Expedia Group Inc (EXPE) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Expedia, Inc.

fourth quarter 2007 conference call.

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

Following the presentation, the conference will be open for questions.

(OPERATOR INSTRUCTIONS) This conference is being recorded, Thursday, February 7, 2008.

I would now like to turn the conference over to Mr.

Stu Haas, Senior Vice President, Investor Relations, and Treasurer.

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, 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's views as of today, February 7, 2008, only.

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

Actual results may differ materially.

We do not undertake any obligation to update or revise this information.

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, and subsequent 10-Q filings, for additional information about factors that could potentially affect our financial and operational results.

During this call, we will discuss 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 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 Dara.

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

I do apologize in advance for my voice.

I have been knocked over by a flu, so please bear with me as I try to make it through here.

Expedia made solid progress again in Q4, with accelerating growth in transactions, bookings and revenue.

We finished 2007 just shy of $20 billion in global bookings, with a record $669 million of OIBA, growth of 12% versus 2006 and in line with our low double-digit expectation.

Expedia continued to diversify its business mix during the year, with international businesses delivering a record 36% of revenue in Q4.

And our advertising and media businesses really came of age in 2007, accounting for 7% of full year revenue compared with just 4% a year ago.

Most importantly, for long-term shareholders, we continued to make progress towards our goal of maximizing cash flow over the long-term while efficiently managing dilution.

Expedia's free cash flow for 2007 grew 19% to $625 million and our share count was down 11% year-over-year, reflecting $55 million in share repurchases and measured equity grants.

Now I want to jump right into the question that is likely top-of-mind for many of you, which is how the economy is impacting Expedia here early in 2008.

As you might expect based on what other companies in the travel space are saying, it's a bit of a mixed bag right now.

From an overall industry perspective, air travel continues to be fairly robust, with carriers reporting solid traffic and forward bookings.

Fare increases have had variable success where there is a clear bias from carriers to sacrifice loads for yield and to cut capacity even further should the consumer weakness warrant.

While sustained demand is obviously quite favorable for Expedia, higher fares are not.

And if any of the rumored consolidation activity in the space comes to fruition, that would likely push fares even higher.

On the hotel side, according to industry experts, U.S.

occupancies have generally been down year-on-year so far here early in 2008.

And while overall industry ADR growth has been similar to full year '07, Expedia's ADR growth has been a few hundred basis points lower in North America and in Europe versus what we saw in Q4.

And based on the visibility we have for future periods, we see this trend continuing.

On the plus side with lower occupancies, we do see hotel inventory freeing up, leading to some great deals on our sites.

Putting it all together, January began slowly for Expedia, but picked up as the month went on, helped in part by continue to progress in our advertising and media businesses as well as earlier and more aggressive marketing this Q1 than in '07m which drove anticipated unit volumes.

The big question is how trends will progress as we move into the heart of the year when topline comps get tougher.

While the external landscape is cloudy at best, what I have made very clear internally is that Expedia must deliver growth and value for our travelers, suppliers, advertisers and shareholders regardless of the economic climate.

Turning to Q4 and our brand portfolio, Expedia.com executed well in the quarter, with continued strength in our telesales channel, contribution from the Thank You rewards program and success on the marketing front with our holiday sale, our Pirates of the Caribbean promotion and our first official season as Official Travel Sponsor of the NFL.

We are also pleased with the initial response to the Expedia Elite program, who's hundreds of thousands of high-value numbers benefit from dedicated customer service and no change/cancel fees among other perks.

Our European point-of-sale drove 35% FX-neutral bookings growth despite a pretty tough comps last year Q4, which was the strongest growth quarter in '06.

Our fee and pricing activity combined with proactive marketing spend were certainly significant factors behind Europe's growth.

Given the positive results thus far and the substantial long-term growth opportunity, we intend to continue to aggressively invest in our marketing efforts in Europe in 2008 and beyond.

Hotwire had another great quarter, with the year-on-year bookings nearly doubling.

For a second straight year, Hotwire secured J.D.

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

While Hotwire has meaningfully diversified its business beyond air, it continues to make advances in that product, including the recent addition of Airtran content.

On the downside, Hotwire's marketing partnership with Travelports' brands will not continue in 2008, which will present a headwind for the business.

That said, we have already seen signs here in early '08 that Hotwire's value proposition to suppliers and travelers continues to resonate, demonstrating, once again, the benefit of our diversified brand portfolio.

Hotels.com grew worldwide bookings 27% in Q4, its third straight quarter of accelerating growth.

H-Com finished the year with over $2.6 billion in worldwide bookings, making it one of the -- making it one of the world's top five online travel brands.

Hotels.com's growth in North America was similar to our 18% overall growth rate for that segment.

And in Europe, Hotels.com grew its bookings nearly 80% on the strength of our product offering, pricing activity and marketing efforts.

ECT finished the year on an up-note with Q4 bookings growth of 28%.

Full year '07 bookings exceeded 1.3 billion from over 3500 active client accounts.

ECT has generally not seen corporate clients cut back on their spend, but we have seen higher airfares from Q4 continue into early Q1.

This could lead to lower future bookings as companies strive to remain within annual budgets, but we have, as yet, seen no consistent evidence of that.

Our APAC business reached a milestone in 2007 with more than 500 million in annual gross bookings.

We're looking forward to the launch of our India point-of-sale this year and also improving our existing websites in China, Australia, New Zealand and Japan.

Given the opportunity, we may consider heavier incremental investment into APAC region than we have historically.

Our advertising and media businesses continue to flourish, posting Q4 organic revenue growth in excess of 50% and contributing more than $180 million in high-margin revenue for the full year.

TripAdvisor continues to lead the way for us in add and media.

Its Cities I've Visited app on Facebook has been downloaded more than five million times and TA's CPM business is significantly larger in '07 than it was in '06, complementing its core CPC offerings.

Advertising on our transactional sites grew 35% in Q4 and we continue to believe that there is additional opportunity there.

Our dcolumn display media continues to expand and we're testing and learning with our travel ads products.

We have also hired an initial core of account executives to begin educating non-travel advertisers on Expedia's value.

I think we have a ton of work to do to get transactional advertising right, but there is no doubt that the potential is there for a more significant contribution.

In closing on the brand portfolio, while we're certainly proud of nearly $20 billion in 2007 bookings, we are also pleased with the number of brands meaningfully adding to our scale.

We finished the year with six of our businesses above or very near the $1 billion in annual bookings -- Expedia, Inc.

sites in the U.S., UK and Canada, as well as Hotels.com, ECT and Hotwire.

And we believe the cupboard is full future of billionaires, with Expedia Germany, Hotels.com Europe and our APAC businesses all eclipsing the half billion bookings mark in '07 with a collective growth rate of over 50%.

On the supply front, PSG continued to make progress with hoteliers in Q4, inking multiyear agreements with Starwood, IHG and Kimpton.

We finished 2007 with every major hotel chain under contract and nearly 80,000 bookable properties on our worldwide sites, including over 35,000 properties in Europe and APAC.

While we made some progress in expanding European hotel selection in '07, we're not satisfied with our progress on this front.

It will be a critical area of focus and investment in '08, particularly in smaller towns and cities in continental Europe.

On the air front, we have progressed from stabilizing unit economics to working constructively with our partners to expand volumes.

One great example is a recent partnership with Hawaiian Air.

It began in Q4 with our driving share for Hawaiian in exchange for some compelling package discounts and has expanded here in early '08 with our NFL Pro Bowl promotion, featuring our first co-branded television campaign offering travelers exclusive rates to Honolulu for the big game.

We hope to broaden these types of win-wins to our other valuable air partners.

A few comments real briefly on the technology front.

We're continuing to work on our replatforming and as I mentioned last call, we're not moving as quickly as I would prefer.

We have experienced delays in the rollout of the new platform and the upshot is we will be delayed in realizing the benefits of our investments until late 2008 and likely into 2009.

There are plenty of things we can do to improve our traveler experiences beyond the platform, which is what we are focused on, but I will say that we won't see material improvements in the very near-term.

In closing, we are pleased with the 2007 that put Expedia back on a growth track.

There is clearly significant uncertainty around the economy and the consumers relating to 2008 and we will certainly be mindful of those trends and make adjustments as required.

That said, I do think it's important for investors to understand that we're managing Expedia for more than the next quarter or the next year.

Simply put, we think online travel has substantial global runway and we intend to continue investing to improve our travel experiences worldwide and, in turn, drive sustained growth and long-term shareholder value.

With that, I will turn the call over to Mike.

Great, thanks Dara.

Good morning, everyone.

I am going to cover our Q4 results and close with our initial financial expectations for 2008.

Worldwide gross bookings grew 25% in Q4, driven by 18% growth in North American bookings and 47% growth in Europe, including nearly 80% growth at Hotels.com Europe.

Hotels.com is benefiting from its geographic expansion in Europe with points-of-sale in 25 countries now compared with 20 a year ago, as well as over 20% more merchant hotel properties.

Higher volumes bolstered bookings growth in Q4, with unit growth up 14% in air tickets and 18% in hotel room nights.

As for pricing, we saw ADR growth of 6%, similar to what we have seen in the past few quarters.

We did see lower ADR growth in December spill over to January.

On the air pricing front, fares grew sharply at 9%, including 8% growth in North America, as carriers largely succeeded in passing along fuel price hikes through direct fare increases and fuel surcharges.

Revenue growth accelerated to 25%, led by 23% growth in merchant hotel revenue and 90% growth in advertising and media.

Revenue growth was also supported by a 13% increased in air revenue -- our second straight quarter of growth.

While this increase was primarily fueled by another quarter of strong ticket growth, we're also pleased to report that revenue per air ticket decreased just 2% in Q4 due to our consumer fee reductions.

This lower rate of decline in Q4 is consistent with or expectation of stabilized economics upon comping GDS and North America carrier negotiations.

Revenue margin was up six basis points for Q4.

For the full year, we finished up 30 basis points, reversing two years of declining rev margins on the strength of our advertising business and stabilization in our air and hotel products.

Gross margin also expanded over 100 basis point in '07, benefiting from an increased mix of ad revenue and cost efficiencies.

Turning to operating expenses, total OpEx grew 34% in Q4, driving over 250 basis points of OIBA margin deleverage despite our revenue growth as we continue to invest in our various businesses.

As we indicated would be the case on last quarter's call, selling and marketing expense growth accelerated in Q4 to 38%.

The increase was driven by incremental spend across our brand portfolio, with meaningful increases in direct marketing spend in both North America and Europe to leverage growth opportunities within those markets.

In addition, we increased indirect selling costs to strengthen teams in PSG, the TripAdvisor network, Local Expert and ECT.

Looking ahead to selling and marketing in '08, while we will avoid pushing on a string if travel significantly weakens, we believe great companies take share in choppy markets.

And we also believe our business model and financial flexibility afford us the opportunity to continue investing in growth markets across the globe in both our transaction and media businesses.

As such, we expect selling and marketing to increase as a percentage of revenue in '08, but less so than it did in '07.

Technology and content grew 55% in Q4, due to increased internal headcount, the ramp up of offshore technology initiatives and higher amortization.

G&A was one area where we did see positive operating leverage, with growth of 13% year-on-year due to increased payroll taxes on option exercises, increased headcount in Europe, NIT and increased legal costs.

2007 CapEx came in at $87 million.

CapEx for the year would have been $100 million, but there was a shift of $13 million from '07 to '08 due to timing of cash payments.

Absent this timing impact, we would have roughly doubled CapEx in Q4 '07 versus Q3 '07, as we communicated on last quarter's call.

We anticipate '08 CapEx, including the 13 million shifted from Q4 '07, will come in at 140 to $150 million, with approximately 40 to $50 million of that amount related to leasehold improvements we plan to make at new offices, including the relocation of our corporate headquarters, to support our worldwide growth.

Additional CapEx priorities in '08 include investments in our call centers, global SEO capabilities, replatforming, data warehouse and our hotel extranet, among other technology initiatives.

I will close with our initial expectations for '08.

We are certainly going to remain very mindful of the global economic climate and maintain flexibility to intelligently respond in ways that may temper growth.

But based on what we know today and assuming no meaningful worsening in the ADR environment, we expect full year OIBA to grow in the low double digits again in 2008.

Free cash flow will likely increase again in '08, but the pace of year-on-year growth will likely be slower, as we will see the year-on-year CapEx increase I mentioned earlier partially offset some of our anticipated OIBA growth.

While we don't provide quarterly expectations, I do want to flag for investors that the Easter holiday occurs in Q1 in 2008.

Easter will pull some steady revenues into Q1 that occurred in Q2 in '07.

We also began off-line brand marketing activities earlier this year versus last, meaning you will see much higher selling and marketing spend growth in Q1 '08 versus Q1 '07.

Looking ahead to Q2, we will have double rent our new headquarters beginning in May and we will have comped most of our '07 media acquisitions.

So we anticipate substantially higher OIBA growth in Q1 versus Q2.

I would also remind you that our topline comps become more difficult in the back half of '08.

Lastly, it is worth mentioning that our international businesses are unlikely to benefit from year-on-year FX rates as much in '08 as they did in '07.

For example, the pound is currently trading near its '07 average.

So as a reminder, our OIBA expectations today assume FX rates remain where they have been recently.

I want to thank everyone for your time today and I will now turn the call over to Barry.

Thank you, and good morning, everyone.

Over the last year, Expedia has strengthened itself in nearly every market and every area of its operations.

Whatever happens with the broader economy, the truth is that life is going to go on, people will work, people will spend and people will travel.

And when they do, history shows that Expedia and its great assortment of leading brands will be on their radar.

That is not to say that we won't see adjustments in travelers' behavior -- substitutions, folks trading down in hotel star ratings, choosing drive travel instead of air, long weekend escapes versus 10-day vacations and on and on.

But travel they will and Expedia, Hotels, Hotwire and all the rest of our brands will be there to help no matter what the budget or what the desire.

As Dara and Michael have indicated in a lot of detail, we are certainly going to be mindful of the economic tradewinds, blow as they may, and we'll, of course, correct as warranted.

But by and large, the destination for Expedia remains unaltered by quarter-to-quarter economic gyrations and talking head prognostications.

Expedia is committed to being the travel brand of choice for our advertisers, our suppliers and, increasingly, our advertisers.

Before questions, I do want to address the recent difficulties surrounding IAC and Liberty.

It is, of course, an unfortunate situation.

Once we became aware of a dispute, we petitioned the court to tell us that the course we were recommending was consistent with the agreements between Liberty and myself.

Given no harm could have come to Liberty prior to the court's deciding, I wish they hadn't raised up this issue in such an aggressive way, but they have.

And we have responded appropriately.

I do think we will prevail.

But the critical point for listeners on this call is the fact that these developments have absolutely no bearing on Expedia and its future.

The proxy which exists between Liberty and myself related to Expedia is completely separate from the one related to IAC.

One has nothing to do with the other and I will just say, once again, that Expedia is not a party to the IAC/Liberty discussions and it is not going to be impacted with -- it won't be impacted by them.

So, Mr.

Haas, do you what to get the questions?

Great, thanks, Barry.

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

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

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

Thank you.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) Imran Khan from JPMorgan.

Hello, this is Bridget calling in for Imran.

We have two questions for you.

First of all, both Google and Yahoo noted weakness in the travel vertical for advertising.

We were wondering if you saw any of that?

And secondly, what do you think the effective potential Yahoo/Microsoft merger would be?

Thank you.

Sure.

Thank you, Bridget.

We did not see any specific weakness as far as our spend, for example, went.

We have been spending fairly aggressively in the search category.

I would say that search engine marketing spend as a percentage of our total spend in '07 increased versus '06, and increased pretty consistently.

There were some ups and downs as far as the -- our brands, probably we were a little bit less aggressive on Expedia.com, for example in December, in search than our other brands.

But I would say overall, our SEM spend has been increasing and I think as far as what we are seeing in January and what we expect in '08, we expect to be fairly aggressive on the search channels.

One of the positive factors that we are seeing as far as search goes is that our conversion has been improving in various parts of the business.

Hotels.com's conversion has improved.

For example, Hotwire conversion has improved pretty significantly, which then allows us to actually pay more for search terms than we were last year.

So, we are able to, in certain circumstances, buy certain keywords profitably that we weren't able to buy before.

It creates -- it reduces efficiency as far as marketing spend as a percentage of revenue, but it increases profitability and that is something that we have been working on to the extent we are increasing our conversion.

We are spending a bit more aggressively on search and hopefully that is something that we can drive in '08.

As we have said before, we are focused on maximizing absolute kind of OIBA and free cash flow dollars, we are not as focused on the margins, so to speak, of the Company on a long-term basis.

As far as the potential impact of the Microsoft/Yahoo merger, it remains to be seen.

I do think that probably having a number-two player that is significantly stronger is a better environment and we will be watching carefully as to what happens.

I think one issue that we will be watching very closely is that, obviously, we are a very close travel partner of Microsoft, Yahoo is a partner of -- Yahoo partners with Travelocity and also owns a meta search site called FareChase.

So whether they go with, call it, Travelocity/FareChase or they go with us could have an effect on us, although I will say that Microsoft is becoming a smaller portion of our overall revenue as the years have gone by.

Barry, do you want to add anything on Microsoft/Yahoo?

No, I mean, I think that -- I think that the Internet world and for certainly people who are in the area of search-related things, that a stronger competitor to Google is a good long-term thing.

I think short-term, those that compete with Microsoft and Yahoo will be advantaged because I think they certainly lack focus today on how they operate their own businesses.

Next question.

Michael Millman with Soleil Securities.

Thank you.

Maybe you can talk a little bit more about the consolidation?

What have you assumed in your '08 numbers on consolidation -- airline consolidation and looking forward to presumably one consolidation breeding additional consolidations, how do you see this affecting the business longer-term?

Then I have another question.

Sure, Michael.

As far as consolidation goes, most of the deals that we have with our airline partners are longer-term deals.

So, from -- as far as '08, any '08 effect on our numbers, we don't think it's going to really have any effect.

Even if a deal was announced, we think it will take some time to kind of get through regulatory scrutiny etc.

and I would be really surprised if anything would be completed in '08, so I don't see anything happening in the near-term.

From a long-term perspective, obviously, to the extent that the airlines consolidate, we would expect to see even, call it, further discipline as far as capacity goes and, just like any other supply demand equation, to the extent that you have capacity going down, you will probably have kind of ticket prices going up.

In general for us, the more capacity there is, the more tickets there are to sell, the better off we are.

And the less consumers have to spend on their airfare, the more the have to spend on hotels, etc.

So, I think for now, we are not taking any account as far as consolidation as far as when we look at '08.

The real question is what kind of effect is it going to have in '09 and '10, for example.

Okay, and I guess appropriate to both of us, when the U.S.

-- as they say, when the U.S.

catches cold -- sniffles, Europe catches a cold.

I was wondering if you are starting to see any differences in the European market in supply, saying, boy, maybe we better double up or travel changes?

Anything that you can point to that suggests that there may be some economic effect in Europe?

You know, it has been a real -- we certainly haven't seen anything definitive as far as our trends in Europe goes.

The European business remains healthy.

You saw the Q4 results.

We have pretty aggressive plans for 2008 and I would say so far, so good.

When we look at -- you know, our partners and what they are seeing, it is a real mixed bag.

You had Ryanair commenting, I think, a couple of days ago, having a very negative outlook as far as what they saw in booking activity and what their anticipation was for the balance of the year.

And you had folks like BA talk about their long-haul business being very healthy, short-haul business being a little less healthy and in general, I think you have seen our airline partners having high load factors, very, very healthy business, etc.

You know, we have certainly seen kind of the high street retail has been soft.

And I do think as far as the European economies go, my anticipation would be that we would see the first sign of weakness in the UK and for us, the UK is the biggest part of our European business and that is something that we are going to watch pretty closely.

Now, I think all of this -- when you run through all of this, I do think that our European business, in general, will be more resistant to weakness if it shows up just because we are at the earlier stage of growth as far as Internet penetration goes.

And that tailwind, to the extent that there is economic and macro softness, that tailwind should be able to make up for that more so than, for example, in the U.S., where our Internet penetration is pretty high and where our results should mirror overall economic results more closely, so to speak.

So bottom line is that your '08 projections don't assume any weakness in Europe?

Our '08 projections, I would say, assume -- have a fairly aggressive plan in Europe and so far, we haven't seen any signs to the contrary.

Great, thank you.

And feel better.

Thank you.

Doug Anmuth with Lehman Brothers.

Thank you for taking my question.

My first question is regarding the airline booking fees and we have obviously seen some competitors in the U.S.

pull back on bookings fees.

Just wondering if you are seeing any impact there on your airline business?

And then secondly, can you talk about some of the benefits of the TripAdvisor applications on Facebook and how you think these are playing out in your numbers?

Thank you.

Sure, sure, Doug.

As far as the booking fees, you know, no change from what we talked to you about last quarter.

You can see that the growth in our air ticket sales has been pretty consistent over the past couple of quarters.

Our overall air revenue has -- continues to improve, which we are really, really happy with.

You know, our air revenue per ticket been down 2% and that 2% being due to fee activity I think makes our air business, overall, a pretty healthy business.

I will tell you the greatest sensitivity that we see in air ticket growth relates to air ticket prices.

So, I'm watching much more carefully and kind of much higher in my mind our overall air ticket prices versus the fee activity that Priceline has in place and we have certainly talked about it previously.

Hotwire is not charging fees neither.

Neither is our [opaque] channel and just because of the diversity of our various businesses, you know, we have exposure to no fee in certain businesses that are kind of higher growth, and in Hotwire and in Europe, for example.

And then we are charging fees in, call it, our more mature air markets, Expedia.com in the U.S.

for example.

So we don't see any changes in the near-term, we will certainly be watching it.

Really what I am watching more than anything else are air ticket prices.

As far as TripAdvisor on Facebook goes, we are really pleased with the reaction and the uptake of the various TripAdvisor applications on Facebook.

There are three applications that we have that are doing quite well.

There is Cities I've Visited, there is the Local Picks application, and there is also the Traveler IQ Tests, which are all doing incredibly well.

At this point, we are treating -- we are really, really focused on just increasing our distribution on Facebook.

It is not a profit center.

We are spending money on it.

We are in investment mode and it is not something that we are looking to monetize, I would say, in the next year two.

It is really, we think it is an extraordinary audience out there and we just want to get out there far beyond anyone else and we view it as a land grab.

And I think, so far, as far as our transactional or advertising and media competition, we are winning the land grab and that is our mode right now.

Okay, great.

Thank you.

Jennifer Watson from Goldman Sachs.

Thank you.

Just two questions for you.

First, net revenue rates seemed to decline for the first time year-over-year, when excluding advertising revenue from the past three or four quarters.

Can you discuss the primary drivers of this and the trends you see going forward?

And then my second question would just be do you think that your growth rates are representative of the industry?

Or do you think that you guys have continued to gain share?

I will let Mike take on net revenue and I will talk about growth rates.

Yes, on net revenue, as we have discussed, we have seen stabilization with regard to the rates with suppliers, really, on both the hotel and air side of the business.

What is driving the year-on-year decline, excluding advertising and media, are some of the pricing actions that we have taken, in particular more competitive pricing in Europe, which has been extremely successful for us in driving the topline, the reduction -- or the elimination of the Hotels.com change/cancel fee and the various fee actions that we have taken in Europe.

And to some extent, those parts of the business are also growing faster and so you start to see a little bit of a greater impact from those as the businesses continue to grow.

And as far as the growth rates go, it is obviously difficult to tell without the full data being out, but my guess is that we are gaining share.

I certainly think in the domestic markets we are gaining share.

To some extent we are spending to gain share, but we're happy that we are seeing returns on those investments.

The data that we have seen in the European markets suggests that the European market is growing at around 25% on a constant sort of constant currency basis.

We are growing at 35%, so that would suggest that we are gaining share in Europe as well, although we do have a very big competitor, Bookings.com, that I anticipate is going to be growing faster than us.

So, you know, I do think overall we are gaining share, but we're certainly not satisfied with where we stand right now.

Great, thank you.

Brian Fitzgerald from Banc of America Securities.

Thanks.

Just want to quickly confirm organic advertising was up 50% year-over-year.

And then I think last quarter, we saw two-thirds of advertising was from TripAdvisor and network and the third was transactional.

Any color on how that mix is progressing and any color on traction with the TripAdvisor relaunch?

Yes, on the organic advertising question, yes, it was up over 50% this quarter.

And TripAdvisor is around two-third, it is still relatively stable.

The TA relaunch has gone very well.

We launched it in the UK, initially.

There were some bugs that needed to be debugged, so to speak, and after some of the debugging in the UK, we rolled out the relaunch to -- on a worldwide basis.

What we are seeing is increased activity in areas of the site that we wanted to really highlight.

For example, consumers are seeing a lot more -- are looking at a lot more of the consumer videos that we have out there, the pictures, etc., that we have out there.

So we do see increased engagement, so to speak, of the users, and certainly the feedback has been very, very positive.

And we have been able to monetize kind of the new site as effectively as the old design, which is obviously very, very important to us.

So we're pretty happy with the redesign and obviously we're quite optimistic as far as the media and advertising business in general.

Great, thanks guys.

Marianne Wolk from Susquehanna.

Yes, thank you.

You said you saw 35% growth in transactional advertising this quarter.

Can you talk about the kind of growth you might expect to see in 2008 and whether your guidance reflects a similar growth rate there?

And then, two housekeeping questions.

First, wasn't this the quarter you were going to make that major payment to Microsoft?

Did you make that payment?

How large was it?

And was it included in working capital?

And finally, there is a lot left in your repurchased authorization.

Do you still have appetite for your shares.

We're sort of surprised to see that you had not been in the market this quarter or even since the quarter's close?

Thanks.

Sure.

I'm not going to get into specifics as far as the growth rates for our transactional sites versus not transactional sites etc.

What I would tell you is that we think there is significant opportunity out there.

We are designing our sites -- the new site design allows us to sell kind of more standard banner sizes, etc.

for advertisers now than where we were, call it, a year and a half ago, so we think that is going to help our sellthroughs.

Our TravelAds product is young, but it's kind of an entirely new product that we are selling through that we think should provide for growth opportunity essentially from a zero base.

And also, we are really focused on building our sales force to sell our audience, which is a very, call it, high-online-purchasing audience to non-travel advertisers as well.

So we think that is a real opportunity as well.

It is not going to happen overnight as we build up the sales force, but we think it is a real opportunity.

So we have seen nice growth on the transactional sites, the 35% that we talked about, and we think there is plenty of opportunity on a go-forward basis.

Mike is going to talk about Microsoft and I think Barry is going to talk about repurchase.

Great, okay, yes, the amount of working capital does include the Microsoft payment and it was $30 million, obviously not recurring.

On purchasing securities, as we said in the past, certainly net buyers of Expedia and -- but this relates also to our cash position and to other needs for cash and in the last period, we have had higher priorities then purchasing the stock.

In the future, we will continue to be opportunistic and, given our balance sheet and what we think the prospects are for acquisitions and other things, you can look to us in the future to continue to be net buyers of stock.

As you know, there is an outstanding -- there is an amount outstanding -- a number of shares outstanding that is sufficient for us and we will proceed accordingly.

If I could add a little bit of color to that.

I think there are, in general, three factors that go into the determination for us as to whether we want to buyback stock.

One is what we think the underlying value of our company is and where the trends of the business are.

Two is your cost of capital, right?

One -- the first relates to your anticipated return on capital, the second is the cost of capital and the third is exogenous factors, the economy, etc.

I'd say on the first factor, as far as the business goes, we are much more confident about our business, our ability to project it, our ability to execute and I think you guys have seen that this business has become a lot more stable, a lot more predictable.

And I think in general, we are executing better than we ever have and I would say our confidence in the first factor is higher than it ever has been and certainly continues to be as high as it was in 2007 when we made the significant repurchases.

Now, number two, as far as cost of capital and availability of capital, that has swung, as you know, very significantly to the negative.

And, you know, the ability for companies to secure long-term capital -- and I do think that we would want to secure long-term capital at reasonable rates -- has gone very, very difficult.

Hopefully the Fed rate activity, etc.

will solve that, but we certainly haven't seen the debt markets open up, etc., so we do think the cost of capital and availability of capital for us has decreased significantly.

If that changes, that would absolutely be a positive factor for buybacks.

And then, of course, the third factor is exogenous factors, etc.

We have talked a lot about how we see the economy affecting us but there is a high degree of uncertainty going forward, so we are going to be careful about how we deploy capital.

So, I do think that we are going to be balanced about it, but I would not take, call it, the lack of short-term buybacks that you see as a sign of any kind of underconfidence in the business, because it is not.

Thank you.

Aaron Kessler from Piper Jaffray.

Yes, hello Dara.

A couple questions.

First, in our recent hotel survey we conducted that we put out a couple days ago on the European hotels, they indicated some concerns just over the pricing commission rates as well as kind of the fixed room allotments from Expedia Europe.

And I know you've talked in the past about kind of how your premium offering warrants, I guess, a higher commission rate versus your competitors.

So I guess at what point would you consider maybe the lower commission rate to gain hotel market share as opposed to just gaining consumer marketshare?

And one follow-up question.

Sure.

You know, we -- listen, we are going to keep an open mind as to what we do in Europe.

We are constantly going out to hotels, talking to them, etc., and the feedback that we have gotten from our hotels is, of course, they would like lower commissions, but in general, they understand that the off-line spending that we spend on, the kind of travelers that we bring through, it's a different profile from, call it, the European competition and that, to some extent, our higher commissions are warranted.

They don't have to pay credit card fees, they don't have to take fraud, etc., risk.

So the commission rates in reality are a lot closer than they seem.

Where we think we have a lot of improvement to do or a lot of improvement to make is the way that we work with those hotels, the systems, our intranet site, etc., and that is really where we are focused in 2008.

There is an enormous investment going in to allow us to work with those hotels on a smoother basis and to be more open, etc.

I would say, too, that we are making a real investment as far as increasing the number of market managers that we have in those markets not only to increasing number of hotels that we have -- especially in secondary and tertiary markets -- but also to make sure that we are responsive to the individual hotelier's needs, etc.

So we certainly think we have our work cut out for us, but right now, we don't think commissions are a problem.

We think there is a lot that we can be doing better sort of on the ground, so to speak.

Great, and just one follow-up question.

I don't know if you can give us this, but for Ryanair and maybe for other private-label deals, can you give us maybe a sense of approximate how much they contributed to the international growth?

And then when is the Ryanair deal anniversary?

Ryanair is still a pretty modest proportion of our European gross bookings.

It is, I think, less than 5%, significantly less than 5% of our European bookings.

The Ryanair -- it anniversaries, I think, starting in Q2.

Is that right?

It is either late Q1 or early Q2.

Yes.

Great, thank you.

Justin Post from Merrill Lynch.

Thanks for taking my call.

I guess the first question -- and we will get back to the gross profit growth -- but you guided to low double-digit OIBA growth with some marketing and tax expense pressure.

Can we assume that the revenue growth rate is higher?

And then getting back to cost of sales, where are you on the cost of sales front?

Can you still get that margin higher going forward?

Mike, do you want to talk about that?

Yes, so in terms of the revenue -- revenue growth rate, we won't -- we don't give particulars to that.

We have grown substantially in '07 on the topline and do think that there is substantial runway in front of us in '08.

We think that there's a modest gross margin expansion opportunity.

We had significant expansion in '07, a lot of that was driven from some fairly large actions we took on the cost efficiency side.

We still continue to look and see further opportunities, probably not as impactful in '08 as in '07.

In terms of the mix of the business, that can also dramatically impact where the gross margin goes.

So to the extent that the advertising business continues to grow faster than our transactional business, that that is tailwind as well.

Okay, and then I think you said 80% growth for Hotels.com in Europe.

Was that an acceleration versus last quarter and how do you -- I guess you're not going to tell us how you see that going forward, but do you really think the sustainability of that growth rate can continue to?

And is any of that Europe-related -- sorry, Asia-related?

Those figures are European point-of-sale only and the 80% is an acceleration from earlier quarters.

In the year, we continued to expand geographies.

We will continue to add more and more hotels and push on this as hard as we can.

This is our pure play hotel business in Europe and as we know, the market is growing very quickly.

As to whether or not we can keep up rates, rates like that, at some point, math takes over, but we do expect considerable growth again next year.

We are invested pretty aggressively in Hotels.com and, call it, the consumer experience.

A couple of things that we're doing going into '08 is we have eliminated change/cancel fees for Hotels.com in Europe as well and you remember that we did it for Hotels.com in the U.S.

We have done that in Europe, which we think puts us kind of in a more even stead against Bookings.com, which doesn't have change/cancel fees as well.

So we are going to see how the consumer reacts to that.

We are also, for the first time, also investing in branding and off-line branding in the Hotels.com brand.

We have done it in the UK, we have done it in some of the Scandinavian countries and we have seen really, really good response to that as well.

So, it's a growth rate that we are happy with.

And we are investing kind of appropriately and aggressively behind that brand, which we think has very significant potential in the European markets.

And then I would remind folks that the growth rate we gave is in dollars and that we have said that we don't think that we will get as much FX benefit in '08 as in '07.

Okay, and last question, I know you have already addressed buybacks a bit, but the cash flow generation of this business is one of the real good attributes.

You probably have an incremental $800 million of cash as we get towards the middle of the year.

Do you have a plan for that?

Are you just going to kind of see how market conditions and acquisition opportunities are at that point?

Yes, I think, Justin, we are going to be -- I think in this kind of a marketplace, we do want to be fairly flexible as far as what we do and how we do it.

We don't want to be in a position, as you have seen a lot of these financial companies, of, calling it, overstressing your balance sheet and then having to go hunt for capital at very difficult rates.

We are just not going to let that happen to our company and we have seen that happen to unbelievably strong, strong companies out there -- Citibank, etc.

-- and it is just not a risk that we will take.

Barry has been very clear about that.

The Board has been very clear about that.

So we think in this kind of an environment, we are going to be more conservative and aggressive and we will react accordingly.

And when and if in the short-term we do buyback activity, we will report to you for.

Great, congratulations on turning around the market share from '06.

Thanks a lot.

Thank you very much.

We have time for one question.

Mark Mahaney from Citi.

Thank you.

You mentioned domestic hotel inventory, to some extent, freeing up in a wake of declining occupancy rates.

Is there any way you can quantify that or maybe the bind rate and one of the challenges you've had in the past is not being able to perhaps fulfill demand?

Those -- I think you in the had referred to those Las Vegas round-trip vacation packages that you just couldn't hit those bids, now you maybe better able to?

Can quantify that?

And then just on the platform synergies, the platform investment efforts, it seems like you've had a challenge with this to date.

Are we starting from scratch?

Are you starting from scratch on this?

And what is the level of confidence that you can develop -- generate the kind of synergies off of platform improvements that seem to have been kind of elusive so far?

Thank you.

Sure, Mark.

As far as quantifying the inventory situation, I would say that the one piece of quantification that we can make is that we do go out with our various hotels and negotiate, call it, exclusive deals for exclusive offers -- special 20% off if you book three or four days, book four days get one night free, etc.

And when we track the number or the percentage of sales that come from those "special" deals in January versus last year, the percentage of sales that we're getting on those specials are up significantly in certain markets.

So for example, in New York, I saw statistics that we were going through where almost over 50% of our sales in New York City, I think it was for January, were based on special promotions that we put forward.

Now, that is a function of our being able to secure special promotions much more effectively from our supply partners and it also could be a function of the consumer looking and hunting out those special deals as well, which could be a factor in kind of the ADR numbers that we talked to you about kind of at the beginning of the call.

So, we're seeing good inventory out there, and there is some quantification of that.

Obviously, we will be watching it very, very closely as far as how the year kind of progresses on that basis.

You know, as far as the platform goes, no, we're not starting from scratch at all.

The next six months for us are going to be very, very active as far as releases, etc., as it relates to the new platform.

It has just been a delay of, I would say, three to six months and I would say the next six months are going to be really, really important for us.

And we have got kind of or technology teams and IT teams very, very focused on delivery of elements of the new platforms.

The rollout is going to be staged.

It will be different parts of the sites coming out at different times.

And, we hope to see kind of staged improvements as the year progresses.

Because it is staged, again, we don't believe that you will kind of see big, big material improvements in the near-term.

And anytime that you release a new platform, you have all sorts of debugging that you have to do in the early days.

So if anything, in the early days, it probably hurts you more than it helps you as you debug various parts of it.

So, it is on track, it is just later than we wanted to and we're certainly not starting from scratch.

Thank you, Dara.

Thank you, management.

I will turn the conference back to you for any closing remarks.

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

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

We appreciate your interest in Expedia, Inc.

and look forward to speaking with you again next quarter.

Thank you very much for bearing with my frog voice.

I apologize for that.

We look forward to talking to you next quarter.

Thank you.

Ladies and gentlemen, this concludes the Expedia, Inc.

fourth quarter 2007 conference call.

You may now disconnect and thank you for using AT&T Teleconferencing.