Expedia profit rises on bookings boost

Expedia said Thursday that quarterly profits increased as bookings rose by 14 percent. Second-quarter profit hit $96.1 million compared with $95.5 million a year earlier.

“There is no more positive statement we could make about our confidence in Expedia than our current tender offer and outstanding share repurchase authorization,” said Barry Diller, Expedia, Inc.‘s Chairman and Senior Executive.

“The recent signings of Alaska Airlines, American Airlines, Delta Air Lines, JetBlue Airways, Northwest Airlines and Wyndham Worldwide by our Partner Services Group demonstrate Expedia’s ongoing progress in assembling the world’s most compelling marketplace of travel products and services,” said Dara Khosrowshahi, Expedia Inc.‘s CEO and President. “With the combination of our highest revenue growth rate in nearly two years, continued momentum at Expedia.com(R) and strong growth in our advertising and media businesses, we are increasingly confident in our strategy and poised for continued execution in 2007 and beyond.”

  Discussion of Results
 
Gross Bookings & Revenue

Gross bookings increased 14% for the second quarter of 2007 compared with the second quarter of 2006. North America bookings increased 8%, Europe bookings increased 38% (30% excluding the impact of foreign exchange) and Other bookings (including Expedia(R) Corporate Travel and our Asia Pacific operations) increased 27%.

Revenue increased 15% for the second quarter, primarily driven by increased worldwide merchant hotel revenue and advertising and media revenue, partially offset by a decline in North America air revenue. North America revenue increased 11%, Europe revenue increased 30% (23% excluding the impact of foreign exchange) and Other revenue increased 28%.

Worldwide merchant hotel revenue increased 14% for the second quarter due to a 10% increase in room nights stayed, including rooms delivered as a component of vacation packages, and a 4% increase in revenue per room night. Revenue per room night increased due to a 5% increase in worldwide average daily rates (“ADRs”), partially offset by a modest decrease in hotel raw margin compared to second quarter 2006.

Worldwide air revenue decreased 7% for the second quarter due to a 19% decrease in revenue per air ticket, partially offset by a 14% increase in air tickets sold. The decrease in revenue per air ticket primarily reflects decreased compensation from air carriers and global distribution system (“GDS”) providers. Packages revenue increased 1% compared with the prior year period primarily due to higher package volumes in Europe.

Worldwide revenue from products and services other than merchant hotel and air (including advertising and media, car rentals, destination services and cruises), increased 40% for the second quarter due primarily to increases in advertising and media and car rental revenues.

Revenue as a percentage of gross bookings (“revenue margin”) was 13.21% for the second quarter, an increase of 10 basis points. North America revenue margin increased 34 basis points to 13.58%, Europe revenue margin decreased 85 basis points to 14.05%, and Other revenue margin increased 10 basis points to 8.39%. The second quarter increase in worldwide and North America revenue margin was primarily due to an increased mix of advertising and media and car rental revenues as compared to second quarter 2006, partially offset by the decline in revenue per air ticket and lower merchant hotel raw margin. Europe revenue margin decreased in part due to decreased revenue from air booking fees and more competitive hotel pricing.

Profitability

Gross profit for the second quarter of 2007 was $546 million, an increase of 16% compared with the second quarter of 2006 primarily due to increased revenue and a 64 basis point improvement in gross margin to 79.18%. The gross margin increase was due to cost savings from our Apollo and other cost cutting initiatives and an increased mix of advertising and media revenue, partially offset by a lower gross margin on our agency air product.

OIBA for the second quarter increased 2% to $187 million, driven primarily by higher revenue. OIBA as a percentage of revenue decreased 366 basis points to 27.12%, primarily reflecting a higher growth in sales and marketing expenses excluding stock-based compensation as a percentage of revenue, partially offset by higher gross margin. Operating income increased 13% to $154 million due to the same factors impacting OIBA, as well as lower intangible amortization and stock-based compensation expenses.

Adjusted net income for the second quarter decreased $4 million due to lower net interest income and net losses from our equity investments and foreign currency transactions, partially offset by increased OIBA. Net income increased less than $1 million reflecting higher operating income and a federal excise tax refund, partially offset by a higher tax provision, lower net interest income and net losses related to our AskJeeves, Inc. (“Ask”) derivative liability. Second quarter adjusted EPS and diluted EPS were $0.35 and $0.30, respectively. These measures increased 9% and 11% due to the same factors impacting adjusted net income and net income, as well as lower net share counts from our share repurchase activity since June 30, 2006.

Cash Flows & Working Capital

For the six months ended June 30, 2007, net cash provided by operating activities was $923 million and free cash flow was $884 million. Both measures include $687 million from changes in operating assets and liabilities, primarily driven by seasonal receipt of cash related to our merchant hotel business. Free cash flow for the second quarter increased $128 million primarily due to an increase in changes in operating assets and liabilities.
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