized by robust demand and constrained supply,
resulting in increasing occupancy rates and average daily rates (ADRs). More recently, hotels
have begun to see a leveling in occupancies with ADRs continuing to grow. Industry experts expect
demand growth to continue to outstrip supply through at least 2007. While increasing ADRs generally
have a positive effect on our merchant hotel operations as our remuneration increases
proportionally with the room price, higher ADRs can impact underlying demand, and the higher
occupancies which accompany robust ADRs can restrict our ability to obtain merchant hotel room
allocation, particularly in high occupancy destinations popular with our travel base, including our
three largest markets in Las Vegas, New York and Orlando. Higher occupancy levels also has
historically tended to drive lower margins as hotel room suppliers have less need for third-party
intermediaries to generate demand.
Increased usage and familiarity with the internet has driven rapid growth in online
penetration of travel expenditures. According to PhoCusWright, an independent travel, tourism and
hospitality research firm, in 2006 29% of worldwide leisure, unmanaged and corporate travel
expenditures occurred online, with 49% in the United States, compared with 22% of European travel
and 12% in the Asia Pacific region. These penetration rates have increased considerably over the
past few years, and are expected to continue growing. This significant growth has attracted many
competitors to online travel. This competition has intensified in recent years, and the industry is
expected to remain highly competitive for the foreseeable future.
In addition to the growth of online travel agencies, airlines and lodging companies have
aggressively pursued direct online distribution of their products and services over the last
several years, with supplier growth outpacing online growth since 2002, and now accounting for
nearly two-thirds of all online travel expenditures in the United States according to PhoCusWright.
Going forward, airline supplier site growth is expected to move more in line with
20
overall online air bookings growth, while hotel supplier sites are expected to continue
growing faster than online hotel bookings growth.
Differentiation among the various travel websites has narrowed in the past several years, and
the travel landscape has grown extremely competitive, with the need for competitors to generally
differentiate their offerings on features other than price.
Business Strategy
We play a fundamental role in facilitating travel, whether for leisure or business. We are
committed to providing our travelers with the best set of resources to serve their travel needs by
taking advantage of our critical assets our brand portfolio, our technology and commitment to
continuous innovation, our global reach and our breadth of product offering. In addition, we take
advantage of our growing base of knowledge about our destinations, suppliers and travelers based on
our unique position in the travel value chain.
A discussion of the critical assets that we leverage in achieving our business strategy
follows:
Portfolio of Travel Brands. We seek to appeal to the broadest possible range of travelers and
suppliers through our collection of industry-leading brands. We target several different
demographics, from the value-conscious traveler through our Hotwire brand to luxury travelers
seeking a high-touch, customized vacation package through our Classic Vacations brand. We believe
our flagship Expedia brand appeals to the broadest range of travelers, with our extensive product
offering ranging from single item bookings of discounted product to complex bundling of higher-end
travel packages. Our Hotels.com site and its international versions target travelers with premium
content about lodging properties, and generally appeal to travelers with shorter booking windows
who prefer to drive to their destinations.
Technology and Continuous Innovation. Expedia has an established tradition of innovation,
from Expedia.coms inception as a division of Microsoft, to our introduction of more recent
innovations such as our ThankYou Rewards Network offered in conjunction with Citigroup, Traveler
hotel reviews, Expedia® Fare Alerts and Flight Fare Calendar, Travel
Tickertm by Hotwire®, TripAdvisors traveler network and ECTs
business intelligence toolset.
We intend to continue to aggressively innovate on behalf of our travelers and suppliers,
including our current efforts to build a scaleable, service-oriented technology platform for our
travelers, which will extend across our portfolio of brands. We expect this to result in improved
flexibility and allow faster innovation. This transition should allow us to improve our site
merchandising, browse and search functionality and add significant personalization features. This
transition is occurring in a phased approach, with a portion of our worldwide points of sale
migrating to the new platform during 2007.
For our suppliers, we have developed proprietary technology that streamlines the interaction
between some of our websites and hotel central reservation systems, making it easier for hotels to
manage reservations made through our brands. We began offering more streamlined application
programming interfaces for our lodging partners in 2007 to enable faster and simpler integration of
real-time hotel content.
Global Reach. In 2006, international gross bookings accounted for approximately 26% of
worldwide gross bookings and 28% of revenue. We currently operate over 70 branded points of sale in
more than 50 countries across the globe, including Expedia-branded sites in the United States,
Australia, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden
and the United Kingdom. Our Hotels.com and TripAdvisor brands also maintain both U.S. points of
sale and additional points of sale outside the United States. We also offer Chinese travelers a
wide array of products and services through our majority ownership in eLong.
We intend to continue investing in and growing our existing international points of sale. We
anticipate launching points of sale in additional countries where we find large travel markets and
rapid growth of online commerce.
21
ECT currently conducts operations in the United States, Belgium, Canada, France, Germany,
Italy and the United Kingdom. We believe the corporate travel sector represents a large opportunity
for Expedia, and we believe we offer a compelling technology solution to businesses seeking to
control travel costs and improve their employees travel experiences. We intend to continue
investing in and expanding the geographic footprint of our ECT business.
In expanding our global reach, we are leveraging our significant investment in technology,
operations, brand building, supplier integration and relationships and other areas since the launch
of Expedia.com in 1996. We intend to continue leveraging this investment when launching points of
sale in new countries, introducing website features, adding supplier products and services, and
adding value-added content for travelers.
Breadth of Product Offering. We believe we offer a comprehensive array of innovative travel
products and services to travelers. We plan to continue improving and growing these offerings, as
well as expand them to our worldwide points of sale over time.
The majority of our revenue comes from transactions involving the booking of hotel
reservations and the sale of airline tickets, either as stand-alone products or as part of package
transactions. We are working to grow our package business as it results in higher revenue per
transaction, and we also seek to continue diversifying our revenue mix beyond core air and hotel
products to car rental, destination services, cruise and other product offerings. We are also
working to increase the mix of revenue from advertising through expansion of our TripAdvisor model,
as well as media enhancements across many of our other worldwide points of sale.
Seasonality
We generally experience seasonal fluctuations in the demand for our travel products and
services. For example, traditional leisure travel bookings are generally the highest in the first
three quarters of the year as travelers plan and book their spring, summer and holiday travel. The
number of bookings typically decreases in the fourth quarter. Because revenue in the merchant
business is generally recognized when the travel takes place rather than when it is booked, revenue
typically lags bookings by several weeks or longer. As a result, revenue is typically the lowest in
the first quarter and highest in the third quarter. The continued growth of our international
operations or a change in our product mix may influence the typical trend of our seasonality in the
future.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that we believe are important in the
preparation of our consolidated financial statements because they require that we use judgment and
estimates in applying those policies. We prepare our consolidated financial statements and
accompanying notes in accordance with generally accepted accounting principles in the United States
(GAAP). Preparation of the consolidated financial statements and accompanying notes requires that
we make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as of the date of the consolidated financial
statements as well as revenue and expenses during the periods reported. We base our estimates on
historical experience, where applicable, and other assumptions that we believe are reasonable under
the circumstances. Actual results may differ from our estimates under different assumptions or
conditions.
There are certain critical estimates that we believe require significant judgment in the
preparation of our consolidated financial statements. We consider an accounting estimate to be
critical if:
|
|
|
It requires us to make assumptions because information was not available at the time
or it included matters that were highly uncertain at the time we were making the
estimate; and |
|
|
|
|
Changes in the estimate or different estimates that we could have selected may
have had a material impact on our financial condition or results of operations. |
22
For additional information about our critical accounting policies and estimates, see the
disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2006.
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, we record income taxes under the liability method. Deferred tax assets and liabilities
reflect our estimation of the future tax consequences of temporary differences between the carrying
amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes
based on the differences in accounting methods and timing between financial statement and income
tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary
difference based on the enacted tax rates in effect for the years in which we expect to realize the
underlying items of income and expense. We consider many factors when assessing the likelihood of
future realization of our deferred tax assets, including our recent earnings experience by
jurisdiction, expectations of future taxable income, and the carryforward periods available to us
for tax reporting purposes, as well as other relevant factors. We may establish a valuation
allowance to reduce deferred tax assets to the amount we believe is more likely than not to be
realized. Due to inherent complexities arising from the nature of our businesses, future changes in
income tax law, tax sharing agreements or variances between our actual and anticipated operating
results, we make certain judgments and estimates. Therefore, actual income taxes could materially
vary from these estimates.
We record liabilities to address uncertain tax positions we have taken in previously filed tax
returns or that we expect to take in a future tax return. The determination for required
liabilities is based upon an analysis of each individual tax position, taking into consideration
whether it is more likely than not that our tax positions, based on technical merits, will be
sustained upon examination. For those positions for which we conclude it is more likely than not
it will be sustained, we recognize the largest amount of tax benefit that is greater than 50
percent likely of being realized upon ultimate settlement with the taxing authority. The
difference between the amount recognized and the total tax position is recorded as a liability.
The ultimate resolution of these tax positions may be greater or less than the liabilities
recorded.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 2 Summary of Significant
Accounting Policies in the notes to the consolidated financial statements.
Segments
We have two reportable segments: North America and Europe. We determined our segments
based on how our chief operating decision makers manage our business, make operating decisions and
evaluate operating performance.
Our North America segment provides a full range of travel services to customers in the United
States, Canada and Mexico. This segment operates through a variety of brands including Classic
Vacations, Expedia.com, Hotels.com, Hotwire.com and TripAdvisor.
Our Europe segment provides travel services primarily through localized Expedia websites in
Denmark, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden and the United Kingdom, as
well as localized versions of Hotels.com in various European countries.
Corporate and Other includes ECT, Expedia Asia Pacific and unallocated corporate functions and
expenses. ECT provides travel products and services to corporate customers in North America and
Europe. Expedia Asia Pacific provides online travel information and reservation services primarily
through eLong in the Peoples Republic of China, localized Expedia websites in Australia and Japan,
as well as localized versions of Hotels.com in various Asian countries.
23
Operating Metrics
Our operating results are affected by certain metrics that represent the selling
activities generated by our travel products and services. As travelers have increased their use of
the internet to book their travel arrangements, we have seen our gross bookings increase,
reflecting the growth in the online travel industry and our business acquisitions. Gross bookings
represent the total retail value of transactions booked for both agency and merchant transactions,
recorded at the time of booking reflecting the total price due for travel by travelers, including
taxes, fees and other charges, and are generally reduced for cancellations and refunds.
Gross Bookings and Revenue Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
% Change |
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Gross Bookings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
3,722,859 |
|
|
$ |
3,445,166 |
|
|
|
8% |
|
|
$ |
7,281,797 |
|
|
$ |
6,966,804 |
|
|
|
5% |
|
Europe |
|
|
1,035,243 |
|
|
|
751,793 |
|
|
|
38% |
|
|
|
2,066,889 |
|
|
|
1,531,737 |
|
|
|
35% |
|
Corporate and Other |
|
|
466,052 |
|
|
|
367,805 |
|
|
|
27% |
|
|
|
891,450 |
|
|
|
714,430 |
|
|
|
25% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross bookings |
|
$ |
5,224,154 |
|
|
$ |
4,564,764 |
|
|
|
14% |
|
|
$ |
10,240,136 |
|
|
$ |
9,212,971 |
|
|
|
11% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
13.6 |
% |
|
|
13.2 |
% |
|
|
|
|
|
|
12.5 |
% |
|
|
12.0 |
% |
|
|
|
|
Europe |
|
|
14.0 |
% |
|
|
14.9 |
% |
|
|
|
|
|
|
12.4 |
% |
|
|
12.9 |
% |
|
|
|
|
Corporate and Other |
|
|
8.4 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
8.2 |
% |
|
|
8.0 |
% |
|
|
|
|
Total revenue margin |
|
|
13.2 |
% |
|
|
13.1 |
% |
|
|
|
|
|
|
12.1 |
% |
|
|
11.9 |
% |
|
|
|
|
Gross bookings increased $659.4 million and $1.0 billion, or 14% and 11%, for the three and
six months ended June 30, 2007 compared to the same periods in 2006. For the three and six months
ended June 30, 2007, North America gross bookings increased 8% and 5% compared to the same periods
in 2006. For the three and six months ended June 30, 2007, Europe gross bookings increased 38% and
35% compared to the same periods in 2006.
Revenue margin, which is defined as revenue as a percentage of gross bookings, increased 10
basis points and 26 basis points for the three and six months ended June 30, 2007 compared to the
same periods in 2006. For the three and six months ended June 30, 2007, revenue margin increased 34
basis points and 50 basis points in our North America segment compared to the same periods in 2006.
For the three and six months ended June 30, 2007, revenue margin decreased 85 basis points and 52
basis points in our Europe segment compared to the same periods in 2006.
The increase in worldwide and North America revenue margin for the three months ended June 30,
2007, as compared to the same period in 2006, was primarily due to an increased mix of advertising
and media and car rental revenue, partially offset by the decline in revenue per air ticket and
lower merchant hotel raw margin (defined as hotel net revenue as a percentage of hotel gross
revenue). The increase in worldwide and North America revenue margin for the six months ended June
30, 2007, as compared to the same period in 2006, was primarily due to an increased mix of
advertising and media and car rental revenue as well as a higher merchant hotel raw margin,
partially offset by the decline in revenue per air ticket. Europe revenue margin decreased in part due to a 4% and 9% increase in airfares, as our
remuneration generally does not vary with the price of air tickets. In addition, for the three
months ended June 30, 2007 compared to the same period in the prior year, Europe revenue margin
also decreased due to decreased revenue from air booking fees and more competitive hotel pricing.
24
Results of Operations
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
North America |
|
$ |
505,379 |
|
|
$ |
455,925 |
|
|
|
11% |
|
|
$ |
911,780 |
|
|
$ |
837,850 |
|
|
|
9% |
|
Europe |
|
|
145,437 |
|
|
|
112,036 |
|
|
|
30% |
|
|
|
255,427 |
|
|
|
197,304 |
|
|
|
29% |
|
Corporate and Other |
|
|
39,107 |
|
|
|
30,497 |
|
|
|
28% |
|
|
|
73,227 |
|
|
|
57,202 |
|
|
|
28% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
689,923 |
|
|
$ |
598,458 |
|
|
|
15% |
|
|
$ |
1,240,434 |
|
|
$ |
1,092,356 |
|
|
|
14% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue increased for the three and six months ended June 30, 2007, compared to the same
periods in 2006, primarily due to increases in worldwide merchant hotel revenue and
advertising and media revenue, partially offset by a decline in our North America air revenue.
Worldwide merchant hotel revenue increased 14% and 15% for the three and six months ended June
30, 2007, compared to the same periods in 2006. The increases were primarily due to a 4% and 8%
increase in revenue per room night as well as a 10% and 7% increase in room nights stayed,
including rooms delivered as a component of vacation packages. For the three months ended June 30,
2007, revenue per room night increased due to a 5% increase in worldwide ADRs, partially offset by
a modest decrease in hotel raw margins. For the six months ended June 30, 2007, revenue per room
night increased due to a 7% increase in worldwide ADRs and a modest
increase in hotel raw margins.
Worldwide air revenue decreased 7% and 12% for the three and six months ended June 30, 2007,
compared to the same periods in 2006, due to a 19% decrease in revenue per air ticket for both
periods partially offset by an increase of 14% and 9% in air tickets sold for those periods. The
decrease in revenue per air ticket primarily reflects decreased compensation from air carriers and
GDS providers. Packages revenue grew 1% and decreased 1% for the three and six months ended June
30, 2007 compared with the prior year periods.
The remaining worldwide revenue other than merchant hotel and air discussed above, which
includes advertising and media, agency hotel, car rental, destination services, and cruise,
increased by 40% and 35% for the three and six
months ended June 30, 2007, compared to the same periods in 2006, primarily due to an increase
in advertising and media revenue and car rental revenue.
Cost of Revenue and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
Cost of revenue |
|
$ |
143,646 |
|
|
$ |
128,449 |
|
|
|
12 |
% |
|
$ |
264,944 |
|
|
$ |
247,763 |
|
|
|
7 |
% |
% of revenue |
|
|
20.8 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
21.4 |
% |
|
|
22.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
546,277 |
|
|
$ |
470,009 |
|
|
|
16 |
% |
|
$ |
975,490 |
|
|
$ |
844,593 |
|
|
|
15 |
% |
% of revenue |
|
|
79.2 |
% |
|
|
78.5 |
% |
|
|
|
|
|
|
78.6 |
% |
|
|
77.3 |
% |
|
|
|
|
Cost of revenue increased for the three and six months ended June 30, 2007, compared to the
same periods in 2006, primarily due to higher costs associated with the increase in transaction
volumes.
Gross profit increased for the three and six months ended June 30, 2007, compared to the same
periods in 2006, primarily due to increased revenue and an increase in gross margin. Gross margin
increased 64 basis points and 132 basis points for these periods primarily due to the same factors
contributing to our increased revenue margin, as well as cost savings from our productivity
initiatives.
25
Selling and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
Selling and marketing |
|
$ |
255,905 |
|
|
$ |
198,666 |
|
|
|
29 |
% |
|
$ |
478,173 |
|
|
$ |
399,692 |
|
|
|
20 |
% |
% of revenue |
|
|
37.1 |
% |
|
|
33.2 |
% |
|
|
|
|
|
|
38.5 |
% |
|
|
36.6 |
% |
|
|
|
|
Selling and marketing expenses increased, compared to the same periods in 2006, primarily due
to increased marketing spend in Europe and increased online marketing efforts across our global
points of sale, as well as higher indirect costs.
We expect absolute amounts spent on selling and marketing to increase in 2007, and we expect
selling and marketing to be higher as a percentage of revenue in 2007 as we support our established
brands, grow our earlier stage international markets, invest in our global advertising and media
business and expand our corporate travel sales and market management teams.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
General and administrative |
|
$ |
75,733 |
|
|
$ |
71,053 |
|
|
|
7 |
% |
|
$ |
151,896 |
|
|
$ |
144,414 |
|
|
|
5 |
% |
% of revenue |
|
|
11.0 |
% |
|
|
11.9 |
% |
|
|
|
|
|
|
12.2 |
% |
|
|
13.2 |
% |
|
|
|
|
General and administrative expense increased, compared to the same periods in 2006, primarily
due to higher personnel costs related to expansion of our corporate
information technology functions and our European businesses. We expect general and administrative expense to increase in absolute dollars but
decrease as a percentage of revenue for the full year of 2007 versus 2006.
Technology and Content
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
Technology and content |
|
$ |
41,511 |
|
|
$ |
33,288 |
|
|
|
25 |
% |
|
$ |
83,763 |
|
|
$ |
68,832 |
|
|
|
22 |
% |
% of revenue |
|
|
6.0 |
% |
|
|
5.6 |
% |
|
|
|
|
|
|
6.8 |
% |
|
|
6.3 |
% |
|
|
|
|
Technology and content expense increased in absolute costs and as a percentage of revenue
primarily due to increased amortization of capitalized software development costs, a significant
amount of which was placed into service beginning in the fourth quarter of 2006 and the first
quarter of 2007 and growth in personnel-related expenses in our software development and
engineering teams as we increase our level of website innovation.
Given our historical and ongoing investments in our enterprise data warehouse, new platform,
geographic expansion, data centers, redundancy, call center technology, site merchandising, content
management, site monitoring, networking, corporate travel, supplier integration and other
initiatives, we expect
technology and content expense to increase in absolute dollars and as a percentage of revenue for
both 2007 and 2008.
26
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
Amortization of intangible assets |
|
$ |
19,503 |
|
|
$ |
30,120 |
|
|
|
(35 |
%) |
|
$ |
40,699 |
|
|
$ |
60,291 |
|
|
|
(32 |
%) |
% of revenue |
|
|
2.8 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
3.3 |
% |
|
|
5.5 |
% |
|
|
|
|
Amortization of intangible assets decreased for the three and six months ended June 30, 2007,
compared to the same periods in 2006, due primarily to the completion of amortization related to
certain technology and supplier intangible assets over the past year, partially offset by
amortization related to new business acquisitions.
Amortization of Non-Cash Distribution and Marketing
In 2006, we substantially utilized all media time we received from IAC in conjunction
with the Spin-Off, with an original value of $17.1 million.
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
Operating income |
|
$ |
153,625 |
|
|
$ |
136,255 |
|
|
|
13 |
% |
|
$ |
220,959 |
|
|
$ |
162,497 |
|
|
|
36 |
% |
% of revenue |
|
|
22.3 |
% |
|
|
22.8 |
% |
|
|
|
|
|
|
17.8 |
% |
|
|
14.9 |
% |
|
|
|
|
Operating income increased for the three and six months ended June 30, 2007, compared to the
same periods in 2006, due to an increase in gross profit and a general decrease in
operating expenses as a percentage of revenue, including stock-based compensation, amortization of
intangibles, and amortization of non-cash distribution and marketing, with the exception of sales
and marketing expense and technology and content expense which grew as a percentage of revenue.
Operating Income Before Amortization (OIBA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
OIBA |
|
$ |
187,100 |
|
|
$ |
184,223 |
|
|
|
2 |
% |
|
$ |
291,490 |
|
|
$ |
272,763 |
|
|
|
7 |
% |
% of revenue |
|
|
27.1 |
% |
|
|
30.8 |
% |
|
|
|
|
|
|
23.5 |
% |
|
|
25.0 |
% |
|
|
|
|
The increase in OIBA for the three and six months ended June 30, 2007, compared to the same
periods in 2006, was primarily due to an increase in gross profit, partially offset by
growth in sales and marketing expenses and technology and content expenses as a percentage of
revenue.
Definition of OIBA
We provide OIBA as a supplemental measure to accounting principles generally accepted in
the United States (GAAP). We define OIBA as operating income plus: (1) amortization of non-cash
distribution and marketing expense, (2) stock-based compensation expense, (3) amortization of
intangible assets and goodwill and intangible asset impairment, if applicable and (4) certain
one-time items, if applicable.
OIBA is the primary operating metric used by which management evaluates the performance of our
business, on which internal budgets are based, and by which management is compensated. Management
believes that investors should have access to the same set of tools that management uses to analyze
our results. This non-GAAP measure should be considered in addition to results prepared in
accordance with GAAP, but should not be considered a
27
substitute for, or superior to, GAAP. We
endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the
comparable GAAP measures, GAAP financial statements, and descriptions of the reconciling items and
adjustments, to derive the non-GAAP measure. We present a reconciliation of this non-GAAP financial
measure to GAAP below.
OIBA 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 that may not be indicative of our core business operations. We
believe this measure is useful to investors for the following reasons:
|
|
|
It corresponds more closely to the cash operating income generated from our core
operations by excluding significant non-cash operating expenses; |
|
|
|
|
It aids in forecasting and analyzing future operating income as stock-based compensation,
non-cash distribution and marketing expenses and intangible assets amortization, assuming no
subsequent acquisitions, are likely to decline going forward; and |
|
|
|
|
It provides greater insight into management decision making at Expedia, as OIBA is our
primary internal metric for evaluating the performance of our business. |
OIBA has certain limitations in that it does not take into account the impact of certain
expenses to our consolidated statements of income, including stock-based compensation, non-cash
payments to partners, acquisition-related accounting and certain one-time items, if applicable. Due
to the high variability and difficulty in predicting certain items that affect net income, such as
tax rates, stock price and interest rates, we are unable to provide a reconciliation to net income
on a forward-looking basis without unreasonable efforts.
Reconciliation of OIBA to Operating Income and Net Income
The following table presents a reconciliation of OIBA to operating income and net income
for the three and six months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
OIBA |
|
$ |
187,100 |
|
|
$ |
184,223 |
|
|
$ |
291,490 |
|
|
$ |
272,763 |
|
Amortization of intangible assets |
|
|
(19,503 |
) |
|
|
(30,120 |
) |
|
|
(40,699 |
) |
|
|
(60,291 |
) |
Stock-based compensation |
|
|
(13,972 |
) |
|
|
(17,221 |
) |
|
|
(29,832 |
) |
|
|
(41,108 |
) |
Amortization of non-cash distribution and marketing |
|
|
|
|
|
|
(627 |
) |
|
|
|
|
|
|
(8,867 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
153,625 |
|
|
|
136,255 |
|
|
|
220,959 |
|
|
|
162,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
650 |
|
|
|
6,559 |
|
|
|
(3,257 |
) |
|
|
8,262 |
|
Other, net |
|
|
5,936 |
|
|
|
10,466 |
|
|
|
441 |
|
|
|
14,123 |
|
Provision for income taxes |
|
|
(64,076 |
) |
|
|
(56,158 |
) |
|
|
(87,688 |
) |
|
|
(65,816 |
) |
Minority interest in (income) loss of consolidated subsidiaries, net |
|
|
1 |
|
|
|
(1,640 |
) |
|
|
457 |
|
|
|
(249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
96,136 |
|
|
$ |
95,482 |
|
|
$ |
130,912 |
|
|
$ |
118,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
Interest income |
|
$ |
10,552 |
|
|
$ |
7,034 |
|
|
|
50 |
% |
|
$ |
17,821 |
|
|
$ |
10,635 |
|
|
|
68 |
% |
Interest expense |
|
|
(9,902 |
) |
|
|
(475 |
) |
|
|
1,985 |
% |
|
|
(21,078 |
) |
|
|
(2,373 |
) |
|
|
788 |
% |
Interest income increased for the three and six months ended June 30, 2007, compared to the
same periods in 2006, primarily due to higher cash and cash equivalent balances.
28
Interest expense increased for the three and six months ended June 30, 2007, compared to the
same periods in 2006, due to interest expense related to the $500.0 million senior unsecured notes
(the Notes) that we issued in August 2006. Interest expense will increase for fiscal 2007 versus
2006, as the Notes will have been outstanding for a full year. In addition, interest expense may
increase in the second half of 2007 due to the potential draw on our revolving credit facility to
fund the outstanding tender offer.
Other, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
Other, net |
|
$ |
5,936 |
|
|
$ |
10,466 |
|
|
|
(43 |
%) |
|
$ |
441 |
|
|
$ |
14,123 |
|
|
|
(97 |
%) |
For the three months ended June 30, 2007, other, net primarily includes a gain of $12.1
million related to federal excise tax refunds, partially offset by net losses of $3.2 million from
fair value changes in and the settlement of derivative instruments related to the Ask Jeeves Notes
and certain stock warrants as well as $2.3 million of losses from unconsolidated equity affiliates.
For the six months ended June 30, 2007, other, net primarily includes a gain of $12.1 million
relating to federal excise tax refunds, partially offset by net losses of $4.5 million from fair
value changes in and the settlement of derivative instruments related to the Ask Jeeves Notes and
certain stock warrants, net losses of $3.2 million from the fluctuation of exchange rates on
foreign denominated assets and liabilities of U.S. dollar functional currency subsidiaries, as well
as $3.6 million of losses from unconsolidated equity affiliates.
For the three and six months ended June 30, 2006, other, net primarily includes net gains of
$7.9 million and $12.2 million from fair value changes in and the settlement of derivative
instruments related to the Ask Jeeves Notes and certain stock warrants as well as net gains of $1.9
million and $1.5 million from the fluctuation of exchange rates on foreign denominated assets and
liabilities of U.S. dollar functional currency subsidiaries.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
|
($ in thousands) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
Provision for income taxes |
|
$ |
(64,076 |
) |
|
$ |
(56,158 |
) |
|
|
14 |
% |
|
$ |
(87,688 |
) |
|
$ |
(65,816 |
) |
|
|
33 |
% |
Effective tax rate |
|
|
40.0 |
% |
|
|
36.6 |
% |
|
|
|
|
|
|
40.2 |
% |
|
|
35.6 |
% |
|
|
|
|
We determine our provision for income taxes for interim periods using an estimate of our
annual effective rate. We record any changes to the estimated annual rate in the interim period in
which the change occurs, including discrete tax items.
Our effective tax rate was 40.0% and 40.2% for the three and six months ended June 30, 2007,
which is higher than the 35% statutory rate primarily due to state income taxes, non-deductible
losses related to our derivative liabilities, interest accruals related to uncertain tax positions
and a taxable dividend from an equity investment.
Our effective tax rate was 36.6% and 35.6% for the three and six months ended June 30, 2006,
which is higher than the 35% statutory rate primarily due to state income taxes and the valuation
allowance on foreign losses, partially offset by the disallowance for tax purposes of the
mark-to-market net gain related to our derivative instruments.
Financial Position, Liquidity and Capital Resources
Our principal sources of liquidity are cash flows generated from operations, our cash and
cash equivalents balances, which were $1,011.4 million and $853.3 million as of June 30, 2007 and
December 31, 2006, and our
29
$1.0 billion revolving credit facility, of which $947.5 million was
available to us as of June 30, 2007 representing the total of the facility less $52.5 million of
outstanding stand-by letters of credit.
On June 19, 2007, we announced our intention to repurchase up to 116,666,665 shares of our
common stock in a tender offer at a price per share not less than $27.50 and not greater than
$30.00. On July 25, 2007, we filed an amended offer to purchase that reduced the maximum number of
shares the Company is offering to purchase to 25,000,000 shares, due to lack of available financing
on terms satisfactory to the Company, as a result of current conditions in the credit market. We
expect to fund the purchase of shares under the amended tender offer through available borrowing
capacity under our existing revolving credit facility and cash on-hand. The 25,000,000 shares
subject to the amended tender offer represent approximately 9% of the number of shares of common
stock outstanding and approximately 8% of the total number of shares of common stock and Class B
common stock outstanding as of the announcement date. The tender offer will expire, unless
extended, on August 8, 2007. A modified Dutch auction will allow stockholders to indicate how
many shares and at what price within our specified range they wish to tender. Based on the number
of shares tendered and the prices specified by the tendering stockholders, we will determine the
lowest price per share within the range at which the Company can purchase up to 25,000,000 shares
of its common stock or such lesser number of shares as are properly tendered. We will not purchase
shares below a price stipulated by a stockholder, and in some cases, may actually purchase shares
at prices above a stockholders indication under the terms of the modified Dutch auction. Our
directors and executive officers and Liberty Media Corporation have advised the Company that they
do not intend to tender any shares in the tender offer.
Under the merchant model, we receive cash from travelers at the time of booking and we record
these amounts on our consolidated balance sheets as deferred merchant bookings. We pay our
suppliers related to these bookings generally within two weeks after completing the transaction for
air travel and, for all other merchant bookings, which is primarily our merchant hotel business,
after the travelers use and subsequent billing from the supplier. Therefore, there is generally a
greater time from the receipt of cash from the traveler to the payment to the supplier, and this
operating cycle represents a working capital source of cash to us. As long as the merchant hotel
business continues to grow and our business model does not significantly change, we expect that
changes in working capital will positively impact operating cash flows. If this business declines
relative to our other businesses, or if there are changes to the model which compress the time
between receipts of cash from travelers to payments to suppliers, our working capital benefits
could be reduced, as was the case to a certain degree in fiscal 2006 as we increased the efficiency
of our supplier payment process.
Seasonal fluctuations in our merchant hotel bookings affect the timing of our annual cash
flows. During the first half of the year, hotel bookings have traditionally exceeded stays,
resulting in much higher cash flow related to working capital. During the second half of the year,
this pattern reverses. While we expect the impact of seasonal fluctuations to continue, merchant
hotel growth rates or model changes as discussed above may affect working capital, which might
counteract or intensify the anticipated seasonal fluctuations.
As of June 30, 2007, we had a deficit in our working capital of $690.4 million compared to a
deficit of $217.4 million as of December 31, 2006. The increase in deficit is primarily a result of
the completion of a tender offer during the three months ended March 31, 2007, partially offset by
the generation of working capital from operations.
We anticipate continued investment in the development and expansion of our operations. These
investments include but are not limited to improvements to infrastructure, which include our
enterprise data warehouse investment, servers, networking equipment and software, release
improvements to our software code and continuing efforts to build a scaleable, service-oriented
technology platform that will extend across our portfolio of brands. Portions of our worldwide
points of sale are migrating, in a phased approach, to the new platform during 2007. Capital
expenditures are expected to increase up to 10% in fiscal 2007. Our future capital requirements may
include capital needs for acquisitions or expenditures in support of our business strategy. In the
event we have acquisitions,
30
this may reduce our cash balance and increase our debt. Legal risks and
challenges to our business strategy may also negatively affect our cash balance.
Our cash flows are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
2007 |
|
2006 |
|
$ Change |
|
|
(in thousands) |
|
|
|
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
922,613 |
|
|
$ |
708,913 |
|
|
$ |
213,700 |
|
Investing activities |
|
|
(128,190 |
) |
|
|
(40,552 |
) |
|
|
(87,638 |
) |
Financing activities |
|
|
(642,746 |
) |
|
|
(337,623 |
) |
|
|
(305,123 |
) |
Effect of foreign exchange rate
changes on cash and cash equivalents |
|
|
6,453 |
|
|
|
15,187 |
|
|
|
(8,734 |
) |
For the six months ended June 30, 2007, net cash provided by operating activities increased by
$213.7 million primarily due to an increase in changes in operating assets and liabilities, an
increase in cash flows from operating income as well as a decrease in tax payments, partially
offset by an increase in interest payments in the current period. We made tax payments of $5.9
million, a decrease of $27.2 million over the prior year period, increasing cash provided by
operations due primarily to timing differences in tax payments.
Cash used in investing activities increased by $87.6 million for the six months ended June 30,
2007 primarily due to a $54.7 million increase in cash paid for acquisitions and a $28.0 million
increase in long-term investments and deposits mainly related to our 50% investment in a travel
company.
Cash used in financing activities for the six months ended June 30, 2007 primarily included
cash paid to acquire shares in first quarter of 2007 tender offer pursuant to which we acquired 30
million tendered shares of our common stock at a purchase price of $22.00 per share, for a total
cost of $660 million plus fees and expenses relating to the tender offer. Cash used in financing
activities for the six months ended June 30, 2006 primarily included the $230.0 million repayment
of our revolving credit facility as well as $127.2 million of treasury stock activity primarily
related to share repurchases.
Prior to the end of 2007, we expect that, upon exercise of certain options to purchase shares
of our common stock, the Company may make certain payments on behalf
of the exercising optionee in lieu of issuing shares of the Company
that would otherwise have been issued with a value equal to the tax obligations of
the optionee associated with such exercise. Based upon our stock price of $29.29 as of June 29,
2007, such payments would be approximately $100 million.
We reclassified certain foreign exchange effects on our cash balances from operating
activities to effect of foreign exchange rate changes for the periods presented. The effect of
foreign exchange on our cash balances denominated in foreign currency for the six months ended June
30, 2007 showed a net decrease of $8.7 million from the same period in 2006.
In addition to the ongoing tender offer, we currently have authorization from our Board of
Directors to repurchase up to 20 million outstanding shares of our common stock. There is no fixed
termination date for the authorization.
In our opinion, available cash, funds from operations and available borrowings will provide
sufficient capital resources to meet our foreseeable liquidity needs.
Contractual Obligations and Commercial Commitments
For a discussion of potential future commitments related to new acquisitions, see Note 8
Acquisitions and Other Investments in the notes to the consolidated financial statements. In
addition, see Note 9 Commitments and Contingencies for updated future minimum lease commitments.
There have been no other material changes outside the normal course of business to our contractual
obligations and commercial commitments since December 31,
31
2006. Other than our contractual
obligations and commercial commitments, including derivatives, we did not have any off-balance
sheet arrangements as of June 30, 2007 or December 31, 2006.
32
Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Management
There have been no material changes in our market risk during the six months ended June
30, 2007. For additional information, see Item 7A, Quantitative and Qualitative Disclosures About
Market Risk, in Part II of our Annual Report on Form 10-K for the year ended December 31, 2006.
33
Part I. Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the
Exchange Act), our management, including our Chairman and Senior Executive, Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined by Rule 13a-15(e) and 15(d)-15(e) under the Exchange
Act). Based upon that evaluation, our Chairman and Senior Executive, Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.
Changes in internal control over financial reporting.
There were no changes to our internal control over financial reporting that occurred
during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
34
Part II. Item 1. Legal Proceedings
In the ordinary course of business, Expedia and its subsidiaries are parties to legal
proceedings and claims involving property, personal injury, contract, alleged infringement of third
party intellectual property rights and other claims. A discussion of certain legal proceedings can
be found in the section titled Legal Proceedings, of our Annual Report on Form 10-K for the year
ended December 31, 2006 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.
The following are developments regarding such legal proceedings:
Litigation Relating to Hotel Occupancy Tax
Canales v. Hotels.com. On April 11, 2007, the parties submitted a Joint Status Report to
the court asking that the court reset the next status conference until October 2007.
City of Los Angeles Litigation. On June 11, 2007, a hearing took place on defendants
demurrers and motion to strike class allegations. The court has not ruled on those motions.
City of Chicago Litigation. On July 12, 2007, the court issued an order resetting the ruling
date on defendants motion to dismiss to September 27, 2007.
City of Rome, Georgia Litigation. On May 10, 2007, the court denied, without prejudice,
defendants motion for summary judgment based on plaintiffs failure to exhaust administrative
remedies, but stayed the litigation, concluding that the plaintiffs must exhaust their
administrative remedies before continuing to litigate their tax claims.
Pitt County, North Carolina Litigation. A hearing on defendants motion for reconsideration
or certification of an interlocutory appeal took place on July 31, 2007. The court has not yet
ruled on the motion.
Orange County, Florida Litigation. On July 17, 2007, the court entered an order granting
defendants motion to dismiss the Countys Amended Complaint.
City of Atlanta, Georgia Litigation. On June 22, 2007, the plaintiffs in the Rome, Georgia
litigation filed a motion seeking to unseal the appellate record in the City of Atlanta appeal. On
July 17, 2007, the Court of Appeals denied the City of Romes motion to unseal the record.
City of Charleston, South Carolina Litigation. On May 14, 2007, the plaintiff filed its first
amended complaint. On June 4, 2007, the Defendants filed a motion to dismiss.
City of San Antonio, Texas Litigation. On May 16 and 17, 2007, the court held a hearing on
plaintiffs motion for class certification. The court has not ruled on that motion.
City of Gallup, New Mexico Litigation. On July 6, 2007, the City of Gallup refilled its
lawsuit. The deadline to respond to the lawsuit has not yet been established.
Town of Mt. Pleasant, South Carolina Litigation. On May 14, 2007, the town filed its first
amended complaint. On June 4, 2007, the defendants filed a motion to dismiss.
Cities of Columbus and Dayton, Ohio Litigation. On July 10, 2007, the court entered an
ordering transferring the case to the Northern District of Ohio, Western Division. On July
23, 2007, the court ruled that the defendants are not subject to Ohios transient guest tax
ordinance, adopting the courts July 26, 2006 order in the Findlay, Ohio lawsuit. The court also
granted Columbus/Daytons request to withdraw the class action allegations from their lawsuit.
Cumberland County, North Carolina Litigation. A hearing on defendants motion to dismiss took
place on July 18, 2007. The court has not yet rendered a decision on that motion.
Branson, Missouri Litigation. On April 23, 2007, the defendants filed a motion to dismiss the
lawsuit.
35
Part II. Item 1. Legal Proceedings
Wake County, North Carolina Litigation. A hearing on defendants motion to dismiss took place
on July 18, 2007. The court has not yet rendered a decision on that motion.
Buncombe County, North Carolina Litigation. A hearing on defendants motions to dismiss took
place on July 18, 2007. The court has not yet rendered a decision on that motion.
Dare County, North Carolina Litigation. A hearing on defendants motion to dismiss took place
on July 18, 2007. The court has not yet rendered a decision on that motion.
Myrtle Beach, South Carolina Litigation. On April, 30, 2007, the defendants filed a motion to
dismiss. That motion is pending.
Horry County, South Carolina Litigation. On April 23, 2007, the defendants filed a motion to
dismiss. That motion is pending.
City of Fayetteville, Arkansas Litigation. On June 6, 2007, the court entered an order
granting defendants request to extend the deadline to file an answer or other responsive pleading.
Defendants deadline to file their answers or other responsive pleadings is ten days after
plaintiffs file their Amended Class Action Complaint, which has not been filed.
City of Houston, Texas Litigation. On July 5, 2007, the court denied defendants special
exception requesting the city to replead its complaint, but granted defendants special exception
that the plaintiff plead the maximum amount of damages claimed.
The following cases relating to hotel occupancy taxes have been filed in addition to the legal
proceedings discussed in the Legal Proceedings, of our Annual Report on Form 10-K for the year
ended December 31, 2006 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007:
Jefferson City, Missouri Litigation. On June 27, 2007, Jefferson City, Missouri filed a
putative class action in state court against a number of internet travel companies, including
Hotels.com, Hotwire and Expedia. Jefferson City v. Hotels.com, L.P., et al., 07AC-CC0055 (Circuit
Court of Cole County). The complaint alleges that the defendants have failed to pay to the city
hotel accommodations taxes as required by municipal ordinance. The complaint purports to assert
claims for violation of that ordinance, violation of Missouris Merchandising Practices Act,
conversion, unjust enrichment, breach of fiduciary duties, constructive trust, and declaratory
judgment. The complaint seeks injunctive relief and damages in an unspecified amount. The
deadline to respond to the lawsuit has not yet been established.
City of Oakland, California Litigation. On June 29, 2007, the City of Oakland filed an
individual lawsuit in federal court against a number of internet travel companies, including
Hotels.com, Hotwire and Expedia. City of Oakland v. Hotels.com, L.P., et al., C-07-3432 (United
States District Court, Northern District of California). The complaint alleges that the defendants
have failed to pay to the city hotel accommodations taxes as required by municipal ordinance. The
complaint purports to assert claims for violation of that ordinance. The complaint seeks
injunctive relief and damages in an unspecified amount, including punitive damages and restitution.
The deadline to respond to the lawsuit has not yet been established.
The Company believes that the claims discussed above lack merit and will continue to defend
vigorously against them.
36
Part II. Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A, Risk Factors, in our Annual Report on Form
10-K for the year ended December 31, 2006, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K are not the only
risks facing the Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
37
Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase
There was no repurchase activity during the three months ended June 30, 2007.
On July 25, 2007, we filed an amended tender offer pursuant to which we offered to repurchase
up to 25,000,000 shares of our common stock in an amended tender offer at a price per share not
less than $27.50 and not greater than $30.00. The shares subject to the tender offer represent
approximately 9% of the number of shares of common stock outstanding and approximately 8% of the
total number of shares of common stock and Class B common stock outstanding as of the announcement
date. The tender offer will expire, unless extended, on August 8, 2007. Based on the number of
shares tendered and the prices specified by the tendering stockholders, we will determine the
lowest price per share within the range at which the Company can purchase up to 25,000,000 shares
of its common stock.
In addition to the ongoing tender offer, we currently have authorization from our Board of
Directors to repurchase up to 20 million outstanding shares of our common stock. There is no fixed
termination date for the authorization.
38
Part II. Item 4. Submission of Matters to a Vote of Security Holders
On June 6, 2007, the Companys annual meeting of stockholders (the Annual Meeting) was held.
Stockholders present in person or by proxy, representing 246,379,652 shares of Expedia common stock
(entitled to one vote per share), 25,599,998 shares of Expedia Class B common stock (entitled to
ten votes per share) and 469 shares of Expedia Series A preferred stock (entitled to two votes per
share), voted on the following matters:
Proposal 1. Election of DirectorsThe stockholders elected ten directors of the Company, three
of whom were elected by holders of common stock only, and seven of whom were elected by holders of
common stock, Class B common stock and Series A preferred stock, voting together as a single class,
each to hold office until the next annual meeting of stockholders or until their successors have
been duly elected and qualified. In each case, the affirmative vote of a plurality of the total
number of votes cast was required to elect each director. Stockholders eligible to vote voted as
follows:
Holders of Expedia Common Stock, voting as a separate class:
|
|
|
|
|
|
|
|
|
|
|
Number of Votes |
|
Number of Votes |
|
|
in Favor |
|
Withheld |
A. George Skip Battle |
|
|
235,229,424 |
|
|
|
11,150,228 |
|
David Goldhill |
|
|
235,438,824 |
|
|
|
10,940,828 |
|
Peter M. Kern |
|
|
235,433,248 |
|
|
|
10,946,404 |
|
Holders of Expedia Common Stock, Expedia Class B Common Stock and Expedia Series A Preferred
Stock, voting together as a single class:
|
|
|
|
|
|
|
|
|
|
|
Number of Votes |
|
Number of Votes |
|
|
in Favor |
|
Withheld |
Barry Diller |
|
|
457,542,381 |
|
|
|
44,838,189 |
|
Dara Khosrowshahi |
|
|
459,590,960 |
|
|
|
42,789,610 |
|
Victor A. Kaufman |
|
|
456,721,750 |
|
|
|
45,658,820 |
|
Simon J. Breakwell |
|
|
466,707,978 |
|
|
|
35,672,592 |
|
Jonathan L. Dolgen |
|
|
491,433,812 |
|
|
|
10,496,758 |
|
William R. Fitzgerald |
|
|
451,053,462 |
|
|
|
51,327,108 |
|
John C. Malone |
|
|
446,563,778 |
|
|
|
55,816,792 |
|
Proposal 2. Approval of the Expedia, Inc. 2005 Stock and Annual Incentive Plan The holders of
Expedia Common Stock, Expedia Class B Common Stock and Expedia Series A Preferred Stock, voting as
a single class, also approved the Expedia, Inc. 2005 Stock and Annual Incentive Plan. The
affirmative vote of a majority of the total voting power of those shares of Expedia Common Stock,
Class B Common Stock and Series A Preferred Stock present in person or represented by proxy at the
Annual Meeting, voting together as a single class, was required to approve Proposal 2. Those
stockholders eligible to vote voted as follows:
|
|
|
|
|
|
|
Number of Votes in Favor |
|
Number of Votes Against |
|
Number of Votes Abstaining |
|
Number of Broker No Votes |
439,866,760
|
|
48,155,629
|
|
415,187
|
|
13,942,994 |
Proposal 3. Ratification of Appointment of Independent Registered Public Accounting FirmThe
holders of Expedia Common Stock, Expedia Class B Common Stock and Expedia Series A Preferred Stock,
voting as a single class, also ratified the appointment of Ernst & Young LLP as the Companys
independent registered public accounting firm for the year ending December 31, 2007. The
affirmative vote of a majority of the total voting power
of those shares of Expedia Common Stock, Class B Common Stock and Series A Preferred Stock
present in person
39
Part II. Item 4. Submission of Matters to a Vote of Security Holders
or represented by proxy at the Annual Meeting, voting together as a single class,
was required to approve Proposal 3. Those stockholders eligible to vote voted as follows:
|
|
|
|
|
Number of Votes in Favor |
|
Number of Votes Against |
|
Number of Votes Abstaining |
502,209,828
|
|
65,416
|
|
105,326 |
40
Part
II. Item 6. Exhibits
The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.1
|
|
Office Building Lease by and between Tower 333 LLC, a
Delaware limited liability company, and Expedia, Inc., a
Washington corporation, dated June 25, 2007 |
|
|
|
10.2
|
|
First Amendment to Governance Agreement, dated as of June
19, 2007, among Expedia, Inc., Liberty Media Corporation
and Barry Diller (1) |
|
|
|
31.1
|
|
Certification of the Chairman and Senior Executive
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act |
|
|
|
31.2
|
|
Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 as adopted pursuant to Section 302
of the Sarbanes-Oxley Act |
|
|
|
31.3
|
|
Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 as adopted pursuant to Section 302
of the Sarbanes-Oxley Act |
|
|
|
32.1
|
|
Certification of the Chairman and Senior Executive
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act |
|
|
|
32.2
|
|
Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act |
|
|
|
32.3
|
|
Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act |
|
|
|
(1) |
|
Incorporated by reference to Expedia, Inc.s Current Report on Form 8-K,
filed on June 19, 2007 (File Number 000-51447). |
41
Signature
Pursuant to the requirements of the Section 13 or 15(d) Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
|
|
|
|
|
August 2, 2007 |
Expedia, Inc.
|
|
|
By: |
/s/ MICHAEL B. ADLER
|
|
|
|
Michael B. Adler |
|
|
|
Chief Financial Officer |
|
|
42