Expedia Group Inc (EXPE) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Expedia Inc.

first-quarter 2008 conference call.

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

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

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded today on Thursday the 1st of May, 2008.

I will now turn the conference over to Mr.

Stu Haas, Senior Vice President of Investor Relations and Treasurer for Expedia.

Please go ahead, sir.

Thank you, Michael.

Good morning and welcome to Expedia Inc.'s financial results conference call for the first quarter ended March 31, 2008.

I'm pleased to be joined on the call today by 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, May 2, 2008 only.

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

Actual results may differ materially.

We do not undertake in the 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, 2007, 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 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 2007.

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

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

Expedia is off to a good start here in 2008.

Our worldwide employees delivered strong Q1 top-line growth of 20% in bookings and 25% in revenue, with Q1 operating income before amortization growing 21% on the strength of our merchant hotel and advertising businesses.

Expedia continues to meaningfully diversify its business mix, with our international businesses accounting for 32% of worldwide revenue compared with 29% in Q1 of '07.

And our advertising and media businesses grew 73% to account for more than 9% of worldwide revenue compared with less than 7% a year ago.

On the trailing four-quarter basis, our ad and media business now exceeds $200 million in high margin revenue and is an integral piece of our travel marketplace strategy.

From an air and hotel standpoint, I'd say the first quarter came in about as we expected when we last gave you some color back in February.

The US airline industry had another fairly robust quarter, aided by Easter falling in March this year compared to April in '07.

Expedia drove double-digit ticket growth once again this quarter, albeit at a lower growth rate than recent quarters due in part to an 8% increase in airfares, as the carriers struggle with oil's steady upward climb.

Air revenue per ticket grew 6%, indicating further stabilization in our air economics, although we don't anticipate that type of growth continuing throughout the year.

Going forward, I think it's pretty safe to say that the air environment is going to get more challenging from here, and that carriers' bias towards continued fare increases will only take on increased urgency given the price of oil and record crack spreads, accelerating capacity reductions in the back half of the year, recent bankruptcy filings and the long rumored but now materializing industry consolidation.

Now, fare increases not only directly impact demand, they also eat into travelers' travel budgets.

So we will continue to keep a close eye on developments there.

On the hotel side, Expedia continued to see strong performance in Q1, with merchant hotel revenue growth above 20% for the third straight quarter.

The difference in Q1 was our growth came exclusively from room nights, with revenue per room night down 1% on lower ADR growth and lower margins.

This margin reduction came from reducing barriers to purchase through package discounts, eliminating change fees at Hotels.com and more competitive hotel pricing in general.

As we indicated the trend on our last call, ADR growth of 3% in Q1 was down several hundred basis points from growth in Q4, reflecting the industrywide deceleration in ADR growth anticipated for '08, as well as Expedia's high relative exposure to the leisure weekend and mid-scale markets, which have all seen slower growth in '08 compared with the overall hotel sector.

Looking ahead, based on everything we're hearing from travel suppliers and seeing in forward-booking patterns, I'd say we're incrementally more cautious about the traveler than we were last time we reported earnings, particularly as it relates to the back half of the year.

That said, there are also portions of our business that will benefit from a price-sensitive Traveler.

Turning to our brand portfolio, Expedia.com had a solid quarter, but we do expect challenges going forward due to the US economy and higher ticket prices.

Conversion has held steady, but traffic growth has been somewhat challenged, in part due to our trimming marketing spend based on the macroenvironment.

Room night growth accelerated, but lower ADR growth cut into some of the improvement.

Looking ahead, we are very excited about a recently launched Summer of Adventure promotion which piggybacks on the upcoming release of Indiana Jones and the Kingdom of the Crystal Skull.

We have great advertising tie-ins with Burger King, Dr Pepper and some other great brands promoting the movie, as well as package savings up to 30%, with 80% higher hotel participation than in our '07 summer sale.

Our European point-of-sale drove 34% bookings growth in Q1.

While this is strong absolute performance that we believe remains ahead of overall industry growth in Europe, it does mark a deceleration from the levels we saw in the back half of 2007.

Our UK point-of-sale accounted for roughly half the deceleration from Q4 on a bookings basis due to the economy, reduced brand spend and a reduced tailwind from FX appreciation.

As we said before, we do expect comps in Europe overall to get tougher as the year progresses and we comp high back-half growth from '07.

Hotwire had another great quarter, with strong year-on-year growth in bookings and revenue on robust traffic growth and improved conversion.

I'm particularly pleased with Hotwire's continued top-line success, considering that we have a tough comp against 2007 without the TravelCorp business.

As always, Hotwire continues to innovate for its value-driven travelers with its recently debuted deal engine, improving deal-based merchandising on the site, including geo-targeted offers.

Hotels.com grew worldwide gross bookings 22% in Q1, its third straight quarter above 20% growth.

In the US, hotels.com launched new branding and creative focused on hotel reviews, which seems to be resonating nicely with travelers.

Both traffic and conversion are up on the site as the team aggressively monitors and addresses conversion inhibitors.

And Hotels.com Europe continues to perform well, with bookings growth yet again over 50%.

ECT grew bookings in revenue ahead of overall growth rates for Expedia inc.

We continue to keep a close eye on corporate demand, particularly in the US, but as yet we've seen no signs of broadbased softness from corporate travelers.

We will be watching this closely as we move into the back half of the year.

Our APAC business has continued along their high-growth trajectory in Q1, with bookings and revenue both up over 50%.

We were very pleased to launch our 17th Expedia-branded website in India in early March.

Expedia.co.in offers India-based travelers access to our Expedia-wide platform benefits, such as nearly 80,000 hotels and over 3000 attractions, but also local benefits, such as payment in rupees and dedicated care agents speaking both Hindi and English.

As with many of our APAC sites, it is very early days in India, but we are delighted to have meaningful footholds in longer-term markets such as Australia, China, Japan, New Zealand and now India.

Our advertising and media businesses continued to flourish in Q1, with over 50% organic growth on the acquisition of Airfarewatchdog.com and Holidaywatchdog.com in the UK.

TripAdvisor itself had another great Q1, not only financially, but operationally.

The content acceleration inherent in a viral business model like TripAdvisor is reflected in Trip's attaining to 15 million reviews and opinions threshold less than a year after hitting the 10 million mark.

We are further leveraging Trip's media leadership position, extending its search engine marketing and search engine optimization expertise across our own network and to the larger Expedia brand portfolio.

Advertising revenue on our transaction sites continued to gain attraction in Q1, with acceleration and growth compared with Q4.

We've continued to iterate on our [NAS] and TravelAds' product through rigorous A-B testing, and have seen dramatically improved click-through as a result.

Later this month, we will be launching Version 2.0 of TravelAds in test markets, featuring an improved advertiser UI based on feedback from hoteliers, including invoice billing, weekend versus weekday bucketing, and the implementation of TravelAds also on Hotels.com.

On the supply front, PSG continues to excel.

Just last week, we signed Air Berlin, Germany's number two airline, to a full-content multiyear agreement.

In hotel supply, we have welcomed some initial IHG properties back to our sites, and we're continuing to add market managers in Europe to drive our continental hotel acquisition.

We've got a long way to go in adding hotels, but net property additions in Q1 exceeded our goal.

And the upcoming addition of local language capability to our extranet should improve Expedia's appeal to smaller market hotel proprietors.

Before turning things over to Mike, I did want to make some brief comments around air booking fees, as some of you have no doubt notice that we've recently been testing fees ranging from zero to $8 on Expedia.com.

I think the first thing to note is that this really is not a change of approach, as we have been experimenting with varying fees in a number of geographies over the past year or so.

And while I don't think we've reached any permanent conclusion on fees, we do believe that the fee level in a given market depends on many factors, from competitor rates and reactions to the maturity of the market and demand elasticities.

I would also say that we don't view booking fees in isolation, but in conjunction with other pieces of the customer value proposition that may change over time.

The only thing I can promise is that we will continue to test and learn in each market and focus on assuring that we're delivering appropriate total value to our travelers.

In closing, 2008 is off to a good start, but we're well aware of the challenges in the macroenvironment, consumers spend and confidence, particularly as we move past the summer travel months.

That said, we believe Expedia is well-diversified and executing to drive sustained growth and long-term shareholder value, well-positioned as the leader in travel to help our supply partners in times of need, and of course helping our travelers find great deals and great service.

World-class companies deliver value in good times and bad times, and Expedia's goal is to make good on that standard.

With that, I'll turn the call over to Mike.

Great.

Thanks, Dara.

Good morning, everyone.

Rather than review information sufficiently covered in today's release, I'm going to provide more fulsome commentary in three areas of investor interest -- marketing efficiencies, the impact of foreign exchange on our business and cash flow trends.

I will close with an update on our financial expectations for 2008.

Selling and marketing costs are by far our single biggest expense.

And as such, the efficiency of the spend has a significant impact on OIBA margins and operating leverage.

In Q1, selling and marketing expense increased 29%, ahead of revenue growth of 25%.

This translated to 141 basis points of OIBA margin deleverage.

There are two key drivers.

The first is increased personnel costs in higher-growth strategic areas of our business, including the TripAdvisor network and our other advertising teams, as well as our expanding staff of European-focus market managers in PSG to attract and retain properties in that market.

We added twice as many merchant hotels in Q1 '08 in Europe compared to Q4 '07.

As would be expected, there is a ramp-up period where we're incurring costs without an immediate payoff.

But our firm belief is that these are the right long-term investments to make.

The second driver is our direct advertising efforts in the Europe and APAC markets.

In Europe, SEM is becoming a larger part of our marketing mix and where experiencing keyword inflation.

We've also ramped up off-line spend in Europe to support the emerging Hotels.com brand.

And we've seen lower efficiencies from our more recent private-label deals.

Another variable at play here is mix.

On average, our international businesses have less efficient marketing compared with our US businesses, since the latter has had the benefit of extensive long-term branding behind it.

So as our international mix grows, it pulls down our overall marketing efficiency.

Over time, we expect international efficiency to improve, but as we expand into more countries every quarter, it is a near-term headwind.

We continue to expect that selling and marketing expense will increase as a percentage of revenue for full-year '08, but less so than the 235 basis points of deleverage in 2007.

We also expect more deleverage from these expenses in Q2 compared to Q1, given the absence of Easter stay revenues.

Turning to foreign exchange, this is a topic that is rightfully receiving more and more attention from the investment community.

Expedia currently derives 32% of worldwide revenue from international markets, and we have our sites set on reaching the 50% mark.

So understanding the FX impact on our model is becoming increasingly important.

As would any company reporting in US dollars, our international operations generally benefit from the strengthening of foreign currencies versus the dollar.

In Q1, our gross bookings of revenue both grew approximately 3% more than they would have had exchange rates remained the same as they were in the prior-year period.

Note that this is greater than the 1% to 2% FX benefit to Q1 '07's top-line figures.

While we neither want nor deserve credit for these currency fluctuations, the fact is our results measured in dollars are better due to FX and have been since mid-2006.

Needless to say, this is a double-edged sword, and if the foreign currencies in places we do business were to begin depreciating against the dollar, our results would be negatively impacted.

Another place in our financials where you see an impact from FX is in the other net line on our P&L.

We take a gain or loss here to reflect the impact of FX on our foreign-denominated assets and liabilities, including those due to intraquarter movements in exchange rates.

A final note on FX.

This is hard to quantify with precision, but obviously movements in currencies impact travel patterns.

US travelers have found it increasingly more expensive to travel to Europe, while Europeans have been riding the strong euro and pound to New York, Las Vegas and other popular US destinations.

Q1 was fairly unique in that the pound lost ground to the dollar and euro, so we saw a negative impact on both our UK to Europe and UK to US businesses.

Fortunately, we have meaningful traffic between the UK, Continental Europe and the US, so we have a bit of a natural hedge.

But this dynamic is certainly something to be aware of.

On cash flow, you'll notice in today's release that while Expedia's Q1 OIBA grew 21%, our year-on-year operating cash flow was up just 5%.

While most of the difference is in working capital related to our merchant hotel business, cash payments related to annual incentive comp, net interest and taxes were approximately $30 million higher in Q1 '08 compared with Q1 '07.

On the working capital front, Easter was certainly a large factor, as our February to March ramp in hotel bookings and in turn cash flow was more pronounced last year as people were still booking Easter travel in March.

Whereas that bookings ramp up occurred in February in 2008, and the seasonal post Easter low in bookings and cash hit us in March this year compared with April in '07.

Further, revenue and OIBA associated with Easter stays in Q1 '08 were reflected in Q2 in '07.

So we think comparing first-half results in each year will be a more accurate indicator of year-on-year cash flows than either the first or second quarters in isolation.

Lastly, our working capital benefit from merchant hotel in Q1 was also impacted by some year-on-year compression in the booking window particularly atHotels.com, as well as more efficient payment processing.

It's unclear whether the booking window compression is a reflection of an early Easter or perhaps later planning by families in uncertain economic times.

But on the payables side, we do expect the shorter pay cycle to continue going forward.

I'll close with our revised expectations for '08.

We remain appropriately cautious about the economic environment, and we've certainly seen some impact here in early '08 on travelers and suppliers.

We have slightly scaled back some of our investments in the business and continue to take measures to ensure flexibility as conditions evolve.

Therefore, despite the challenges, we continue to expect full-year OIBA will grow in the low double digits in full-year '08, absent any meaningful worsening in the ADR or airfare environments.

We expect free cash flow to grow more slowly than OIBA, given $140 million to $150 million CapEx and a lower working capital benefit for the reasons I touched on earlier.

While we don't provide quarterly expectations, I do want to remind investors that Q2 will be a particularly tough comp due to the shift of revenue to Q1 due to an early Easter, our plan to aggressively market in Q2 to seed spring and summer travel and our having now comped most of our media acquisitions.

As such, we anticipate modest Q2 OIBA growth.

Before moving to Q&A, two brief housekeeping items.

Our gross bookings and other operational metrics now exclude results from a French joint venture in which we have a minority interest.

Since results from the JV are not consolidated in our financial statements, we thought it more consistent from an analytical perspective to exclude them from these metrics as well.

This has no impact on revenue, OIBA or cash flows.

Second, we are excluding gains and losses relating to changes in the value of eLong's USD cash balances from adjusted net income and adjusted EPS, as these amounts do not reflect changes in the economic value of these cash balances to Expedia, and they are not directly tied to the core operations of the business.

Please note that this change increased Q1 adjusted EPS by $0.01 to $0.24 from $0.23 under our historical method of calculation.

We've provided adjusted metrics for bookings and adjusted EPS back to Q1 '06 on page 14 of this morning's release.

I want to thank everyone for your time today and I will now turn the call back to Stu to kick off Q&A.

Thanks, Mike.

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

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

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

Thank you, sir.

(OPERATOR INSTRUCTIONS) Aaron Kessler with Piper Jaffray.

Just a couple of questions.

First on the Hotwire business, it appears they had a good quarter.

Do you believe Hotwire is somewhat countercyclical, especially people looking for better deals.

Now on the European side, are you seeing similar growth in UK as opposed to Continental Europe and any signs of a macro slowdown yet, or has it just really made tougher comps year-over-year?

Thank you.

Sure, Aaron, on Hotwire, we definitely think that there are countercyclical elements in Hotwire.

The kind of inventory that we are getting in the marketplace, the Hotwire marketplace, is actually very, very good.

And there are certainly consumers coming in looking for deals.

Through a lot of good work that the Hotwire team has done, we've been able to push up conversion there, which then allows the team to go out and bid higher on terms, on search engine marketing terms and also be more aggressive on the marketing side, which leads to higher volume.

And if you look at Hotwire's performance versus the macroenvironment, last year was a dynamite year.

This year I think is going to be a very, very good year.

And it happens to correlate somewhat with the economy and also I think really good week work again done by the team.

Also, just a reminder to you, we've got comps -- top-line comps are tough for Hotwire because we lost the TravelScape business, but the business is performing really, really well, regardless.

You can also see a little bit of that countercyclical element in our package business as well.

Again, a little bit similar to the (inaudible) channel.

Even though we are not getting the kind of air nets that we got call it two, three years ago in the package business, you are seeing growth again in the package business.

And that is because the inventory in the package path is better, and consumers are definitely shopping around and looking for deals.

As far as Europe goes, we definitely saw a slowdown in the UK, a macro slowdown in the UK.

But I wouldn't put the slowdown in our business on the UK entirely on the macro environment.

I think is a more competitive marketplace and we proactively took some marketing back on UK in Q1.

We are going to market a bit more aggressively in Q2 when we are seeing decent volumes in the UK.

If you look at revenue growth, in the Continental business X UK in Europe, this quarter was 56% versus 58% in Q4 of '07.

So X UK, the Continental European revenue growth is essentially identical on kind of a quarter-to-quarter basis.

So, we're watching the Continent, but we definitely don't see macro signs as far as any effect on travel over there as of yet.

Great.

Thank you, Dara.

Marianne Wolk, Susquehanna.

Thanks.

A couple of quick questions.

On the advertising surge, in the past you told us that TripAdvisor was roughly two-thirds of advertising.

Is that still the case or did some of the benefits that you saw on the Expedia.com site shift that balance?

And then also, just wondering on the merchant hotel inventory in Europe, I thought you were running around 15,000 merchant hotels over there.

Is that the right property account?

Just hoping you can give us a little update there too.

Sure, Marianne.

On TripAdvisor, it still is more than two-thirds of the advertising there.

There are seasonal effects there, but we expect it to be more than two-thirds.

With some of the acquisitions that we have added into the TripAdvisor media network, my anticipation is that it is going to be well past two-thirds of the revenue there.

But revenue, kind of organic revenue growth in that whole sector is over 50%; it's very, very healthy.

And there's a ton of growth there, not only in the US, but especially internationally.

For example, TripAdvisor we expect to be in Japan and China by the end of the year, as well, just expanding the network.

We are really not after revenue growth there, but it is kind of establishing the TripAdvisor profile there, trying to get local language reviews, etc.

So very healthy growth on both sides and still over two-thirds.

On the merchant hotel side, we are at 15,000 hotels in Europe.

It's up 1000 this quarter, and we actually expect that pace going forward to accelerate.

Because we are investing -- we are pretty focused on investing not only in people and systems there, which should ease the acquisition of hotels in Europe and the Asia-Pacific region as well.

Thank you.

Brian Fitzgerald with Banc of America Securities.

Thanks, guys.

Just one moment, I'm sorry.

Do we have the questioner on the line, operator?

We just lost him momentarily.

Just one moment.

Mark Mahaney with Citi.

Okay.

A couple of questions.

First is, any comments, Dara, on ability to gain greater access to hotel inventory in the US in this declining occupancy rate environment?

Secondly, is there any way to know the Europe deceleration you saw, to what extent that was due to market share losses in the quarter.

Are there any specific examples of hotels -- I know the overall hotel count increased with you, but were there major hotels that fell off?

And then third, of the advertising revenue, how much of that -- any comments on the international element of that and how that is growing?

I know that is relatively small, but where that is Thank you.

Sure.

As far as access to hotels in the US or hotel inventory in the US, we have always had access --I guess I'll put it differently.

In the past three years, we've had very good access to inventory in the US.

So as far as having the inventory and having the availability, that hasn't fundamentally changed.

What has changed a bit in this kind of environment is access to what I will call promotional inventory for the hotels, where to the extent that -- at least the pattern that we are seeing of the hoteliers in this kind of a market is occupancies are coming down, but remember that supply is up in the marketplace as well.

So I still think that the number of room nights being [drawn] are up on a year-on-year basis.

And what hotels are trying to do is hold onto ADR gains to drive RevPar.

Now what they're doing with a channel like ours, which is a significant channel but it's a promotional channel, is they're using our channel to drive promotional inventory.

And the amount then of promotional inventory that we have available is increasing on a year-on-year basis, which is also being reflected in our consumer behavior.

If you look at the percentage of, let's say, bookings in a market like Miami that is on promotional inventory, let's say, stay three nights, get a free night, or 30% off, etc., the percentage of deals and transactions that are happening off of promotional inventory is up pretty significantly.

Another view of that, for example, is with our summer sale last year, we had around 1000 participating hotels, around 200 destinations.

And this year we've got 1800 participating hotels, around 200 destinations as well.

So, we had the inventory last year; we have the inventory this year.

The difference is the access to the promotional inventory that we have.

As far as in Europe goes, the deceleration, again, I think is significantly attributable to the UK.

And if you look at our growth rate, certainly in the Continent, I think that the growth rates are significantly in excess of call it market growth rates in Europe.

That said, certainly seeing bookings.com growth rates last quarter, unless there's been significant deceleration there, I do think that they are going to be growing faster than we are in Europe.

But as far as the other competitors go, I think we are doing just fine in Europe and we continue to gain share overall in Europe.

And as far as the hotel supply in Europe goes, we are in good shape there.

We're adding; they are net adds.

We don't see hotels dropping off in any kind of significant manner at all.

And we've IHG coming back towards the back half of the year.

So from the inventory -- on an inventory basis, we actually expect our hotel inventory in Europe to be significantly strong call it by the end of this year than it is now.

We think we've got good trends there.

I think your last question was on international advertising.

I don't -- Mike, do have the number there?

Yes.

International advertising makes up approximately 20% to 25% of our total advertising revenue.

It is an accelerating growth rate within TripAdvisor.

And then with respect to advertising on our transaction sites, our European advertising business is starting to scale very quickly as well.

So we expect that number to increase.

And it's significantly lower than the amount of traffic that comes from the international site.

So we think there is -- as you have the advertising dollars catch up to the traffic, you're going to have goodness there.

Thank you, Dara, thank you, Mike.

Brian Fitzgerald, Banc of America Securities.

Thanks, guys.

I wanted to drill down a bit on the impact of mergers in the airline business.

Should we expect bookings to be impacted or would it be more subtle, where you see an impact to ticket price increases on the consumers?

Perhaps same bookings levels but with less disposable income on higher prices, you are getting less other things booked there?

And assume you took this consideration into your outlook for OIBA going forward.

Yes, Brian, I think the answer is, it depends.

Ultimately, the most relevant factor that we see affecting our bookings is ticket prices.

And I'm talking about our air bookings.

And it depends part is it depends on what the airlines do as a result of consolidation.

If they do take out capacity, that will naturally, just by the laws of supply and demand, drive up prices.

And if they do drive up prices along with lower capacity, that is going to have a negative effect on our air ticket volumes.

As to follow-on effect that it has on call it hotel bookings, travel, etc., I wouldn't expect that effect to be positive, but it's too soon to tell what that effect would be.

So it might have some kind of negative effect on kind of downstream spend.

And if the consumer has a certain amount to spend on travel, if they have to spend more of their dollars on air ticket prices, they are going to have less to spend on hotels and other activities, local activities.

The other effect that we would expect to see is a higher percentage of travelers traveling to drive markets.

So more driving on vacation.

And kind of if you click one level deeper on that, the markets that we would expect to see most affected in the US are call it fly-to domestic markets.

So, markets where you've got drive-to markets I think are going to be less affected as far as downstream impact.

But fly-to markets are going to be somewhat affected because there will be less capacity flying in, and of people flying, prices are going to be higher.

Got it.

Thanks.

Justin Post, Merrill Lynch.

Thank you.

First, Dara, maybe you talked about the Company's philosophy with the tech spend; clearly higher than some of your competitors.

And just wondering when you think we might start seeing that, if we're not already, in some of your results.

Has it already started affecting your bookings or do think you'll start to see some improvements on the marketing side or the customer efficiency side that we could start seeing?

And then if you could also comment on the tax situation with cash flow.

Which line in the cash-flow statement would the year-over-year differences in paying more cash taxes show up in?

Sure.

As far as the tax spend goes, Justin, I'd say that you are seeing some returns on that spend, but certainly not -- let's say we're not in the final inning there as far as the returns go.

In general, if you look at conversion rates across our businesses, in the past I would say -- and again, I'm generalizing, so there may be differences between point-of-sale.

In general, conversion rates have been stable to going up.

If you compare that to where we were three years ago, conversion rates were dropping.

Part of the reason for -- now, you could argue that there's actually more competition now than there was two or three years ago; everyone is getting better at their game.

Part of the reason for the stability of conversion and part of the reason for increases in conversion in certain of our lines of business are because of the technology investments that we're making.

Very hard focus on why it is that consumers drop off, why it is that they don't convert.

And going in and fixing those issues and frankly having much better measurement tools than we did in the past.

Now, that is not -- again, the returns that we're seeing, that is not the full returns that we expect.

And I think that by the end of the year, especially on the Expedia.com points-of-sale and eventually in Europe, you are going to see different UIs.

You will see our ability to move much faster and test and learn much more quickly as far as user interfaces, what works, what doesn't, than we have been in the past.

And that is going to start this year towards the end of the year.

Last, but certainly not least, we've talked about search engine optimization a lot and getting our sites much more optimized for search, which it isn't right now.

That is also going to roll in this year.

So that by the end of the year, I think our site will be significantly stronger on the SCO part, which will attract traffic that right now we essentially don't.

So we do think that by the end of year it's going to be a combination of traffic and it's going to be, hopefully, continued goodness on the conversion side.

And Mike is going to answer your cash tax question.

Yes, I want to make sure I understand the question.

As I heard it is which line item does the year-on-year change in cash tax payments appear on the cash flow.

Is that right?

Yes, I'm assuming it might be in one of the payable lines.

Yes, it's in accounts payable other accrued expenses and other current liabilities.

Great.

And one follow-up.

You did see the deceleration in Europe bookings.

Do you think that levels off at some point or is it some trends you expect to continue to see as we go through the year?

You know, hard to tell, Justin.

I think that the UK on a year-on-year basis for the balance of the year should be better; we've made some adjustments there.

And so I think that we will see better performance from the UK in the back half of the year versus the front half of the year.

On the negative side, if you remember last year, we were rolling through decreases in air booking fees in Europe.

And as we comp over kind of a like-to-like, which is no booking fee to no booking few or low booking fee to low booking fee, some of the year-on-year growth is going to naturally decrease because of just the lapping effect.

So we're going to have positives and negatives; I don't want to be more specific than that.

Okay.

And, Dara, have you ever given people the data on the mix between air and hotel in Europe?

Can you help us out at all with that?

What I would say on the mix -- and Mike, correct me if I'm wrong -- is that in general, EU has a lower air mix than the US.

I think that is all we've said.

That is correct.

Thank you.

Doug Anmuth, Lehman Brothers.

Thank you for taking my question.

Dara, you mentioned your experiments with booking fees.

Can you talk a little bit about what you've learned there so far and also whether you have any view on what the airlines could do with their booking fees?

Because we've seen some testing there as well.

And then a second question, can you comment on the growth in revenue per air ticket?

I was a little bit surprised to see that positive this quarter.

Thank you.

Sure.

As far as booking fees go, I don't think we are ready to make any kind of statement as far as what we've learned.

We are still in the test and learn phase.

Our ability to test like we are now is partially a result of some of the technology improvements that we made.

We weren't able to before kind of test the way that we are now.

And we're in data collection mode.

I think that, as I said in my prepared remarks, in the US, we don't see ourselves eliminating booking fees.

We think that as a percentage of kind of as ticket prices go up, as a percentage of the whole, it is fairly low.

And we don't see ourselves allocating more capital as a cut in booking fees would be to the domestic air business for Expedia.com.

For Hotwire, we have cut booking fees, we've seen good response there, and we don't see that changing on a go-forward basis.

Again, if we have more to tell you, we will certainly come out with it.

Mike, do you want to talk about air revenue per ticket?

Yes, thanks.

First thing to note is that we actually have a fairly easy comp.

If you go back and you look at Q1 '07, you will see that the air revenue per ticket was down 20%.

We did have some timing benefits in our favor in Q1.

And I would say as compared to the 6%, a more normalized number is closer to 3% growth.

I would also note that there is no real benefit to increased fees in that number, as the tests that we ran really had an immaterial impact.

Generally, we expect there to be some unevenness in revenue per ticket, but we think it will be pretty stable on a sequential basis in '08.

But we certainly don't expect increases of this size in any of the subsequent quarters this year.

Okay, great.

Thank you.

Scott Kessler, Standard & Poor's.

Thanks a lot.

Two questions about Europe.

One is indications are that route rationalization is starting to occur there.

Obviously, there is some discussion about that occurring in the US as well.

I'm wondering if you've seen the impact in Europe at all, and if so, what do you think the effect would be on Expedia's business.

The second question I have is you highlighted the notion of keyword inflation Europe.

I'm wondering if somehow you could quantify that.

That would be helpful.

Thanks a lot.

Sure, as far as Europe goes, the route rationalization, we haven't seen any kind of direct impact there.

Again, similar to what you say, we've seen carriers talk about capacity.

And obviously, to the extent that capacity does come down or growth in capacity comes down, we will see some effect on pricing.

And we think that the same rules that apply in the US will apply to Europe, which is higher ticket prices will probably result in lower demand.

But we haven't seen anything as of yet, Scott, so I think it is too soon to comment as far as the affect on us.

If we see anything next quarter, we will certainly update you on that.

As far as keyword inflation goes, on Google, etc., we have seen keyword inflation; it's in the double digits.

More than that we're not going to quantify.

Now, as an entity, the good part about our advertising and media business is that to some extent we are hedged against that.

We are a big spender on Search, but we are a big spendee as well.

And when you look at TripAdvisor and the assets that we have there, some of the revenue growth that we are seeing there is coming from higher CPC prices that travel companies out there are spending.

And we certainly haven't seen any kind of effect on CPMs, etc.

CPMs in the advertising business is pretty strong.

We haven't seen any kind of economic effect as of yet.

Okay, great.

Thanks a lot, Dara.

Jennifer Watson with Goldman Sachs.

Great, thank you.

Can you talk a little bit about the margin structure of the business longer-term and where you think it will stabilize?

Obviously, we've seen some contraction over the past several years.

So I just wanted to get a sense of are you guys more focused on a targeted OIBA margin over time or operating dollars?

Yes, we're -- I would say over the long-term, we are focused on free cash flow generation and call it quantum OIBA and quantum free cash flow.

So, we don't measure ourselves by the specific margin; we measure ourselves by the bottom-line growth and how much cash that the company is throwing off.

Now, there are puts and takes as far as margin on a go-forward basis, and I can certainly go through some of the puts and takes for you.

The international business in general is a lower margin business than the US, the vast majority of that being on the marketing side.

The marketing spend internationally is significantly higher than that of the US.

And as international business becomes a higher percentage of our overall business, you are going to see sales and marketing spend on an overall basis increase.

Over a long-term period, as -- typically the more mature international markets have better marketing efficiencies, so over a long-term period, you might see some of that mitigated as some of the markets mature and we get more repeat passengers, etc.

You will see, as our sales and as our media and advertising businesses grow as a percentage of the total, you should see higher margins as a result of that, which could be offset, let's say, fee cuts, etc., that we're taking in Europe, for example.

We are trying to remove barriers of entry for consumers.

We've been cutting fees in Europe, we've eliminated change-cancel fees in Hotels.com.

Those kinds of actions definitely take a hit on short-term profitability, but we think it's the right long-term action to take.

So I guess if I put it all together, again, lots of puts and takes.

I do think that on the G&A side of the business over the long-term, we absolutely expect to see leverage there.

And then otherwise.

depending on the growth of the business internationally, domestically, you may see different effects on sales and marketing, etc.

And I would add leverage on the tech and content line.

Yes, that should start happening.

And again, if you look on -- for example, last year, we increased the spend on tech and content in G&A fairly significantly between Q4 of last year to Q1 of last year.

You're not going to see that kind of increase this year.

Okay, great.

Thank you.

Michael Millman, Soleil Securities.

Thank you.

You mentioned that the promotional hotels, particularly in the US, has increased.

Could you talk about what the impact is on the bottom line or in other lines and how that may impact your packaging?

And second, particularly in Europe, can you talk about hotel tenuring?

By that I mean, once you have inventory, is there some natural growth in the amount of business you do between one year, two-year and sort of evening out at some point?

Thank you.

Sure, Michael.

As far as the promotional hotels go, it's hard to tell, but we think that the effect on the bottom line is essentially neutral.

And I think you kind of see it in Q1.

To the effect that were getting promotional inventory from the hotels, because of our margin structure, because we get a cut of the transaction, we make less per transaction just like the hotel makes less per transaction.

So we are promoting along with the hotel.

So, that transaction is less profitable, but you do see it driving transaction growth.

So for example, if you look in Q1, we had a higher growth rate in merchant hotel rooms than we've had in, I think, two, three years.

So you saw an acceleration of merchant hotel room night growth, but a decrease in revenue per room night.

And that is exactly what we would expect to see in call it a promotional environment.

So I think on a net-net basis, the two cancel out.

Now rate is higher margin.

If you get a big rate on a hotel, there are essentially no costs associated with that.

So to the extent that you are making up rate with volume, there are costs associated with that, customer service costs, fulfillment costs.

So maybe it might be a slight negative as far as call it the bottom line goes.

On Europe on hotel tenuring, I think the way we view it is we want our growth rates in Europe to grow consistently with our hotel inventory.

And if you look at the last year, the growth rates in Europe exceeded the growth and the number of hotels that we have in play.

So just doing the math on that, you would expect that the sales per hotel would be increasing.

And I think this year we are pretty focused on increasing the number of hotels that we have in the system as well, just to give our consumers more choice and kind of increase breadth and depth.

How long does that tenuring last typically, before it sort of flattens out?

I'd say there is no typical.

It depends on the marketplace; it depends on if a hotel is in a city center versus a seasonal hotel.

There are certain hotels in New York, London, etc., where we do an enormous amount of business, and we are very, very deep partners.

The merchant business itself lends itself to driving very high volumes to strong hotel partners.

And, you know, it's a relationship that takes time.

Thank you.

Imran Khan, JPMorgan.

Yes, hi.

Thank you for taking my questions -- two questions.

Dara, I wanted to dive a little deeper on your statement that you are incrementally cautious.

I was trying to understand can you give us some color, whether is it U.S., UK, or Continental Europe; which part of U.S.

you are seeing more weakness?

Any geographic color would be very helpful.

And secondly, I think in your statement you said that you are doing very well from most of the competitors, but bookings.com is going faster.

Can you give us some color what kind of initiatives you are taking, and when do you think you can catch up with them?

Thank you.

Sure.

As far as the more cautious stance, I think it's based on just the intelligence that we see around in the marketplace.

If you look at the Smith research data, Q1 occupancies are down 2.7%, and I think in general the trends point to weakening occupancies on a go-forward basis.

And the question is whether ADRs are going to hold up the way that they are going to hold up.

If there is any sector that I am more cautious about, it is the U.S.

consumer.

I think there was some economic data, for example, yesterday that came out which is all of the economic issues that we are seeing, gas prices, etc., are hitting the consumer wallet.

And while we absolutely believe that the consumer is going to travel, that they are going to take those trips, we do think that they are going to be more cautious in their approach.

And that if they are hurting in the pocketbook, they are going to spend a bit less on that trip than they did last year or the year before.

So it's just everything that we see around us in the US.

I think that the UK is going to be a bit more like us.

Again, Continental Europe, we are seeing some -- we're listening to all the signals that everyone else is listening to.

But for us, Continental Europe demand remains very strong and Continental Europe demand, especially into the US, that kind of demand is quite powerful.

As far as bookings.com goes, the plan to take them on is pretty similar to the plan that we had last time around.

Again, we said that we can't kind of achieve everything overnight, which is much more aggressive supply acquisition on the European side.

I think that, Mike -- correct me if I'm wrong -- but we acquired double the number of hotels in Q1 this year in Europe than we did last year.

Than in Q4.

Than in Q4, I'm sorry, and our targets are going up from here.

So much more aggressive hotel acquisition, more aggressive acquisition call it in kind of secondary and tertiary markets, so improving supply.

And then some of what I talked about as far as the technology improvements, I think our UI is going to get better.

Our search engine optimization across the board is going to get more effective.

And then last but certainly not least, consumer-centric initiatives; lowering booking fees for consumers in Europe even on the hotel side.

Hotels.com in Europe has eliminated change/cancel fees, etc.

So kind of across the board really trying to make our service the very best service out there.

And I think we are seeing it in the performance, and we expect a lot from that group going forward.

Great, thank you.

All right, thank you.

There are no further questions at this time.

Please continue with any closing comments.

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

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

Appreciate your interest in Expedia and certainly look forward to talking with you again next quarter.

And thank you very much, and we will talk to you next quarter.

And special thanks to all of our employees who are working really, really hard to make this happen.

So thank you.

All right, thank you.

Ladies and gentlemen, this does conclude the Expedia, Inc.

first-quarter 2008 conference call.

You may now disconnect.

Thank you for using ACT conferencing.

Have a very pleasant rest of your day.