Debt May Weigh Down Expedia Takeoff

While Microsoft Corp.’s big day in court may be Friday — when a U.S. District
Court judge is expected to issue a finding of fact in the Department of
Justice’s anti-trust suit against the software giant – Internet
investors could render a verdict next week on the company’s ability to
spin off a successful consumer portal.

Perhaps as early as Monday, shares of Expedia, Microsoft’s online travel
reservations operation, will be available to the public. Microsoft Microsoft (MSFT)and
lead underwriter Goldman Sachs plan to offer 5.2 million shares between
$10 and $12 each in hopes of raising $57.2 million. The software maker
will retain a majority stake in Expedia, which will trade under the
Nasdaq symbol EXPE.

It looks like an offering put together by a powerful partnership, and
that often means an IPO moonshot. However, investors should keep in
mind that Microsoft’s track record with online consumers has been

Yes, they captured the majority of the browser market once dominated by
Netscape, but only because they gave away Internet Explorer for free.
And that’s just a single product.

Microsoft’s MSN access and portal effort has sputtered, with
subscriptions of 2 million dwarfed by AOL’s 20 million.

And Sidewalk, Microsoft’s arts-and-entertainment city guide, failed to
live up to its hype. The company sold the group of sites earlier this
year to rival Ticketmaster Online-CitySearch (TMCS).

It’s impossible to know the bottom line on these efforts, for Microsoft
doesn’t break out numbers for each unit of its consumer and commerce

But Expedia’s S-1 reveals an online travel booking service with $38.7
million in revenue in the fiscal year ended June 30, with another $15.3
million in the quarter ended Sept. 30. That’s far below the revenue of
competitors such as Cheap Tickets (CTIX)
($110 million in Q3) and (PCLN)
($152 million), and ahead of Preview Travel (PTVL)
($9 million).

Though Expedia may lag badly behind Cheap Tickets and in
terms of sales, the company has proved it can lose money with the best
of them. In the fiscal year ended June 30, Expedia had a net loss of
$19.6 million and negative cash flow of $18 million. In the most recent
quarter, the net loss was $5 million and there was negative cash flow of
$6.3 million.

As of Sept. 30, accumulated debt was $91.7 million. The company’s
revised S-1 also warns of a non-cash charge of $100 million to $150
million related to stock options issued to employees to replace
Microsoft options they are losing.

While Goldman Sachs is a skilled and experienced IPO pilot, it’s
difficult to attain much altitude with this extra baggage. Given that
there are no other big names slated to go public next week, Expedia
could do reasonably well in its debut, considering the recent hot market
for Internet offerings. Just don’t expect another Cobalt Networks (COBT) or
Akamai Technologies (AKAM) Akamai

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