Expedia Group Inc (EXPE) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Expedia Incorporated fourth 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).

This conference is being recorded today, February 19, 2009.

I would now like to turn the conference over to our host, Mr.

Stu Haas.

Please go ahead, sir.

Thank you, Operator.

Good morning, everyone.

And thanks for joining us for Expedia, Inc's financial results conference call for the fourth quarter and year ended December 31, 2008.

I'm pleased to be joined on the call today by Dara Khosrowshahi, Expedia's CEO and President, and Michael Adler, our CFO.

The following discussion, including responses to your questions, reflects management's views as of today February 19, 2009, only.

As always some of the statements made on today's call are forward looking, including comments on financial expectations in performance, operational results, margins, planned investments and spending, foreign exchange 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 forms 10-K for the year ended December 31, 2007, and subsequent 10-Q's, 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 excludes stock-based compensation, and all comparisons in the call will be against results for the comparable period of 2007.

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

Thanks, Stu.

Now it will be beyond a bromide to start with a call with how difficult the economic environment has been, so we will spend the majority of today's call talking about how the environment affected Q4 results and what we are doing about it.

Our hotel volumes actually held up pretty well with 10% worldwide room night growth.

In the US significantly above overall US demand with which Smith Travel indicates was down around 5% in the September to December time period.

On the downside, we have seen significantly weaker ADR trends relative to the industry, with our average ADR's down 10%, the weakest we have seen since 9/11.

And revenue per night down 19% on a worldwide basis, steeper than the ADR decline due to the impact of foreign exchange and to a lesser extent, service fee reductions.

Now, in this environment as our hotel partners look to fill rooms, they are turning to the leisure segment which seems to be displaying signs of short term price elasticity.

As a result, we have seen incredible deals in our marketplace, which has brought down our ADR's faster than the industry average, a trend we see continuing into early 2009.

We're encouraged, this pricing does seem to be stimulating demand.

Weakening ADR's in the November to January time period have been met with improving room night growth.

With worldwide growth improving and into the double digits during that same period.

January's room night growth was frankly very good.

Now, keep in mind, that we do have costs tied to transactions versus ADR's or dollars, so running higher volumes at lower unit prices does challenge our margins.

In Q4 we saw some pretty negative volume trends in our air and package businesses.

In early '09 however, we are seeing airlines respond to lower demand curves with price cuts, and we are in general seeing better package savings than ever.

Both leading to better air ticket and package volume trends in January and February, relative to what we saw in Q4.

Whether these recent improved trends in air, packages and hotel room nights continue is unclear but we are encouraged by the recent data.

I also want to quickly share some highlights on some of the 2009 focus areas that I mentioned on our last call.

In marketing, we have been improving our search engine optimization capabilities, so that we can drive more traffic through this channel.

We have seen benefits already as SEO traffic is growing in the double digits for both Ecom and Hcom here in the US, and I expect substantial improvement in Europe in 2009.

In conversion, we have had great success at hotels.com, both in Europe and especially in the US.

Through a combination of site optimization, reduction of fees and our welcome rewards program in the US, we are driving higher transactions at lower spend.

We continue to push on this in order to see similar improvement on other points of sales.

Supply additions in Q4 were very strong with bookable merchant properties up 15% sequentially, and combined with our growing Venere agency hotel base, Expedia's bookable properties now are over 99,000 worldwide.

As I mentioned earlier, our promotional inventory is better than ever, and we certainly see travelers clicking on and booking our great deals.

To facilitate these deals and improve ongoing supplier interactions, we have launched Expedia Partner Central, which allows our hotel partners to better manage their rates, inventory and exposure in our marketplace.

In advertising and media, we saw solid growth of 29% in Q4 '08, and we continue to see opportunity going forward.

In 2009, Trip Advisor will expand its efforts in three areas of the travel media space, metasearch, vacation rentals, and China.

We are building a new and innovative air metasearch product, which we expect to launch soon.

We recently launched a new vacation rental product on TripAdvisor, which is powered by FlipKey, a recent acquisition.

And later this year, we will officially launch our user generated content product in China, daodao.com.

We have earned terrific returns on capital invested in travel media and will continue to invest where we think returns will be strong over the long term.

Now Mike will cover our progress on cost reductions but I would like to mention some decisions we have made in terms of compensation.

We have decided to freeze salaries at 2008 levels, as have many other companies.

And we significantly cut our 2008 annual bonus pool in light of the softer results for the year.

We also expect to find additional efficiencies here in 2009, as the recent global restructuring of our brands allows us to fundamentally change how we structure our functions and operate as a Company.

This kind of redesign takes a huge amount of effort and more time to effect, but we think it will result not only in cost efficiencies but also in our becoming a more nimble and competitive Company.

This unpredictable and unprecedented environment requires us to be especially thoughtful and vigilant in our approach, and our teams are working harder than they have ever before.

We certainly believe we are up for the challenge.

Mike?

Thanks, Dara.

Let me begin with a couple of key trends in the business.

First, we had a huge headwind in Q4 from the extreme volatility in foreign currency.

Excluding the negative impact of FX, gross bookings would have been down 8% and revenue would have grown by 1%.

Not surprisingly, FX had its greatest impact on our business in Europe, where revenue would have grown 6% excluding the impact of foreign exchange.

Absent FX for the quarter, OIBA would have been positive.

Second, despite the pressure we saw on the top line, we do have businesses which continue to grow even in this difficult environment albeit at slower rates.

Hotwire continues to grow as its value-conscious consumer proposition resonates well.

Our advertising businesses continue to grow across the Trip Advisor network as well as on our transactional sites.

In APAC, saw gross bookings grow more than 20%.

Third, volume in our hotel business is proving somewhat resilient to the economic climate.

Room night volume continues to grow in the hotel front across most of our markets.

This reinforces the value we bring to our hotel partners and to travelers in this environment.

From a cost perspective, we understand the need to manage costs diligently.

Through the process Dara described earlier and actions already taken, we have achieved approximately $20 million of annualized cost savings from variable cost reductions, primarily in cost of revenue, and another $20 million from headcount reductions, which will be reflected primarily in operating expenses.

We expect to achieve additional efficiencies from our global realignment, and will have more to share with you on our Q1 call.

We expect some related restructuring or one-time charges, which will be excluded from OIBA but of course will be included in our GAAP results.

We are also focused on continually improving management of our FX exposure.

Since our gross bookings are reported on a booked basis and revenue on a stayed basis, there are differences in the FX impact between the two.

In short, we have FX risk on our revenue, based on currency movement between the time of booking and the time of the stay.

The steep decline in the pound in the late part of 2008 created a significant headwind in the fourth quarter.

Obviously, if FX rates don't fluctuate significantly on a sequential basis in 2009, then we won't see this type of impact going forward.

In Q4, we began hedging a small portion of the book to stay exposure, resulting in a net gain of nearly $2 million in the quarter and we are expanding the program here in Q1.

I should note that gains or losses from these hedges, offsetting the impact on revenue, will be below the line in other net.

Of course, like other FX gains and losses, they will be included in adjusted net income and adjusted EPS.

The impairment charge we took in Q4 is essentially a result of the macro-economic pressures on our business and the decline in our stock price, which required us to write down the value of goodwill and intangibles for acquisitions made several years ago.

But importantly, there is no cash or operating impact from this charge, and it certainly doesn't reflect on the fundamental health and strength of our businesses.

We also amended our credit facility and there is no impact on the Company's liquidity.

Normally on our Q4 call we would lay out our OIBA expectations for the coming year, but given the uncertainty around FX, the economy and especially ADR's, we are not prepared to give an OIBA range at this time.

Instead I will talk about how we see the current trends in the marketplace impacting our business going forward.

We are currently assuming that the economy and the travel market will be challenging for all of 2009, with no indications pointing to significant improvement.

In hotel, the ADR trends clearly create headwinds for hotel revenue.

We also have reduced hotel fees in the past and could make further reductions.

We are, however, seeing solid room night growth early in the year, and our economics with suppliers should be stable to improving as we become an increasingly important distribution channel for our hotel supply partners.

In air, our forward bookings for the next several months show ticket prices continuing to trend down.

We do have a few carrier contracts renewing in 2009 but we don't expect the non-fee portion of our air economics to change significantly this year.

All in, we think it is very likely that gross bookings and revenue will decline in full year 2009, and our operating plan assumes that will be the case.

On operating expenses, we are cutting back on marketing spend significantly and are raising the bar on our expected return.

We will also see cost reductions from the activity Dara and I referred to earlier.

And lastly, while we expect both OIBA and free cash flow to decline in 2009, we are not providing any ranges for that decline due to the uncertainty and variability in the economy and the travel market.

One quick housekeeping item, Easter falls in Q2 in '09 compared with Q1 in '08.

This will make for relatively tough revenue and OIBA comps in Q1 and easier ones in Q2, all else being equal.

With that, we'll turn to Q & A.

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

Thank you, sir, we will now begin the question and answer session.

(Operator Instructions).

Our first question comes from the line of Imran Khan from JPMorgan.

Please go ahead.

Yes.

Thank you very much for taking my questions.

Dara, two questions.

First, about booking fee.

I think you talked about 12% decline in tickets sold and one of your competitors had 44% increase in tickets sold, so I'm trying to understand how much--because of that is size versus how much because they are discounting -- they are not taking the booking fee and that's helping them to grow the business in your opinion.

And would you consider to remove the booking fee.

Second question is regarding advertising.

Could you give us some color what kind of trends you're seeing on cost per click and the traffic conversion rate from advertising.

Thank you.

Sure, Imran.

As far as booking fee goes, it is difficult to tell exactly what portion of the share loss that we are seeing is due to booking fee and/or the overall momentum of the business.

You'll remember that we increased our booking fee mid-year on Expedia from $5 to $7.

It was around mid-year.

And since then we have seen some share loss, not just relative to priceline but relative to the OTA category in general.

January, we saw reversal of that share loss, a pretty sharper reversal but January is just one month.

So we don't know whether that is a continuing trend or not but it is certainly a good trend.

And when we try to break down the share loss compared to the revenue gain from the increase in the booking fee, we still think it is a net positive from a revenue and contribution standpoint.

Now, all that said, we are not happy with our unit volume growth in the air segment.

We are watching it very closely, and you have seen us experiment a ton with booking fees last year.

We are going to be taking a hard look at all aspects of our air business and booking fee is part of it.

So I don't think that book is by any means closed, as far as booking fees go.

On the advertising areas, the trends in general, the traffic trends have been quite good, especially in Europe.

CPC's, we have certainly seen pressure come on the CPC area, and the advertising and media segment, along with ADR's coming down.

So as average daily rates for I'd say online travel agencies in general have come down, they have self-corrected as far as what they are willing to bid, and Google and other direct channels including TripAdvisor.

So we are seeing a bit of pressure on the CPC side on TripAdvisor.

We are kind of looking at the advertising and media area from a bigger picture.

While we are seeing kind of CPC pressure, what we are trying to do is just increase the addressable market so to speak, for the advertising and media segment, which is why you're seeing us going to metasearch.

That's an area that we didn't have any exposure to.

It is a new area that we will have exposure to that is going to grow over time.

That's why you have seen us going to vacation rentals and kind of the listings market in general, which we think is a huge market.

There are some big players there like homeaway.com, and we certainly want to give them some competition, and then China is kind of a new market that we are going into with TripAdvisor as well.

And then on the transactional side, there are a number of new products that we are coming out with.

For example, the TravelAds product continues to get momentum, is growing very, very nicely.

Actually on a week on week basis.

So that's kind of a new exposure area for us.

And also we are looking at google add words, etc.

So we are seeing some rate pressure on advertising and media, but we think just the increase in exposure, the increase in new products, etc, is going to drive it to be a growth area in 2009.

Great.

Thank you.

You bet.

Thank you.

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

Please go ahead.

Great.

Thank you.

So when we look at '08 results, we saw margins in the travel products business to the client about 220 basis points year over year if we exclude the advertising business, and it seems like this trend has been prevalent prior to 2008 as well.

Can you talk a little bit about what's driving this trend in your view, particularly as you have raised airline booking fees and how you can stabilize margins at current rates?

Sure, as far as the margins go, when we look at the margins and the negotiated margins so to speak, with our travel partners, we are seeing stability there in general.

When we go out and we renegotiate with our strategic partners, whereas two, three years ago you saw decreases in margins, those renegotiations are stable margins, and in some cases are increased margins.

And we are seeing on a local level with our local hotels, etc, they are coming in and asking for higher exposure in exchange for higher margin, and in those cases to the extent that we have a hotel partner who is looking for more exposure, we will try to help them out as best that we can.

I'd say the decline in margins that you're seeing are more focused on our activity as it relates to the consumer.

And reducing the reasons, let's say for a consumer to not book on Expedia.

So, for example, on Expedia or hotels.com.

We have taken booking fees down on the hotel segment pretty consistently throughout the year.

We have removed, eliminated, change and cancellation fees, which hurts on a revenue basis but we think increases kind of the return type of business.

And then -- and so those kinds of activities, which were more consumer-centered activities, have contributed to the reduction -- to the decline in margins.

So, as far as our activity with our supply base, we see margins being stable to actually going up, especially on the hotel side of the coin.

And to clarify, our revenue margin excluding advertising and media, actually improved by 23 bps in Q4.

So, relatively flat as you said.

Thank you.

Sure.

Thank you.

Our next question comes from the line of Doug Anmuth from Barclay's Capital.

Please go ahead.

Hi, this is actually Ron Josey calling in for Doug.

Two quick questions.

The first is, it was refreshing to hear hotel and air packages rebounded somewhat in January.

I am wondering if that's more due to typical seasonality, or a response to improved offers available to users.

And any insight into summer travel going forward?

Thank you.

Sure, Ron, the trends that we are talking about are year-over-year trends, so they would typically take into account any seasonality we see from January to January.

I would say that last year's January for us was a little bit slow, so the comps are a bit easy.

So we don't want to get our hopes up too much.

But I think that part of what you're seeing, I think in prior calls that there have been a lot of discussion on whether our business was counter-cyclical or not.

And I think what you saw in Q4, and certainly what we are hoping that you saw in Q4 is, as the environment got worse there was a bit of the suppliers and the hoteliers, etc, really not knowing what to do and not taking what I'll call aggressive action to try to build demand in a difficult market.

And we think that in kind of the December/January time frame, a lot of our suppliers have leapt into action.

We have a market management force that's out there on the streets talking with them, coaching them on what's going on, how demand patterns are looking.

And I think that we are seeing our hoteliers being a lot more active in responding to the environment.

The second note that you have to take here is that another difference between I'd say Q4 and what we are seeing in January is that the business demand has gotten significantly worse.

We see that both in our Egencia business, kind of on a same account basis, business demand has come down pretty significantly.

The government certainly has not helped in the meetings and incentives business, has I think done quite poorly in terms of the travel industry and what they've said in the meetings and incentive business.

So, a lot of these larger hotels need help.

They have taken action in January by working with us to stimulate demand and we are seeing the results of that action.

So we saw it in January.

We are seeing it continue in February.

But it is just a month and a half, and while we are happy with it, we don't want to get our hopes up too much.

And then, of course, as far as summer goes, our booking windows are -- we have some long booking windows, but it is really too soon to call summer.

What I will say is that March stays, because of April -- because of Easter, are going to look relatively poor and April stays are looking better because of Easter.

So that's about the widest window that we have.

Great.

Thank you very much.

Sure.

Thank you.

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

Please go ahead.

Thank you.

Two questions.

Dara, I think on the last call when asked about the timing for the full integration of Venere, I think you had said mid-2009.

Could you give us an update on how that integration process is going?

And then separately, in your break out it looks like this by brand gross bookings other showed nice acceleration on a tough comp.

I think in there is Hotwire.

I think in there is maybe a little bit of corporate, and maybe a little APAC.

Could you break that down a little bit and what's performing best in that gross bookings other brand category?

Thank you.

Sure.

The Venere integration remains on track.

The teams are working very hard.

The Venere teams along with Expedia and hotels teams, and it is on track for mid-year.

Now, there is a limited amount of what I'll call limited integration on hotels.com in Europe already, where some of the Venere hotels are showing up kind of in the back of the sort.

So to the extent there aren't merchant properties available and call it a secondary or tertiary city, Venere properties are showing up.

What you'll see in mid-year is Venere properties showing up in the Expedia sort and Venere properties showing up kind of intermingled with the merchant product for both Expedia and hotels.com.

So it will be kind of a much more proper integration so to speak.

So that's on track and we are quite excited about it.

We think that the addition of that inventory can really help us in some secondary and tertiary markets where booking.com has a relative advantage.

As far as the other drivers, I'd say the strongest two segments are Hotwire and our Asia-Pacific segments.

I think we were certainly listening to the results, Priceline's strong results yesterday, and if you look at our Hotwire business in the US, you see similar very strong results that they have had through the year.

Hotwire's revenue for Q4 was up 25%.

Hotwire's profits were up over 50%.

So that team is executing really well, but I think that they are also benefiting from the fact that they are in the opaque segment, they have no booking fees, their inventory is more attractive than it ever has been.

So it is a combination I think of good execution and also a friendly environment for the Hotwire brands, and certainly we have seen it with Priceline as well.

The Asia-Pacific segment for us growth is still growing pretty helpfully over a small base.

We think we can even do better in 2009.

And we are investing pretty aggressively in 2009.

And Egencia on a relative basis performed better than the leisure businesses, although based on business travel demand in '09, what you'll see with Egencia is, same-store sales so to speak are going to be down but new sales, our ability to go out and get new clients are stronger than they ever have been.

Thank you, Dara.

Sure.

Thank you.

Our next question comes from the line of Kevin Crissey with UBS.

Please go ahead.

Hi, everyone.

Thank you.

In terms of your air contracts, which air contracts do you have coming up and why do you expect to achieve similar terms to prior contracts.

Kevin, we don't disclose the specific contracts that are coming up or the negotiations that are coming up.

I think that, we are in contact with our airline partners on a continuing basis.

And there are contracts that are renegotiated all the time, and I'd say in general, the economics with our supply partners in general, these are both our hotel and air partners, are more stable than call it the last round of negotiations.

Right, but more stable doesn't necessarily imply stable if you know what I'm saying, because the last round wasn't exactly very good for you--.

No, I think the last round was -- I don't want to characterize it as good or bad, but there are, with some partners there will be positives, with some partners there will be negatives.

We just don't think they are going to be -- at least based on what we know now, we don't anticipate big step changes in economics similar to what we saw in the past.

It doesn't mean every single deal is going to be either better or worse.

Okay, terrific.

And, do you guys give details as to what percentage of international -- how many, what percentage of your air are international itineraries?

I don't think that we disclose that, in general a third of our business is international and two thirds is domestic, and I think for the airlines segment it is similar.

It could be a little bit lower because Hotwire is a domestic player versus -- a domestic only player.

But I think that the numbers are going to be roundabout similar.

Thank you.

You're welcome.

Thank you.

Our next question comes from the line of Scott Hamann with KeyBanc Capital Markets.

Please go ahead.

One of the competitors yesterday indicated that bad debt expense looked like it was picking up a little bit in, internationally.

Is that something that you're seeing as well, and just maybe a little color on that?

Yes, I mean it is something that we are seeing.

Our international partners I guess historically have paid slower than our partners in the US, and we have seen some pressure on stretching that out.

It's not something that we really anticipate is going to be a problem for us going forward, and it is really related mostly to our advertising business and our corporate travel business.

So we watch it closely and think that it is in pretty good shape.

Scott, one of the advantages that we have actually in the merchant model is that we don't have any kind of a collections issue on the merchant hotel business.

So the consumer pays us directly.

So we collect 100%, our collection rate is 100%.

And we are in general trying to remit on time or faster than on time to our hotel partners, especially the ones who are in need.

But it is a real advantage of the merchant business in this kind of an environment, which is our collection rate is perfect.

Okay.

Then just on cash flow for 2009, can you just talk around some of the major drivers there, and what the use of free cash flow would be as we move through the year.

I noticed it looks like there is going to be some debt pay down, but are you thinking about acquisitions and what can we expect?

So in terms of free cash flow, the biggest driver is OIBA, and while we did say that we expect a decline in OIBA, we will be generating significant amounts of OIBA in 2009.

We also will be having significantly less Capex in 2009, 2008 included a number of large real estate projects that will not be recurring.

A fairly important part of our cash flow as well is from working capital, in particular from our merchant hotel business, and depending upon whether we see growth or not in that business, working capital will also be impacting our free cash flow next year.

In terms of debt pay down or acquisitions, that is actually not included in our free cash flow.

Obviously it is included in our overall cash figures.

We did indicate in our release that we would be paying down almost all of our revolver debt in the next day or two.

So that is occurring.

On the acquisition front, we did use about $500 million in cash in '08.

In '09 I would say we don't expect the same level of activity or near the same level of activity.

The market prices for deals, we don't yet think really reflect the value of businesses, but we will continue to be opportunistic and look at things as they come up.

Scott, just to give you a little bit more color on the use of cash.

Certainly, I think our paying down the revolver and I think it was $550 million, is that the number?

Yes.

Should reflect the fact that we feel good about our cash flows early in the year and the balance sheet of the Company.

As far as the use of cash in 2009, one significant factor is going to be the extension if any of our revolvers in 2010.

We do want to have significant liquidity of the Company.

We value flexibility.

The revolver has given us that flexibility.

To the extent that we know that we can extend the revolver beyond 2010, you will see us be more aggressive in general on cash use, but until we know that we can extend in 2010, we will tend to use our cash early on at least in 2009 to build a cushion so that we are not dependent on a refinancing.

There have been a lot of companies who have bet on refinancings happening who have gotten trapped and we don't want to fall into that same trap.

Sounds fair.

Thanks a lot.

You're welcome.

Thank you.

Our next question comes from the line of Michael Millman with Millman Research Associates.

Please go ahead.

Thank you.

Obviously there has been a lot of discussion of the numbers that Priceline reported yesterday, and so in that connection, can you talk about Venere, if that model is doing what the Priceline model has been doing in Europe.

And maybe generally, are we in a market maybe, will continue to be in a market where price becomes the most important factor for consumers, and that the merchant model at least just is not modeled for this kind of economic environment?

And then regarding the merchant -- another question.

Regarding the deferred merchant revenue, is there some point that gets -- that drops, where you have to make some significant decisions regarding cash flow and maybe covenants affected?

Sure, Mike.

As far as Venere in Europe and the overall merchant hotel business, Venere production in Europe is not that different from let's say the production of our other businesses in Europe.

If you look at Venere, it was owned by private equity holders, and I think to some extent it suffered from a lack of investment in IT functions and technology, which we are doing our best to make up for.

So when you look at booking.com production in Europe and you compare that to Venere production, I would say booking.com is comfortably ahead for now of Venere.

I don't think that the difference in the relative performance in Europe of the companies really has to do fundamentally with the merchant model versus agency model.

It has to do with technology, search engine, marketing expertise, and scale, and a lot of other factors.

For example, you see hotels.com production in Europe, not as good as booking.com but better than Venere and better than Expedia in Europe because I think that group has gelled for a longer period.

The technology is relatively newer.

And is executing very well, and we are quite confident that we can get Expedia to similar levels as well.

So, we don't think that it is a fundamental issue between merchant and agency.

Now, the reason why we were attracted to the agency model is that we do think that the agency model has an advantage in secondary and tertiary markets with smaller hotels, where having an agency model is more -- is easier for those hotels.

So what we are trying to create is kind of the right product for the right hotel set.

As far as price being more important in this marketplace, I would say price is more important in this marketplace, and again, we think that with the merchant model has actually responded quite well to price.

To some extent you see that in our average daily rates being lower than the industry's average daily rates, and while we haven't reported it, we are seeing it in the improving trends that we are seeing in unit sales in January going into February as well.

The second factor and the advantage of the merchant model is the ability for the package business to then become a new opaque channel.

For example, in January our package business is performing much, much better.

Certainly relative to Q4 because we are getting great discounts.

Consumers are finding those discounts and are booking.

So, I do take exception to any kind of statement saying that the merchant model isn't the model for this kind of a marketplace because actually the merchant model in, I think in '09 is going to increase share gain versus, for example, in '08.

I'm quite confident of that.

Mike, do you want to talk about the working capital impact.

Yes, so the question on working capital and impact or potential impact on covenants is that there is no impact from the deferred merchant booking side on covenants.

We have no minimum cash covenants.

Okay.

Thank you very much.

Thank you.

Our next question comes from the line of Justin Post with Merrill Lynch.

Please go ahead.

Thank you.

Dara, can we revisit the 1Q improvement.

What do you think turned on in January if anything, and was it fair to say that the booking metrics are actually better so far in 1Q then they were in 4Q in total dollars in addition to units?

The booking metrics, you mean our gross bookings levels?

Yes.

I don't want to get in to specific gross bookings, etc, but certainly I'd say in general, unit metrics are better.

ADRs are a little bit weaker, and I think that what you're seeing is a little bit of what I talked about previously which is, our hotel partners moving from relative inaction in response to demand trends to action in response to demand trends.

If you look at a typical hotel, typically there will be three large demand buckets for a hotel.

There will be the meetings and incentives business.

There will be the corporate business.

And there will be the transient leisure business.

It is very hard on a short term basis to stimulate the other two buckets.

Meetings and incentives have long sales cycles.

Business travel typically has longer sales cycles.

You can't -- by cutting prices on business travel you're not going to necessarily stimulate business travel.

So the one channel, the transient leisure traveler does seem to respond to stimulus and great prices and great deals.

So we have seen a lot of activities from our supply partners, December, January, going to February, on creating promotions, loading in better package inventory, etc, which has resulted in better unit growth.

Again, that is somewhat offset by rate.

But there is no question that we are seeing unit growth in the first quarter going to February that's better than what we saw in Q4.

Again, it is only a month and a half.

Okay.

And then second kind of bigger picture.

As you look out to 2009 and 2010, obviously you have three very large travel brands, and then you're getting into some other businesses like advertising and other things you talked about.

What do you think is Expedia's competitive advantage?

Is it really knowing the traveler across platforms and really having a good look at different customers, or do you think it is just the scale that you bring, that you can leverage expenses.

What do you see as your long-term advantage as a Company?

I think there are three areas.

One is just scale of the business.

As far as being able to talk to a partner and being able to deliver to them not only demand across multiple channels but demand across multiple geographies.

There are very few companies that have built -- there are very few -- there is no real true worldwide travel brand out there and we are building three of them, Expedia, hotels and TripAdvisor.

So the ability to go to a partner, discuss their needs and be able to help them across different brands but also on a worldwide basis we think is a real advantage that translates into better economics, closer relationships, etc.

If a hotel needs -- is in need after a weekend where a meeting is canceled, they will come to us first because we can do more for them.

The second we think is kind of business intelligence, which is our ability to see what's going on in the marketplace, compare trends for Expedia, hotels.com, Hotwire, etc, we think is quite valuable and will be valuable on a go-forward basis, and there is a lot of best practice sharing that can happen amongst the various brands.

The third area we think is the advertising and media space.

There are two reasons there.

One is, if you look at our model in general, marketing is the highest expense of I would say any OTA out there.

So it provides us with a great hedge against marketing in general becoming more expensive.

We are significant recipients of that.

And I think on a go-forward basis, to the extent that I think you're seeing models hybridized much more.

You see advertising on Amazon.

Amazon getting into the listings business, etc.

So to the extent that ten years from now this business, this online travel agency business turns into what I will call an online travel business, where we will be delivering either transactions to our partners or eyeballs to our partners, our having a big stake in both the transactional side and the advertising and media side of the equation, and being kind of front and center on the technology delivery there we think will be a great long-term advantage.

Thank you.

You're welcome.

Thank you.

At this time there are no further questions in the queue.

I would like to turn the call back over to Stu Haas for closing remarks.

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

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

Certainly appreciate your interest in Expedia and look forward to convening with you again next quarter.

Dara, did you want to make any final comments?

No, just thank you very much for joining the call and we hope to tell you much more after our first quarter call.

Thank you.

Ladies and gentlemen, that does conclude the Expedia, Inc, fourth quarter 2008 conference call.

We thank you for your participation and for using ACT, you may now disconnect.