Expedia Group Inc (EXPE) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Expedia Inc.

first-quarter earnings conference call.

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

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

(Operator Instructions).

This conference is being recorded today, Thursday, April 29, 2010.

I would now like to hand the conference over to Stu Haas, Senior Vice President of Investor Relations and Treasurer.

Please go ahead, sir.

Good afternoon.

Welcome to Expedia Inc.'s financial results conference call for the first quarter ended March 31, 2010.

Believe it or not, today's earnings call is Expedia's 20th since our spinoff from IAC in 2005.

And it is going to be the last one for me personally, because I'm going to turn my full attention to running Expedia's treasury group.

I want to thank our investors and those who follow Expedia for your support and interest over the past five years.

And with that, I'm now going to turn the call over to Expedia's new Vice President and Head of Investor Relations, Alan Pickerill.

Thanks, Stu.

We're pleased to be joined on the call today by Dara Khosrowshahi, Expedia's CEO and President; and Mike Adler, our CFO.

The following discussion including responses to your questions reflects management's views as of today April 29, 2010 only.

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 which 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 today's earnings release and our updated investor presentation.

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 2009.

With that, let me turn the call over to Dara.

Thanks, Alan.

Thanks to everyone for making time to join us this afternoon.

2010 is off to a good start for Expedia as Q1 operating income before amortization grew 10% on a 13% increase in revenue with expected deleverage in selling and marketing offsetting leverage in some of our other expense areas.

Our adjusted earnings per share grew at a healthy 24% due to our OIBA growth, combined with a lower tax rate.

We expect earnings per share to continue increasing faster than OIBA in 2010.

On capital structure as part of Expedia's long-standing discipline of returning excess cash to shareholders, we completed the distribution of our inaugural dividend of $20 million in March and we also repurchased $188 million worth of our stock.

Over the long-term we plan to continue both programmatic and opportunistic returns of shareholder capital, all consistent with Expedia's commitment to maintaining an investment grade credit rating.

Now diving in a bit more on our results, our advertising and media businesses had a strong quarter with topline growth accelerating to 34% for the business which now contributes 14% of our revenue and generating run rate revenues of nearly $400 million.

TripAdvisor delivered 33% revenue growth on very strong traffic and click growth across its global media network.

Trip has signed over 12,000 subscribers for its new business listings product so we are encouraged by the early adoption on that front.

Our transaction-based sites generated a solid 18 and 22% growth in room nights and air tickets despite tougher comps and less favorable pricing environments.

And our international businesses delivered their highest rate of FX neutral revenue growth in over two years with our APAC region exceeding the $1 billion trailing four quarter bookings threshold for the first time in Expedia's history.

A significant driver of international strength continues to be our hotels business.

We saw an acceleration in room night growth from 24% to 27%.

On the other hand, US room night growth decelerated in Q1 due to lower gross at Hotwire and Hotels.com on tougher comps.

Hotels.com is comping the ramp of our very successful Welcome Rewards program last year which we believe significantly accelerated volume growth.

We also completed the integration of our Hotels.com US and international platforms into one global platform which we do think cost us some volume in Q1 and here early in Q2.

Balance of the year growth on Hotels.com will largely depend on driving conversion increases through site optimizations, which will require strong execution going forward.

But we have a very solid product plan in place and that's exactly what the common platform is suited for.

Now we told you last year that we expected Egencia to show both top and bottom line growth in 2010.

And we are off to a solid start on that accord with Q1 bookings growth of 47% and OIBA of $6 million.

Some of that profitability was driven by timing of investments that we're making to benefit our clients in support of their needs.

So we don't expect that level of OIBA going forward for Egencia but we do expect a nicely profitable year in 2010.

All in all, a solid start to the year amidst an improving travel environment.

With that, over to Mike.

Thanks, Dara.

I'll briefly step through some Q1 analytics before updating our 2010 expectations.

Starting with transaction growth, we continued to benefit for most of Q1 from the various fee actions we took last year.

We just started comping over the e.com air fee elimination the last few weeks of the quarter.

And comps since then have been muddied a bit by the volcano, year on year differences in Easter timing and rising airfares.

And we have even less data on hotel as we reduced fees last April 21 but as expected, air ticket and room night growth rates are moderating.

That said, we believe we are still taking meaningful share in the travel market as a whole.

Revenue margin was down 134 basis points year on year in Q1 due largely to our various fee cuts.

This is a modest improvement from Q4 but was approximately 40 bps below our forecast due largely to the 9% increase in airfares compared with the low single-digit increases we had expected.

We continue to expect an easier comp on revenue margin in Q3 and beyond as we fully anniversary our larger fee cuts.

Turning to expenses, as expected, Q1 selling and marketing was closer to our more typical seasonal pattern with spend up nearly 20% sequentially and we anticipate a similar sequential uptick here in Q2.

As a reminder, Q2 selling and marketing will include roughly half the $20 million in relocation and other costs we will incur in 2010 related to the opening of our large lodging supply headquarters in Geneva, Switzerland.

On taxes, our 34% ANI rate reflects changes to our business operations we mentioned last call as well as relative growth in our international businesses.

We believe 34% is an appropriate tax rate for modeling purposes for the remainder of 2010 and we anticipate our ANI tax rate in 2011 will be a few additional points lower.

I know many of you are interested in the impact of the volcanic ash episode which recently disrupted European travel patterns.

Keep in mind that Expedia's business is fairly sensitive to events impacting air travel on the continent, since we tend to have a disproportionate share of airlift driven travel within Europe compared to some travel companies in the region.

In short, we clearly saw a meaningful increase in cancellations and a decrease in bookings related to Europe for a good two-week period, some of which we may claw back later in Q2 and some we may not.

But our best estimate is that Q2 OIBA growth will be several percentage points lower than it would have been otherwise.

So overall, we are now expecting roughly flat Q2 OIBA growth due to our currently assumed volcano impact, COGs deleverage and Geneva related expenses.

Even with Q2, we expect full year 2010 OIBA will grow in the low double digits compared with 2009.

As always, this assumes FX rates don't vary markedly from what we see today.

Given our outlook for single digit OIBA growth in the front half of the year, it's a fair question as to why we think we can deliver higher growth for the full year.

Fundamentally, we believe we can continue driving healthy room night growth with a more favorable revenue per room night profile as we anniversary our fee cuts and enjoy some tailwind from rising ADRs.

And while air ticket growth may be harder to come by in light of higher ticket prices, we will enjoy more stable revenue per ticket economics as we progress through the year.

In addition, we're looking for continued strong growth from our highly accretive advertising businesses which are showing nice acceleration against some favorable comps given the CPM and CPC deflation we experienced in 2009.

On the cost side, we are looking for COGs leverage in the back half from several areas including improved contract rates negotiated with third-party providers, consolidation of our call center footprint and some operational improvements including intelligent call routing.

We will also have much more normalized marketing comps as we get into the back half.

And finally, we expect to see meaningful leverage in G&A in the second half, particularly in Q4 when we lap some nonrecurring legal and professional expenses and we will likely experience a more typical year-on-year bonus pattern.

With that, let's turn to questions.

Operator will you please remind listeners how to ask a question?

(Operator Instructions) Doug Anmuth, Barclays Capital.

Two things.

First just on tech and content spending, I think in the release you talked about it being up on an absolute basis but did not comment as a percentage of revenues.

I was hoping you could elaborate there a little bit.

And then secondly, can you talk about your appetite potentially to buy in Liberty Media shares just given the fact that you did buy back $200 million worth of stock in Q1 and also in context given the commitment to the investment grade rating?

Thank you.

Sure, I will start with the second question and then Mike can talk about the first question.

As far as Liberty Media share buy-in prospects, Liberty has been a great shareholder, long-term shareholder of ours.

They continue to be supporters of ours and they are very kind of value add board members for us.

And everything that we have heard from them is that they want to be long-term shareholders.

So at this point, we have not had any kind of discussions with them about buying in their shares one way or the other.

We hope to have them as shareholders for a long time and make them lots of money on a go forward basis.

You know, I would say that our view on buying shares to some extent, we don't care who we buy the shares from.

This quarter we felt that there was a delta between what we thought the economic value of the shares was and what they were trading for on the market and we went into the market and we took advantage of what we thought was that delta and hopefully will prove to be a good investment on a go forward basis.

So what I focus on is the desire for us to buy in shares which we did in this quarter and kind of add value over a long term for shareholders in addition to dividend payments etc.

So with that, I'll have -- Mike, you want to talk about tech and content?

Yes, so on tech and content, I guess the first thing I'd point out is our spend in Q1 was actually very similar to Q4 in absolute dollars.

We do think that that will increase during the year.

And then for the full year, we will have absolute dollar increases.

Over the long run, it is absolutely our intent that we leverage tech and content spending.

Along the way there may be periods where we leverage more or less and as it looks right now, for this year given some of the investments we are making in TripAdvisor, it will be close.

So we're not sure exactly where it will end up.

Ingrid Chung, Goldman Sachs.

Dara, I was wondering if you could talk about the acceleration in hotel room nights growth that you talked about earlier in Europe.

Was that coming more from new hotels, new properties or was that from just more rooms booked for existing properties and should we continue to see good trends there outside of the volcano ash issue?

Sure, Ingrid.

The acceleration that we saw was actually primarily due to the Asia-Pacific business getting larger as a percentage of our overall business.

The APAC growth has been quite healthy and we've got a really good team and as that business -- it's kind of math.

As that business gets to be a larger part of our portfolio, you should see acceleration there, assuming that the growth in Asia-Pacific doesn't slow down and it has not.

We are also seeing nice success at Hotels.com in the Latin American region.

In Mexico, Brazil we're seeing very encouraging results there off of a small base.

And then Canada is doing really well for Expedia and Hotels.com.

The team out there is executing really, really well.

So most of the acceleration of the growth that you are seeing is APAC, Latam, Canada and some of these regions that we feel are -- have huge potential for us and are really strong kind of emerging markets.

Europe as a whole was stable and doing well and we think that there is frankly more potential in Europe on a go forward basis which hopefully we will execute on.

Mark Mahaney, Citigroup.

Two questions please.

Could you update your thoughts on the free cash flow outlook for the year?

Should that also be roughly in line with that low double digit OIBA growth.

Secondly, Dara, any updated comments on of course access to promotional inventory in the US hotel market?

Thank you.

Thanks, Mark.

Mike, you want to start off on free cash flow?

Sure, so on free cash flow, we're not updating our expectations today.

I would call out that we're off to a good start here in Q1.

Working capital from our merchant hotel business may be a bit lower than we had originally expected due to the pace of growth.

Also keep in mind, on our working capital, we will have a tougher comp as we head through the year just based upon booking patterns last year.

We do expect CapEx to be a bit higher than we had expected.

Probably using our Q1 rate on an annualized basis will get you close to where we think we will end up.

We have decided to do further buildouts in our data center and as TripAdvisor continues to grow, we are increasing CapEx spend there, both in terms of product development as well as just real estate.

I'd also call out that we are pleased with the improvements that we've seen in our tax rate which help us on a year-over-year basis and I would remind you that there's always puts and takes on our free cash flow and we are very sensitive to timing as well.

Mark, on your second question on the access to promotional inventory in the US, we are actually seeing good promotional inventory out there.

If you look at hotel occupancies in Q1 for example, I think average occupancy based on the Smith Travel data we saw was 52% which is significantly lower than call it the historical average occupancy that we've seen.

So you know the hoteliers still need help.

The environment is getting a lot better but I think hoteliers are still looking to move volume and they're still putting promotional inventory out there and will continue to on a go forward basis.

Now I don't think that the promotional inventory is going to be quite as deep discount as it was last year.

Last year you had a once-in-a-lifetime hopefully event last year where business travel just disappeared, group travel was nonexistent and really the hoteliers had to lean very heavily on leisure inventory and leisure discounted inventory in order to drive volume.

To expect that to happen again this year I think would be foolish.

But what we are seeing is that hoteliers are in the market.

They are pushing promotions and the nature of those promotions might change.

Instead of buy two nights, get one free; it might be buy three nights, get one free.

Instead of 40% off, it might be 30% off.

Some hoteliers we're seeing who were driving aggressive retail promotions are dipping more into the opaque channel into for example package inventory and/or Hotwire opaque channels etc.

So the nature of the promotion, the promotional activity is going to change.

But we absolutely think that lots of promotional activity will remain, will go on on a go forward basis and we think that hoteliers who are smart about using our marketplace can have real upside as far as room night growth and RevPAR growth which is something that both ourselves and the hoteliers are aiming for.

Imran Khan, JPMorgan.

A couple of questions.

First question, it seems like your OIBA for your leisure segment, which is core business, OIBA was down 9% year over year.

I think this is the first time I am seeing that OIBA was down for the leisure segment.

Can you help us understand that?

And second question was could you give us some sense about your booking impact from this volcanic in hotel and air segment of the business, how much booking you lost for hotel segment and also in the air segment.

Thank you.

Sure, I'll answer the first one and then Mike can answer the second.

On Q1, the leisure business OIBA being down, that frankly was something that was not a surprise.

It was mostly driven by the year-on-year increases in sales and marketing that we talked about coming out of Q4.

If you remember in Q1 of '09, really none of us had any idea of what was going on or what was going to happen.

So we essentially put a stop on almost all nonessential, especially offline marketing.

So in Q1 of 2010, we started marketing again kind of on a sequential basis and call it a more normal seasonal pattern that -- what we typically see from going Q4 of one year into Q1 of next year.

So sales and marketing, there was a significant amount of sales and marketing deleverage for our leisure businesses.

It was something that was planned.

Typically that kind of sales and marketing, especially when you come back in offline media, you don't get immediate call it bookings benefit etc.

There's -- you can't put a dollar of marketing in and expect X dollars in returns.

So we thought there was going to be some deleverage.

We saw it.

Q2 is going to be mixed because of Geneva, volcano etc.; but then Q3, Q4 we think that you will see the leisure business growing as we expect it to do.

Second question, Mike, on volcano?

And I would just remind folks on the first question on the leisure OIBA that there was the negative impact from -- the Geneva expenses were in there as well as some of the call center investments that we made as well.

On the second question, we saw an impact really across air and hotel.

Obviously specifically on gross bookings we expect to be more impacted on the air side.

In terms of whether or not we will recover some of that in the quarter, that remains to be seen and is a bit difficult to predict.

As I called out in my comments, we do expect several points of OIBA degradation as a result of volcano.

But it's a short-term thing for us and obviously doesn't impact the long run of the business.

Justin Post, Bank of America Merrill Lynch.

First question that you said you're going to increase marketing 20% sequentially.

Is that normal for you?

And what are you going to be spending it on?

Is that CPC increases or are you working more on offline?

And then the second question, can you give us any thoughts on what your transaction growth rates could look like as we get past the volcano but we get out to the middle of say the summer?

Much tougher comps on hotel nights and air.

Could we be single digits or can you give us any help on that?

Hey, Justin, I think on -- Mike, correct me if I'm wrong.

We didn't talk about a 20% increase in marketing.

I think all we said, Justin, was that the amounts kind of from Q4 of last year to Q1 of this year looks more like the sequential increase that we typically have seen in other years, aside from last year.

So similar amount but we didn't talk about a specific amount.

As far as the transaction growth rates, kind of the future state, I think we're not to give you a specific number because frankly we don't know.

But we think that we are pretty well positioned on a go forward basis.

If you think about the quality of our service as far as taking away booking fees, air booking fees, lowering hotel booking fees, no change cancel fees, in general the marketing out there, etc.; we feel much more confident about the value that we are bringing consumers now than I would say we have in the last five years.

If you look in the last five years; if you look '05, '06, '07, periods in which the economy was in a strong recovery, I think we are able to deliver very solid unit growth.

Typically revenue per units was growing as well and we showed nice revenue growth.

And my expectation is to see that on a go forward basis as well.

So we might see some pressure Q3, Q4 because we're not getting the benefit, the unit benefit of bookings cuts.

But our revenue per unit should be in much, much better shape.

And as Mike said, we are pretty confident that in the second half, we're going to be delivering pretty good growth in order to get a full year at low double digits.

So I think that's kind of the best I can do for you.

Anything to add, Mike, to that?

So on the sales and marketing question, we did say that Q2 would have a similar sequential increase in spend from Q1 and that is in keeping with our normal seasonality.

Last year was just kind of an odd year.

And I'd also point out that we feel like we are in a modestly improving travel environment as well and so we think the spend will make sense.

Okay just to clarify, what did you exactly say about the ramp in Q2?

Can you clarify that?

Yes, I think our words were similar rate of sequential increase in Q2 that we saw in Q1.

Next question?

Herman Leung, Deutsche Bank.

Thanks, two quick questions.

First on domestic inventory for hotel rooms, I guess one of your large partners in the US is expecting the pipeline to be sort of tempered a bit in ADR and RevPAR rates to be up 3 to 6%.

Is this a case where hotels are employing an airline strategy where they're kind of putting less inventory out there and kind of controlled pricing for the OTAs?

Wondering if that has any impact and what your view is on that inventory side.

And then second, there's been a lot of speculation about you know Google and an ITA software deal tying up.

Wondering how this transaction like this can potentially impact the OTA landscape if any.

I have a very quick follow-up.

Sure, I think on the inventory side, one thing to keep in mind is that we have very strong relationships and contracts with our hotel partners and I think in general to the extent that they're selling inventory on the web, they're making that inventory, that pricing etc.

available to us as well.

So it's not an issue of quality of inventory or our getting access to inventory.

I do think that if you look at where we were last year versus this year, some of those hotel partners are not going to call it go in with promotional inventory as aggressively as they were last year because the market is improving, because the consumer is coming back to some extent.

That said again, because of where occupancies are now, we do think there is going to be plenty of promotional inventory.

There are going to be good deals on a go forward basis.

We do think that hoteliers to some extent to the extent that they are too aggressive on the ADR side will be leaving money on the table as far as RevPAR goes.

So we are pretty -- we think we are going to have to work hard on getting the promotional inventory but we're confident this year now when we look at the summer on a go forward basis that we will have nice access to promotional inventory.

I think the one area that I am a bit worried about is actually on the air side.

And if you look at the air ticket prices out there and the growth in air ticket prices, our average air ticket price I think was up around 9% and we see those numbers only going up for the summer.

So to the extent that I worry about inventory, it's the effect that air ticket prices are going to have on the summer traveler, on the leisure traveler.

I would say in general we don't see a direct effect on air ticket prices and room night growth, but we do see an effect on air ticket prices and air ticket growth and also air ticket prices could have an effect on the pricing in our packages and attractiveness of our package inventory in general.

So on an inventory basis or on a price basis, I'm actually quite confident of our hotel inventory.

It's on the air side that I would be a little bit more worried.

As far as ITA and Google, that rumor has been going around for a while.

And so we are not particularly inclined to speculate on what could happen or what could not happen there.

ITA is a very strong technology company in the travel business.

Most of it, the major part of the technology that they have is an air search engine or an air pricing engine called QPX and we are fortunate enough to have built similar technology in-house.

We have our own technology, BFS, which we call Best Fare Search, and we have got a group of brilliant engineers a couple of floors down from here working on that.

So we actually from our standpoint, we don't feel too exposed.

I think if I were another OTA and there are others out there for example, Orbitz who depends on ITA for their pricing, you become awfully dependent on Google not only for let's say your leads, but also for the pricing of those leads, your dependency on Google is pretty high.

Google has been a great company.

They have been fair with their partners etc., but I think we are lucky enough where we don't have a dependency there.

So we don't think it's going to have a particular effect on us one way or the other.

We will watch with interest and we will read the articles like everyone else.

Got it.

And then just a very quick follow-up.

I think you talked about Hotwire kind of decelerated in the first quarter on the domestic hotel side.

Wondering if you can kind of comment on that, whether or not you're seeing some impact from competitive opaque offerings kind of trying to go after inventory on that side of the business.

That's a great question.

I honestly don't think that it's a result of competitive opaque inventory.

I think it's just because Hotwire was growing so darn fast and the rates of growth were in the 30% range etc.

And you can only grow that fast for so long and the Hotwire team did an incredibly good job of finding kind of every year new avenues of profitable marketing spend and they would drive that profitable marketing spend, drive conversion rates and together when you have kind of more UVs, more conversion, you kind of get the magic of unit growth there.

And at some point, it's got to slow down and I think the team right now is very focused on kind of on conversion and on finding more profitable spend out there and it's just a little bit harder to come by.

The growth is still quite healthy.

It's just coming off a number that was very, very high.

Michael Millman, Millman Research Associates.

Kind of following up a little bit on that last -- can you talk about what trends you are seeing regarding conversion, regarding retention of existing -- I'm not sure if you call them clients -- but these customers.

And the second question regards rental cars.

I was wondering if you could give us the change that you are seeing in price and availability, both generally on your sites, and for your opaque (inaudible)

Sure, I think on conversion and customer retention, it's difficult to be general with all the various sites that we have out there.

I would say in general we are happy with conversion trends.

Conversion trends tend to be a positive.

They were certainly positive on the Expedia side and we expect kind of healthy conversion on a go forward basis.

Hotels.com conversion in the first quarter took a little bit of a hit because of the platform, kind of the platform merging that I talked about in my prepared remarks.

So on that basis, Hotels.com took a bit of a hit on conversion.

But we are already seeing the team kind of move their way back and actually conversion on Hotels.com is moving in the right direction on a daily basis or more recently, which gives us nice confidence for that team in kind of Q3, Q4.

And Hotwire conversion I would say is flat to down a bit on decent growth.

And again, that conversion we think can be moved up as well.

So overall, I would say conversion is stable to up if I put everything together.

Certainly on TripAdvisor to some extent, conversion is the number of clicks they get and that team continues to execute very, very well on the conversion front there.

As far as rental cars go, I think it's a tale of two cities.

The retail part of our rental car business continues to do very, very well.

We are seeing transaction growth, we're seeing nice revenue growth there.

But we are selling a higher portion of our rental car sales, retail versus opaque.

So as our mix goes more to retail versus opaque, our revenue per transaction comes down a bit.

So overall transactions are doing nicely, opaque transactions mix coming down which hurts our revenue per transaction a bit.

And I wouldn't expect to see that change unless to the extent that call it fleet strategies change going forward.

And that's not something that we anticipate at least call it in the near to midterm.

Kevin Crissey, UBS.

Can you talk about the cross-selling of hotel and more particularly hotel as it relates to air?

I am in agreement with you on the rising fares and the air being a difficult environment.

The capacity is not there.

Last year you had the advantage of the growth due to the booking fee cuts.

How many of your hotel rooms or what percentage of your hotel rooms gets sold as a result of people looking and buying air tickets as well?

Great question.

That for a competitive reason is not a question that I will directly answer.

Obviously our packaged business is one in which the consumer decides to buy air and hotel together and gets a discount for it and we think that in these kinds of environments, it's a great opportunity to push packages.

And if you see some of our offline advertising for Expedia, the ad that we have on is a package ad which appeals to that kind of leisure traveler looking for a deal.

And I think the deals on packages are terrific, but that's somewhat modified by air ticket prices.

As far as the number of consumers who come in, buy an air ticket and then come back and buy a hotel; that's actually a fairly small percentage.

And that is an area where e-mail marketing teams were building kind of much more sophisticated, much more sophisticated e-mail technologies etc.

so that when we know that you're going to a particular destination, we will try to upsell you hotel, car etc.

We have some success there, but I have to tell you, it's not a lot of success.

And moving that up by a couple of percentage points can be very significant money.

So that is -- again, that's very kind of confidential information.

So I'm not going to give you kind of specifics on that.

I think one of the questions going forward on consumer behavior with air ticket pricing going up is are consumers going to drive more?

Are they going to take the train more, etc.?

We haven't seen any kind of call it hard statistics that would suggest that they are at this point.

But it is something that we will be looking for going forward.

Terrific.

And have you seen the airlines retaliate -- retaliate is a strong word -- but adjust to try to get back -- get the consumer back to their website direct through mileage offerings or other strategies?

Because they are commenting about seeing higher distribution costs and mostly they're talking about on the credit card side due to higher fares, but also on the distribution through the OTAs.

Yes, I think we hear similar comments.

I think we haven't seen any kind of retaliation whatsoever.

But I do think that the airlines are more focused on credit card fees etc.

But in general, they're focused on costs going forward.

We think that we bring great value for our price, so to speak.

As air ticket pricing moves up, our distribution costs as a percentage of their revenue tends to go down.

So we think that this environment is more friendly to the airlines as far as our distribution costs as a percentage of total revenue.

And the way that we look at it is it's in the interest of the airlines to build up their load factors any way they can.

And we have been able to demonstrate historically that to the extent that they use our channel, especially packages etc., they can kind of revenue manage up the rest of the plane so to speak and there's no one who is better revenue managing than the airlines.

So we think right now there's a nice balance, but every time you get in a discussion with airlines, it's a negotiation and you try to do the best that you can.

Ross Sandler, RBC Capital Markets.

Just had a quick follow-up question on the full-year OIBA growth comment.

You're seeing 10% growth in the first quarter, flat in the second quarter from the volcano and the increased marketing in the COG.

What are you seeing that gives you the confidence from the low double-digit for full year?

You're running at 12% growth in hotel revenue in the current quarter.

Your comps are getting a little bit harder and what kind of hotel room night growth and ADR do you need to see to get there or is the OIBA growth going to come in the back half from cost cutting and the G&A leverage that you mentioned?

Just a little more color there.

Thanks.

Overall, I think we have mentioned, we see the travel environment improving a bit and we do have another quarter's visibilities into trends.

I think as Dara elaborated on a bit, we expect to continue to grow our hotel room nights and our air tickets.

And not only will we be lapping the fee reductions which have been hurting revenue the last several quarters, but we also expect a continued benefit from ADR on the hotel side of the business.

And we also expect our advertising business to really continue to perform well which will help us.

And in the second half of the year, as I mentioned, we will get much more normalized comps on sales and marketing, our cost of goods, cost of sales investments that we're making in the first half which are deleveraging us a bit will begin to bear fruit in the second half of the year.

So we feel confident that we can deliver the low double-digit growth.

ATPs are a headwind as Dara mentioned, higher ticket prices.

We will have to deal with whatever that brings.

FX certainly hasn't been our friend of late.

But taking it all into account as of today, we feel good about our ability to accelerate growth in the second half of the year.

Ross, if it's a bet that you're translating that into, it is a bet that we are going to be able to keep growing volumes on a go forward basis.

And if history tells us we're able to do it again, we think that our services without fees etc.

are much stronger and we have a number of technology projects etc.

which if they do what's promised should be more tailwind.

So we are absolutely making a bet that volume and unit growth will continue and obviously it's up to us to deliver on that bet.

(Operator Instructions) James Cakmak, Sidoti & Co.

With regard to your partner services group, you had begun to make significant investments to maintain that strong supply inventory.

Can you talk a little bit about the progress you have made to ensure long-term relationships on both the merchant and agency sides.

Specifically as it relates to the degree of flexibility you are offering with commission structures?

And secondly, any update you can provide on potential M&A opportunities?

Thank you.

Sure, James.

As far as PSG goes, the biggest investment we make in PSG is in people and that is to get our folks in front of other hoteliers to get to know them, to understand them, to teach them how they can use our marketplace in order to maximize their RevPAR in their local market.

So if you look at the investments we are making, it's really getting a significant amount of kind of more feet on the street both in the US, in Europe and especially in some of the emerging markets.

I talked about our international room night growth accelerating because of Asia Pacific regions, because of Latin America, because of Canada etc.

We are getting people out there and we are seeing benefits for it.

If you look at our rooms kind of hotels available, we've got 123,000 hotels now available in the marketplace.

That is up 24% on a year-on-year basis.

And again we couldn't, we wouldn't be able to sign up as many hotels without the help of our kind of market managers and our market coordinators etc.

Another area that we haven't focused on is the agency kind of Easy Manage business.

And on a worldwide basis, we've got over 20,000 Easy Manage properties and we are starting to see volume move through Easy Manage as well and that's encouraging especially in secondary, tertiary markets, smaller hotels we had a difficult time getting to.

So it's feet on the street, getting more hotels on.

I would say the third area that we're focused on is technology, connectivity etc.

We are trying to actively lower the cost of hotels doing business with us, lower the cost of our doing business with hoteliers, getting them their cash faster etc.

And for example one area that we're pretty interested in and pretty excited about is kind of matching up supply and demand, working on sort order and making sure that when a consumer comes to our site, we show them -- and does a search let's say in New York for LA, we show them the appropriate hotel at the right time.

You should -- a person that comes to our site and does a weekday search should see a different list of hotels because that's probably a business person than a person doing a weekend search.

So those kinds of technologies are also being worked through on the PSG front which we think are great for hoteliers and we think can be additive for us on a kind of revenue per unique basis.

Okay and the potential M&A opportunities?

We're looking.

I'd say we've been very interested in the media area.

The last acquisition you saw for us was in China in metasearch, Kuxun, which we think is an incredibly promising opportunity.

So we are looking out there in the media areas and I would say more in the international areas.

We are tending I would say to look at smaller targets and we will be opportunistic.

But I tell you right now, there aren't any kind of huge, huge targets out there.

Although that could change short term.

Thank you.

At this time, there are no further questions in my queue.

Please continue.

Okay, well thanks everybody for joining us today.

Dara, any final words you'd like to say?

Yes, just finally, just wanted to stay a special thank you to Stu Haas.

He has run our IR group for -- and by group, I mean two people probably, for five years now and he has been more than an investor relations person.

I don't think there's anyone who knows more about our company than Stu.

He jumps in very, very deeply and I think he is set up for our investor relations practice the way that you want to set it up and that getting you all the information, not trying to sell people, and encouraging our Company all the time whenever he speaks with to bet on the long-term.

And that's exactly how you want to run a company.

So thank you, Stu.

And, Alan, God help you.

Thank you very much for joining us.

Thanks everybody.

A replay will be on the IR website shortly after we finish here.

We thank you for your interest in Expedia and we will talk to you again next quarter.

Thank you.

Ladies and gentlemen, this does conclude our conference for today.

We thank you for your participation and at this time, you may now disconnect.