Expedia Group Inc (EXPE) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by.

Welcome to the Expedia Inc. fourth quarter 2006 conference call.

During today's presentation, all parties will be on a listen-only mode.

Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS).

This conference call is being recorded today, Thursday, February 15, 2007.

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

Please go ahead, sir.

Good morning, and welcome to Expedia Inc.'s financial results conference call for the fourth quarter and year ended December 31, 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 question, reflects management views as a today, February 15, 2007 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 in 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 the Company's filings with the SEC, including our form 10-K for the year ended December 31, 2005, and our subsequent 10-Q filings 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 OIBDA, operating expenses excluding stock-based compensation, 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 full-year 2005.

Finally, unless otherwise stated, in this call all references to gross margin, selling and marketing expense, general administrative expense, and technology and content expense exclude stock-based compensation.

And all comparisons will be against our results for the comparable period of 2005.

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

Thank you, Stu.

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

As most of you know during 2006, we celebrated Expedia.com's tenth anniversary, and while we take pride in our progress, we are very much focused on the next decade for Expedia Inc.

As such, our senior management team recently developed a new mission statement for the Company, which is "Expedia gets the world going by building the world's largest and most intelligent travel marketplace."

This statement reflects our fundamental role in facilitating travel, whether for business or for pleasure, as well as our commitment to providing travelers with the very best resources to serve their travel needs.

In doing so, we leverage Expedia's critical assets, our global reach, our brand portfolio, our leading technology, and the breadth of our product offering.

And we take advantage of our growing base of knowledge about our destinations, suppliers, and travelers based on the unique position that we maintain in the value chain.

I don't want to say too much about tactics at this time, but we look forward to shedding more light on our implementation in the years to come.

Moving to results, 2006 was a year of progress at Expedia.

We generated over $17 billion in gross bookings and $525 million in free cash flow.

We launched four new Expedia branded Websites, three in Scandinavia and one in Japan, and we are excited about leveraging our existing technology and supply infrastructure to launch India in 2007.

Hotels.com more than tripled its worldwide annual growth rate to 20%, reaching 2.3 billion in bookings.

ECT grew annual bookings 45% to over $1 billion and posted its first full year of operating profitability.

Our partner services group made huge strides on the supply side of the house, signing or extending partnerships with Hyatt, Kempton, Louvre, [Dragavive], Accor in hotel;

Enterprise, Dollar, Thrifty, and Vanguard in car; and Continental, USAir, United, and Airtran on the air side.

We successfully diversified our GDS business to include Amadeus and Saber.

Lastly, the team continued to execute in early '07, with recently-signed agreements with Frontier Airlines, Hertz, and Shangri La Hotels and Resorts.

We demonstrated our ongoing dedication to long-term shareholder returns in '06 by efficiently managing dilution, keeping net equity awards to less than 1% of outstanding shares.

We completed our first debt offering, and put in place share repurchases for nearly 15% of our outstanding shares.

And we have an additional 20 million share repurchase authorization remaining.

That said, 2006 was not without its challenges and we are certainly not happy about delivering negative OIBA growth for the year.

But I think it is fair to say that after a rough start, we stemmed the tide through continued growth in our international and merchant hotel businesses, expense control, and stabilized revenue margins.

These developments enabled us to end the year on a more-positive note, with 10% operating income before amortization growth and a slight reacceleration in transaction, bookings, and revenue growth in Q4.

As a result, we delivered on our original expectation from a year ago of positive OIBA growth in the second half of a year, and we came in at the high end of the full-year OIBA range that we articulated beginning with our Q2 call.

Shrinking OIBA is simply not acceptable, but I am pleased by our ability to deliver results more in keeping with expectations on the last few earnings calls.

We still have room to go on this front, but the improvements we have made combined with the progress on stabilizing operating profitability strengthen our confidence that absent some dramatically adverse outcome in our remaining air discussions, we remain on a path for OIBA growth in 2007 and beyond.

Our first priority in 2007 is turning the ship around at Expedia.com.

As we anticipated, Q4 was not much improved from Q3 for Expedia.com, but we have made progress on several fronts aimed at reigniting momentum in 2007.

We have launched a new homepage design and while it is too early to gauge the impact of the redesign, the initial trials indicate that the simplified layout is more relevant and appealing, easier for users to navigate, and encourages broader exploration, versus just spearfishing.

I encouraged to take a look and let us know what you think.

Early results from our ThankYou rewards program are also very encouraging.

We are very happy with consumer adoption of the program, which, at more than 200,000 enrollments in three months, is ahead of our expectations.

While we don't anticipate ThankYou will have a significant impact on overall results in the near-term, we are closely analyzing member behavior to optimize the program.

We are also looking forward to launching a co-branded credit card later this year to provide travelers with even more ways to earn loyalty rewards with Expedia, as well as marketing efforts from Citi aimed at their existing 10 million ThankYou members.

On the traffic side of things, our private-label and co-branded businesses had some nice wins recently.

Expedia is now the exclusive travel booking engine for the NYTimes.com and for Sam's Club.

While we continue to see very significant year-on-year declines from MSN, we remain focused on trying to counteract that trend with new sources of traffic, much like these two partnerships.

As we get into Q2, we will begin to lap the downdraft of traffic from MSN.

I'm also very pleased to say that we are in the final stages of readying our 2007 branding campaign, which we will launch by the end of this month.

As always, travelers will be the final judges, but I like what our team has come up with to answer the question, why Expedia, when it comes to booking travel.

We will also do much better job this year of integrating our various marketing touch points for customers, from our Websites, to our e-mail campaigns, to our broad-based media campaigns on TV, print, and radio.

We believe these initiatives in concert was several others we expect to roll out during a year, have the potential to reignite the topline growth at Expedia.com in 2007.

While we continue to face challenges at Expedia.com, we are happy with the progress in other parts of our business.

Our international points of sales continue to execute well and grow at healthy rates.

We saw particular strength in Europe, including Germany, Italy, in Hotels.com in Europe, each of which posted over 50% gross bookings growth in Q4.

ECT had another solid quarter, with worldwide bookings growth of 30% for the quarter, and continued to build on its impressive growth with record new client additions in Q4.

We expect to see continued global expansion from ECT in 2007.

TripAdviser continues to aggressively enriched their content and functionality, recently enabling video uploads to travel reviews, as well as a save-it-and-go personalization feature, which allows users to file content into their personal My Trips folder for easy reference and access.

Just as important as these innovations on TripAdvisor sites, are our efforts to better leverage its content across our brand portfolio.

Visitors to our Expedia.ca site in Canada and our Expedia.com AU site Australia can now find TripAdvisor's attraction and destination content in a new destinations tab, where they can add and edit inside pages contents through our Wiki functionality, which is then published on both TripAdvisor and the Expedia sites.

This has been terrific test bed for us, and we look forward to leveraging this valuable content across others sites, including Expedia.com.

Lastly, an update on Hotwire. 2006 was especially difficult for Hotwire in light of merchant air challenges.

Despite this, management has strongly executed by diversifying its revenue base to hotel and car, pursuing partnerships to expand the top line, and also delivering a world-class experience to their travelers, as evidenced by the J.D.

Power number one ranking for highest customer satisfaction for independent travel websites.

Hotwire also launched its Travel Ticker service, including a biweekly e-mail to more than 10 million subscribers, which now features exclusive travel deals that are geo-targeted based on the recipient's location.

As a result of this perseverance and an easier comp against last year's Q4, when we first started to face air challenges, Hotwire generated its first quarter of positive revenue growth in five quarters.

Let me turn to supply and update everyone on where things stand.

While the air environment remains challenging, we saw glimmers of light in Q4.

Air revenues declined at a slower rate and we saw positive growth in air tickets sold for the first time in three quarters.

We remain in discussion with several airlines and while we look forward to bringing these discussions to close, our philosophy with regard to these discussions has not and will not change.

We are focused on optimizing the business for the long run and we're prepared to make sacrifices in the short term to that end.

Based on what we know today, we expect to see another step-down in revenue per ticket in 2007, similar to what we saw in '06, as we absorb a full year of revised GDS and the airline economics.

We expect the step-down to be weighted toward the first half of a year, as we will face easier comps in the second half.

And we remain cautiously optimistic that 2008 will bring more flattish comparisons as it relates to the non-booking fee portion of our agency air revenues.

On the hotel fronts, we have begun renewal discussions with our major hotel partners whose contracts expire in '07.

We continue to believe that our current economics with hoteliers appropriately reflect the value we deliver, but it is too early to predict the outcome of the renewals at this time.

We hope to provide more color as we put deals to bed in quarters to come.

Real briefly on the technology front, as it relates to platform redesign, we remain on track to begin migrating onto our new platform over the next few months.

And we have improved our migration strategy.

Rather than move entire points of sale at a time, we plan to take a more tactical approach and prioritize the migration of those pages across our points of sale that will most benefit from the enhanced technology.

Our enterprise data warehouse successfully launched in Q4, with an initial focus in the accounting and SOX testing areas.

We will shortly begin using the system to harness our customer data, to enable significant improvements in terms of personalization, site merchandising, and segmented marketing.

We expect to make progress on this front through 2007 and 2008.

In closing, Q4 was another solid quarter for Expedia Inc., in which our international business, as well as Hotels.com, TripAdvisor, ECT, and Hotwire, all executed well.

As we look forward, we will focus our efforts on building our brands globally, with a heightened emphasis on returning Expedia.com to positive growth.

We don't expect to achieve this result through quick fixes, but we certainly made progress and we look forward to continued momentum in 2007.

Mike?

Good morning, everyone.

I would like to provide you with a review of our results and close with our financial expectations for 2007.

Let me begin with gross bookings.

Worldwide gross bookings were up 9% for the quarter on 3% transaction growth.

Our domestic gross bookings growth of 1% continued to lag, mainly due to continued weakness at Expedia.com and deceleration at Hotels.com, as they anniversaried a high gross quarter.

We also experienced slower domestic growth at ECT due to soft client additions in early '06, on top of tighter travels spend by U.S. corporate clients toward the end of the year.

Our international businesses continued to accelerate in Q4, posting 34% growth in gross bookings, or 27%, excluding the impact of foreign exchange.

Europe was particularly strong in both leisure and corporate, representing over 70% of international bookings growth.

From a product standpoint, we were happy to see worldwide air ticket growth return to positive levels in the quarter, including a 5% increase in agency tickets sold, as we benefited from increased content and less-rapid growth in air fares.

Our merchant hotel business continues to be a significant driver of overall revenue growth.

More than offsetting the declines we have seen in air revenue.

While room night growth slowed in Q4, total merchant hotel growth accelerated to 15% on the strength of higher ADRs.

On the packages front, we saw some slight improvement in Q4, with revenue up 1%.

As we mentioned on our last call, we did make some pricing changes domestically that reduced the negative impact on profitability without degrading the top line.

Despite these efforts, we were not able to offset the industry-wide pressure on domestic package volumes, resulting from diminished availability of merchant air.

While packages were soft throughout '06, I think it is important to note that this dynamic has primarily been driven by the domestic market, as our international package bookings accelerated throughout the year, growing more than 40% in Q4.

While international is smaller than our domestic packages, it is growing rapidly and we are beginning to see it have an impact in offsetting some of the current decline in the domestic packaging business.

Worldwide revenue margin declined 16 basis points to 14.4% with domestic margin flat at 14% and international margin down approximately 100 basis points to 15.5%.

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

The good news is that we continue to see an increasing mix of higher-margin merchant hotel business, which partially offsets the impact of air margin declines.

Hotel raw margin declined approximately 30 basis points in Q4, consistent with our expectation of more-favorable comps in late '06, as we comped lower margin hotel deals struck in late '05.

While it is a bit premature to predict the outcome of our next round of hotel negotiations, we do expect that any raw margin degradation we may experience in 2007 will be less than the 100 basis points we experienced in full-year '06.

And that any impact felt would be greater in the second half of '07.

Turning back to the P&L, gross margin declined 31 basis points in Q4, despite an increased mix of merchant hotel revenue due to the in-sourcing of certain high-touch traveler care activities, as well as costs associated with implementing our GDS diversification effort.

Sales and marketing expense grew 8%, slightly ahead of revenue growth, primarily reflecting increased investments in our partner services group and the expansions of our ECT and destination service sales forces.

Our direct sales and marketing costs grew just 2%.

In 2007, we expect the absolute amount of selling and marketing expense to increase, driven in part by increased brand advertising for Expedia.com.

The extent of leverage or deleverage we see will depend on our ability to drive efficiencies across our various marketing programs, as well as the product and geographic mix of our business.

General and administrative expense increased 4%, primarily reflecting increased legal fees.

Technology and content expense was down 2% and remained fairly stable in absolute dollar terms throughout the year.

It is important to note the bulk of our '06 software development expenditures had not been placed into service by the end of Q4.

So we expect this expense to increase in earnest in Q1 and throughout '07, and we expect even greater deleverage from technology and content in '07 than we saw in full-year '06.

As a reminder, the operating expenses just discussed exclude stock-based compensation.

CapEx in the fourth quarter was $25 million, bringing full-year CapEx to 93.

In addition to our spend on re-platforming in our enterprise data warehouse, we invested it in a number of technologies to improve our ability to manage and analyze site activity, improve long-term conversion, and bolster our call center and network infrastructure.

On the bottom line, we delivered Q4 OIBA of $146 million, up 10%, reflecting 7% gross profit growth and leverage in G&A and technology and content.

Full-year '06 OIBA was down 5% on gross bookings growth of 10% and revenue growth of 6%, reflecting 59 basis points of lower revenue margin and higher operating expense.

Our business generated $525 million of free cash flow in '06, compared to 807 in '05.

The decrease was primarily due to higher cash taxes in CapEx less work capital benefit as we increase the efficiency of our supplier payment process, and lower OIBA and interest income.

As described in the release, we have reclassified the effect of exchange rate changes on our cash balances from cash from operations to effective exchange rate changes on cash and cash equivalents.

This has the effect of reducing cash flow from operations, but I want to emphasize that there is no impact on our actual cash balances due to the re-class.

I will close with our expectations for full-year 2007.

Absent something dramatically different from our current expectations on the air side, we expect to return to positive single-digit OIBA growth in 2007, with revenue margins declining year-on-year, albeit at a slower rate than what we experienced in 2006.

While we don't provide specific entry-year expectations, we do expect to see more-flattish growth in the first half of '07 than in the second half.

Q2 will be a particularly tough comp, due to our strong OIBA growth last year and higher relative marketing expenses in Q2 '07, as we are starting our brand spend later this year.

As a reminder, last year we turned our brand spend down in Q2.

We are optimistic that we won't have to take such action this year.

In addition, we delayed some marketing spend in Europe in Q2 in anticipation of the World Cup, which we won't have to do this year.

We should see faster growth in the second half of '07 as we anniversary the tougher air revenue environment from second half '06, gain more benefit from marketing investment as we move through the year, and see the anticipated growth improvements on the Expedia.com fronts.

I also want to make you aware to that our expectations for 2007 assume foreign exchange rates remain where they have been recently.

Last quarter, we mentioned that CapEx in 2007 will be higher than in 2006.

We currently expect CapEx to increase 5 to 15% in '07, reflecting continued investments in our infrastructure initiatives.

I also want to emphasize that while we will begin leveraging our new platform in enterprise data warehouse in '07, the financial expectations I just outlined assume no material financial impact from these initiatives.

Lastly, we expect a modest decline in free cash flow due to higher CapEx, some additional compression from working capital, and higher tax-related cash payments.

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

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

Thank you and good morning to everybody.

I think you all know that company's have cycles.

Thankfully, we have passed through the third cycle in Expedia's relatively short history.

The first was the takeoff and for Expedia, it was explosive, great growth of its businesses and, of course, in its valuations.

The second was the result of having built up the business very quickly, with this tremendous work output by everybody, which is impossible to sustain, of course.

Of course, then with thoughts of turning the results into equity gains by selling the business added to that.

Invariably, what this does is take the focus off the business itself at exactly the time that competition grows, and unfortunately for Expedia, this resulted in a lack of investment in both infrastructure and technology.

The third phase, which we have been experiencing over the last year and a half, has been, forthrightly, and often painfully, dealing with all of these issues.

These issues requiring investment, retooling, and a reinvigoration of the entire enterprise.

I believe that Dara, and Paul Brown, and Dermot Halpin in Europe and their teams have been making the difficult decisions that have been involved in this reinvention of Expedia.

And I think that they are now ready to ensure Expedia's fourth cycle, sustainable growth over a long period of time.

For me, it has been very frustrating to watch the level of investment behind the scenes that is going to position the Company for the future.

Investments that can't be seen on the outside yet, but throughout the course of '07, we do anticipate that these will be the engine thrust of really good performance.

For now, look to our newly-designed homepage, the enthusiastic response to our loyalty efforts, which we have just begun, and I think that these are a prelude to a lot of developments that are going to take place throughout the balance of this year.

Now, I think we go to questions.

So Stu, do you want to prompt that?

Absolutely.

Thanks, Berry.

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

As a reminder, please limit yourself 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) Robert Peck, Bear Stearns.

Congratulations, strong quarter.

I just wanted to dig to a couple of the details here.

First of all, could you comment a little bit on Hotels.com.

It seems that its growth decelerated to about 12% from sort of the 20 level.

Could you talk about what is going on there and then sort of bigger picture, how can you accelerate domestic growth?

Can you may be provide just a little more color on what is causing some of the pressure?

Then I have just a follow-up.

Just on Hotels.com, as far as the growth goes, really the growth that we saw this year, and it was great growth domestically, had two significant factors associated with it.

One was the marketing campaign, the expert marketing campaign, and the improved homepage design.

And the second was plugging in of Hotels.com into the common supply infrastructure that we built, into the PSG group that we have built.

The plugging in into the new supply got Hotels.com much better inventory, better quality inventory, some hotel chains that in the past, had not done business with Hotels.com.

If you look at the growth rate and a year-on-year growth rates, once you lap that benefit, once you lap the plugging in into the new supply, once you lap, call it, an entirely new Website, growth becomes a little more difficult to combine.

We did expect this -- if you look at last year, really the reacceleration of Hotels.com started happening in Q4 of last year.

We are lapping those comps right now, so growth going forward is going to be a little harder to come by, but we think that the team over there is very much focused on it.

We think what is important is that over the long-term, they can build a brand that drives, a brand that keeps growing, a brand that is top of mind amongst consumers if they are just looking for a hotel.

And we think that they are certainly up for that.

Just really quickly as a follow-up, during the quarter there was some news flow about American and Delta and supply.

Could you just comment a little bit on what exactly was going on there and your access to inventory?

I don't want to comment too much on, call it, individual relationships with suppliers.

Those issues have more to do with connectivity and, specifically, our connectivity to those suppliers through Worldspan than specific issues having to do with those suppliers.

That said, we are in discussions with those suppliers, with both American and Delta, about a hopefully long-term arrangement with them.

And hopefully we can come to a solution that everyone is happy with.

Thank you.

Doug Anmuth, Lehman Brothers.

Thank you.

Michael, you mentioned a couple of things that are going to weigh on free cash flow a little bit in 2007, in terms of CapEx and changes in working capital and the taxes.

Could you just provide some more detail on those, and I am specifically focused on the changes in working capital with suppliers and how we should think about that not just in '07, but a little bit further, going out a few years and sort of beyond that.

Is it generally fair to think that free cash should trend with OIBA or would we expect to have further pressures there on working capital?

Thank you.

I think over the long run, we would absolutely expect our freight cash flow to trend with OIBA and the earnings of the business.

What we experienced in '06 was a compression in the amount of time that we take to pay our suppliers.

We have made significant investments in '06 in improving our infrastructure and taking cost out on the payment transactions side.

That is allowing us really to pay our suppliers at the terms which we have agreed to.

We are certainly not paying anyone faster than we have to, but we have ended up with lower cost and, really, better supplier relationships by the investments that we have made.

On the cash taxes side, we were a partial taxpayer in '06 and we will expect to be a full-cash taxpayer in '07, absent the discrete items which always, always occur.

And so with that expectation, we do expect to see some pressure next year.

We also have a payment that we will be making to Microsoft next year under an historical tax sharing agreement of approximately $30 million.

And that will certainly weigh on free cash flow next year, but will not have any impact on go-forward rates.

With respect to CapEx, we expect in '07 to see a much smaller increase than what we experienced in '06.

We are investing in our infrastructure.

At the same time, we are working as hard as we can to make sure that we don't spend one dollar that we don't need to spend, and over time, that CapEx growth rate will return to be much more consistent with earnings.

And just to clarify, Doug, -- this is Stu -- that 30 million will be in 2007.

And how does that 30 million -- is that showing upon the income statement?

That will not show up on the income statement, but it will be a cash outflow on the cash flow and it will occur at the end of '07.

Okay, thank you.

Doug, just on the working capital side -- it is Tara -- I just want to stress that the working capital cycle, to some extent, has compressed.

It is because of our activity and very specific work that we have done in really upgrading the payables operations of the Company.

It work that has taken place over the past two years.

It is great work done by the executive team here, and it is part of our overall efforts at the partner services group to just work much more closely with our suppliers and make sure that we take great care of them.

Great, thank you.

Paul Keung, CIBC World Markets.

Good morning.

Thanks for taking my question.

I have a couple clarification questions on two things that I think Dara and Mike mentioned in your prepared remarks.

You mentioned that on the booking fee, you are confident in achieving flattish comparisons in '08 on the non-bookings fee portion.

So you noticed you left out the booking fee portion.

I was curious how you feel about that long-term?

The other comment was on the lower margin.

You mentioned any degradation will likely be second half, not the first half and does that suggest that there is still hotel contracts out there that are of-market as you enter second half of '07?

I think on the fee, Paul, we don't anticipate the fee changing significantly over the short term or the long term.

That said, we are experimenting with it.

And one of the real benefits for us as a Company is that we are on different platforms, but Expedia, especially, is on one global platform and we can experiment with these kinds of aspects of our business and really test consumer sensitivity to pricing, to fees, etc.

And to the extent that we're going to test that, we're not going to do it in the U.S. where the consequences of testing are much more public and also we're talking with bigger dollars.

We test in smaller countries, and typically we're doing a lot of our testing in Europe right now.

So we have been doing some experimenting in Europe on booking fees.

The results have been very interesting, and in some cases, our tests with booking fees have resulted in pretty good volumes in Europe and certain countries.

So we are not sure where we're going to go long-term as a Company, but it is just a real advantage for us to be able to work this way and experiment across the Company and, ultimately, share best practices.

Something else, for example, that I didn't mention on the new home page design at Expedia.com is that the three-column layout that you see on Expedia.com was actually a layout that was originally introduced in the UK.

We introduced that layout, it was very new, other travel Website's just don't look like that, and it worked well in the UK.

We are rolling across Europe, and Expedia.com guys in the U.S. decided to use that layout.

And early indications are positive.

So it is a great strength of the Company to be able to experiment there.

Mike, do you want to talk on raw margins?

On raw margin, as Dara indicated, we are in the process of renegotiating a number of hotel contracts that will potentially impact '07 results.

But we think that the value proposition that we are offering and delivering to our hotel partners is sort of set at the right economics at this time.

However, we can't predict the outcome, the outcome of the negotiations.

So the point is if there is any impact on raw margin, we would expect to see it later in the year, versus the first half.

That said, we feel pretty good about where our negotiations -- how they are going with our hotel partners.

Great, I will get back into queue.

Thanks.

Helpful.

Anthony Noto, Goldman Sachs.

Dara, I was wondering if you could give us a sense, or Mike, what the net revenue rate would have been relative to a year ago without any change in advertising revenue?

And then I'm not sure if you will share this with us, but what percentage of our hotel contracts have been renewed in the last 12 months to give us a sense for how much more there is to go there?

I think you mentioned that Hotwire's air revenue increased by 1%.

I didn't know if you had a perspective on the hotel business there.

Thanks.

Anthony, on the raw margins for the media side, it is helping us.

I think that it's -- my guess is it is around 20 basis points delta, maybe a little bit less than that as far as the effect of that business.

And it is pretty simple, which is the advertising business in general is growing faster than the transactional business.

It is close to 100%, call it revenue margin if you want to define it as that.

So that business growing faster helps their overall revenue margins.

That said, there are a lot of puts and takes here, Anthony.

For example, the faster our corporate business grows because that tends to have a lower raw margin than the rest of our business, it has a smaller merchant hotel portion.

The faster our corporate business grows, the lower our raw margins go.

So there are a lot of puts and takes.

The media business definitely helps.

I think -- what was the second question?

Hotel contracts that have been renewed in the last 12 months, what percentage?

We have a number -- I'm not going to give you a percentage, but I will give you an idea which is we do have a number of our larger hotel contracts coming up this year, the big chains contracts.

And you have seen some of the results, we saw Shangri La, etc.

Hopefully, we will come out with some pretty good news in the near-term on more contracts.

So we feel pretty good about it.

That said, our relationships with independents on an annual basis, we are renewing these contracts with our independents as well.

So renewals are going on every day at this company.

Okay?

Okay, great.

Thank you.

Chris Gutek, Morgan Stanley.

Thanks, good morning.

A couple questions.

First, given the changes in ownership among some of the competitors, specifically more private equity ownership, that would seem to imply the potential for further consolidation in the online travel business.

And I am curious, especially in the context of your comments on the last call where you suggested you didn't have any interest in owning a GDS, if you wouldn't mind sharing your updated thoughts for the potential for further consolidation and Expedia's potential to participate in that?

Sure.

The movement that we have seen, at least in the travel distribution front, really don't have much to do with consolidation.

They have to do more with recapitalization.

We view it as a positive in that there is some very smart money that is coming in and making long-term investments in the travel distribution sector.

So we think that is certainly an encouraging sign.

And with our buybacks and taking in 15% of our own equity, you can see that we share in that belief, which is long-term the travel distribution sector is going to grow.

We hope that it is going to thrive, and we bring a ton of value to the equation.

So from that standpoint, it is interesting and encouraging.

I think what remains to be seen is whether this private equity, what effect the private equity activity is going to have on the actual operations of the businesses that have gone private.

On the one hand, it can be a distraction for management not knowing whether you are public or private or who your owners are going to be.

So that could be a positive relative to us.

On the other hand, you have management much more focused on running the business rather than the fun that we are having on these quarterly calls.

So that could be a relative negative.

All of that said, I think we are counting on hefty competition going forward, and we are very much focused on growing our business and continuing to expand globally.

To follow up on the first question you guys had, if you look at the domestic gross booking growth trend, it has decelerated for six straight quarters.

I would presume if you strip out the corporate travel business that the core domestic leisure business is actually shrinking a little bit.

And I know that you don't want to give specific guidance, but when you look at the next couple of quarters is there reason to believe or be optimistic that that will actually be positive growth in the next couple of quarters in the core domestic leisure business for gross bookings growth?

If we do our job, there is reason to be optimistic.

I don't mean to be flip on that.

I think we demonstrated with Hotels.com that we could turn around a good brand and make it a great brand.

With Expedia.com, I think that we are essentially working the same playbook.

It is about improving the user experience and customer service first of all, getting better supply, which I think we are working on, Airtran is back in our marketplace, which is great.

We just signed a deal with Frontier, as well.

We have always talked about loyalty as being a potentially interesting factor in these.

We launched the ThankYou program, which is we think better than your average loyalty program.

And then improvements in marketing and technology we think are going to yield results.

We internally have reason to be optimistic, but we know that we have a lot to prove to you guys.

Thanks, Dara.

Michael Millman, Soleil.

I guess a couple of things, as well.

In line with your discussions about the improving of the site, can you talk about what your trip planning, trip experience initiatives have shown?

Also on your Hotels.com, you said 50% European growth.

Could you talk about whether that is directly comparable to the kind of things that Priceline is doing, or is it still with tier one.

Then I have just a quick housekeeping question.

At the end of your question on Hotels.com, you said is it comparable and then you said something I didn't get.

Priceline has been showing these 100% growth rates, a lot of that having to do, as you well know, second-tier hotels.

So I was wondering if your Hotels.com growth is in first tier, second tier?

I see.

Let me take your first question on the trip planning, trip experience.

I think it is too soon to tell for us.

If you look at the new sites, it does create the impetus for our travelers to experiment, to explore a bit more, which is something that we are encouraging, one, because it is a good experience for the travelers.

It encourages them to come to Expedia much earlier in the planning process, rather than, call it, when they have decided where they are going to go and buy.

And in general, our investment in content, our investment in TripAdvisor, and we think our continued investment in the content and media space are going to be designed that moving upwards in the traveler consideration, so to speak.

We are optimistic about it, but I think it is too early for me to give you specific results.

On Hotels.com, the business is obviously growing in the E.U. nicely, but we are still behind the kind of growth rates that Priceline has put up there.

And we don't know exactly what the distribution of their growth is, as far as in, call it, primary and secondary cities.

We do believe that we have a greater concentration in larger tourist destinations in the continent, the type of destinations were you have got international travelers going as a percentage of our business overall.

We think that these secondary cities are a real opportunity.

We obviously haven't solved that opportunity and we haven't, called it, penetrated those secondary cities the way that Priceline has.

And we have a management team in Europe who is more than competent, who is very much focused on what Priceline is doing, and is focused on catching up to those guys.

And then the quick question.

You show $46 million revenue non-transaction.

Should we assume that that is advertising and/or TripAdvisor, or is it something else?

Can you repeat the dollar amount?

Just not sure where you came up with that.

I subtracted your transaction revenue, the domestic and international revenue, from your total 531 million revenue.

Those should add.

Domestic revenue was 368 for the quarter and international is 164.

Is there something maybe at the core of your questioning around advertising that we could perhaps address?

I guess I was looking for how much is advertising, and what the revenues for advertising are, and what the revenues for TripAdvisor were?

Not something that we are going to get into a tremendous amount of detail on.

I would just reiterate what Dara said earlier around the year-on-year change in revenue margin would have been a little less than 20 basis points more had we not have the benefit of that advertising.

Can we have the next question please, operator?

Scott Devitt, Stifel Nicolaus.

Thank you.

As I look at Priceline, Travelport, and Travelocity over the past 18 months, it seems like Expedia has been losing share to competitors over that time horizon.

I was wondering if you could talk about your longer-term ambitions and strategy in terms of market share versus cash flow maximization in, specifically, 2007 and 2008?

Thanks.

I think you have to balance both share and cash flow maximization.

I would say in the final say, we are focused on cash flow maximization, however, we are keenly aware that share has a ton to do with the long-term prospects of the Company.

So it is a trade-off that you do look at and we are certainly not happy about losing share to our competition.

That said, the majority of our share loss has been domestic.

I would say international, we certainly have Priceline that is growing very, very quickly, but compared to, basically, all of the other competition out there in the international marketplaces, we are growing very well.

We are executing very well.

We are starting to make significant investments in the Asia-Pacific region, which aren't going to return big share dollars early on, but we think are the right long-term investments to make.

If you do look at the domestic business and what is going on there, I do want to point out that part of the domestic results were as a result of capital allocation decisions that we have made.

We determined around a year and a half ago that we needed to make some very fundamental platform investments in the Expedia platform in order to position us to grow for the long-term.

To some extent, we took capital that we might have been spending on marketing and we shifted that capital to spend in technology, in infrastructure.

That is the reason why you see the CapEx numbers for the Company going up pretty significantly.

To the extent that we were investing incremental dollars in marketing, we took most of those dollars offshore.

We took most of those dollars to the international markets.

We took some of those dollars into the Asia-Pacific regions.

We invested some of those dollars in the corporate business that we are very hopeful of.

So we could have, if we wanted to, operate Expedia.com domestically in a way that you would be higher gross bookings growth, less share losses, but we thought from a capital perspective, the decisions that we make our sound decisions.

What you will see in 2007 and 2008 is a shift of incremental capital back into the Expedia.com brand.

You're going to see that in Q2 especially, compared to what we saw last year, which is why Mike was saying that Q2 was going to be incrementally more difficult from a bottom-line standpoint.

These are capital decisions that we are making.

We are not satisfied with our share results, but they are the results of capital allocation decisions that we are making.

Separately, could you give us the cash tax rate of the business in 2006 and then what you expect it to be in 2007?

The cash tax rate in '06 was in the mid-to-high 20s and we expect it to approach our A&I tax rate of 36, 37 on a go-forward basis.

Thanks.

Mark Mahaney, Citigroup.

Two questions.

The transactions growth rate did modestly reaccelerate in the December quarter, but I think it is probably below where you would like it to be.

Would you want to give us a range of where you think you would like to see sustainable transactions growth going forward?

Secondly, could you just give us a quick update on your option in China with eLong and any thoughts on what you want to do with that over the next 12, 24 months?

Thank you.

I don't think we are going to comment on long-term sustainable transaction growth, other than saying we are hopeful that it gets better from here.

As far as the option, the eLong option in China, we do have an option to -- or we have an opportunity to buy-in the balance of eLong.

I don't think it is something that we are going to do in the short term.

We think that eLong is very much a local business in China and we want to make sure that we have got local management who is very much incented on how they build that business and what they do from a day-to-day standpoint.

And we think it is a good thing and so we expect to remain where we are for the near-term.

Thank you.

Aaron Kessler, Piper Jaffray.

A couple of questions.

First, can you give a sense for where your raw margins are internationally and if you think those are sustainable or those are going to have to come down over time, similar to the U.S. market?

Also I know on the Priceline call, the indicated that merchant load factors are becoming more favorable in the airlines for them.

I'm not sure that was more just the name-your-own price model or if you are seeing that as well, in terms of load factors becoming more favorable to your model?

I will answer the second question first, as far as merchant load factors.

We are seeing similar signs at Hotwire that I think Priceline referenced.

Obviously, we don't have a good view into their business, but we did talk about how Q4 revenues at Hotwire improved.

And we are certainly seeing early trends in '07 at Hotwire that are encouraging.

I think you are getting to a point right now where airlines are continuing to try to push up price, there does seem to be some resistance from consumers out there.

And it remains to be seen how that plays out, but in that kind of an environment, the opaque channel does become an incrementally more interesting channel.

And we have seen a bit of that.

So we will see how it goes.

We are encouraged by the early results.

Mike, do you want to talk on international margins?

Yes.

Over the long run, we think that international margins at a higher level than domestic is sustainable and it is due, in large part, to the increased level of fragmentation of the supply base internationally.

At the same time, we will continue to experience pressure on air revenue, particularly margins, and again, that will be, we think, counteracted by the fragmentation of the supply.

Some of your competitors are offering, I think, closer to a mid-teens raw margin internationally.

Is that going be a competitive pressure or with your scale, are you able to get a higher margin than that?

I think, Aaron, it is a question of scale and also scope.

So scale certainly has something to do with it, as far as the amount of business that we can bring to our partners and the consistency of the demand that we can bring to bare.

The other is the scope, in that we are a truly global marketplace.

As in any marketplace, the further a field the transaction, the more valuable that transaction is.

So a consumer traveling from -- in the U.S. from New York to Boston, to the extent to think of a marketplace, that connection is going to be worth less than a consumer flying to Mumbai in India.

Our ability to connect consumers not only locally, but globally, makes us a bit of a different animal and kind of enables us to offer a unique value proposition, versus, certainly, travel companies that have been around in the past and most travel companies that you see now.

The global systems that we have are truly integrated.

We have one partner supply group who is having discussions with supply our partners on behalf of the Company on a global basis.

It is a differentiator.

Thank you.

Imran Khan, JPMorgan.

Thank you for taking my questions.

Two questions.

First, primarily, international growth rate accelerated.

I was trying to get a better sense.

I was wondering if you're seeing the growth acceleration across every country or if any specific country is doing better than others?

Secondly, if we exclude the Microsoft traffic, MSN traffic lost year-over-year, just look at a same-store basis, can you give us some sense how is the traffic doing for Expedia and what are the conversion trends for Expedia traffic?

On international, the results that we saw, the positive results were pretty broad.

So I would say, almost across Europe, we had good performance.

I would single out Germany and Italy and the Hotels.com brand across Europe as being particularly strong.

The corporate business did quite nicely, as well.

The strength was fairly broad.

You should also note that FX helps, so FX rate in Q4 looked pretty good and, obviously, that certainly helps.

On the MSN side, I don't want to specifically comment on the size of MSN as a percentage of the whole.

That said, it was material.

And if you look at the issues that we are having as far as gross bookings go right now, it has more to do on the Expedia side with traffic, rather than conversion.

So conversion rates are pretty stable.

We are not having conversion problems and with the ThankYou program and some of the other programs that we have them place, we are actually hoping that we can move conversion up.

It is really more about investment in marketing spend to get travelers, new consumers, to our site and that is what we are very much focus on for the balance of '07.

Okay, thank you.

Scott Kessler, Standard & Poor's.

Thanks a lot.

A lot of my questions have been asked and answered, but I did have two related to Europe.

First of all, is there any way that you could detail what percentage of your either other overall revenues or international revenues were derived from Europe?

Also relative to that geography, could you talk about what the major drivers of your potential share gains will be, say, in 2007, for example?

Thanks.

I think that, correct me if I am wrong, but the vast majority of our international revenues were from Europe. eLong is of any of our A-pack businesses.

So I am getting a number, 75% of our international revenues roughly being from Europe.

Asia-Pacific revenues are obviously pretty small to start with, eLong had some scale there.

Australia, Japan, etc. have a fairly long way to go.

As far as the drivers for Europe, it is just continued execution across the European territories.

One thing that we are doing differently in Europe this year than we did last year is we are going to start investing incrementally more brand money in some of the secondary territories.

This year, really for the first time, we are going to spending some branding money on the Hotels.com brand.

We have started on a that and it is too early to tell, but the results seem to be promising.

We are going to be putting some more branding money against Expedia in France and Expedia in Germany, and to some extent, in Italy, as well.

That may be part of, again, the bottom-line pressure that you will see in Q2, but we think that with the mix, I will call it, tactical and more strategic branding monies, we should be -- we are investing in the Expedia and hotels brand in the E.U., and we hope to see the returns of that investment in quarters and years to come.

Very helpful.

Thanks, Dara.

I think that is it for questions.

One clarification, Dara, sorry, from someone who had e-mailed a question on where that 30 million tax payment to Microsoft would appear in the cash-flow statement.

It would be in cash flow from operating activities.

I just wanted to clarify that.

Thank you everyone for joining our call.

I did want to say a special thank you to the employees of Expedia this year.

I think that this year, we made real progress during the year.

I have been here for -- I have been at my job for two and a half years and I have never seen our employee population working as hard as they are now.

And the passion that they are putting into the business and the hope and the optimism that I see really gets me excited to come to work everyday.

So special thank you to everyone who is working as hard as they are right now.

With that, thank you.

Ladies and gentlemen, that will conclude today's teleconference.

We thank you for your participation and at this time, you may disconnect.