Expedia 2005 Annual Report Download - page 3

To our stockholders
2005 was an exhausting and exhilarating year for Expedia, Inc. While the spin-off that was finalized
in August caused a minimum of disruption to our underlying operations, it and the challenges of the
business Ì together with a full scale reorganization of the Company and its executive team Ì made even
the most energetic of our staff draw on their every reserve. But I believe the result is a focused and
coherent collection of industry-leading travel brands ... the promise of which is exhilarating (and though
I'm in a different age class, the youth and energy of Expedia is something mighty to behold).
As a stand-alone entity, current and prospective investors can now much more effectively understand,
analyze and ultimately evaluate our fortunes. And as to the size of that opportunity for fortune, it's
invigorating to know that our over $15 billion in gross bookings1 represents less than 2% of the
approximately $900 billion in annual travel spend across the globe. Even in the United States, our very
first market and one where our $12 billion in bookings is nearly double the size of our next nearest online
competitor, we represent less than 5% of the total travel spend.
For long-term investors, this significant untapped global opportunity, combined with Expedia's
substantial leadership position (we are the third largest travel company in the world), is the foundation on
which to anchor an attractive investment thesis.
But for the thesis to prove out, a fuller, and more sober evaluation is mandatory, as capturing the next
$15 billion of bookings on a profitable basis Ì long a hallmark of this company Ì is going to be a lot
harder than the first $15 billion.
As to our current profitability, Expedia continued to lead the way in 2005 with OIBA2 of
$627 Million (nearly 30% of our revenue), and free cash flow3 of $798 million. This performance is a fine
indication of the underlying strength of our business model Ì despite the added pressures of both the
reconfiguration and an almost total reorganization of the entire Company, performance was there Ì and
also there given the increased competition everywhere Ì from travel suppliers with their product offerings
improving and aggressive marketing campaigns touting the virtues and rewards of "booking direct' to online
travel agencies other than Expedia continuing to expand their product and service offerings, improving
their customers' experience and investing in marketing and technology.
And for added soberness, 2006 is going to be no cakewalk either. Profitability is going to be
compromised as we experience continued efforts from product suppliers to reduce their costs of
distribution, lower marketing efficiencies, full-year expenses associated with our becoming an independent
public company and increased headcount in various functional areas.
Also pressuring profitability in the near-term will be the critical technology investments which
Expedia is undertaking. Our CEO, Dara Khosrowshahi, will cover this in greater detail below, but we are
convinced these are the right investments to make on behalf of our travelers, our supplier partners and our
long-term stockholders. These initiatives will be neither inexpensive nor will they have immediate returns,
but they are absolutely essential if we are to continue the Company's leadership position and capture more
of the immense opportunity in this huge global travel industry.
2006 is going to be a rough year for Expedia, but sometimes you have to take a step backwards in
order to leap forward. And if we are right, the investments we are making begin coming home next year.
On the winds of the internet revolution we have built a wonderful business. But with the inevitable
competition that early success has attracted, the revolution itself won't carry us far enough or make us a
Company worthy of your continuing interest ... what will is our succeeding in becoming a first in class
travel merchant Ì a true retailer rather than a transaction processor. Everything we are doing is in pursuit
of that Ì every investment we make, every initiative Ì is designed and justified by how much closer it
gets us to that goal. It is our faith in the rightness of that premise and the belief we are making real
progress that energizes our days and allows us to be optimistic for the future.