Expedia Group Inc (EXPE) 2007 Q2 法說會逐字稿

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

Welcome to the Expedia second quarter 2007 conference call.

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

Following the presentation the conference will be opened for questions.

(OPERATOR INSTRUCTIONS).

This conference is being recorded Thursday, August 2, 2007.

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

Please go ahead, sir.

Good morning and welcome to Expedia Inc.'s financial results conference call for the second quarter ended June 30, 2007.

I am pleased to be joined on the call today by Barry Diller, Expedia's Chairman and Senior Executive; Dara Khosrowshahi, our CEO and President; and Michael Adler, our CFO.

The following discussion, including responses to your questions, reflects management views as of today, August 2, 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 investment 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 the Company's filings with the SEC, including our form 10-K for the year ended December 31, 2006, 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, 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 www.ExpediaInc.com/IR, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with the most comparable GAAP measures.

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

And all comparisons in this call will be against our results for the comparable period of 2006.

And with that, let me turn the call over to Barry.

Thanks, Stu, and good morning, everyone.

We're going to switch the order up a bit today because I wanted to provide some color on the recent reductions in the size of the tender offer.

While we certainly would have preferred to bring in more stock, we just weren't willing to do so at financing terms that we found unacceptable.

Specifically, the deterioration in the bank loan credit market since we announced the tender resulted in rate spread in restrictive covenants which we felt didn't reflect Expedia's liquidity, the cash flow generation, and its growth prospects.

What hasn't changed since we announced the tender is the Company's desire to aggressively pursue to every means to create value for our shareholders, obviously including share repurchases.

You all do know, I think, that since May '06 we've repurchased about 50 million shares.

If the maximum of the 25 million shares and the tender offer come through, we will have retired 75 million shares in a little over a year, about 20% of our share count.

And we're going to be net buyers of our shares over the long-term.

And I want to also remind everyone that in addition to the tender, we've got 20 million share purchase authorization that remains outstanding.

We continue to believe that additional leverage makes sense for Expedia and absent some extraneous reason, if the credit markets do become more hospitable, you should expect us to raise additional debt, including debt to repurchase shares.

Our financial policy, as we have clearly demonstrated, is that we are willing to add leverage which would take us well above our long-term goal of net debt to EBITDA of two or three times.

Of course we're going to what to reduce leverage consistent with our long-term goal as quickly as we could.

In addition, we generally expect Expedia to maintain liquidity of $1 billion.

Unfortunately, at least from the way I look at it, this eventfulness of the past couple of weeks has overshadowed the progress that has been unfolding at Expedia, progress which Dara and his team have been increasingly expertise been driving for over two years now.

Dara and Mike are going to cover this year's -- not this year's, sorry, this quarter's particulars.

And are not going to preempt that.

But just as we said 2006 was going to be a rough year, and it was, we told you 2007 was going to be better, more stable year, and it has been that.

The challenge for the future, which everyone at the Company embraces, is to build a company with sustainable growth prospects in this hypercompetitive, increasingly global environment and to extend our leadership into every area of travel that makes sense.

I really don't think it is hyperbole to say that no company is better positioned in travel that Expedia, whether you're talking brand, global reach, product breadth, management talent, supply relationships, technology investments, bookings worth, or margins.

Expedia is simply the clear leader in online travel, and we're going to push our advantage everywhere.

So with that, Dara, do your stuff.

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

As you can see from our results released earlier this morning, this was another solid quarter for Expedia.

We reported transactions and bookings growth of 14%, our highest rates of gross since the fourth quarter of 2005.

Revenue growth was also strong at 15%, as revenue margins extended expanded modestly for a second straight quarter.

And our primary operating metric, operating income before amortization, grew 2% to a record $187 million.

I am also pleased to report that the Company's geographic diversification continues, with international bookings reaching 29% of total bookings, up from 24% last year too.

And in Europe, segment bookings growth accelerated to 38%, and we achieved our second straight quarter of one billion plus bookings.

Our goal as a management team is to optimize cash flow over the long-term while efficiently managing dilution.

And to that end on a trailing 12-month basis, which controls for the seasonality in our merchant hotel business, Expedia's free cash flow was $734 million and our diluted share count for Q2 was down 11% year-over-year, reflecting our share repurchases and measure granting of equity awards.

Our Partner Services Group was a real highlight in Q2, continuing to gain momentum in building the world most compelling assortment of travel products and services.

On the air side of the house, we are in a much more stable situation today than we were a year ago.

Since then, we've reached multiyear agreements with nine of the top 10 domestic carriers, including all the majors.

We have increased selection for our travelers with addition of full content from JetBlue, AirTran, Frontier, and ExpressJet.

And we now have the ability to flow segments through three GDS providers under long-term contracts.

In addition to securing long-term and diversified content for our travelers, we now expect our worldwide air revenue per ticket will be steady as we move towards the back half of this year, with flattish year-over-year comparables beginning Q1 '08 on the non-booking fee portion of our compensation.

This is great, great work from PSG.

In lodging, PSG has been busy expanding our selection of merchant hotel properties, which now number over 34,000, including over 12,000 in Europe, which grew nearly 20% from Q2 '06.

Combined with our GDS agency hotels, we now offer travelers over 75,000 total properties to choose from.

I am also pleased to report that Wyndham, one of our large chain deals up for renewal this year, has now been signed through 2010.

The good news on the hotel front is that based on everything we know thus far, we believe economics will remain largely similar to what we achieved in the last round of major negotiations in the second half of 2005.

As our year-to-date results demonstrate, hotel margins have largely stabilize here in 2007 in keeping with our expectations.

The first half of this year, hotel [raw] margins were up modestly due partly to an easy Q1 comp.

Similarly, we expect modest year-on-year changes through this year -- through this year on into 2008 based on our hotel discussions to date.

Stabilization of supply economics is beneficial on many fronts.

Perhaps the most important front is evolving the supplier dialogue from how do we divide the pie on each transaction to how we can work better together towards generating incremental volume for both parties.

To that end, our summer sale promotion was a great success and our acceleration in room night growth to 10% is an indication that we are making real progress in that evolution.

I have said on the past couple of calls that our top priority in 2007 is turning the tide at Expedia.com and I am very pleased to say that the early signs of renewal we saw in March and into early Q2 continued throughout the quarter.

We finished Q2 with a solid positive year-on-year growth in transactions at Expedia.com, which strengthened both of the hotel and air business at our flagship.

We think airfares decreasing year-on-year for the first time since Q4 '04 certainly helped our cause.

More importantly, through, we saw stronger other execution across a wide front from our new leadership team; emphasizing more data-driven, streamlined decision making; increased heft in our marketing campaigns with stronger creative and improved coordination between supply and retail; an expanded air carrier roster per my earlier comments; better site performance; and growth in our telesales business.

While I'm pleased with the progress to date at Expedia.com, our team is clear that we still have real opportunity to improve the website and our travelers' experience wherever and whenever they choose to interact with us.

We realize that some of our success in '07 could be attributed to easier comps versus 2006 and that the really important timeframe is 2008 and beyond.

In our minds, building a sustainable growth trajectory while reducing our reliance on recurring ads spent to draw out top line is the key challenge for Expedia.com and our company in general.

I want to touch real briefly on the other pieces of our brand portfolio, starting with our international points-of-sale, which had another strong quarter.

European bookings were up 38% and Germany, Italy, the Netherlands, and Hotels.com Europe again posted growth in excess of 50%.

Foreign exchange was a tailwind yet again this quarter, but even on an FX-adjusted basis, we saw an acceleration in growth from 22% in Q1 to 30% in Q2.

As with Expedia.com, aggressive marketing spent played a significant role in our European growth this quarter.

While some of the increased spent reflects a tough comp in Q2 '06 due to the World Cup, more was due to strong proactive growth and spend in light of the attractive opportunity we see in the European marketplace.

And while we did the reduced efficiencies in some countries is quarter, we are not only to be taking our fund off the gas in Europe and you should expect to see us continue with heavy marketing spend while simultaneously working to improve the value proposition we deliver to travelers all across Europe.

TripAdvisor continues growing the world's leading online travel community.

During Q2, Trip launched functionality to enable its five million plus members to build a more personalized travel network allowing travelers to discover not just what million of travelers worldwide think about hotels, restaurants, and destinations, but also want their friends have to say.

I am also happy to say that the new acquisitions in this area, especially SmarterTravel, are exceeding our performance expectations.

ECT grew bookings over 20%, added more than $100 million in new business for a third straight quarter, and launched its newest geography in Italy.

Classic Vacations further cemented its position as a leading luxury wholesaler for travel agents by reestablishing a preferred supplier relationship with Virtuoso, the leading luxury travel network.

Hotels.com had a nice reacceleration in bookings growth in Q2 to 12%, with our U.S.

point-of-sale seeing benefit from our gas rebate promotion and our guest booking functionality, which allows travelers to purchase from hotels without the hassle of creating an account.

We were also more aggressive in our online marketing, which drove some of our top line growth, and we expect to continue doing so going forward in the second half.

Hotwire.com continued to excel in almost every part of their business, with revenue growth exceeding 50% and Hotwire's contribution to our overall profitability more than doubled year-on-year despite increased marketing costs from our Orbitz relationship and increased brand spend this quarter.

I do want to point out that both Hotels.com and Hotwire.com recently took action to reduce barriers to booking for our travelers.

In the case of Hotels.com we removed, changed, and canceled fees charged on top of any supplier change fees.

And in Hotwire's case, we eliminated booking fees on air travel, both opaque and retail, on a promotional basis.

We've been pleased with travelers' response to these actions thus far and more broadly, we believe that these tactics are consistent with our Thank You loyalty program, our off-line telesales business, and our fee actions that we told you about in Europe.

We're going to continue working hard to remove purchase barriers where it makes sense for both travelers and long-term shareholder value.

Last quarter we began talking in more detail about our media business and I wanted to give a brief update on that front.

In Q2, our global advertising and media revenue grew 97% to $44 million and on an organic basis, growth was, again, over 50%.

Since the Q1 results, many investors have inquired as to the size of the opportunity for Expedia in media.

According to Advertising Age, in 2006 airlines, hotels, and car rental companies spent over $5 billion on all media, with less than 10% of that occurring on the Internet.

With overall online advertising forecasted to grow approximately 20 to 25% over the next few years, that makes for a significant opportunity for companies like TripAdvisor and SmarterTravel that are well positioned to capture the increased penetration of online travel advertising dollars.

We are also strong believers that our transaction sites, such as Expedia.com, are well positioned to capture not just travel advertising dollars, but also non-travel advertising dollars, given our strong income and education demographic, our differentiated content, and our longer-term ability to target media spend based on travelers' shopping and purchase history.

We have several exciting initiatives on the horizon in 2007 and beyond for our global media businesses and we look forward to updating you on our operational and financial progress in quarters to come.

In closing, Q2 was a great step in the right direction for Expedia Inc.

We are encouraged by growth across our portfolio and in nearly all our brands and nearly all geographies.

The early signs of growth that we saw late in Q1 at Expedia.com have continued into Q2 and our international and media businesses are becoming more meaningful parts of our story with each passing quarter.

With the supply picture meaningfully stabilized, Expedia and our investors now have a much better visibility into revenue margin dynamics going forward.

We are seeing leverage of the gross margin level thanks to our Apollo savings program.

Finally, our historical and prospective share repurchase activity enable long-term equity holders to enjoy a larger piece of this growing pie at a lower cost of capital.

Mike?

Great.

Thanks, Dara.

Good morning, everyone.

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

Worldwide gross bookings were up 14% during the quarter, fueled by 38% within Europe and 8% in North America.

This reacceleration in North America growth builds on the strength Dara mentioned at Expedia.com, but also reflects broad success across the brand portfolio, specifically at Hotels.com and Hotwire, where despite the continued pressure on merchant air, we grew bookings 27%.

And Hotwire's transactions exceeded one million for the first time in its history.

We still have a lot of work ahead in North America, but we are encouraged by the improved growth profiled at our major brands in Q2.

While bookings growth have historically exceeded transaction growth due to rising travel prices, this quarter the two metrics moved more in tandem, as we saw airfares actually declined year-on-year while hotel ADR growth moderated.

Should airfares remain under pressure, we could see this divergence continue in the second half.

Revenue increased 15%, led by 14% growth in our merchant hotel revenue, 97% growth in advertising and media revenue, and nearly 70% growth in stand-alone car rental.

This progress more than offset a 7% declined in air revenue.

We are obviously not happy with declining air revenue, but we are pleased that the rate of decline has decelerated markedly based on stronger ticket volumes.

Hotel revenue was driven by room night growth of 10%, fueled by strong growth at Expedia.com and Hotwire, both of which benefited from 5% ADR growth, albeit a slower growth rate than in recent quarters.

Package revenue grew only 1% in Q2.

As in prior quarters, growth challenge is North America-specific, as European package revenue was up 18% for a second straight quarter.

Our package business continues to be negatively impacted by less than desired availability of merchant air product to key destinations.

Worldwide revenue margin increased 10 basis points, with North America up 34 points and Europe down 85 points.

North America's rev margin again benefited from an increased mix of advertising and media revenue, more than offsetting a significant decline in air margin and a less significant decline in hotel margin.

In Europe, we saw pressure in air and hotel margins as well, but in addition, we saw the impact of air booking fee reductions, the addition of Ryanair as an affiliate, which drove some booking activity in Q2 for which we won't recognize revenue until Q3, and more competitive pricing in merchant hotel.

Gross margin improved 47 basis points year-on-year due to savings from our Apollo productivity and cost initiatives and an increased mix of advertising revenue, which, together, offset the impact from the decrease in air revenue per ticket.

We estimate Apollo is now driving over $50 million in annual cost savings for Expedia, achieving our previously stated goal.

And we believe there may be further opportunities to leverage gross margin going forward, particularly in Europe.

On the operating expense side of things technology and content expense was fairly flat to what we saw in Q1 at $38 million, but was up 27% year-on-year as the capitalized software we began running through the P&L in late 2006 continued into Q2.

There were some timing issues which reduced Q2's expense and we expect growth rates in year-on-year tech and content in the back half of the year to be greater than what we saw in the first half.

We also continue to expect to see tech and content to grow faster than revenue in 2007 and 2008.

G&A was $69 million, up 10% year-on-year as we added staff and IT and continued to build out our European operations team.

We expect to leverage G&A for the full year of 2007, but we will see growth greater than revenue in Q3 in G&A since Q3 '06 G&A was light by a few million dollars from some compensation expense reductions we don't expect to recur this year.

Selling and marketing grew 30% in Q2 and was the primary reason we saw OIBA margin degradation this quarter despite our revenue and gross margin improvements.

In light of this, I want to spend sometime detailing what drove that year-on-year growth.

As we have consistently indicated, Q2 '06 was going to be a tough comp from a selling and marketing and, in turn, OIBA perspective, as last year we moved marketing spend from Q2 did to Q3 in Europe due to the World Cup last Q2.

In addition, we reduced brand spend at Expedia.com in part due to a poorly performing campaign, which we did not do this Q2 in light of the improved performance of the business and our desire to fully support our successful Summer Sun sale.

We also had a couple of new areas in marketing spend in this Q2 that were incremental to last year, specifically our Ryanair deal in Europe and our Thank You program here at Expedia.com.

While these programs do generate incremental revenue, they are not as efficient as some of our other marketing channels.

Beyond these factors weeded aggressively increase marketing spend in Europe, project only an online channels to both grow our new markets and in response to the competitive environment.

We have seen a fair degree of keyword inflation on search engine marketing in both Europe and domestically, which is negatively impacting our marketing efficiencies.

Hotwire spend was also up strongly year-on-year as we supported our Orbitz partnership.

We continue to expect absolute selling and marketing expense to increase in '07, driven in part by increased advertising for Expedia.com as we support the brand throughout the year, as opposed to our front-end-loaded approach last year.

And as Dara mentioned, we plan to continue spending aggressively in Europe in the second half, including brand spend at a number of European points-of-sale.

We anticipate selling a marketing expense overall in the second half will grow at rates similar to what we saw in Q2 and therefore expect it will increase as a percentage of revenue for full year '07.

CapEx in the quarter was $21 million, essentially flat to the prior year.

This is consistent with our decision last quarter to reallocate some planned spend from the first half of '07 to the back half.

So expect to see year-on-year increases in Q3 and Q4 CapEx.

On the bottom line, we delivered Q2 OIBA of $187 million, up to 2% year-on-year, reflecting 15% revenue growth and gross margin improvement, partially offset by deleverage in operating expenses, excluding stock-based compensation.

Adjusted net income per share for the quarter was $0.35, with lower share counts from repurchase activity offsetting lower adjusted net income due in large part to the interest expense associated with our senior notes.

I'll close with our updated expectations for full year '07.

With first half OIBA up 7%, we now expect OIBA for full year '07 will grow in the high single digits, with second half growth likely higher than the first half.

Given our results to date and the stability we have achieved on the supply side of the house, we also expect revenue margins will be flat to slightly positive in 2007.

While gross margins are likely to improve for the full year, we also continue to expect double-digit increases in total operating expenses.

Our expectations for '07 assume FX rates remain where they have been recently, which would imply less benefit for our internationally-based operations as we move deeper into the year.

We now expect CapEx to increase up to 10% in '07, with similar growth in '08.

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

As it relates to free cash flow, given our revised OIBA expectations for the year and our positive working capital benefit to date, we think that free cash flow for the year is likely to increase compared to our prior expectation of a flattish year.

I do want to remind investors that we expect to see negative free cash flow in the back half of the year as we did last year due to traditional payments to merchant hoteliers for summer stays and payment of cash taxes, which we expect to be $150 million or less for the year.

In addition, we have a $30 million payment to Microsoft related to an historical tax sharing agreement, which will reduce cash flow from operations in the second half, as well.

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

I will now turn the call back to Stu to get us started on Q&A.

Thanks, Mike.

Let's move onto 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) Imran Khan, JPMorgan.

Thank you for taking my questions.

Two questions.

First, your U.S.

revenue growth rate accelerated despite difficult comp.

And as we get into the second half of this year and the comps to get easier, how should we think about the U.S.

gross bookings growth?

And do you think that you are gaining back some marketshare both in the U.S.

and international markets?

Thank you.

On the U.S.

gross bookings growth, I think that the easier comps really started in Q2 moving forward through the year.

Q1 was a decent quarter for us last year as far as gross bookings growth, and then you saw gross bookings growth in the U.S.

slow down in Q2 and beyond.

Now, it is hard to tell while you are in the middle of a year, but we think that is a combination of really, really good execution across the board in our various U.S.

brands and easier comps have something to do with it.

So for example, I think Hotels.com in the U.S.

on balance will have easier comps in the second half of the year than they had in the first half of the year.

And certain European markets, will have more difficult comps because in the second half of the year was when we took down booking fees, which helped to the European gross bookings and we're going to be lapping those decreases in booking fees.

So when you put it all together, I would say that on a gross bookings basis, probably the back half of the year has maybe slightly easier comps on the gross bookings level and maybe slightly harder comps on the profitability level.

But what we're really focus on his what we are executing on right now and what we can do to improve our operations today rather than being totally focused on comps.

On share, U.S.

and internationally, it's touch to tell, especially in the U.S., because a number of our competitors have gone private.

Orbitz has now come public.

Judging from some data that they have in the S1, they certainly suggested that their U.S.

growth rates are slowing down fairly significantly.

But we do not know when they are going to announce their Q2, so it will be a wait-and-see as to how we are doing on share.

So I do know if we are gaining share, but I would say our relative share position in the U.S.

is certainly improving.

And in Europe, Priceline is a tough competitor, and every single quarter they seem to come out with better results than we expect and the street expects, so that's what I'm expecting from them this quarter.

I am really happy with the way that we are executing in Europe.

It feels like we are taking share and I'm hoping to be able to increase in share going forward.

But again, the data is not that dependable.

So we are pretty focus on what we're doing internally.

And what I'm happy about on Europe is that with FX and ex FX, our growth rates are accelerating.

So that is a pretty good sign.

Thank you for taking my questions.

Good quarter.

Doug Anmuth, Lehman Brothers.

Thank you.

Two questions.

You talked about the supply picture materially stabilizing going forward and you mentioned the Wyndham deal.

Can you give us an update on the other outstanding hotel deals -- I think MGM, Starwood, and Hilton.

And then secondly, can you also reconcile -- you mentioned 50% growth in revenue at Hotwire, but also continued challenges in merchant air and packaging.

Can you sort of reconciled those two things?

Thank you.

On the supply side, the three brands that you mentioned are partners that we are having discussions with.

I don't wan to -- we don't comment on specific deals and I do necessarily want to comment on specific discussions, other than saying we are hopeful.

We are having good, constructive dialogues with them.

We are talking with them about how we can partner up with them and how we can add value from a long-term basis.

And certainly the momentum you see in our business helps.

I think that our partners are -- see that we are a better partner in general and we are investing marketing dollars.

We are investing in technology.

We are investing in people to grow this business from a long-term perspective across broad brands and broad geographies.

So that really, really comes when we enter into discussions with them, because they know that we're going to be a bigger partner for them three years from now than we are today.

So all I can say about those discussions are we are cautiously optimistic.

Hopefully they won't go sideways and hopefully we will have good news to tell you and I think our track record has been pretty good.

On the Hotwire side versus the merchant hotel business, or I think it was the package -- yes, the package business.

You know, Hotwire is just executing really, really well, and we are seeing significant strength for them on the hotel side of the business and especially on the car side of the business.

So the air side of the business with Hotwire is more difficult and I think that they are executing uphill quite effectively.

The cut in the booking fees has helped volume.

But in general, the air side of Hotwire is less profitable now than it has been for the past couple of years, and they're making up for it, and more, with the other sides of the business, with hotel and especially car.

So they are battling uphill and they are battling uphill very, very effectively.

And what you see on the air side of Hotwire is very consistent with what you see on the air side of our package business, which is less attractive inventory, in general.

Great.

Thank you.

Robert Peck, Bear Stearns.

My first question is for Barry and then one for Dara.

Barry, if we think about allocation of capital with these tighter debt markets, can we see other uses of this capital, should we be thinking about acquisitions, strategic moves that should be made, and what are your thoughts on eLong going forward?

And then just a quick follow-up for Dara.

On the capital, I think that we are always primed and ready for acquisitions.

We make, and have made, small acquisitions in the last period.

I can't say that that will be true for the future.

There may be something that will come in our sights of some size.

If so, depending upon -- I don't think you can predict the debt markets, certainly not at this moment.

There is obviously, as you all know, currently a freeze-up.

Now, things are getting done.

There is a tremendous amount of supply, though, all of those deals that have been outstand not yet completed the funding.

So I think that we should always be ready to -- and always have powder for, first, acquisitions to build a business and other investments to make in the business.

And then, as I have said in the best way I can, which is our willingness to borrow a good deal of money to purchase the stock, an aggressive share program.

I think Dara would be better to comment on eLong than I would.

Robert, on eLong, we're very happy about the position we have.

We are a solid number two in China, which is a promising and incredibly fast-growing and incredibly fast changing market.

We've got Henrik Kjellberg who, as you know, came from our PSG group in Europe, running the APAC group in general and is now the interim Chairman, or the interim CEO of eLong.

And he is very focused on basic operational steps at eLong.

I think that the good news at eLong is we have a good core group of managers there.

We are bringing on great talent over the next couple of months.

We are meeting really, really interesting candidates for the CEO job there.

And it is an operational issue and we are in a pretty friendly environment.

And if we get one step in front of the other, I think eLong can be a great success.

And we are pretty confident that Henrik and his management can get us there.

And then just a quick follow-up on Apollo, if you don't mind.

Did you say you're already currently hitting that $50 million a year run rate?

You got some of that this quarter.

Should we start thinking about that $50 million annualized starting to run through our quarters going forward here?

And what do you think as far as any sort of differential on that number?

Could there be any upsides surprise from Apollo?

Yes, we are seeing the $50 million on an annualized basis and would expect to see that going forward on a full-year basis.

With respect to upsides on Apollo, we really don't view it as Apollo anymore.

We view as really an ingrained attitude in the Company in terms of continuous improvement for productivity and cost initiatives.

And we have a whole series of things that we are doing and that we are working on that we expect will continue to roll into the business into the future, some of which will offset investments that we make in other places.

We have spent most of our time on the cost of sales line, and we will begin looking more carefully at the other lines of our business, as well.

Robert, just on Apollo, it really does go to what Mike said, which is a philosophy as to how we operate.

And you see its deep down in the business.

It is a belief that when we are building systems and/or business processes to build them right and build them to scale, so that as we grow, the cost per transaction of the Company gets better and becomes optimized.

And sometimes that takes taking longer to build something up front, but ultimately the wants and rewards are there and I think it is a shift in philosophy as to how we approach projects and how we approach business processes.

Thanks, Dara.

Anthony Noto, Goldman Sachs.

Thank you very much.

Dara, I was wondering if you could give us a sense -- your advertising numbers are obviously becoming bigger and accelerating for several quarters now.

Could you give us a sense of what the page view growth is at TripAdvisor, the change in sell-through in CPM just so we can start to better understand how much growth opportunity there is from just selling more of what is available as opposed to necessarily having to drive more usage?

And the second question, also related to advertising, but from a cost perspective for Expedia.

We are seeing a trend in the industry of a significant abundance of new inventory of available from the likes of Facebook and Glam Media and all these other companies that have very valuable audience and they are selling that at much lower CPMs what you may need to pay at some place like a Yahoo or AOL or MSN.

Have you at all been able to leverage that diversification in your marketing mix to drive down your cost for audience reach on the advertising line?

And the last question also related to cost, PayPal was able to signup two major airlines as a payment functionality for those airlines.

Is there an opportunity for you to reduce your credit card fees or payment fees per transaction by using an alternative payment system like PayPal?

Thank you.

On TripAdvisor, the traffic and in general, the page views and the commerce clicks are of up pretty significantly.

It is very, very strong double digits.

The organic growth for TripAdvisor in general is over 50% and really, the growth that we are seeing in TripAdvisor is more on traffic than rate, so to speak.

Now just digging into that a little bit, what is happening with a TripAdvisor on the revenue side is the kind of cost pre click business is growing healthily, Anthony, and that is based on traffic increases and actual clicks, both domestically and especially growing in the international market.

And what we are adding on to that is really a CPM business, is really a media business that is essentially a new business that is starting from essentially scratch, I'd say, middle of last year.

And what we are getting to do is layer on that media business, travel media business on top of the CDC business on TripAdvisor, as well.

So that is why we are seeing the momentum and the momentum is both on traffic and obviously revenue.

The UUs on TripAdvisor I think on a year-over-year basis were up 15%.

Page views were up stronger than that.

I don't have the exact number on the page views.

As far as kind of alternate media and the Facebooks, etc., we are looking at those alternate media.

It is not a significant amount of our spend to date and while it can be a decent branding media, we haven't seen it be, let's say, a significant amount of -- we haven't seen significant click-throughs, etc., from the kind of advertising.

So I think we are still in the experimental stage on Facebook and some of the new media, but we are certainly very, very interested in it.

One of the areas that we are actually focused on Facebook, for example, is as you know they opened up their platform for applications, third party applications.

And TripAdvisor in about a week built a mapping application onto the Facebook platform and I think it is the second kind of largest downloaded application, travel application in the Facebook community.

So we are pretty active there, and we are experimenting, but I can't kind of come to you with any conclusions right now as to the size or the success of the experimentation right now.

And then I think your last question was on PayPal, is that right?

Yes.

Mike, why don't you talk about that?

We have looked over the most recent periods at our cost of credit card transaction fees as an area that we will continue to analyze.

We have several points-of-sale that already are using alternative payment systems, including Bill Me Later at Hotwire and at Hotels.com.

I think Hotwire is also using PayPal, right?

I believe Hotwire is using PayPal, as well.

And in Europe, we are using debit cards and things of that nature.

So we definitely view it as an opportunity.

It continues to be a cost for us that is larger than we would like it to be.

And as we continue to centralize some of the operations of the Company and bring together our points-of-sale around the world through [E3] and other projects, it is going to make it easier for us to leverage and to get better rates across the Company.

So definitely an opportunity for us in the future.

Small right now, and hopefully it will increase in size.

Great.

Thank you.

Michael Millman, Soleil.

That's Soleil Securities.

I guess a couple questions, also.

I think in the press release and maybe in the script talk about in Europe a competitive market in hotels.

Does that mean that you are reducing the commissions or discounts in merchant in order to compete with Priceline's agency charges?

I have a couple other questions.

Michael, in Europe, we actually think that in Europe the value that we bring to our hotel supply partners is equal to what they pay us.

So it is not an issue, or we haven't been focused on revenue margins as much as we been focused on price.

I kind of talk about a couple of quarters ago how we are very focused with the PSG group on the product that we have on the shelves, and that means availability, breath, and price.

And in looking at Europe, we found out -- maybe we shouldn't have been surprised -- that our pricing wasn't as good as it should have been.

We took actions on that accord that did affect European revenue margins, and improved pricing pretty significantly.

And you see it in the volumes.

So -- now, that did affect margins, but it is not kind of a margin to the hotel issue.

When you say price wasn't as good, you mean you lowered the price or raised the price?

We lower the price.

And that has helped pick up volume?

That has helped increase our competitiveness with Booking.com and other providers out there.

Our volume has been quite positive.

Whether you can draw kind of a one-to-one causal affect between price and volume is not entirely clear, but we think that it helped.

On the servicing fee, or transaction fee where you have dropped it from place to place, how important is that servicing fee to the ad revenue ticket and to what extent does that reduction in certain locations and products impacted your 19% decline in air revenue per ticket?

I don't have -- Michael, do you know the exact effect that it had on the 19%?

I do think that we have that number.

I don't know if we would disclose it exactly, but if you look at the European revenue margin decrease, the two largest drivers of that revenue margin decreased were the booking fee reductions that we mentioned and also signing up with Ryanair, which is a new deal, so to speak, and having gross bookings volume coming in from Ryanair and not recognizing the revenue in quarter.

So it's definitely piece of the revenue margin equation.

Can you give us some rough idea as to how much, how important, on a macro basis, those fees are?

In general, air revenue is now less than 15% of our overall revenue.

It is decreasing pretty -- every quarter, it seems to decrease.

And the air booking fee is roundabout one-third -- this is on a global basis -- of our total air revenue.

And then, of course, what section U.S.

versus Europe, we don't disclose, but you can probably do some math guessing on that.

And in regard to improvements in Expedia.com with marketing spend, to what extent is that you are getting more volume and to what extent is that you have improved your conversion rate?

It's both, Michael.

It is better volume.

It is better volume from direct channels.

It is very, very strong performance from the email channel, offset by some weakness on the affiliate channel and some of the indirect channels.

So it is -- and it is a very solid, I would say, conversion performance, as well.

It is a combination of both.

Thank you.

Mark Mahaney, Citigroup.

Thank you very much.

Two questions, please.

You mentioned that the ECT growth, I think, in bookings was over 20%.

Can you put that in context, what was the growth like for that the last couple of quarters?

And secondly, just thinking broadly about margins for the business as a whole, with European margins -- with that revenue growth faster, but European OIBA margins 1000 basis points below U.S.

levels, how do you think about what that means for the overall -- what are the implications of that for the overall margins of the business.

Do the U.S.

and European margins reach -- converge over the next couple of years or do the European margins rise up to U.S.

levels?

What would be the factors that would cause that to happen or not cause that to happen?

Thank you very much.

On ECT, the 20% growth that we had is similar to the growth rate that we had in Q1.

It is slower than what we had last year.

And really, the European markets at ECT remain very strong.

In the U.S.

we are seeing a little bit of weakness as far as corporate travel spend with some of our clients.

So the new client signups is -- goes along quite well, over 100 million.

We think we can do better.

But in general, we are getting plenty of new clients in the door, so to speak.

The client retention is excellent, but some of the spending levels in the U.S.

on an account-by-account basis have been a bit weaker than we expected.

We think that it is a combination of some U.S.

corporations being conservative, conservative on spend and conservative on margins.

And we are trying to figure out if it had something to do with wallet share, as well.

So that is really what we are focused on as far as the U.S.

goes and hopefully taking the 20% and hopefully improving in from there.

I think on European margins, Mike, you can speak to that as well.

Do you wan to talk to that or do you want me to --?

Go ahead.

Okay.

I would say in Europe in general, you look at the European market and the overall European travel market is larger, actually, than the U.S.

travel market.

And when you look at our international revenue, it is around 29%.

I think actually that's gross bookings.

It is around 29% of our total and what we see in Europe right now is opportunity.

And there is -- we still think that there is very, very significant growth potential in Europe.

And because of that growth potential and also, frankly, because we've got a very tough competitor there, we are focused on making sure that we maintain or grow share and that requires investment, and frankly, we're happy to invest in that market.

So I would say in the near-term, we are more focused on European top-line growth than bottom-line growth.

But as the market matures, and I'm hoping that it doesn't mature anytime soon, but as the market matures I would think that margins in Europe do have the opportunity to uptick.

And if you look inside the countries in Europe, for example, the UK which is a more mature market, does have significantly higher margins than, let's say, a Germany or France.

So I do expect it to get there, but frankly I don't want it to get there anytime soon.

Thank you very much.

Just a quick clarification; the 29% of bookings was the international figure, and then Europe would be 20% of the total.

Thank you.

Chris Gutek, Morgan Stanley.

Two questions.

I guess given the nice acceleration in the top-line growth, the partly offset by the higher marketing spending in the quarter, I'm curious if you guys have changed your long-term thinking on how to maximize the value of the firm given the trade-off between growth and profitability.

Specifically, it is a long-term expectation that any leverage you sell elsewhere in the business gets consumed by higher marketing spending, or conversely the heavy spending you talked about earlier, is that really just for the next couple quarters and beyond that, you haven't necessarily made a decision about optimal strategy?

Chris, I would say it is more the latter.

You can certainly see that our behavior as far as marketing spend if you compare it to last year has changed pretty significantly.

And we haven't, let's say, undertaken this strategy for a long time, so it is hard to come to a long-term conclusion.

We think that at least for this year, it is the right strategy going forward.

Now, we've told you that over the long-term we are optimizing for a free cash flow number.

We are not optimizing for margins.

And when we look at well, is the best path to get there, is it better to get there with very, very strong top-line growth or weaker top-line growth and trying to leverage a business, so to speak.

The one thing that we've seen with strong top- line growth is that in gets you scale.

It helps you with revenue margins and the kind of discussions that we have with our supply partners.

And I think that we are -- I do believe that we can secure a long-term economic and relationship advantage over our competitors because of that scale.

And it gets you scale as far as the fixed cost.

It lets you amortize the kind of admittedly large investments that we are making on technology, on fixed infrastructure.

It lets you amortize those investments over a wider swath of transactions.

And third, and this is new, as we build audience, we build a bigger audience for which to build a media business on.

And I think at least for now, we are the only players in -- we're the only travel player who is building a media business of scale.

And again, that goes to kind of the amount of revenue that we can get per unique user, per eyeball, and scale does get us advantages that we believe, at least at this point, we believe we have a chance of being differentiated, so to speak.

Great.

Then my second follow-up question to the prior discussion regarding the elimination of booking fees at Hotwire and Priceline for domestic air bookings, do you think this is sort of a shot across the bough that booking fees could be eliminated across other products or all products in all geographies?

Or is it just that the domestic air business has a lower value proposition to the customer and you don't see this spreading?

Tough to tell at this point.

Hotwire and Priceline have a very, very specific audience, and it's an audience that is looking for discounts, and it's an audience that wants price breaks.

So I think that -- and at the same time, you have both Hotwire and Priceline experiencing degradation in the quality of their air inventory.

So what Priceline did and they did it first, made a lot of sense, and it is something that they've done very -- that is specific to their business and specific to their audience, and the same goes for Hotwire.

So this time, I don't know if it is a shot across the bough.

I don't know if it's going to spread.

Okay.

Great, thanks.

Aaron Kessler, Piper Jaffray.

A couple questions.

First on Europe, I might have misheard you, but can you give us an update on the hotel inventory maybe for UK and continental Europe, if you give that; and also your investment in field sales, and I have one follow-up question.

Sure.

As far as the inventory goes, we've increased the inventory, I think it is 20% on a year-over-year basis as far as the number of merchant hotel properties that we have available.

I am frankly hoping to accelerate that growth.

To build a field sales force, and I think we are investing in the field sales force in Europe, takes a bit of time.

It's a combination of investing in the field sales force and also investing in systems that allow us to hook up to the hotels in a cleaner way, in a more -- in a faster way, and also allow the hotels to kind of work with us easier.

Our Internet, for example, isn't as good or smooth as it needs to be.

So it is a combination of system investments and field sales force investments.

I would say we are in the early to middle part of that cycle, but I am really confident about the way that that group is going to execute.

Did you say you had 12,000 hotels in Europe or is that just direct connections?

I think it is 12,000 merchant hotel and then we obviously have GDS connections.

I do not know to how many hotels in Europe.

Just one follow-up question.

For the keyword inflation you were talking about, can you give us a little more details on that, when did they start, maybe roughly what type of increase you saw there?

Thank you.

The keyword inflation has been fairly consistent.

It has been double-digit inflation on a keyword-by-keyword basis.

It is -- we are able to mitigate some of the it because, in general, ADRs, for example, on the hotel side of the business are increasing.

So we are able to offset some of that and we've done good work on the conversion side as far as what keywords to bid for, and also how consumers are converging on our site.

But it is a pretty competitive marketplace out there and it has been since the beginning of the year.

And we certainly haven't seen any change in behavior there.

A quick clarification, when you sent you changed your pricing in Europe, was that for pricing to the consumer or your commission rates?

Pricing to the consumer in general.

Great.

Thank you so much.

Justin Post, Merrill Lynch.

Nice quarter.

I would like to first talk about where you are at in penetration of the U.S.

consumer markets in corporate travel.

Could you just give us an update on where you think you are as far as the percent and where it could go?

And secondly, I do know if Barry is still on the line, but could you talk about your philosophy with doing tender offers?

It seems to create extra volatility for the stock.

Why not just do buybacks kind of in an opportunistic way the way that IAC has approached it so far?

As far as penetration in the corporate market, it is tiny, Justin, so we are, let's say, at the run rate of around $300 million a quarter as far as our corporate travel business goes.

The corporate travel, the size of the corporate travel market in the U.S.

I'm guessing is in excess of 80 million -- $80 million billion or so, Stu?

Yes.

Stu is nodding his head.

So the penetration is tiny.

The big, big players are obviously the AMEXs and the Carlsons of the world and where we have the largest challenge right now is to break into kind of the top tier, the very big accounts where AMEX and Carlsons are very strong.

We are doing great on the small to medium accounts.

The challenge is to kind of step up ladder, so to speak, and it's something that we are very much focused on.

But ECT is going to be a growth story for a very, very long time to, for this company.

And then, I will let Barry answer the last question.

I have no guiding philosophy on how to purchase stock.

I think, again, it really is best done opportunistically.

And we felt that tender offers, while, yes, they may produce more volatility -- because they're such a point-of-sale, so to speak, such a point of buy -- but we thought it was most efficient when we were -- when we were thinking of particularly large numbers in terms of our desire at a moment in time to buy stock, tender offer, or other mechanisms one stop only, so to speak, or more efficient.

But we debate this all the time as to whether or not we are just better with a plan or whether we are better going in every day, or every other day, or every 40th day depending upon what we think.

Again, our approach to all of this, relative to stock repurchases, is opportunistic, and we've really only talk about it after the fact.

And other than our, I think, now quite -- I hope clearly understood and accepted position that, number one, our intent as shown is to buy stock and secondly, that we think a certain amount of leverage is healthy for this business at this point in time.

I think those are the two guiding principles.

Those are the ones we're going to follow in the future and I think that is going to be very good for the people who are current holders of the stock.

Thank you, Barry.

If I could follow-up, Dara, could you give penetration of the U.S.

market?

And then the last thing, Amazon kind of surprised people, I think, with Amazon Prime driving some growth there.

How do you feel about the loyalty program and can you give any metrics on that?

What do you mean by the U.S.

market?

I thought I had given the penetration.

Just the leisure market.

Okay.

The leisure market.

It is close to 50% according to PhoCusWright, Justin.

You know those aren't numbers that we make available.

Great.

Thank you.

And then on the loyalty program, how do you feel about that and are there any metrics you can share as far as driving additional purchase activity?

The metrics that we can share is we are happy with the signups.

We've got over 750,000 Thank You members now onboard.

The Thank You program is definitely driving increased frequency as far as visits and shopping and also transactions, especially on the hotel site of the equation, which is obviously our most profitable line of business.

But it is still too early for us to kind of give you other metrics as far as what is truly incremental or what is not.

But we are certainly happy with what we see from the Thank You program and we are very happy with the partnership that we've got with Citi.

Thank you.

Thank you very much for joining us today.

Barry, myself, and Mike get to tell you about everything that we've done in the quarter, but it is really the 7000 employees of Expedia who are the ones who were doing it and executing on a daily basis.

So I didn't want to sign off before giving a special thank you to them.

So we are hoping to tell you all about our accomplishments in Q3 and we will see you then.

Stu, anything else?

No, that's it.

A replay of the call will be available on the Investor Relations website subsequent to this call and thank you for listening in.

Thank you, ladies and gentlemen.

That does conclude Expedia Inc.'s second quarter 2007 conference call.

If you would like to listen to a replay, you may also dial 1-800-405-2236, or 303-590-3000, and use pass code 1109-4031# to access the conference.

Thank you again for your participation today.

You may now disconnect.