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| EXPE > SEC Filings for EXPE > Form 10-Q on 30-Apr-2009 | All Recent SEC Filings |
30-Apr-2009
Quarterly Report
Trends
The travel industry, including offline agencies, online agencies and other
suppliers of travel products and services, has been characterized by intense
competition, as well as rapid and significant change. In addition, beginning in
September 2008, global economic and financial market conditions worsened
markedly, creating uncertainty for travelers and suppliers. This macroeconomic
downturn has pressured discretionary spending on travel and advertising, with
weakness initially identified in the United States and the United Kingdom
markets increasing and spreading to all geographies. We cannot predict the
magnitude or duration of the downturn, but our current limited visibility does
not suggest any near-term improvement.
In late April 2009, the World Health Organization acknowledged an outbreak of
swine influenza, with reported cases in Mexico and eight other countries. In
response, travel advisories were issued by several countries against
non-essential travel, primarily to Mexico. We are unable to predict the scope or
duration of the swine flu outbreak or its impact on the travel industry
generally, or our business in particular. However, concerns relating to the
health-risk posed by the swine flu could result in a decrease and/or delay in
demand for our travel services. This decrease and/or delay in demand, depending
on its scope and duration, could adversely affect our business and financial
performance.
Airline Sector
The airline sector in particular has historically experienced significant
turmoil. U.S. airlines have responded to chronic overcapacity, financial losses
and extreme volatility in oil prices by aggressively reducing their cost
structures and seating capacities. Reduced seating capacities are generally
negative for Expedia as there is less air supply available on our websites, and
in turn less opportunity to facilitate hotel rooms, car rental and other
services on behalf of air travelers. Many carriers have continued reducing
capacity in 2009.
In 2008, many carriers raised their per seat yields by increasing fares,
assessing fuel surcharges and increasing the use of a la carte pricing for such
items as baggage, food and beverage and preferred seating. Fare increases, fuel
surcharges and other fees are also generally negative for Expedia's business, as
they may negatively impact traveler demand with no corresponding increase in our
remuneration as our air revenue is tied principally to ticket volumes, not
prices. Fare increases were especially pronounced through the first three
quarters of 2008, but began to moderate in the fourth quarter of 2008, and
average airfares have declined meaningfully in the first quarter of 2009 as
carriers attempt to fill planes in a time of slower demand.
In addition to capacity and pricing actions, carriers have responded to
industry conditions by aggressively reducing costs in every aspect of their
operations, including distribution costs. Prior to 2008, airlines lowered (and
in some cases, eliminated) travel agent commissions and overrides, and increased
direct distribution through their proprietary websites. Carriers also reduced
payments to global distribution systems ("GDS") intermediaries, which have
historically passed on a portion of these payments to large travel agents,
including Expedia. In early 2009, Expedia.com and other major online travel
agencies began offering air tickets to consumers without an associated online
booking fee on a promotional basis, matching the airline supplier sites, which
also do not charge online booking fees. The promotion contributed to lower
revenue per ticket for Expedia in the first quarter of 2009.
Primarily as a result of decreased costs of distribution and reduced access
to excess air supply, Expedia's revenue per air ticket decreased more than 10%
in each of 2005, 2006 and 2007, and by 2008 air revenue constituted less than
15% of the Company's global revenue. We saw greater stability in air revenue per
ticket during 2008 due to our signing long-term agreements with nine of the top
ten domestic carriers and three GDS providers in prior years, as well as an
increase in booking fees for Expedia.com travelers. However, in the first
quarter of 2009, in part due to our booking fee promotion, our revenue per
ticket declined 14%. If this promotion is extended, or made permanent, it would
further reduce our annual air revenue. We may also encounter additional pressure
on air remuneration as certain supply agreements renew in 2009 and beyond.
In addition to the above challenges, larger carriers participating in the
Expedia marketplace have generally reduced their share of total air seat
capacity, while leading low-cost carriers such as Southwest in the United States
and EasyJet in Europe have increased their relative capacities, but have
generally chosen not to participate in the Expedia marketplace. This trend has
negatively impacted our ability to obtain supply in our air business, and
increased the relative attractiveness of other online and offline sales
channels.
Hotel Sector
In 2008, the hotel sector witnessed continued supply growth and rapidly
slowing demand, resulting in declining occupancy rates. Average daily rate
("ADR") growth, which had been robust in 2006 and 2007, slowed considerably
throughout 2008, and by the fourth quarter was declining year-over-year. Some
key leisure travel markets for Expedia, such as Las Vegas and Hawaii, have seen
dramatic year-on-year declines in ADRs. In early 2009, we have experienced a
further weakening in ADRs due primarily to continued declines in industry
occupancy rates and weak consumer demand.
While lower occupancies have historically increased our supply of merchant
hotel rooms, and a lower rate of ADR growth can positively impact underlying
room night growth, lower ADRs also decrease our revenue per room night as our
remuneration varies proportionally with the room price. ADRs on Expedia's
worldwide sites grew 7% in 2007, but declined 1% in 2008, including a 10%
decrease in the fourth quarter of 2008 compared to the same period in 2007. In
the first quarter of 2009, ADRs declined 18% compared to the same period in
2008. Our hotel remuneration is also impacted by our hotel margins, which
declined in 2008 due to adverse movements in foreign exchange rates, lower fees
and more competitive hotel pricing.
Industry sources forecast lower occupancies and year-on-year declines in ADRs
in 2009 compared to 2008. These trends, combined with softer demand in a
weakening economy and lower air capacity into our core leisure travel
destinations, create a challenging backdrop for our hotel business, which has
been a key source of revenue and profitability for Expedia.
Online Travel
Increased usage and familiarity with the internet have driven rapid growth in
online penetration of travel expenditures. According to PhoCusWright, an
independent travel, tourism and hospitality research firm, in 2008 approximately
58% of U.S. leisure, unmanaged and corporate travel expenditures occurred
online, compared with approximately 33% of European travel. Online penetration
in the Asia Pacific region is estimated to lag behind that of Europe. These
penetration rates have increased 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, and supplier growth has outpaced online agency growth since 2002.
As a result, according to PhoCusWright, by 2008 travel supplier sites accounted
for 61% of total online travel spend in the United States. PhoCusWright
forecasts that suppliers' share of online travel has reached an inflection
point, and will remain relatively constant in 2009 and 2010.
Differentiation among the various website offerings has narrowed dramatically
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. Newer competitive entrants such as "meta
search" companies have in some cases been able to introduce differentiated
features and content compared with the legacy online travel agency companies;
although in most cases they are not providing actual travel booking services. In
early 2009, TripAdvisor.com launched a competitive meta search travel offering
featuring a Fee Estimator enabling customers to see the price of their flight
including various airline fees such as baggage charges.
The online travel industry has also seen the development of alternative
business models and timing of payment by travelers and to suppliers, which in
some cases place pressure on historical business models. Intense competition has
also led to aggressive marketing spend by the travel suppliers and
intermediaries, and a meaningful reduction in our overall marketing efficiency
and operating margins.
Strategy
We play a fundamental role in facilitating travel, whether for leisure,
unmanaged business or managed business travelers. We are committed to providing
travelers, travel suppliers and advertisers the world over with the best set of
resources to
serve their travel needs by leveraging Expedia's critical assets - our brand
portfolio, our technology and commitment to continuous innovation, our global
reach and our breadth of product offering. In addition, we intelligently utilize
our growing base of knowledge about destinations, activities, suppliers and
travelers and our central position in the travel value chain to more effectively
merchandise our travel offerings.
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, suppliers and advertisers 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 dynamic bundling of higher-end travel packages. Our
hotels.com site and its international versions target travelers with premium
hotel content such as 360-degree tours and hotel reviews. In the United States,
hotels.com generally appeals to travelers with shorter booking windows who
prefer to drive to their destinations, and who make a significant portion of
their travel bookings over the telephone.
Through Egencia, we make travel products and services available on a managed
basis to corporate travelers in North America, Europe and the Asia Pacific
region. Further, our TripAdvisor Media Network allows us to reach a broad range
of travelers with travel opinions and user-generated content.
We believe our appeal to suppliers and advertisers is further enhanced by our
geographic breadth and range of business models, allowing them to offer their
products and services to the industry's broadest range of travelers using our
various agency, merchant and advertising business models. We intend to continue
supporting and investing in our brand portfolio, geographic footprint and
business models for the benefit of our travelers, suppliers and advertisers.
Technology and Continuous Innovation. Expedia has an established tradition of
technology innovation, from Expedia.com's inception as a division of Microsoft
to our introduction of more recent innovations such as Expedia.com's TravelAds
sponsored search product for hotel advertisers, hotels.com's slider tools for
improving search results, hotel.com's iPod and iPhone applications and the
TripAdvisor Media Network's meta search Fee Estimator, the first tool of its
kind to help consumers estimate the complete cost of air travel in this
developing era of unbundled air pricing.
We intend to continue innovating on behalf of our travelers, suppliers and
advertisers with particular focus on improving the traveler experience, supplier
integration and presentation, platform improvements, search engine marketing and
search engine optimization.
Global Reach. Our Expedia, hotels.com and TripAdvisor Media Network brands
operate both in North America and internationally. We also offer Chinese
travelers an array of products and services through our majority ownership in
eLong, and we offer hotels to European-based travelers through our wholly-owned
subsidiary Venere, which we acquired in the third quarter of 2008. During the
first quarter of 2009, approximately 32% of worldwide gross bookings and 30% of
worldwide revenue were international.
Egencia, our corporate travel business, currently operates in Australia,
Belgium, Canada, China, France, Germany, India, Ireland, Italy, the Netherlands,
Spain, Switzerland, the United Kingdom and the United States. 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
optimize travel costs and improve their employees' travel experiences. We intend
to continue investing in and expanding the geographic footprint and technology
infrastructure of Egencia.
In expanding our global reach, we leverage significant investments in
technology, operations, brand building, supplier relationships and other
initiatives that we have made since the launch of Expedia.com in 1996. We intend
to continue
leveraging this investment when launching additional points of sale in new
countries, introducing new website features, adding supplier products and
services, and offering proprietary and user-generated content for travelers.
Our scale of operations enhances the value of technology innovations we
introduce on behalf of our travelers and suppliers. As an example, our traveler
review feature - whereby our travelers have created millions of qualified
reviews of hotel properties - is able to accumulate a larger base of reviews due
to the higher base of online traffic that frequents our various websites. In
addition, our increasing scale enhances our websites' appeal to travel and
non-travel advertisers.
We intend to continue investing in and growing our 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. Future launches
may occur under any of our brands, or through acquisition of third party brands,
as in the case of eLong, Venere and Egencia.
Breadth of Product Offering. We offer a comprehensive array of innovative
travel products and services to our travelers. We plan to continue improving and
growing these offerings, as well as expand them to our worldwide points of sale
over time. Travelers can interact with us how and when they prefer, including
via our 24/7 1-800 telesales service, which is an integral part of the Company's
appeal to travelers.
In 2008, over 60% of our revenue came from transactions involving the booking
of hotel reservations, with less than 15% of our worldwide revenue derived from
the sale of airline tickets. We facilitate travel products and services either
as stand-alone products or as part of package transactions. We have emphasized
growing our merchant hotel and packages businesses as these result in higher
revenue per transaction; however, primarily through our Venere brand we are
working to grow our global agency hotel business. 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 have been working
toward and will continue to work toward increasing the mix of advertising and
media revenue from both the expansion of our TripAdvisor Media Network, as well
as increasing advertising revenue from our worldwide websites such as
Expedia.com and hotels.com, which have historically been focused on transaction
revenue. During the first quarter of 2009, advertising and media revenue
accounted for approximately 11% of worldwide revenue.
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 as travelers plan and book
their spring, summer and holiday travel. The number of bookings typically
decreases in the fourth quarter. Because revenue in our 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 an assumption 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.
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, 2008.
Stock-based Compensation
In the first quarter of 2009, we began awarding stock options rather than
restricted stock units as our primary form of employee stock-based compensation.
We measure the value of stock option awards on the date of grant at fair value
using the Black-Scholes option valuation model. We amortize the fair value, net
of estimated forfeitures, over the remaining term on a straight-line basis. The
Black-Scholes model requires various highly judgmental assumptions including
volatility and expected option life. If any of the assumptions used in the
Black-Scholes model change significantly, stock-based compensation expense may
differ materially in the future from that recorded in the current period.
We record stock-based compensation expense net of estimated forfeitures. In
determining the estimated forfeiture rates for stock-based awards, we
periodically conduct an assessment of the actual number of equity awards that
have been forfeited to date as well as those expected to be forfeited in the
future. We consider many factors when estimating expected forfeitures, including
the type of award, the employee class and historical experience. The estimate of
stock awards that will ultimately be forfeited requires significant judgment and
to the extent that actual results or updated estimates differ from our current
estimates, such amounts will be recorded as a cumulative adjustment in the
period such estimates are revised.
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
Beginning in the first quarter of 2009, we have three reportable segments:
Leisure, the TripAdvisor Media Network and Egencia. The change from two
reportable segments, North America and Europe, was a result of the
reorganization of our business around our global brands. We determined our
segments based on how our chief operating decision makers manage our business,
make operating decisions and evaluate operating performance.
Our Leisure segment provides a full range of travel and advertising services
to our worldwide customers through a variety of brands including: Expedia.com
and hotels.com in the United States and localized Expedia and hotels.com
websites throughout the world, Expedia Affiliate Network, Hotwire.com, Venere,
eLong and Classic Vacations. Our TripAdvisor Media Network segment provides
advertising services to travel suppliers on its websites, which aggregate
traveler opinions and unbiased travel articles about cities, hotels, restaurants
and activities in a variety of destinations through tripadvisor.com and its
localized international versions as well as through its various travel media
content properties within the TripAdvisor Media Network. Our Egencia segment
provides managed travel services to corporate customers in North America,
Europe, and the Asia Pacific region.
Reclassifications
During the first quarter of 2009, our development and information technology
teams were effectively combined to better support our global brands. As a result
of our reorganization, in addition to costs to develop and maintain our website
and internal use applications, technology and content expense now also includes
the majority of information technology costs such as costs to support and
operate our network and back-office applications (including related data center
costs), system
monitoring and network security, and other technology leadership and support
functions. The most significant reclassification of costs occurred between
general and administrative expense and technology and content expense as,
historically, a significant portion of the information technology costs were
within general and administrative expense. Technology costs to operate our live
site and call center applications in production remained in cost of revenue. For
a detail of the amounts reclassified for the three months ended March 31, 2008,
see Note 1 - Basis of Presentation in the notes to the consolidated financial
statements.
Operating Metrics
Our operating results are affected by certain metrics, such as gross bookings
and revenue margin, which we believe are necessary for an understanding and
evaluation of Expedia's Leisure and Egencia segments. 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. As travelers have increased their use of
the internet to book travel arrangements, we have generally seen our gross
. . .
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