Expedia 2005 Annual Report Download - page 45

Stock-based compensation expense consists primarily of the amortization of the fair value of equity
awards that we assumed from IAC related to the Expedia.com and Hotels.com acquisitions as well as
expense for restricted stock unit (""RSU'') grants to employees. In addition, we capitalize stock-based
compensation, net of estimated future forfeitures, related to personnel who develop our internal use
software. We record amortization expense related to these capitalized costs in stock-based compensation
expense on a straight line basis over the useful life of the internal use software.
In 2005, we recorded stock-based compensation expense of $91.7 million primarily relating to stock
options and RSU grants. Our 2005 stock-based compensation expense includes a benefit of $44.7 million
related to changes in estimated forfeiture rates for stock options, RSUs and other equity compensation and
capitalization of software development costs, partially offset by a modification charge on stock option
awards related to the Spin-Off. In 2005, we completed assessments of the estimated forfeiture rates
including analyses of the actual number of instruments that had forfeited to date compared to prior
estimates and an evaluation of future estimated forfeitures.
RSUs have been the primary form of stock-based awards granted to our employees since 2003.
Because RSUs contain no exercise price, the number of RSUs awarded is typically less than the number
of options that might have been granted in the past.
Assuming, among other things, that our stock price does not vary widely from present levels, we
anticipate the stock-based compensation expense will decrease from $136.4 million (before the benefit of
$44.7 million discussed above) as stock options granted in 2003 and prior are fully amortized and replaced
with amortization expense from RSU.
In 2004, the increase in stock-based compensation expense was due to acquisitions of Expedia.com
and Hotels.com in 2003, which resulted in the conversion of all Expedia.com and Hotels.com stock
options, warrants and RSU grants into IAC equity grants and valued at the time of conversion.
Amortization of Non-Cash Distribution and Marketing
Year Ended December 31, % Change
2005 2004 2003 2005 vs 2004 2004 vs 2003
($ in thousands)
Amortization of non-cash distribution
and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,597 $16,728 $41,974 (25)% (60)%
% of revenue (as reported)ÏÏÏÏÏÏÏÏÏ 1% 1% 2%
% of revenue (on a comparable net
basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1% 1% 3%
Amortization of non-cash distribution and marketing expense consists mainly of advertising from
Universal Television contributed to us by IAC at Spin-Off. We use this advertising without any cash cost.
In 2005, the decrease in amortization of non-cash distribution and marketing expense compared to
2004 was due to a decline in the amount of television advertising that we used.
In 2004, the decrease in amortization of non-cash distribution and marketing expense compared to
2003 was primarily due to the termination of Hotels.com's distribution agreement with Travelocity in 2003.
Operating Income
Year Ended December 31, % Change
2005 2004 2003 2005 vs 2004 2004 vs 2003
($ in thousands)
Operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $397,052 $240,473 $243,518 65% (1)%
% of revenue (as reported)ÏÏÏÏÏÏ 19% 13% 10%
% of revenue (on a comparable
net basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19% 13% 17%
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