Expedia Group Inc (EXPE) 2008 Q2 法說會逐字稿

Welcome to the Expedia, Inc.

second quarter 2008 conference call.

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

Following the presentation we will open the call for a question-and-answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, July 31, 2008.

At this time, I would like to turn our presentation over to our host of the conference call, Senior Vice President of Investor Relations and Treasurer, Stu Haas.

Please go ahead, sir.

Good morning and welcome to Expedia, Inc.'s financial results conference call for the second quarter ended June 30, 2008.

I'm 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, July 31, 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 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 the 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 time to join us on the call.

Now, in the interest of testing and learning, which we do all the time with our businesses, we are going to significantly shorten our prepared remarks this quarter, saving more time for Q&A which we suspect is more valuable to investors.

I will restrict my remarks to the economic environment and capital allocation before Mike goes into some financial highlights.

Now, to the subject at hand.

The economic environment is proving to be fairly challenging, to say the least.

We were probably more cautious than most on our Q1 call and net-net I'd say we are incrementally more cautious now as we face meaningful uncertainty in the marketplace and especially in the post Labor Day period when air carriers reduced US capacities by 10% to 15%.

And while our air mix remains modest, it is difficult to predict the impact of such unprecedented reductions on our other business lines.

The fact is that in the current domestic market it is increasingly difficult and costly to capture the incremental booking as US travelers are shopping harder and harder.

ADRs are coming down, which helps, but we are going beyond that and working alongside our hotel partners to deliver truly exceptional deals for travelers to stimulate demand and gain share.

While the near-term outlook is a bit cloudy, investors should bear in mind that historically speaking travel spending has proven very resilient.

In fact, there have only been a few times in the last several decades where US travel spending has decreased year to year and when it has hit that rare rough spot, it has managed to rebound fairly quickly.

Despite the difficult environment, I'm pleased with Expedia's Q2 results as described in detail in today's release.

One area I'm particularly enthusiastic about is the diversification in our business mix where our advertising and international businesses now deliver over 40% of worldwide revenues, a big shift from 25% just three short years ago.

Domestically, Hotwire had a very strong quarter while both E.com and H.com had their challenges for the reasons described earlier.

Our European points of sales had a very solid performance even though a deacceleration from Q1 due in part to Easter and Leap Day in Q1, as well as some tougher comps this quarter.

To normalize for these, we will point to revenue growth in the first half of ' 08 of 30% similar to the 29% we saw in the first half of '07.

Bookings growth at Hotels.com Europe remains particularly strong at over 70%.

The UK continues to be a big part of our challenge in Europe, but there is also some evidence of macroeconomic softness extending into continental Europe.

For now, our overall growth rates look good but the second half of '07 will present some tougher comps.

Our planned acquisition of Venere adds to our momentum in Europe.

With Venere's agency model, we can offer a more comprehensive solution to hotel partners in this battleground market.

Venere sold over 3 million room nights in 2007, has almost 3 million monthly uniques, and already has agency agreements with nearly 30,000 hotels across the EMEA sector, 10,000 of which are incremental to Expedia.

I expect the transaction to close in the third quarter.

Our ad and media business is continuing to flourish in Q2, growing over 60% organically to reach more than 9% of our total revenue.

Trip continues its global push with its recent beta launch in Japan, and we're driving to launch in China by year end.

Ad revenue on our transaction sites gained transaction and accelerated in Q2 and we have now rolled out travel ads out to two dozen markets and pricing and click through are improving as more hoteliers see the benefit of this tool.

One final area where I know there is significant interest is capital allocation.

As you know, over the past 18 months or so we have announced a number of acquisitions.

To be clear, we are allocating capital to areas that we believe are particularly attractive from a long-term result and accretion perspective and to areas that are highly strategic for us.

Specifically, we consider the travel media sector as well as gaining more scale and supply and demand globally to be core to Expedia's strategy moving forward.

As to our relative success or failure in allocating capital, I would ask you to look at our track record to date in travel media.

This was an entirely new business for us four years when we acquired TripAdvisor.

Since then, we've acquired seven additional media companies in assembling the TripAdvisor media network and in the aggregate have spent just over $400 million, not including Virtual Tourist which we acquired at the very end of this quarter.

We now have a rapidly growing business that, including intercompany revenue, generated $260 million of revenue and $129 million of OIBA in the last four quarters.

Now, while I don't want to get into multiples or valuations for TripAdvisor, I do think that by any measure our strategy and execution from the TA team led by Steve Kaufer have been exceptional.

We will likely slow our acquisition pace in the back half of the year, but will remain opportunistic as always.

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

Thanks, Dara.

I am going to cover Q2 results and financial expectations for full year ' 08.

On the hotel front, the key driver in the quarter was 13% growth in volume, our fifth quarter of double digit room night growth, albeit a slower rate than we have seen in a while.

ADRs grew 1%, down 200 basis points from Q1, and trailed industry averages due to our leisure and weekend skew.

In air, ticket growth decelerated to 4%, impacted by 12% growth in air fares.

And we would expect the capacity cuts coming up in Q3 and Q4 to continue to push air fares higher, putting ongoing pressure on ticket volumes.

Moving to revenue, our merchant hotel business grew nicely in Europe and APAC, but we saw deceleration in North America where room night and revenue per room night growth rates declined.

In air we saw a 9% growth in revenue per ticket due to a combination of factors, including a relatively easy comp driven by some one-time items.

We do not expect to see this level of year-over-year growth in revenue per ticket in the back half of the year.

Operating expense growth was the lowest it has been in five quarters as we lap some of the initiatives we kicked off last year and made adjustments for the current economic conditions, paring back expenses where it made sense to do so.

We intend to continue to balance prudent expense management against top-line growth in the back half.

We pulled back some sales and marketing spend as the quarter developed, most significantly at expedia.com and hotels.com while increasing sales and marketing in higher growth markets like Europe and APAC and TripAdvisor and Hotwire here in the US.

We continue to expect that selling and marketing expense deleverage in full year ' 08 will be less than the 235 basis points we had in '07.

As for financial expectations, the uncertain economy and the air capacity reductions are meaningful headwinds facing the travel industry.

Also, if the continental European economy were to materially soften, that would put additional pressure on our business.

But as we did in Q2, we will monitor trends carefully and navigate appropriately.

As such, we continue to expect full year '08 OIBA will grow in the low double digits.

While we expect OIBA to grow, working capital from our merchant hotel business is growing at a slower rate than we had anticipated due in part tolower than expected gross bookings growth.

We also continue to partner with our suppliers and invest in technology to improve invoicing and payment processes negatively impacting working capital.

And we expect to continue to see increased mix from businesses without the float historically associated with our merchant hotel business.

We expect that float from the merchant hotel business will constitute a smaller percent of free cash flow over time.

As for 2008 we believe free cash flow will decline for the full year.

As a reminder, we typically have negative free cash flow in the second half of the year.

Even with the expected free cash flow decline in 2008, I would reiterate that Expedia continues to be a strong generator of free cash flow.

Quickly, a couple of housekeeping items.

Interest expense from our new $400 million notes will be $8.5 million in each of Q3 and Q4, or roughly $0.02 per share after taxes per quarter.

In addition, we are holding Euro cash balances to economically hedge our pending Venere purchase price, so our Q3 results may be impacted more than normal by any Euro versus USD movements.

As of today, we have about $0.01 loss due to this hedge.

With that, I will now turn the call over to Barry for some closing remarks ahead of questions.

Thank you, Mike.

I think you all know that in spite of current conditions Expedia is certainly doing very well.

I think you also know that we operate the Company for the long-term and I think it has been shown we do every smart thing to adjust to whatever the economic conditions of the day are.

I don't think it should much matter in valuing the Company exactly what happens while in the throws of a negative macro cycle beyond, of course, operating sensibly.

I think there are only two things that do matter.

We are the leaders in travel and we have the ability to invest in our brands during the period.

The economy is certainly going to heal.

When?

Who knows.

But heal it will and consumers will again start spending and they will certainly travel.

Travel, as we all know, is an enduring business.

When the economy does turn, here Expedia stands.

It will be stronger than we were before, not by chance but by a lot of design and an awful lot of effort and certainly investment, and, I would say, about the best execution that I have seen in any enterprise I have looked carefully at.

So, I think the thing for us to do is now to turn to questions.

Mr.

Haas, will you conduct the parade?

Certainly, Barry.

Thank you.

Let's move onto the Q&A portion of the call.

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

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

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Justin Post with Merrill Lynch.

Please go ahead.

Thank you.

Since macro is such a topic of the call, a couple macro-related related questions here.

Dara, how do you see the impact of air on your hotel volumes?

Do you think people might travel more locally and look for local deals so there could actually be a net neutral impact on your hotel or maybe rental car business?

How do you see that?

And the second thing, are you seeing traffic increases as people are doing more shopping to your sites but maybe lower conversion rates?

And, last thing, do you think you will get any exclusives that will help you compete against your competitors if conditions actually get worse?

Thanks, Justin for the questions.

I will try to remember all of them.

On the air volume, it is difficult to tell what kind of effect the air volume is going to have on hotel bookings going forward.

We have certainly seen the effect of the most sensitive kind of metric that we see related to air volumes is pricing.

In average pricing, air ticket pricing was up close to the teens in Q2.

When we look at forward bookings, it is in the mid teens and we definitely see higher prices affecting our volume and we are starting to see those trends, for example, in July and I don't expect that to change.

We are not seeing the same kind of affect on our hotel business.

So if you look at our business right now, the hotel business is in much stronger condition so to speak than the air business and that's something that we expect to see in Q3 and Q4.

I do think that one area that will be affected pretty significantly by not only air volumes but especially air prices is hotel pricing.

So for certain markets when -- where you see air ticket, where you see capacity coming down and air pricing going up and those are markets that are where the consumer can't get to those markets driving.

It is what we call domestic fly-to destinations.

It is a Hawaii, it's a Mexico, for example.

In those markets, I think you are going to see -- we are seeing and you will continue to see hotels bring down rates and ADRs in order to make up for the increased costs of customers getting to those markets.

I think on a go-forward basis as it relates to our financials, the most significant kind of effect that we anticipate seeing from air capacity is actually hotels moving down ADRs in order to stimulate more demand and I will say that consumers absolutely react to lower pricing.

There is no question about it.

We are working with our hotel partners to come in with better pricing and it absolutely stimulates demand.

On the traffic conversion side, we are seeing conversion actually on the hotel side of the business is pretty solid because the inventory that we have is very good.

Conversion on the air side in general tends to be down.

I would say overall on our sites conversion is pretty solid though.

So we are not seeing big conversion issues.

And then as far as exclusives go, we don't really think about -- we don't think exclusives are a good thing in the OLTA environment so to speak because if you got an exclusive, then one of your competitors will try to get an exclusive.

We do have a lot of feet on the streets.

We are and want to be very competitive from a price perspective and so we do go to individual hotels all the time and secure specials.

For example, coming up on August 4 on Expedia and some of our other points of sales, we are launching a 50% off sale for around 500 hotels.

It is a huge sale.

And we are really kind of upping the hurdle as far as securing great, great deals for consumers and we think that's the way forward.

Thank you.

You bet.

Our next question comes from the line of Mark Mahaney with Citigroup.

Please go ahead.

I want to ask two questions, please.

Those hybrid transaction advertising deals with travel partners like you have with Intercontinental Hotel Group.

Do you think other ones like that in the platform, what kind of market appetite do you think there is for that?

And then a free cash flow question.

Post this year, after this year do you think it is reasonable to assume that free cash flow can grow in line with OIBA or are there particular structural reasons that would mean that free cash flow growth will always be below OIBA growth?

Thank you very much.

Sure.

On the question of the hybrid deals, I think that IHG was a bit of a unique situation there and they were very interested in that kind of a deal.

The economics work for them.

The economics worked for us.

So we have not had -- most of the renewals that we have had with our hotel partners and most of the discussions that we have had with the chains have been along the lines of call it more traditional economics.

Let's negotiate margin levels.

Let's negotiate access to supply, pricing, and I don't expect that to change.

We are very hard at work getting more IHG hotels on the site.

They are around, I think, over 3000 hotels that will be on the site, the majority of which will come up in the second half of this year.

And hopefully we will see terrific results for them and terrific results for ourselves and maybe that will spur other partners to look at hybrid models like that as well.

In general, I would say we are fairly neutral economically as to call it the traditional method or hybrid method.

We want to be flexible to work with our partners in ways that work for them and work for us as well.

Mike do you want to talk about free cash flow?

Yes.

Free cash flow going forward, I would say there is a number of factors and of course there are always puts and takes in any particular period.

We do think we will continue to grow free cash flow fairly consistently with OIBA.

For example, just looking ahead to next year, we do expect our CapEx to be lower in '09 versus '08.

'08 had some very large spikes in it for some real estate projects.

I think you will see our cash taxes level off.

We will have a large increase from '07 to '08 in cash taxes that's a bit disproportionate.

On the merchant hotel working capital front, we do expect that to continue to grow going forward but probably less slowly than it has in the past as we continue to invest in technology and process improvements to make us easier to do business with for hotels.

We think that is an important aspect of our proposition going forward.

On the other side, we are growing in businesses that are actually working capital -- consume working capital as opposed to throw it off in the advertising business.

As that gets bigger, that will require working capital, commitments, the corporate travel business and then Venere as an agency business doesn't have the characteristics of our merchant hotel business.

So, net-net, yes.

The answer is yes, that we do think that we can grow roughly in line.

Thank you Dara and Michael.

Our next question comes from Doug Anmuth with Lehman Brothers.

Please go ahead.

Great.

Thanks for taking my question.

Two questions.

First on TripAdvisor.

Given the obvious strength in Q2, it is clearly an important part of the business I think 22% of total OIBA.

Has TripAdvisor seen any negative affects at all related to macro and how resilient do you think that this business is going forward?

And then, secondly, can you also comment on the impact of the departure of MSN in terms of the portal agreement?

Thank you.

Sure, Doug.

As far as TripAdvisor goes, we are watching pretty closely but we have not seen any real affect from the macroenvironment.

I think it is typical for businesses that are growing at these kind of growth rates.

When your organic growth rates exceeds 50%, it is difficult to see where the macroenvironment affects kind of underlie those 50%.

If the organic growth rate came down from 60 to 50 is that the law of large numbers or is that the macroenvironment?

So, in general, the business continues to be incredibly healthy.

We see a ton of potential still in the European markets, especially on the continental markets where we see more shift going into kind of CPC type advertising, the CPM advertising is very healthy across the world, and CPC rates are holding strong if not improving as partners continue to sign up, as more partners sign up with TripAdvisor as the TripAdvisor marketplace gets more competitive and as some of our partners continue to look for more traffic so to speak.

TripAdvisor is a very big gateway to more and more travelers on a worldwide basis and I would say traffic and eyeballs are becoming more dear on a go forward basis in this kind of an economic environment.

And then there is Asia getting into China, getting into Japan.

We are very happy with the execution from the TripAdvisor team and, for now, we expect to see great things of them, but there is no question that we will be watching closely to see if the macroenvironment does have call it a material affect on that business.

On MSN, MSN has been a call it continually shrinking part of our business not going to zero.

In 2007 it was less than 2% of our worldwide gross bookings and revenue and it will prove for E.com to have some challenging comps for the back half of the year.

We think we can take some money that we were spending on MSN.com and spend it on other areas and there are other kind of large partners that are going to come online for us which, again, we think can offset that volume.

So it will be a bit of a challenge.

They have been a good partner for us and we wish them well but it is something that we were prepared for.

It is something that we certainly have taken into account as far as our volumes and our OIBA growth for the second half of the year.

Great.

Thank you.

You bet.

Our next question will come from the line of Jennifer Watson with Goldman Sachs.

Please go ahead.

Dara, can you talk a little bit about the strength in European EBITDA growth?

It was very robust in the second quarter accelerating year on year, and then how we can think about that in the second half?

And also can you just talk about what your guidance implies for the macroenvironment?

Does it assume that the environment stays as it is now or are you building in conservatism for things to worsen a little?

The EBITDA growth in the second half to some extent that was planned.

If you look in Q1, the EBITDA growth was modest in Europe.

European numbers tend to be back half weighted so to speak.

So we plan to spend I would say aggressively going into Q1 and then call it Q2 to be in a little bit more of a harvest mode as far as advertising spend goes.

When you see the increase in our sales and marketing relative to the increase in revenues kind of being more in line in this quarter and actually direct spend was increased a little bit less than revenue.

Some of that was call it more careful spending in Europe and, in particular, in the UK.

The UK market continues to show some weakness.

We are not going to spend call it aggressively into a weaker environment.

Now, going into the second half for Europe, we are going to have tougher comps so I would not expect the kind of leverage that you saw in Q2 but we do expect to see solid numbers in the second half for Europe, especially in continental Europe which is performing quite well.

As far as the macroenvironment goes, I would say in general our assumptions for the macroenvironment are similar to what we see and for the travel environment are taking into consideration issues like capacity cuts coming in for the US airlines.

So it is hard for us to have a take as to are things going to get worse or better, but we are certainly prepared and the way that I describe us is that we are trying to be flexible.

We are trying to have lots of hands on levers and react to the environment appropriately so to speak.

Great .

You bet.

Thank you.

Our next question comes from the line of Imran Khan with JPMorgan.

Please go ahead.

Yes.

Hi.

Thank you for making my questions.

Two questions.

First, I was wondering if you could give us some color, how big is the UK business compared to your total European business?

And, secondly, you talked about average daily rate up 1%.

Can you give us some color on what trend you are seeing US versus international?

Sure.

On the UK, the UK is about a third of the European business.

It is -- in general, the continental business is growing significantly faster than the UK.

So a few years ago, it was a significantly larger portion of the business.

The UK tends to be more profitable than the other continental business.

The more mature our markets are, the US, the UK, where we have a strong brand presence, the higher our profit margins are because a higher percentage of our traffic comes from travelers coming direct to the site.

It is about a third of our business and we expect that to decrease based on the growth rates that we are seeing and we certainly don't see that changing any time soon.

We are going pretty aggressively into new continental European markets into eastern Europe and the growth rates there are very, very high.

It is based on geography and based on everything we are doing, we do expect the UK to continue to become a smaller portion of our overall business.

As far as ADRs go, ADRs in the US were actually negative on a year-on-year basis and European ADRs were positive, obviously helped by FX.

And, in general, the trends we have seen in the US are ADRs to soften a bit.

You see the same numbers you see kind of in the Smith travel data, Q1 ADRs were up 4.7%, Q2 ADRs were up 38.

Last week ADRs were up 2.1.

We will tend to lead the industry as far as ADR softness partially because we are a consumer-driven business, partially because we are a promotional kind of outlet.

So we don't expect North American ADRs to get any better and we do think there could be some softness ahead.

Got it.

Thank you.

Thank you.

Our next question comes from the line of Michael Millman with Soleil Securities.

Please go ahead.

Thank you.

I want to talk or ask you about Venere in particular.

Does this suggest that you want to build an agency model along with your merchant model?

Do you see this as being -- giving you the ability to more competitive price to compete with Booking and you won this at auction.

I was wondering if you paid a full price and if you might have some dilution and, finally with that, the 18,000 I think international hotels in inventory, does that compare with bookings 45,000 or is there some discontinuity there?

Sure.

I think the answer to most of your questions are yes.

We are in the travel business.

Our goal is to be the largest travel company in the world.

I guess we look at life and the markets that we want to enter and the business that we want to be in based on the consumer.

I think on a go-forward basis, there is really no debate as to if there is going to be a very, very huge merchant hotel business and there's going to be a very, very large agency hotel business and I think the distinction between the two on a go-forward basis will increasingly narrow.

Venere for us was an opportunity to use our cash flow to get into the agency hotel business, acquire a large number of hotels in Europe.

I think the number for Venere is around 30,000 hotels and around 10,000 of them being incremental to the merchant hotels we have on Expedia.

I think we will essentially run the businesses separately.

The businesses will be helping each other and we will look at intermingling inventory to the extent that that is appropriate, but I think Venere is very strategic to what we do.

Our main line business is the lodging business and whether that is merchant or agency, we want to be a big player and Venere gave us the chance to make an entry into that marketplace and we took it.

As far as the price goes, we did win it at an auction.

So I guess definitionaly we are paying a full price.

I would say that the prices that have been reported publicly far exceed the price that we actually paid.

Do you see Bookings 45,000 inventory in the near term, in the next several years?

I think with Venere we are at 30,000, adding a thousand hotels on a monthly basis.

So we will get to that kind of inventory level but I certainly don't expect bookings.com to be standing still either.

I think one of the questions we will have with Venere once we start working with their management and we haven't closed yet, so the kind of interaction we can have with them is limited is how fast is it appropriate to increase their inventory?

How do we look at inventory increases on the merchant side versus the agency side?

How do the businesses work together and how do we continue to invest in those marketplaces?

A lot of questions still.

We think we have a great management team.

I was there with the company.

It is the culture of that business is very similar to the culture and the feel that you get in Expedia businesses and it is a great, great brand and it is a great set of employees to join our company.

Thank you.

Thanks.

Thank you, our next question will come from the line of Brian Fitzgerald with Banc of America Securities.

Please go ahead.

You guys have talked before during economic down turns that being an opportune time to take share.

Can you give us some of your thoughts on that strategy?

Would it require any kind of price cuts and, for example, revenue margin in North America declined slightly on impact from competitive hotel pricings, are you taking share here?

Second question is a derivative of that.

Are you still seeing a beneficial supply come in in terms of opaque and packages?

Thanks.

Sure, Brian.

What we -- I think factually we are taking shares certainly in the domestic marketplace, in the US marketplace.

Our room night growth is healthy and I think the trade off is going to be with ADRs.

There is no question that the consumer right now is incrementally willing to spend less for the same product this year than they were last year because their pocketbooks are strained and we and our hotel partners have to work to get them those kind of deals and when they get the deals, they do respond and they do respond in volume.

When you compare our ADRs to industry ADRs, again you see the reflection of the industry using our platform as a promotional platform and I would say we are working better now with our industry partners than we ever have been.

The relationships are closer.

The day-to-day kind of tactical execution is better than it ever has been and what you will see is a gain in share with some weakness in ADR and some weakness in revenue per room night which will put some pressure on bottom line margins.

Not necessarily revenue margins but bottom line margins because their revenue per transaction should see some pressure.

You are also seeing for us as far as our average ADRs and our revenue margin, there is a mix shift, for example, going on into certain markets.

The Las Vegas market has been very aggressive in taking down ADRs.

Our room night growth there is quite healthy, but our revenue per transaction in Las Vegas is not the same revenue per transaction that we have on a national basis.

You are going to see some share shifts in call it leisure markets that are highly promotional which could affect our revenue margin going forward.

Then as far as the supply coming in, our supply growth is very solid.

Our worldwide -- we have added -- our worldwide hotel count is up 23%, North America it is up 20%, Europe it is up 26%.

We are certainly not having any trouble bringing hotels into the marketplace.

We have to make sure we bring demand to those hotels.

We don't want to add them to the marketplace and not get any demand.

You have to kind of balance both demand and supply there, but I would say that the quality of supply that we have in the marketplace right now is better than it ever has been.

I think it is going to continue to improve.

Now, we have access to inventory.

It is about pricing right now.

Again, we have never been able to pull off a 50% off sale which is going to be launched coming up in a couple of days and that is what you will call beneficial supply.

That's what I'm certainly calling beneficial supply that we are seeing in the North American marketplace.

Our next question will come from the line of Vance Edelson with Morgan Stanley.

Please go ahead.

Thanks.

Just a follow-up on that last question on kind of the state of competition in the market given the economic slow down.

Outside of attracting business through lower prices, is there any meaningful ability to change your marketing message to kind of position yourselves better in light of the weaker economy to attract more business from the stretched consumers?

Is that something you are actively doing and do you see any change from your competition in that regard or is it really just pricing?

Thanks.

We have been pretty aggressively -- great question by the way.

We have been pretty aggressively changing our marketing message for expedia.com, for example, to be much more promotional.

We talk about sales going on.

You will see messaging coming up in August that is going to be very promotional related to the big hotel sale we are having and, for example, we have been pushing the gas card fairly aggressively as well.

It is a $50 gas card or $25 gas card that we have been giving our customers to the extent that they book hotel stays for two or three days.

Same thing with the hotels.com.

At the beginning of the year you saw us promoting reviews which was part of a platform we launched and the latest messaging has been, for example, we had a Memorial Day sale.

Our messaging has been very, very aggressive on sale, on price, on gas card which we think is appropriate for the environment.

We are seeing some similar messaging from competition.

Orbitz is obviously messaging their new air product and on a net-net basis we are happy promoting hotels and if they want to promote air, that's okay as well.

Okay.

Great.

Thanks for that, and just one follow-up.

You mentioned reducing the overall ad budget this quarter, I think.

Are there other opportunities to reduce OpEx outside of advertising by looking for internal operating efficiency or anything else?

Can you comment on that opportunity?

We are looking at driving internal efficiencies all the time.

As far as the add budget goes, I wouldn't call it a reduction.

It is just the increase in spend and direct ad spend has been much more in line with revenue than let's say last year when ad spend increased significantly higher than revenue increases.

I'm not saying that is necessarily good news or bad news.

We do want to invest in building our businesses and brands.

We think it is the right thing to do in this marketplace.

On the cost side, you have seen our SG&A growth is now significantly lower than our revenue growth.

That is something that we watch pretty closely and that's despite our SG&A being upped by a corporate move and some new real estate that we are bringing in that is increasing our SG&A.

We are looking for efficiencies all the time.

You do still see the investments that we are making on the technology side.

Technology & content spend grew 30% this quarter.

We are going to keep making investments on the technology side hopefully offset by some G&A leverage and sales and marketing increases not increasing the way that they did last year relative to revenue.

Okay.

That's helpful.

Thanks.

You bet.

Thank you, sir.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Jake Fuller with Thomas Weisel.

Please go ahead.

Good afternoon.

Two questions for you.

Number one, one of your major competitors is running a test of sponsored links on the main site.

Have you thought about that?

What has kept you from doing that in the past?

And secondary, any changes on booking fees particularly on hotels in the US?

Sure, Jake.

As far as sponsored links go, we are looking at it.

We have been testing it actually in Europe.

It is kind of one of the advantages we have.

We have got pretty significant obviously international operations we are running off of, typically similar platforms and we get to test and learn.

When you see us testing, you will typically see us testing in Europe as well.

So if you go to hotels.co.uk for example and you do a search, you will see some sponsor links from Google on the right side and we are testing with that and we are looking at cannibalization.

We will be testing and learning there.

We will be watching our competitor to see what happens.

Right now I would say that we are more focused on rolling out the UI that we have onto the new E3 platform and more focused on building out our UI to drive better search engine optimization and to start to see if we can more efficiently convert consumers based on UI testing.

So changing our UI in order to have sponsored links at least in the US on E.com is not the first order of business based on kind of the work we have in hand and we think there is a big opportunity in SEO, for example, and we believe in focus and that's what we're going to go after.

That's where we will go after first.

We will keep testing in Europe.

If we think it is appropriate in the US, we will.

The second point I will make is we have essentially built our own sponsored listing engine with TravelAds and it is integrated into the hotel path in the US, it is integrated into hotels.com as well.

It is working well and the hotel users who are using it are getting a great return on it.

To the extent that that is something that we can launch and grow, which is internal, we think it is a better equation than using Google ad words, although I'm sure we will put one to the test versus the other to see what happens.

As far as booking fees go, what I tell you, Jake, is we are constantly testing and learning.

You saw lots of testing going on in Q2.

I think that -- I know that you are on this site a lot.

I think you will see more testing on a go forward basis and I will say in general we are quite comfortable where booking fees are and really what we are focused on is the end price to the consumer and booking fees are a part of that and really what we look at is what is the end price that we are getting for the consumer, especially on the hotel side, and I will tell you right now our hotel inventory is just exceptional and the end prices that we are getting to the consumes, I was on the site looking at some hotels in San Francisco, are significantly better than the competition and we think that consumers will react to that.

Thanks, Dara.

You bet.

Thank you.

Management, at this time we have no additional questions at the conference and I will turn the presentation over to Mr.

Haas at this time.

Thank you all 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 certainly appreciate your interest in Expedia and look forward to talking to you next quarter.

Dara, do you have any final comments?

I just wanted to say we get to sit here and talk about what we have done during the quarter, but it is the employees of this company who are doing it.

It is a tough environment.

I think that our team is executing especially well.

So my thank you to them.

And you should know that this is a team that is determined to keep executing going forward and it is our full expectation to do so.

Thank you.

Thank you management.

Ladies and gentlemen, at this time we will conclude today's teleconference presentation for Expedia second quarter 2008 conference call.

We do thank you for your participation.

At this time you may now disconnect.

Thank you for using AT&T HCT teleconferencing.