Expedia Group Inc (EXPE) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Expedia Inc third quarter 2005 earnings call.

At this time all participants are in a listen-only mode.

Following today's presentation instructions will be given for the question and answer session. [Operator Instructions]

I would now like to turn the conference over to Stu Haas, Vice President of Investor Relations.

Please go ahead, sir.

Good afternoon and welcome to Expedia Inc.'s financial results conference call for the third quarter ended September 30, 2005.

Joining us on today's call are Barry Diller, Expedia Inc Chairman;

Dara Khosrowshahi, our CEO, and Mark Gunning, our CFO.

The following discussion and responses to your questions reflects management's views as of today, November 3, 2005 only.

As always, some of the statements made on today's call are forward-looking, including our comments on guidance.

Actual results may differ materially.

We do not intend to update or revise these forward-looking statements until our next quarterly call.

Additional information about factors that could potentially impact our financial results is included in today's press release and the Company's filings with the SEC including IAC Interactive Corp.'s 2004 annual report on Form 10-K as well as Form S-4 and amendments thereto filed in relation the spin-off transaction of Expedia Inc.

During this call we will discuss certain non-GAAP financial measures.

In our press release and our 8-K furnished to the SEC today, each of which is posted on the IR web site, at www.expedia.com/ir, you will find additional disclosures regarding these non-GAAP measures including reconciliation of these measures with the most comparable GAAP measures.

We strongly encourage you to review the section entitled "Basis of Presentation" in today's earnings release for more details on how we are presenting results for the period ended September 30, 2005.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2004.

And with that, let me turn the call over to Barry for some introductory remarks.

Well I add my welcome to this, the first Expedia Inc conference call.

We all know about the dislocating nature of a spin-off.

But for both IAC and Expedia, it's been mostly a frictionless process, both entities hitting the ground truly running.

And Expedia's operations are off to a fine start as a stand-alone company.

Under the hood, Expedia has begun to significantly transform itself over the last 18 months.

And I'd say in every respect it's the better for it.

Maintaining stability during change is always difficult as is undertaking lots of new initiatives.

It's a testament to Dara and his leadership, together with the truly talented executives he's recruited to the cause, as well as to the great Expedia team in place that we are able to report solid operating results amid all this combustion.

The earnings season thus far has certainly been fascinating for Internet companies, something for every species of bull and bear with plenty of volatility to go around.

But apparently lost in the cacophony of who beat or missed consensus by a penny and who raised or raised yet lowered guidance, is the fact that there continue to be some amazingly durable companies being built in this space.

Companies who share sizable markets, operating leverage, expansive global reach, the inexorable push of online penetration, most importantly, technology and innovation at their core, which certainly defines Expedia.

We did not make Expedia a stand-alone company out of weakness, weakness about the travel sector or our own operations.

We did it because we believed it was worthy of being judged solely in its space, both big enough and with enough runway ahead to make it compelling to any constituency.

We have the size, the substance, momentum, to claim leadership and strength in online travel services.

While micro conditions always contain volatility, I and my colleagues are convinced we have a truly great and enduring business model, to report on that, Mr. Khosrowshahi.

Thanks, Barry.

And thank you to everyone for making the time to join us on the call.

I'm going to spend a portion of my call talking more specifically about Expedia's continued innovation during the quarter.

And then turn things over to Mark to review some financial highlights.

The innovation has long been a compelling differentiator for Expedia.

And our third quarter was no exception, as we continued to improve our service for our customers and for our supply partners.

Let me start with Hotels.com.

As we mentioned in our release today, Hotels continued its efforts to transition from a brand based exclusively on price, to one anchored by expertise.

Most notably, the brand's web site was re-launched in September with a meaningful upgrade in content and functionality.

If you haven't visited Hotels.com lately, I really urge each of you to check it our and book, of course.

There are many great innovations on the new site, but one feature that stands out is the compare feature.

If, for example, you're considering a trip to Las Vegas you can quickly line up the Palms, the Wynn Las Vegas, which is a great new hotel, and the Bellagio and compare those properties on a single web page across several different dimensions.

Amenities, prices for your state -- prices for your stay by room class, customer and star ratings, strip location, and so on.

This is on top of several other great features like enhanced pictures, virtual tours of the hotel rooms, mapping capabilities, and much, much more.

And I should point out that Hotels.com operates 28 international sites.

And during Q3 our European team improved their sties as well including integrating photo browsing and cleaner tab display options.

Now I've heard some investors express skepticism that customers care only about price when it comes to making travel decisions or choosing a travel service provider.

While we've always felt strongly that content is a key factor in the choice of the hotel, the Hotels.com team validated this belief with extensive research ahead of the re-launch.

And their findings indicated that content was a very significant factor in customers' rating of a travel site and their propensity to return to the site.

Of course, the proof of progress is ultimately in results and while it's still early days in Hotels.com evolution, the early returns are quite encouraging.

Q3 '05 gross bookings for Hotels.com were up 9% year-on-year, its highest year-on-year growth since mid 2004.

And early results in Q4 show a similar, positive trend.

Transitioning to the Expedia.com brand, we re-launched our homepage and category landing pages last month.

While our booking wizard remains prominent, we've moved toward more prominent merchandising of the real estate around the wizard, stressing our most popular destinations, and highlighting compelling offers, such as our $150 discount on the trip you really want to take in '06 by booking travel on Expedia this holiday season.

The discount is intended to drive incremental behavior from customers since the discount is only valid on package travel, hotel and air for example.

We want customers to think of Expedia as their travel agent of choice for all their travel, not just an occasional rental care or airline purchase.

The site redesign builds on the success that we've had in adding rich hotel content this year, including over 75,000 qualified traveler reviews of actual hotel stays, which is unique to Expedia, a 50% increase from the figure we discussed on last quarter's call.

And we found that user reviews are the most visited content feature immediately prior to checkout indicting their importance in driving purchases.

As the base of reviews grows, this becomes a unique asset for Expedia to leverage more prominently in our customers' experience.

In an effort to improve our email targeting, we also debuted our air shopper email campaign in Q3.

The first 8 air targeted customers who shopped for a flight with Expedia but did not purchase.

We sent those customers outstanding hotel and car offers for those travel dates for that destination as well as updated flight purchases for their date of travel.

We think this is a great product.

As Barry mentioned in his open, there's a lot more innovation ahead for Expedia.

And I consider these developments at Hotels.com and Expedia.com to just be the very initial steps in driving greater personalization, more effective merchandising, and a broader definition of value for our customers, and as a result for our suppliers.

While we've certainly built a strong base of business as Expedia, we also recognize that we have a lot of upside. 75% of all people who buy travel online according to our statistics visit our site at least once while shopping for their trip.

Most of our customers, however, still spend a fairly modest portion of their annual travel spend at Expedia.

And we're setting out to change that.

We also continued to innovate this quarter on behalf of our suppliers with a significant increase in the number of properties we've direct connected.

We announced today that over 5,000 properties, approximately 20% of our merchant hotel base, are now fully direct connected.

With full Direct Connect, we relieve the hotel properties from having to load availability and pricing into an Extranet.

We also provide real-time purchasing data to the hotels, eliminating the delay of accompanying faxed reservations.

In turn we save our suppliers a great deal of time that would otherwise arise in processing the nearly 300,000 rate and inventory changes per day we now receive from Direct Connect hoteliers.

While we're on Direct Connect and Hotels, investors often ask me what a Company like Expedia gains for its size and scale advantages versus its competition.

When it comes to hotels, this manifests itself in several ways.

But one is the network effect of a content feature like traveler reviews.

The greater a traffic advantage, the more high quality, and more recent reviews we post on the site, the more high quality reviews, the higher our conversion, which means a greater pool of reviews and so on in the virtual cycle.

Our size and global reach means that we can invest more and provide better content to our customers as we amortize that cost over a larger sales base than our competitors.

And we plan to expand our content's advantage going forward.

Our size also allows us to approach hotels with valuable assets, including the ability to fill significant room volume at their properties with our targeted merchandising, as well as offering significant free advertising and marketing intelligence for their properties.

This scale hopefully affords us better room allocation at better terms against our competitors.

While Expedia drills considerable innovation during the quarter, we expect the pace in significance of innovation and the level of technology and content spend across our sites to pick up in 2006 and 2007 as we expand our software and engineering teams.

We believe that we are still in the early days of our evolution as a consumer service.

And we have considerable growth both local and global ahead of us.

Now you'll hear from our CFO, Mark Gunning.

Mark joined us in July and brings over 20 years of significant expertise to bear in the areas of financial controls, operations, analytics, and forecasting from senior financial leadership experience with AT&T Wireless, Nextlink, and AirTouch.

Mark is one of several top shelf executives Expedia has brought on board over the past 12 months to help transition the Company from a leadership position in online travel transactions, to becoming a world class retailer of travel experiences.

We're very pleased to have Mark on board.

And now I'll turn the call over to him to touch on our financial performance.

Mark?

Thank you very much, Dara and thank you to those listening in today.

This was a solid quarter for Expedia Inc.

Gross bookings a quarter grew 21% to over 3.9 billion, the domestic growth of over 16% and international growth of 39% versus the prior year quarter.

While domestic gross bookings growth has been fairly stable throughout 2005 in the mid teens, our international gross bookings did see a drop off in the third quarter from 66% growth in the first half of the year down to 39% in Q3.

Certainly terrorist activity in London and foreign exchange affected growth rates, but also saw an impact from economic conditions in Germany and the UK as well as strong competition from supplier direct sites.

These impacts were more pronounced on our air business than on our merchant hotel business in Europe.

Revenue rose 16% during the quarter or 14% excluding the impact of foreign exchange movements and acquisitions.

This organic top line growth rate is the Company's highest in 4 quarters and represents acceleration over the 11% we witnessed in the first half of the year.

And our international growth, excluding the impact of FX, was 47% in the third quarter versus 62% in the first half of the year.

Revenue margins, basically our take rate on bookings was 14.8% this quarter, down 58 basis points versus last year.

We continue to see airline pressuring distribution costs and hotels enjoying above historical average occupancy levels.

But this decline in revenue margin is a lower year-over-year decline than we saw in the second quarter.

I do want to spend a little time talking about our overall hotel business.

As I know there is quite a bit of focus externally on the concept of raw margins and continued pressure on those margins.

But occupancy levels continue to be tight with attendant pressure on hotel deals.

We also encourage investors to look beyond just raw margins in assessing the fortunes of this business for Expedia.

Specifically, revenue growth for merchant hotels was 15% in the third quarter, our highest rate of growth since Q3 '04 and the third straight quarter of accelerating growth.

This is due to the healthy pace of nights stayed through our various points of sale.

It's also due to the flip side of high occupancy.

Increased room rates in the form ADRs have translated into a higher level of revenue per room night despite raw margin pressure.

Going forward, our over-arching goal at Expedia is to deliver outstanding hotel performance to our shareholders, regardless of where we might be in the macroeconomic and occupancy cycles.

Our gross bookings of revenue are critical metrics in evaluating our business.

As most of you know, our Company's primary metric for measuring success is operating income before amortization or OIBA.

OIBA strips out large, non-cash items such as amortization of intangibles and stock based compensation, which aren't particularly useful in accessing our future cash earnings prospects.

During the third quarter, OIBA grew 15%, the same rate of year-on-year growth we saw in Q2.

OIBA growth exceeded 20%, excluding the impact of acquired companies, the negative impact from foreign exchange, and a $4.4 million net adjustment primarily for the reversal of an excise tax reserve.

Year-to-date, we've expanded OIBA margin 121 basis points despite an 85 basis point drop in revenue margins.

And despite a necessary increase in G&A costs as Expedia moved toward becoming an independent public company.

Turning to cash, net cash provided by operating activities for the 9 months ended September 30 was over $940 million while free cash flow, operating cash flow less capital expenditures was over $900 million.

We expect free cash flow in the fourth quarter to be negative as we process increased hotel payables, meaning trailing 12-month free cash flow at year-end will be lower than the $940 million through the first 3 quarters of 2005.

We have begun implementing some recommendations from Project Apollo, which as you'll recall, was focused on better leveraging and integrating our brand portfolio and removing redundant costs.

We're undertaking several initiatives, including call center integration, improving customer service and fulfillment processes, and moving our financial and operating systems to common platforms.

As part of this movement to common infrastructure as well as a spin-off from IAC, we are examining accounting policies among our various brands and businesses.

As such, we recently reclassified certain operating expenses to be more in line with how we want to report our results, now that Expedia is an independent public company.

I want to emphasize, this re-class had no impact on overall expenses or OIBA.

We also had one-time items during the quarter, which impacted GAAP results, specifically, a $30 million pre-tax net credit primarily due to a change in our forfeiture rate assumption for equity awards and a $23 million pre-tax write-off of an investment.

In addition, we reported a derivative liability for obligations related to Ask Jeeves convertible debt assumed by IAC, which gave rise to an unrealized pre-tax gain of $12 million for Q3.

These 3 items combined increased GAAP net income by $8 million and GAAP EPS by $0.02 but had no impact on our OIBA or adjusted net income measures.

Looking ahead to expectations for Q4 and full-year 2005, we have seen the growth rate declines in Europe I mentioned earlier in the call continue into the early part of Q4.

The hurricane activity in Q4 is having an impact on our domestic results.

Lastly, we have indicated in prior calls, compared to last year we are pushing more marketing spend into Q4 of this year, which will pressure Q4 OIBA growth.

As such, we are maintaining our prior expectation of low to mid teens growth in full-year OIBA for 2005.

Okay, Stu.

Let's take some questions.

Great.

Thanks, Mark.

Let's move on to the Q&A portion of the call with Barry, Dara, and Mark.

As a reminder, please limit yourselves to 1 or 2 questions.

Operator, will you please remind our listeners how to ask a question?

Thank you. [Operator Instructions] And our first question comes from Paul Keung with CIBC.

Please go ahead.

Hey, good afternoon, a couple of questions.

One, on your marketing spend, I know it's been a couple of quarters now.

We keep hearing a shift of spending.

Yet you continue to do very well in showing much more efficiency in your marketing spend.

Can you give us a little more color in terms of how are you shifting to offline, online?

Where are you spending your dollars more?

Where are you spending it less?

And when you say you're shifting, where you do think you'll finish the year in terms of that marketing spend?

And the second question is on your corporate side of your business.

There's a good amount of mixed news out there in terms of how that business is.

Can you break it down for us and let us know where your holes may be?

How profitable is that business?

Are you still on track to be profitable in your core business going to next year?

Sure.

As far as the marketing spend goes, we have been able to drive pretty good efficiency across the board.

We've been much more careful about our offline spend as far as where we spend it, how we spend it, and what the timing of that spend is.

And the results certainly to date have been quite good.

And on our online spend, search engine marketing kind of online advertising spend, we have just been very carefully optimizing that kind of spend, measuring it.

We've improved our measurement techniques over last year.

And finally we're using email marketing and CRM marketing in a way that we certainly hadn't been last year.

And that's proven to be quite effective.

Our email marketing channels have turned out to be one of our most efficient channels.

And really wasn't, we really started on those efforts I'd say 2 or 3 quarters ago.

So the efficiency has been really good.

When you look for -- looking forward to Q4, the pattern of our marketing spend really isn't going to change on a sequential basis as far as what we've been doing this year.

The change is really relative to last year.

Last year in Q4 we cut back on marketing pretty significantly.

We did it for a lot of reasons including the fact that we weren't getting access to merchant inventory, as much access or the quality of access that as we have been expecting.

If you remember back to last Q4, and this year we feel pretty good about our product going into Q4.

So we don't think that as is appropriate to cut back on marketing.

We think it's appropriate to keep spending based on the same patterns that we spent in the first 3 quarters of the year.

As far as the pattern of online, offline, generally we've been spending half of our dollars online and half of our dollars offline.

And I think that that will continue going forward.

I think your second question was on corporate, is that right Paul?

That's right.

The corporate business is doing fine.

I think that we found that breaking into that market and scaling sales there has been a little bit more than, more difficult that we anticipated.

I think we have a great product on the technology side.

I think the functionality is second to none.

The user experience is excellent, which is driving adoption, which is higher than I think anyone's expectations in the 80% range, which is terrific.

I think where we still have a little improvement to do is on the service side and getting great, consistent, top shelf service.

And I think we made great strides there.

And I think we're only going to get better.

As is the job of convincing large corporations, et cetera, to buy into the future is difficult.

But we think over the long-term the trend is our friend.

And as our platform becomes more global, I think that we become just a better product out there.

I will say that the European team at ECT is doing just great.

They are executing both on the top line and bottom line.

They have a terrific product.

We have an excellent, excellent team.

And as you know, we brought in Cheryl Rosner, who was running Hotels.com to run ETC worldwide.

And I think even in the last 2 months that she's been there, she's driven a great improvement in kind of the product and the team.

So I'm pretty confident of where we're going.

It's not going to be easy.

But I think long-term we're going to do fine.

Okay, great.

Thanks.

And your next question comes from Mark Mahaney with Citigroup.

Please go ahead.

Mr. Mahaney, your line is open.

Please go ahead with your question.

I think we can move on to the next questioner.

Our next question comes from Michael Savner with Banc of America Securities.

Please go ahead.

Thanks.

Good afternoon.

Two questions, first Mark you mentioned some increasing competition internationally from direct suppliers on the airline side I believe is what you said.

If you could just us a little bit more color around that.

If that's a new issue, something you expect to continue to go or maybe there was something interesting or unique going on in the quarter that would be helpful.

And second there's quite a number of footnotes on your amortization of non-cash comp in the release.

Maybe if just conceptually you can give us some guidance on how we should think about the amount of non-cash comp going forward.

And then why the logic behind excluding that from OIBA if options are being expensed now and if that's something different than what's going on in the non-cash comp line would just be, would may be helpful to get a little bit more color on.

Thanks very much.

Mark, I'll take the international question.

Just as far as supply direct internationally goes and especially on the airside, I think that the 2 things are different in the international markets.

One is that the suppliers, the major flag carriers in Europe, tend to be much more healthy than the carriers in the U.S.

And probably a little bit, if you look at the last 2 or 3 years behind the U.S. carriers as far as their aggression in the supplier direct channels.

They are now very aggressively going after those channels.

And they have a really good product.

If you go to ba.com for example, it's a very, very good, competitive product.

And BA has a very, very strong share in its domestic markets.

So I do think that supplier direct on the airside in Europe is certainly going to be a factor.

I think the other factor you have to look at in Europe is also the LCC.

RyanAir and EasyJet are pretty big players there.

And they're growing quite quickly and gathering a lot of share.

And those are, that's product that we don't have on our store, so to speak so far.

So I think that we felt a bit of that on the airside.

There are various initiatives that we have in place to fix that, including bringing in some of the third, some of the second tier LCCs in markets like Germany and some of our other European markets.But there's some technology integration, et cetera, that has to take place there before we can get all of that on board.

Thanks, Dara.

Sure.

The second question regarding the amortization of the non-cash compensation.

First of all the majority of the cost is coming from amortizing the cost of stock options.

And a decision was reached a few years back to shift over to RSUs, which is restricted stock units.

Those have a much lower cost.

And so going forward you'll see the expense going down as the stock options mature.

So on the going forward basis, you'll see a drop.

And the question then comes down to why is this not included in OIBA?

This is not what we consider an ongoing cost to run the business.

It's not a cash expense of running the business.

Therefore, these like one-time items such as when you go in you true up or review forfeiture assumptions, we have significant impacts to this one line-item, has nothing to do with the way we run the business.

Therefore we back it out.

Mark, just to add to that.

And Mark wasn't here.

But when for example, we brought in at IAC Expedia and also with the spin-off, when we originally brought in Expedia for accounting purposes, we have to essentially reissue all of the options that were outstanding that have already been issued to employees of Expedia way in the past.

So for accounting purposes it was as if we had issued all of those options day one when we brought in Expedia.

We essentially had to do the same exercise on the spin-off as well.

So it creates an accounting expense, which is a GAAP expense.

And we're certainly not going to contest that.

But it's not a current cost of doing business for us.

If you look at our adjusted EPS calculations, what we do there is while we add back the amortization, we actually add to the denominator all of the RSUs that we've issued, even RSUs that are unvested.

So we put in the denominator.

We take the pain for dilution.

And as you can see in our numbers as far as the RSUs go we've been issuing the dilution it's certainly not that significant.

And compared to our peers, so to speak, I'd say we're in a pretty good spot.

Thanks for the comment.

Sure.

Thank you.

The next question comes from Heath Terry with Credit Suisse First Boston.

Please go ahead.

Thanks.

Can you give us a little bit of detail on the progress you're making as far as the integration between Ask Jeeves onto the Expedia site as well as Expedia's presence on Ask Jeeves?

And whether or not just from using the 2 sites if it doesn't appear like there's been a whole lot done there.

But if you can give us an idea of what that's ultimately going to look like and to the extent that there has been progress made and what impact that's having, if there has been, on your marketing spend?

I'll answer first and Barry, I don't know if you want to add something to it.

But as far as the integration on Ask Jeeves goes, some of that has been delayed, unfortunately, by the integration frankly that we are doing internally here.

We talked about Project Apollo and found out integrating businesses that had never been integrated, the Expedia, Hotels.com, Hotwire where appropriate.

And a lot of that is taking the management attention right now.

So we haven't been able to integrate the Ask and Expedia services kind of in the way that we would want to do from a long-term basis.

I think that right now IAC is integrating various of their transactional services with Ask.

And we're really going to use that as a blueprint.

Kind of see what works, see what doesn't work.

And then hopefully once we're well on the path with our own integration, use that as a guide as the kind of integration that we can do with Expedia and Ask.

Now on the marketing side, for Expedia, Ask is a very good partner of ours.

And we're working with them so that they use, they use their spiders to crawl our sites.

And certainly they're a pretty good partner as far as spend on their site.

The returns that we're getting are quite good.

I think that the plan is, is that after the first of the year, we'll begin to get Expedia into the Ask Jeeves service.

Probably by that time it'll be called Ask.com.

But Ask is quite busy now integrating the IAC sites.

And as Dara said, everyday we learn something about it.

And I think Expedia will be the beneficiary of it.

While we want to go quickly, we're in no great rush here.

Great.

Thank you.

Your next question comes from Justin Post with Merrill Lynch.

Please go ahead.

Thank you.

Could you talk a little bit about Hotels.com?

It looks like your merchant hotel room nights definitely picked up and that really helped the results.

Was it because of a higher conversion?

Or did you add a bunch of inventory because Hotels.com became more attractive to hotels to be on the site?

The answer to that is both.

The first step that we had to take was to change the branding of the site from what was essentially an exclusive pricing message to a message, which was we're the hotel experts.

And initially that certainly hurt gross bookings.

But it made suppliers, especially larger chains and brands, much more willing to do business with us.

And now if you look at the kind of inventory that we have on Hotels.com, it very much mirrors the inventory that we have on Expedia.

And so I'd say that in the early days the answer was that the quality of supply improved.

Therefore the quality of the customer experience improved, which led to higher gross bookings.

With the site re-launch and kind of the additional functionality and features that we've improved, we think we've taken that to another level.

And we're certainly hoping to see that in the gross bookings going forward both domestically and internationally.

And so far signs are good.

Great and one follow-up.

International front, any country specifically strong in the quarter or what countries are you most excited about for next year?

I think we're - France and Italy continue to grow quite nicely.

The growth that we see in Italy is quite explosive.

The French team continues to execute quite well.

And the UK is a bit more mature.

But it's a really, really nice, solidly profitable market.

So I think we're pretty excited across Europe.

Germany is proving to be a little bit more difficult than we anticipated.

But it is the largest traveled market in Europe, so we're certainly going to put dollars there.

And we're going to keep investing until we break through.

But I think that experience is pretty consistent with the other online providers there.

And then of course China we're really excited about.

We are still in the method (ph) mode in China.

We are a number 2 player there.

But we are constantly bringing over eloan (ph) management to train them in kind of the way we do business here and teach them the processes, the procedures.

We have a very strong manager there, Barney Hartford, and Justin as well.

And we're pretty confident then in China we're going to make some strides.

It's not going to be overnight.

It's not going to be a month or a quarter.

But as we get into next year, we do expect improving performance, frankly, there.

Thank you, Dara.

Sure.

Thank you.

Your next question comes from Aaron Kessler with Piper Jaffray.

Please go ahead.

Great.

Thanks, guys and good quarter.

Thank you.

A couple of quick questions for you.

On the international side, your hotel margins are a little higher than some of our competitors there.

Are you seeing any pressure on the margins?

And then secondly, can you give us an update on Hotwire is doing?

I also noticed you re-classified some of the gross bookings from Expedia to the others?

Can you give us an explanation of what happened there?

Sure.

As far as the international raw margins go, we talk about the international markets in that it is much more of a market that is dominated by independent hotels.

It's a much more fragmented marketplace.

And on average our raw margins with hotels, with independent hotels tend to be higher than raw margins with the chains.

If you look at raw margins, track raw margins trends domestically, a fair amount of the negative trends that we've seen domestically is because of chain deals, et cetera.

That said again, our raw margins.

I think, we think that the market focuses on raw margins a bit too much.

Really what you should be looking at are revenue per room night, revenue per transaction.

And certainly in this quarter increases in ADRs more than offset decreases in raw margins.

But I think, what was the second question about Hotwire?

Just wanted to see if I could get an update on the performance of how Hotwire is doing?

I think they're doing - it's very solid performance.

The bottom line performance is excellent.

The company is really driving profitability, really increasing their marketing efficiency across the board.

And really one area where Hotwire is very much focused on is building their hotel business.

I think on the airside of the business I would guess that Hotwire is actually selling more air opaque air tickets than Priceline.

But I would estimate that Priceline is probably selling multiples, 3 or 4 times as many room nights as Hotwire is.

The Hotwire team is totally focused on that.

And they are driving kind of changing the brand perception of the product itself to from what has been mostly air, to air and hotel.

And that has been what's driving the profitability this year.

So I think if we keep executing on that front, we're going to be just fine.

Have you reduced the marketing on Hotwire or are you shifting away from TV a little, maybe going a little more offline?

We are, the marketing spend, as a percentage of Hotwire this year is significantly more efficient than it was last year.

I'd say as far as the spending goes, a higher percentage of the spending on Hotwire is very direct spent, meaning not TV spend.

When you think about Hotwire, Hotwire isn't a mass consumer brand, right?

It is a very specific brand with a very specific consumer value proposition.

We estimate that somewhere between 15 and 20% of U.S. customers are what we will call the Hotwire customer.

The customer who is willing to make significant trade-offs as far as flexibility or the amount of time that they spend traveling in order to save some money.

So we don't think that a very broad mass market marketing medium is necessarily appropriate for a target audience of 15 to 20% of U.S. travelers.

So the Hotwire is really focused on is micro-marketing, email marketing, and online marketing, of really driving efficiency there, becoming much more of a direct marketer on a go-forward basis, which I think is going to drive efficiencies for the company.

Great.

Thank you.

Sure.

Thank you.

Your next question comes from Douglas Anmuth with Lehman Brothers.

Please go ahead.

Thank you.

Can you talk about the recent addition of your travel results being directly integrated into Google?

How this relationship is working in terms of how money is exchanging hands?

Is it on a pay per clip basis or a paper transaction or something else?

And then separately, given the Worldspan filings last week, can you talk about what your rationale is in potentially switching, or moving some of your bookings in Europe over to a different GES?

Thank you.

Well on Google I don't want to talk about specifically how kind of what their arrangements are, whether it's a cost per clip or cost per transaction.

But you can be rest assured that they are directly related to kind of dollars that we're driving.

And we think the returns on those monies are well spent.

We are a big partner of Google cause we're a big partner of Yahoo! and Ask.

And we are talking to them about different ways in which we can integrate our product more deeply in their product.

And this is just one example.

It's great to be working with a group that is as innovative as Google.

And obviously we work hand in hand because they're a pretty big partner for us and our dollars spend there and our return is growing year-over-year.

I think, what was your second question?

The Worldspan.

Oh, the Worldspan.

We have, I think we've said it before.

Which is in an era of deregulation when, or let me go to when GDS's were regulated.

You had guaranteed access to all airlines.

GDS's were connected to all airlines.

So you were essentially guaranteed access to inventory.

In an environment where, which is unregulated, we don't feel it makes sense to kind of have only one connectivity provider necessarily.

So we thought it was opportunistic in this situation to perhaps establish another method of connectivity.

Again, we're very happy with Worldspan, our partner.

But we're in a pretty good position that we are, we're not married to any type of connectivity.

So we will certainly use that flexibility.

And ultimately our goal is to drive value for our customers and our supply partners.

And this was an opportunity that we'll probably take.

Great.

Thank you.

Sure.

Thank you.

Your next question comes from Scott Devitt with Legg Mason.

Please go ahead.

Thanks, 2 questions.

First I think I heard that Marriott is introducing new policies that are going to limited intermediaries' ability to actually bid on the Marriott trademark brand through search engines.

And I wondering if, how you thought that may change your paid search strategy or that of your affiliates.

And if you think other hoteliers may actually what Marriott has begun in that policy.

And then secondly, around the tax provision in the quarter as 46%.

And I may have just missed this, but that's higher than it's been historically.

Is there something one-time in that and how should we model tax rate going forward?

Thanks.

Okay, as far as the Marriott question goes, different partners of ours feel differently about that.

So there are certain chain partners of ours who are happy to have us bid on their keywords.

Our attitude and their attitude is that to the extent that someone clicks on our site and we drive the transaction to them, that's an incremental transaction.

And they're perfectly happy with that.

Some partners don't want us to bid on their key words.

And certainly in the spirit of partnership, we don't.

So different partners have different beliefs.

And we will certainly honor how they feel about their trademarks in search engines.

Obviously we do our best to convince them to let us bid on those keywords to the extent they're profitable for us.

Mark, you want to take the tax comment?

Yes, the, I mentioned on the call that we had a write-off on one of our investments of $23 million.

That write-off was a one-time item.

We don't take any tax benefit for that because it's a capital loss.

And so if you look at the run rate we've had on our effective tax rate, this basically makes up the difference in the one-quarter.

It's a one-time item.

So I don't want to comment going forward what our rate would look like.

But that's what's caused the significant increase in the quarter.

Thanks.

Our next question comes from Michael Millman with Soleil.

Please go ahead.

Thank you.

That's Soleil.

Just a couple of questions on the merchant hotels, you mentioned your focus on Hotwire that Hotels.com has done better.

Are all these pulling from the sale pool of allocations?

Or the improvements allow you to get better allocations?

And sort of related to that, can you talk about what the, particularly in the U.S., what the allocation market looks like?

On the merchant hotels, Hotwire right now is pulled from its own inventory certainly for its opaque product.

And in some rare instances will be pulling from Hotels.com inventory as well when it doesn't have any inventory in a particular market at a particular time, say in a peak time.

Expedia and Hotels.com are largely pulling from the same inventory base.

This is an integration that we are going through now.

And it is I'd say probably three quarters of the way complete.

So we're not quite fully pulling from the same inventory.

But we are well on our way.

And certainly by next year we will pulling from the same inventory base.

Generally the hotel allocation market, I don't know enough to generalize regarding how the market is.

I will say that we are very pleased with the start that our partner services group has had.

We recently reorganized the Company and put all of our supply relationships, at least for Expedia, Hotels.com, corporate travel, both in the U.S. and globally under one group, a partner services group we call it, under Paul Brown, who's a new executive here who's doing great.

And I think having, bringing to bear kind of all the different options that we have our global scale and presence to our suppliers with one conversation kind of one dataset has really, I think improved, not only our supplier relationships, but our ability to show our suppliers what we have to offer.

And how we can really bring incremental demand to them.

And how we can be a great partner to them.

So we're pretty happy with how supply is looking again.

I can't speak to the broader market.

I will say that in Q4 there are certain compression times in New York at the end of the year.

And I think everyone will feel that compression.

And we're no exception.

In the third quarter, what was the increase and night, U.S. night or decrease?

We don't, we disclosed overall nights, but we don't disclose kind of U.S. versus global.

Do we know what overall nights increases were, merchant nights?

Do we have that number?

Yes, we disclosed that.

I think overall, 13%.

And a quick question I think you're talking about Worldspan.

In your agreement, is there an escape clause if they get under some supply content?

Can you, I'm not sure I understand the question.

Well if others drop, if they're plan is not the first and others drop Worldspan, then do you get out of your minimum contract with them?

Of course at some level they need to supply a certain content and can't reach it.

I don't want to comment on the particulars of our deal with Worldspan.

I will say that we don't expect that, first of all, to happen with Worldspan.

We do think that GDS' Beraldi (ph) are going to get access to broad content.

And so we certainly don't expect Worldspan over the long-term to be missing any broad slot of content.

And we're very happy with them as a partner and we're sending the significant, significant, majority of our segments over Worldspan, which should kind of speak for itself.

That said, we do have very significant flexibility from a contractual perspective to do what's best for our Company.

Okay, thank you.

Sure.

And your next question comes from Mark Mahaney with Citigroup.

Please go ahead.

Great.

Thank you very much, just one question.

This has to do with the AirTran relationship and maybe not specifically commenting on that relationship.

But it seems like they recently decided to work with 2 of your competitors and not with you.

Is that a trend you can see other major carriers doing, just selecting 1 or 2 leading travel agents and not working with another one?

Thank you.

Well we don't, while we can't speak to what's going to happen in the future, I don't believe that it will be general trend.

If you look at AirTran, a significant amount of their bookings go through their own sites.

They're a different kind of carrier than the broad flat carriers out there.

And ultimately I do think that we are going to be doing business with AirTran over the long-term.

While we do look to increase our supplier relations over the long-term, there are times when we may choose not to allow certain suppliers to participate in our platform from time-to-time.

That happened before.

I'm sure it'll happen again.

And our goal is great content, a great customer experience, great depth of product.

And in order to get that we have to get the products with the highest demand on our shelves and that's what we do.

With AirTran it's an issue not only with us but with Worldspan as well.

We couldn't kind of meet our overall goals with them.

We're still in discussions with them.

And we hope those discussions work out.

But this has happened in the past.

And generally it's been resolved.

And again, our connectivity flexibility is pretty significant.

Thank you very much.

Let's do I think it's almost the top of the hour, so let's do 1 more question.

Thank you.

Our next question comes from Robert Peck with Bear Stearns.

Please go ahead.

Hey, guys congratulations.

Just want a complete follow-up here.

First of all while we're talking about GDSs, Dara can you talk a little bit about the plans to shift some of the bookings over to Sabre?

How that timeline is shaping is right now?

Next, could you also just talk about the current look to book ratio on the platform and how you've been seeing that trending?

And lastly, could you touch base on any sort of reward program slash funding programs of other IAC properties to entice people to stay on the platform?

Sure.

As far as Sabre goes, I can't be that specific on the timeline but we do have a contract with them and it is our intention to flow segments to them.

But I can't be that specifics on the timeline.

Part of it depends on integration technology issues, which we haven't quite tied up yet.

As far as the look to book ratios I'm assuming you're talking about a conversion trends.

While we don't disclose specific conversions, the trends have been good.

They are kind of as the year has gone on, the conversion trends are pretty encouraging.

Hotels.com, the conversion trends have actually improved So we're pretty happy with what we're seeing.

And hopefully it will continue.

As far as rewards or loyalty programs, we're certainly looking into all of those possibilities.

And part of what we've done already is we're -- I think we approach loyalty in 2 ways.

One isn't necessarily a program.

One is through CRM and direct marketing, which isn't in the form of a program, but it's trying to encourage customer behavior that's profitable for you.

So for example this Christmas we've launched a program which is you get $150 off the trip that you really want to take if you book on Expedia this quarter.

It is encouraging not one booking, but a return booking through Expedia and it's also encouraging booking on a packages path, which is certainly something that we want to encourage.

So that's an example of what I would call a reward program, which is a micro reward program based on our needs at a time.

And based on what we think consumers want.

And also backed up by a media campaign, which we think is a really, really good media campaign.

So certainly we are going to do more of that.

As far as other rewards programs or loyalty programs, I'll just say that we're working on it.

We do expect to announce something.

But right now would be too soon to give details to you.

But we do anticipate doing something on that front.

Thanks, Dara.

You bet.

I think that's it.

Thank you very much for joining the call.

We're pretty happy with our results.

And hopefully we can keep it up.

Thank you.

Thank you.

Ladies and gentlemen that concludes Expedia Inc third quarter 2005 earnings call.

Thank you for your participation in today's conference.

And at this time you may disconnect.