Expedia Group Inc (EXPE) 2009 Q3 法說會逐字稿

Ladies and gentlemen welcome to the Expedia third quarter 2009 conference call on 29 October 2009.

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

After the presentation there will be an opportunity to ask questions.

(Operator Instructions).

I will now hand the conference over to Stu Haas.

Please go ahead sir.

Good morning and welcome to Expedia Inc.'s financial results conference call for the third quarter ended September 30, 2009.

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, October 29, 2009 only and we do not undertake any obligation to update or revise this information.

As always, some of the statements made on today's call are forward-looking, typically preceded by words such as we expect, we believe, we anticipate or similar statements.

Please refer to today's press release and the company's filings with the SEC for information about factors that could cause our actual results to differ materially from these forward-looking statements.

You will find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in our press release, which is posted on the company's IR website at ExpediaInc.com/IR.

I encourage you to periodically visit the IR site for important content, including our updated investor presentation reflecting today's results.

Finally, unless otherwise stated, all references to cost of revenue, selling and marketing expense, general and administrative expense, and technology and content expense excludes stock-based compensation.

And all comparisons in this call will be against our results for the comparable period of 2008.

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

Thanks and good morning everyone.

Expedia's global employees delivered another quarter of accelerating transaction volumes, with 27% growth in both air tickets and hotel nights.

The biggest difference from last quarter is that in Q3 our volume growth was strong enough to drive positive growth in both bookings and revenue which, combined with continued expense leverage, drove 11% growth in OIBA and 23% growth in adjusted earnings per share.

Expedia's overall strategy remains simple.

We focus on improving our traveler value proposition and removing barriers to purchase.

We made further progress here during Q3 by broadening our fee reductions to many international points of sale and eliminating most of our worldwide change and cancel fees.

We've continued improving our industry-leading supply footprint, which at quarter end included over 110,000 global hotels with record pricing and discounting comparing favorably versus our OTA competition.

And we continue investing in building traveler loyalty with Hotels.com's Welcome rewards program generating nice repeat and share of wallet momentum.

Expedia also continues to generate meaningful cash flows.

In fact in today's release you will see year-to-date free cash grew over $100 million despite a 14% dip in ADRs, pay-to-play occupancy tax payments and other challenges.

So a natural question for investors to ask is, what does the company intend to do with its substantial cash flow?

Well our answer to that question really hasn't changed much.

We will continue to judiciously deploy capital back into our business for growth in high return areas like hotel and media.

And we'll use capital opportunistically for tuck-in acquisitions such as the recent agreement to acquire leading Chinese meta player Kuxun.

Lastly, where we have excess cash flows and we do expect to generate excess cash, we tend to return that capital to shareholders through repurchases or perhaps dividends in amounts consistent with our investment grade financial policy and liquidity.

In closing, Expedia had a good quarter.

It didn't come easy, as there was a ton of hard work behind the scenes in delivering these results today.

But I know I speak for everyone on the team when I say we're more focused on what lies ahead for Expedia than behind.

On that score, we know 2010 will present much tougher comps on both revenue and expense fronts particularly in the back half of the year.

It is unlikely we'll benefit elasticity wise from another year of double-digit ADR and ATP declines, meaning marketing will have to carry much more of the demand burden.

And beginning in second quarter we'll lap the aggressive fee actions that we've taken.

Fees clearly altered our transaction trajectory but we know the next wave of Traveler First advances will be hard yards by comparison, delivering more incremental progress than the sea change we saw with fees.

But as I always say, we're more than up for the challenge and we look forward to sharing our progress in quarters to come.

With that, I will turn things over to Mike.

Thanks Dara.

Once again, unit growth this quarter was fairly strong across our brands.

Hotels.com room nights in Europe, APAC and Latin America grew roughly 40% for the second straight quarter, surpassing the 2 million mark for the first time.

Hotwire continues to do well in this economy with room nights up over 45%.

And Egencia, facing perhaps the weakest corporate travel market in history, had its first quarter of positive transaction growth in four quarters, a testament to the progress on the new account front.

While I think our results were generally positive, investors may be curious as to the decline in revenue margin after several quarters of increase.

Drivers of the Q3 decline include a full quarter of hotel fee reductions, the elimination of many change/cancel fees, the contra revenue impact of our Welcome rewards loyalty program, a shift towards lower margin chain hotels and the inclusion of lower margin agency bookings from Cruise Ship Centers which we began consolidating in late Q2.

Obviously based on these drivers we would expect to see continued pressure on revenue margins until we lap some of these impacts.

But I would also emphasize were not optimizing for margin, but rather OIBA and free cash flows.

And we believe all of the factors I mentioned are accretive to both and should benefit shareholders over the longer-term.

Before turning to expectations, I want to cover one area we're getting a lot of questions on, and that relates to hotel inventory availability and how Expedia might fare in a more favorable ADR environment.

It is no secret that Expedia and online travel agencies more broadly have benefited from increased inventory and promotions during this downturn.

Our domestic room night growth of 24% in Q3 compares very favorably to Smith Travel's 5% decline in rooms sold.

We certainly expect to work hard to keep that share, but realistically and on the margin, we expect to eventually enjoy less overall promotional inventory.

But here are some things that would work in our favor.

First, Expedia has dramatically improved the sheer volume of hotel inventory on our sites since the last time we emerged from a recession.

In fact, in late 2001 on the heels of 9/11, Expedia.com had just 5000 merchant hotel properties.

Today we have many multiples of that count.

That means we have a much wider selection of partners across geographies and star classes.

Second, we are in the very early stages of our agency hotel strategy with focus on Europe and select APAC markets.

It will take us a while to recruit and properly merchandise these hotels.

Frankly, probably longer than most investors currently expect, but once we begin gaining traction in these markets we believe this will be mostly incremental business for Expedia, positively impacting hotel volumes.

Third, I would encourage investors not to underestimate the differentiating value our PSG market managers provide to merchant hotels in our portfolio.

We know these hotels rely heavily on the market insight and revenue management services that our end destination teams offer.

And we certainly don't expect that value to diminish in an upturn.

And keep in mind even in good times, average hotel occupancy rates run around 65%.

That leaves a lot of supply to be matched with the industry's leading online demand channel.

And lastly, we would say the same thing related to an upswing that we said ahead of the downturn, which is while we feel there are countercyclical elements to our model, having a positive demand environment is a good thing for Expedia which combined with our improved value proposition, search engine marketing and search engine optimization efforts and better site experience should help drive transaction growth at a time when ADR growth is likely to improve.

Putting it all together on hotel inventory, the fact is we really haven't been through enough cycles to provide investors with a lot of conclusive quantitative guidance.

What we do know is that there are going to be puts and takes in every economic environment and we're focused on building a company to execute as well as possible in all of them.

Turning to financial expectations, results through Q3 are certainly better than we had anticipated coming into the year.

So barring any meaningful change in the economic environment in Q4, severe H1N1 outbreaks or a sharp reversal in FX rate trends, we expect to deliver high single-digit growth in full-year OIBA.

And even including approximately $50 million in pay to play payments to San Francisco, we expect to grow full-year free cash flow well ahead of our OIBA growth rate.

We do expect OIBA margin expansion again in Q4 but it will mostly come from year-on-year benefit in cost of sales, with little if any leverage on the marketing front as we lap a Q4 2008 where we dramatically pulled back on spend in light of the weakening and uncertain demand environment.

Tech and content and G&A spend will grow again in Q4 and likely at higher rates than we have seen year to date, in part due to a tougher bonus comp in light of our improved results and higher legal fees.

With that, let's turn to Q&A.

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

(Operator Instructions) Imran Khan, JPMorgan.

Dara, two questions, first, starting with -- there's some press report about your discussions with Choice Hotel and how Best Western might do the same thing regarding the last room availability and the three-year term with no exit cost.

Could you give us some color what kind of discussions you are having with those hotels and how comfortable you are having those inventory?

Secondly, with regard to booking fee elimination, I think in the past you talked about that air booking fee elimination will cost you $3 million or so monthly.

Can you give us an update on that number?

Thank you.

As far as the discussions we have had with Choice, we're not doing business with Choice right now on a chain basis.

We don't have the vast majority of Choice hotels on our site.

I don't want to get into the particulars of, let's say, negotiations and discussions we have had for Choice other than to say, first of all, our primary goal is to have the broadest, deepest set and highest-quality set of inventory for the benefit of our customers.

And this doesn't signal any kind of a change in our overall philosophy as far as how we work with our hotel partners and what we're looking at.

It's not really an issue of economics.

It's more an issue of our wanting rate parity and inventory parity for our customers.

When our customers come to Expedia we want them to know that they're getting the best prices and certainly we're insistent on that.

To the extent that Choice doesn't want to work under those terms, we won't be doing business with each other.

Those are terms that we work with, with our other strategic partners.

They're comfortable with it.

We're comfortable with it.

So it's nothing unusual from what I would say is typical practice for us in most of our other OTA competitors so to speak.

The good news for us and for our Expedia shareholders is that when we look at the recapture analysis, when we look at our bookings in Choice markets versus -- or markets where we have Choice presence versus markets where Choice doesn't have much of a presence, it looks like we're recapturing the vast majority of the bookings.

So as far as a financial impact for us, it is minimal to none.

And hopefully we can get to a place where we can work with Choice on a go forward basis, but right now it really is not a big deal.

As far as Best Western goes, we don't have a chain deal with Best Westerns.

We work with Best Westerns on an independent basis.

And everything I know in talking to our market managers, the relationship with those hotels are great and hopefully we'll continue to do lots of business with them as we'll continue to do lots of business with our other strategic partners.

As far as booking fee elimination, I'd say no real change.

The volume impact of the booking fees has probably been above our expectations.

So, if you look at the $3 million a month maybe it is a touch better than that.

We have essentially taken any benefit there and rolled it into -- call it funding booking fees around the world.

So we've taken booking fees out of Canada, Italy, Germany, New Zealand and Australia and we're rolling that through.

That wasn't necessarily an assumption that we had made in the second quarter, so that will continue to affect margins on a go forward basis.

But we think it will also add up to more transactions, a better customer experience and we think long-term it is a worthwhile investment.

Got it.

Thank you.

I appreciate that.

Doug Anmuth, Barclays Capital.

Thanks for taking the question.

Two things, first, can you talk about your progress with Easy Manage in Europe in terms of signing up hotels on the agency model and how some of them are moving over potentially from the merchant side?

Secondly, Mike, maybe you can talk about the revenue margin going forward.

Is this an appropriate level to think about?

It feels like some of the factors you mentioned are more things that are sustainable, probably more than one time things, if you could comment on that.

Thanks.

Thanks Doug.

As far as Easy Manage program goes, we're quite satisfied with the sign-up process right now for the Easy Manage properties.

The hotels we're going to like the product.

It's pretty simple.

And for the year-to-date we have signed approximately 6500 hotels in the European region to sign up for Easy Manage terms.

The hard work now is kind of after the sign-ups loading them onto the site, making sure the content is correct, making sure the content is in multiple languages and then starting to push demand out to those hotels.

So I think we're kind of in stage one as far as sign ups and getting them onto the site.

And we think that production or significant production will be delayed by a couple of quarters.

I wouldn't expect call it material production from Easy Manage from an Expedia standpoint, although there'll be material production in smaller markets, etc., until kind of next year and I think the production will increase as we roll along.

Keep in mind that most of the Easy Manage properties are in smaller markets, secondary, tertiary markets or they're smaller hotels by nature.

So signing up one Easy Manage property is probably not equal to signing up one merchant property.

So the property counts are going to have to go quite high in order for this to have a significant effect on the revenues coming in.

And I think, Mike, you were going to talk about --

Yes.

So on revenue margin there is always a lot going on there.

I would say that the largest factor in the reduction of revenue margin in the quarter is the reduction in service and booking fees, which we've done on most of our larger sites.

So we will anniversary that going forward.

So, that will stabilize.

And then we have a year on year change really; last year our loyalty program at Hotels.com was much smaller and that is recorded as contra revenue as opposed to sales and marketing expense.

So we will lap that as well.

I would also note, Cruise Ship Center is now in our figures on a consolidated basis and previously they had not been in.

That is somewhat of a lower margin business and actually accounted for about 20 to 25% of the degradation.

So, again, we expect most of these things to lap.

One of the things that did drive it down a bit this quarter is the higher mix impact of the strategic and chain hotels, and that will bounce around a bit.

But, in closing I would say that the supplier margins themselves are stable to improving and the reductions of the revenue margin are for the most part from actions we've taken and understood their impact in advance and have, as Dara said with respect to the fee reductions, that we feel good about for the long-term of the business.

Great, thank you.

Thanks Doug.

Aaron Kessler, Kaufman Brothers.

A couple of questions.

First, I don't know if you gave us the hotel ADRs but if you could give us an update on that, and in terms of your strong bookings growth, is it your sense that it's -- the share shift maybe came more from the suppliers?

Or do you think took some OTA share as well?

And I have one follow-up question.

Mike will talk about hotel ADRs and I'll talk about share.

On hotel ADRs we saw a decline, I believe, of 14% in the quarter and that is down from what we have seen in the last couple of quarters, split between domestic and international; not really much to say.

Very similar in trend.

I will say that as we advanced through the quarter, the ADR year on year difference began to improve because our comp gets easier.

And ADRs really started to drop sharply in the latter half of the quarter last year and so the comps do get easier.

It doesn't necessarily mean that our ADRs actually changed and we pretty much saw somewhat steady ADRs throughout the quarter.

But again with the comp getting easier it looks better at the end of the quarter and that actually helps us on the revenue line as well.

(multiple speakers)

Sorry Dara.

Go ahead Aaron.

Why don't you ask the follow-up and I will answer your --

Yes, I was going to ask on the acquisitions it looks like you anniversaried most of your acquisitions in Q3 with Venere.

Is there -- can you give us a sense for how much acquisitions would be in the Q4 numbers on a percentage basis?

I think it will be pretty minor.

Correct me if I'm wrong.

I think there's Cruise Ship Centers which was a kind of cruise-based company that we consolidated starting I think the very end of Q2.

So the effect you'll see with Cruise Ship Centers is that their revenue margins are significantly less than the revenue margins of the whole company.

For example, just for Q3 we saw $100 million of gross bookings coming in with $2 million of revenue, just to give you a sense of that size.

So, that will change kind of the revenue margin mix.

And I would again stress what Mike said, which I think was the most important issue on revenue margin, is that as we're renegotiating with our suppliers, most of the margins are stable to improving.

So from a fundamental basis, most of the shift that you see in revenue margins are actions that we're taking on the consumer side or mix shifts.

They are not anything having to do with the fundamental kind of business model so to speak.

Great, thank you.

As far as your other question on share of gross bookings and where we're taking it, I think that in listening to some of the airline calls, it looks like their traffic to direct sites and their bookings from airline Web direct sides continued to be quite strong.

And OTA category I think is strong as a category.

So I think that my instinct is that most of the share that we're taking on the air side is from off-line travel agencies, traditional travel agencies, etc., that don't have call it the balance sheets that we do and the flexibility that we do as far as being able to charge less fees and improving the consumer value proposition.

On the hotel side my guess is we are gaining share both from off-line and some of the online players, but the data there is more difficult to parse through.

Occupancies were down in the US and our room nights were up very, very significantly.

So I think it is a broad share gain.

It doesn't -- but in terms of whom we're taking share from specifically, we just don't know.

Okay, thank you.

Sure.

Ingrid Chung.

It is actually Jordan on for Ingrid from Goldman Sachs.

Just two quick questions, one on air volumes.

I'm just wondering why your volumes accelerated so sharply relative to hotel in Q2 versus Q3.

Was that -- looks like that was partly comps, but was there anything else going on there?

And then to what extent was that international versus domestic?

Okay so on air volumes, air is continuing to benefit from the fee cuts that we have implemented and there were additional cuts introduced in Q3.

And as Dara noted, we extended the fee reductions on air to Canada, Germany, Italy, Australia and New Zealand and so that helped accelerate the international growth.

But most of the volume growth nonetheless is driven by e.com, which is our largest air point of sale.

Okay, great.

Thank you.

Justin Post, BAS-ML.

Could you talk a little bit about the revenue per unit pressure?

We know all the things that are going on.

As you look out to next year you issued more cautious statements on your unit growth.

Maybe you could go through those again and then whether you think revenues per unit can be kind of more flattish as you get out to the second half of next year on potential ADRs stabilizing on some your fee things.

Is that something that could happen by the second half of next year?

Justin, right now it is very difficult to have -- call it real visibility into 2010.

This is a pretty darn volatile market and that has not changed.

When we talk to our hotel partners in particular, I think most think that overall ADRs will be down slightly going into next year.

But in general, I think that the leisure segment will be stronger than the business segment, which is something we have seen pretty consistently from kind of call it the Smith Travel results on -- that come out on an industry weekday, occupancies and ADRs in general have been pretty consistently stronger than -- I'm sorry, weekend has been stronger than weekday.

So it is very difficult to have visibility going into next year.

My guess is that we're basically planning for ADRs being flat to down slightly.

But I think it's anyone's best guess as to what happens.

And in general I think unit volume and ADRs do kind of move against each other.

I would expect that to the extent that we can strength in ADRs that will put some pressure on our unit volume.

To the extent that ADRs remain weak, we think our unit volume will be stronger.

So to some extent we're hedged as an entity.

And I think if we keep focusing on what we're focusing on, which is to increase the traveler proposition, value proposition, becoming a better product, we're going to do fine either in a weak ADR market or a strong ADR market.

Per Mike's statements, ADR comps do get easier in Q4 and certainly I would expect ADR comps next year to be a lot easier than they have been this year.

So I would say we are cautiously optimistic but more cautious than anything else.

Two quick follow-ups, can you give us any visibility on air as a percentage of your total revenues or bookings, anything you can break out there versus hotel?

Then, you said Hotwire was up 45% this quarter.

Can you remind us what it was up last quarter?

Thank you.

Yes.

So on the air side, air represented 12% of our total revenue in the quarter.

Thank you.

And on Hotwire we're grabbing the number.

I think in general on the hotel side I would say it is probably similar to last quarter's number, maybe up slightly but that's a guess.

We'll get back to you later on that.

I would add on air, my guess is that air is going to continue trending down as a percentage of revenue (multiple speakers) so looking forward it should keep going down unless something unexpected happens and we'll get back to you on Hotwire.

Thanks.

Mark Mahaney, Citigroup.

Thanks.

If I could quickly throw out a couple of questions.

In terms of our revenue margin, was that revenue margin decline kind of a full quarter impact or would there have been some of the steps like the Cruise Ship Center that would've occurred later in the quarter that mean that normalized year-over-year decline in the rev margins could be a little greater in Q4?

Secondly, just to clarify on the Cruise Ship Center impact; did you say it was 20 to 25 bps of the degradation was due to that?

Third, could you talk a little bit about optimal capital structure?

Dara, this company has been very consistent about what it's done with cash in the past.

When it's been in excess you have done a lot of share buybacks.

I think you've had certain optimal capital structures in the past.

Any changes in your thought on those?

I'll talk rev margin.

But I will go back to the Hotwire question, and on Hotwire the increase was 36% in Q2.

So, on revenue margin, I would say it represents substantially the full quarter impacts.

The E.com and h.com fee changes for the most part impacted the full quarter.

Some of the international points of sale actions were not made with a full quarter's worth of impact so there will be a little bit of that rolling into Q4.

CSC, I did say of the 98 bp drop in Q3, 20 bps of that approximately was due to CSC and that represents a full quarter.

And then as far as capital structure goes, we do place a high premium on liquidity, obviously based on events that we've all been through.

I don't think we need to explain why.

A significant portion of our liquidity is not only cash but it is a bank revolver that we have in place, now a billion-dollar bank revolver which expires -- Mike correct me if I'm wrong -- in August of next year.

Correct.

Now, I don't think we're going to go for $1 billion again because I don't think we need $1 billion based on the cash flow generation and the balance sheet we have now.

We got $1 billion when we spun off from IAC and our balance sheet is substantially stronger now than it was at the time of the spinoff due to good work of a lot of people here.

So, one of the issues that we're going to look at is the revolver and the renewal there.

And until we are confident that we're going to renew, and I've got to tell you we're pretty confident we're going to renew.

But until the renewal happens I think we'll be fairly conservative from having -- from a cash standpoint having a nice big cash cushion.

Generally, we want to make sure we have plenty of liquidity in the range of $750 million to over $1 billion of capital available at any time, just in case.

We like to have some capital available for opportunistic acquisitions.

And excess capital above that is capital we'll look to return to shareholders kind of in due time.

And we've done it in the past through buybacks.

We'll look at dividends because we've got very good and stable cash flows.

But over time I think you can expect us to return that capital.

And we're having the luxury now of thinking about that, frankly, for the first time and we'll be responsible with the cash.

If I could make one final quick question to Mike.

You made a comment earlier about the international agency hotel properties building out maybe a little slower than investors had expected.

Are there structural issues there?

Is it just that the execution, in terms of feet on the street or getting more hotels, just takes longer?

Or do you see something bigger as an obstacle?

I would say there's nothing bigger as an obstacle.

It really is the hard work of the execution behind bringing those properties, bringing properties up and into the system.

I would say that also, the size of our pre-existing base is so big that also, it will take some time before you start to see a meaningful impact in the figures as well.

Mark just to add a little color to that, the sign-up process is great.

The field team is going out and selling it.

It's a terrific product.

What you have to keep in mind is that we built a machine, or we have built a machine for adding a certain number of hotels onto our sites.

The volume of hotels added to our sites is going to increase substantially because of Easy Manage.

When we build these systems and processes, you have to build them for a very significant scale.

When you add one hotel you don't add just one hotel.

You add descriptions, you add pictures.

They have to be in multiple languages, typically over 20 languages.

You have to bid on them in many languages, etc.

And we have just added a very significant input into the machine and now we've got to adjust the machine.

And we want to make sure we do it in a scalable way so we are not always playing catch-up.

So that takes a little bit more time up front, but we think spending that time up front is worthwhile, so that we're basically building a very scalable lodging machine for the next five, ten years of growth for this company.

Michael Olson.

Piper Jaffray.

The question is with the acquisition you announced I was wondering if you could talk about your strategy in China between the eLong investment and this meta-search deal.

How much of a priority is China and I guess how aggressively are you going to be continuing to invest in China?

And then lastly how do you kind of feel about the competitive environment in China compared to other geographies?

Thanks.

China is an incredible promise for us and it is an incredible challenge.

Our strategy there is pretty simple in that eLong is our transactional play there.

eLong is our Expedia in China and will continue to be our only transactional play.

Obviously they're competing against a very tough competitor in Ctrip who has incredible scale, has great kind of brand recognition etc.

and so I think eLong has a tough battle ahead of it.

I will say that I really do think that the eLong management, after investing in the infrastructure, making sure that the customer service that we have is excellent and shifting the effort of the business not only in building the off-line business but accelerating the online business, I think it's starting to see some results and we're hopeful that eLong's go forward results are going to be better than the results that we've seen over the past two years.

But that said, Ctrip is a very significant competitor and is quite a challenge.

We are kind of fighting the battle on two fronts though.

We have gone in with Trip Advisor on the media side with DaoDao and with Kuxun we're adding size, scale, eyeballs.

It's around 6 million unique users that we add to Dao Dao.

DaoDao is already a top 10 site in China, I believe and will have the most reviews and user reviews in China by the end of the year.

So we are kind of building a very big media play with Trip Advisor, DaoDao, Kuxun and investing pretty aggressively there.

And hopefully we will have Ctrip as a partner just like we have lots of our competitors in the US as a partner.

That media play in China is going to be friendly to all.

It's going to be built on a stand-alone basis and we think based on the profitability that we have seen on Trip Advisor all around the world, in 10 years it could be the most profitable set of Trip Advisor sites around.

Who knows?

The China leisure market now has really started to grow at incredible rates and some of the industry numbers that we see is that it's going to grow 24% a year to $13 billion in spend in 2011.

So we want to be there as the Chinese leisure market grows, leisure being kind of our core expertise.

So we think between eLong and the efforts of Trip Advisor, while Ctrip is a very tough competitor and there are plenty of other local competitors out there, I think as far as the global online travel companies we think we have by far the best position.

And while we are in investment mode for now, we think that five to 10 years from now it will pay off in a big way.

Thanks.

Michael Millman.

Michael Millman, Millman Research Associates.

Two questions, the first is can you give us the numbers from merchant and agency hotels and are most of the agency hotels that you have international?

I don't know if it's above that 6500 that you quoted.

Secondly is on rental car companies, can you talk about what the margin is for you for rental car companies and also the trends and availability of pricing and the availability of opaque cars in the rental car business?

Thank you.

Thank you Michael.

Mike will talk about merchant and agency hotels.

As we've indicated at the end of the quarter we had, Expedia and Hotels.com, over 110,000 bookable properties.

And that was made up of 63,000 merchant properties and about 48,000 agency properties.

And Michael we signed up more Easy Manage properties year-to-date I believe than merchant properties.

So Easy Manage has really accelerated quite nicely.

Easy Manage is agency, for clarification.

As far as rental car goes, we don't disclose specific revenue margins for rental cars.

It's higher than our air margins.

It's lower than our merchant hotel margins.

But we don't specifically disclose those numbers.

As far as pricing and availability, etc., the pricing on the rental car business actually looks pretty strong.

I think fleet sizes are fairly narrow based on the rental car companies not increasing their fleets.

As a result, actually pricing is up on a year-on-year basis and we are seeing some shortage of availability in cars in certain markets at certain times.

That shortage is true for our retail product as well as our opaque product.

And going to next year, to the extent that the rental car companies increase their fleets, we think that will be good news.

We certainly see consumer demand out there for increased fleet sizes and we'll see how aggressive the rental car companies are.

Thank you.

Herman Leung, Deutsche Bank.

A couple of questions.

First, I think the cost model -- expenses were pretty well managed during the third quarter.

I was wondering -- and data center cost was down about 18%.

I was wondering how far along are we in the cost reduction process.

I know there was also some call centers in Tacoma as well as Dallas sort of consolidating.

Can you talk about how far along the way are you in terms of pulling some of these cost levers on that side?

And I have two quick follow-ups.

Okay, on cost I've answered this question several times in the 3 plus years I've been at Expedia and I would say it is never -- cost reduction and looking for efficiency is never over for us.

And with that said, each year, there are relative puts and takes and there are some items this year that are going to be more difficult to duplicate next year.

We've had a lot of reductions in our merchant credit card fees this year due to some technology investments.

Those will be difficult to duplicate as we go forward.

However, there are other reductions that we are expecting.

We've taken, as you've all probably noticed, a number of restructuring charges during the year and those will result in savings going forward.

We eliminated some duplicative functions and shut down a few offices and call centers and a lot of that has a fairly rapid payback.

Some of it stretches out a bit longer.

And then keep in mind that we also redirect some of those savings back into the business.

So, we will keep a very firm focus on the cost on data center.

We've done a lot of good work in really better rationalizing our IT costs across the business and we feel good about that.

On some of the other categories on sales and marketing, we will be facing tougher comps as we move out into next year.

We'll keep our focus on driving out our proprietary platform for search engine marketing.

We'll keep our focus on SEO, etc.

but a lot of it comes down, on sales and marketing, to the competitive environment as well and what pricing ultimately turns out to be.

So we'll continue to work hard to manage cost there.

On R&D and G&A, I'd expect to continued discipline.

We'll see depreciation continue to roll in from prior cash investments that we've made and on the G&A front, legal fees has been a bit of a wildcard for us.

We actually would have probably leveraged expenses in 2009 absent that.

So depending upon where that ends up next year as well will kind of tell the story on cost.

Just a very quick follow-up on your comments here, were there any one-time charges on the legal fees that you took this quarter?

As well as you talked about marketing coming back maybe a little bit in 2010, what are you seeing in the pricing environment in terms of competition with the bidding velocity across the travel segment?

So, I'll take the legal question and throw the second question back to Dara.

On the legal fees, no special one-time charges; just the ordinary course cost of the various legal actions that we're involved in.

Just going back to something that Mike said, which is very important, in general what we're trying to build is scalable systems everywhere.

So there is a real discipline across the company in automating big, scalable systems that hopefully on a long-term basis can provide us leverage on cost of sales, on G&A, on technology and content, the R&D line.

The marketing line is a bit more unpredictable as far as what competition is.

So we want to make sure we're building the kind of systems that can leverage in the other parts of the P&L that we can control.

So I think everyone is behind it and it's good work from Mike and his team to everyone around the company to kind of get religion there.

As far as the CPC's marketing costs etc.

go, our CPCs on Google and the other sites out there in general continue to be down on a year on year basis.

We do think that comps are going to get harder but we are seeing more discipline out of ourselves, out of the other OLTAs to pull back on unprofitable spend.

I think we'll continue to see that in Q4.

But in 2010 to the extent that the various players have taken out unprofitable spend, you should see spend kind of rolling up with transaction volumes etc.

We are seeing some benefits.

We are taking a fair amount of our CPC activity in-house and to kind of an in-house built system.

That has allowed us to get better visibility behind our profitability and our bidding and in marketing in general, all around the world.

And step one we're moving on right now is getting rid of unprofitable activity and hopefully next year what you'll see is our finding more profitable avenues and corners where we had not been bidding on, and hopefully starting to be more offensive and growing our CPC clicks and volumes.

So that will be stage two.

Stage one is going quite well.

Got it.

Thanks.

That was very helpful.

Last question regarding the contracts, you talked about this Choice Hotel and Best Western, how the key variability is on the rate parity and inventory parity.

Could you talk about how some of these near-term contract negotiations have changed over the past six months to one year and how that kind of impacts the long-term viability of these contracts that you have with suppliers?

Thanks.

Herman I will make sure people understand.

We don't have any issue whatsoever with Best Western.

We have done business with the independents for some time.

We continue to do business with them and there is absolutely no change there.

In general, as far as our hotel contracts and relationships, they've actually been quite stable.

The last five, six, seven renewals have -- obviously there are discussions that take place, but there hasn't been significant change in how we do business with our hotel partners really over the past one or two years.

I think there is a good understanding.

There is a great partnership.

We work very hard for them and we want to be there especially in this environment for them to help them as much as we can.

Our chain volumes are very, very healthy.

I would say Choice is an outlier.

Obviously, they're making choices as to whether they want to participate in the market place and if they do, terrific.

If they don't, we are really capturing the vast majority of bookings, so we'll be fine.

And I hopefully we'll come to terms with that.

Great, thank you.

James Cakmak, Sidoti & Co.

Good morning.

We have been seen some improvement on the online advertising front, obviously.

You guys are doing pretty well there, still at about 10% of revenue.

Can you just discuss how you are thinking about growing that business?

It's a high margin.

And how do you feel Trip Advisor and your overall online media platform is faring versus the broader travel ad market and how we should be thinking about any margin benefit we could see from growth in the coming quarters?

I'll say I feel as good about Trip Advisor as I ever have, to be honest with you.

We're feeling the same CPC pressures that our transactional sites are kind of enjoying, TripAdvisor is feeling a long with FX pressures in the last three quarters.

Although that should ease up in Q4 next year.

So, unit volume or click growth in TripAdvisor is growing substantially and excess of the revenue growth that you see with some CPC pressure which should ease as the year goes on and into next year.

So, we think that is a tough trend that TripAdvisor has overcome through good work and if CPCs ease up next year or CPC pressure eases up next year, it should be a really good year for TripAdvisor both domestically and internationally.

The base TripAdvisor business grows very -- the growth is strong domestically, in Europe and obviously Asia is a new area we're investing in.

And in addition to the base business which is growing nicely, we are also investing in three areas.

One is getting into air metasearch with TripAdvisor flights, which is an award winning product, a terrific product.

We're in investment mode right now.

One is China which is DaoDao and Kuxun.

Now again we're going to be in net investment mode in China I'm guessing for the next two years.

And then the third is the vacation rental business through Flipkey which is a huge, huge category, potential category for us.

There is a terrific competitor, HomeAway, and we're getting into that market and we think that will be a substantially profitable market for us as well.

Again, some investment spend both this year and going into next.

So, the model that I'd say is, you've got an enormously profitable growing base TripAdvisor business and then we're investing in these three areas.

The TripAdvisor business is able to fund those investments and grow.

And then hopefully years two, three, four, five we're going to reap the rewards of these investments in these totally new areas that we're making.

So Steve Kaufer and that team are executing really well and we think this is a unique asset and will continue to set us up apart from the other players.

Okay, thank you.

(Operator Instructions).

There appear to be no further questions.

Okay, thank you for joining us on the call today and for the great questions.

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

I certainly appreciate your interest in Expedia and look forward to chatting with you again next quarter.

Dara, did you have any final thoughts?

Just thank you to the employees of Expedia on a worldwide basis.

They delivered a terrific quarter and hopefully will continue to do the same going forward.

Thanks.

Thank you.

This concludes the Expedia third quarter 2009 conference call.

Thank you for participating.

You may now disconnect.