BELLEVUE, Wash., Feb. 15 /PRNewswire-FirstCall/ -- Expedia, Inc. today announced financial results for its fourth quarter and full-year ended December 31, 2006.

"Begun with adversity, 2006 was a year of change, challenge and investment that ended positively for Expedia," said Barry Diller, Expedia, Inc.'s Chairman and Senior Executive. "We believed our results would improve, and they did in the form of 10% OIBA growth for the fourth quarter, with robust international growth, a stabilized revenue margin and efficient expense control. At the same time, we continued to make longer term strides for shareholders-fortifying our brand portfolio, expanding and stabilizing supplier relations, extending our geographic reach in Europe and Asia-Pacific and continuing our commitment to capital efficiency by issuing debt and taking steps to reduce our share base nearly 15%, with an incremental authorization for 20 million shares still outstanding. The result is an Expedia better positioned for sustained growth and value creation in 2007 and beyond."

"We continued our progress this quarter in stabilizing the Company's operating profitability, resulting in OIBA at the high end of our expectations range for the year," said Dara Khosrowshahi, Expedia, Inc.'s CEO and President. "We enter 2007 with online travel's vanguard brands, more than 50 unique points of sale across the globe and an intense commitment to innovation, but above all with a firm eye toward re-accelerating growth at our flagship point of sale, Expedia.com(R)."

Financial Summary & Operating Metrics (figures in $MM's, except per share amounts)

Metric 3 Months 3 Months Year Year Ended Ended Y / Y Ended Ended Y / Y 12.31.06 12.31.05 Growth 12.31.06 12.31.05 Growth ________ ________ ______ _________ _________ _______ Gross bookings $3,686.7 $3,395.1 9% $17,160.6 $15,551.5 10% Revenue 531.3 494.7 7% 2,237.6 2,119.5 6% Revenue Margin 14.4% 14.6% (16 bps) 13.0% 13.6% (59 bps) Gross profit 409.5 382.1 7% 1,734.9 1,639.2 6% Operating income before amortization* ("OIBA") 146.2 132.9 10% 599.0 627.4 (5%) Operating income 99.5 85.7 16% 351.3 397.1 (12%) Adjusted net income * 98.1 72.7 35% 390.5 415.8 (6%) Net income 67.1 25.2 166% 244.9 228.7 7% Adjusted EPS * $0.28 $0.20 40% $1.09 $1.18 (8%) Diluted EPS $0.20 $0.07 186% $0.70 $0.65 8% Free cash flow * (131.2) (102.7) (28%) 524.8 806.9 (35%)

* "Operating income before amortization," "Adjusted net income," "Adjusted EPS," and "Free cash flow" are non-GAAP measures as defined by the Securities and Exchange Commission (the "SEC"). Please see "Definitions of Non-GAAP Measures" and "Tabular Reconciliations for Non-GAAP Measures" on pages 16-18 herein for an explanation of non-GAAP measures used throughout this release. Please also see "Basis of Presentation" on page 19 for additional information on financial results for full-year 2005 results presented throughout this release.

Discussion of Results - Fourth Quarter 2006 Gross Bookings & Revenue

Gross bookings increased 9% for the fourth quarter 2006 compared with fourth quarter 2005. Domestic gross bookings increased 1% and international gross bookings increased 34%, or 27% excluding the impact of foreign exchange rates.

Revenue increased 7% for the fourth quarter, primarily driven by increased worldwide merchant hotel revenue, partially offset by a decline in our domestic air revenue. Domestic revenue growth was 1%, and international revenue increased 25%.

Worldwide merchant hotel revenue increased 15% for the fourth quarter. The growth was primarily driven by a 9% increase in revenue per room night, as well as by a 6% increase in room nights stayed, including rooms delivered as a component of vacation packages. Revenue per room night increased due to a 9% increase in worldwide average daily rates ("ADRs"), partially offset by a small decline in hotel raw margin.

Worldwide air revenues decreased 14% for the fourth quarter due to a 15% decrease in revenue per air ticket, partially offset by a 1% increase in air tickets sold. The decrease in revenue per air ticket reflects decreased compensation from air carriers and global distribution system ("GDS") providers. Excluding merchant air tickets, worldwide air tickets sold would have increased 5%. Lower availability of merchant air inventory also impacted our packages revenue, which increased 1% compared with the prior year period.

Revenue as a percentage of gross bookings ("revenue margin") was 14.4% for the fourth quarter, a decrease of 16 basis points. Domestic revenue margin was flat at 14.0%, while international revenue margin decreased 102 basis points to 15.5%. The fourth quarter decline in worldwide revenue margin was primarily due to the decline in air revenue per ticket, coupled with an increase in average worldwide airfares of 4%, as our remuneration generally does not vary with the price of the ticket. This impact was nearly offset by an increased mix of merchant hotel and advertising revenue, which have higher margins compared with our other product groups and services.

Profitability

Gross profit for the fourth quarter of 2006 was $410 million, an increase of 7% compared with the fourth quarter of 2005 primarily due to increased revenue, partially offset by a 16 basis point decline in gross margin to 77.1%. The gross margin decline was due in part to costs associated with our GDS diversification, partially offset by an increased mix of merchant hotel revenue, which has a higher gross margin than our overall business.

Operating Income Before Amortization ("OIBA") for the fourth quarter increased 10% to $146 million, primarily driven by higher revenue. OIBA as a percentage of revenue increased 66 basis points to 27.5%, primarily reflecting lower growth in general and administrative and technology and content expenses excluding stock-based compensation compared to revenue growth during the quarter, partially offset by a lower gross margin. Operating income increased 16% during the quarter to $100 million due to the same factors impacting OIBA, as well as lower amortization expense related to intangibles, partially offset by higher stock-based compensation expense.

Adjusted net income for the fourth quarter increased $25 million due to an increase in OIBA, higher interest income on increased cash balances and a lower effective tax rate, partially offset by an increase in interest expense related to our Senior Notes. Net income increased $42 million due to a lower effective tax rate, an increase in operating income, a net increase in income related to derivative liabilities and increased interest income, partially offset by greater interest expense. Fourth quarter adjusted EPS and diluted EPS were $0.28 and $0.20, respectively. These measures increased 40% and 186% due to the same factors impacting adjusted net income and net income, as well as lower share counts from share repurchase activity during 2006.

Discussion of Results - Full Year 2006 Gross Bookings & Revenue

Gross bookings increased 10% in 2006 compared with 2005. Domestic gross bookings increased 6% and international gross bookings increased 26%, or 24% excluding the impact of foreign exchange rates.

Revenue increased 6% for the year, primarily driven by increased worldwide merchant hotel revenue, partially offset by a decline in our domestic air revenue. Domestic revenue growth was flat, and international revenue increased 24%.

Worldwide merchant hotel revenue increased 13% in 2006. The growth was primarily driven by a 10% increase in room nights stayed, including rooms delivered as a component of vacation packages, as well as by a 2% increase in revenue per room night. Revenue per room night increased due to a 6% increase in worldwide ADRs, partially offset by a decrease in hotel raw margins.

Worldwide air revenues decreased 14% in 2006 due to a 13% decrease in revenue per air ticket and a 2% decrease in air tickets sold. The decrease in revenue per air ticket reflects decreased compensation from air carriers and GDS providers. Excluding merchant air, worldwide air tickets sold would have increased 4%. Lower availability of merchant air inventory also impacted our packages revenue, which increased 1% compared with 2005.

Revenue margin was 13.0% in 2006, a decrease of 59 basis points. Domestic revenue margin decreased 76 basis points to 12.7%, while international revenue margin decreased 19 basis points to 13.9%. The decline in 2006 worldwide revenue margin was primarily due to the decline in air revenue per ticket, coupled with an increase in average worldwide airfares of 9%.

Profitability

Gross profit for 2006 was $1.73 billion, up 6% compared to 2005 due to increased revenue. Gross margin increased 19 basis points to 77.5%, due primarily to an increased mix of merchant hotel revenue.

OIBA decreased 5% to $599 million due to higher operating expenses, partially offset by higher revenue and the improvement in gross margin. OIBA as a percentage of revenue was down 283 basis points to 26.8%, primarily reflecting higher growth in selling and marketing and general and administrative expenses compared to revenue growth during the year. Operating income decreased 12% during the year to $351 million, driven by the same factors impacting OIBA, as well as a $47 million intangible asset impairment, partially offset by lower amortization expense related to intangible assets and lower stock-based compensation.

Adjusted net income for the year decreased by $25 million compared with 2005 due to lower OIBA, decreased interest income from lower cash balances and increased interest expense related to our Senior Notes issue. Net income increased by $16 million due to a lower effective tax rate, a net increase in income related to derivatives and an asset write-off in the prior period, partially offset by a decrease in operating income, lower net interest income and increased interest expense. 2006 adjusted EPS and diluted EPS were $1.09 and $0.70, respectively. These measures decreased 8% and increased 8%, respectively, due to the same factors impacting adjusted net income and net income.

Cash Flows & Working Capital

Net cash provided by operating activities in 2006 was $617 million and free cash flow was $525 million. Both measures include $133 million from a positive net change in operating assets and liabilities, primarily driven by our merchant hotel business.

Free cash flow in 2006 decreased $282 million from 2005 due primarily to increased cash taxes, increased capital expenditures, reduced benefit from working capital, lower OIBA and lower net interest income due to reduced cash balances. In addition, we reclassified the effect of exchange rates on our cash balances from "net cash provided by operating activities" to "effect of exchange rate changes on cash and cash equivalents" in our statements of cash flows.

Recent Highlights Global Presence -- Expedia, Inc.'s international points of sale in Canada, the United Kingdom, Germany, France, Italy, China, Australia, Japan and other countries accounted for a record 29% of gross bookings and 31% of revenue in the fourth quarter, up from 23% of gross bookings and 26% of revenue in the prior year periods. For full-year 2006, international accounted for 26% of gross bookings and 28% of revenue, up from 23% and 24% in 2005. -- Expedia, Inc. entered the world's second largest travel market with the launch of its Japanese Web site, Expedia.co.jp, offering Japanese travelers a selection of over 30,000 properties worldwide and features to help them choose the hotel that best meets their needs. Brand Portfolio -- The Hotwire.com(TM) site was ranked "Highest Customer Satisfaction For Independent Travel Web Sites" according to the J.D. Power and Associates' 2006 Independent Travel Web Site Satisfaction Study(SM), which ranked customer satisfaction when booking a hotel, airfare or rental car through an independent web site. (For J.D. Power and Associates award information including information about the study see http://www.jdpower.com/.) -- Expedia.com and WWTE(R) technology were selected by NYTimes.com, the #1 newspaper Web site in the U.S., and Sam's Club, a division of WalMart stores. Under these agreements Expedia.com content will power the travel booking engine for these companies' respective websites. -- Expedia(R) Corporate Travel ("ECT") added a record number of new client accounts during the fourth quarter, and grew worldwide gross bookings 45% to over $1 billion in 2006. -- Hotels.com(R), the fifth largest online travel agency in the world, grew its worldwide gross bookings 20% to $2.3 billion in 2006, and expanded its presence to 35 countries. Content & Innovation -- TripAdvisor(R), the largest travel community in the world, was named the "best website for travel information" by Zagat Survey. TripAdvisor continues to innovate on behalf of travelers, most recently introducing its "save it and go" functionality, allowing travelers to personalize their TripAdvisor experiences by adding maps, photos, their own notes and travel plan details to their "MyTrips" folders. -- Expedia.com began testing a new homepage treatment at http://www.expedia.com/, balancing planning, inspiration and savings, including a real-time scrolling "Today's Top Travel Deals" widget. Expedia also debuted guest registration, empowering travelers to purchase Expedia products and services without requiring a user account. -- ECT announced the launch of a new Global Flight Search platform for the European market, offering European-based customers enhanced flight search and booking capabilities. ECT also launched a new global reporting platform to help travel managers oversee travel programs across multiple regions, giving them greater access to information and the ability to better evaluate and optimize their travel decisions. -- Expedia.com.au(TM) and Expedia.ca(TM), Expedia's websites in Australia and Canada, launched "Destinations" tabs featuring TripAdvisor's user generated "wiki" content. -- Travel Ticker(TM) by Hotwire now delivers promotional offers from 115 top brands to more than 10 million U.S. subscribers. Every two weeks, geographically targeted editions of the Travel Ticker newsletter feature handpicked deals for consumers in the East, West and Central U.S. Partner Services Group ("PSG") -- Expedia, Inc. announced a new four-year strategic partnership agreement with AirTran Airways, through which AirTran's full range of products and services -- including all fares, schedules and inventory -- will be marketed through Expedia.com(R). -- Expedia, Inc. announced a partnership with Jin Jiang International Hotel Management Company, the largest hotel owner and operator in China. Jin Jiang owns and operates more than 250 hotels, from luxury lodging to economy accommodations, and will now make its entire inventory of hotels available to Expedia(R) customers. EXPEDIA, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited) Three months ended Year ended December 31, December 31, __________________ ______________________ 2006 2005 2006 2005 ________ ________ __________ __________ Revenue $531,288 $494,749 $2,237,586 $2,119,455 Cost of revenue(1) 121,781 112,612 502,638 480,219 ________ ________ __________ __________ Gross profit 409,507 382,137 1,734,948 1,639,236 Operating expenses: Selling and marketing(1) 171,417 158,861 786,195 715,624 General and administrative(1) 79,079 73,653 289,649 257,389 Technology and content(1) 35,505 28,509 140,371 130,507 Amortization of intangible assets 23,906 31,863 110,766 126,067 Impairment of intangible asset -- -- 47,000 -- Amortization of non-cash distribution and marketing 60 3,542 9,638 12,597 ________ ________ __________ __________ Operating income 99,540 85,709 351,329 397,052 Other income (expense): Interest income from IAC/InterActiveCorp -- -- -- 40,089 Other interest income 11,733 2,916 32,065 10,690 Interest expense (10,036) (1,722) (17,266) (2,106) Write-off of long-term investment -- -- -- (23,426) Other, net 1,721 (20,317) 18,770 (8,428) ________ ________ __________ __________ Total other income (expense), net 3,418 (19,123) 33,569 16,819 ________ ________ __________ __________ Income before income taxes and minority interest 102,958 66,586 384,898 413,871 Provision for income taxes (35,928) (42,082) (139,451) (185,977) Minority interest in (income) loss of consolidated subsidiaries, net 110 730 (513) 836 ________ ________ __________ __________ Net income $67,140 $25,234 $244,934 $228,730 ======== ======== ========== ========== Net earnings per share available to common stockholders: Basic $0.20 $0.07 $0.72 $0.68 Diluted 0.20 0.07 0.70 0.65 Shares used in computing earnings per share: Basic 330,294 339,746 338,047 336,819 Diluted 343,586 363,632 352,181 349,530 (1) Includes stock-based compensation as follows: Cost of revenue $1,772 $2,370 $8,399 $9,503 Selling and marketing 4,228 3,531 15,893 18,121 General and administrative 11,394 8,347 36,877 45,874 Technology and content 5,344 (2,422) 19,116 18,227 ________ ________ __________ __________ Total stock-based compensation $22,738 $11,826 $80,285 $91,725 ======== ======== ========== ========== EXPEDIA, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) (Unaudited) December 31, ______________________________ 2006 2005 ___________ ____________ ASSETS Current assets: Cash and cash equivalents $853,274 $297,416 Restricted cash and cash equivalents 11,093 23,585 Accounts and notes receivable, net of allowance of $4,874 and $3,914 211,430 174,019 Prepaid merchant bookings 39,772 30,655 Deferred income taxes, net 4,867 -- Prepaid expenses and other current assets 62,249 64,569 ___________ ____________ Total current assets 1,182,685 590,244 Property and equipment, net 137,144 90,984 Long-term investments and other assets 59,289 39,431 Intangible assets, net 1,028,774 1,176,503 Goodwill 5,861,292 5,859,730 ___________ ____________ TOTAL ASSETS $8,269,184 $7,756,892 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, merchant $600,192 $534,882 Accounts payable, other 120,545 107,580 Short-term borrowings -- 230,755 Deferred merchant bookings 466,474 406,948 Deferred revenue 10,317 7,068 Income taxes payable 30,902 43,405 Deferred income taxes, net -- 3,178 Other current liabilities 171,695 104,409 ____________ ___________ Total current liabilities 1,400,125 1,438,225 Long-term debt 500,000 -- Deferred income taxes, net 369,297 368,880 Derivative liabilities 28,991 105,827 Other long-term liabilities 4,725 38,423 Minority interest 61,756 71,774 Commitments and contingencies Stockholders' equity: Preferred stock $.001 par value -- -- Authorized shares: 100,000,000 Series A shares issued and outstanding: 846 and 846 Common stock $.001 par value 328 323 Authorized shares: 1,600,000,000 Shares issued: 328,066,276 and 323,184,577 Shares outstanding: 305,901,048 and 321,979,486 Class B common stock $.001 par value 26 26 Authorized shares: 400,000,000 Shares issued and outstanding: 25,599,998 and 25,599,998 Additional paid-in capital 5,903,200 5,695,498 Treasury stock - Common stock, at cost (321,155) (25,464) Shares: 22,165,228 and 1,205,091 Retained earnings 309,912 64,978 Accumulated other comprehensive income (loss) 11,979 (1,598) ___________ ___________ Total stockholders' equity 5,904,290 5,733,763 ___________ ___________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,269,184 $7,756,892 =========== =========== EXPEDIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Year ended December 31, _______________________ 2006 2005 _________ _________ Operating activities: Net income $244,934 $228,730 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 48,779 50,445 Amortization of intangible assets, non-cash distribution and marketing and stock-based compensation 200,689 230,389 Deferred income taxes (10,652) 68,198 Unrealized (gain) loss on derivative instruments, net (8,137) 6,042 Equity in income of unconsolidated affiliates (2,541) (1,668) Minority interest in income (loss) of consolidated subsidiaries, net 513 (836) Write-off of long-term investment -- 23,426 Impairment of intangible asset 47,000 -- Foreign exchange (gain) loss on cash and cash equivalents, net (37,182) 9,292 Other 1,100 1,161 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts and notes receivable (32,148) (21,833) Prepaid merchant bookings and prepaid expenses (20,694) (22,492) Accounts payable, other and other current liabilities 59,858 150,944 Accounts payable, merchant 63,246 90,623 Deferred merchant bookings 59,450 45,051 Deferred revenue 3,225 1,715 _________ _________ Net cash provided by operating activities 617,440 859,187 _________ _________ Investing activities: Capital expenditures (92,631) (52,315) Acquisitions, net of cash acquired (32,518) 10,547 Proceeds from sale of business to a related party 13,163 -- Increase in long-term investments and deposits (1,514) (369) Purchase of marketable securities -- (63) Proceeds from sale of marketable securities -- 1,000 Transfers to IAC/InterActiveCorp, net -- (757,206) Other, net -- (2,937) _________ _________ Net cash used in investing activities (113,500) (801,343) _________ _________ Financing activities: Short-term borrowings, net (231,036) 230,735 Proceeds from issuance of long-term debt, net of issuance costs 495,346 -- Changes in restricted cash and cash equivalents 4,578 (9,495) Proceeds from exercise of equity awards 35,258 29,060 Excess tax benefit on equity awards 1,317 -- Withholding taxes for stock option exercises -- (86,556) Treasury stock activity (295,691) -- Distribution to IAC/InterActiveCorp, net -- (52,844) Other, net -- (4,393) _________ _________ Net cash provided by financing activities 9,772 106,507 Effect of exchange rate changes on cash and cash equivalents 42,146 (8,603) _________ _________ Net increase in cash and cash equivalents 555,858 155,748 Cash and cash equivalents at beginning of year 297,416 141,668 _________ _________ Cash and cash equivalents at end of year $853,274 $297,416 ========= ========= Supplemental cash flow information Cash paid for interest $3,036 $251 Income tax payments, net 126,126 10,384 Income Statement Notes Gross Bookings / Revenue -- Expedia, Inc. makes travel products and services available on a merchant and agency basis. Merchant transactions typically produce a higher level of net revenues per transaction and are generally recognized when the customer uses the travel product or service. Agency revenues are typically recognized at the time the reservation is booked. -- Agency bookings accounted for 61% and 59% of total gross bookings for the fourth quarter and full-year 2006, and the fourth quarter and full-year 2005. The mix of agency and merchant bookings remained constant year-over-year for both periods as the increase in average worldwide airfares for agency bookings and the decrease in domestic merchant air bookings were offset by an increase in our worldwide merchant hotel bookings. -- Agency revenue as a percentage of total revenue decreased for both the fourth quarter and full-year 2006 compared with the prior year periods. Cost of Revenue -- Cost of revenue primarily consists of: (1) costs of our data and call centers, including telesales expense; (2) credit card merchant fees; (3) fees paid to fulfillment vendors for processing airline tickets and related customer services; (4) costs paid to suppliers for certain destination inventory; and (5) reserves and related payments to airlines for tickets purchased with fraudulent credit cards. -- Cost of revenue was 23% of revenue for the fourth quarters of both 2006 and 2005. Excluding stock-based compensation, cost of revenue was 23% of revenue for the fourth quarter and 22% for the prior year period. Cost of revenue excluding stock-based compensation increased 31 basis points as a percentage of revenue due to the increase in costs from traveler care expense and costs associated with our transition of air segments between GDS providers, partially offset by an increased mix of merchant hotel revenue, which has a higher gross margin than our overall business. -- 2006 cost of revenue was 22% of revenue compared with 23% in 2005, a decrease of 19 basis points as our mix of merchant hotel increased. Excluding stock-based compensation, cost of revenue was 22% of revenue for both 2006 and 2005. -- Cost of revenue includes depreciation expense of $3 million for the fourth quarters of 2006 and 2005, and $10 million and $11 million for 2006 and 2005. Operating Expenses (non-GAAP)

(Stock-based compensation expense has been excluded from all calculations and discussions below)

-- Operating expenses as a percentage of revenue for the fourth quarters and full-years of 2006 and 2005 were as follows (some numbers may not add due to rounding): Three months Twelve months ended December 31, ended December 31, ___________________ ___________________ 2006 2005 2006 2005 _____ _____ _____ _____ Selling and marketing 31.5% 31.4% 34.4% 32.9% General and administrative 12.7% 13.2% 11.3% 10.0% Technology and content 5.7% 6.3% 5.4% 5.3% _____ _____ _____ _____ Total 49.9% 50.8% 51.1% 48.2% -- Operating expenses include depreciation expense of $10 million for the fourth quarter of 2006 and 2005, and $39 million for both 2006 and 2005. Selling and Marketing (non-GAAP) o Selling and marketing expense primarily relates to direct advertising and distribution expense, including television, radio and print spending, as well as traffic generation costs from internet portals, search engines and our private label and affiliate programs. o Approximately 27% of fourth quarter expense related to indirect costs including personnel such as PSG staff, marketing teams and destination services desk personnel, compared with 23% for the prior year period. o Selling and marketing expense was relatively flat for the fourth quarter as increased indirect costs were offset by slower growth of direct costs due to reduced spend at our domestic points of sale. o The 1.5% increase in selling and marketing expense as a percentage of revenue for full-year 2006 compared with 2005 was primarily due to a 25% increase in indirect costs. Excluding indirect cost increases, selling and marketing expense grew 7% year-over-year, nearly in-line with our 6% revenue growth. o We expect absolute amounts spent on selling and marketing to increase in 2007. The direction of this line item as a percentage of revenue in 2007 will primarily depend on our ability to drive efficiencies in our various marketing spends. General and Administrative (non-GAAP) o General and administrative expense consists primarily of personnel- related costs for support functions that include our executive leadership, finance, legal, tax and human resources functions, and fees for professional services that include legal, tax and accounting. o The 0.5% year-over-year decrease in general and administrative expense as a percentage of revenue for the fourth quarter was primarily due to decreased use of external professional services as we transitioned to full-time employees, as well as lower payroll taxes from option exercises compared with the prior year period, partially offset by increased legal fees. o The 1.3% year-over-year increase in general and administrative expense as a percentage of revenue in 2006 was due to the increased headcount and compensation as an independent public company for the full year, as well as increased legal expenses. o We expect general and administrative expense to increase in absolute dollars but decrease as a percentage of revenue in 2007 as we have largely completed our overhead additions as a stand-alone public company. Technology and Content (non-GAAP) o Technology and content expense includes product development expenses principally related to payroll and related expenses, hardware and software expenditures and amortization of software development costs. o The 0.6% year-over-year decrease in technology and content expense as a percentage of revenue for the fourth quarter was due to the completed amortization of capitalized spend impacting the prior year's expense, and the capitalization of current software development efforts which have yet to be placed into service. o Technology and content was relatively flat as a percentage of revenue in 2006 compared with 2005 as software development costs incurred during the year were largely capitalized, and we completed the amortization of previously capitalized amounts. o The $40 million increase in capital expenditures for 2006 compared with 2005 is primarily due to capitalized software costs, which are capitalized during development and expensed as technology and content over a three year period subsequent to the software being placed into service. We began putting significant amounts of development work into service in the fourth quarter, and expect that to continue in early 2007, which will significantly increase 2007 technology and content expense. o Given our historical and ongoing investments in our enterprise data warehouse, re-platforming, geographic expansion, data centers, redundancy, call center technology, site merchandising, content management, site monitoring, networking, corporate travel, supplier integration and other initiatives, we expect technology and content expense to increase in absolute dollars and as a percentage of revenue in both 2007 and 2008. Stock-Based Compensation Expense -- Stock-based compensation expense relates primarily to expense for stock options and restricted stock units ("RSUs"). Since February 2003, we have awarded RSUs as our primary form of employee stock-based compensation. Our stock-based awards generally vest over five years. -- Fourth quarter stock-based compensation expense was $23 million, consisting of $15 million in expense related to RSUs and other equity compensation and $8 million in stock option expense. $4 million of RSU expense and $1 million of option expense relate to a change in estimate related to award forfeitures. -- Fourth quarter stock-based compensation increased $11 million primarily due to a $14 million reduction of the prior year amount due to a change in forfeiture rate estimates and capitalization of software, partially offset by the $5 million in increased expense related to the net change in estimate. -- Stock-based compensation expense for 2006 was $80 million, consisting of $44 million in stock options expense and $36 million in expense related to RSUs and other equity compensation. Stock-based compensation decreased $11 million from the prior year amount due to reduced compensation expense from options. -- Assuming, among other things, no modification of existing awards or significant award grants, we expect stock-based compensation expense for full-year 2007 will be less than $65 million, and will decrease further in 2008. -- The adoption of SFAS 123( R ) on January 1, 2006 did not have a material impact on our financial position as we have been accounting for stock-based awards in accordance with SFAS 123 since January 1, 2003. Per SFAS 123( R ), 2006 "cash flow from financing activities" includes $1 million of "excess tax benefit on equity awards." Other, Net -- The $22 million increase in other, net for the fourth quarter primarily relates to a $3 million net unrealized loss from our AskJeeves, Inc. ("Ask") derivative liability (see Balance Sheet Notes) compared with an $18 million unrealized loss in the prior year period. In addition, we had a $7 million foreign exchange gain in the fourth quarter of 2006, compared with a $2 million loss in the prior year period. -- Other, net increased $27 million in 2006, primarily due to an $8 million net unrealized gain on the Ask derivatives compared with a $6 million unrealized loss in 2005, and a foreign exchange gain of $10 million in 2006 compared with a $1 million loss in 2005. Income Taxes -- The effective tax rate on GAAP pre-tax income was 35% and 36% for the fourth quarter and year-ended December 31, 2006 compared with 63% and 45% in the prior year periods. The effective tax rates in the fourth quarter and for the year were affected by a lower state tax rate, taxes applicable to foreign earnings and non-deductible losses related to our derivative liabilities. Our effective rates in both 2005 periods were higher than the statutory rate principally due to non-deductible stock-based compensation, non-deductible losses related to our derivative liabilities and state income taxes. -- The effective tax rate on pre-tax adjusted income was 36% and 37% for the fourth quarter and year-ended December 31, 2006 compared with 45% and 38% in the prior year periods. The effective tax rates in the fourth quarter and for the year were affected by a lower state tax rate and taxes applicable to foreign earnings. The prior year period rates were higher than the statutory rate principally due to state taxes and taxes applicable to foreign earnings. -- Cash paid for income taxes in 2006 was $126 million, an increase of $116 million compared with 2005 primarily due to IAC's payment of taxes on behalf of Expedia prior to our becoming an independent public company, at which point we became directly responsible for our tax obligations. -- During 2006 we utilized substantially all of our net operating loss carryforwards and expect to be a full cash taxpayer in 2007. -- We are currently assessing the impact of Financial Interpretation No. 48 on our financial statements. Foreign Exchange, Acquisitions -- As Expedia, Inc.'s reporting currency is the U.S. Dollar ("USD"), reported financial results are affected by the strength or weakness of the USD in comparison to the functional currencies of our international operations. Management believes investors may find it useful to assess our growth rates with and without the impact of foreign exchange. -- For the fourth quarter, worldwide gross bookings grew approximately 7% excluding the impact of foreign exchange, compared with 9% prior to adjusting for foreign exchange. International gross bookings in the fourth quarter grew approximately 27% excluding the impact of foreign exchange, compared with 34% prior to adjusting for foreign exchange. -- For the full-year 2006, worldwide gross bookings grew 10% both before and after adjusting for the impact of foreign exchange. International gross bookings in 2006 grew approximately 24% excluding the impact of foreign exchange, compared with 26% prior to adjusting for foreign exchange. -- The benefit of foreign exchange on our cash balances denominated in foreign currency was $42 million in 2006, and is included in "effect of exchange rate changes on cash and cash equivalents" on our statements of cash flows. This amount showed a net increase of $51 million from 2005 due to the benefit of foreign currency appreciation during that time period versus our reporting currency, as well as the increase in our cash balances. -- There was minimal year-over-year impact from acquisition activity for both the fourth quarter and full-year 2006. Balance Sheet Notes Cash, Cash Equivalents and Restricted Cash -- Cash, cash equivalents and current restricted cash totaled $864 million at December 31, 2006. This amount includes $11 million in restricted cash and equivalents related to merchant air revenue transactions. -- The $543 million increase in cash, cash equivalents and restricted cash for 2006 principally relates to $599 million in OIBA, $495 million in net proceeds from our senior notes offering, and a $133 million increase in cash from net changes in operating assets and liabilities, partially offset by $296 million in treasury stock activity primarily related to our 20 million share repurchase, $231 million primarily related to pay down of our revolver balance, $126 million in cash taxes paid and $93 million in capital expenditures. Accounts and Notes Receivable -- Accounts receivable include credit card receivables generally due within two to three days from credit card agencies, as well as receivables from agency transactions, which are generally due within 30 days from our airlines, global distribution partners and hotel suppliers. -- Accounts and notes receivable grew faster than overall bookings in 2006 due in part to December 31st falling on a Sunday in 2006 compared with a Saturday in 2005, adding an extra day of receivables to the year-end balance as payments are not received on weekend days. Prepaid Merchant Bookings -- Prepaid merchant bookings primarily relate to our merchant air business and reflect prepayments to our airline partners for their portion of the gross booking, prior to the travelers' dates of travel. Despite the decrease in merchant air booking volume in 2006, prepaid merchant bookings increased $9 million due in part to higher airfares. Prepaid Expenses and Other Current Assets -- Prepaid expenses and other current assets are primarily composed of prepaid marketing, prepaid merchant fees, prepaid license and maintenance agreements and prepaid insurance. -- Prepaid expenses and other current assets decreased in 2006 primarily due to the decrease in prepaid marketing for non-cash distribution and marketing credits we received from IAC as part of our Spin-Off. Long-Term Investments and Other Assets -- Long-term investments and other assets include transportation equipment, collateral deposits related to our cross-currency swap agreements, investments in joint ventures and capitalized debt issuance costs. -- Long-term investments and other assets increased $20 million in 2006 primarily due to higher collateral deposits on our cross-currency swap agreements, capitalized debt issuance costs related to our senior notes and an increase in the value of our joint venture investment. Goodwill and Intangible Assets, Net -- Goodwill and intangible assets, net primarily relates to the acquisitions of Hotels.com, Expedia.com and Hotwire.com. -- $867 million of intangible assets, net relates to intangible assets with indefinite lives, which are not amortized. Our indefinite lived intangible assets relate principally to trade names and trademarks acquired in various acquisitions. -- We determined that the carrying amount of our indefinite lived trade name intangible asset related to Hotwire exceeded its fair value. As a result, in the third quarter of 2006 we recognized an impairment charge of $47 million. This impairment charge was not deductible for tax purposes. -- $162 million of intangible assets, net relates to intangible assets with definite lives, which are generally amortized over a period of two to ten years. The majority of this amortization is not deductible for tax purposes. -- Amortization expense related to definite lived intangibles was $24 million for the fourth quarter and $111 million for full-year 2006, compared with $32 million and $126 million for the prior year periods. Assuming no impairments or acquisitions, we expect amortization expense for definite lived intangibles of $74 million in 2007 and $52 million in 2008. Deferred Merchant Bookings and Accounts Payable, Merchant -- Deferred merchant bookings consist of amounts received from travelers who have not yet traveled. The payment to suppliers related to these bookings is not made until approximately one week after booking for air travel and, for all other merchant bookings, after the customer's use of services and subsequent billing from the supplier, which billing is reflected as accounts payable, merchant on our balance sheet. Therefore, especially for merchant hotel, there is a significant period of time from the receipt of cash from our travelers to supplier payment. -- As long as the merchant hotel business continues to grow and our business model does not change, we expect that changes in working capital will continue to be positive. If this business declines or if the model changes, it would negatively affect our working capital. -- Deferred merchant bookings generally mirror the seasonality pattern of our gross bookings. -- Accounts Payable, merchant contributed $27 million less to net cash flow provided by operating activities in 2006 compared with 2005 due to faster supplier payment processing. Borrowings -- Expedia, Inc. maintains a $1 billion five-year unsecured revolving credit facility that bears interest based on our financial leverage, currently priced at 1-month LIBOR+0.50%. As of December 31, 2006 we had no balance on our revolver and were in compliance with all financial covenants under the credit facility. -- In January 2007 we completed a modified "Dutch auction" tender offer, purchasing 30 million common shares of Expedia, Inc. at a total cost of $660 million, excluding transaction fees and expenses. We borrowed $150 million against the credit facility to finance a portion of the repurchase amount. -- In August 2006 we completed the placement of $500 million 7.456% Senior Notes (the "Notes") due 2018 with plans to use the net proceeds of the offering for general corporate purposes, which may include additional repurchases of common stock, repayment of debt, acquisitions, investments, additions to working capital, capital expenditures and advances to, or investments in, our subsidiaries. -- The Notes are repayable in whole or in part on August 15, 2013 at the option of the note holders. We may redeem the Notes at any time at our option. -- Semi-annual interest expense related to the Notes is $19 million, to be paid on February 15 and August 15 of each year, beginning with February 2007. -- On February 14, 2007, we commenced an offer to exchange the Notes for publicly-traded notes with the same terms and conditions. The offer will expire, unless extended, at 5:00 p.m. New York time on March 15, 2007. Other Current Liabilities -- Other current liabilities principally relate to accruals for cost of service related to our call center and internet services, accruals for service, bonus, salary and wage liabilities and a reserve for occupancy taxes. -- Other current liabilities increased $67 million in 2006 due to the net reclassification from other long-term liabilities of $30 million related to our tax sharing agreement with Microsoft, which we expect to pay in the fourth quarter of 2007, accrued interest expense related to our Note payment due February 2007 and increased accrued liabilities associated with the growth of our business. Derivative Liabilities -- In connection with IAC's acquisition of Ask, we issued 4.3 million shares of Expedia, Inc. common stock into an escrow account, which shares (or cash in equal value) were due to holders of Ask convertible notes upon conversion. These shares have been included in diluted shares from the date of Spin-Off. -- During 2006 notes were converted for 3.5 million shares, leaving 0.8 million shares of Expedia common stock (or cash in equal value) due to Ask note holders upon conversion. -- The estimated fair value of the Ask notes at December 31, 2006 was $16 million, recorded as a derivative liability on our consolidated balance sheet. This compares with $105 million at year-end 2005. The $89 million decrease reflects the note conversions during 2006, as well as the decrease in our share price from year-end 2005 to year-end 2006. -- For the fourth quarter we recorded a net unrealized loss of $3 million related to the Ask notes due to the increase in our share price at the end of the fourth quarter compared with the end of the third quarter. This loss is reflected as an increase in derivative liabilities, is recorded in "other, net" on our consolidated statements of income and is excluded from both our OIBA and adjusted net income calculations. -- For 2006 we recorded a net gain of $8 million related to the Ask notes due to changes in our share price during 2006. This gain is reflected as a decrease in our derivative liabilities balance. -- We anticipate recording a quarterly unrealized gain or loss in future quarters related to any remaining liability as we adjust the fair value for changes in our stock price, as measured at subsequent quarter-ends compared with the prior quarter-end. -- The remaining $13 million of derivative liabilities at December 31, 2006 primarily relates to cross-currency swaps, which increased $12 million from December 31, 2005 due to the weakening of the USD compared with the Euro and rising interest rates. Other Long-Term Liabilities -- The $34 million decrease in other long-term liabilities principally relates to the reclassification to other current liabilities of a $36 million payable to Microsoft in conjunction with a tax sharing agreement, $6 million of which we paid in the fourth quarter of 2006, and $30 million of which we expect to pay in the fourth quarter of 2007. Minority Interest -- Our minority interest primarily relates to our minority ownership position in eLong, results for which are consolidated for all periods presented. -- 2006 minority interest decreased $10 million, reflecting our purchase of the remaining minority interests in TripAdvisor and Egencia, offset by increased minority interest associated with changes in our eLong equity holdings during the year. Purchase Obligations -- At December 31, 2006 we have agreements with certain vendors under which we have future minimum obligations of $29 million in 2007, $9 million in 2008 and $8 million in 2009. These minimum obligations for telecom, loyalty, software and other support services are less than our projected use for those periods, and we expect payment to be more than the minimum obligations based on our actual use. In addition, if certain obligations are met by our counterparties, our obligations will increase. -- These obligations are not reflected on our consolidated balance sheets herein. Common Stock -- During 2006 we repurchased 20 million shares of Expedia, Inc. common stock for $288 million at an average repurchase price of $14.42 per share, including transaction costs. -- In August 2006 our Board of Directors authorized an additional repurchase of up to 20 million common shares. There is no fixed termination date for the repurchase, and as of the date of this release we have not repurchased any shares under this authorization. -- In January 2007 Expedia completed its tender offer, purchasing 30 million shares of its common stock at a purchase price of $22.00 per share at a total cost of $660 million, excluding transaction costs. Class B Common Stock -- There are approximately 26 million shares of Expedia Class B common stock outstanding, owned solely by Liberty Media Corporation and its subsidiaries ("Liberty"). Class B shares are entitled to ten votes per share when voting on matters with the holders of Expedia common and preferred stock. -- Through the common stock our Chairman and Senior Executive, Barry Diller, owns directly, as well as the common stock and Class B stock for which he has been assigned an irrevocable proxy by Liberty, Mr. Diller had a controlling 55% voting interest in Expedia, Inc. as of December 31, 2006. As of January 19, 2007, following our repurchase of 30 million shares, Mr. Diller's voting interest increased to 58%. Warrants -- As of December 31, 2006 we had 58.5 million warrants outstanding, which, if exercised in full, would entitle holders to acquire 34.6 million common shares of Expedia, Inc. for an aggregate purchase price of approximately $774 million (representing an average of $22 per Expedia, Inc. common share). -- 32.2 million of these warrants are privately held and expire in 2012, and 26.0 million warrants are publicly-traded and expire in 2009. There are 0.3 million miscellaneous warrants outstanding. Stock-Based Awards -- At December 31, 2006 we had 31 million stock-based awards outstanding, consisting of stock options to purchase 23 million common shares with a $16.52 weighted average exercise price and weighted average remaining life of 3.4 years, and 8 million RSUs. -- During the fourth quarter we granted 0.7 million RSUs. For the year we granted 5 million RSUs to employees, including approximately 1 million performance-related grants to certain executives. -- For the year employee equity award grants net of cancellations, expirations and forfeitures were 2.2 million, less than 1% of the prior year diluted share count. Basic, Fully Diluted and Adjusted Diluted Shares -- Weighted average basic, fully diluted and adjusted diluted share counts are as follows (in 000's; some numbers may not add due to rounding): __________________________________________________________________________ 3 Months 3 Months 12 Months 12 Months Ended Ended Ended Ended Shares 12.31.06 12.31.05 12.31.06 12.31.05 ____________________________________ ________ ________ ________ ________ Basic 330,294 339,746 338,047 336,819 ____________________________________ ________ ________ ________ ________ Options 7,339 13,249 7,744 5,568 Warrants 3,756 5,138 3,600 5,007 Derivative liabilities 867 4,304 1,463 1,697 RSUs / RSAs 1,323 419 1,092 145 Other 7 776 235 295 ____________________________________ ________ ________ ________ ________ Fully diluted 343,586 363,632 352,181 349,530 RSUs / RSAs, Adjusted Net Income method 5,849 4,648 6,189 2,366 ____________________________________ ________ ________ ________ ________ Adjusted diluted 349,435 368,280 358,370 351,896 __________________________________________________________________________ -- Our 30 million share repurchase completed pursuant to a tender offer in January 2007 is not reflected in these share amounts. -- The decrease in basic, fully diluted and adjusted diluted shares for the fourth quarter primarily relates to our open market repurchase of 20 million common shares, completed in July 2006. -- Full-year 2006 shares increased from the prior year period despite the 20 million share repurchase as we did not include the dilutive effect of any securities other than warrants prior to August 9, 2005 because we were not obligated to issue underlying common stock for these potentially dilutive securities prior to the Spin-Off date (see "Basis of Presentation" below for additional information on the Spin-Off). Expedia, Inc. Operational Metrics - Fourth Quarter and Full-Year 2006 (All figures in millions) -- The following metrics are intended as a supplement to the financial statements found in this press release and in our filings with the SEC. In the event of discrepancies between amounts in these tables and our historical financial statements, readers should rely on our filings with the SEC and financial statements in our most recent earnings releases. -- We intend to periodically review and refine the definition, methodology and appropriateness of each of our supplemental metrics. As a result, these metrics are subject to removal and/or change, and such changes could be material. -- "Expedia" gross bookings constitute bookings from all Expedia-branded properties, including our international sites and our worldwide ECT businesses. "Other" gross bookings constitute bookings from all brands other than Expedia and Hotels.com. -- 100% of TripAdvisor revenue is included in "Domestic" revenue. -- Metrics, with the exception of revenue items, include 100% of the results of an unconsolidated joint-venture of which we own approximately 49.9%. -- These metrics do not include adjustments for one-time items, acquisitions, foreign exchange or other adjustments. -- Some numbers may not add due to rounding. 2005 _________________________________ Q1 Q2 Q3 Q4 ______ ______ ______ ______ Gross Bookings by Geography Domestic $3,160 $3,208 $3,031 $2,604 International 926 924 907 791 ______ ______ ______ ______ Total $4,086 $4,133 $3,938 $3,395 Revenue by Geography Domestic $378 $430 $447 $364 International 107 125 138 130 ______ ______ ______ ______ Total $485 $555 $585 $495 Gross Bookings by Brand Expedia $3,252 $3,191 $3,048 $2,679 Hotels.com 483 497 502 407 Other 352 445 387 309 ______ ______ ______ ______ Total $4,086 $4,133 $3,938 $3,395 Gross Bookings by Agency/Merchant Agency $2,364 $2,396 $2,276 $2,068 Merchant 1,722 1,737 1,662 1,327 ______ ______ ______ ______ Total $4,086 $4,133 $3,938 $3,395 Packages Revenue $114 $124 $128 $106 Number of Transactions 9.6 10.1 10.4 8.7 Merchant Hotel Room Nights 7.3 8.8 10.2 8.3 2006 ________________________________ Q1 Q2 Q3 Q4 ______ ______ ______ ______ Gross Bookings by Geography Domestic $3,508 $3,455 $3,095 $2,628 International 1,140 1,109 1,166 1,058 ______ ______ ______ ______ Total $4,648 $4,565 $4,261 $3,687 Revenue by Geography Domestic $371 $443 $434 $368 International 123 156 180 164 ______ ______ ______ ______ Total $494 $598 $614 $531 Gross Bookings by Brand Expedia $3,680 $3,590 $3,343 $2,962 Hotels.com 582 621 600 456 Other 386 354 318 268 ______ ______ ______ ______ Total $4,648 $4,565 $4,261 $3,687 Gross Bookings by Agency/Merchant Agency $2,695 $2,728 $2,473 $2,253 Merchant 1,953 1,837 1,788 1,433 ______ ______ ______ ______ Total $4,648 $4,565 $4,261 $3,687 Packages Revenue $114 $131 $125 $107 Number of Transactions 10.8 10.6 10.4 9.0 Merchant Hotel Room Nights 8.1 10.1 11.1 8.7 Q4 Y/Y 2006 Y/Y Growth 2005 2006 Growth