JPMorgan 2006 Global Internet Conference Dara Khosrowshahi Expedia, Inc. CEO & President March 14,...

JPMorgan2006 Global Internet

Conference

Dara KhosrowshahiExpedia, Inc. CEO & President

March 14, 2006

2

JPMorgan 2006 Global Internet Conference

Forward-Looking StatementsT h is p re s e n ta tio n c o n ta in s "fo rw a rd -lo o k in g s ta te m e n ts " w ith in th e m e a n in g o f th e P riv a te S e c u ritie s L itig a tio n R e fo rm A c t o f 1 9 9 5 . T h e s e s ta te m e n ts a re n o t g u a ra n te e s o f fu tu re p e rfo rm a n c e . T h e s e fo rw a rd -lo o k in g s ta te m e n ts a re b a s e d o n a s s u m p tio n s w h ic h a re in h e re n tly s u b je c t to u n c e rta in tie s , ris k s a n d c h a n g e s in c irc u m s ta n c e s th a t a re d iff ic u lt to p re d ic t. T h e u s e o f w o rd s s u c h a s "a n tic ip a te s ," "e s tim a te s ," "e x p e c ts ," "in te n d s ," "p la n s " a n d "b e lie v e s ," a m o n g o th e rs , g e n e ra lly id e n tify fo rw a rd -lo o k in g s ta te m e n ts . H o w e v e r, th e s e w o rd s a re n o t th e e x c lu s iv e m e a n s o f id e n tify in g s u c h s ta te m e n ts . In a d d itio n , a n y s ta te m e n ts th a t re fe r to e x p e c ta tio n s , p ro je c tio n s o r o th e r c h a ra c te riz a tio n s o f fu tu re e v e n ts o r c irc u m s ta n c e s a re fo rw a rd -lo o k in g s ta te m e n ts a n d m a y in c lu d e s ta te m e n ts re la tin g to fu tu re re v e n u e s , e x p e n s e s , m a rg in s , p ro fi ta b ility , n e t in c o m e , e a rn in g s p e r s h a re a n d o th e r m e a s u re s o f re s u lts o f o p e ra tio n a n d th e p ro s p e c ts fo r fu tu re g ro w th o f E x p e d ia , In c .’s b u s in e s s . A c tu a l re s u lts a n d th e tim in g a n d o u tc o m e o f e v e n ts m a y d iff e r m a te ria lly fro m th o s e e x p re s s e d o r im p lie d in th e fo rw a rd -lo o k in g s ta te m e n ts fo r a v a rie ty o f re a s o n s , in c lu d in g , a m o n g o th e rs : E x p e d ia , In c .’s a b ility to e ff e c tiv e ly u p d a te , a u to m a te a n d in te g ra te d is p a ra te fi n a n c ia l a n d a c c o u n tin g s y s te m s a n d a p p ro a c h e s a m o n g its b ra n d s a n d b u s in e s s e s ; th e a c c u ra c y , in te g rity , s e c u rity a n d re d u n d a n c y o f s y s te m s , in c lu d in g fi n a n c ia l a n d a c c o u n tin g s y s te m s , a n d n e tw o rk s o f E x p e d ia , In c .; re lia n c e o n n e w ly im p le m e n te d s y s te m s s u p p o rtin g o u r fi n a n c ia l p la n n in g a n d p ro je c tio n s ; a d v e rs e c h a n g e s in s e n io r m a n a g e m e n t; th e ra te o f g ro w th o f th e In te rn e t a n d o n lin e tra v e l; c h a n g e s in g lo b a l e c o n o m ic c o n d itio n s ; c o n s u m e r s p e n d in g , th e c o m p e titiv e e n v iro n m e n t; th e e -c o m m e rc e in d u s try a n d b ro a d b a n d a c c e s s ; w o rld e v e n ts (in c lu d in g a d v e rs e w e a th e r, h e a lth ris k s a n d te rro ris m ); th e ra te o f o n lin e m ig ra tio n in th e v a rio u s g e o g ra p h ie s a n d m a rk e ts in w h ic h E x p e d ia , In c . o p e ra te s , in c lu d in g A s ia ; fl u c tu a tio n s in fo re ig n e x c h a n g e ra te s ; th e h e a lth o f th e tra v e l in d u s try , in c lu d in g c o n s u m e r a n d b u s in e s s s p e n d in g o n tra v e l; E x p e d ia , In c .’s a b ility to e x p a n d s u c c e s s fu lly in in te rn a tio n a l m a rk e ts ; p o s s ib le o n e -tim e c h a rg e s re s u ltin g fro m , a m o n g o th e r e v e n ts , in te g ra tio n a n d p ro c e s s re v ie w a c tiv itie s , p la tfo rm m ig ra tio n a n d s h a re d s e rv ic e s e ff o rts ; fa ilu re to re a liz e c o s t e ff ic ie n c ie s ; th e s u c c e s s fu l c o m p le tio n o f p e n d in g c o rp o ra te tra n s a c tio n s a n d th e in te g ra tio n o f c u rre n t a n d a c q u ire d b u s in e s s e s ; a n d o th e r ris k s d e ta ile d in E x p e d ia , In c .’s p u b lic fi lin g s w ith th e S E C , in c lu d in g E x p e d ia , In c .’s Q u a rte rly R e p o rt o n F o rm 1 0 -Q fo r th e q u a rte r e n d e d S e p te m b e r 3 0 , 2 0 0 5 . E x c e p t a s re q u ire d b y la w , E x p e d ia , In c . u n d e rta k e s n o o b lig a tio n to u p d a te a n y fo rw a rd -lo o k in g o r o th e r s ta te m e n ts in th is p re s s re le a s e , w h e th e r a s a re s u lt o f n e w in fo rm a tio n , fu tu re e v e n ts o r o th e rw is e .

3


International Mix

1.1 1.5 1.8 2.1 2.3 2.7 3.0 3.3 3.5

8.49.3 9.8 10.2 10.5 10.9

11.3 11.8 12.1

Q4 03 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05

Expedia, Inc. U.S. & International gross bookings, trailing 12 months($B)

International now 22% of mix, up from 12% in 2003

INTL

‘03 to ‘05 77% avg growth

U.S.

‘03 to ‘05 20% avg. growth

Source:Company financial reports

4


Travel Industry - Global Opportunity

Worldwide

$875 Billion Total

10% ($90B) online

United States

$209 BillionTotal

25% ($52B) online

Europe

$265 Billion Total

9% ($24B) online

Source : 2004 estimates; Company estimates; IAC/Interactive S4/A filed June 17, 2005; PhoCusWright 2004 market estimates for leisure & unmanaged business travel.

Asia Pacific5% ($12B)

online

$264 Billion Total

Sizeable opportunity with long-term penetration upside

5


Brand Portfolio

PackagesComplex itinerariesBusiness travel

Air ticketsHotel roomsRental cars

$$$$

$

Simple Complex

Portfolio approach appeals to broadest range of traveler needs

6


Brand Portfolio –

Sources : Company estimates; Company financial reports; Hotels.com website.

Hotels.com Gross Bookings – Y/Y Growth Percent

38

13

6

-4 -2

69

16

Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05

~$1.9B 2005 Gross Bookings

#5 WW Online Travel Agency

WW presence in 29 countries

Complimentary to core Expedia

traveler

7


Brand Portfolio -

TripAdvisor.comCumulative Reviews & Opinions (by month)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jan-05

Feb-05

Mar-05

Apr-05

May-05

Jun-05

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Month & Year

Nu

mb

er o

f R

evie

ws

& O

pin

ion

s (i

n t

ho

usa

nd

s)

Sources : Company estimates; comscore media metrix; TripAdvisor website.

1MM

2MM

3MM

4MM

19MM Jan ‘06 unique visitors (41% Y/Y)

#3 worldwide travel website

4MM reviews & opinions

Expanded reach to U.K., Germany,

France, Italy & Spain

8


Brand Portfolio –

Sources : Company financial reports; Company estimates; Company website.

What will high online adoption mean for you?

$8.5M Total $7.2M Total

15%Lower Air

15%Lower Air

8%Lower Hotel

8%Lower Hotel

50%Lower Fees

50%Lower Fees

15%CombinedSavings

15%CombinedSavings

Savings chart based on fee comparison at ourHigher Select agent service plus the PhocusWright Study. The study shows the effects of high onlineadoption on lowering air and hotel costs. ExpediaCorporate Travel’s higher online usage, lowerfees, and additional inventory may offer you evengreater savings.

TraditionalLow Adoption

On DemandHigh Adoption

$7M Air

$1.15M Hotel

$379K Fees

$5.95M Air

$1.06M Hotel

$190K Fees

Example: A company currently spending $7 million in ARC with a traditional agency

Let us present a personalized ROI comparison for you

$700MM+ Gross Booking –

90% Y/Y growth

Top 10 Corporate Travel

Agency

Launched TripController –

leading technology solution

Operating in U.S., U.K.,

France, Canada, Belgium,

Netherlands & Lux.

9


Benefits of Brand Breadth & Scale

Expedia Travelocity Cendant (A)

Gross bookings $15,551 Gross booking $7,446 $8,776

Revenue 2,119 Revenue 830 587 Revenue % gross bookings 13.6% Revenue % GB 11.1% 6.7%

OIBA * 627 EBITDA 48 74 OIBA % revenue 29.6% EBITDA % Rev 5.8% 12.6%

Figures in $MM

Note A: Cendant revenue and EBITDA for Orbitz, Gullivers & eBookers.* “Operating income before amortization” is a non-GAAP measure as defined by the SEC. Please see “Definitions of non-GAAP Measures” and “Tabular Reconciliations for Non-GAAP Measures” elsewhere in this presentation for an explanation of Non-GAAP measures used throughout this presentation.

Expedia’s vision = become largest & most profitable retailer of travel products & services.

Sources : Company financial reports; Sabre Holdings & Cendant Corp. financial reports and earnings call transcripts.

10


Strong Free Cash Flow, Flow Through

FY 2005 Results

OIBA $627 MM+ Depreciation 50 MM+ Changes in working capital & other 173 MM- Capital expenditures (52 MM)= Free cash flow $798 MM

Flow Through:2005 FCF as % of :

EXPE Travel Average (A) Internet Average (B) Revenue 38% Revenue 8% Revenue 32% OIBA 127% EBITDA 79% EBITDA 84%

Note A: Travel Average consists of Cendant (NYSE : CD), Sabre Holdings (NYSE : TSG) and Priceline (NASDAQ : PCLN).

Note B: Internet Average consists of Yahoo (NASDAQ : YHOO), eBay (NASDAQ : EBAY) and Google (NASDAQ : GOOG).

Sources : Company financial reports; Cendant, Sabre Holdings, Priceline, Yahoo, eBay & Google financial reports and earnings call transcripts..

11


2005 Results

Source:Company Financial Reports.

Figures in $MM

2004 2005 Y / Y GrowthGross bookings 12,774$ 15,552$ 22%Revenue 1,843 2,119 15% Revenue Margin 14.4% 13.6% (80) basis pointsGross profit 1,453 1,649 13%Selling & Marketing 653 698 7% % of Revenue 35.4% 32.9% 252 basis pointsGeneral & Administrative 161 212 31% % of Revenue 8.7% 10.0% (125) basis pointsTechnology & Content 85 112 32% % of Revenue 4.6% 5.3% (68) basis pointsOIBA 554 627 13% OIBA Margin 30.0% 29.6% (44) basis points

12


Q4 2005 Results

Q404 Q405 Y / Y GrowthGross bookings 2,895$ 3,395$ 17%Revenue 439 495 13% Revenue Margin 15.2% 14.6% (59) basis pointsGross profit 343 385 12%Selling & Marketing 129 155 20% % of Revenue 29.4% 31.4% (201) basis pointsGeneral & Administrative 47 65 39% % of Revenue 10.7% 13.2% (250) basis pointsTechnology & Content 23 31 33% % of Revenue 5.3% 6.3% (94) basis pointsOIBA 143 133 -7% OIBA Margin 32.6% 26.9% (577) basis points

Figures in $MM

Source:Company Financial Reports.

13


Leverage Points

G&A – Public Company Costs/Apollo

Revenue Margin

Supply Relationships

Business Analytics

Volume

Long-Term Selling & Marketing Efficiency

Product

Improve end-to-end traveler experience

Short & medium-term investments for long-term results

14


Value to Suppliers –Lodging

We bring our partners business when they need

it

Solid weekday business, while also improving weekend

utilization

Higher ADRs than industry average

Our ADRs are nearly 50% higher than the

industry

Our customers stay longer than industry

customers

Average length of stay is nearly 40%

longer

AD

R (

ind

ex

)

Industry Expedia

%

Industry bookings

Expedia bookings

Le

ng

th o

f s

tay

(in

de

x)

Industry Expedia

Source: Proprietary consumer research; Smith Travel Research LTM August 2005; internal data

13

4938

10

63

28

0

20

40

60

80

Sunday Weekday Fri/Sat

1

1.48

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

11.38

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

15


0

1

2

3

4

5

2001 2002 2003 2004 2005

Ind

ex

%

Industry On EI

Average hub passengersof U.S. carriers

0

20

40

60

80

We bring carriers a different set of customers We can help with yields

Our packages help move distressed inventory

Most of the customers we

deliver are outside hub

markets

Our airfares are rising faster than

overall faresIndustry 2001 to 2005 CAGR is -

2.0% vs. our 3.5%

Package sales have quadrupled as a

portion of our total sales in the last 5

years

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

2001 2003 2005

Industry EI

%

YoY change in air yields

Value to Suppliers –Air

16


Why Retail?

TODAY

Industry-leading OLTATechnology leadership

Strong brand awarenessBroad selection

Competitive prices

Most travelers are one-time buyersVast majority buy a single item

<5% U.S. Leisure spend at Expedia.com

YET…

17


Fragmented Traveler Behavior

7%

29%

29%

35%

Traveler behavior Upside to Expedia

Source: Company estimates; Forrester; Jupiter; Merrill Lynch; comScore; Yankelovich

% T

ota

l 2005 t

rave

l sp

en

d b

y U

.S. h

ou

seh

old

s w

ith

on

lin

e a

ccess

Opportunity to convince our shoppers to buy with us

Opportunity to convince our shoppers to buy online with us

The next frontier!

Purchase on Expedia

Shop online but purchase from online competitor

Shop online but purchase from offline competitor

Shop and purchase with offline competitor

18


Move from Selling Inventory…to Selling an Experience

At the core of all travel is a story……

Segmentation

Wishlist

Recommender

Booking

TSF and itinerary planner

Travel experience

Memories and

storytelling

Expedia’s current view of the story and its

climax

The customer’s view of the story and its climax

19


Transformation: From ATM … to Merchant …

20


…From “One Site Fits All” … to Personal & Relevant

21


Personal & Relevant – Air Shopper E-mail Campaign

Site behavior

drives promotion

22


Experience – Personal Trip Guides

23


Experience – Expedia Best Price Guarantee

24


33%

37%26%

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.10 0.15 0.20 0.25 0.30 0.35

AAA

Hilton

Southwest

*Percent preferring travel provider based on “lowest prices and fares available”**Percent preferring travel provider based on 9 Emotional/Relationship attributes (including “Values me as a customer,” “Cares about me and my travel,” “Understands me and how I feel about travel,” “Consistently Exceeds expectations”)

Preference based on relationship (9 attributes)**

Pre

fere

nce b

ase

d o

n p

rice*

16%

21%

27% 29%

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.10 0.15 0.20 0.25 0.30 0.35

OTA2

Expedia

OTA1

OTA3

Customer View of Travel Market

Brand perception and loyaltySize of circle = Percent who would recommend to friends

Source: Expedia Brand Health Tracker

25


In Summary….

ATTRACTIVE INDUSTRY

• Sizeable global target market - $875B

• Low global online penetration of 10% with significant upside

EXPEDIA STRENGTHS

• #1 in most WW points of sale

• Industry-leading brand recognition, traffic, travelers

• Brand portfolio offers broadest customer & supplier appeal

• WW, centralized supply relationships - drive increased value for suppliers given traveler & geography breadth

• Large fixed investment can be levered across existing & future businesses

• Significant base & leadership position as we transition to world-class retailer of travel experiences

• Efficient flow through: ~$800MM in free cash flow on $2.1B in revenue

26


Q & A

27


Appendix

28


Definitions of Non-GAAP MeasuresThe following are defined as non-GAAP measures by the SEC:

Operating Income Before Amortization is defined as operating income plus: (1) amortization of non-cash distribution and marketing expense, (2) stock-based compensation expense, (3) amortization of intangible assets and goodwill impairment, if applicable and (4) certain one-time items, if applicable. Management believes this measure is useful to investors because it represents the combined operating results of Expedia, Inc.’s businesses, taking into account depreciation, which we believe is an ongoing cost of doing business, but excluding the effects of other non-cash expenses that may not be indicative of our core business operations. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to Expedia, Inc.’s statements of income of certain expenses, including non-cash compensation, non-cash payments to partners, and acquisition-related accounting. Due to the high variability and difficulty in predicting certain items that affect net income, such as interest rates and tax rates, Expedia, Inc. is unable to provide reconciliation to net income on a forward-looking basis without unreasonable efforts.

Adjusted Net Income generally captures all items on the statements of income that have been, or ultimately will be, settled in cash and is defined as net income available to stockholders plus (1) amortization of non-cash distribution and marketing expense, (2) stock-based compensation expense, (3) amortization of intangible assets and goodwill impairment, if applicable, (4) one-time items, net of related tax, and minority interest, (5) mark to market gains and losses on derivative liabilities and (6) discontinued operations, net of tax. We believe Adjusted Net Income is useful to investors because it represents Expedia, Inc.’s combined results, taking into account depreciation, which management believes is an ongoing cost of doing business, but excluding the impact of other non-cash expenses and items not directly tied to the recurring core operations of our businesses.

Adjusted EPS is defined as Adjusted Net Income divided by weighted fully diluted shares outstanding for Adjusted EPS purposes. We include dilution from options and warrants per the treasury stock method and include all shares relating to restricted stock units (“RSU”) in shares outstanding for Adjusted EPS. This differs from the GAAP method for including RSUs, which treats them on a treasury method basis. Shares outstanding for Adjusted EPS purposes are therefore higher than shares outstanding for GAAP EPS purposes. We believe Adjusted EPS is useful to investors because it represents, on a per share basis, Expedia’s consolidated results, taking into account depreciation, which we believe is an ongoing cost of doing business, as well as other charges which are not allocated to the operating businesses such as interest expense, taxes and minority interest, but excluding the effects of other non-cash expenses not directly tied to the core operations of our businesses. Adjusted Net Income and Adjusted EPS have the same limitations as Operating Income Before Amortization. In addition, Adjusted Net Income does not include all items that affect our net income and net income per share for the period. Therefore, we think it is important to evaluate these measures along with our consolidated statements of income.

Free Cash Flow is defined as net cash flow provided by operating activities less capital expenditures. Management believes Free Cash Flow is useful to investors because it represents the operating cash flow that our operating businesses generate, less capital expenditures but before taking into account other cash movements that are not directly tied to the core operations of our businesses, such as financing activities or certain investing activities. Free Cash Flow has certain limitations in that it does not represent the total increase or decrease in the cash balance for the period, nor does it represent the residual cash flow for discretionary expenditures. Therefore, it is important to evaluate Free Cash Flow along with the consolidated statements of cash flows.

29


Reconciliation of Non-GAAP Measures

Operating Income Before Amortization

2005 2004 2005 2004

OIBA 132,940$ 143,291$ 627,441$ 553,692$ Amortization of intangibles (31,863) (32,571) (126,067) (125,091) Stock-based compensation (11,826) (37,006) (91,725) (171,400) Amortization of non-cash distribution and marketing (3,542) (3,701) (12,597) (16,728) Operating Income 85,709 70,013 397,052 240,473

Net interest income 1,194 14,745 48,673 38,356 Write-off of long-term investment - - (23,426) - Other (20,317) (12,192) (8,428) (9,286) Provision for income taxes (42,082) (28,634) (185,977) (106,371) Minority interest in loss of consolidated subsidiaries 730 188 836 301 Net Income 25,234$ 44,120$ 228,730$ 163,473$

Year endedDecember 31,

Three months endedDecember 31,

(in thousands)(Unaudited)

Adjusted Net Income & Adjusted EPS

2005 2004 2005 2004

Net income 25,234$ 44,120$ 228,730$ 163,473$ Amortization of intangibles 31,863 32,571 126,067 125,091 Stock-based compensation 11,826 37,006 91,725 171,400 Amortization of non-cash distribution and marketing 3,542 3,701 12,597 16,728 Write-off of long-term investment - - 23,426 - Unrealized loss on derivative instruments 18,042 - 6,042 - Minority interest (382) (191) (1,827) (523) Provision for income taxes (17,378) (25,328) (70,982) (109,251) Adjusted net income 72,747$ 91,879$ 415,778$ 366,918$

GAAP diluted weighted average shares outstanding 363,632 340,549 349,530 340,549 Additional restricted stock units 4,648 - 2,366 - Adjusted weighted average shares outstanding 368,280 340,549 351,896 340,549

Diluted earnings per share 0.07$ 0.13$ 0.65$ 0.48$ Adjusted earnings per share 0.20$ 0.27$ 1.18$ 1.08$

Three months ended December 31,

Year ended December 31,

(in thousands, except per share data)

30


Reconciliation of Non-GAAP Measures

Free Cash Flow

2005 2004 2003

Net cash provided by operating activities 849,895$ 802,853$ 644,023$ Less: capital expenditures (52,315) (53,407) (46,183) Free cash flow 797,580$ 749,446$ 597,840$

Year endedDecember 31,

(in thousands)

31


Business Model – Operating Income

FY 2005 Results ($MM)

Gross bookings $15,552

Revenue 2,119

Cost of revenue 470

Gross profit 1,649

Gross margin 78%

Selling and marketing 698

General and administrative 212

Technology and content 112

OIBA 627

OIBA margin 30%

Non-cash marketing & dist. 13

Stock-based compensation 92

Amortization of intangibles 126

Operating income (GAAP) 397

Operating margin 19%

• Credit Card & Bad Debt• “Fulfillment” Costs, incl. paper tickets• Call Centers (Traveler Service) • Data Center• Costs to destination services suppliers

$1 of every $3 in revenue, consisting of advertising and distribution expense, as well as personnel-related costs, including PSG market manager staffing. Our distribution channels include portals, search engines and our affiliate programs.

30% of Revenue flows to operating profit (4% of Gross Bookings)

Significant acquisition activity being amortized

Annual equity awards in February. Shifted to RSUs w/ ‘03 grant cycle, reducing expense & dilution

(1) Personnel costs for support functions that include our executive leadership, finance, legal, tax and human resources functions. (2) Fees for professional services that include legal, tax and accounting.

Customer books a travel product or service; total retail value (incl taxes and fees) constitutes “Gross Bookings”

Expedia’s portion of the gross booking gets recorded as revenue (fees, commissions, etc.) Revenue = 13.6% of bookings in 2005.

Includes product development expenses such as payroll and related expenses, and depreciation of website development costs.

Source:Company financial reports

32


Business Model - Free Cash Flow Build

Free Cash Flow$ Millions

Depre-ciation

IntangiblesNon-CashMarketing

Non-Cash Charges

50

126 13

Stock-Based Comp.

Accounts Payable, Merchant

Deferred Merchant Bookings

Working Capital Changes

86

45

Inc. Tax Payable

(A)

Cap Ex 2005 Free Cash Flow

798

2005 Net Income

229

92

(52)

Decr. in Taxes

Payable (A)

43

114

Other W.C.

844

Other

Note A: Cash taxes paid in 2005 were $11 million. $114 million reduction in taxes payable was due primarily to stock-based compensation deductions and transfer of Payables to IAC.

JPMorgan 2006 Global Internet Conference Dara Khosrowshahi Expedia, Inc. CEO & President March 14,...

Documents

Transcript of JPMorgan 2006 Global Internet Conference Dara Khosrowshahi Expedia, Inc. CEO & President March 14,...