Expedia Group (EXPE) FY2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-13, FY ended December 31, 2025) + Yahoo Finance

Auditor: Ernst & Young LLP — Unqualified opinion (1 critical audit matter: loyalty program accounting)

One-line verdict: Expedia's travel platform generated $14.7B in revenue and $3.9B in operating cash flow, but the balance sheet is structurally distressed: Altman Z-Score of -0.39 places it firmly in the distress zone, goodwill plus intangibles of $7.7B represent 599% of equity, and DSO surged 18 days in a single year. The high CFFO/NI ratio of 3.0x is a feature of the merchant model (deferred bookings create working capital) rather than earnings quality. Three red flags — DSO surge, AR outpacing revenue for 2 consecutive years, and goodwill dwarfing equity — warrant the F grade, though the underlying travel business is operationally healthy with 90.1% gross margins and improving profitability.

Revenue: B2C and B2B Driving Growth

Per the 10-K, Expedia operates through three segments. Total revenue of $14.7B breaks down by type:

Revenue increased 8% in FY2025 "on strong growth in our B2B segment resulting from increased lodging revenue." Merchant, agency, and advertising/media/other accounted for 70%, 22%, and 8% of total revenue respectively. The Expedia Traveler Preference (ETP) program allows customers to choose between paying Expedia upfront (merchant model) or paying at the hotel (agency model), creating a complex revenue recognition and working capital dynamic.

Profitability: Improving But Thin Net Margins

The 90.1% gross margin reflects Expedia's asset-light model — the "cost of revenue" is primarily payment processing, data center costs, and customer service. But net margins of only 8.8% on a 90% gross margin business reveal the heavy spending: selling and marketing consumed 67.4% of gross profit.

The effective tax rate reconciliation shows $334M at the 21% statutory rate, with $32M in state/local taxes and various foreign adjustments netting to a total provision that approximates the statutory rate.

Cash Flow: The Merchant Model Creates Optical Strength

The persistently high CFFO/NI ratio (3.0x) is structural, not a sign of conservatism. Expedia's merchant model collects payment upfront from travelers but pays hotels later, creating a permanent working capital float recorded as "deferred merchant bookings." As the business grows, this float grows, inflating operating cash flow. The filing warns that "if our merchant hotel business declines, it would likely result in further pressure on our working capital cash balances."

Depreciation of property and equipment including internal-use software was $847M, amortization of stock-based compensation $398M, and amortization of intangible assets $40M. The $398M in stock-based comp is a real dilution cost.

In February 2025, Expedia redeemed all of its approximately $1B in 6.25% senior notes that were due May 2025, recognizing an immaterial loss on debt extinguishment.

The 18-Point Screening

Revenue Quality

A1 is a red flag. DSO jumped from 79 days (FY2023) to 86 days (FY2024) to 103 days (FY2025). An 18-day single-year surge in a travel booking business is significant. The DSRI component of the M-Score hit 1.205, confirming receivables are growing disproportionately to revenue.

A2 is a red flag. AR outpaced revenue growth for two consecutive years, suggesting either loosening collection terms with hotel partners or changes in the merchant/agency revenue mix that are extending the cash conversion cycle.

Expense Quality

Cash Flow Quality

Balance Sheet

D1 is a red flag. Goodwill of $6.9B plus intangibles of $819M total $7.7B against only $1.3B in stockholders' equity — a 599% ratio. This goodwill stems from Expedia's aggressive acquisition history. The filing acknowledges the company "materially expanded the breadth and depth" of the business through acquisitions. However, the company also recorded $147M in goodwill impairment during 2025 and $426M in 2024, demonstrating that these assets are not immune to write-downs.

Z-Score of -0.39 (distress zone). The negative working capital (driven by deferred merchant bookings exceeding current assets) and thin equity drive the Altman Z-Score deep into distress territory. This is partly structural — the merchant prepayment model creates large current liabilities that are not true "debt" — but it means Expedia has no margin for error if bookings decline sharply.

Acquisition Risk

Manipulation Score

The M-Score passes cleanly at -2.78, with no component raising concern. TATA (total accruals to total assets) is strongly negative at -0.1058, consistent with the merchant model cash flow dynamics.

Key Risks from the 10-K

1. Dual-Class Share Structure

The filing discloses that Barry Diller and his affiliates control approximately 28% of combined voting power through Class B shares. The risk factors warn about potential divergence between controlling shareholder interests and minority shareholder interests.

2. Loyalty Program Liability — The Auditor's Focus

Ernst & Young identified the One Key loyalty program as the sole critical audit matter. The company defers revenue for earned rewards "net of rewards not expected to be redeemed (known as breakage)." Estimating the relative standalone selling price of rewards and breakage rates involves significant management judgment. With $1.6B in dividends declared during FY2025 ($0.40 per share quarterly), the balance between cash returns and liability management is important.

3. Convertible Notes Due February 2026

The debt schedule shows $1B in convertible senior unsecured notes with 0% interest due February 2026 — just weeks after the filing date. This creates a near-term liquidity event. The filing also lists $750M in 5.0% notes due February 2026, meaning $1.75B in debt matures within months of the filing.

4. Macro Sensitivity

The filing extensively warns about sensitivity to "slow growth or recession, high unemployment, inflation, tighter credit, higher interest rates" and "geopolitical conditions" including "the war in Ukraine and the Israel-Hamas war." Travel is a discretionary spend, making Expedia highly cyclical.

Summary

Grade: F. The balance sheet structure drives the grade, not the operating business.

Expedia's travel platform is operationally healthy: 90.1% gross margins, 8% revenue growth, improving profitability, and $3.1B in free cash flow. The M-Score of -2.78 is clean. But the balance sheet tells a different story: goodwill at 599% of equity from years of acquisitions, a Z-Score of -0.39 in the distress zone, and DSO surging 18 days in a single year. The imminent maturity of $1.75B in debt (including $1B in convertible notes) within weeks of the filing date adds urgency.

The key insight is that much of Expedia's balance sheet "distress" is structural to the merchant booking model — the negative working capital and thin equity are features, not bugs, of a business that collects cash upfront. But that model also means any sharp decline in bookings would rapidly unwind the working capital float, creating real liquidity pressure on a company with limited equity cushion.

**Disclaimer**: This report is based on Expedia Group's FY2025 10-K filed with SEC EDGAR on February 13, 2026. This is NOT investment advice.

Data: SEC EDGAR 10-K + Yahoo Finance

Auditor: Ernst & Young LLP (Unqualified opinion, 1 critical audit matter — loyalty program accounting)

Fiscal year ended: December 31, 2025