UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

EXPEDIA, INC.

Delaware		20-2705720
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

(Address of principal executive office) (Zip Code)

(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The number of shares outstanding of each of the registrant’s classes of common stock as of April 17, 2009 was:

Common stock, $0.001 par value per share		262,624,426 shares
Class B common stock, $0.001 par value per share		25,599,998 shares

 

 

Expedia, Inc.

Form 10-Q

For the Quarter Ended March 31, 2009

Contents

Part I Financial Information
Item 1 Consolidated Financial Statements
Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008 (unaudited)			2
Consolidated Balance Sheets as of March 31, 2009 (unaudited), and December 31, 2008			3
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008 (unaudited)			4
Notes to Consolidated Financial Statements (unaudited)			5
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3 Quantitative and Qualitative Disclosures about Market Risk			32
Item 4 Controls and Procedures			33
Part II Other Information
Item 1 Legal Proceedings			34
Item 1A Risk Factors			37
Item 6 Exhibits			38
Signature			39
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-31.3
EX-32.1
EX-32.2
EX-32.3

Part I.

EXPEDIA, INC.

(in thousands, except per share data)

(Unaudited)

		Three months ended
		March 31,
		2009				2008
Revenue		$	635,712			$	687,817
Cost of revenue (1)			143,513				152,260
Gross profit			492,199				535,557
Operating expenses:
Selling and marketing (1)			235,884				287,995
Technology and content (1)			77,672				71,946
General and administrative (1)			67,909				67,567
Amortization of intangible assets			9,069				18,051
Restructuring charges			8,718				—
Operating income			92,947				89,998
Other income (expense):
Interest income			2,671				8,115
Interest expense			(21,645	)			(15,700	)
Other, net			(6,947	)			(3,673	)
Total other expense, net			(25,921	)			(11,258	)
Income before income taxes			67,026				78,740
Provision for income taxes			(27,272	)			(28,972	)
Net income			39,754				49,768
Net (income) loss attributable to noncontrolling interests			(370	)			1,538
Net income attributable to Expedia, Inc.		$	39,384			$	51,306
Earnings per share attributable to Expedia, Inc. available to common stockholders:
Basic		$	0.14			$	0.18
Diluted			0.14				0.17
Shares used in computing earnings per share:
Basic			287,344				285,117
Diluted			287,875				294,031
(1) Includes stock-based compensation as follows:
Cost of revenue		$	711			$	580
Selling and marketing			3,991				3,752
Technology and content			5,176				4,822
General and administrative			8,694				8,652
Total stock-based compensation		$	18,572			$	17,806

See accompanying notes.

EXPEDIA, INC.

(in thousands, except per share data)

		March 31,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	475,234			$	665,412
Restricted cash and cash equivalents			12,008				3,356
Short-term investments			89,974				92,762
Accounts receivable, net of allowance of $13,949 and $12,584			323,671				267,270
Prepaid merchant bookings			89,373				66,081
Prepaid expenses and other current assets			100,243				103,833
Total current assets			1,090,503				1,198,714
Property and equipment, net			240,152				247,954
Long-term investments and other assets			80,081				75,593
Intangible assets, net			818,210				833,419
Goodwill			3,519,825				3,538,569
TOTAL ASSETS		$	5,748,771			$	5,894,249
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, merchant		$	640,305			$	625,059
Accounts payable, other			171,742				150,534
Deferred merchant bookings			1,009,551				523,563
Deferred revenue			17,530				15,774
Accrued expenses and other current liabilities			201,435				251,238
Total current liabilities			2,040,563				1,566,168
Long-term debt			894,678				894,548
Credit facility			—				650,000
Deferred income taxes, net			199,041				189,541
Other long-term liabilities			213,928				213,028
Commitments and contingencies
Stockholders’ equity:
Preferred stock $.001 par value			—				—
Authorized shares: 100,000
Series A shares issued and outstanding: 1 and 1
Common stock $.001 par value			341				340
Authorized shares: 1,600,000
Shares issued: 341,276 and 339,525
Shares outstanding: 262,548 and 261,374
Class B common stock $.001 par value			26				26
Authorized shares: 400,000
Shares issued and outstanding: 25,600 and 25,600
Additional paid-in capital			5,989,002				5,979,484
Treasury stock — Common stock, at cost			(1,735,400	)			(1,731,235	)
Shares: 78,729 and 78,151
Retained earnings (deficit)			(1,876,175	)			(1,915,559	)
Accumulated other comprehensive loss			(41,733	)			(16,002	)
Total Expedia, Inc. stockholders’ equity			2,336,061				2,317,054
Noncontrolling interest			64,500				63,910
Total stockholders’ equity			2,400,561				2,380,964
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	5,748,771			$	5,894,249

See accompanying notes.

EXPEDIA, INC.

(in thousands)

(Unaudited)

		Three months ended March 31,
		2009				2008
Operating activities:
Net income		$	39,754			$	49,768
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment, including internal-use software and website development			24,636				17,068
Amortization of intangible assets and stock-based compensation			27,641				35,857
Deferred income taxes			365				7,908
Gain on derivative instruments assumed at Spin-Off			—				(4,980	)
Equity in loss of unconsolidated affiliates			328				823
Foreign exchange (gain) loss on cash and cash equivalents, net			4,620				(234	)
Realized loss on foreign currency forwards			5,187				—
Other			1,227				615
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable			(60,198	)			(93,285	)
Prepaid merchant bookings and prepaid expenses			(29,963	)			(66,372	)
Accounts payable, merchant			16,425				88,014
Accounts payable, other, accrued expenses and other current liabilities			(15,788	)			3,995
Deferred merchant bookings			486,014				518,219
Deferred revenue			1,756				6,383
Net cash provided by operating activities			502,004				563,779
Investing activities:
Capital expenditures, including internal-use software and website development			(23,386	)			(33,188	)
Acquisitions, net of cash acquired			(2,412	)			(82,455	)
Changes in long-term investments and deposits			3,175				(7,157	)
Distribution from Reserve Primary Fund			5,418				—
Net settlement of foreign currency forwards			(5,187	)			—
Maturities of short-term investments			2,903				—
Net cash used in investing activities			(19,489	)			(122,800	)
Financing activities:
Credit facility repayments			(650,000	)			(345,000	)
Changes in restricted cash and cash equivalents			(8,652	)			(14,756	)
Proceeds from exercise of equity awards			40				1,665
Excess tax benefit on equity awards			12				1,333
Treasury stock activity			(4,164	)			(9,488	)
Other, net			(5,714	)			—
Net cash used in financing activities			(668,478	)			(366,246	)
Effect of exchange rate changes on cash and cash equivalents			(4,215	)			5,749
Net increase (decrease) in cash and cash equivalents			(190,178	)			80,482
Cash and cash equivalents at beginning of period			665,412				617,386
Cash and cash equivalents at end of period		$	475,234			$	697,868
Supplemental cash flow information
Cash paid for interest		$	38,679			$	25,511
Income tax payments, net			36,840				7,604

See accompanying notes.

Notes to Consolidated Financial Statements

March 31, 2009

(Unaudited)

Note 1 — Basis of Presentation

Description of Business

     Expedia, Inc. and its subsidiaries provide travel products and services to leisure and corporate travelers in the United States and abroad. These travel products and services are offered through a diversified portfolio of brands including: Expedia.com^®, hotels.com^®, Hotwire.com^tm, Expedia Affiliate Network (formerly “Worldwide Travel Exchange and Interactive Affiliate Network”), Classic Vacations, Egencia^tm, eLong^tm, Inc. (“eLong”), TripAdvisor^® Media Network and Venere Net SpA (“Venere”). In addition, many of these brands have related international points of sale. We refer to Expedia, Inc. and its subsidiaries collectively as “Expedia,” the “Company,” “us,” “we” and “our” in these consolidated financial statements.

Basis of Presentation

     These accompanying financial statements present our results of operations, financial position and cash flows on a consolidated basis. The unaudited consolidated financial statements include Expedia, Inc., our wholly-owned subsidiaries, and entities we control, or in which we have a variable interest and are the primary beneficiary of future cash profits or losses. We have eliminated significant intercompany transactions and accounts.

     We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting. We have included all adjustments necessary for a fair presentation of the results of the interim period. These adjustments consist of normal recurring items. Our interim unaudited consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the full year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008, previously filed with the Securities and Exchange Commission (“SEC”).

Accounting Estimates

     We use estimates and assumptions in the preparation of our interim unaudited consolidated financial statements in accordance with GAAP. Our estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our interim unaudited consolidated financial statements. These estimates and assumptions also affect the reported amount of net income during any period. Our actual financial results could differ significantly from these estimates. The significant estimates underlying our interim unaudited consolidated financial statements include revenue recognition; recoverability of current and long-lived assets, intangible assets and goodwill; income and indirect taxes, such as potential settlements related to occupancy taxes; stock-based compensation and accounting for derivative instruments.

Reclassifications

     We have reclassified certain amounts relating to our prior period results to conform to our current period presentation. During the first quarter of 2009, our development and information technology teams were effectively combined to better support our global brands. As a result of our reorganization, in addition to costs to develop and maintain our website and internal use applications, technology and content expense now also includes the majority of information technology costs such as costs to support and operate our network and back-office applications (including related data center costs), system monitoring and network security, and other technology leadership and support functions. The most significant reclassification of costs occurred between general and administrative expense and technology and content expense as,

Notes to Consolidated Financial Statements — (Continued)

historically, a significant portion of the information technology costs were within general and administrative expense. Technology costs to operate our live site and call center applications in production remained in cost of revenue.

     The following table presents a summary of the amounts as reported and as reclassified in our consolidated statements of operations for the three months ended March 31, 2008:

		Three months ended
		March 31, 2008
		As reported				As reclassified
		(in thousands)
Revenue		$	687,817			$	687,817
Cost of revenue			151,943				152,260
Gross profit			535,874				535,557
Operating expenses:
Selling and marketing			287,122				287,995
Technology and content			52,302				71,946
General and administrative			88,401				67,567
Amortization of intangibles			18,051				18,051
Operating income		$	89,998			$	89,998

Seasonality

     We generally experience seasonal fluctuations in the demand for our travel products and services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue in our merchant business is generally recognized when the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks or longer. As a result, revenue is typically the lowest in the first quarter and highest in the third quarter.

Note 2 — Summary of Significant Accounting Policies

Recently Adopted Accounting Pronouncements

     On January 1, 2008, we adopted certain provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 applies when another standard requires or permits assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not require any new fair value measurements. On January 1, 2009, we adopted the remaining provisions of SFAS 157 as it relates to nonfinancial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of SFAS 157 did not materially impact our consolidated financial statements.

     On January 1, 2009, we adopted SFAS No. 141R, Business Combinations (“SFAS 141R”), which replaces SFAS 141. SFAS 141R applies to all transactions or other events in which an entity obtains control of one or more businesses and requires that all assets and liabilities of an acquired business as well as any noncontrolling interest in the acquiree be recorded at their fair values at the acquisition date. Contingent consideration arrangements are recognized at their acquisition date fair values, with subsequent changes in fair value generally reflected in earnings. Pre-acquisition contingencies are also typically recognized at their acquisition date fair values. In subsequent periods, contingent liabilities are measured at the higher of their acquisition date fair values or the estimated amounts to be realized. The adoption of SFAS 141R did not materially impact our consolidated financial statements but does change our accounting treatment for business combinations on a prospective basis.

Notes to Consolidated Financial Statements — (Continued)

     On January 1, 2009, we adopted SFAS No. 160, Accounting and Reporting on Non-controlling Interest in Consolidated Financial Statements, an Amendment of ARB 51 (“SFAS 160”). SFAS 160 states that accounting and reporting for minority interests are to be recharacterized as noncontrolling interests and classified as a component of equity. The calculation of earnings per share continues to be based on income amounts attributable to the parent. FAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but affects only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. Beginning on January 1, 2009 upon adoption of SFAS 160, we recharacterized our minority interest as a noncontrolling interest and classified it as a component of equity in our consolidated financial statements with the exception of shares redeemable at the option of the minority holders, which are not significant and have been classified as a liability.

     On January 1, 2009, we adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The adoption of SFAS 161 did not materially impact our consolidated financial statements. See “Derivatives” below for applicable disclosures under SFAS 161.

New Accounting Pronouncements

     In April 2009, the Financial Accounting Standards Board (“FASB”) issued three Staff Positions (“FSPs”) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 and FAS 124-2 establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income. FSP FAS 107-1 and APB 28-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to interim periods. All of these FSPs are effective for interim and annual periods ending after June 15, 2009. We are in the process of evaluating the potential impact of the adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 on our consolidated financial statements. FSP FAS 107-1 and APB 28-1 will result in increased disclosures in the second quarter of 2009.

Other Investments

     During the first quarter of 2009, we received $5 million in distributions from the Reserve Primary Fund (the “Fund”). At March 31, 2009, we had $11 million in redemptions of money market holdings due from the Fund, of which $5 million was included in prepaid and other current assets and $6 million in long-term investments and other assets. During the first quarter of 2009, $6 million was reclassified from short-term to long-term as the Fund announced that it would not distribute a certain amount of fund assets until such time as pending claims and litigation against the Fund are settled. In April 2009, we received an additional $4 million in distributions from the Fund. The timing of distribution of the remaining fund assets, including amounts set aside for pending litigation, cannot be determined at this time and we may be required to record additional losses in future periods as further information becomes available from the Fund.

Derivatives

     Derivative instruments are carried at fair value on our consolidated balance sheets. We use foreign currency forward contracts to economically hedge certain merchant revenue exposures and in lieu of holding certain foreign currency cash for the purpose of economically hedging our foreign currency-denominated merchant accounts payable and deferred merchant bookings balances. Our goal in managing our foreign exchange risk is to reduce, to the extent practicable, our potential exposure to the changes that exchange rates might have on our earnings, cash flows and financial position. Our foreign currency forward contracts are typically short-term and are recorded at fair value with gains and losses recorded in other, net. Valuation of the foreign currency forward contracts is based on foreign currency exchange rates in active markets (a

Notes to Consolidated Financial Statements — (Continued)

Level 2 input). We had a net forward asset of $5 million recorded in prepaid and other current assets as of March 31, 2009 and a net liability of $1 million recorded in accrued expenses and other current liabilities as of December 31, 2008. We recorded $2 million in net gains from foreign currency forward contracts during the three months ended March 31, 2009.

Note 3 — Debt

     The following table sets forth our outstanding debt:

		March 31,				December 31,
		2009				2008
		(In thousands)
8.5% senior notes due 2016, net of discount		$	394,678			$	394,548
7.456% senior notes due 2018			500,000				500,000
Long-term debt			894,678				894,548
Credit facility			—				650,000
Total long-term indebtedness		$	894,678			$	1,544,548

Long-term Debt

     Our $400 million of senior unsecured notes outstanding at March 31, 2009 are due in July 2016 and bear interest at 8.5% (the “8.5% Notes”). The 8.5% Notes were issued at 98.572% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in January and July of each year, beginning January 1, 2009. The 8.5% Notes are repayable in whole or in part upon the occurrence of a change of control, at the option of the holders, at a purchase price in cash equal to 101% of the principal plus accrued interest. Prior to July 1, 2011, in the event of a qualified equity offering, we may redeem up to 35% of the 8.5% Notes at a redemption price of 108.5% of the principal plus accrued interest. Additionally, we may redeem the 8.5% Notes prior to July 1, 2012 in whole or in part at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. On or after July 1, 2012, we may redeem the 8.5% Notes in whole or in part at specified prices ranging from 104.250% to 100% of the principal plus accrued interest.

     Our $500 million in registered senior unsecured notes outstanding at March 31, 2009 are due in August 2018 and bear interest at 7.456% (the “7.456% Notes”). Interest is payable semi-annually in February and August of each year. The 7.456% Notes are repayable in whole or in part on August 15, 2013, at the option of the holders of such 7.456% Notes, at 100% of the principal amount plus accrued interest. We may redeem the 7.456% Notes in accordance with the terms of the agreement, in whole or in part at any time at our option.

     The 7.456% and 8.5% Notes are senior unsecured obligations guaranteed by certain domestic Expedia subsidiaries and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. For further information, see Note 10 — Guarantor and Non-Guarantor Supplemental Financial Information. Accrued interest related to the 7.456% and 8.5% Notes was $13 million and $32 million as of March 31, 2009 and December 31, 2008.

Credit Facility

     Expedia, Inc. maintains a $1 billion unsecured revolving credit facility with a group of lenders, which is unconditionally guaranteed by certain domestic Expedia subsidiaries and expires in August 2010. No amounts were outstanding as of March 31, 2009. We had $650 million outstanding under the revolving credit facility as of December 31, 2008. The facility bears interest based on market interest rates plus a spread, which is determined based on our financial leverage. The interest rate was 1.34% as of December 31, 2008. On February 18, 2009, we amended our credit facility to replace a tangible net worth covenant with a minimum interest coverage covenant, among other changes. As part of this amendment our leverage ratio was tightened, pricing on our borrowings increased by 200 basis points and we paid approximately $6 million in fees, which is being amortized over the remaining term of the credit facility. The annual fee to maintain the facility ranges from 0.4% to 0.5% on the unused portion of the facility, or approximately $4 million to $5 million if all of the facility is unused. The facility also contains financial covenants consisting of a leverage ratio and an interest expense coverage ratio.

Notes to Consolidated Financial Statements — (Continued)

     The amount of stand-by letters of credit (“LOC”) issued under the facility reduces the credit amount available. As of March 31, 2009, and December 31, 2008, there was $51 million and $58 million of outstanding stand-by LOCs issued under the facility.

Note 4 — Stockholders’ Equity

Stock-based Awards

     Stock-based compensation expense relates primarily to expense for restricted stock units (“RSUs”) and stock options. Our RSUs generally vest over five years and our stock options generally vest over four years.

     As of March 31, 2009, we had stock-based awards outstanding representing approximately 27 million shares of our common stock consisting of options to purchase approximately 19 million shares of our common stock with a weighted average exercise price of $15.41 and weighted average remaining life of 5.8 years and approximately 8 million RSUs.

     Annual employee stock-based award grants typically occur during the first quarter of each year. In the first quarter of 2009, we began awarding stock options rather than RSUs as our primary form of stock-based compensation. During the three months ended March 31, 2009, we granted 10 million options and 1 million RSUs. During the three months ended March 31, 2008, we granted 3 million RSUs.

     The fair value of the stock options granted during the three months ended March 31, 2009 was estimated at the date of grant using the Black-Scholes option-pricing model, assuming no dividends and the following weighted average assumptions:

Risk-free interest rate			1.74	%
Expected volatility			49.92	%
Expected life (in years)			4.73
Weighted-average estimated fair value of options granted		$	3.17

Stock Warrants

     During the three months ended March 31, 2009, 26 million warrants, which were traded on the NASDAQ stock market under the symbols “EXPEW” and “EXPEZ”, expired unexercised.

Comprehensive Income

     Comprehensive income was $14 million and $47 million for the three months ended March 31, 2009 and 2008. The primary difference between net income attributable to Expedia, Inc. as reported and comprehensive income was foreign currency translation adjustments.

Notes to Consolidated Financial Statements — (Continued)

Note 5 — Earnings Per Share

     The following table presents our basic and diluted earnings per share:

		Three months ended March 31,
		2009				2008
		(in thousands, except per share data)
Net income attributable to Expedia, Inc.		$	39,384			$	51,306
Earnings per share attributable to Expedia, Inc. available to common stockholders:
Basic		$	0.14			$	0.18
Diluted			0.14				0.17
Weighted average number of shares outstanding:
Basic			287,344				285,117
Dilutive effect of:
Options to purchase common stock			113				1,471
Warrants to purchase common stock			—				5,624
Other dilutive securities			418				1,819
Diluted			287,875				294,031

     The earnings per share amounts are the same for common stock and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

Note 6 — Other, Net

     The following table presents the components of other, net:

		Three Months Ended March 31,
		2009				2008
		(In thousands)
Foreign exchange rate losses, net (1)		$	(6,376	)		$	(7,824	)
Equity loss of unconsolidated affiliates			(328	)			(823	)
Gain on derivative instruments assumed at Spin-Off			—				4,980
Other			(243	)			(6	)
Total		$	(6,947	)		$	(3,673	)

Note 7 — Restructuring Charges

     During the first quarter of 2009, in conjunction with the reorganization of our business around our global brands, we recognized $9 million in restructuring charges. The domestic restructuring charges are expected to be substantially completed by the end of 2009, and our international restructuring charges in the first half of 2010.

Notes to Consolidated Financial Statements — (Continued)

     The following table summarizes the restructuring activity for the three months ended March 31, 2009:

		Employee
		Severance and
		Benefits				Other				Total
					(in thousands)
Accrued liability as of January 1, 2009		$	—			$	—			$	—
Charges			7,946				772				8,718
Payments			(2,915	)			(39	)			(2,954	)
Non-cash items			(67	)			(624	)			(691	)
Accrued liability as of March 31, 2009		$	4,964			$	109			$	5,073

Note 8 — Commitments and Contingencies

Legal Proceedings

     In the ordinary course of business, we are a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Expedia. We also evaluate other potential contingent matters, including value-added tax, federal excise tax, transient occupancy or accommodation tax and similar matters.

     Litigation Relating to Hotel Occupancy Taxes. Lawsuits have been filed by forty-six cities and counties involving hotel occupancy taxes. In addition, there have been six consumer lawsuits filed relating to taxes and fees. The municipality and consumer lawsuits are in various stages ranging from responding to the complaint to discovery. We continue to defend these lawsuits vigorously. To date, fifteen of the municipality lawsuits have been dismissed. Most of these dismissals have been without prejudice and, generally, allow the municipality to seek administrative remedies prior to pursuing further litigation. Five dismissals (Pitt County, North Carolina; Findlay, Ohio; Columbus and Dayton, Ohio; City of Orange, Texas; and Louisville, Kentucky) were based on a finding that the defendants were not subject to the local hotel occupancy tax ordinance. As a result of this litigation and other attempts by certain jurisdictions to levy similar taxes, we have established a reserve for the potential settlement of issues related to hotel occupancy taxes in the amount of $21 million and $20 million at March 31, 2009 and December 31, 2008. Our reserve is based on our best estimate and the ultimate resolution of these issues may be greater or less than the liabilities recorded.

     In connection with various occupancy tax audits and assessments, certain jurisdictions may assert that tax payers are required to pay any assessed taxes prior to being allowed to contest or litigate the applicability of the ordinances, which is referred to as “pay to play.” These jurisdictions may attempt to require that we pay any assessed taxes prior to being allowed to contest or litigate the applicability of similar tax ordinances. Payment of these amounts, if any, is not an admission that we believe we are subject to such taxes and, even if any such payments are made, we will continue to defend our position vigorously. On March 30, 2009, the California Superior Court for Orange County determined we are not required to make a payment in order to litigate in Anaheim, California.

Note 9 — Segment Information

     Beginning in the first quarter of 2009, we have three reportable segments: Leisure, the TripAdvisor Media Network and Egencia. The change from two reportable segments, North America and Europe, was a result of the reorganization of our business around our global brands. We determined our segments based on how our chief operating decision makers manage our business, make operating decisions and evaluate operating performance. Our primary operating metric for evaluating segment performance is “Operating Income Before Amortization” (OIBA as defined below). OIBA for our Leisure and Egencia segments includes allocations of certain expenses, primarily cost of revenue and facilities, and our Leisure segment includes the total costs of our Partner Services Group. We base the allocations primarily on transaction volumes and other

Notes to Consolidated Financial Statements — (Continued)

usage metrics; this methodology is periodically evaluated and may change. We do not allocate certain shared expenses such as accounting, human resources, information technology and legal to our reportable segments. We include these expenses in Corporate and Eliminations.

     Our Leisure segment provides a full range of travel and advertising services to our worldwide customers through a variety of brands including: Expedia.com and hotels.com in the United States and localized Expedia and hotels.com websites throughout the world, Expedia Affiliate Network, Hotwire.com, Venere, eLong and Classic Vacations. Our TripAdvisor Media Network segment provides advertising services to travel suppliers on its websites, which aggregate traveler opinions and unbiased travel articles about cities, hotels, restaurants and activities in a variety of destinations through tripadvisor.com and its localized international versions as well as through its various travel media content properties within the TripAdvisor Media Network. Our Egencia segment provides managed travel services to corporate customers in North America, Europe, and the Asia Pacific region.

     Concurrent with the change to three reportable segments, we have expanded our segment disclosure to include intersegment revenues, which primarily consist of advertising and media services provided by our TripAdvisor Media Network segment to our Leisure segment. These intersegment transactions are recorded by each segment at estimated fair value as if the transactions were with third parties and, therefore, impact segment performance. However, the revenue and corresponding expense are eliminated in consolidation. The elimination of such intersegment transactions is included within “Corporate and Eliminations” in the table below.

     Corporate and Eliminations also includes unallocated corporate functions and expenses. In addition, we record amortization of intangible assets and any related impairment, as well as stock-based compensation expense and restructuring charges in Corporate and Eliminations.

     The following tables present our segment information for the three months ended March 31, 2009 and 2008. As a significant portion of our property and equipment is not allocated to our operating segments, we do not report the assets or related depreciation expense as it would not be meaningful, nor do we regularly provide such information to our chief operating decision makers.

		Three months ended March 31, 2009
						TripAdvisor								Corporate &
		Leisure				Media Group				Egencia				Eliminations				Total
		(in thousands)
Third-party Revenue		$	559,200			$	51,473			$	25,039			$	—			$	635,712
Intersegment Revenue			—				34,029				—				(34,029	)			—
Revenue		$	559,200			$	85,502			$	25,039			$	(34,029	)		$	635,712
Operating Income Before Amortization		$	151,996			$	48,081			$	(1,102	)		$	(69,188	)		$	129,787
Amortization of intangible assets			—				—				—				(9,069	)			(9,069	)
Stock-based compensation			—				—				—				(18,572	)			(18,572	)
Restructuring charges			—				—				—				(8,718	)			(8,718	)
Realized gain on revenue hedges			—				—				—				(481	)			(481	)
Operating income (loss)		$	151,996			$	48,081			$	(1,102	)		$	(106,028	)		$	92,947

Notes to Consolidated Financial Statements — (Continued)

		Three months ended March 31, 2008
						TripAdvisor								Corporate &
		Leisure				Media Group				Egencia				Eliminations				Total
		(in thousands)
Third-party Revenue		$	612,822			$	47,346			$	27,649			$	—			$	687,817
Intersegment Revenue			—				24,524				—				(24,524	)			—
Revenue		$	612,822			$	71,870			$	27,649			$	(24,524	)		$	687,817
Operating Income Before Amortization		$	164,342			$	35,354			$	1,898			$	(75,739	)		$	125,855
Amortization of intangible assets			—				—				—				(18,051	)			(18,051	)
Stock-based compensation			—				—				—				(17,806	)			(17,806	)
Operating income (loss)		$	164,342			$	35,354			$	1,898			$	(111,596	)		$	89,998

     As we finalize the implementation of our new structure during the second quarter of 2009, we may reclassify certain revenue and/or expenses from one segment to another with no impact on consolidated results.

Definition of Operating Income Before Amortization

     We provide OIBA as a supplemental measure to GAAP operating income and net income. During the first quarter of 2009, we reviewed and revised our definition of OIBA to better reflect our current operations and take into consideration the impact of new accounting literature. We now define OIBA as operating income plus: (1) stock-based compensation expense, including compensation expense related to certain subsidiary equity plans; (2) acquisition-related impacts, including amortization of intangible assets, goodwill and intangible asset impairment, gains (losses) recognized on changes in the value of contingent consideration arrangements, and gains (losses) recognized on noncontrolling investment basis adjustments when we acquire controlling interests; (3) certain infrequently occurring items, including restructuring; (4) charges incurred for monies that may be required to be paid in advance of litigation in certain occupancy tax proceedings and (5) gains (losses) realized on revenue hedging activities that are included in other, net.

     OIBA is the primary operating metric by which management evaluates the performance of our 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 measures. We endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the comparable GAAP measure, 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 to GAAP below.

     OIBA represents the combined operating results of Expedia, Inc.’s businesses, taking into account depreciation of property and equipment (including internal-use software and website development), which we believe is an ongoing cost of doing business, but excluding the effects of non-cash or other expenses that may not be indicative of our core business operations. We believe this performance measure is useful to investors for the following reasons:

	•		It provides greater insight into management decision making at Expedia, as OIBA is our primary internal metric for evaluating the performance of our business; and
	•		It corresponds more closely to the cash operating income generated from our core operations by excluding significant non-cash operating expenses.

     OIBA has certain limitations in that it does not take into account the impact of certain expenses to our consolidated statements of operations, including stock-based compensation, acquisition-related accounting and certain other expenses, if applicable.

Notes to Consolidated Financial Statements — (Continued)

Reconciliation of OIBA to Operating Income and Net Income Attributable to Expedia, Inc.

     The following table presents a reconciliation of OIBA to operating income and net income attributable to Expedia, Inc for the three months ended March 31, 2009 and 2008:

		Three months ended
		March 31,
		2009				2008
		(in thousands)
OIBA		$	129,787			$	125,855
Amortization of intangible assets			(9,069	)			(18,051	)
Stock-based compensation			(18,572	)			(17,806	)
Restructuring charges			(8,718	)			—
Realized gain on revenue hedges			(481	)			—
Operating income			92,947				89,998
Interest expense, net			(18,974	)			(7,585	)
Other, net			(6,947	)			(3,673	)
Provision for income taxes			(27,272	)			(28,972	)
Net (income) loss attributable to noncontrolling interests			(370	)			1,538
Net income attributable to Expedia, Inc.		$	39,384			$	51,306

NOTE 10 — Guarantor and Non-Guarantor Supplemental Financial Information

     Condensed consolidating financial information of Expedia, Inc. (the “Parent”), our subsidiaries that are guarantors of our debt facility and instruments (the “Guarantor Subsidiaries”), and our subsidiaries that are not guarantors of our debt facility and instruments (the “Non-Guarantor Subsidiaries”) is shown below. The debt facility and instruments are guaranteed by certain of our wholly-owned domestic subsidiaries and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. The guarantees are full, unconditional, joint and several. In this financial information, the Parent and Guarantor Subsidiaries account for investments in their wholly-owned subsidiaries using the equity method.

     During the second quarter of 2008, we reclassified amounts related to borrowings under our revolving credit facility in our condensed consolidating statements of operations, balance sheets and statements of cash flow from Parent to Guarantor Subsidiaries. There was no impact to consolidated totals. Prior periods have been restated to conform to current period presentation. In addition, during 2009, certain other reclassifications were made to conform to the current period presentation.

Notes to Consolidated Financial Statements — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2009
(in thousands)

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenue		$	—			$	550,056			$	164,313			$	(78,657	)		$	635,712
Cost of revenue			—				117,793				26,862				(1,142	)			143,513
Gross profit			—				432,263				137,451				(77,515	)			492,199
Operating expenses:
Selling and marketing			—				216,608				96,761				(77,485	)			235,884
Technology and content			—				62,631				15,038				3				77,672
General and administrative			—				46,127				21,815				(33	)			67,909
Amortization of intangible assets			—				2,839				6,230				—				9,069
Restructuring charges			—				7,004				1,714				—				8,718
Operating income			—				97,054				(4,107	)			—				92,947
Other income (expense):
Equity in pre-tax earnings (losses) of consolidated subsidiaries			50,810				(2,820	)			—				(47,990	)			—
Other, net			(18,175	)			(6,811	)			(935	)			—				(25,921	)
Total other income (expense), net			32,635				(9,631	)			(935	)			(47,990	)			(25,921	)
Income (loss) before income taxes			32,635				87,423				(5,042	)			(47,990	)			67,026
Provision for income taxes			6,749				(35,654	)			1,633				—				(27,272	)
Net income (loss)			39,384				51,769				(3,409	)			(47,990	)			39,754
Net income attribuatable to noncontrolling interest			—				—				(370	)			—				(370	)
Net income (loss) attributable to Expedia, Inc.		$	39,384			$	51,769			$	(3,779	)		$	(47,990	)		$	39,384

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2008
(in thousands)

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenue		$	—			$	619,314			$	172,988			$	(104,485	)		$	687,817
Cost of revenue			—				127,579				25,815				(1,134	)			152,260
Gross profit			—				491,735				147,173				(103,351	)			535,557
Operating expenses:
Selling and marketing			—				281,669				109,733				(103,407	)			287,995
Technology and content			—				60,449				11,479				18				71,946
General and administrative			—				45,413				22,116				38				67,567
Amortization of intangible assets			—				15,998				2,053				—				18,051
Operating income			—				88,206				1,792				—				89,998
Other income (expense):
Equity in pre-tax earnings (losses) of consolidated subsidiaries			52,218				(2,409	)			—				(49,809	)			—
Other, net			(4,515	)			616				(7,359	)			—				(11,258	)
Total other income (expense), net			47,703				(1,793	)			(7,359	)			(49,809	)			(11,258	)
Income (loss) before income taxes			47,703				86,413				(5,567	)			(49,809	)			78,740
Provision for income taxes			3,603				(33,420	)			845				—				(28,972	)
Net income (loss)			51,306				52,993				(4,722	)			(49,809	)			49,768
Net loss attributable to noncontrolling interest			—				—				1,538				—				1,538
Net income (loss) attributable to Expedia, Inc.		$	51,306			$	52,993			$	(3,184	)		$	(49,809	)		$	51,306

Notes to Consolidated Financial Statements — (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2009
(in thousands)

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Total current assets		$	48,820			$	1,602,281			$	356,673			$	(917,271	)		$	1,090,503
Investment in subsidiaries			3,825,648				546,659				—				(4,372,307	)			—
Intangible assets, net			—				682,918				135,292				—				818,210
Goodwill			—				3,015,779				504,046				—				3,519,825
Other assets, net			3,834				196,948				119,451				—				320,233
TOTAL ASSETS		$	3,878,302			$	6,044,585			$	1,115,462			$	(5,289,578	)		$	5,748,771
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total current liabilities		$	583,063			$	1,864,412			$	510,359			$	(917,271	)		$	2,040,563
Long-term debt			894,678				—				—				—				894,678
Other liabilities			—				344,235				68,734				—				412,969
Stockholders’ equity			2,400,561				3,835,938				536,369				(4,372,307	)			2,400,561
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,878,302			$	6,044,585			$	1,115,462			$	(5,289,578	)		$	5,748,771

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2008
(in thousands)

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Total current assets		$	42,084			$	1,784,614			$	348,496			$	(976,480	)		$	1,198,714
Investment in subsidiaries			3,799,986				545,401				—				(4,345,387	)			—
Intangible assets, net			—				687,786				145,633				—				833,419
Goodwill			—				3,015,958				522,611				—				3,538,569
Other assets, net			4,063				214,663				104,821				—				323,547
TOTAL ASSETS		$	3,846,133			$	6,248,422			$	1,121,561			$	(5,321,867	)		$	5,894,249
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total current liabilities		$	570,621			$	1,433,356			$	538,671			$	(976,480	)		$	1,566,168
Long-term debt			894,548				—				—				—				894,548
Credit facility			—				650,000				—				—				650,000
Other liabilities			—				355,561				47,008				—				402,569
Stockholders’ equity			2,380,964				3,809,505				535,882				(4,345,387	)			2,380,964
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,846,133			$	6,248,422			$	1,121,561			$	(5,321,867	)		$	5,894,249

Notes to Consolidated Financial Statements — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2009
(in thousands)

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Consolidated
Operating activities:
Net cash provided by operating activities		$	—			$	499,237			$	2,767			$	502,004
Investing activities:
Net cash used in investing activities			—				(18,478	)			(1,011	)			(19,489	)
Financing activities:
Credit facility repayments			—				(650,000	)			—				(650,000	)
Transfers (to) from related parties			4,146				(4,146	)			—				—
Other, net			(4,146	)			(15,485	)			1,153				(18,478	)
Net cash provided by (used in) financing activities			—				(669,631	)			1,153				(668,478	)
Effect of exchange rate changes on cash and cash equivalents			—				(4,663	)			448				(4,215	)
Net increase (decrease) in cash and cash equivalents			—				(193,535	)			3,357				(190,178	)
Cash and cash equivalents at beginning of period			—				538,342				127,070				665,412
Cash and cash equivalents at end of period		$	—			$	344,807			$	130,427			$	475,234

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2008
(in thousands)

						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Consolidated
Operating activities:
Net cash provided by operating activities		$	—			$	542,272			$	21,507			$	563,779
Investing activities:
Acquisitions, net of cash acquired			—				—				(82,455	)			(82,455	)
Other, net			—				(36,410	)			(3,935	)			(40,345	)
Net cash used in investing activities			—				(36,410	)			(86,390	)			(122,800	)
Financing activities:
Credit facility repayments			—				(345,000	)			—				(345,000	)
Transfers (to) from related parties			6,541				(82,621	)			76,080				—
Other, net			(6,541	)			(14,831	)			126				(21,246	)
Net cash provided by (used in) financing activities			—				(442,452	)			76,206				(366,246	)
Effect of exchange rate changes on cash and cash equivalents			—				9,707				(3,958	)			5,749
Net increase in cash and cash equivalents			—				73,117				7,365				80,482
Cash and cash equivalents at beginning of period			—				379,199				238,187				617,386
Cash and cash equivalents at end of period		$	—			$	452,316			$	245,552			$	697,868

Part I.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

     This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. Actual results could differ materially from those contained in these forward-looking statements for a variety of reasons, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2008, Part I, Item 1A, “Risk Factors,” as well as those discussed elsewhere in this report. Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition and results of operations. Accordingly, readers should not place undue reliance on these forward-looking statements. The use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” among others, generally identify forward-looking statements; however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. We are not under any obligation to, and do not intend to, publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Please carefully review and consider the various disclosures made in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”) that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

     The information included in this management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

     Expedia, Inc. is an online travel company, empowering business and leisure travelers with the tools and information they need to efficiently research, plan, book and experience travel. We have created a global travel marketplace used by a broad range of leisure and corporate travelers, offline retail travel agents and travel service providers. We make available, on a stand-alone and package basis, travel products and services provided by numerous airlines, lodging properties, car rental companies, destination service providers, cruise lines and other travel product and service companies. We also offer travel and non-travel advertisers access to a potential source of incremental traffic and transactions through our various media and advertising offerings on both the TripAdvisor Media Network and on our transaction-based websites.

     Our portfolio of brands includes Expedia.com^®, hotels.com^®, Hotwire.com^tm, Expedia Affiliate Network (formerly “Worldwide Travel Exchange and Interactive Affiliate Network”), Classic Vacations, Egencia ^tm, eLong^tm, TripAdvisor^® Media Network and Venere Net SpA (“Venere”). In addition, many of these brands have related international points of sale. For additional information about our portfolio of brands, see “Portfolio of Brands” in Part I, Item 1, “Business,” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Trends

     The travel industry, including offline agencies, online agencies and other suppliers of travel products and services, has been characterized by intense competition, as well as rapid and significant change. In addition, beginning in September 2008, global economic and financial market conditions worsened markedly, creating uncertainty for travelers and suppliers. This macroeconomic downturn has pressured discretionary spending on travel and advertising, with weakness initially identified in the United States and the United Kingdom markets increasing and spreading to all geographies. We cannot predict the magnitude or duration of the downturn, but our current limited visibility does not suggest any near-term improvement.

     In late April 2009, the World Health Organization acknowledged an outbreak of swine influenza, with reported cases in Mexico and eight other countries. In response, travel advisories were issued by several countries against non-essential travel, primarily to Mexico. We are unable to predict the scope or duration of the swine flu outbreak or its impact on the travel industry generally, or our business in particular. However, concerns relating to the health-risk posed by the swine flu could result in a decrease and/or delay in demand for our travel services. This decrease and/or delay in demand, depending on its scope and duration, could adversely affect our business and financial performance.

Airline Sector

     The airline sector in particular has historically experienced significant turmoil. U.S. airlines have responded to chronic overcapacity, financial losses and extreme volatility in oil prices by aggressively reducing their cost structures and seating capacities. Reduced seating capacities are generally negative for Expedia as there is less air supply available on our websites, and in turn less opportunity to facilitate hotel rooms, car rental and other services on behalf of air travelers. Many carriers have continued reducing capacity in 2009.

     In 2008, many carriers raised their per seat yields by increasing fares, assessing fuel surcharges and increasing the use of a la carte pricing for such items as baggage, food and beverage and preferred seating. Fare increases, fuel surcharges and other fees are also generally negative for Expedia’s business, as they may negatively impact traveler demand with no corresponding increase in our remuneration as our air revenue is tied principally to ticket volumes, not prices. Fare increases were especially pronounced through the first three quarters of 2008, but began to moderate in the fourth quarter of 2008, and average airfares have declined meaningfully in the first quarter of 2009 as carriers attempt to fill planes in a time of slower demand.

     In addition to capacity and pricing actions, carriers have responded to industry conditions by aggressively reducing costs in every aspect of their operations, including distribution costs. Prior to 2008, airlines lowered (and in some cases, eliminated) travel agent commissions and overrides, and increased direct distribution through their proprietary websites. Carriers also reduced payments to global distribution systems (“GDS”) intermediaries, which have historically passed on a portion of these payments to large travel agents, including Expedia. In early 2009, Expedia.com and other major online travel agencies began offering air tickets to consumers without an associated online booking fee on a promotional basis, matching the airline supplier sites, which also do not charge online booking fees. The promotion contributed to lower revenue per ticket for Expedia in the first quarter of 2009.

     Primarily as a result of decreased costs of distribution and reduced access to excess air supply, Expedia’s revenue per air ticket decreased more than 10% in each of 2005, 2006 and 2007, and by 2008 air revenue constituted less than 15% of the Company’s global revenue. We saw greater stability in air revenue per ticket during 2008 due to our signing long-term agreements with nine of the top ten domestic carriers and three GDS providers in prior years, as well as an increase in booking fees for Expedia.com travelers. However, in the first quarter of 2009, in part due to our booking fee promotion, our revenue per ticket declined 14%. If this promotion is extended, or made permanent, it would further reduce our annual air revenue. We may also encounter additional pressure on air remuneration as certain supply agreements renew in 2009 and beyond.

     In addition to the above challenges, larger carriers participating in the Expedia marketplace have generally reduced their share of total air seat capacity, while leading low-cost carriers such as Southwest in the United States and EasyJet in Europe have increased their relative capacities, but have generally chosen not to participate in the Expedia marketplace. This trend has negatively impacted our ability to obtain supply in our air business, and increased the relative attractiveness of other online and offline sales channels.

Hotel Sector

     In 2008, the hotel sector witnessed continued supply growth and rapidly slowing demand, resulting in declining occupancy rates. Average daily rate (“ADR”) growth, which had been robust in 2006 and 2007, slowed considerably throughout 2008, and by the fourth quarter was declining year-over-year. Some key leisure travel markets for Expedia, such as Las Vegas and Hawaii, have seen dramatic year-on-year declines in ADRs. In early 2009, we have experienced a further weakening in ADRs due primarily to continued declines in industry occupancy rates and weak consumer demand.

     While lower occupancies have historically increased our supply of merchant hotel rooms, and a lower rate of ADR growth can positively impact underlying room night growth, lower ADRs also decrease our revenue per room night as our remuneration varies proportionally with the room price. ADRs on Expedia’s worldwide sites grew 7% in 2007, but declined 1% in 2008, including a 10% decrease in the fourth quarter of 2008 compared to the same period in 2007. In the first quarter of 2009, ADRs declined 18% compared to the same period in 2008. Our hotel remuneration is also impacted by our hotel margins, which declined in 2008 due to adverse movements in foreign exchange rates, lower fees and more competitive hotel pricing.

     Industry sources forecast lower occupancies and year-on-year declines in ADRs in 2009 compared to 2008. These trends, combined with softer demand in a weakening economy and lower air capacity into our core leisure travel destinations, create a challenging backdrop for our hotel business, which has been a key source of revenue and profitability for Expedia.

Online Travel

     Increased usage and familiarity with the internet have driven rapid growth in online penetration of travel expenditures. According to PhoCusWright, an independent travel, tourism and hospitality research firm, in 2008 approximately 58% of U.S. leisure, unmanaged and corporate travel expenditures occurred online, compared with approximately 33% of European travel. Online penetration in the Asia Pacific region is estimated to lag behind that of Europe. These penetration rates have increased over the past few years, and are expected to continue growing. This significant growth has attracted many competitors to online travel. This competition has intensified in recent years, and the industry is expected to remain highly competitive for the foreseeable future.

     In addition to the growth of online travel agencies, airlines and lodging companies have aggressively pursued direct online distribution of their products and services, and supplier growth has outpaced online agency growth since 2002. As a result, according to PhoCusWright, by 2008 travel supplier sites accounted for 61% of total online travel spend in the United States. PhoCusWright forecasts that suppliers’ share of online travel has reached an inflection point, and will remain relatively constant in 2009 and 2010.

     Differentiation among the various website offerings has narrowed dramatically in the past several years, and the travel landscape has grown extremely competitive, with the need for competitors to generally differentiate their offerings on features other than price. Newer competitive entrants such as “meta search” companies have in some cases been able to introduce differentiated features and content compared with the legacy online travel agency companies; although in most cases they are not providing actual travel booking services. In early 2009, TripAdvisor.com launched a competitive meta search travel offering featuring a Fee Estimator enabling customers to see the price of their flight including various airline fees such as baggage charges.

     The online travel industry has also seen the development of alternative business models and timing of payment by travelers and to suppliers, which in some cases place pressure on historical business models. Intense competition has also led to aggressive marketing spend by the travel suppliers and intermediaries, and a meaningful reduction in our overall marketing efficiency and operating margins.

Strategy

     We play a fundamental role in facilitating travel, whether for leisure, unmanaged business or managed business travelers. We are committed to providing travelers, travel suppliers and advertisers the world over with the best set of resources to

serve their travel needs by leveraging Expedia’s critical assets — our brand portfolio, our technology and commitment to continuous innovation, our global reach and our breadth of product offering. In addition, we intelligently utilize our growing base of knowledge about destinations, activities, suppliers and travelers and our central position in the travel value chain to more effectively merchandise our travel offerings.

     A discussion of the critical assets that we leverage in achieving our business strategy follows:

     Portfolio of Travel Brands. We seek to appeal to the broadest possible range of travelers, suppliers and advertisers through our collection of industry-leading brands. We target several different demographics, from the value-conscious traveler through our Hotwire brand to luxury travelers seeking a high-touch, customized vacation package through our Classic Vacations brand.

     We believe our flagship Expedia brand appeals to the broadest range of travelers, with our extensive product offering ranging from single item bookings of discounted product to dynamic bundling of higher-end travel packages. Our hotels.com site and its international versions target travelers with premium hotel content such as 360-degree tours and hotel reviews. In the United States, hotels.com generally appeals to travelers with shorter booking windows who prefer to drive to their destinations, and who make a significant portion of their travel bookings over the telephone.

     Through Egencia, we make travel products and services available on a managed basis to corporate travelers in North America, Europe and the Asia Pacific region. Further, our TripAdvisor Media Network allows us to reach a broad range of travelers with travel opinions and user-generated content.

     We believe our appeal to suppliers and advertisers is further enhanced by our geographic breadth and range of business models, allowing them to offer their products and services to the industry’s broadest range of travelers using our various agency, merchant and advertising business models. We intend to continue supporting and investing in our brand portfolio, geographic footprint and business models for the benefit of our travelers, suppliers and advertisers.

     Technology and Continuous Innovation. Expedia has an established tradition of technology innovation, from Expedia.com’s inception as a division of Microsoft to our introduction of more recent innovations such as Expedia.com’s TravelAds sponsored search product for hotel advertisers, hotels.com’s slider tools for improving search results, hotel.com’s iPod and iPhone applications and the TripAdvisor Media Network’s meta search Fee Estimator, the first tool of its kind to help consumers estimate the complete cost of air travel in this developing era of unbundled air pricing.

     We intend to continue innovating on behalf of our travelers, suppliers and advertisers with particular focus on improving the traveler experience, supplier integration and presentation, platform improvements, search engine marketing and search engine optimization.

     Global Reach. Our Expedia, hotels.com and TripAdvisor Media Network brands operate both in North America and internationally. We also offer Chinese travelers an array of products and services through our majority ownership in eLong, and we offer hotels to European-based travelers through our wholly-owned subsidiary Venere, which we acquired in the third quarter of 2008. During the first quarter of 2009, approximately 32% of worldwide gross bookings and 30% of worldwide revenue were international.

     Egencia, our corporate travel business, currently operates in Australia, Belgium, Canada, China, France, Germany, India, Ireland, Italy, the Netherlands, Spain, Switzerland, the United Kingdom and the United States. We believe the corporate travel sector represents a large opportunity for Expedia, and we believe we offer a compelling technology solution to businesses seeking to optimize travel costs and improve their employees’ travel experiences. We intend to continue investing in and expanding the geographic footprint and technology infrastructure of Egencia.

     In expanding our global reach, we leverage significant investments in technology, operations, brand building, supplier relationships and other initiatives that we have made since the launch of Expedia.com in 1996. We intend to continue

leveraging this investment when launching additional points of sale in new countries, introducing new website features, adding supplier products and services, and offering proprietary and user-generated content for travelers.

     Our scale of operations enhances the value of technology innovations we introduce on behalf of our travelers and suppliers. As an example, our traveler review feature — whereby our travelers have created millions of qualified reviews of hotel properties — is able to accumulate a larger base of reviews due to the higher base of online traffic that frequents our various websites. In addition, our increasing scale enhances our websites’ appeal to travel and non-travel advertisers.

     We intend to continue investing in and growing our international points of sale. We anticipate launching points of sale in additional countries where we find large travel markets and rapid growth of online commerce. Future launches may occur under any of our brands, or through acquisition of third party brands, as in the case of eLong, Venere and Egencia.

     Breadth of Product Offering. We offer a comprehensive array of innovative travel products and services to our travelers. We plan to continue improving and growing these offerings, as well as expand them to our worldwide points of sale over time. Travelers can interact with us how and when they prefer, including via our 24/7 1-800 telesales service, which is an integral part of the Company’s appeal to travelers.

     In 2008, over 60% of our revenue came from transactions involving the booking of hotel reservations, with less than 15% of our worldwide revenue derived from the sale of airline tickets. We facilitate travel products and services either as stand-alone products or as part of package transactions. We have emphasized growing our merchant hotel and packages businesses as these result in higher revenue per transaction; however, primarily through our Venere brand we are working to grow our global agency hotel business. We also seek to continue diversifying our revenue mix beyond core air and hotel products to car rental, destination services, cruise and other product offerings. We have been working toward and will continue to work toward increasing the mix of advertising and media revenue from both the expansion of our TripAdvisor Media Network, as well as increasing advertising revenue from our worldwide websites such as Expedia.com and hotels.com, which have historically been focused on transaction revenue. During the first quarter of 2009, advertising and media revenue accounted for approximately 11% of worldwide revenue.

Seasonality

     We generally experience seasonal fluctuations in the demand for our travel products and services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue in our merchant business is generally recognized when the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks or longer. As a result, revenue is typically the lowest in the first quarter and highest in the third quarter. The continued growth of our international operations or a change in our product mix may influence the typical trend of our seasonality in the future.

Critical Accounting Policies and Estimates

     Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with generally accepted accounting principles in the United States (“GAAP”). Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.

     There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:

•

It requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate; and

•

Changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.

     For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Stock-based Compensation

     In the first quarter of 2009, we began awarding stock options rather than restricted stock units as our primary form of employee stock-based compensation. We measure the value of stock option awards on the date of grant at fair value using the Black-Scholes option valuation model. We amortize the fair value, net of estimated forfeitures, over the remaining term on a straight-line basis. The Black-Scholes model requires various highly judgmental assumptions including volatility and expected option life. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

     We record stock-based compensation expense net of estimated forfeitures. In determining the estimated forfeiture rates for stock-based awards, we periodically conduct an assessment of the actual number of equity awards that have been forfeited to date as well as those expected to be forfeited in the future. We consider many factors when estimating expected forfeitures, including the type of award, the employee class and historical experience. The estimate of stock awards that will ultimately be forfeited requires significant judgment and to the extent that actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period such estimates are revised.

New Accounting Pronouncements

     For a discussion of new accounting pronouncements, see Note 2 — Summary of Significant Accounting Policies in the notes to the consolidated financial statements.

Segments

     Beginning in the first quarter of 2009, we have three reportable segments: Leisure, the TripAdvisor Media Network and Egencia. The change from two reportable segments, North America and Europe, was a result of the reorganization of our business around our global brands. We determined our segments based on how our chief operating decision makers manage our business, make operating decisions and evaluate operating performance.

     Our Leisure segment provides a full range of travel and advertising services to our worldwide customers through a variety of brands including: Expedia.com and hotels.com in the United States and localized Expedia and hotels.com websites throughout the world, Expedia Affiliate Network, Hotwire.com, Venere, eLong and Classic Vacations. Our TripAdvisor Media Network segment provides advertising services to travel suppliers on its websites, which aggregate traveler opinions and unbiased travel articles about cities, hotels, restaurants and activities in a variety of destinations through tripadvisor.com and its localized international versions as well as through its various travel media content properties within the TripAdvisor Media Network. Our Egencia segment provides managed travel services to corporate customers in North America, Europe, and the Asia Pacific region.

Reclassifications

     During the first quarter of 2009, our development and information technology teams were effectively combined to better support our global brands. As a result of our reorganization, in addition to costs to develop and maintain our website and internal use applications, technology and content expense now also includes the majority of information technology costs such as costs to support and operate our network and back-office applications (including related data center costs), system

monitoring and network security, and other technology leadership and support functions. The most significant reclassification of costs occurred between general and administrative expense and technology and content expense as, historically, a significant portion of the information technology costs were within general and administrative expense. Technology costs to operate our live site and call center applications in production remained in cost of revenue. For a detail of the amounts reclassified for the three months ended March 31, 2008, see Note 1 — Basis of Presentation in the notes to the consolidated financial statements.

Operating Metrics

     Our operating results are affected by certain metrics, such as gross bookings and revenue margin, which we believe are necessary for an understanding and evaluation of Expedia’s Leisure and Egencia segments. Gross bookings represent the total retail value of transactions booked for both agency and merchant transactions, recorded at the time of booking reflecting the total price due for travel by travelers, including taxes, fees and other charges, and are generally reduced for cancellations and refunds. As travelers have increased their use of the internet to book travel arrangements, we have generally seen our gross bookings increase, reflecting the growth in the online travel industry and our business acquisitions. Revenue margin is defined as revenue as a percentage of gross bookings.

Gross Bookings and Revenue Margin

		Three months ended March 31,
		2009				2008				% Change
		($ in thousands)
Gross Bookings
Leisure		$	4,904,264			$	5,509,536				(11	%)
TripAdvisor Media Group(1)			—				—				N/A
Egencia			321,132				392,930				(18	%)
Total gross bookings		$	5,225,396			$	5,902,466				(11	%)
Revenue Margin
Leisure			11.4	%			11.1	%
TripAdvisor Media Group(1)			N/A				N/A
Egencia			7.8	%			7.0	%
Total revenue margin(1)			12.2	%			11.7	%

     The decrease in worldwide gross bookings for the three months ended March 31, 2009, as compared to the same period in 2008, was primarily due to a 13% decrease in airfares and an 18% decrease in hotel ADRs, partially offset by a 7% increase in transactions.

     The increase in revenue margin for the three months ended March 31, 2009, as compared to the same period in 2008, was primarily due to an increased mix of advertising and media revenue.

Results of Operations

Revenue

		Three months ended March 31,
		2009				2008				% Change
		($ in thousands)
Leisure		$	559,200			$	612,822				(9	%)
TripAdvisor Media Group (Third-party revenue)			51,473				47,346				9	%
Egencia			25,039				27,649				(9	%)
Total revenue		$	635,712			$	687,817				(8	%)