Expedia 2005 Annual Report Download - page 42

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International revenue increased 111% in 2004 compared to 2003. This was primarily due to growth in
the hotel and air businesses from acquisitions and increased activity from international websites.
Cost of Revenue and Gross Profit
Year Ended December 31, % Change
2005 2004 2003 2005 vs 2004 2004 vs 2003
(In thousands)
Cost of revenue (as reported) ÏÏÏÏÏÏÏ $ 470,716 $ 390,318 $1,233,743 21% (68)%
Cost of revenue (on a comparable net
basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 470,716 390,318 294,094 21% 33%
% of revenue (as reported) ÏÏÏÏÏÏÏÏÏ 22% 21% 53%
% of revenue (on a comparable net
basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22% 21% 21%
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,648,739 $1,452,695 $1,106,070 13% 31%
% of revenue (as reported) ÏÏÏÏÏÏÏÏÏ 78% 79% 47%
% of revenue (on a comparable net
basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78% 79% 79%
Cost of revenue primarily consists of (1) credit card merchant fees, (2) reserves and related
payments for product and services purchased with fraudulent credit cards and other chargebacks, (3) fees
paid to our fulfillment vendors for issuing airline tickets and related traveler services, (4) costs for the
operations of our data center and call centers, including personnel-related costs, and (5) costs paid to
suppliers for destination service inventory related to the portion of our destination services that is reported
on a gross basis.
The cost of revenue increase in 2005 was primarily due to costs associated with an increase in
transaction volumes and acquisitions. In 2004, the decrease in cost of revenue compared to 2003 revenue
(as reported) was due to a change in business practice at Hotels.com to conform its business practice to
the approach used by the other Expedia Businesses. On a comparable net basis, the cost of revenue
increased in 2004 compared to 2003 primarily due to costs associated with an increase in transaction
volumes.
Gross profit increased in 2005 compared to 2004, primarily due to an increase in transaction volumes,
while gross margin decreased by 1% due to our acquisition of a destination services company, which
records its revenue on a gross basis. Gross profit increased in 2004 compared to 2003, primarily due to the
growth in our merchant hotel business, including increased revenue from international websites and
packages.
Selling and Marketing
Year Ended December 31, % Change
2005 2004 2003 2005 vs 2004 2004 vs 2003
(In thousands)
Selling and marketing ÏÏÏÏÏÏÏÏÏÏ $697,503 $653,018 $463,684 7% 41%
% of revenue (as reported)ÏÏÏÏÏÏ 33% 35% 20%
% of revenue (on a comparable
net basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33% 35% 33%
Selling and marketing expense relates to direct advertising and distribution expense, including traffic
generation from internet portals, search engines, private label and affiliate programs. The remainder of the
expense relates to personnel costs, including market manager staffing in our Partner Services Group
(""PSG''), which enhances our relationships with both supplier relationships and destination services desk
personnel.
35