Expedia Group Inc (EXPE) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to Expedia, Inc.'s third-quarter 2006 conference 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).

As a reminder, this conference is being recorded today, Thursday, November 9, 2006.

I would like 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, 2006.

Joining me on today's call are Barry Diller, Expedia's Chairman and Senior Executive;

Dara Khosrowshahi, our CEO; and Michael Adler, our CFO.

The following discussion, including responses to your questions, reflects management's views as of today, November 9, 2006 only.

As always, some of the statements made on today's call are forward-looking, including our comments on financial expectations, operational performance and margins, planned investments and spending, platform improvements, systems upgrades, growth of business lines, financial performance and dilution.

Actual results may differ materially.

We do not undertake any obligation to update or revise this information to reflect future events or circumstances.

Please refer to today's press release and to the Company's filings with the SEC, including our Form 10-K for the year ended December 31, 2005, for additional information about factors that could potentially affect our financial and operational results.

During this call, we will discuss certain non-GAAP financial measures including OIBA, free cash flow, adjusted net income and adjusted EPS.

In our press release, which is posted on the Company's IR website at expediainc.com/ir, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with the most comparable GAAP measures.

We 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 some periods.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2005.

With that, let me turn the call over to Dara.

Thanks, Stu, and thank you to everyone for making the time to join us on the call.

Mike will cover the financial details of the quarter later, but I did want to add that through expense control and continued mix shift towards our international and merchant hotel businesses, we delivered operating income before amortization for the (technical difficulty) about OIBA shrinking year on year, but we are fairly confident that absent some dramatically adverse outcome in our remaining airline discussions, we are on a path for OIBA growth in 2007 and beyond.

The good news for Expedia is that our international businesses, as well as Hotels.com, TripAdvisor and ECT, are all executing well and growing at healthy rates.

The bad news is that our domestic Expedia.com business, which is also our largest P&L, continues to perform at unsatisfactory levels.

While gross bookings growth for non-Expedia businesses actually accelerated from Q2 levels, Expedia.com's growth rate continued to slow, pulling down overall sequential bookings growth.

So the story for our company and our absolute focus over the next few quarters is turning around Expedia.com, as we did last year with Hotels.com, while at the same time continuing to execute at our other brands and geographies.

Not an easy task by any means, but one that we're certainly up for.

Now, let me give you a quick update on where things stand with our airline economics in light of recent airline and GDS discussions.

While the air environment has certainly been challenging as of late, we think that we may finally be seeing some light at the end of the tunnel.

We now have the option of flowing segments through three GDS providers in Sabre, Amadeus and Worldspan, with whom we had a prior agreement.

Just this morning, we signed a long-term deal with AirTran Airways to increase value-priced selection for travelers, complementing long-term agreements that we have with our other airline partners.

Putting it all together, we expect to see a step-down in revenue per ticket in 2007, similar to what we will see for full year 2006, as we absorb a full year of revised GDS and airline economics.

That said, we're cautiously optimistic that 2008 will bring more flattish comparison, as it relates to the non-booking fee portion of our agency air revenue.

As it relates to our platform redesign, we are on track to move our first point of sale onto the new platform in early 2007.

Our enterprise data warehouse is nearly ready for launch, which, when combined with our new platform, will enable groundbreaking improvements in terms of personalization, site merchandising and segmented marketing.

While meaningful improvements to our travelers' experiences remain on track for delivery in 2007 and beyond, we continue to push forward on the innovation front across our brand portfolio.

The most recent example of this was our launch earlier this week in conjunction with Citi of our traveler rewards program.

Expedia.com travelers can now earn Thank You points on their bookings, including double points for air plus hotel travel.

The 10 million existing members of Citi's Thank You network can now redeem their points online for travel with Expedia.com.

Perhaps the most compelling feature of Thank You on Expedia is that it is tender-neutral.

In plain English, this means that you can earn Thank You points no matter what method of payment you prefer to use.

No need to sign up for a credit card, no need to worry about making sure to charge everything on one card and no membership fees.

Just shop for travel at Expedia and earn points.

Thank You is also incremental.

You earn points on top of any rewards you generate through your existing travel or credit card loyalty program.

With Thank You, Expedia has replaced the tyranny of the "or" with the liberation of "and."

While we're certainly enthusiastic about launching Thank You and hopeful that it will provide meaningful value to travelers over the long term, I do want to stress that we don't anticipate significant impact on overall behavior in the near term.

History shows programs like this take time to generate flywheel momentum.

But we're excited to get the program out there, observe how travelers responds to it and make improvements accordingly.

We hope you'll take a moment to sign up and let us know what you think.

TripAdvisor continues to lead the Web 2.0 revolution in travel with this quarter's introduction of its mapping mashup, enabling families and business travelers alike to begin their travel research with a precise destination, and then visually work their way backwards from that point to the best nearby hotels, attractions, restaurants and more.

We look for continued innovation out of TripAdvisor, and we plan to more aggressively integrate TripAdvisor's award-winning content across our brand portfolio in quarters to come.

Hotels.com continues its development as the hotels expert.

Worldwide gross bookings were up 19% in Q3, and we saw particular strength in Europe as Hotels.com European points of sale grew gross bookings nearly 60%, and now constitute over 10% of Expedia's total European leisure bookings and an even higher percentage of revenue.

In fact, Hotels.com international points of sale, including our newest country in Israel, contributed more revenue in Q3 to our international operations than any European or APAC Expedia brand at point of sale, other than in the UK.

What's very encouraging from a portfolio perspective is that with Expedia, Hotels.com and TripAdvisor, we have built three significant global brand franchises, and we have built them organically.

This is critical from a long-term operating leverage standpoint, as well as a return on capital, as each additional point of sale we add builds upon the existing technology, brand and supplier investments that have been made already.

This is a model we plan to replicate again and again, as we did just yesterday with the launch of Expedia sites in Norway, Denmark and Sweden.

With these three sites, we leverage the technology and supplier relationships we already have in place, as well as earlier hotels-only efforts in Scandinavia via our Hotels.com brand.

We plan to follow the model later this year with the launch of Expedia in Japan, the world's second-largest travel market, followed by India in 2007.

Expedia Corporate Travel had another solid quarter, with worldwide bookings growth of 47% and trailing 12-month bookings in excess of $1 billion for the first time.

These numbers are encouraging, but arguably the most significant development in ECT this year is our work on the operations side of the house, which has resulted in not only an improved likelihood of our clients to recommend our services, but also the best record of client retention in ECT's history.

Through the first 10 plus months of 2006, we have lost just one client with an annual travel spend in excess of $1 million, just one client.

ECT continues to expand globally, most recently with the launch of its operations in Germany, as well as the acquisition of [MTM Reissen], a profitable Munich-based corporate provider with over EUR11 million in annual gross bookings.

Lastly, I do want to spend a moment on Hotwire.

As a result of industry-wide revenue declines in merchant air, which was Hotwire's historical bread and butter, we did take a $47 million non-cash impairment charge for Hotwire's intangibles this quarter.

But I do want to emphasize that we remain 100% committed to the opaque travel channel and the value it provides to both our travelers and our suppliers.

Despite the near-term challenges in merchant air, Hotwire's management team continues to execute strongly.

Along those lines, after a year's absence, we will be rejoining Orbitz and CheapTickets.com a their exclusive provider of opaque travel services.

Hotwire has meaningfully diversified its revenue base with hotels and car rentals, much of it through driving significant improvements in conversion rates in both of these product groups.

In closing, this was a solid quarter for Expedia, Inc., and you are beginning to see the very early fruits of our investment labor with this week's launch of Thank You.

There's certainly more to come on that front, which we believe, along with solid ground execution, should return us to the kind of growth that we've come to expect from ourselves as a company.

Mike?

Thanks, Dara.

Hello, everyone.

I'm going to review the results for the quarter and close with an update on financial expectations for the full year.

Let me begin with gross bookings.

Worldwide gross bookings were up 8% for the quarter, split between 2% domestic growth and 29% international.

While international growth is similar to levels we have seen for the past few quarters, domestic growth continued to decelerate in Q3.

Some of this is a natural deceleration for Hotels.com as they anniversary high-growth quarters, but most of the deceleration is due to Expedia.com.

Excluding the Expedia.com points of sale, our worldwide gross bookings growth would have roughly doubled the 8% we are reporting today.

So what are we seeing at Expedia.com?

At the top of the funnel, we continue to see relatively flat year-on-year traffic to the site.

We have been encouraged by positive results from our efforts in [SCM] and e-mail, but these gains have not been enough to offset the declines we have seen from our MSN and affiliate channels.

We do not anticipate much improvement in traffic in Q4, but we're looking forward to launching a new brand advertising campaign in January.

Brand spend will be a key part of our marketing strategy going forward, as we feel we may have pulled back too sharply in 2006 from what can be a very efficient marketing channel.

Some of the traffic flatness at Expedia.com is born of a conscious decision on our part to shift domestic spend to more efficient uses at Hotels.com.

Direct spend for Expedia.com was actually down 5% year over year, as we moved spend to Hotels.com, which has a higher revenue per transaction due to a greater mix of merchant hotel revenue.

As mentioned on our Q2 call, we had expected our package pricing actions during Q3 to positively contribute to Expedia.com's growth.

While we did see a meaningful pickup in the markets where we took pricing down, it was not enough to overcome the overall pressure on package volumes from lower availability of merchant air.

In addition, we did not see enough lift to offset our reduced margins.

In response, we are modifying our approach on a market-by-market basis to drive incremental volume with less negative impact to overall profitability.

Before moving to revenue margin, a bit of housekeeping. 2004 and 2005 geographic splits for bookings and revenue have changed, based on a reallocation of Hotels.com results between domestic and international websites.

This reallocation is consistent with how we have been allocating those amounts in 2006.

As such, year-over-year comparisons for 2005 and 2006 have been impacted per the metric schedule on page 14 in our release.

I want to stress that there is no impact on worldwide bookings and revenue, nor any change in gross bookings at Hotels.com.

Turning to revenue margin, Q3 declined 44 basis points year over year to 14.4%.

The largest driver of decline remains the decrease in domestic air margins due to lower revenue per ticket and higher airfares.

The good news is that, while worldwide merchant hotel margins were down year over year, the increase in that business as a percentage of our mix was enough to offset the impact on consolidated revenue (technical difficulty).

We're not counting on a similar mix shift benefit in Q4, where we think revenue margin declines will shake out closer to the 80 basis points estimate we gave last quarter for second half 2006.

On the hotel front, we saw approximately 60 basis points of raw margin degradation, compared with 150 basis points in the first half of 2006.

This is consistent with our expectation of more favorable comps in the back half of 2006 as we anniversary the lower-margin hotel (technical difficulty), easing year-over-year raw margin declines.

So we should see last raw margin decline in full year 2006, compared with the 125 basis points we experienced in full year 2005.

Now, turning back to the P&L detail, gross margin for the quarter, excluding stock-based compensation, improved slightly.

This was mainly due to the increased mix of merchant hotel revenue, which carries a higher gross margin than other products.

We continue to think that we will see an improved gross margin over the longer term, due to our Apollo initiatives.

Keep in mind, some of these savings may be offset in the near term, with investments in our call and data centers and by revenue margin declines.

Sales and marketing grew 14% this quarter, in excess of revenue growth, largely due to increased international spend, including our shift of Q2 spend to Q3 in Europe.

We also increased spending at Hotels.com to drive high-revenue merchant hotel bookings, and we supported Expedia.com's 10th anniversary with a multimedia spend.

We expect worldwide sales and marketing will again exceed revenue growth in Q4, as Q3 trends at Expedia.com continue into Q4 and as we support our newer points of sale in Scandinavian countries and Japan.

General and administrative expense came in at $59 million, flat year on year, as we now have lapped the ramp-up in G&A as we became a public company.

We anticipate higher G&A in Q4, as Q3 benefited by a few million dollars from some compensation expense reductions that we don't anticipate benefit in Q4.

While the ramp in G&A will lead to deleverage from this expense in full year 2006, we expect positive leverage in 2007.

Technology and content expense grew just 9% year over year, as most of the investment we are making on the platform, enterprise data warehouse and other fronts are capitalized.

Year-over-year CapEx more than doubled to $34 million, and we now anticipate full-year 2006 CapEx will come in between $85 million and $95 million, and we expect to see higher dollar amounts of CapEx in 2007.

We anticipate the expense associated with these increased capital expenditures will start to hit the P&L in early 2007 as we place software into service, which will cause even greater deleverage from technology and content in 2007 and possibly 2008, on top of what we will experience in 2006.

On the bottom line, we delivered Q3 OIBA of $180 million, down 2% versus Q3 2005.

Year-to-date OIBA is down 8% on gross bookings growth of 11%, primarily reflecting 70 basis points of lower revenue margin and operating expense deleverage previously mentioned.

I want to close my comments with an update of our expectations for full year 2006.

We now anticipate OIBA for 2006 will decline between 5% and 10%.

While we are not providing expectations for 2007 at this time, I can say that, absent something dramatically different from our current expectations on the air side, we expect to return to positive OIBA growth in 2007, with revenue margins still declining year on year, but at a slower rate than what we experienced in 2006.

I want to thank everyone for your time today and for your continued interest Expedia.

I will now turn the call over to Barry for some closing thoughts ahead of Q&A.

Thank you.

Good afternoon to everybody.

Sausage making, in this particular case of our sausage making, has not been pretty.

It has been extremely difficult, but I think it's beginning to come out in somewhat finished links.

I think the work of the last year and a half -- it slowly, as I think you can see, I think you can see that there is beginning traction here.

We have made many, many changes, the most recent in Expedia.com itself, which was fairly expensive.

But I think we now have, with Expedia.com, which was our only real problem -- there were, of course, issues about investment all over the place.

But the only real operating problem we had was Expedia.com.

It now has new leadership, lots of changes underneath, all of which, I think, are with people that we really do have great confidence in.

I think -- you never can absolutely tell about this stuff, but I think that's the end of it, meaning the end a big change.

I think the team that Dara has all across now is a permanent team.

I think most of their -- the work isn't done, but I think that the great disruption is done.

So I think that we will -- it won't happen -- it never happens that quickly, and it won't be, I think, probably settled in people's minds outside the Company.

I think that everybody can maintain their skepticism about Expedia.com and the drags that they associate with the business, but I have growing confidence that it is, without question, improved and it will be back to real growth next year.

So with that, I think it's best we take some questions.

So I guess Mr. Stu, you do that part, so go ahead.

Thanks, Barry.

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

As a reminder, please limit yourselves to one or two questions, so we can fit more questioners into the call today.

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

(OPERATOR INSTRUCTIONS).

Anthony Noto, Goldman Sachs.

This is actually Erin McCann for Anthony.

I guess the first question I have is I wondered if you could discuss the effectiveness of your marketing spend.

It looks like this quarter, sales and marketing were up to 5% of gross bookings, and yet we continue to see a deceleration in growth.

I wonder if you could comment on when you expect to see the benefit from that marketing spend?

I think a significant amount of the sales and marketing spend relating to gross bookings and the revenue growth that you're seeing is actually due to a mix shift here.

We mentioned in Q2 that we were light on international marketing as it related to the World Cup happening, that Q3 we were going to increase the spend, and we did just that.

International sales and marketing spend on international points of sale is less efficient than sales and marketing spend on domestic points of sale.

But as you can see by the acceleration in international gross bookings growth, it has been effective and is something that is working and we're going to do more of.

So there's certainly a mix shift there.

I would say a similar thing regards to Hotels.com, which is we been spending more on Hotels.com brand marketing.

Again, that tends to be a higher percentage of Hotels.com revenue than what you see on Expedia.com.

So a lot of what you're seeing is mix shift of incremental spend is positive.

All that said, we do believe that we can do better on the Expedia.com side, as far as off-line brand marketing goes, and it's certainly something that we're working on.

It looks like you continue to see good growth internationally, and you mentioned that you plan to introduce Expedia in Japan and India in 2007.

Are there other geographies that are attractive and that you considered?

I'm thinking, I guess, more specifically about Latin American.

We are looking at Latin America.

We do some business in Latin America on the Hotels.com side.

We have a site Hotelus.com.

We're going to look at the Latin American countries opportunistically.

I will say that from a priority standpoint, and we're always setting priorities at this company, the Asia-Pacific markets in total are kind of the next large market segment that we're going to go after.

The biggest issue that we have with Latin American countries is that credit card penetration is quite low there.

As you know, most of the transactions on our various sites are done by credit card.

So as long as credit card penetration is low, we probably won't go in, in a big way; we will just go in opportunistically.

Justin Post, Merrill Lynch.

A couple of bigger-picture questions.

We're seeing hotel occupancies kind of level off on a year-over-year basis.

I'm wondering if that could start to help your net rates a year or two down the road, once your current agreements run out, or if you're just going to stop seeing pressure there?

Secondly, have you seen any pickup in booking trends?

Some of your competitors have mentioned things got a little bit better in September, relative to the first part of the third quarter.

As far as occupancies go and leveling off, from a macro standpoint, that is a good trend for us.

I will say that our PSG group, our Partner Services Group, has done a really, really good job in securing inventory in both primary and secondary and tertiary markets as well.

So we really have not had any real issues as far as inventory availability goes.

Inventory availability is very good.

As far as the economics of the business go long-term, I think that the economic relationship that we have with our suppliers is appropriate.

I think we bring a significant amount of value, as far as being not only a national but an international platform and being largely variable as far as their spend on our site goes.

So I think we bring a ton of value there.

To the extent that occupancy rates are leveling off, we think that our hotel partners are going to be looking for our help, and we're going to be there for them.

As far as booking trends go, September versus the other months, I don't want to comment on individual months, and I don't want to comment on forward booking trends.

Mike talked about our expectations for the year, as far as 5% to 10%.

We remove the lower end of the range, so our expectations are pretty consistent with where our business is going right now.

Mark Mahaney, Citigroup.

Can I ask you to comment just on one of the numbers?

The transactions growth year over year was flat.

Should we attribute that mostly, solely to the weakness in Expedia business in the US?

Is there any other way we should think about that?

Then one question on the loyalty program.

You have now got, it sounds like, the ideal partner.

You've talked about rolling this out in the careful, phased way.

How should we think about how aggressive you will be with this program 12 months from now, in terms of international markets and different brands?

As far as transaction growth goes, I don't want to pin this only on Expedia.com, but obviously transaction growth at Expedia.com domestically has been weaker than transaction growth on our other brands or internationally.

So the majority of the slowdown that you see in transaction growth due to Expedia.com.

We are on it, we have got a team that's very much focused on it.

I'm confident that we can turn this around.

As far as Citi goes, we believe that they are an ideal partner.

As to our aggressiveness, I think it depends on how things go.

The last time that we talked to you, we said that we are going to roll this out.

We're going to test and learn.

We're going to see how we can change our traveler behavior and how we can, hopefully, effect and engender higher loyalty amongst our travelers.

That's really what we're going to be focused on as far as the Thank You program goes.

As to where we're going to expand it, I think that we're going to go to new brands -- for example, Hotels.com, before we go internationally, just because Citi is such a strong presence nationally here.

So I think that you'll see a brand extension before we go international with it.

Another step, certainly, that we are looking at right now is introducing an Expedia and/or perhaps Hotels.com branded credit card, which will allow consumers who use that card to get double, triple points, et cetera, to really, really increase the velocity of the points that they receive when they book on our site.

So that's kind of the steps that we're looking at with Thank You.

We're pretty pleased with it so far.

We're optimistic about we can achieve.

We think it will take a bit of time, but we're pretty excited.

Imran Khan, JPMorgan.

Hello, this is [Bridget Weischer] calling for Imran.

First question -- could you give us an idea about any trends you have seen in your conversion from advertising?

Conversion from advertising?

You mean site conversion in general?

Yes.

Conversion over the year has not changed significantly one way or the other.

Now, it differs by site, by point of sale, and so it's very difficult to kind of generalize conversion.

But if I were to characterize for Expedia.com domestically, the biggest issue that we have is increasing the traffic to the site.

Conversion, we don't think, is an issue.

We think we can get it better, and we're working on it, but it's really about bringing more traffic to the site and increasing our direct type and traffic.

It seems like MSN is generating a little bit of weakness.

Do you have any ideas for replacing it as a traffic source?

We're focused on executing with MSN and working with the team to improve it as a traffic generator and as a transaction generator for us.

We're always looking at new channels for traffic, so we don't view one channel as necessarily replacing another channel; we view it as additive.

An example of that is Hotwire's deal with Orbitz.

It's a new channel for Hotwire.

It is incrementally additive.

But I think really what we're focused on at MSN is working with them to start building transactions back up.

We think we can get there.

Aaron Kessler, Piper Jaffray.

First, on the international growth, can you give us how that is performing versus your expectations going into the quarter, and what other areas we should be looking to, to expand that?

I think you mentioned a couple of them, maybe [if you're looking to] extend more into Eastern or Continental Europe.

Second, can you just give us an update on the search pricing environment, whether it's a little more rational this year?

Finally, on Priceline's call yesterday, they did mention that when they disbanded their Orbitz relationship, they mentioned it wasn't really financially feasible or at the rates -- maybe you got better rates?

Can you comment on what you're seeing there?

On international, I guess the results have been as expected.

We took a little bit of a risk as far as increasing the marketing spend in various geographies, and I think the team there executed very well in pulling through nice gross bookings growth pretty much across the board, as a result of those increasing spends.

We are very pleased with the progress of Hotels.com internationally.

We did a mini re-platforming for Hotels.com to make the site more [SCO]-friendly, to improve the consumer experience.

We're certainly seeing the rewards of that, and we're rolling that out across Europe.

So right now, we're really happy with how the international markets are doing.

We're happy with how the European markets are doing.

I think we're looking at the Priceline growth rates with envy and asking ourselves, how can we get those growth rates?

I think the team is really challenging themselves.

While we are improving, I would not say that we're in any way happy or satisfied.

So I think more to come.

Our expectations are for better growth going forward internationally, and I think the team is really challenging themselves.

As far as search pricing goes, I do not want to comment specifically on how this quarter went versus another quarter.

What I would say is that in general, search terms -- there continues to be increase or inflation in search terms, and I think that our search team does a great job of optimizing around that inflation.

The optimization is in two parts.

One is, which terms are you going to bid for, and where do you want to be -- as far as do you want to be first or second or third, et cetera -- and which search engines do you use?

Also working on the conversion of the landing pages once someone types in or clicks on a search term.

So while there is inflation, we have a great team working there that is, overall, getting pretty good efficiency out of the search engine marketing channel overall.

I think your third question was on the Orbitz deal.

Is that correct?

Yes.

I know Priceline backed out of that deal.

I don't know if it was a competitive win for you, or -- it seemed like it was getting too expensive for them to keep up that deal.

I don't know whether it was a competitive win, but it was a win.

The economics that we offered Orbitz were pretty similar to the economics that we had with them two years ago, and so we're pretty confident that it's a channel that's going to work for us and be profitable with us.

If it didn't work for Priceline, then the conclusion that you would draw is that Hotwire must be converting better than Priceline, because I don't think that Orbitz would take a less economically attractive deal.

Christopher Gutek, Morgan Stanley.

I know you guys are not giving detailed guidance for next year yet, but I think you did suggest at the end of your prepared comments that you think margins could be down modestly in 2007 versus 2006.

I'm wondering if you could just comment on the speculation or suggestion that maybe the Company's economic model, in terms of margins and cash flow, were put in places several years ago with better supply, in terms of the hotel and air inventory?

Going forward with relatively tight supply, that's sort of a trade-off between growth and profitability.

To get real topline growth, you might have to give up more in terms of margins going forward.

I'm wondering if you could kind of comment on that, in terms of general expectations for margins longer-term relative to growth longer term?

On revenue margins for 2007, we are anticipating on the air side the margin reducing in a similar amount that has occurred in 2006.

We think that by the long-term nature of the contracts that we have entered into and are continuing to negotiate, that we are optimistic that we will see a leveling-off of that in 2008.

In terms of the hotel revenue margin, I think, as Dara mentioned earlier, we think that the economic relationships we have on the hotel side are appropriate at this time, and really reflect the value that we're delivering to the hotels.

Just to comment on that further, what we are solving for long-term is the amount of cash that this business throws off.

We kind of don't care whether it's high margins or low margins or high revenue growth or low revenue growth.

We're solving for long-term cash generation and optimizing long-term cash generation.

It may happen that we may have an environment where dropping margins is going to really drive revenue growth, which is going to result in higher profitability.

We will do that. the opposite may be true as well.

So it's very difficult to comment on long-term trends in margins without knowing what's happening.

We have some partners that we do business with today with whom our margins are actually increasing.

Now, the production in their particular hotels is increasing dramatically as well, so it's a win-win situation.

They get a ton of volume from us, we get high margins from them, and we both win.

So it's going to depend on the particulars, and we'll act accordingly.

Just one of the other interesting aspects of our business is that we think we have a real advantage in that we do have a global platform here, and we're constantly -- you guys don't see it, but we're constantly testing staff in countries outside the US, as far as how do our margins affect our revenue growth, high booking fee, lower booking fee, higher margins with hotels, lower margins with hotels?

It's something that we're starting to do, that we started to do.

I think we can learn a lot more about the revenue, the effect on revenue and margins and the trade-offs there.

So, frankly, I don't think we're smart enough right now, and I think we're going to get much smarter about that over the next years.

In the context of getting smarter, do you think you have enough visibility going forward such that when you report Q4 results, you can give more detailed guidance for 2007, and [there's the] relatively limited guidance you gave for 2006?

Or is this kind of a multiyear process to kind of get smart and figure out the optimal way to maximize that cash flow, and therefore the guidance will be somewhat limited going forward?

I think that there are two factors to that.

One is that I think we are getting better at forecasting in general.

This company, as far as being a public company, is a fairly young company.

So I do think that we're going to get better at that.

The second is our view of guidance.

You put those together, and you're going to get the formula as to what we're going to tell you next quarter.

I can't tell you right now what that will be.

Finally, two quick balance sheet questions.

Could you guys comment on the potential for additional goodwill or intangible write-downs relative to the Company's market cap?

Could you also comment on the optimal capital structure now that you have done the debt deal?

I'll take the first question, relating to goodwill.

We're performing the annual assessment, which we do each year at this time.

It's premature for us to comment on a non-cash impairment to goodwill, as we are still making that assessment.

I will say that the things that are looked at as part of that analysis are, as disclosed in our 10-K, are discounted cash flow characteristics of the Company and market comparables.

That's what we will be looking to during the Q4 period.

Barry, do you want to talk about capital structure?

We're in very good shape, obviously.

We have a good amount of cash.

We have little debt.

We do think that when it's appropriate, we would think we would take on some leverage.

The business is stable enough for us to do so.

I would think that, for normal purposes, it would be at about two times.

That's what we have been historically comfortable with.

We have not ever really gotten there, but it's at least intellectually what we think is about right.

We might go higher than that for a period of time, but we would look to pay it down to around two times.

But we're not anxious right now about that.

We're obviously, right now, quite comfortable in our current structure.

Robert Peck, Bear Stearns.

Just a quick follow-up on the previous question when you talked about keyword pricing.

In your point of view, is any sort of irrational exuberance there, or do you think it's justified and you're getting (indiscernible) investments?

Number two is, could you quantify, to any degree you can, the changes in the GDS agreements and how that is affecting some of the numbers going forward?

Lastly, could you talk about the integration of lastminute.com and how that is affecting you from a competitive point of view?

As far as the keyword pricing goes, are we seeing any irrational exuberance?

I would say, less than what we have seen in the past, but this is awfully big marketplace.

There's a $900 billion worldwide market.

You're going to get all sorts of new entrants and new players in it every day.

Frankly, we can't really tell when someone is being irrationally exuberance or not, because we don't understand how they're converting one way or the other.

The keywords go up and down based on various factors.

For example, the terror alert had an effect on keyword pricing this quarter.

So it goes up and down, but we actively manage it.

We are good at it, and we're not seeing anything strange going on, so to speak.

As far as the GDS agreements go, I don't want to comment on the specifics of the economics.

I think you all know that the GDS economics relating to their economics relating to the airlines took a hit, and some of those economics were passed onto us, which has affected our revenue per ticket.

That said, we think we're in a pretty good spot, in that we have new agreements with Sabre and Amadeus.

We are sending segments over those partners.

Actually, we're now in conversations with another GDS partner who is at least offering to us pretty attractive economics as well.

So we will see whether we get in business with yet another GDS provider or not.

Fundamentally, we believe in multi-GDS connectivity, and we will construct the flow over segments, depending on what's economically best for us.

So in general, we like the position there.

Lastly, I think you talked about integration of lastminute.

Honestly, we don't have a lot of visibility into how lastminute is doing or what lastminute is doing.

I heard Sabre's call, and it does seem that they are having some integration pains.

I can say that our international group is doing well, and we're confident and we are executing, but we know that there are a ton of challenges there as well.

So we are more focused on what we're doing, more than what's happening to third parties.

Michael Millman, Soleil Securities.

On international, I guess, a couple things.

One is, can you talk a bit about the international profit, now that you have significant spend there?

So, related to your Hotels.com -- and I didn't quite get the number.

I think you said Hotels.com represented about 60% of international hotels.

Just to correct that one real quickly is that we said that Hotels.com growth rates in Europe were 60% year over year, the gross bookings growth rate.

That was what the 60% referred to.

Did we say anything else, Mike or Stu, on that -- on Hotels.com?

(Multiple speakers) of the whole number.

That may partly answer.

What do you think is the prospects for getting it up to the 120% that Priceline is talking about?

In terms of just a bookkeeping item, where is TripAdvisor?

Is that in domestic, or is that split between the two segments?

Then the other question, just following on something that you just said regarding where you give a lot of business to a hotel, it sounded like you can make more and they can make more.

Does this suggest that your focus should be on narrowing relationships, so that you can maximize the potential for them and you?

Sure, let me take those on.

Mike, as far as TripAdvisor goes, correct me if I'm wrong -- TripAdvisor is in domestic now?

Yes.

So even though TripAdvisor does have international revenues, and we believe that those international revenues are going to increase, all of it is in domestic right now, just because of accounting system issues, et cetera.

We may break that out at some point.

So that suggests that the business, the gross bookings travel business growth domestically was even less than suggested?

TripAdvisor would not affect our domestic or international gross bookings rate, because it doesn't show up in gross bookings.

But I meant in terms of the revenue, since it --

Revenue, correct.

That would be true to the extent that TripAdvisor revenue internationally was growing faster than TripAdvisor revenue domestically.

I just think that overall, TripAdvisor is a pretty small mix of the whole.

So you're not going to see significantly different trending from what we're telling you about.

But to the extent we get better information, we will talk to you about it.

On international profitability, I don't want to make specific comments there.

I think that international is now broken out as a segment, so we do talk about profitability.

Right, Mike?

Yes, in the Q.

Here's what I'll tell you, is that international is nicely profitable.

The bulk of our profit come in the UK and for Hotels.com.

In the other markets, most of them are breakeven to slightly profitable, and we're really focused on improving growth there rather than getting immediate profitability.

But I would think that our European profitability is significantly higher than most of our competition's, probably other than Priceline's, because I know Priceline is very strong internationally as well.

Then I think you said, when do we get to the 120% on our international?

I ask that question of our team in Europe all the time.

So when we do, we will let you know.

We're growing off of a pretty big base, and actually if you look at the dollars, the dollar increase in international gross bookings last quarter, Priceline and we were pretty equal.

This quarter, actually, on international gross bookings, I think we're a bit above where Priceline was.

So, as far as the dollars that we're adding, we're actually adding more dollars relative to Priceline than last quarter.

It doesn't mean that we're doing our job as good as we can, but it does mean that our execution is getting better and we're pretty pleased with that.

Lastly, as far as doing business with individual hotels and how deep we go, frankly, that's a balance between optimizing your profitability and optimizing the traveler experience.

So our job is to make sure that travelers who come to our site get a broad base of hotel choices for them.

Depending on the city, that may mean 400 hotels to a smaller market, which may mean 20 hotels.

We want to optimize around that.

So every day, we're thinking about how deep or how broad we go.

Frankly, we don't want to fall to one side or the other.

Depending on the market, it may mean different things.

At this time, I will turn the conference back to Stu Haas.

Please go ahead.

Thank you for joining us on the call today and for your questions.

A replay will be available on the investor relations website shortly after the completion of this call.

We certainly appreciate your interest in Expedia, Inc., and look forward to speaking with you again next quarter.

Thank you very much.

Thank you.

Thank you.

Ladies and gentlemen, that will conclude the Expedia, Inc. third-quarter 2006 conference call.

We thank you again, and at this time you may disconnect.