Expedia 2007 Annual Report Download - page 47

Download and view the complete annual report

Please find page 47 of the 2007 Expedia annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 120

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120

Worldwide air revenue decreased 14% in 2006 compared to 2005 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. The decrease in air tickets sold reflects the reduction in
relative capacity of carriers participating in our marketplace and continued challenges in obtaining merchant
air inventory in light of record industry load factors. Lesser availability of merchant air inventory also
impacted our packages revenue, which grew only 1% in 2006 compared to 2005.
Other revenue which includes advertising and media, agency hotel, car rental, destination services, and
cruises, increased by 7% in 2006 compared to 2005 primarily due to an increase in advertising and media
revenue.
Cost of Revenue and Gross Profit
2007 2006 2005 2007 vs 2006 2006 vs 2005
Year Ended December 31, % Change
($ in thousands)
Cost of revenue........... $ 562,401 $ 502,638 $ 480,219 12% 5%
% of revenue ............ 21% 22% 23%
Gross profit ............. $2,102,931 $1,734,948 $1,639,236 21% 6%
% of revenue ............ 79% 78% 77%
Cost of revenue primarily consists of (1) costs of our data and call centers, including telesales, (2) credit
card merchant fees, (3) fees paid to fulfillment vendors for processing airline tickets and related customer
services, (4) costs paid to suppliers for certain destination inventory, (5) reserves and related payments to
airlines for tickets purchased with fraudulent credit cards and (6) stock-based compensation.
The cost of revenue increase in 2007 compared to 2006 and in 2006 compared to 2005 was primarily due
to higher costs associated with the increase in transaction volumes.
The year-over-year increases in gross profit are primarily due to increased revenue and, to a lesser extent,
an increase in gross margin. Gross margin increased 136 basis points in 2007 as compared to 2006 primarily
due to an increased mix of advertising and media revenue as well as cost savings from our various efficiency
initiatives. Gross margin increased in 2006 as compared to 2005 primarily due to the increased mix of
merchant hotel revenue.
Selling and Marketing
2007 2006 2005 2007 vs 2006 2006 vs 2005
Year Ended December 31, % Change
($ in thousands)
Selling and marketing .......... $992,560 $786,195 $715,624 26% 10%
% of revenue ................ 37% 35% 34%
Selling and marketing expense relates to direct advertising expense, including television, radio and print
spending, as well as traffic generation from internet portals, search engines, and our private label and affiliate
programs. The remainder of the expense relates to indirect costs, including stock-based compensation costs
and market manager staffing in our Partner Services Group (“PSG”), Expedia Corporate Travel, Expedia Local
Expert and TripAdvisor Media Network.
In 2007, the increase in selling and marketing was primarily due to increased direct online search and
brand spend across our worldwide points of sale, as well as higher personnel costs.
In 2006, the increase in selling and marketing expenses was primarily due to growth in indirect PSG and
destination services staffing costs. Direct selling and marketing expense grew 7% in 2006.
We expect selling and marketing expense to be higher as a percentage of revenue in 2008 as we continue
to support our established brands and geographies, grow our earlier stage international markets, increase our
use of brand spend as markets reach scale, anticipate continued keyword inflation, invest in our global
41