Expedia Group Inc (EXPE) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Expedia Inc.

fourth-quarter 2009 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, Thursday, February 11, 2010.

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

Stu Haas.

Please go ahead, sir.

Thank you and good morning.

Welcome to Expedia Inc.'s financial results conference call for the fourth quarter and full year ended December 31, 2009.

I am joined on the call today by Dara Khosrowshahi, Expedia's CEO and President, who is dialing in from our offices in London; and Michael Adler, our CFO.

The following discussion, including responses to your questions, reflect management's views as of today, February 11, 2010 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 upon which we have based our financial expectations and 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 earnings release, which is posted on the Company's IR website at expediainc.com/ir.

I encourage you to periodically visit our IR site for important content, including our updated investor presentation reflecting today's Q4 results.

You may also have noticed we've changed the way we are distributing our earnings release.

Rather than put the release out over the newswire, we are pointing people to our IR site, where they can pull down the PDF version.

You should expect us to continue this practice going forward.

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 periods of 2008.

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

Thanks, Stu, and thanks to everyone for making time to join us this morning.

I'm happy to kick things off today with a couple of significant developments on the capital structure side of things.

First, we've closed on a new three-year $750 million revolver, which affords us well over $1 billion in liquidity, even at the seasonal low point on our cash cycle.

And combined with our ongoing cash generation, this ensures more than adequate capital to address Expedia's internal investment opportunities, as well as value-add bolt-on acquisitions.

Second, today we are unveiling the Company's first-ever quarterly cash dividend, which is part of Expedia's ongoing commitment to return excess cash to our shareholders.

Turning to results, Q4 capped a successful year for the Company.

Expedia delivered 2009 free cash flow of nearly $600 million despite the worst economic conditions many of us have lived through, and despite our cutting over $150 million in gross annualized fee revenue.

On the advertising side of the house, TripAdvisor's revenue growth accelerated to 29% on sustained traffic and click growth, as well as improved CPCs.

Trip recently launched its Business Listings product, allowing hotels to directly merchandise their websites and display telephone numbers and e-mail.

And if you will forgive me on the shameless plug, first-year listing subscriptions are starting as low as $300 through the end of February.

Overall, our advertising businesses now constitute about 11% of our revenues, representing a significant differentiator versus our competition, as well as a growing hedge against media rate inflation.

Expedia's international businesses hit a record 41% of revenue in Q4, with hotels.com now operating over 70 sites around the globe, and our Expedia brand launching its 20th site in Mexico.

Our managed travel provider, Egencia, meaningfully outpaced competitor growth in Q4, while adding nine additional countries through localized partnerships.

Looking forward in the first half of 2010, Expedia will open a new office in Switzerland that will serve as a global headquarters for a lodging supply group, bolstering Expedia's presence in the heart of our most competitive battleground.

In closing, I would like to comment on a frequent topic of investor discussion, which is the notion of Expedia as a countercyclical play.

I want to reiterate that we are not concerned about our hotel inventory availability in an upturn.

We've made significant investments in PSG to ensure that we maintain industry-leading access to inventory in all environments.

As importantly, we have a history of doing well in rising ADR environments.

To illustrate, take a look at page 10 of the updated investor deck on our IR site, where you will see some of our strongest growth, which came during peak ADR periods.

And here in Q4 '09, we delivered the best hotel revenue growth in nearly two years despite an improving ADR environment.

To be clear, we are not saying Expedia is a cyclical play either, but we are saying we've demonstrated we can deliver growth in both downturns and upturns, and we don't expect that to change going forward.

Mike.

Thanks, Dara.

I will step through some Q4 analytics before covering 2010 expectations.

First, revenue margin.

Q4 revenue margin declined, primarily due to our fee actions in the first half of the year.

Q4's decline was greater than Q3's, primarily due to air fares.

Variances in fares meaningfully impact gross bookings, but have little impact on our revenues.

Holding all else constant, had air fares declined as much year-over-year in Q4 as they did in Q3, our revenue margins would have actually decreased less than the 98 bps we experienced in Q3.

As we've said before, we continue to think that once we lap the bulk of our fee cuts in Q3 2010, and assuming that air fares don't rise more than low single digits, revenue margins will be flat to up in the back half of 2010.

Q4 '09's rev margin decline is a great illustration that rev margin by itself is not a particularly useful metric with which to evaluate Expedia, as there are so many factors that could influence one quarter's rev margin, from product mix to FX to chain hotel to advertising mix, and on and on.

It is our position that if we continue to drive meaningful revenue and cash flow growth over the long-term, quarterly revenue margin gyrations aren't terribly important.

And bear in mind the most important driver of rev margin over the long term is supplier margins, which have been stable.

Turning to OIBA margins, we drove 127 bps of leverage in Q4 due to continued efficiencies in COGS and marketing.

To the downside, G&A and tech and content grew faster than revenue due to higher bonus accruals, depreciation from prior investments and higher legal fees and settlements, which together made up roughly 70% of the total increase in these two expense categories combined.

We expect to lever both G&A and tech and content in 2010 on more normalized comps and over the longer term.

On taxes, our ANI rate was lower than anticipated, primarily due to a reduction in some tax reserves.

In addition, we began to see some modest improvement in our effective tax rate in late 2009 due to certain changes in our business structure, which will continue in 2010.

And we think these activities, combined with the relative earnings growth in our international businesses, should help decrease our effective cash tax rate by a few hundred basis points below our typical ANI rate of 38% to 39% in 2010 and beyond.

Turning to 2010, although there is still significant uncertainty in the economy generally and travel specifically, we feel comfortable enough with the operational and financial improvements we've made in our businesses that we expect our 2010 OIBA growth rate to exceed our 9% growth in 2009.

This assumes that FX rates don't vary markedly from what we are seeing today.

Before questions, some quick points on the first half of 2010.

Keep in mind we ratcheted marketing spend down sharply in Q1 '09 in response to the economic environment.

In 2010, we are returning to a much more typical seasonal spend pattern, which means Q1 '10 marketing spend will increase significantly from Q4 '09, consistent with seasonality we observed in prior years.

Therefore we do expect to see selling and marketing grow in excess of revenue in Q1.

In addition, we're making some investments in cost of sales that we are confident will deliver leverage in the second half of the year, but that will require a ramp-up of certain expenses, leading to slight COGS deleverage in the front half of the year.

Lastly, we do expect to see full-year free cash flow grow in line with or better than OIBA growth in 2010, with CapEx coming in around $100 million.

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

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

(Operator Instructions) Mark Mahaney, Citigroup.

Thanks.

Could you give a little color on particularly international and European bookings and patterns that you are seeing there, your success in building out more hotel inventory and what kind of success you've also had in rolling out more of an agency model in Europe?

Thank you.

As far as booking patterns, really Q4 was a pretty consistent quarter.

The room night growth, the air ticket growth that you saw for the quarter was fairly stable throughout the quarter.

There wasn't any significant kind of upward movements or downward movements there.

The ADR environment certainly improved as the quarter went along.

So ADRs got better.

So from a revenue standpoint, the hotel -- the merchant hotel business looked better as the quarter proceeded.

And certainly in January, we think those ADR trends are continuing.

So the ADR kind of headwind that we had all of last year should be easing up on a go-forward basis.

As far as inventory on the European side, we've got about 16,000 agency hotels.

We added 9000 in Europe.

And we think we are in a very good position from an inventory standpoint in 2010 to really start pushing more demand to the hotels from multiple channels, search engine optimization, SEM, brand channels, et cetera.

So we think '09 was a good year for setting the infrastructure of the Company, et cetera and gaining inventory.

And we think in 2010, it is time to execute, and we are pretty confident on where we are right now.

Thank you, Dara.

Imran Khan, JPMorgan.

Thank you for taking my questions.

Two questions.

One, it seems like sales and marketing as a percentage of revenue continue to remain low.

Can you give some color how the CPC trending does (inaudible) or what do you expect -- do you expect to make additional investment in off-line advertising, or European advertising or salesforce?

And secondly, advertising and media revenue growth rate accelerated to 18%, I believe.

Could you talk a little bit about what kind of trends you are seeing, both domestically and internationally?

Thank you.

As far as the sales and marketing side, we are continuing to gain leverage, and that is very good news.

It is indicative of a couple of trends.

One is we are getting much better at improving profitability on a channel basis and our data collection is better.

I think the teams are more effective.

And so we are pushing out unprofitable spend and inefficient spend, I'd say, more effectively than we have in the past.

CPC trends have been quiet friendly to us since the beginning of the year, although I do believe that the CPC trends are going to get a little more difficult as 2010 progresses.

But they certainly -- for 2009, they have been quite positive.

The other benefit that we saw on the marketing side is that we were able to cut brand spend.

Because we decreased fees, transaction growth was still very strong, so the consumer value proposition of the product is better.

And we also have been able to shift some of our channels to cheaper channels -- search engine, again, search engine optimization, the e-mail channels, etc.

have been pretty effective.

We think the advertising comps going into 2010 are going to be a bit tougher.

Certainly in Q1, we were very conservative on brand spend in Q1 '09, and as we feel better about the business, now and in 2010, and we certainly do, we do think that it's time to reinvest in the brand, which is why we'll get some early marketing deleverage that Mike talked about.

But in general, from a long-term perspective, we think that we can manage our advertising and marketing costs generally in line with revenue, although, again, the market will determine that to some extent.

We do have a great hedge and a great growth engine as far as TripAdvisor.

The ad and media business really accelerated in Q4, and that was a reflection of very, very strong traffic growth at TripAdvisor, some new products that we are introducing and also CPCs for TripAdvisor getting better on a relative basis.

They were still down in Q4, but they were down less in Q4 than they had been early in the year.

And we think that 2010 is just going to be a great year for TripAdvisor.

Got it.

Thank you.

Justin Post, Bank of America Merrill Lynch.

A couple things.

First, you did say -- I just want to make sure -- OIBA will grow faster than 9% this year.

And is that a reflection of just what you've been saying consistently, that better environments are actually better for Expedia?

And then secondly, it looks like if there was a little disappointment, it was US revenues.

Was there any abnormal pressure on US hotel nights in the quarter?

And do you see any pressure from kind of some of the problems in maybe Southern Europe for international going forward?

Thank you.

Mike, do you want to take those questions, then I'll fill in?

Okay.

Yes, great.

We did say we expect OIBA growth in 2010 to grow faster than 9%.

And there is a number of things that go into that.

And I would point out that the comps will get more difficult for us on the top line for transactions as we comp the fee actions that began in Q1 2009.

We also, as I think I indicated earlier, there will be a tough marketing comp earlier in the year, as we return to the normal seasonality of that spend.

We will get some COGS leverage in the second half of the year, as opposed to the first half of the year.

The flattening of ADR declines that we've seen will put a little bit less pressure on revenue per room night.

And to your question about the environment, we obviously expect some level of volume impact as the ADRs start to shift.

But as we indicated on Dara's comments, we expect to have strong inventory really in any environments.

On the second question, on whether there is any abnormal pressure on room nights, the answer is no.

The room nights grew very similar levels in Q4 in the US as they did in Q3.

And similar to Q3, we did that in an environment where overall demand reported by Smith Travel was actually down.

And so we continue to take a significant amount of share in this environment.

And Justin, if you think about it on a merchant revenue growth standpoint, growing room nights in a negative ADR environment provides a significant amount of profit pressure.

Because there are other costs that come along with those increases -- overhead costs, server costs, customer service costs, etc.

So getting back to an environment where we can grow room nights and we have either flat ADRs or rising ADRs from a profitability standpoint is much friendlier to our P&L, which to some extent goes to the first question that you asked, about our confidence in our OIBA growth.

And we think a balanced environment is good for us.

Okay.

In the quarter, was Europe better growth rate in hotel nights than US?

And any -- my last question -- any abnormal pressure in southern Europe going forward?

Really, the US and Europe, the growth was quite balanced, so no big swings one way or the other.

And it was a pretty consistent quarter.

Southern Europe, we worry about to some extent from the economic front, but I think it is too soon to tell.

And we certainly think we've got a lot of upside in the whole of Europe as far as just executing better on the improved inventory that we have.

And last thing, does your guidance include the $20 million one-time marketing expense?

Thank you.

That's it.

Yes, it does.

Justin Post.

Thank you.

Ingrid Chung, Goldman Sachs.

I just have one question.

I was wondering if you could talk about the bookings window and whether you've seen it lengthen or not.

And if so, I was wondering if that negatively impacted your net revenue rate in the fourth quarter and it could be a benefit in the first quarter.

We've seen booking window lengthen slightly in kind of Q1-ish.

I wouldn't say that the lengthening was that significant in 2000 -- in Q4 of '09.

It is not back to kind of 2008 levels yet.

Lengthening booking window, as you said, does hurt revenue margins, so to speak.

But really, the difference between Q4 and Q3 revenue margins was all about air ticket prices and nothing else.

Okay, perfect.

Thank you.

Ross Sandler, RBC Capital Markets.

Quick clarification on the revenue margin again.

So you stated that most of it was from mix shift of air.

And you mentioned in the prepared remarks -- or in the press release the fee cuts.

Can you talk about any other items potentially that impacted the revenue margin?

And how do those particular items change as we move into the first half before you kind of anniversary the third quarter?

Thanks.

On rev margin, there was a slight mix shift into air, but the item that we pointed out was actually air fares had been down minus 14%, I think, in Q3, but were only down minus 4% in Q4.

And that actually ends up putting pressure on the revenue margins.

We do expect air fares from this point on to be flattish to slightly up, and that will continue to put some pressure on the air fares.

We also have a number of items that we discussed really last quarter that still apply.

We began consolidating CruiseShipCenters in -- I think at the end of Q2.

And CruiseShipCenters has a much lower revenue margin, but actually has a higher OIBA margin.

So it is a very profitable business for us.

But when you just look at the revenue margin, it does have a negative impact.

We also are recording Welcome Rewards as a contra-revenue, and that is having an impact on the numbers as well.

We are making some changes to that program that will improve the efficiency of that going forward.

So we will have less headwind from Welcome Rewards going forward.

There is a chain hotel mix shift, which it is hard to predict how that will react moving forward.

It really depends upon who is most aggressive on pricing.

And then one correction, the -- air fare was actually down even more in Q3 than I had indicated, down 18% versus the minus 4% in Q4.

I think if you pulled that all together, once we anniversary a lot of these factors that come through, which is really in the second half of the year, we anticipate revenue margins being stable to up.

Obviously, the wild card in that is air ticket prices.

If air ticket prices go up very significantly, that will hurt revenue margins.

If they go down, that will help revenue margins.

But that is really a wild card that doesn't have that much to do with the revenue margins on a fundamental basis.

Right.

And I would point out one last thing, that in the first half of 2010, we expect rev margin on a year-on-year basis to be more similar to Q3.

Thanks, guys.

Aaron Kessler, Kaufman Brothers.

A couple questions.

First, on the improvements on the RevPAR and the air rate, is your sense that those are -- is it more from easy comps, or are you starting to see some real kind of acceleration or improvement in those rates?

And then also, can you give us a sense for maybe Hotwire, just the opaque performance in the quarter?

Sure.

As far as RevPAR goes, we think it's a combination of both.

Comps were certainly easier.

And you would see our movement in ADR.

We kind of -- in Q4 of last year, we moved down a bit ahead of the industry.

So I think the comps for us were probably easier than industry comps, as well.

But the fundamentals we do think are getting a bit better, especially on the business travel side.

So when you look at Egencia, for example, which is our business travel group, it is really showing nice strength.

It's a combination of same-store sales getting better, businesses starting to travel again, and also very strong sales on the kind of new account front.

So Egencia revenue in Q4 was up 17%, which is a pretty significant turnaround from earlier in the year.

And that is fundamental strength, as well as easy comps.

So it is really a combination of both.

I wouldn't say that things are super, but it is a heck of a lot better than last year, and I think everyone is feeling more stable and it is back to kind of managing the business.

As far as Hotwire's performance, Hotwire continues to perform very, very well.

We are seeing a little bit of weakness on the car side as fleets are lower.

A lower percentage of our sales are on the opaque front.

And opaque is an incredible deal for consumers, and as a result, the more opaque we sell, the better for Hotwire.

And of course, the Toyota recall in this first quarter hasn't helped any, because it brings down the fleet sizes.

It will help on the pricing front, but won't help on the volume front.

On the hotel side, Hotwire continues to be very, very strong, room nights up over 30%.

So on balance, we think Hotwire is good.

The car side is going to be a little bit difficult in '09 and in 2010.

Great.

Thank you.

Herman Leung, Deutsche Bank.

Thanks, guys.

Three quick questions.

First, you guys have been seeing very strong air volume continuously, obviously impacting the revenue margin a little bit.

But on the concessions side, what are you expecting from kind of override commissions in the first half for this year, considering that the ramp-up in air transactions have gone up very significantly?

And then second, could you give us a sense of kind of your early takeaways on the new campaign that you guys ran and some of the new tools that were introduced on the website, including kind of the hotel booking with the new pricing structure that you have?

And then lastly, just can you give us an update on package transactions and how they did, both in Europe and the domestic regions?

Thanks.

Sure.

As far as air volume goes and override payments, in general, we have structured our various deals so that our revenue goes up or down kind of 80% based on air volume and probably 20% based on air gross bookings; in other words, higher prices bringing in higher commissions for us.

So other than the fee cuts, which were a negative as far as revenue on the air side, we don't expect to see very significant changes in air revenue per ticket.

Overall air revenue on a go-forward basis and certainly in 2010 is going to improve because of the lapping of the fee cuts.

So we feel pretty good about where the air business is, and certainly, air revenue looks much better in 2010 than it has for a while.

As far as the new campaign for Expedia, I would say it is a bit too soon to tell.

It is a Where You Book Matters campaign.

We are seeing searches for Expedia on Google up significantly.

We are seeing those searches kind of out-index the searches we see from the competition.

But I think it is really early.

I think the campaign is not as much of a price promotion campaign as we have had in the past.

It has been more of a campaign of, hey, here are the many, many things that Expedia can do for you.

And we think that is a campaign that we can work with and build over a long period of time.

So I think it is too soon to tell, but we are pleased with what we are seeing.

It is also a campaign that we can take international.

So we are taking that campaign, and for example, we are running spots in Scandinavia, etc.

So I think so far, so good.

But I think we will be able to tell you the story in a couple quarters.

On the package side, Mike, you want to talk through that?

Sure.

On packages, we saw 33% transaction growth in the quarter, and that is an acceleration from Q3 '09.

On the revenue side, we saw revenue increase 16%.

There is obviously a large difference between the transaction rates and the revenue rates, and that is being impacted in large part by hotel pricing.

In terms of international versus domestic, we saw pretty good growth in both the US and in Europe on packages in the quarter.

And I think package revenue going forward, a significant component of package transactions are revenues, the inventory that comes in, and that can be unpredictable on a seasonal basis.

But we are certainly encouraged by the strength that we saw in Q4.

One last question, if I may, on the European side.

If you can give us an update on the in-house SEM/SEO efforts, and when we should start to see some of that kick in.

And could we expect some more monetization in the back half of 2010?

Thanks.

Well, you can certainly see the effect of the SEO efforts in both transaction growth and marketing efficiencies.

One of the significant reasons why we are seeing marketing efficiencies is because a higher percentage of our transactions are coming through from the SEO channel.

On the SEM front, step one -- and I think it was quite an effective step -- was to get rid of inefficient spend.

And again, that helped marketing efficiency in 2009.

And step two is really going to be to try to grow revenue through the SEM channel, bid on more key words, bid on more geographies, bid on more languages, etc.

And I think you will see that roll through in 2010.

Michael Millman, Millman Research Associates.

Thank you.

Could you talk about what effect you expect I guess the shift in FX to have on the first quarter compared with the fourth?

And also, while you explained what is happening in agency bottom line, could you also talk to agency -- I think revenue was up 25% -- excuse me -- gross bookings were up 25%, but revenue was down 1%.

And then I have 30,000-foot question after that.

Sure.

Mike, you want to talk about those two?

Sure.

So on FX in Q4, we saw an extremely large impact on our business on FX.

And primarily due to last year, we had a very large book to stay loss.

There was a 20% increase last quarter in the US dollar versus the pound, so the dollar strengthened.

If you actually look at the full year, you will see that the impact was much more moderate.

So that in some ways kind of adjusts for the severity of the Q4 move.

In terms of Q1, we would expect a lesser impact from FX.

The relative differences in rates is not as large Q1 '10 as compared to Q1 '09, as Q4 '09 to Q4 '08.

So we will actually expect perhaps some modest upside in Q1 from FX, but nowhere near along the lines that we saw in Q4.

And on the agency, Mike, it is simply a function of air fees.

So our taking out the fees affected the air business or air booking fees.

And as a result, revenue did not increase nearly as much as gross bookings.

Going into -- I will remind folks that we cut air booking fees on Expedia on March 11, so we would expect Q2 through Q4 gross bookings and revenue to move closer together, mitigated either by movements up or down of air ticket prices.

If air ticket prices go up, gross bookings will tend to go up faster than revenue; and the opposite is true if air ticket prices go down, gross bookings on the agency basis will tend to kind of trail revenue, so to speak.

Revenue will look stronger.

And the high, broad question is Travelport just announced that they are not doing an IPO.

And I was wondering if you could talk about generally what trends you see in how Expedia and others deal with GDS's or eliminate them going forward, and what this might mean in terms of the bottom line.

I was reading the news as you were, I suspect, so I don't have a lot of insight as to specifically why Travelport pulled their IPO.

I will say that in general, we do work with the GDS's.

They are good partners of ours.

And at least for the foreseeable future, unless things change, unless the nature of the industry changes, we think we are going to keep working with GDS's.

Our technology folks, I think where we add value is the consumer value proposition, building a better service, working our own infrastructure.

We are not particularly good in air connectivity.

We are good in hotel connectivity, but not particularly good in air connectivity.

We don't consider it a core function.

So we will continue to look to work with our GDS partners.

And today, we are working with Sabre, we're working with Amadeus, and we are working with Travelport as well, so that we are diversified in our base and we are not dependent on any one player.

So that is really all I can comment on as far as Travelport and what they are doing.

Great.

Thank you.

James Cakmak, Sidoti & Company.

You mentioned you think that you are gaining share here, gained share in 2009.

I was wondering if you could provide some insight into where you feel you are gaining that share and where you expect that to trend going forward.

And secondly, as far as the new dividend is concerned, can you just take us through the thought process of putting that dividend policy in place and your overall view on potential M&A activity here in 2010?

Thank you.

Sure, James.

On a share basis, honestly, it is a bit difficult to tell where we are gaining share, because we are fairly early in reporting certainly amongst OTAs.

I think if you compare our room night growth to industry room night growth, it is up significantly.

Our room night share in the US is up 50% over the past two years.

And we know we are selling many more rooms.

Where is it coming from?

We think it is probably coming from off-line travel agencies, and we think that we are winning share amongst online travel agencies as well.

But other than that, it is difficult to tell where it is coming from.

Specifically, in Q4, for example, in the US, we grew room nights 23%.

And based on Smith Travel Research, rooms sold -- or demand in Q4 was down 1%.

So we know we are gaining share, and in general, as long as we are gaining share, we are happy, and that is our job and it is something we feel that we can execute on going forward.

We're certainly gaining share on the air side as well.

Fees help, and we think as long as we keep building a great consumer value proposition -- and I think in 2009, we made huge strides in improving our consumer value proposition -- we think we are just going to be -- we're going to be just fine on a go-forward basis.

You put that together with some of the loyalty programs and just better execution across the board, we feel pretty good about our share prospects on a go-forward basis.

As far as dividends go, really, the thinking was pretty simple.

We told you and our investors for some time that to the extent that we had excess capital, we would start to return it to our shareholders.

One of the issues that we wanted to take care of was the renewal of our revolver.

Our revolver was up, I believe, in August of this year.

We renewed it at $750 million over three years.

We have over $600 million of cash in the books.

The first half of the year, we are going to see very significant cash flows coming in, and we think free cash flow growth in 2010 is going to be very healthy, higher than OIBA growth.

So we expect to have a fair amount of excess capital in 2010.

So we thought the dividend was a start of giving it back to our shareholders.

It is a start.

It is not the finish.

And our goal over the long term is to maximize shareholder value, and that will be through dividends, it will be through acquisitions, it will be through buybacks.

And we'll allocate capital to the best part of that.

And in the long term, we want to make our shareholders do well.

And all of this is going to be in keeping with investment grade.

And we've had some really good news along that, because liquidity -- the fundamental liquidity of the Company is pretty important to us.

So we think this is just a start.

Mike Olson, Piper Jaffray.

As far as improving hotel inventory in Europe, would you be willing to share any metrics on just what hotel inventory growth has been in Europe versus, say, Q4 of last year?

Just something to put some parameters around the inventory growth.

And secondly, what would you say is the geography outside of Europe that you're most focused on gaining share in?

We have not talked specifically about inventory growth in Europe.

What we have shared is that agency inventory, we've got 16,000 agency hotels available now, and the vast majority of those are in Europe.

So other than that, we are not going to share specifically where our inventory is.

Overall, on a merchant basis, we added 22% to our hotel count.

Obviously, we have the 15,000 agency hotels.

So we are pretty happy about that.

And now we've got to get on with the business of selling them, making sure our inventory quality is high and also acquiring more hotels where appropriate.

As far as Europe goes and targeting Europe, I would say Southern Europe, Spain is a target for us.

We think that in general our penetration relative to the market is a bit low.

And Eastern Europe is a very big growth opportunity for us.

So we are continuing to acquire hotel inventory in Eastern Europe and all across Europe.

Our anticipation is that for 2010, we are going to add another 9000 or 10,000 agency hotels in Europe.

So it is pretty consistent growth across the board.

All right, thanks.

Scott Kessler, Standard & Poor's.

Two questions on the corporate transactional front.

The first is obviously there was discussion about Travelport, an IPO not happening, maybe it will.

Would you guys ever consider taking TripAdvisor public?

And what are some of the things that we should think about in the context of your consideration of that?

And in addition, you guys obviously have become a little bit more active on the M&A front in Asia, and I was wondering how you think about that in the context of building your business in that part of the world.

Thanks a lot.

Sure, Scott.

As far as taking Trip public, we will be opportunistic.

I think on Trip, I would say the fundamental reason to take TripAdvisor public is if it is suffering as a result of being inside of Expedia.

And right now, what I would argue is that it isn't.

Trip is operated very much on an independent basis.

Steve Kaufer and his team are running Trip as they would essentially a stand-alone business.

It has friends at Expedia, which is it knows that Expedia and hotels.com and Hotwire are buyers of its advertising all the time, and essentially make a market.

And it can very aggressively sell to third parties, and it does.

And frankly, Steve and their team don't have to be distracted by calls like this.

They can worry about executing, and they are executing incredibly effectively.

And I think the opportunity at Trip is greater than it ever has been.

So for now, as long as Trip is executing well, I think it will be -- it will remain inside the Company.

And as far as valuation issues and is Trip being valued at a high enough multiple, my experience in looking at companies being spun off is that the market is pretty smart.

And whenever people spin off subsidiaries and they think that magically all of a sudden multiples are going to change, lo and behold, they don't.

And there is a reason why the market is valuing a company at that particular valuation.

I think multiple changes based on long-term performance, and we are hoping that our long-term performance proves that the market is undervaluing the stock, at least from a short-term perspective.

And it will be up to us to allocate capital to take advantage of short-term market back and forth.

We don't think a spin-off is the solution, at least near-term.

So that is a long-winded way of saying as long as TripAdvisor continues to execute, and I think it is going to continue to execute, we are very happy where it is.

The second issue for Trip just being inside the Company is it provides us a great hedge against our most significant expense.

Our biggest expense is sales and marketing.

To some extent, it is the least in our control.

We are really happy about where G&A is and where it is going forward, and cost of goods are and where they are going forward.

Sales and marketing are based on external conditions, and TripAdvisor provides us a terrific hedge.

The revenue that we get from Trip is over 50% of the CPM and CPC marketing costs that we have.

So we love having Trip inside here, and we would be very happy and expect it to only increase as a percentage of the Company as a whole.

As far as M&A in Asia goes, we think it is a great opportunity.

We've been focused on -- first, we've gone into the market so that we know who the best players are.

We will tend to put small money against acquisitions in areas like Asia because they are high return, high risk; we don't want to bet the farm.

And we are very happy with our newest addition in China on the meta-search front, and we are going to invest in it on an appropriate basis.

So we'll look in Asia, but to the extent that we make bets, they are going to be smaller bets, because, again, there is a fair amount of uncertainty there along with the potential that comes with it.

Thanks.

Appreciate the detail.

Sandeep Aggarwal, Collins Stewart.

Thanks for taking a questions.

What percentage of your air bookings are done by phone?

And what kind of changes you are seeing in the customer behavior by elimination of these fees?

And any comments on how material the revenue impact could be in 2010 because of the elimination of these phone fees?

Mike, you want to talk through that, on the fee front?

We don't disclose the percentage of air over the phone, specifically.

But Mike, you want to talk about the elimination of fees?

Yes, sure.

We, again, we will start lapping the elimination of fees in the US towards the end of Q1, and then we have made a number of other reductions around -- really around the world.

And so we do expect more significant air ticket growth year-on-year in the first half of the year, and particularly in Q1 and Q2.

As Dara indicated earlier, our economics on air have been stable absent the fee.

And so we will expect to, all things being equal, we would expect to return to some growth in air revenue next year.

Again, probably post Q1 will probably be our most difficult comp -- or Q1, I should say, our most difficult comp.

So we will probably have a very modest increase in air revenue.

On the question about air bookings by phone, perhaps it is precipitated by our removal of the booking fee by phone.

And I believe we are the only online travel agency not to charge a fee for booking on the phone.

So we think that makes us very customer friendly.

But we don't think it is going to be nearly as meaningful as the reduction/elimination that we've made on the online fee, as the very large bulk of our tickets are booked online.

But again, as Dara said, we don't provide that exact detail.

And Sandeep, in general, strategically we view the phone as a strategic channel.

It's a bigger channel on the hotel side than it is on the air side.

Conversion rates on the phone are quite good.

And we are making some really important investments as far as technology, phone technology, so that our customer service improves -- our customer service levels improve, we can hopefully drive conversion.

And you will see some of those costs come in in the first half of the year, but we think on a cost of sales side, especially in the second half of the year, we are going to have very good news.

Does that answer your question, Sandeep?

Yes, it does.

Thank you.

So I think that's the last question.

Thank you for joining us.

Stu, is there anything that you need to add?

No, I would also thank listeners and just remind them a replay will be available on the IR website shortly after the completion of the call.

And to the Expedia employees, thanks for a strong '09 and looking forward to '10.

Thank you.

Ladies and gentlemen, this concludes the Expedia Inc.

fourth-quarter 2009 conference call.

Thank you for your participation and for using ACT Conferencing.

You may now disconnect.