Microsoft's Expedia Files IPO

<B> Microsoft's Expedia Files IPO</B>

By Cheryl Rosen

Microsoft Corp. is about to spin off Expedia Inc., its public online travel site, in a decision announced just days after competitor GetThere.com filed for an initial stock offering of its own.

While other travel technology companies, like Sabre and Galileo, and travel agencies, like Uniglobe Online, have gone public in the past couple of years, Expedia and GetThere will be the first independent online travel sites to hit Wall Street.

Expedia filed an S-1 registration with the Securities and Exchange Commission on Sept. 23, eight days after the former Internet Travel Network, which changed its name to GetThere.com in preparation for its stock offering (<I>BTN</I>, Sept. 20).

Goldman Sachs analyst Glen Engal said "there's two things going on" simultaneously that make the timing right for the travel tech IPOs. First, "we continue to see a lot of Internet deals based on the belief that you want to move fast in this channel and spend money on advertising to build your visibility quickly. The feeling is that you cannot worry about earnings; the Internet market is not impacted by earnings. You should focus on building markets as quickly as possible."

But at the same time, the high spending and low returns of divisions focusing on the online channel hurt the short-term financial returns of large companies like Microsoft, Engal said. Spinning off Expedia therefore will protect the share prices of Microsoft as a whole, and bring in independent financing for Expedia from those who believe in its future value.

While Expedia's principals now are in a mandated "quiet period" that proscribes them from speaking to the press until the stock offering, the S-1 itself offers some interesting insights into the state of the travel technology market.

According to the filing, Expedia's strategy will focus on "aggressive brand development" through advertising to grow consumer awareness of the site; enhanced supplier relationships to build advertising revenues; "new tools to facilitate the entry of pricing, availability and description information" into the system; an "increased level of personalization" of travel products for the consumer, and an expansion into new product areas, such as cruises and vacations.

Also on the agenda is an international expansion that will build on Expedia's current operations in the United Kingdom, Germany and Canada.

On the financial side, Expedia reported losses of about $30 million a year in fiscal years 1997 and 1998, and $20 million in 1999. As of June 30, 1999, the company had an accumulated deficit of $86.8 million. To that it will add $100 million to $150 million in debt for stock options it will offer employees.

The sales side, though, is tripling its business every year, with net revenues up from just $2.7 million in 1997 to $13.8 million in 1998 and $38.7 million in 1999. The site attracted 4.4 million unique visitors in August 1999 and generated $183 million in sales in the quarter ended June 30, 1999.

The SEC filing also noted that Expedia will continue to partner with Worldspan for air and car rental bookings, Pegasus Systems for hotel, and WorldTravel Partners-BTI Americas for fulfillment services including ticketing and 24-hour support.

On the vendor side, Continental, Northwest and KLM license components of Expedia's technology to run the transaction engines on their Web sites, as American Express does with its AXI corporate system.

One insider said companies wait an average of about 45 days after filing an S-1 before actually issuing stock. The quiet period runs from the S-1 filing until a month after the IPO.