Expedia 2005 Annual Report Download - page 46

In 2005, the increase in operating income was primarily due to increased revenue, which contributed
to a higher gross profit, and a decrease in stock-based compensation due to changes in the estimated
forfeiture rates used to determine stock-based compensation, offset by an increase in selling and marketing,
general and administrative, and technology and content expense as discussed above. In 2005, operating
income included a $79.7 million decrease to stock-based compensation expense mainly due the 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. Operating income was favorably impacted in 2004 by a
$12.1 million net reserve adjustment primarily related to the reversal of an air excise tax reserve and the
resolution of a contractual dispute.
In 2004, the decrease in operating income was due to an increase in the amortization of intangibles
principally due to the increase in intangible assets upon IAC's acquisition of the minority interest in
Hotels.com and Expedia.com in 2003 and other acquisitions, an increase in stock-based compensation due
to the Expedia.com and Hotels.com mergers in 2003, partially offset by a decrease in non-cash distribution
and marketing expense due to the termination of Hotels.com distribution agreement with Travelocity and a
decrease in merger costs. Operating income was favorably impacted by a $4.7 million write-down relating
to packaging technology by Hotels.com in 2003.
Operating Income Before Amortization (""OIBA'')
Year Ended December 31, % Change
2005 2004 2003 2005 vs 2004 2004 vs 2003
($ in thousands)
OIBA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $627,441 $553,692 $469,010 13% 18%
% of revenue (as reported)ÏÏÏÏÏÏ 30% 30% 20%
% of revenue (on a comparable
net basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30% 30% 33%
In 2005, the increase in OIBA was primarily due to increases in revenue that contributed to a higher
gross profit, offset by increases in selling and marketing, general and administrative, and technology and
content expense discussed above.
In 2004, the increase in OIBA was primarily due to increases in revenue that contributed to higher
gross profit, profitability from our European operations and acquisitions, partially offset by an increase in
selling and marketing, general and administrative, and technology and content expense discussed above.
Definition of OIBA
We provide OIBA as a supplemental measure to GAAP. We define OIBA as operating income plus:
(1) amortization of non-cash distribution and marketing expense (2) stock-based compensation expense,
(3) amortization of intangibles and goodwill impairment, if applicable and (4) certain one-time items, if
applicable.
OIBA is one of the primary metrics by which management evaluates the performance of the business,
on which internal budgets are based, and by which management is compensated. Management believes
that investors should have access to the same set of tools that management uses to analyze our results.
This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP,
but should not be considered a substitute for or superior to GAAP. We endeavor to compensate for the
limitation of the non-GAAP measure presented by also providing the comparable GAAP measures, GAAP
financial statements, and descriptions of the reconciling items and adjustments, to derive the non-GAAP
measure. We present a reconciliation of this non-GAAP financial measure from GAAP to non-GAAP
below.
OIBA represents the combined operating results of Expedia, Inc.'s businesses, taking into account
depreciation, which we believe is an ongoing cost of doing business, but excluding the effects of other non-
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