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Expedia turns first operating profit

    Online travel site Expedia topped analysts' estimates in its third quarter Monday, posting an operating profit of $4.4 million, or 9 cents a share, on sales of $110 million. However, including charges, the company also reported large losses.

    First Call consensus pegged Expedia for a profit of 4 cents a share on sales of $90.3 million.

    Ahead of the earnings report, Expedia (Nasdaq: EXPE) shares hustled up $2.46, or 10 percent, to a 52-week high of $26.01 before jumping to $28.25 in after-hours trading.

    The $110 million in sales marks an 88 percent improvement from the year-ago quarter when it lost $21.4 million, or 50 cents a share, on sales of $59 million.

    Earlier this quarter, Expedia executives told analysts that it would post its first operating profit in company history, citing strong sales through its own services as well as partnership services.

    "March was just an outstanding quarter for Expedia," said Chief Executive Officer Richard Barton during a conference call with analysts.

    Including non-cash stock option expenses and amortization of goodwill and intangibles, Expedia posted a net loss of $17.6 million, or 37 cents a share, compared with a loss of $66.5 million, or $1.56 a share, in the year-ago quarter.

    In the quarter, gross travel bookings grew to $674 million, up 68 percent from the $401 million recorded in the year-ago quarter.

    Agency sales improved 88 percent to $33.5 million, and merchant sales jumped to $67.1 million, up 98 percent from the year-ago quarter. International sales rose 57 percent from the second quarter.

    Expedia exited the quarter with more than $151 million in cash and short-term investments, an improvement of $33.4 million from the prior quarter.

    More than 1 million unique customers bought services from Expedia in the quarter, up 86 percent from a year earlier, and up 27 percent from the prior quarter.

    "This is one of the online (businesses) that's actually working," said Steve Weinstein, an analyst at Pacific Crest Securities. "Expedia is showing tremendous momentum as an organization. This is a good stock to own for the long term."

    Microsoft (Nasdaq: MSFT), which started Expedia in 1994, still owns approximately 70 percent of the company.

    The airline connection
    The strong third-quarter results were especially impressive considering both Northwest Airlines and KLM Royal Dutch Airlines announced they would stop paying commissions to Internet travel agencies earlier this quarter.

    Some analysts warned that other airlines would soon follow suit, forcing online travel agencies such as Expedia and Travelocity.com (Nasdaq: TVLY) to either charge service fees--at the risk of alienating its customer base--or leave prices unchanged and accept lower profit margins.

    But none of the other major airlines stopped paying commissions.

    "The airlines have always competed against travel agencies," Weinstein said. "I was surprised by what Northwest and KLM did because online agencies are one of the most inexpensive ways for them to generate sales. As an airline, you want more business through that channel because it's cheaper."

    Fourth quarter and beyond
    Chief Financial Officer Gregory Stanger told analysts to expect a profit, excluding one-time charges, of between 6 cents and 9 cents a share in the fourth quarter, well above the First Call consensus estimate calling for a loss of 5 cents a share.

    Stanger said sales in fiscal 2002 will improve between 50 percent and 55 percent from fiscal 2001. Earnings for the fiscal year should come in between 30 cents and 40 cents a share, much higher than the current First Call estimate of a profit of 13 cents a share.

    Last quarter, Expedia easily topped analysts' estimates when it posted a loss of $2.6 million, or 6 cents a share, on sales of $80 million.

    All nine analysts tracking the stock rate it either a "buy" or "strong buy."