XNAS:EXPE Expedia Inc Quarterly Report 10-Q Filing - 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨ 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)

 

 

 

Delaware   20-2705720

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

333 108th Avenue NE

Bellevue, WA 98004

(Address of principal executive office) (Zip Code)

(425) 679-7200

(Registrant’s 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of each of the registrant’s classes of common stock as of July 13, 2012 was:

 

Common stock, $0.0001 par value per share

     122,940,850 shares   

Class B common stock, $0.0001 par value per share

     12,799,999 shares   

 

 

 


Table of Contents

Expedia, Inc.

Form 10-Q

For the Quarter Ended June 30, 2012

Contents

 

 

 

 

Part I

 

 

Financial Information

 

    

Item 1

 

Consolidated Financial Statements

  
 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)

   2
 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)

   3
 

Consolidated Balance Sheets as of June 30, 2012 (unaudited), and December 31, 2011

   4
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)

   5
 

Notes to Consolidated Financial Statements (unaudited)

   6

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   22

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

   35

Item 4

 

Controls and Procedures

   36

Part II

 

 

Other Information

 

    

Item 1

 

Legal Proceedings

   37

Item 1A

 

Risk Factors

   39

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

   40

Item 6

 

Exhibits

   41

Signature

     42


Table of Contents

Part I. Item 1. Consolidated Financial Statements

EXPEDIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per share data)

(Unaudited)

 

     Three months ended
June  30,
    Six months ended
June  30,
 
     2012     2011     2012     2011  

Revenue

   $ 1,039,980      $ 913,591      $ 1,856,468      $ 1,641,426   

Costs and expenses:

        

Cost of revenue (1)

     229,741        195,810        429,839        371,420   

Selling and marketing (1) (2)

     444,573        400,483        821,645        751,391   

Technology and content (1)

     116,026        93,101        224,937        179,908   

General and administrative (1)

     83,218        72,045        161,796        143,205   

Amortization of intangible assets

     8,631        5,914        12,053        11,748   

Legal reserves, occupancy tax and other

     3,350        2,531        3,074        4,889   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     154,441        143,707        203,124        178,865   

Other income (expense):

        

Interest income

     7,072        5,451        12,815        8,786   

Interest expense

     (21,989     (22,489     (43,381     (45,011

Other, net

     (4,660     (5,404     (10,867     (12,586
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (19,577     (22,442     (41,433     (48,811
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     134,864        121,265        161,691        130,054   

Provision for income taxes

     (28,755     (33,132     (33,995     (36,018
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     106,109        88,133        127,696        94,036   

Discontinued operations, net of taxes

     —          52,757        (23,889     99,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     106,109        140,890        103,807        193,099   

Net income attributable to noncontrolling interests

     (868     (497     (1,847     (667
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Expedia, Inc.

   $ 105,241      $ 140,393      $ 101,960      $ 192,432   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to Expedia, Inc.:

        

Income from continuing operations

   $ 105,241      $ 87,682      $ 125,849      $ 93,508   

Discontinued operations, net of taxes

     —          52,711        (23,889     98,924   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 105,241      $ 140,393      $ 101,960      $ 192,432   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share from continuing operations attributable to Expedia, Inc. available to common stockholders:

        

Basic

   $ 0.79      $ 0.64      $ 0.95      $ 0.68   

Diluted

     0.76        0.63        0.91        0.67   

Earnings per share attributable to Expedia, Inc. available to common stockholders:

        

Basic

   $ 0.79      $ 1.03      $ 0.77      $ 1.41   

Diluted

     0.76        1.01        0.73        1.38   

Shares used in computing earnings per share:

        

Basic

     132,556        136,796        132,877        136,863   

Diluted

     138,192        139,053        138,747        139,068   

Dividends declared per common share

   $ 0.09      $ 0.14      $ 0.18      $ 0.28   

 

(1) Includes stock-based compensation as follows:

        

Cost of revenue

   $ 803      $ 581      $ 1,722      $ 1,391   

Selling and marketing

     3,248        2,279        7,693        5,788   

Technology and content

     3,874        2,690        8,158        6,553   

General and administrative

     8,696        5,963        15,999        12,579   

(2) Includes related party amounts as follows:

   $ 55,720      $ 59,199      $ 107,081      $ 113,143   

See accompanying notes.

 

2


Table of Contents

EXPEDIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Three months ended
June  30,
    Six months ended
June  30,
 
     2012     2011     2012     2011  

Net income

   $ 106,109      $ 140,890      $ 103,807      $ 193,099   

Other comprehensive income (loss), net of tax

        

Currency translation adjustments

     (24,326     10,510        (11,375     35,590   

Unrealized gains (losses) on available for sale securities, net of taxes

     (313     985        1,089        951   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (24,639     11,495        (10,286     36,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     81,470        152,385        93,521        229,640   

Less: Comprehensive (income) loss attributable to noncontrolling interests

     18        (5,022     (972     (5,797
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Expedia, Inc.

   $ 81,488      $ 147,363      $ 92,549      $ 223,843   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

EXPEDIA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)        
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 1,343,346      $ 689,134   

Restricted cash and cash equivalents

     24,489        19,082   

Short-term investments

     1,050,107        648,819   

Accounts receivable, net of allowance of $9,428 and $7,959

     512,856        339,427   

Prepaid expenses and other current assets

     141,383        121,541   

Current assets of discontinued operations

     14,330        456,426   
  

 

 

   

 

 

 

Total current assets

     3,086,511        2,274,429   

Property and equipment, net

     376,528        320,282   

Long-term investments and other assets

     204,938        289,348   

Intangible assets, net

     836,365        743,898   

Goodwill

     3,000,754        2,877,301   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 7,505,096      $ 6,505,258   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable, merchant

   $ 998,150      $ 777,602   

Accounts payable, other

     277,042        173,855   

Deferred merchant bookings

     1,791,628        833,625   

Deferred revenue

     22,855        15,238   

Accrued expenses and other current liabilities

     360,510        333,237   

Current liabilities of discontinued operations

     —          419,800   
  

 

 

   

 

 

 

Total current liabilities

     3,450,185        2,553,357   

Long-term debt

     1,249,312        1,249,281   

Deferred income taxes, net

     337,450        279,962   

Other long-term liabilities

     126,171        117,491   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock $.0001 par value

     19        18   

Authorized shares: 1,600,000

    

Shares issued: 187,493 and 176,378

    

Shares outstanding: 122,943 and 120,781

    

Class B common stock $.0001 par value

     1        1   

Authorized shares: 400,000

    

Shares issued and outstanding: 12,800 and 12,800

    

Additional paid-in capital

     5,714,512        5,474,653   

Treasury stock - Common stock, at cost

     (2,832,923     (2,535,219

Shares: 64,550 and 55,597

    

Retained earnings (deficit)

     (620,279     (722,239

Accumulated other comprehensive loss

     (26,761     (17,350
  

 

 

   

 

 

 

Total Expedia, Inc. stockholders’ equity

     2,234,569        2,199,864   

Noncontrolling interest

     107,409        105,303   
  

 

 

   

 

 

 

Total stockholders’ equity

     2,341,978        2,305,167   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 7,505,096      $ 6,505,258   
  

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

EXPEDIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six months ended June 30,  
     2012     2011  

Operating activities:

    

Net income

   $ 103,807      $ 193,099   

Less: Discontinued operations, net of tax

     (23,889     99,063   
  

 

 

   

 

 

 

Net income from continuing operations

     127,696        94,036   

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:

    

Depreciation of property and equipment, including internal-use software and website development

     72,980        60,836   

Amortization of stock-based compensation

     33,572        26,311   

Amortization of intangible assets

     12,053        11,748   

Deferred income taxes

     8,556        4,729   

Foreign exchange (gain) loss on cash, cash equivalents and short-term investments, net

     14,522        (26,457

Realized (gain) loss on foreign currency forwards

     (10,460     3,497   

Other

     14,772        3,128   

Changes in operating assets and liabilities, net of effects from acquisitions:

    

Accounts receivable

     (142,121     (109,543

Prepaid expenses and other current assets

     (13,494     (59,959

Accounts payable, merchant

     193,080        219,651   

Accounts payable, other, accrued expenses and other current liabilities

     123,754        48,170   

Deferred merchant bookings

     958,066        810,740   

Deferred revenue

     7,619        (350
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     1,400,595        1,086,537   
  

 

 

   

 

 

 

Investing activities:

    

Capital expenditures, including internal-use software and website development

     (117,217     (98,616

Purchases of investments

     (1,007,745     (853,445

Sales and maturities of investments

     674,315        432,866   

Acquisitions, net of cash acquired

     (199,267     (8,075

Net settlement of foreign currency forwards

     10,460        (3,497

Other, net

     (1,999     1,033   
  

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     (641,453     (529,734
  

 

 

   

 

 

 

Financing activities:

    

Treasury stock activity

     (297,704     (49,227

Payment of dividends to stockholders

     (24,409     (38,584

Proceeds from exercise of equity awards

     224,770        13,749   

Purchases of additional interests in controlled subsidiaries, net

     —          70,626   

Excess tax benefit on equity awards

     16,920        3,613   

Changes in restricted cash and cash equivalents

     (5,498     (7,373

Other, net

     32        2,320   
  

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (85,889     (4,876
  

 

 

   

 

 

 

Net cash provided by continuing operations

     673,253        551,927   

Net cash provided by (used in) discontinued operations

     (7,607     103,559   

Effect of exchange rate changes on cash and cash equivalents

     (11,434     20,600   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     654,212        676,086   

Cash and cash equivalents at beginning of period

     689,134        621,199   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,343,346      $ 1,297,285   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for interest from continuing operations

   $ 43,441      $ 44,574   

Income tax payments (refunds), net from continuing operations

     (3,597     7,282   

See accompanying notes.

 

5


Table of Contents

Notes to Consolidated Financial Statements

June 30, 2012

(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 as well as various media and advertising offerings to travel and non-travel advertisers. These travel products and services are offered through a diversified portfolio of brands including: Expedia.com®, Hotels.com®, Hotwire.com™, Expedia® Affiliate Network, Classic Vacations, Expedia Local Expert, Egencia™, Expedia® CruiseShipCenters®, eLong™, Inc. (“eLong”) and Venere Net SpA (“Venere”). 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.

TripAdvisor Spin-Off

On December 20, 2011, following the close of trading on the Nasdaq Stock Market, we completed the spin-off of TripAdvisor, Inc. (“TripAdvisor”), which consisted of the domestic and international operations previously associated with our TripAdvisor Media Group, to Expedia stockholders. We refer to this transaction as the “spin-off.” Immediately prior to the spin-off, Expedia effected a one-for-two reverse stock split. Accordingly, the results of operations, financial condition and cash flows of TripAdvisor have been presented as discontinued operations for all periods presented. Further, all Expedia common stock share information and related per share amounts in prior periods have been adjusted to reflect Expedia’s one-for-two reverse stock split.

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 expected 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, except for the adjustment described below under “Reclassifications and Adjustments.” 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, 2011, previously filed with the Securities and Exchange Commission.

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 current and long-lived assets, intangible assets and goodwill; income and indirect taxes, such as potential settlements related to occupancy taxes; loss contingencies; loyalty program liabilities; stock-based compensation and accounting for derivative instruments.

 

6


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

Reclassifications and Adjustments

We have reclassified certain amounts related to our prior period results to conform to our current period presentation. In addition, during the three and six months ended June 30, 2012, we recorded an out of period increase to revenue of approximately $8 million and $5 million to correct a prior period overstatement related to sales and use tax in certain jurisdictions, which are recorded in net revenue. In accordance with the relevant accounting guidance, we evaluated the materiality of the adjustment from a quantitative and qualitative perspective and we concluded the adjustment would not have had a material impact on any individual prior period financial statements or affect the trend of financial results.

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. The seasonal revenue impact is exacerbated with respect to income by the more stable nature of our fixed costs. As a result, revenue and income are typically the lowest in the first quarter and highest in the third quarter. In addition, as a result of the spin-off, the seasonal fluctuation on our revenue and operating income will be more pronounced, particularly in the first quarter.

Note 2 – Summary of Significant Accounting Policies

Recently Adopted Accounting Pronouncements

On January 1, 2012, we adopted the new Financial Accounting Standards Board guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements, which is the approach we have selected. The new guidance eliminated the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. While the new guidance changed the presentation of comprehensive income, there were no changes to the components that are recognized in net income or other comprehensive income from that of previous accounting guidance.

Note 3 – Acquisitions and Dispositions

Business Acquisitions. During the second quarter of 2012, we acquired a travel management company in the Nordics. The following table summarizes the fair value of the assets acquired and liabilities assumed in conjunction with this acquisition, in thousands:

 

     June 30,
2012
 

Goodwill

   $ 127,990   

Intangible assets with definite lives(1)

     110,284   

Net liabilities(2)

     (26,262
  

 

 

 

Total

   $ 212,012   
  

 

 

 

 

(1) The weighted average life of acquired intangible assets was 8.1 years.
(2) Includes cash acquired of $13 million.

The business combination accounting is preliminary for up to 12 months after the acquisition date and subject to revision, and any change to the fair value of net assets acquired would be expected to lead to a corresponding change to the amount of goodwill recorded on a retroactive basis. The results of operations of the acquired business has been included in

 

7


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

our consolidated results from transaction closing date forward; its effect on consolidated revenue and operating income during the three and six months ended June 30, 2012 was not significant. For the three months ended June 30, 2012, the acquisition accounted for approximately 2% of total revenue and operating income.

Discontinued Operations. On December 20, 2011, we completed the spin-off of TripAdvisor, Inc., which included its flagship brand as well as 18 other travel media brands. Accordingly, we have presented the financial condition and results of operations of our former TripAdvisor Media Group segment in the consolidated financial statements through December 20, 2011 as discontinued operations. Additionally, the first quarter 2012 loss incurred to extinguish our 8.5% senior notes due 2016 (the “8.5% Notes”) as a result of the spin-off was recorded as discontinued operations. See below for a full description of the extinguishment. Financial data for the discontinued operations for the three and six months ended June 30, 2012 and 2011 was as follows:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012      2011     2012     2011  
     (In thousands)  

Revenue

   $ —         $ 169,242      $ —        $ 317,528   

Income (loss) before income taxes

     —           75,075        (37,568     140,471   

Provision for income taxes

     —           (22,318     13,679        (41,408
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

     —           52,757        (23,889     99,063   

Net income attributable to noncontrolling interest

     —           (46     —          (139
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to discontinued operations

   $ —         $ 52,711      $ (23,889   $ 98,924   
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

         

Basic

      $ 0.39      $ (0.18   $ 0.72   

Diluted

        0.38        (0.17     0.71   

Shares used in computing earnings per share:

         

Basic

        136,796        132,877        136,863   

Diluted

        139,053        138,747        139,068   

The indenture governing our $400 million aggregate principal amount of 8.5% Notes contained certain covenants that could have restricted implementation of the spin-off. On December 20, 2011, prior to consummation of the spin-off, we gave “Notice of Redemption” to the bondholders, the effect of which was the bonds became due and payable on the redemption date at the redemption price. The redemption price was equal to 100% of the principal amount plus a make-whole premium as of, and accrued and unpaid interest to, the redemption date. The redemption date was defined as 30 days after the Notice of Redemption was given. In order to complete the Notice of Redemption, we were required to irrevocably deposit, with the Trustee, funds sufficient to pay the redemption price plus accrued interest on the 8.5% Notes (approximately $451 million). The 8.5% Notes were fully redeemed on January 19, 2012, the redemption date, for approximately $450 million. In connection with the redemption, we incurred a pre-tax loss from early extinguishment of debt of approximately $38 million (or $24 million net of tax), which included an early redemption premium of $33 million and the write-off of $5 million of unamortized debt issuance and discount costs. This loss was recorded within discontinued operations in the first quarter of 2012, as that was the period in which the bonds were legally extinguished.

As a result of the above, at December 31, 2011, we had a current asset of discontinued operations of $456 million primarily related to the deposit for the redemption price of the 8.5% Notes as well as a current liability of discontinued operations of $420 million for the 8.5% Notes, accrued interest expense related to the 8.5% Notes and accrued spin-off costs. At June 30, 2012, the current asset of discontinued operations included a $14 million tax benefit primarily related to the loss on the extinguishment of debt.

 

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Notes to Consolidated Financial Statements – (Continued)

 

Note 4 – Fair Value Measurements

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 are classified using the fair value hierarchy in the table below:

 

     Total      Level 1      Level 2  
     (In thousands)  

Assets

        

Cash equivalents:

        

Money market funds

   $ 740,653       $ 740,653       $ —     

Time deposits

     162,682         —           162,682   

Investments:

        

Time deposits

     929,230         —           929,230   

Corporate debt securities

     254,236         —           254,236   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,086,801       $ 740,653       $ 1,346,148   
  

 

 

    

 

 

    

 

 

 

Liabilities

        

Foreign currency forward contracts

   $ 4,832       $ —         $ 4,832   
  

 

 

    

 

 

    

 

 

 

Financial assets measured at fair value on a recurring basis as of December 31, 2011 are classified using the fair value hierarchy in the table below:

 

     Total      Level 1      Level 2  
     (In thousands)  

Assets

        

Cash equivalents:

        

Money market funds

   $ 310,075       $ 310,075       $ —     

Derivatives:

        

Foreign currency forward contracts

     1,043         —           1,043   

Investments:

        

Time deposits

     592,162         —           592,162   

Corporate debt securities

     268,664         —           268,664   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,171,944       $ 310,075       $ 861,869   
  

 

 

    

 

 

    

 

 

 

We classify our cash equivalents and investments within Level 1 and Level 2 as we value our cash equivalents and investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Valuation of the foreign currency forward contracts is based on foreign currency exchange rates in active markets, a Level 2 input.

As of June 30, 2012 and December 31, 2011, our cash and cash equivalents consisted primarily of prime institutional money market funds with maturities of 90 days or less, time deposits as well as bank account balances.

We invest in investment grade corporate debt securities all of which are classified as available for sale. As of June 30, 2012, we had $121 million of short-term and $133 million of long-term available for sale investments and the amortized cost basis of the investments approximated their fair value with gross unrealized gains of $2 million and gross unrealized losses of less than $1 million. As of December 31, 2011, we had $57 million of short-term and $212 million of long-term available for sale investments and the amortized cost basis of these investments approximated their fair value with gross unrealized gains of $2 million and gross unrealized losses of $1 million.

We also hold time deposit investments with financial institutions. Time deposits with original maturities of less than 90 days are classified as cash equivalents and those with remaining maturities of less than one year are classified as short-term investments. Of the total time deposit investments, $247 million and $228 million as of June 30, 2012 and December 31, 2011 related to balances held by our majority-owned subsidiaries.

 

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Notes to Consolidated Financial Statements – (Continued)

 

Derivative instruments are carried at fair value on our consolidated balance sheets. We use foreign currency forward contracts to economically hedge certain merchant revenue exposures and in lieu of holding certain foreign currency cash for the purpose of economically hedging our foreign currency-denominated operating liabilities. Our goal in managing our foreign exchange risk is to reduce, to the extent practicable, our potential exposure to the changes that exchange rates might have on our earnings, cash flows and financial position. Our foreign currency forward contracts are typically short-term and, as they do not qualify for hedge accounting treatment, we classify the changes in their fair value in other, net. As of June 30, 2012, we were party to outstanding forward contracts hedging our liability and revenue exposures with a total net notional value of $869 million. We had a net forward liability of $5 million as of June 30, 2012 recorded in accrued expenses and other current liabilities and a net forward asset of $1 million as of December 31, 2011 recorded in prepaid expenses and other current assets. We recorded $2 million in net gains and $3 million in net losses from foreign currency forward contracts during the three months ended June 30, 2012 and 2011, and $4 million in net gains and $5 million in net losses for the six months ended June 30, 2012 and 2011.

Note 5 – Debt

The following table sets forth our outstanding debt:

 

     June 30,
2012
     December 31,
2011
 
     (In thousands)  

7.456% senior notes due 2018

   $ 500,000       $ 500,000   

5.95% senior notes due 2020, net of discount

     749,312         749,281   
  

 

 

    

 

 

 

Long-term debt

   $ 1,249,312       $ 1,249,281   
  

 

 

    

 

 

 

We have excluded from the above table the $400 million 8.5% Notes, which were included in current liabilities of discontinued operations as of December 31, 2011 in the consolidated balance sheets, which were redeemed on January 19, 2012. For further information, see Note 3 — Acquisitions and Dispositions.

Long-term Debt

Our $500 million in registered senior unsecured notes outstanding at June 30, 2012 are due in August 2018 and bear interest at 7.456% (the “7.456% Notes”). Interest is payable semi-annually in February and August of each year. The 7.456% Notes are repayable in whole or in part on August 15, 2013, at the option of the holders of such 7.456% Notes, at 100% of the principal amount plus accrued interest. We may redeem the 7.456% Notes at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium, in whole or in part at any time at our option.

Our $750 million in registered senior unsecured notes outstanding at June 30, 2012 are due in August 2020 and bear interest at 5.95% (the “5.95% Notes”). The 5.95% Notes were issued at 99.893% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in February and August of each year. We may redeem the 5.95% Notes at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium, in whole or in part at any time or from time to time at our option.

The 7.456% and 5.95% Notes (collectively 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. In addition, the Notes include covenants that limit our ability (i) to create or incur liens, (ii) to enter into sale/leaseback transactions and (iii) to merge or consolidate with or into another entity. Accrued interest related to the Notes was $31 million as of both June 30, 2012 and December 31, 2011.

Based on quoted market prices, the estimated fair value of 7.456% Notes was approximately $580 million and $563 million as of June 30, 2012, and December 31, 2011, and the estimated fair value of 5.95% Notes was approximately $788 million and $760 million as of June 30, 2012, and December 31, 2011.

 

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Notes to Consolidated Financial Statements – (Continued)

 

Credit Facility

Expedia, Inc. maintains a $750 million unsecured revolving credit facility with a group of lenders, which is unconditionally guaranteed by certain domestic Expedia subsidiaries that are the same as under the Notes and expires in August 2016. As of June 30, 2012 and December 31, 2011, we had no revolving credit facility borrowings outstanding. The facility bears interest based on the Company’s credit ratings, with drawn amounts bearing interest at LIBOR plus 150 basis points and the commitment fee on undrawn amounts at 22.5 basis points as of June 30, 2012. The facility contains financial covenants including leverage and minimum interest coverage ratios.

The amount of stand-by letters of credit (“LOC”) issued under the facility reduces the credit amount available. As of June 30, 2012, and December 31, 2011, there was $23 million and $22 million of outstanding stand-by LOCs issued under the facility.

Note 6 – Stockholders’ Equity

Dividends on our Common Stock

The Executive Committee, acting on behalf of the Board of Directors, declared the following dividends during the periods presented, which have been adjusted for the one-for-two reverse stock split in December 2011:

 

Declaration Date

   Dividend
Per Share
     Record Date      Total Amount
(in thousands)
     Payment Date  

Six months ended June 30, 2012:

           

February 9, 2012

   $ 0.09         March 12, 2012       $ 12,204         March 30, 2012   

April 25, 2012

     0.09         May 30, 2012         12,205         June 19, 2012   

Six months ended June 30, 2011:

           

February 9, 2011

   $ 0.14         March 11, 2011       $ 19,352         March 31, 2011   

April 27, 2011

     0.14         May 27, 2011         19,232         June 17, 2011   

In addition, on July 25, 2012, the Executive Committee, acting on behalf of the Board of Directors, declared a quarterly cash dividend of $0.13 per share of outstanding common stock payable on September 18, 2012 to stockholders of record as of the close of business on August 28, 2012. Future declarations of dividends are subject to final determination of our Board of Directors.

Share Repurchases

In 2010, the Executive Committee, acting on behalf of the Board of Directors, authorized a repurchase of up to 20 million outstanding shares of our common stock. During the first half of 2012, we repurchased, through open market transactions, the remaining 8.8 million shares available under the 2010 authorization for a total cost of $291 million, excluding transaction costs, representing an average repurchase price of $33.24 per share. On April 25, 2012, the Executive Committee, acting on behalf of the Board of Directors, authorized an additional repurchase of up to 20 million outstanding shares of our common stock. As of June 30, 2012, 20 million shares remain authorized for repurchase under the April 2012 authorization. There is no fixed termination date for the repurchases.

Stock-based Awards

During second quarter of 2012, we issued 7.3 million shares of Expedia, Inc. common stock as a result of the exercise of 30 million privately held warrants at a weighted average exercise price of $23.98 for total proceeds to the Company of approximately $175 million. As of June 30, 2012, we did not have any warrants outstanding.

 

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Notes to Consolidated Financial Statements – (Continued)

 

Noncontrolling Interest

During the three and six months ended June 30, 2012, there was no significant ownership interest changes in noncontrolling interest. During the three and six months ended June 30, 2011, we acquired additional shares of eLong for $41 million and, at the same time, Tencent Holdings Limited also acquired approximately 16% of the outstanding shares of eLong for $84 million. The following table shows the effects of the changes in noncontrolling interest for the three and six months ended June 30 2011, in thousands:

 

    Three months ended
June 30, 2011
    Six months ended
June 30, 2011
 

Net income attributable to Expedia, Inc.

  $ 140,393      $ 192,432   

Transfers (to) from the noncontrolling interest due to:

   

Net increase in Expedia, Inc.’s paid-in capital for newly issued eLong shares (1)

    25,957        25,957   
 

 

 

   

 

 

 

Net transfers from noncontrolling interest

    25,957        25,957   
 

 

 

   

 

 

 

Change from net income attributable to Expedia, Inc. and transfers from noncontrolling interest

  $ 166,350      $ 218,389   
 

 

 

   

 

 

 

 

(1) Primarily due to our acquisition of 5.4 million newly issued shares of eLong and, at the same time, Tencent Holdings Limited acquisition of 11.1 million newly issued shares of eLong in the second quarter of 2011.

As of June 30, 2012, our ownership interest in eLong was approximately 67%.

Note 7 – Earnings Per Share

The following table presents our basic and diluted earnings per share:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2012      2011      2012      2011  
     (In thousands, except per share data)  

Income from continuing operations attributable to Expedia, Inc.

   $ 105,241       $ 87,682       $ 125,849       $ 93,508   

Earnings per share from continuing operations attributable to Expedia, Inc. available to common stockholders:

           

Basic

   $ 0.79       $ 0.64       $ 0.95       $ 0.68   

Diluted

     0.76         0.63         0.91         0.67   

Weighted average number of shares outstanding:

           

Basic

     132,556         136,796         132,877         136,863   

Dilutive effect of:

           

Options to purchase common stock

     3,988         1,574         3,715         1,604   

Other dilutive securities

     1,648         683         2,155         601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     138,192         139,053         138,747         139,068   
  

 

 

    

 

 

    

 

 

    

 

 

 

The earnings per share amounts are the same for common stock and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

 

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Notes to Consolidated Financial Statements – (Continued)

 

Note 8 – Income Taxes

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 21.3% and 27.3% for the three months ended June 30, 2012 and 2011, and 21.0% and 27.7% for the six months ended June 30, 2012 and 2011. The decrease in the effective rate for the three and six months ended June 30, 2012 as compared to the same periods in 2011 was primarily due to an increase in estimated earnings in jurisdictions outside of the United States.

Note 9 – Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, we are a party to various lawsuits. Management does 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 tax 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 effect on our financial results; however, litigation is inherently uncertain and the actual losses incurred in the event that our legal proceedings were to result in unfavorable outcomes could have a material adverse effect on our business and financial performance.

Litigation Relating to Hotel Occupancy Taxes. Seventy-nine lawsuits have been filed by cities, counties and states involving hotel occupancy taxes. Forty-seven lawsuits are currently active. These lawsuits are in various stages and we continue to defend against the claims made in them vigorously. With respect to the principal claims in these matters, we believe that the ordinances at issue do not apply to the services we provide, namely the facilitation of hotel reservations, and, therefore, that we do not owe the taxes that are claimed to be owed. We believe that the ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations. To date, twenty-nine of these lawsuits have been dismissed. Some of these dismissals have been without prejudice and, generally, allow the governmental entity or entities to seek administrative remedies prior to pursuing further litigation. Seventeen dismissals were based on a finding that we and the other defendants were not subject to the local hotel occupancy tax ordinance or that the local government lacked standing to pursue their claims. 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, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $34 million as of June 30, 2012 and $32 million as of December 31, 2011. This reserve is based on our best estimate and the ultimate resolution of these contingencies may be greater or less than the liabilities recorded. In addition, as of December 31, 2011, we had an accrual totaling $10 million related to court decisions and final settlements. Changes to these settlement reserves are included within legal reserves, occupancy tax and other in the consolidated statements of operations.

In connection with various occupancy tax audits and assessments, certain jurisdictions may assert that taxpayers are required to pay any assessed taxes prior to being allowed to contest or litigate the applicability of the ordinances, which is referred to as “pay-to-play.” These jurisdictions may attempt to require that we pay any assessed taxes prior to being allowed to contest or litigate the applicability of the tax ordinance. Payment of these amounts is not an admission that we believe we are subject to such taxes and, even when such payments are made, we continue to defend our position vigorously. During 2010 and 2009, we expensed $3 million and $48 million related to monies paid in advance of litigation in occupancy tax proceedings in the cities of Santa Monica and San Francisco. In each case, we paid such amounts in order to be allowed to pursue litigation challenging whether we are required to pay hotel occupancy tax on the portion of the customer payment we retain as compensation and, if so, the actual amounts owed. We do not believe that the amounts we retain as compensation are subject to the cities’ hotel occupancy tax ordinances. If we prevail in the litigation (including any appeal), the cities will be required to repay these amounts, plus interest. In December 2011, the city of Santa Monica returned the $3 million in exchange for a letter of credit. In June 2012, the city of San Francisco issued additional

 

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Notes to Consolidated Financial Statements – (Continued)

 

assessments of tax, penalties and interest for the time period from the fourth quarter of 2007 through the fourth quarter of 2011 against the travel companies, including $22 million against Expedia, Hotels.com and Hotwire. The additional assessments, including the prepayment of such assessments, have been contested by the online companies.

On March 30, 2012, the city of Portland and Multnomah County filed a motion to dismiss the suit brought by the online travel companies, including Expedia, on the basis that the online travel companies should be required to exhaust their administrative remedies, including the payment of any taxes allegedly owed, before proceeding in a lawsuit. On June 15, 2012, the court denied the city and county’s motion to dismiss and the case will proceed in court without the prepayment of the city and county’s claims for taxes.

Note 10 – Related Party Transactions

Mr. Diller, our Chairman of the Board of Directors and Senior Executive, through shares he owns beneficially as well as those subject to an irrevocable proxy granted by Liberty Interactive Corporation, controlled approximately 62% of the combined voting power of the outstanding Expedia capital stock as of June 30, 2012. As such, Mr. Diller effectively controls the outcome of all matters submitted to a vote or for the consent of our stockholders (other than with respect to the election by the holders of common stock of 25% of the members of our Board of Directors and matters as to which Delaware law requires a separate class vote). Upon Mr. Diller’s permanent departure from Expedia, the irrevocable proxy would terminate and depending on the capitalization of Expedia at such time, Liberty could effectively control the voting power of our capital stock.

In addition to serving as our Chairman and Senior Executive, Mr. Diller also serves as Chairman of the Board of Directors and Senior Executive at both IAC and TripAdvisor. Certain of our other executives also maintain roles with both IAC and TripAdvisor. Our certificate of incorporation provides that no officer or director of Expedia who is also an officer or director of IAC or of TripAdvisor will be liable to Expedia or its stockholders for breach of any fiduciary duty by reason of the fact that any such individual directs a corporate opportunity to IAC or TripAdvisor instead of Expedia, or does not communicate information regarding a corporate opportunity to Expedia because the officer or director has directed the corporate opportunity to IAC or TripAdvisor, which could have the effect of increasing the risk of conflicts of interest between the companies.

TripAdvisor, Inc. In connection with the spin-off, we entered into various agreements with TripAdvisor, a related party due to common ownership, including, among others, a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement. In addition, we will continue to work with TripAdvisor pursuant to various commercial agreements between subsidiaries of Expedia, on the one hand, and subsidiaries of TripAdvisor, on the other hand. The various commercial agreements, including click-based advertising agreements, content sharing agreements and display-based and other advertising agreements, have terms of up to one year. We recognized approximately $2 million and $3 million of revenue and expensed approximately $56 million and $107 million related to these various agreements with TripAdvisor during the three and six months ended June 30, 2012. In addition, we reclassified sales and marketing expense related to amounts we paid to TripAdvisor prior to the spin-off, which were previously eliminated in consolidation, to third party expenses for the three and six months ended June 30, 2011. Net amounts payable to TripAdvisor were $35 million and $14 million as of June 30, 2012 and December 31, 2011 and were primarily included in accounts payable, other on the consolidated balance sheet.

Note 11 – Segment Information

We have two reportable segments: Leisure and Egencia. 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 is adjusted EBITDA. Adjusted EBITDA for our Leisure and Egencia segments includes allocations of certain expenses, primarily cost of revenue and facilities, and our Leisure segment includes the total costs of our global supply organizations as well as the realized foreign currency gains or losses related to the forward contracts hedging a component of our net merchant hotel revenue. We base the allocations primarily on transaction volumes and other usage

 

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Notes to Consolidated Financial Statements – (Continued)

 

metrics; this methodology is periodically evaluated and may change. We do not allocate certain shared expenses such as accounting, human resources, information technology and legal to our reportable segments. We include these expenses in Corporate.

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 Egencia segment provides managed travel services to corporate customers in North America, Europe, and the Asia Pacific region.

Corporate also includes unallocated corporate functions and expenses. In addition, we record amortization of intangible assets and any related impairment, as well as stock-based compensation expense, restructuring charges, legal reserves, occupancy tax and other, and other items excluded from segment operating performance in Corporate. Such amounts are detailed in our segment reconciliation below.

The following tables present our segment information for the three and six months ended June 30, 2012 and 2011. As a significant portion of our property and equipment is not allocated to our operating segments and depreciation is not included in our segment measure, we do not report the assets by segment as it would not be meaningful. We do not regularly provide such information to our chief operating decision makers.

 

     Three months ended June 30, 2012  
     Leisure     Egencia     Corporate     Total  
     (In thousands)  

Revenue

   $    964,252      $   75,728      $ —        $ 1,039,980   

Adjusted EBITDA

   $ 283,053      $ 17,820      $ (77,972   $ 222,901   

Depreciation

     (17,565     (2,739     (18,362     (38,666

Amortization of intangible assets

     —          —          (8,631     (8,631

Stock-based compensation

     —          —          (16,621     (16,621

Legal reserves, occupancy tax and other

     —          —          (3,350     (3,350

Realized gain on revenue hedges

     (1,192     —          —          (1,192
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 264,296      $ 15,081      $ (124,936     154,441   
  

 

 

   

 

 

   

 

 

   

Other expense, net

           (19,577
        

 

 

 

Income from continuing operations before income taxes

           134,864   

Provision for income taxes

           (28,755
        

 

 

 

Net income

           106,109   

Net income attributable to noncontrolling interests

           (868
        

 

 

 

Net income attributable to Expedia, Inc.

         $ 105,241   
        

 

 

 

 

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Notes to Consolidated Financial Statements – (Continued)

 

     Three months ended June 30, 2011  
     Leisure     Egencia     Corporate     Total  
     (In thousands)  

Revenue

   $ 866,144      $   47,447      $ —        $ 913,591   

Adjusted EBITDA

   $ 253,858      $ 9,555      $ (74,417   $ 188,996   

Depreciation

     (13,502     (2,165     (15,984     (31,651

Amortization of intangible assets

     —          —          (5,914     (5,914

Stock-based compensation

     —          —          (11,513     (11,513

Legal reserves, occupancy tax and other

     —          —          (2,531     (2,531

Realized loss on revenue hedges

     6,320        —          —          6,320   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $    246,676      $ 7,390      $ (110,359     143,707   
  

 

 

   

 

 

   

 

 

   

Other expense, net

           (22,442
        

 

 

 

Income from continuing operations before income taxes

           121,265   

Provision for income taxes

           (33,132
        

 

 

 

Income from continuing operations

           88,133   

Discontinued operations, net of taxes

           52,757   
        

 

 

 

Net income

           140,890   

Net income attributable to noncontrolling interests

           (497
        

 

 

 

Net income attributable to Expedia, Inc.

         $    140,393   
        

 

 

 

 

     Six months ended June 30, 2012  
     Leisure     Egencia     Corporate     Total  
     (In thousands)  

Revenue

   $ 1,728,065      $ 128,403      $ —        $ 1,856,468   

Adjusted EBITDA

   $ 454,275      $ 27,722      $ (157,278   $ 324,719   

Depreciation

     (33,257     (4,745     (34,978     (72,980

Amortization of intangible assets

     —          —          (12,053     (12,053

Stock-based compensation

     —          —          (33,572     (33,572

Legal reserves, occupancy tax and other

     —          —          (3,074     (3,074

Realized loss on revenue hedges

     84        —          —          84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 421,102      $ 22,977      $ (240,955     203,124   
  

 

 

   

 

 

   

 

 

   

Other expense, net

           (41,433
        

 

 

 

Income from continuing operations before income taxes

           161,691   

Provision for income taxes

           (33,995
        

 

 

 

Income from continuing operations

           127,696   

Discontinued operations, net of taxes

           (23,889
        

 

 

 

Net income

           103,807   

Net income attributable to noncontrolling interests

           (1,847
        

 

 

 

Net income attributable to Expedia, Inc.

         $ 101,960   
        

 

 

 

 

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Notes to Consolidated Financial Statements – (Continued)

 

     Six months ended June 30, 2011  
     Leisure     Egencia     Corporate     Total  
     (In thousands)  

Revenue

   $ 1,551,816      $ 89,610      $ —        $ 1,641,426   

Adjusted EBITDA

   $ 403,853      $ 17,293      $ (150,123   $ 271,023   

Depreciation

     (26,266     (4,168     (30,402     (60,836

Amortization of intangible assets

     —          —          (11,748     (11,748

Stock-based compensation

     —          —          (26,311     (26,311

Legal reserves, occupancy tax and other

     —          —          (4,889     (4,889

Realized loss on revenue hedges

     11,626        —          —          11,626   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 389,213      $ 13,125      $ (223,473     178,865   
  

 

 

   

 

 

   

 

 

   

Other expense, net

           (48,811
        

 

 

 

Income from continuing operations before income taxes

           130,054   

Provision for income taxes

           (36,018
        

 

 

 

Income from continuing operations

           94,036   

Discontinued operations, net of taxes

           99,063   
        

 

 

 

Net income

           193,099   

Net income attributable to noncontrolling interests

           (667
        

 

 

 

Net income attributable to Expedia, Inc.

         $ 192,432   
        

 

 

 

During the first quarter of 2012, we changed our allocation methodology for information technology expenses, which resulted in an increase of expenses at Corporate and a corresponding decrease in expenses being allocated to our Leisure and Egencia segments. In addition, in conjunction with certain organizational changes, we reclassified expenses attributed to our supplier payment group previously captured within Leisure to Corporate. We revised prior year adjusted EBITDA by segment to conform to our current year presentation. There was no impact on consolidated adjusted EBITDA as a result of these changes.

Note 12 – Guarantor and Non-Guarantor Supplemental Financial Information

Condensed consolidating financial information of Expedia, Inc. (the “Parent”), our subsidiaries that are guarantors of our debt facility and instruments (the “Guarantor Subsidiaries”), and our subsidiaries that are not guarantors of our debt facility and instruments (the “Non-Guarantor Subsidiaries”) is shown below. The debt facility and instruments 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 with the exception of certain customary automatic subsidiary release provisions. In this financial information, the Parent and Guarantor Subsidiaries account for investments in their wholly-owned subsidiaries using the equity method.

In connection with the spin-off, TripAdvisor Holdings, LLC and TripAdvisor LLC, both post-spin-off subsidiaries of TripAdvisor, were released from their guarantees of obligations under our existing debt facility and instruments. The discontinued operations of TripAdvisor and its subsidiaries have been presented within the following condensed consolidating financial statements within Guarantor Subsidiaries and Non-Guarantor Subsidiaries consistent with the classification in prior periods. In addition, in connection with the spin-off and the Notice of Redemption of the 8.5% Notes as described in Note 3 — Acquisitions and Dispositions, such 8.5% Notes and the related deposit for the redemption were included within total current liabilities and total current assets of the Parent as of December 31, 2011.

 

17


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATION

Three months ended June 30, 2012

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (In thousands)  

Revenue

   $ —        $ 901,215      $ 139,728      $ (963   $ 1,039,980   

Costs and expenses:

          

Cost of revenue

     —          186,929        42,680        132        229,741   

Selling and marketing

     —          335,070        111,085        (1,582     444,573   

Technology and content

     —          87,071        29,344        (389     116,026   

General and administrative

     —          54,733        27,609        876        83,218   

Amortization of intangible assets

     —          1,573        7,058        —          8,631   

Legal reserves, occupancy tax and other

     —          3,350        —          —          3,350   

Intercompany (income) expense, net

     —          171,914        (171,914     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          60,575        93,866        —          154,441   

Other income (expense):

          

Equity in pre-tax earnings of consolidated subsidiaries

     117,025        104,448        —          (221,473     —     

Other, net

     (20,895     (35,556     36,874        —          (19,577
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     96,130        68,892        36,874        (221,473     (19,577
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     96,130        129,467        130,740        (221,473     134,864   

Provision for income taxes

     9,111        (11,324     (26,542     —          (28,755
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     105,241        118,143        104,198        (221,473     106,109   

Net income attributable to noncontrolling interests

     —          —          (868     —          (868
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Expedia, Inc.

   $ 105,241      $ 118,143      $ 103,330      $ (221,473   $ 105,241   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Expedia, Inc.

   $ 105,241      $ 117,868      $ 79,852      $ (221,473   $ 81,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATION

Three months ended June 30, 2011

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (In thousands)  

Revenue

   $ —        $ 799,735      $ 117,551      $ (3,695   $ 913,591   

Costs and expenses:

          

Cost of revenue

     —          167,602        28,046        162        195,810   

Selling and marketing

     —          294,074        110,376        (3,967     400,483   

Technology and content

     —          74,639        18,516        (54     93,101   

General and administrative

     —          51,080        20,801        164        72,045   

Amortization of intangible assets

     —          1,248        4,666        —          5,914   

Legal reserves, occupancy tax and other

     —          2,531        —          —          2,531   

Intercompany (income) expense, net

     —          157,347        (157,347     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          51,214        92,493        —          143,707   

Other income (expense):

          

Equity in pre-tax earnings of consolidated subsidiaries

     102,204        74,111        —          (176,315     —     

Other, net

     (20,821     (7,719     6,098        —          (22,442
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     81,383        66,392        6,098        (176,315     (22,442
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     81,383        117,606        98,591        (176,315     121,265   

Provision for income taxes

     6,253        (14,484     (24,901     —          (33,132
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     87,636        103,122        73,690        (176,315     88,133   

Discontinued operations, net of taxes

     52,757        55,395        37,731        (93,126     52,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     140,393        158,517        111,421        (269,441     140,890   

Net income attributable to noncontrolling interests

     —          —          (497     —          (497
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Expedia, Inc.

   $ 140,393      $ 158,517      $ 110,924      $ (269,441   $ 140,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Expedia, Inc.

   $ 140,393      $ 159,154      $ 117,190      $ (269,374   $ 147,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATION

Six months ended June 30, 2012

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (In thousands)  

Revenue

   $ —        $ 1,624,735      $ 234,400      $ (2,667   $ 1,856,468   

Costs and expenses:

          

Cost of revenue

     —          356,026        73,358        455        429,839   

Selling and marketing

     —          616,118        209,226        (3,699     821,645   

Technology and content

     —          169,804        55,541        (408     224,937   

General and administrative

     —          106,458        54,353        985        161,796   

Amortization of intangible assets

     —          3,333        8,720        —          12,053   

Legal reserves, occupancy tax and other

     —          3,074        —          —          3,074   

Intercompany (income) expense, net

     —          314,661        (314,661     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          55,261        147,863        —          203,124   

Other income (expense):

          

Equity in pre-tax earnings of consolidated subsidiaries

     149,369        138,610        —          (287,979     —     

Other, net

     (41,701     (35,693     35,961        —          (41,433
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     107,668        102,917        35,961        (287,979     (41,433
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     107,668        158,178        183,824        (287,979     161,691   

Provision for income taxes

     18,181        (7,005     (45,171     —          (33,995
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     125,849        151,173        138,653        (287,979     127,696   

Discontinued operations, net of taxes

     (23,889     —          —          —          (23,889
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     101,960        151,173        138,653        (287,979     103,807   

Net income attributable to noncontrolling interests

     —          —          (1,847     —          (1,847
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Expedia, Inc.

   $ 101,960      $ 151,173      $ 136,806      $ (287,979   $ 101,960   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Expedia, Inc.

   $ 101,960      $ 151,659      $ 126,909      $ (287,979   $ 92,549   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATION

Six months ended June 30, 2011

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (In thousands)  

Revenue

   $ —        $ 1,441,193      $ 207,403      $ (7,170   $ 1,641,426   

Costs and expenses:

          

Cost of revenue

     —          318,859        52,344        217        371,420   

Selling and marketing

     —          553,076        205,778        (7,463     751,391   

Technology and content

     —          146,130        33,832        (54     179,908   

General and administrative

     —          103,087        39,988        130        143,205   

Amortization of intangible assets

     —          2,522        9,226        —          11,748   

Legal reserves, occupancy tax and other

     —          4,889        —          —          4,889   

Intercompany (income) expense, net

     —          279,536        (279,536     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          33,094        145,771        —          178,865   

Other income (expense):

          

Equity in pre-tax earnings of consolidated subsidiaries

     122,488        123,128        —          (245,616     —     

Other, net

     (41,616     (29,032     21,837        —          (48,811
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     80,872        94,096        21,837        (245,616     (48,811
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     80,872        127,190        167,608        (245,616     130,054   

Provision for income taxes

     12,497        (3,110     (45,405     —          (36,018
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     93,369        124,080        122,203        (245,616     94,036   

Discontinued operations, net of taxes

     99,063        104,826        64,369        (169,195     99,063   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     192,432        228,906        186,572        (414,811     193,099   

Net income attributable to noncontrolling interests

     —          —          (667     —          (667
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Expedia, Inc.

   $ 192,432      $ 228,906      $ 185,905      $ (414,811   $ 192,432   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Expedia, Inc.

   $ 192,432      $ 229,592      $ 216,563      $ (414,744   $ 223,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2012

 

     Parent      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
     (In thousands)  
ASSETS              

Total current assets

   $ 126,923       $ 2,849,814       $ 657,305       $ (547,531   $ 3,086,511   

Investment in subsidiaries

     4,041,461         1,157,426         —           (5,198,887     —     

Intangible assets, net

     —           637,963         198,402         —          836,365   

Goodwill

     —           2,436,533         564,221         —          3,000,754   

Other assets, net

     5,250         435,529         140,687         —          581,466   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL ASSETS

   $ 4,173,634       $ 7,517,265       $ 1,560,615       $ (5,746,418   $ 7,505,096   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Total current liabilities

   $ 582,344       $ 3,121,686       $ 293,686       $ (547,531   $ 3,450,185   

Long-term debt

     1,249,312         —           —           —          1,249,312   

Other liabilities

     —           348,796         114,825         —          463,621   

Stockholders’ equity

     2,341,978         4,046,783         1,152,104         (5,198,887     2,341,978   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,173,634       $ 7,517,265       $ 1,560,615       $ (5,746,418   $ 7,505,096   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2011

 

     Parent      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
     (In thousands)  
ASSETS              

Total current assets

   $ 551,488       $ 1,538,509       $ 644,825       $ (460,393   $ 2,274,429   

Investment in subsidiaries

     3,891,811         1,126,412         —           (5,018,223     —     

Intangible assets, net

     —           634,581         109,317         —          743,898   

Goodwill

     —           2,415,482         461,819         —          2,877,301   

Other assets, net

     5,587         465,473         138,570         —          609,630   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL ASSETS

   $ 4,448,886       $ 6,180,457       $ 1,354,531       $ (5,478,616   $ 6,505,258   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Total current liabilities

   $ 894,438       $ 1,906,349       $ 212,963       $ (460,393   $ 2,553,357   

Long-term debt

     1,249,281         —           —           —          1,249,281   

Other liabilities

     —           378,729         18,724         —          397,453   

Stockholders’ equity

     2,305,167         3,895,379         1,122,844         (5,018,223     2,305,167   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,448,886       $ 6,180,457       $ 1,354,531       $ (5,478,616   $ 6,505,258   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

20


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six months ended June 30, 2012

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  
     (In thousands)  

Operating activities:

        

Net cash provided by operating activities from continuing operations

   $ —        $ 1,290,763      $ 109,832      $ 1,400,595   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Capital expenditures, including internal-use software and website development

     —          (95,786     (21,431     (117,217

Purchases of investments

     —          (773,654     (234,091     (1,007,745

Sales and maturities of investments

     —          461,527        212,788        674,315   

Acquisitions, net of cash acquired

     —          —          (199,267     (199,267

Other, net

     —          10,460        (1,999     8,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     —          (397,453     (244,000     (641,453
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Treasury stock activity

     (297,704     —          —          (297,704

Payment of dividends to stockholders

     (24,409     —          —          (24,409

Transfers (to) from related parties

     80,768        (80,768     —          —     

Proceeds from exercise of equity awards

     224,425        —          345        224,770   

Other, net

     16,920        (5,491     25        11,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities from continuing operations

     —          (86,259     370        (85,889

Net cash provided by (used in) continuing operations

     —          807,051        (133,798     673,253   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in discontinued operations

     —          (7,607     —          (7,607
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          (8,088     (3,346     (11,434
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     —          791,356        (137,144     654,212   

Cash and cash equivalents at beginning of period

     —          357,252        331,882        689,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 1,148,608      $ 194,738      $ 1,343,346   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six months ended June 30, 2011

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  
     (In thousands)  

Operating activities:

        

Net cash provided by operating activities from continuing operations

   $ —        $ 1,061,683      $ 24,854      $ 1,086,537   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Capital expenditures, including internal-use software and website development

     —          (87,180     (11,436     (98,616

Purchases of investments

     —          (793,591     (59,854     (853,445

Sales and maturities of investments

     —          390,792        42,074        432,866   

Other, net

     —          (3,497     (7,042     (10,539
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     —          (493,476     (36,258     (529,734
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Treasury stock activity

     (49,227     —          —          (49,227

Payment of dividends to stockholders

     (38,584     —          —          (38,584

Purchase of additional interests in controlled subsidiaries, net

     —          —          70,626        70,626   

Transfers (to) from related parties

        71,269        (71,269     —          —     

Other, net

     16,542        (7,250     3,017        12,309   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities from continuing operations

     —          (78,519     73,643        (4,876

Net cash provided by continuing operations

     —          489,688        62,239        551,927   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by discontinued operations

     —          103,559        —          103,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          11,281        9,319        20,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     —          604,528        71,558        676,086   

Cash and cash equivalents at beginning of period

     —          361,516        259,683        621,199   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 966,044      $  331,241      $ 1,297,285   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Part I. Item 2. Management’s 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, 2011, 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 to, 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 management’s 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 Management’s 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, 2011.

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, offline retail travel agents and 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. We also offer travel and non-travel advertisers access to a potential source of incremental traffic and transactions through our various media and advertising offerings on our transaction-based websites.

Our portfolio of brands includes Expedia.com®, Hotels.com®, Hotwire.com, Expedia Affiliate Network (“EAN”), Classic Vacations, Expedia Local Expert, Expedia® CruiseShipCenters®, Egencia , eLong, and Venere Net SpA (“Venere”). 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, 2011.

On December 20, 2011, following the close of trading on the Nasdaq Stock Market, we completed the spin-off of TripAdvisor, Inc. (“TripAdvisor”), which consisted of the domestic and international operations previously associated with our TripAdvisor Media Group, to Expedia stockholders. We refer to this transaction as the “spin-off.” Immediately prior to the spin-off, Expedia effected a one-for-two reverse stock split.

All percentages within this section are calculated on actual, unrounded numbers.

 

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Trends

The travel industry, including offline agencies, online agencies and other suppliers of travel products and services, has historically been characterized by intense competition, as well as rapid and significant change. Generally, 2011 represented a year of gradual improvement for the travel industry. However, natural disasters, such as the earthquake and tsunami in Japan, political and social unrest in the Middle East and North Africa, the rising price of oil, and ongoing sovereign debt and economic issues in several European countries, all contribute to a somewhat uncertain forward environment for the travel industry.

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 2011, approximately 54% of U.S. leisure, unmanaged and corporate travel expenditures occurred online, compared with approximately 39% of European travel. Online penetration in the Asia Pacific region is estimated to be over 20%, lagging 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 outpaced online agency growth for several years. Competitive entrants such as “metasearch” companies have in some cases been able to introduce differentiated features and content compared with the legacy online travel agency companies. Newer models, such as daily deals and private sale sites have also begun proliferating. We have a number of “daily deals” offered on our retail websites as well as deal specific offerings such as Hotwire’s Travel-Ticker, and a partnership with Groupon called Groupon Getaways with Expedia. In addition, we have seen increased interest in the online travel industry from search engine companies as evidenced by recent innovations and proposed and actual acquisitions by companies such as Google and Microsoft.

The online travel industry has also seen the development of alternative business models and variations in the timing of payment by travelers and to suppliers, which in some cases place pressure on historical business models. In particular, the agency hotel model has seen rapid adoption in Europe. Expedia has both a merchant and an agency hotel offer for our hotel supply partners and we expect our use of these models to continue to evolve. For example, we recently started introducing new technology to our hotel supply partners, which will enable closer integration of the agency hotel model with our core merchant offering in the United States and Europe. Specifically, for participating hotels, we will be able to offer travelers the choice of whether to pay Expedia at the time of booking or pay the hotel at the time of stay. We are calling this program Expedia Traveler Preference (“ETP”).

Intense competition has also historically led to aggressive marketing spend by the travel suppliers and intermediaries, and a meaningful reduction in our overall marketing efficiencies and operating margins. We manage our selling and marketing spending on a brand basis at the local or regional level, making decisions in each market that we think are appropriate based on the relative growth opportunity, the expected returns and the competitive environment. In certain cases, we are pursuing and expect to continue to pursue long-term growth opportunities for which our marketing efficiency is lower than that for our consolidated business but for which we still believe the opportunity to be attractive. However, we believe that over the long-term we can manage our sales and marketing expense to be roughly in line with revenue growth.

Hotel

We generate the majority of our revenue through the marketing and distribution of hotel rooms (stand-alone and package bookings). Our relationships and negotiated economics with our hotel supply partners have remained broadly stable in the past few years. We have, however, implemented new customer loyalty programs and have eliminated or reduced some fees in that timeframe and, as such, the margin of revenue we earn per booking has declined. Over the course of the last two years, occupancies and average daily rates (“ADRs”) in the lodging industry have generally improved in a gradually improving overall travel environment. From a supply perspective, there is very little new, net hotel supply being added in the U.S. lodging market with large chains focusing their development opportunities in international markets. This may help hoteliers with their objective of continuing to grow their ADRs and could lead to pressure in negotiations with hoteliers and may

 

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ultimately lead to pressure on terms for us and our OTA competitors. In international markets, hotel supply is being added at a much faster rate as hotel owners and operators try to take advantage of opportunities in faster growing regions such as China and India, among others. We have had success adding supply to our marketplace with almost 155,000 hotels as of the end of the second quarter of 2012 representing growth in our direct relationships with hoteliers of 14%. In addition, our room night growth has been healthy, with room nights growing 14% in 2010, 18% in 2011 and 23% for the first half of 2012. ADRs for rooms booked on Expedia sites grew 1% in 2010 and 5% in 2011, while they declined 1% for the first half of 2012.

Air

The airline sector in particular has historically experienced significant turmoil. In recent years, there has been increased air carrier consolidation, generally resulting in lower overall capacity and higher fares. In addition, air carriers have made significant efforts to keep seat capacity relatively low in order to ensure that demand for seats remains high and that flights are as full as possible. 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. Ticket prices on Expedia sites grew 11% in 2011 and 6% in the first half of 2012. We are encountering significant pressure on air remuneration as certain supply agreements renew, and as air carriers and global distribution system (“GDS”) intermediaries re-negotiate their long-term agreements.

In part as a result of sharply rising average ticket prices, our ticket volumes decreased by 8% in 2011 after having grown by 11% in 2010. Air ticket volumes grew 4% in the first half of 2012, largely due to the acquisition of VIA Travel and air ticket sales of a major U.S. carrier, which were absent in the first quarter of 2011 due to a commercial disagreement.

From a product perspective, over 70% of our revenue comes from transactions involving the booking of hotel reservations, with approximately 10% of our revenue derived from the sale of airline tickets. We believe that the hotel product is the most profitable of the products we distribute and represents our best overall growth opportunity.

Growth Strategy

Product Innovation. Each of our leading brands was a pioneer in online travel and has been responsible for driving key innovations in the space over the past two decades. They each operate a dedicated technology team, which drives innovations that make researching and shopping for travel increasingly easier and helps customers find and book the best possible travel options. In the past several years, we made key investments in technology, including significant development of our technological platforms that makes it possible for us to deliver innovations at a faster pace. For example, we launched our new Hotels.com global platform in the first quarter of 2010, enabling us to significantly increase the innovation cycle for that brand. Since then, we have been successful in improving conversion and driving much faster growth rates for the Hotels.com brand. We are in the midst of a similar transformation for our Expedia brand, having rolled out its new hotel platform in the second half of 2011, followed by the air platform rollout during the first half of 2012, with expectations that the new package platform will be launched late in 2012.

Global Expansion. Our Expedia, Hotels.com, Egencia, EAN, and Hotwire brands operate both domestically and through international points of sale, including in Europe, Asia Pacific, Canada and Latin America. We own a majority share of eLong, which is the second largest online travel company in China. We also own Venere, a European brand, which focuses on marketing hotel rooms in Europe. Egencia, our corporate travel business, operates in 54 countries around the world and continues to expand aggressively, including its recent acquisition of VIA Travel, a travel management company in the Nordics. We also partner in a 50/50 joint venture with AirAsia – a low cost carrier serving the Asia-Pacific region – to jointly grow an online travel agency business. Although the results for the joint venture are not consolidated in our financial statements, we consider this business to be a key part of our Asia Pacific strategy. In 2011, approximately 39% of our worldwide gross bookings and 42% of worldwide revenue were international up from 22% for both worldwide gross bookings and revenue in 2005. For the first half of 2012, 38% of our gross bookings and 41% of our revenue were international. We have a stated goal of driving more than half of our gross bookings and revenue through international points of sale.

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

 

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leveraging these investments when launching additional points of sale in new countries, introducing new website features, adding supplier products and services including new business model offerings, as well as 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. We believe that our size and scale affords the company the ability to negotiate competitive rates with our supply partners, provide breadth of choice and travel deals to our traveling customers through an increasingly larger supply portfolio and creates opportunities for new value added offers for our customers such as our loyalty programs. The size of Expedia’s worldwide traveler base makes our sites an increasingly appealing channel for travel suppliers to reach customers. In addition, the sheer size of our user base and search query volume allows us to test new technology very quickly in order to determine which innovations are most likely to improve the travel research and booking process, and then roll those features out to our worldwide audience in order to drive improvements to conversion.

New Channel Penetration. Today, the vast majority of online travel bookings are generated through typical desktop and laptop computers. However, technological innovations and developments are creating new opportunities including travel bookings made through mobile devices. In the past few years, each of our brands made significant progress creating new mobile websites and mobile applications that are receiving strong reviews and solid download trends. We own a leading travel application company called Mobiata which is responsible for several top travel applications, such as FlightTrack, FlightTrack Pro and FlightBoard, and is now creating mobile applications for our Expedia brand, most recently launching the mobile Expedia Hotels application for both the iPhone and the iPad. We believe mobile bookings present an opportunity for incremental growth as they are typically completed within one day of the travel or stay which is a much shorter booking window than we have historically experienced via more traditional online booking methods. We are also working with suppliers on specific mobile offerings which can represent a unique value proposition and offer customers room nights for as much as a 50% discount from retail rates.

We also continue to conduct numerous experiments within the ‘daily deals’ space. For example, our Expedia brand has an exclusive partnership with Groupon, Groupon Getaways with Expedia, where we work with suppliers to offer consumers deeply discounted travel opportunities on a limited basis. We believe this may also represent incremental travel bookings as it typically represents an impulse purchase compared to historical travel purchasing activity which tends to be a highly considered and deliberate transaction. Our Hotwire brand also operates the Travel-Ticker brand which sources and markets deep discount travel. Virtually all of our leisure brands have efforts related to the daily deals or deep discount space.

Many of our brands are also actively participating in Facebook, Twitter and other ‘social’ channels and we anticipate the importance of these channels to consumers and to our industry to increase over time. It is our intention to grow our ‘social’ efforts alongside this trend.

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 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. The seasonal revenue impact is exacerbated with respect to income by the more stable nature of our fixed costs. As a result, revenue and income are typically the lowest in the first quarter and highest in the third quarter. Additionally, prior to the spin-off, TripAdvisor typically comprised a larger relative portion of our revenue and income during the first quarter. Thus, following the spin-off the seasonal impact on our business will be more pronounced, particularly in the first quarter, as the bookings versus recognition of revenue time lag under the merchant hotel business represents a larger portion of our operating results without TripAdvisor. The continued growth of our international operations or a change in our product mix may influence the typical trend of the 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

 

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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, 2011.

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.

Occupancy Taxes

We are currently involved in 47 lawsuits brought by or against states, cities and counties over issues involving the payment of hotel occupancy taxes. We continue to defend these lawsuits vigorously. With respect to the principal claims in these matters, we believe that the ordinances at issue do not apply to the services we provide, namely the facilitation of hotel reservations, and, therefore, that we do not owe the taxes that are claimed to be owed. We believe that the ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations.

Recent developments include:

 

   

Broward County, Florida Litigation. The court granted the online travel companies’ motion for partial summary judgment and motion for summary judgment as to Broward County’s counterclaims and held that the online travel companies have no obligation to collect and remit hotel occupancy taxes.

 

   

City of Rome, Georgia Litigation. The court ruled on the parties’ cross motions for summary judgment and held that online travel companies were not previously subject to, and therefore are not obligated to pay, past hotel occupancy taxes to cities in the state of Georgia.

 

   

Leon County, Florida et al. Litigation. The counties are appealing the trial court decision in favor of the online travel companies that hotel occupancy taxes are not due.

 

   

New York City Litigation. The First Appellate Division of the New York Supreme Court denied the city’s motion for reargument or leave to appeal the decision in favor of Expedia that the city did not previously have the authority to tax online travel companies. The city is seeking an appeal of the decision in favor of Expedia to the New York Court of Appeals.

 

   

City of Portland Litigation. The court denied the city and county of Portland’s motion to dismiss the lawsuit brought by the online travel companies. The case will not proceed in the administrative process. Instead, it will proceed in court and the online travel companies will not be required to pay tax assessments prior to seeking a legal determination from the court that it has no obligation to pay hotel occupancy taxes.

 

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City of San Francisco, California Litigation. The city of San Francisco issued additional assessments of tax, penalties and interest for the time period from the fourth quarter of 2007 through the fourth quarter of 2011 against the travel companies, including $22 million against Expedia, Hotels.com and Hotwire. The additional assessments, including the prepayment of such assessments, have been contested by the online companies.

 

   

City of Denver, Colorado Litigation. The online travel companies filed a suit appealing a tax assessment for hotel occupancy taxes, which was previously upheld by the city and county of Denver’s Hearing Officer.

For additional information on these and other legal proceedings, see Part II, Item 1, Legal Proceedings.

We have established a reserve for the potential settlement of issues related to hotel occupancy tax litigation, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $34 million as of June 30, 2012, which includes amounts expected to be paid in connection with the developments described above, and $32 million as of December 31, 2011. In addition, as of December 31, 2011, we also accrued $10 million related to court decisions and the potential and final settlement of issues related to hotel occupancy taxes.

Certain jurisdictions may require us to pay tax assessments, including occupancy tax assessments, prior to contesting any such assessments. This requirement is commonly referred to as “pay-to-play.” Payment of these amounts is not an admission by the taxpayer that it believes it is subject to such taxes. During 2009, we expensed $48 million related to monies paid in advance of litigation in occupancy tax proceedings in the city of San Francisco. During 2010, we expensed $3 million related to monies paid in advance of litigation in occupancy tax proceedings in the city of Santa Monica; these funds were returned to us by the city in December 2011 in exchange for a letter of credit. We do not believe that the amounts we retain as compensation are subject to the cities’ hotel occupancy tax ordinances. If we prevail in the litigation, for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts, plus interest. However, any significant pay-to-play payment or litigation loss could negatively impact our liquidity.

In addition, certain jurisdictions, including the states of New York, North Carolina and Minnesota, the city of New York, and the District of Columbia, have enacted legislation seeking to tax online travel company services as part of sales taxes for hotel occupancy. We are currently remitting taxes to the city of New York, the state of New York, the state and local jurisdictions of South Carolina, and the city of Atlanta, Georgia.

Segments

We have two reportable segments: Leisure, and Egencia. 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, EAN, Hotwire.com, Venere, eLong and Classic Vacations. Our Egencia segment provides managed travel services to corporate customers in North America, Europe, and the Asia Pacific region.

Operating Metrics

Our operating results are affected by certain metrics, such as gross bookings and revenue margin, which we believe are necessary for understanding and evaluating us. 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 bookings increase, reflecting the growth in the online travel industry, our organic market share gains and our business acquisitions. Revenue margin is defined as revenue as a percentage of gross bookings.

 

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Gross Bookings and Revenue Margin

 

     Three months ended
June 30,
          Six months ended
June 30,
       
     2012     2011     %
Change
    2012     2011     %
Change
 
     ($ in millions)           ($ in millions)        

Gross Bookings

            

Leisure

   $ 8,019      $ 7,270        10   $ 15,684      $ 13,923        13

Egencia

     938        684        37     1,693        1,326        28
  

 

 

   

 

 

     

 

 

   

 

 

   

Total gross bookings

   $ 8,957      $ 7,954        13   $ 17,377      $ 15,249        14
  

 

 

   

 

 

     

 

 

   

 

 

   

Revenue Margin

            

Leisure

     12.0     11.9       11.0     11.1  

Egencia

     8.1     6.9       7.6     6.8  

Total revenue margin

     11.6     11.5       10.7     10.8  

The increase in worldwide gross bookings for the three and six months ended June 30, 2012, as compared to the same periods in 2011, was primarily due to a 22% and 23% increase in hotel room nights.

Revenue margin was largely consistent for the three and six months ended June 30, 2012, as compared to the same periods in 2011.

Results of Operations

Revenue

 

     Three months ended
June 30,
           Six months ended
June 30,
        
     2012      2011      %
Change
    2012      2011      %
Change
 
     ($ in millions)            ($ in millions)         

Revenue by Segment

                

Leisure

   $ 964       $ 866         11   $ 1,728       $ 1,551         11

Egencia

     76         48         60     128         90         43
  

 

 

    

 

 

      

 

 

    

 

 

    

Total revenue

   $ 1,040       $ 914         14   $ 1,856       $ 1,641         13
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue increased for the three and six months ended June 30, 2012, compared to the same periods in 2011, primarily due to an increase in hotel room nights stayed partially offset by a decrease in revenue per room night and revenue per ticket. Egencia’s acquisition of VIA Travel in the second quarter of 2012 added approximately 2% to year-over-year growth to total revenue for the second quarter of 2012. In addition, during the three and six months ended June 30, 2012, we recorded an out of period increase to hotel revenue of approximately $8 million and $5 million to correct a prior period overstatement related to sales and use tax in certain jurisdictions, which are recorded in net revenue. Excluding this adjustment, revenue increased 13% for the three and six month periods of June 30, 2012 compared to the same periods in 2011.

Worldwide hotel revenue increased 16% and 17% for the three and six months ended June 30, 2012, compared to the same periods in 2011. The increase was primarily due to a 22% and 23% increase in room nights stayed, partially offset by a 5% decrease in revenue per room night for both periods. Revenue per room night decreased primarily due to changes in our hotel product mix, discounting at the Hotwire brand, impacts from foreign currency and accruals for loyalty programs at Expedia and Hotels.com.

Worldwide air revenue decreased 8% and 13% for the three and six months ended June 30, 2012, compared to the same periods in 2011, due to an 11% and 16% decrease in revenue per air ticket, partially offset by a 3% and 4% increase in air tickets sold. The increase in air tickets sold primarily relates to the VIA Travel acquisition and was partially offset by volume pressure associated with a 5% and 6% increase in average ticket prices for the periods. In addition, the year-over-year increase for air tickets sold for six months ended June 30, 2012 was also due to the availability of American Airlines tickets in the current year that were not available to our leisure consumers during the first quarter of 2011. Revenue per air ticket declined for both the quarterly and year-to-date periods due to lower net supplier economics and impacts from foreign exchange, partially offset by certain regional and interline consumer booking fees.

 

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The remaining worldwide revenue, other than hotel and air discussed above, increased by 17% and 16% for the three and six months ended June 30, 2012, compared to the same periods in 2011, primarily through strong growth in corporate travel fees partially due to the VIA travel acquisition, advertising and media revenue as well as car revenue.

In addition to the above segment and product revenue discussion, our revenue by business model is as follows:

 

     Three months ended
June 30,
           Six months ended
June 30,
        
     2012      2011      %
Change
    2012      2011      %
Change
 
     ($ in millions)            ($ in millions)         

Revenue by Business Model

                

Merchant

   $ 787       $ 685         15   $ 1,390       $ 1,205         15

Agency

     221         200         10     403         380         6

Advertising and media

     32         29         12     63         56         13
  

 

 

    

 

 

      

 

 

    

 

 

    

Total revenue

   $ 1,040       $ 914         14   $ 1,856       $ 1,641         13
  

 

 

    

 

 

      

 

 

    

 

 

    

Merchant revenue increased for the three and six months ended June 30, 2012, compared to the same periods in 2011, due to the increase in merchant hotel revenue primarily driven by an increase in room nights stayed.

Agency revenue increased for the three and six months ended June 30, 2012, compared to the same periods in 2011, primarily due to the growth in our agency hotel business and corporate travel business, partially offset by a decline in agency air revenue.

Cost of Revenue

 

     Three months ended
June 30,
          Six months ended
June 30,
       
     2012     2011     %
Change
    2012     2011     %
Change
 
     ($ in millions)           ($ in millions)        

Customer operations

   $ 113      $ 92        22   $ 210      $ 175        20

Credit card processing

     71        64        10     132        118        12

Data center and other

     46        40        17     88        78        12
  

 

 

   

 

 

     

 

 

   

 

 

   

Total cost of revenue

   $ 230      $ 196        17   $ 430      $ 371        16
  

 

 

   

 

 

     

 

 

   

 

 

   

% of revenue

     22.1     21.4       23.2     22.6  

Cost of revenue primarily consists of (1) customer operations, including our customer support and telesales as well as fees to air ticket fulfillment vendors, (2) credit card processing, including merchant fees, charge backs and fraud, and (3) other costs, primarily including data center costs to support our websites, destination supply, and stock-based compensation.

During the three and six months ended June 30, 2012, the primary drivers of the increase in cost of revenue expense were higher credit card processing costs related to our merchant bookings growth as well as higher headcount and other customer service costs related to the VIA Travel acquisition and additional headcount to support our global customer operations, partially offset by lower debit card fees and an increase in credit card rebates.

Selling and Marketing

 

     Three months ended
June 30,
          Six months ended
June 30,
       
     2012     2011     %
Change
    2012     2011     %
Change
 
     ($ in millions)           ($ in millions)        

Direct costs

   $ 345      $ 311        11   $ 627      $ 580        8

Indirect costs

     100        89        12     195        171        14
  

 

 

   

 

 

     

 

 

   

 

 

   

Total selling and marketing

   $ 445      $ 400        11   $ 822      $ 751        9
  

 

 

   

 

 

     

 

 

   

 

 

   

% of revenue

     42.7     43.8       44.3     45.8  

Selling and marketing expense primarily relates to direct costs, including traffic generation costs from search engines and internet portals, television, radio and print spending, private label and affiliate program commissions, public relations and other costs. The remainder of the expense relates to indirect costs, including personnel and related overhead in our global supply organization, Egencia and various Leisure brands and stock-based compensation costs.

 

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Selling and marketing expenses increased $45 million and $71 million during the three and six months ended June 30, 2012, compared to the same periods in 2011, driven by increases in affiliate marketing expenses at EAN, marketing expenses at Hotels.com as well as higher personnel expenses driven by additional headcount across several brands and our supply organization. For the three and six months ended June 30, 2012, these increases were partially offset by lower offline marketing expenses at our Expedia brand as well as lower online marketing spend for our Expedia brand for the six months ended June 30, 2012.

Technology and Content

 

     Three months ended
June 30,
          Six months ended
June 30,
       
     2012     2011     %
Change
    2012     2011     %
Change
 
     ($ in millions)           ($ in millions)        

Personnel and overhead

   $ 64      $ 50        28   $ 125      $ 96        30

Depreciation and amortization of technology assets

     27        19        39     50        38        29

Other

     25        24        5     50        46        10
  

 

 

   

 

 

     

 

 

   

 

 

   

Total technology and content

   $ 116      $ 93        25   $ 225      $ 180        25
  

 

 

   

 

 

     

 

 

   

 

 

   

% of revenue

     11.2     10.2       12.1     11.0  

Technology and content expense includes product development and content expense, as well as information technology costs to support our infrastructure, back-office applications and overall monitoring and security of our networks, and is principally comprised of personnel and overhead, depreciation and amortization of technology assets including hardware, and purchased and internally developed software, and other costs including licensing and maintenance expense and stock-based compensation.

The increase of $23 million and $45 million in technology and content expense during the three and six months ended June 30, 2012, compared to the same periods in 2011, was primarily due to increased personnel costs for additional headcount to support key technology projects for our Expedia brand, supply organization and corporate technology function as well as increased depreciation and amortization of technology assets.

General and Administrative

 

     Three months ended
June 30,
          Six months ended
June 30,
       
     2012     2011     %
Change
    2012     2011     %
Change
 
     ($ in millions)           ($ in millions)        

Personnel and overhead

   $ 53      $ 44        20   $ 104      $ 86        20

Professional fees and other

     30        28        8     58        57        3
  

 

 

   

 

 

     

 

 

   

 

 

   

Total general and administrative

   $ 83      $ 72        16   $ 162      $ 143        13
  

 

 

   

 

 

     

 

 

   

 

 

   

% of revenue

     8.0     7.9       8.7     8.7  

General and administrative expense consists primarily of personnel-related costs, including our executive leadership, finance, legal and human resource functions as well as fees for external professional services including legal, tax and accounting, and other costs including stock-based compensation.

The $11 million and $19 million increase in general and administrative expense during the three and six months ended June 30, 2012, compared to the same periods in 2011, was due primarily to higher personnel expenses resulting from an increase in headcount.

 

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Amortization of Intangible Assets

 

     Three months ended
June 30,
          Six months ended
June 30,
       
     2012     2011     %
Change
    2012     2011     %
Change
 
     ($ in millions)           ($ in millions)        

Amortization of intangible assets

   $ 9      $ 6        46   $ 12      $ 12        3

% of revenue

     0.8     0.6       0.6     0.7  

Amortization for the three and six months ended June 30, 2012 increased compared to the same periods of 2011 due to amortization related to a new business acquisition. In addition, amortization for the six months ended June 30, 2012 included an approximate $2 million reduction related to a change in the estimated value of contingent purchase consideration for one of our prior acquisitions.

Legal Reserves, Occupancy Tax and Other

 

     Three months ended
June 30,
           Six months ended
June 30,
        
     2012      2011      %
Change
    2012      2011      %
Change
 
     ($ in millions)            ($ in millions)         

Legal reserves, occupancy tax and other

   $ 3       $ 3         32   $ 3       $ 5         (37 %) 

Legal reserves, occupancy tax and other consists of changes in our reserves for court decisions and the potential and final settlement of issues related to hotel occupancy taxes, expenses recognized related to monies paid in advance of occupancy tax proceedings (“pay-to-play”) as well as certain other legal reserves.

Operating Income