Expedia Group Inc (EXPE) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Expedia, Inc.

second-quarter earnings conference call.

(Operator Instructions).

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

I would now like to turn the conference over to Alan Pickerill.

Please go ahead, sir.

Thank you.

Good afternoon and welcome to Expedia, Inc.'s financial results conference call for the second quarter ended June 30, 2010.

I am 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, July 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 a similar statement.

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 exclude stock-based compensation, and all comparisons in this call will be against our results for the comparable period of 2009.

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

Thanks, Alan, and thanks to everyone for making time to join us this afternoon.

We delivered a solid quarter here in Q2, especially given some of the headwinds that we faced.

Obviously, the volcano and foreign exchange trends worked against us, as did sharply rising airfares.

And although it is difficult to measure the precise impact, economic uncertainty, air carrier strikes and the oil spill in the Gulf certainly didn't help the travel business.

Given this backdrop, we are satisfied with our transaction growth of 10%, operating income before amortization growth of 3%, and adjusted earnings per share growth of 16%.

Briefly on the trends for the quarter, on the transactional side, room-night growth in the Americas and Europe slowed, as expected, as we lapped fee cuts from last year and as our European points of sale faced foreign-exchange-, volcano- and economic-related headwinds.

We estimate that the cancellations related to the volcano cost us roughly 200 basis points of worldwide room-night growth.

We also saw significant slowdown in growth rates for trans-Atlantic travel in the quarter, we suspect primarily caused by foreign exchange fluctuations and higher airfares, which also contributed to the overall deacceleration for the quarter.

And remember that room-night comps were simply more difficult in Q2 because we saw a real acceleration in last year's second quarter.

Compared to 2008, room-night growth in Q2 was 41% compared to 33% in Q1.

Room-night growth in the Asia-Pacific and Latin American markets was very strong and accelerated from Q1, a good trend in markets with enormous potential for us.

As far as the shape of the quarter goes, the year-over-year room-night growth was weakest in April, due in part to the volcano, with momentum building through June.

July trends are solid.

And while very early, it does give us some confidence relative to the balance-of-the-year expectations.

Our TripAdvisor Media Group continues its incredibly strong performance with the revenue and operating income before amortization growth accelerating from Q1, growing year over year at 39% and 40%, respectively, fueled by strong growth in traffic and clicks, both on a domestic and international basis.

We were able to grow profits at a robust pace while investing aggressively in new geographies, as well as new products, such as Business Listings, with now over 15,000 properties; Dao Dao and Kuxun in China; air metasearch in the US and UK; and our vacation rentals product, now augmented by our acquisition of Holiday Lettings in the UK.

Finally, we are very excited by TripAdvisor's integration with Facebook through the launch of Trip Friends, which brings together our over 35 million TripAdvisor reviews and opinions with our Cities I've Visited application on Facebook with over 19 million users.

We brought the wisdom of the masses to your travel planning, and now we want to bring the wisdom of your friends to your desktop.

We have a unique asset and a great team at TripAdvisor and are quite optimistic about what the next few years will bring.

And lastly, on capital allocation, we continue to have confidence in our ability to grow the business while also returning cash to our shareholders.

So far in 2010, we've returned almost $230 million to our shareholders through share repurchases and dividends, and it's our expectation that we will continue to do so over the next few years.

And as we've said before, we would be comfortable with gross debt at 2 to 3 times EBITDA, consistent with an investment-grade rating, and will consider raising additional debt if the terms and conditions are right.

Now to Mike.

Thanks, Dara.

Just a few additional details about the quarter, and then I will cover some thoughts about our expectations for the balance of the year.

In the hotel business, revenue per room night was down 7%, while ADRs were up less than 1% for the quarter.

Revenue per room night for our domestic business grew 1% year over year, while international was down 17%.

Two primary drivers that put pressure on international revenue per room night were the FX impact of book-to-stay, which we substantially offset with hedging gains; and customer refunds related to the volcano.

If you exclude the impact from these items, as well as the impact from reduced service fees on hotel, the change in our overall revenue per room night would have looked much more like the year-on-year change in ADRs.

And we expect the gap between the two to narrow in the back half of the year, with the obvious caveat that we can't predict the future impact of foreign currency fluctuations.

In air, we grew revenue at a healthy 13% clip, our best rate of growth in two years and the second quarter in a row where we've increased air revenue.

Despite lapping fee cuts from last year and the steep increase in airfares, we grew ticket volume by 6%, with revenue per ticket up 7%, in part due to variable fees on higher ticket prices.

Ticket growth did decelerate a bit as we moved through the quarter, but looks a bit better here in July.

The steep increase in air ticket prices and full airplanes has definitely put a damper on our packages business, which was essentially flat year over year on both a transaction and a revenue basis.

Our OIBA performance in the quarter was driven in part by strong cost control.

Selling and marketing expense grew just a bit faster than revenue, and includes roughly $5 million related to the opening of our new global lodging supply headquarters in Geneva.

Direct selling and marketing, the largest piece of our expense, actually grew slower than revenue as we pulled back spend in light of the environment in Europe.

In total, we estimate that the volcano cost us roughly $12 million in OIBA this quarter.

Excluding that hit, as well as the Geneva expenses and a $6 million increase in the reserve for potential settlement of occupancy tax matters, our OIBA would have grown in the low teens.

Free cash flow was down year over year in the second quarter, but is up 7% for the first half of the year.

The benefit from working capital accounts can be a bit lumpy and depends in large part on the timing of when bookings come in versus when stays and payments occur.

And businesses like our ad and media business and Egencia that consume working capital as they grow grew quite fast in the quarter.

In addition, CapEx is going to be a fair bit higher this year than last, as you can see from our first-half spend, due in part to additional infrastructure required as the traffic and transaction volume increases on our sites.

Adjusted net income and adjusted EPS grew at a healthy pace, driven in part by a more favorable tax rate of about 34%.

All else held equal, our adjusted EPS should grow faster than OIBA as a result of a favorable tax rate trend through 2011.

As far as our financial expectations are concerned, we are still expecting to deliver low-double-digit OIBA growth for full year 2010, though it's fair to say that the exogenous factors working against us make it more difficult.

And this of course assumes FX rates stay at current levels.

Though the headwinds in the business that we have discussed today are causing leisure results to trail a bit, these are offset by continued strength of TripAdvisor and Egencia.

We have now lapped the lion's share of our fee actions, which will help unit pricing trends going forward.

And as Dara mentioned, we are pleased with trends we are seeing so far in July.

We will of course continue to monitor our spend levels and make appropriate adjustments depending on the environment.

With that, let's turn to questions.

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

(Operator Instructions).

Imran Khan, JPMorgan.

This is actually Bridget in for Imran; he is in Europe this week.

Two quick questions.

On sales and marketing, you said that it was slightly lower because of the situation in Europe.

Do you expect to continue to decrease that spend in the second half of the year?

And then also, you mentioned that you recognized about $5 million of the expenses of opening the new place.

Are you planning -- I know the total was $20 million -- do you plan to recognize a little bit additional in 3Q?

And then the second question relates to ADRs.

The rate of increase was slower from 1Q to 2Q than it has been in previous quarters.

Is this due to the exchange rate, and can you give us a little color on US versus international?

Hi, Bridget, on the sales and marketing question, I will let Mike talk about the new Geneva offices that we have opened up.

But in general, as far as sales and marketing spend goes, we're able to react pretty quickly to the business trends that we see.

Obviously, in our variable marketing, online marketing, and also to some extent even with our brand marketing as well, we try to have some flexibility into dollars that we commit versus dollars that we can pull back, depending on what we see in the environment.

And in Q2, especially starting in April with the volcano, etc., we saw that there was a fair amount of weakness.

And as a result, we underallocated in marketing compared to what we expected and in reaction to the reality that we saw in Europe, which was Europe was a bit weaker than we expected.

So, I think that the answer for Q3 is going to depend on the results that we see.

And this is one of the advantages of our business model.

We can move up our marketing, or down, based on results.

We don't have to take huge risks with it.

Our goal would be to increase the rate of marketing spend in Q3, because that would tend to bring with it a higher revenue increase as well.

And I would say so far in July, we are pretty satisfied with the results that we've seen and kind of the marketing to revenue spend levels.

Mike, can you talk about Geneva a bit?

Yes.

So as I noted, we incurred about $5 million of expense in the quarter.

We still expect kind of the all-in expense to be at about $20 million.

We did incur a couple million dollars in Q1, and we will probably incur kind of like amounts or slightly higher as compared to Q2, in Q3 and Q4.

So again, it is kind of a year-long process to make that transition.

And Bridget, what were you asking about ADR growth?

I'm not sure I got your question there.

Just if you look at the rate of growth, it went from flat in Q1 to up 1% in Q2, and that was a slower acceleration than we saw over the prior quarters.

So I'm just wondering if it was -- some of it I'm sure is exchange rate, but also were there any differences between the US and international markets in ADRs?

Yes, I would say in general, the domestic market ADRs were stronger than the international market ADRs, the European market ADRs.

Domestic was up low single digits; international was down low single digits.

Foreign exchange did play a part of that.

But I would say in general, when we looked at the domestic markets and domestic pricing, domestic pricing has been a bit stronger.

And I think that is just reflected in the general economic environment.

And part of it just has to do with comps, when you look at the past quarters, etc.

We think this year is going to be a bit more normalized than what you've seen in the past quarters.

Perfect.

Thanks so much.

Mark Mahaney, Citi.

Thanks, I am in my office this week.

Two questions.

One, could you just comment on what you think the implications of Google's acquisition, potential acquisition, of ITA is on the online travel industry?

And then secondly, could you focus a little bit on the Egencia business?

It is relatively small, but it is this kind of mid-, high-single-digit percentage of your overall bookings.

Trends there looked relatively positive.

Is there something to you that indicates you have hit a kind of a critical mass point that the growth rates that you've enjoyed for the last couple of quarters are sustainable?

Thank you.

Hi, Mark, and thank you for being in your office.

You know, on Google/ITA, I think it is difficult to speculate.

I think everyone knows that Google wields considerable market power, whether it is in the travel business or many, many other industries.

And so their actions can have very significant consequences in any industry, including ours.

You know, I think that one of the keys that we will be looking for with Google is, if they start favoring their own content and their own results over the results of third parties -- whether that is algorithmic, inside their system, or they hardcode it, etc.

-- and we think that to the extent that they do that, that will be a problem.

The way that we've seen them operate in general has been fair, but we think they would be wise not to favor their own internal products over external products and create an unfair playing field.

And if they do, we think that the government will have something to say to that -- about that.

So we are great partners with them.

In general, their management we've seen has done the right thing and is working to build a great product.

And in general, they work well with consumers.

But the market power that they have is potentially significant.

And that's something that we will watch.

Based on what we see right now and kind of the relationship that we have with them, and our spend, etc., we think we will be in good shape.

But again, it's something for us to watch.

I think on the Egencia part of the business, it really does look like we have hit a critical mass as far as the revenue of that business matching the fixed cost base and now are leveraging off of that.

If you look at the Egencia P&L, it's a little bit the opposite of the Expedia P&L.

The Expedia P&L has very high variable costs, low fixed costs.

The Egencia P&L tends to have higher fixed costs, which is the salesforce, account management, etc., and lower variable costs.

Once you bring in a client, that client tends to stay with you.

You don't have to remarket to that client over and over.

We spent five, six years investing in Egencia technology and innovation, building up account management, salesforce, etc., and building largely organically to the point at which we are at right now.

And we are seeing a couple of things.

One is, the technology that we've built, the product that we've built we think is best-of-breed.

And more and more clients are coming onto the Egencia platform, and we think that will continue.

We are expanding into new markets, international.

We are very strong in the US.

We are very strong in France.

We are expanding into the UK, Germany and some Asia-Pacific markets as well.

So that adds to kind of the new client acquisition, although it does hurt profitability on a near-term basis.

And then third, we are seeing a real bounce-back on corporate spend.

Companies are spending more in 2010.

They are not back to 2008 levels, and we haven't seen any kind of a call it -- we haven't seen corporations pull back yet.

They are not -- it's not the go-go days, but they are spending more aggressively and being more offensive.

So we think it is a pretty favorable corporate environment, and we are gaining share from our competitors, and we don't see that changing at least over the next couple of years.

We are quite happy about our position, and we think Egencia is going to be a solid profit driver over the next three, five years for us.

Justin Post, Bank of America-Merrill Lynch.

Two questions.

First, when you look at the leisure business, OIBA down 6%, I know there are some external factors.

But is that something that's going to have to grow double digits to get to your guidance for the year in the back half?

And then secondly, in Europe, you had the volcano and the World Cup.

Are you seeing kind of a delayed travel season and would you expect a stronger September quarter, given what happened in the second quarter?

Sure.

Yes, I would say if you look at the leisure business and you take out the volcano costs, and you take out the Geneva costs, etc., the leisure business is largely flat on a year-on-year basis.

And that's actually before you take foreign exchange, which went against us, into account.

So it might be wishful thinking to say that these exogenous factors didn't affect us, because they did.

But I do think that they are making the trends look a little bit more negative than they actually are.

As far as the back half of the year goes, I don't want to comment on whether it's double digit or not.

But because of the strength of the media business, because of the strength of Egencia, because of the strength that we are seeing in Asia-Pacific, etc., we don't need a whole lot of heavy lifting from the leisure business in order to hit our expectations, although we certainly need the results of the leisure business to improve.

And to the extent that the exogenous factors that we saw in the first half of the year don't hit us, the World Cup, the volcano, etc., and foreign exchange doesn't move significantly against us, we are reasonably confident that we can hit the double-digit numbers, the low-double-digit numbers that we talked about.

Obviously, I'd say on balance, we were more comfortable with it at the beginning of the quarter than where we are now.

But we think that the combination of the businesses, the diversification of the businesses is really going to help here.

Does that answer your question?

Yes.

And then on Europe, are you seeing kind of a stronger July, given what happened in the World Cup and what happened in the volcano?

Yes, I would say on balance in Europe and overall we are pretty happy with how July is turning out.

But it's just a month, and things may change.

But so far, so good.

Thank you.

Ingrid Chung, Goldman Sachs.

So just to follow up on Justin's question, I was wondering if you could talk about whether you're assuming transaction growth in the back half of the year, whether there is growth in the back half of the year in terms of your guidance.

And you referred to solid room nights trends in July; does that mean it is increasing year over year?

Yes, Ingrid, I don't want to get too specific, but I would say the trends in July in general are stronger than the trends in Q2, so that does imply growth.

And we certainly think decent growth, and we see no reason why that would all of a sudden change in the back half of the year.

Again, things may happen that are beyond our expectations, but we have good marketing plans.

We think in general our product is going to get better from a competitive standpoint in the back half of the year.

So again, unless we're surprised, we think there's going to be growth, and we are hopeful it will be solid growth.

The revenue per room night trends are also going to improve in the back half of the year -- again, assuming that we are not taken by surprise.

So as we build it up, we think it is a reasonable picture.

Okay, great.

And just really quickly, I was wondering, now that you've lapped the fee cuts, can you tell us how conversion rates are trending sequentially and year over year?

The fee cuts obviously had a huge benefit to the conversion trends.

And I would say now that we have lapped the fee cuts, the conversion trends in general are trending flattish.

There is some negative effect as a result of higher ticket prices.

So for example, when we look at conversion on the package path, we did obviously experience very, very high air ticket prices in Q2, and that hurt conversion along the package path.

So I would say flat, and higher or lower ticket prices are going to move that up or down by a bit.

Okay, great.

Thank you.

Douglas Anmuth, Barclays Capital.

Mike, I was hoping you could talk about some of the per-unit economics, and particularly just drilling down a little bit more on hotel revenue, the down 7% revenue per room night.

I am just trying to get a better sense here.

You pointed to FX and volcano refunds, and also lower hotel service fees.

So how much of that impact is sustainable going forward?

And then similarly, on airfare, getting a 7% revenue per ticket lift there, I am just trying to understand why that was occurring.

Obviously, you do have some merchant air business in Hotwire, but it is a little bit more than I would have expected.

Thanks.

Yes, with respect to the hotel revenue per room night down 7%, as I said in my remarks, the domestic revenue per room night was actually up 1%.

And we think that that is really kind of a good indication that our revenue per room nights and ADRs are going to start growing much more hand-in-hand as we go forward.

And we now, again, have substantially lapped our service fee reductions, and that was still just a bit of a headwind for us in the quarter.

On the international side of the business, again, I can't predict FX and I can't predict volcanoes, but to a large degree, those were kind of special things that made our numbers much more negatively impacted this quarter than we would expect on a going-forward basis.

As to air revenue, we expect average ticket prices to stay relatively flat to current levels, and the year-on-year change in the average ticket prices will start to moderate for us.

Nonetheless, our revenue per ticket will continue to benefit from higher average ticket prices as there are some of our agreements that are based upon ticket price, a small minority of them.

But I think we will see less and less of an impact as we progress through the year.

Obviously, there's always puts and takes that impact our air revenue quarter to quarter.

I think on both the air front and the hotel front, the important thing to keep in mind is that we think our underlying supplier dynamics are stable, and we think our fees have largely landed to where they make sense and will continue to be over a fairly long period of time.

And so that's what we look at when we look at the per-unit economics.

And just to be clear, Mike, when you said airfare growth, we expect -- on the balance of the year, we expect airfares to continue to increase as they did in Q2, but at a bit of a moderating pace because the comps essentially get harder for airfares, right?

Yes.

Great.

Thank you, guys.

Aaron Kessler, ThinkEquity.

Just a couple questions.

Any visibility you can give us into maybe domestic room night growth versus international?

Also, any insights into search engine marketing prices?

It seems like you're starting to see a little bit of a rebound, which should help your TripAdvisor, but maybe hurt the leisure marketing.

Thank you.

Hi, Aaron.

As far as domestic room night growth and international room night growth, both of them slowed down to some extent because of the factors that we talked about earlier in the call -- the volcano factors, economic factors, and just more difficult comps.

In general, I would say Europe on balance was weaker than we'd like it to be, and hopefully we will see it strengthen for the balance of the year, especially cross-border Europe -- Europe coming to the US was down significantly.

And we didn't see let's say a huge offsetting pickup of the US going to Europe.

Usually, when Europe to US slows down, US to Europe speeds up.

But we think because of air ticket prices, that didn't happen.

And then the Asia-Pacific/Latin American markets were very strong.

So on a go-forward basis, I would say the expectation is for Europe to strengthen.

And we are seeing some indications of that, especially with the Hotels.com brand and some of the kind of -- the really good kind of conversion activity that's going on there.

As far as search engine marketing goes, I would say CPCs have solidified.

And as I mentioned previously, in the second quarter we did pull back from marketing activities from a broad array of channels.

That did include SEM.

And I would expect in Q3 and Q4 for us to lean in a bit and try to increase our share in the SEM channel.

It may require some increases in CPCs.

It's hard to tell.

But we are trying to the extent that we can drive good conversion, solid conversion activity and solid site activity, we think that leaning into the SEM market might be a good strategy.

So again, these are variable spends, and we can react on a daily, almost hourly basis.

But we are bullish as far as where we think SEM trends are going to take us for the balance of the year.

Any quick comments on Hotwire's performance you saw there?

Yes, I would say Hotwire in general, the team has been executing well, but the environment is a bit more unfriendly for Hotwire.

You are seeing business spend come back, and while the car piece of the business is solidifying, on the hotel side we are seeing hotel ADRs in some of the larger markets come up very significantly.

The Hotwire consumer is a pretty price-sensitive consumer.

And to the extent that ADRs come up, especially in larger markets like New York, kind of let's say top-eight markets, Hotwire volumes are suffering.

So we're doing well in the secondary markets, but we are doing worse in the primary markets.

So on balance, I would say Hotwire hotels is weaker than we would like it to be, and hopefully that situation will get better on the balance of the year.

One of the positives that we expect in the second half is that we are actually integrating some of Hotwire's opaque inventory into the Expedia retail path.

We are doing it as a test now.

We are seeing some early promising results.

And as we optimize the retail path, etc., we are hoping that that product will become a pretty good product, especially in an environment where ADRs are going up a bit and the leisure traveler may be looking for deals, whether that is in packages or the opaque path.

So, we are pretty hopeful about that product integration, and we will certainly tell you more about it in Q3 and Q4.

Great.

Thank you.

Kevin Crissey, UBS.

Thanks for taking the call.

The airlines -- a couple of them, the domestic, more leisure-focused airlines -- commented on kind of a slowdown of trends in May that has kind of continued.

AirTran noted it, and Allegiant -- which I know doesn't participate, but they noted it as well.

Is there anything -- I know you are seeing solid trends in July, but is there anything you are seeing at all that would suggest that things have gone -- from an airline perspective at least -- from great to good, which is kind of the way I would classify their commentary?

You know, Kevin, when we look at air ticket growth, we did see some deacceleration on a month-on-month basis through Q2.

What we are seeing in July is that prices have eased up a bit, so that we are seeing the air ticket growth get better.

Our ticket growth obviously is pretty sensitive to pricing.

So I would say we are fairly consistent with what the airlines saw.

We think that to the extent that they have eased up pricing in response to some of the weakness that they have observed, that has then helped us on the volume front, and obviously the balance of volume in the year is going, to some extent, depend on pricing.

Europe and Asia-Pacific air ticket volume remains solid for us, to some extent assisted by cuts in air fees that we haven't fully lapped.

So we will see how that goes in the back half of the year.

Okay.

Terrific.

And your growth rate looks to be maybe slightly above what the industry is doing, at least according to some data that is out there.

Do you think you are taking share on the air side?

It seems like you might be.

You know, I think on balance we might be.

I mean, if you look at the industry, you have to really split it into two -- the business travel market and the leisure travel market.

There is no doubt that the business travel market is coming back strongly, and you're seeing that in the Egencia numbers.

Now, our penetration into business travel, let's say, is lower than the overall industry penetration in business travel.

So we think we are absolutely gaining share on the business travel front, and that would lead you to believe, then, on the leisure travel front we are still gaining share.

We have no fees.

Our product is only getting better.

We are adding more product to the shelf, so to speak.

So I would expect over the long term we will continue to gain share in both the leisure and the business marketplace.

Thank you.

Michael Millman, Millman Research.

Could you give us some color as to the pieces affecting the revenue margin in particular?

You're seeing reduction in -- you're seeing the ticket prices going up, I guess a negative, but how much of a negative?

And the hotel mix, maybe the merchant and agency, you can talk about -- obviously it's offset by ads and media.

And then, could you -- you touched on cars settling down.

But maybe you can be more specific now that we are in the summer peak season for car rentals, are you seeing more or less inventory?

Are you seeing -- what are you seeing on pricing as well?

Thank you.

So I will take the question on revenue margin first.

On a worldwide basis, the biggest impact by far was average ticket prices, lower fees, the volcano, FX, book-to-stay.

If you look at the domestic revenue margin, some of that gets weeded out, not all of it.

And the domestic revenue margin was down only 68 bps, even with the higher air fees, as we have lapped a number of the fees.

On the international rev margin, that was down significantly more than domestic, and FX was the biggest driver behind the reduction on international rev margin, plus higher average ticket prices.

And then the international revenue margin also includes, on a year-on-year comp basis, I think for the last time, our CruiseShipCenter business, which has a significant amount of international bookings at lower rev margin than some of our other products.

And that is probably accounting for maybe 25% to 30% of the international rev margin decline.

The good news is, CSC is more profitable, but it does affect this one metric.

So if you look at the rev margin on an overall basis and adjust it for FX, we are down only 92 bps, which is our lowest drop since we took the fee actions.

And I think on the car side, Michael, I would say on balance, the environment is a bit better than it was last year.

Last year, we had a pretty difficult environment in that we had very, very strong leisure demand and the car fleets being quite limited as far as increases in fleet sizes.

Now that I would say in general the travel business is in much better shape, the car rental companies are in much better shape, looking to gain more share, we are seeing some increases in fleet size, which makes the inventory situation better than it was last year.

Now, there's no question that during the summer, inventory does tighten up.

But we think that this summer it will be, on balance, a bit less tight than it was last summer.

So as a result, in general, we are seeing increased transactions on the car side.

Revenue per rental is down slightly on lower pricing, with a little bit of an increase in the average length of rental.

So those are kind of the factors that are affecting the car business.

Thank you.

Herman Leung, Deutsche Bank Securities.

Two quick questions for you.

I guess the first is, as you've seen air ticket growth kind of alleviate a little bit, I was wondering if you can talk about how that could impact your inventory trends in terms of access to air inventory, and could that help out potentially the flattish type packages business in the back half of the year?

Then secondly, just on the BFS -- Best Fare Search potential on -- just with all this Google/ITA stuff that's coming out, I know airlines have been sort of testing this service out there.

Is there a potential for you guys to productize this to the guys like Kayak and some of the other airlines that's out there in the world?

Thanks.

Great.

So, on your first question, and forgive me if I may not have understood it correctly, but we don't expect to see a pickup in packages in the second half, based upon where average ticket prices are going.

I think we expect them to stay at relatively high current levels.

We did note that on a year-on-year comp basis that they will start to look a bit better.

But I think given the capacity of the airlines and the demand, we don't see something that is going to kickstart the package business in the second half of the year.

And as far as BFS goes, we have invested pretty aggressively in BFS over the past 10-plus years, and we think it is a terrific product.

It is competitive with any of the pricing product out there in the industry, and we have an absolute top-notch team working on it.

BFS, however, was developed really as an in-house solution.

So while we are talking about it and while we may talk to some potential partners, airlines, about building out BFS capabilities for them, it is an in-house solution.

It would take a fair amount of work to commercialize it for third parties.

And at this point, it is not something that we know whether we want to invest in, put time in, and whether, frankly, it is practical.

But we will see.

We are very happy, especially with Google buying ITA, that we've got the BFS team, and it makes us worry a bit less about what the potential consequences of that transaction could be, at least for us.

Got it.

Thanks.

Ross Sandler, RBC.

Just a couple of housekeeping questions and then one on the share buyback.

So first, can you remind us of the timing of the hotel booking fee eliminations from last year?

Which month did the US, Canada and then the other international fee eliminations hit?

And how meaningful of an improvement in merchant revenue margin should we expect to see in 3Q/4Q?

And then the other housekeeping would be, it looks like the language around tech and content OpEx changed a little bit from last quarter in terms of deleverage for the second half.

Can you just provide us a little more color there?

And then last, on the share buyback, you've repurchased shares last quarter at $22.50 on average.

Can you help us just understand the philosophy around the buyback, as we were kind of at those levels for most of the quarter?

Thanks.

Okay.

So on the housekeeping items, the bookings -- the fee reductions, I guess we reduced hotel fees middish April last year.

In the US.

In the US.

Remind you that the impact actually began to be felt a couple of months later, because the fees are recognized on a stay basis.

We cut the change cancel fees in late May and early June.

I think then, again, we did some further increases -- I'm sorry, decreases -- in hotel fees as we went throughout the fall last year.

We lowered our US-based hotel fees for European shoppers.

And then in September, we reduced the fees in Italy, Australia and New Zealand on the air side of the business.

Was the second question revenue margin?

Yes, the impact of the revenue margin -- like the merchant revenue margin, how much growth could you see there year over year in 3Q/4Q?

Yes, I mean, as we hit Q3 and Q4, there is less and less of an impact from the fee actions that we've taken.

And we will kind of return to the underlying supplier economics, which we said are relatively stable.

There will always be things that will impact the merchant revenue margin -- FX, mix, all sorts of other things.

But in general, as we exit this period associated with the fee actions, we should start to see more stability.

On the tech and content question, we now do expect to delever in the back half of the year.

We've made some decisions to increase our investment at TripAdvisor, as well as some other initiatives.

Last year, we kept our spend relatively flat from Q1 to Q3.

And this year, we are now expecting a bit of an increase from Q2 and Q3 and into the back half of the year.

And so tech and content we do expect to be growing faster than revenue.

And also, we have a bit lower revenue expectations just because of the volcano and things that impacted us in Q2.

I think also just on the tech and content side, it is really a reflection of opportunities that we see in the market.

So for example, we are seeing the mobile markets developing much faster -- mobile search developing much more quickly than it had last year.

So we are building out teams, mobile teams across the Company to make sure that we not only build out mobile capabilities, but leading-edge mobile capabilities.

Same thing for some of the foreign markets, and the Asia-Pacific markets, etc.

As we are seeing the growth in those markets accelerate, we are finding it worthwhile for us to build up smaller technology pods that are dedicated to the Asia-Pacific markets, for example to normalize some of our products for those markets.

In general, what we do is build very, very big solutions that are -- that we can leverage on a worldwide basis.

But some of the Asia-Pacific marketplaces have very different needs on payment services, especially some of the look and feel that you want on the sites, you want to be very different.

Let's say a look and feel in Japan that's acceptable is very different from a look and feel that you see in the US.

And as we've seen these markets kind of grow and mature faster than frankly we expected, we are going to invest ahead to some extent on the tech and content side.

And the nature of technology and content is that you kind of have to invest ahead of the revenue to some extent.

You've got to put a team together.

You've got to build out product.

And typically kind of six months to 12 months after the spend, you start getting some kind of a return on it.

But we think those investments are worthwhile, and we think that increased spend is a reflection of kind of very, very big potential in those marketplaces.

As far as the buyback goes, I just urge you to kind of step back, and if you step back, you see that we spent about $2 billion buying back our stock since the spinoff.

In Q1, we spent almost $200 million, and we brought in over 8 million shares.

And what I don't want to get into is kind of a quarterly recap of why we bought in one quarter or why we didn't buy in another quarter.

There are many, many reasons, including times in which we might have different call it information from the markets, etc.

I think that what you want to pay attention to from a long-term perspective is that we are a company that is going to be throwing off a lot of capital.

We are happy with our strategic position and we don't have to save up a bunch of capital to go after let's say an Asian footprint or to buy media businesses.

We have them inside of our Company.

So we do think we're going to create -- build out excess capital.

And kind of consistent with an investment-grade rating, we are going to, over the long term, return capital to shareholders.

Some of it will happen with dividends, but we would expect over the next couple years to be net buyers of our stock.

But from a quarterly basis, that's certainly not something that I'm going to comment on.

Sandeep Aggarwal, Caris & Company.

Thanks for taking my questions.

I have two questions.

One is, you quantified the impact from the volcanic ash, $12 million.

Was there any negative or quantifiable impact from the Gulf of Mexico in Q2, and does that concern you going forward in Q3?

And secondly, on the ITA stuff, what is the competition on your direct business, transaction business?

But I guess my question is more on -- that with Google acquiring ITA, do you see any dynamics changing in terms of the ad spend you get for advertisers for your transactions at that site, as well as for TripAdvisor?

Thank you.

So, on the first question with respect to the Gulf of Mexico, it is difficult for us to quantify.

It certainly does impact travel patterns, and there can certainly be pressure on specific cities, but we typically see people making plans to go elsewhere.

I would note that there is a big, mass migration of insurance and other folks, actually, down into the Gulf area.

And I think that that is offsetting, to some degree, anyway, the lesser leisure demand.

So nothing that we can quantify nearly as specifically as the volcano.

And Sandeep, on the ITA question, ITA is really an air product.

And when you look at our media properties, especially TripAdvisor, the vast majority of TripAdvisor's revenue comes from hotel, CPC and CPM advertising.

So we don't think that ITA will have any direct effect, so to speak, on the TripAdvisor business, which as you know is growing very, very quickly and is highly profitable for us.

I think the key for us, with Google in general, on a go-forward basis is, is Google going to use its market power to kind of favor its internal content versus third-party content?

As long as it plays a fair game, we feel okay.

And that is really something that we are watching much more carefully than ITA, at least in the hotel segment.

But again, Google has very significant market power, and it's something that I think everyone is going to be watching very closely.

Thank you very much.

Scott Kessler, Standard & Poor's Equity.

I have a simple question, but the response might not be as simple.

I think a lot of people take for granted the pretty substantial growth trajectory that TripAdvisor has been on for the last number of years.

And I was wondering if you could talk about a couple of the factors that are contributing to what has become a really special business that frankly I think doesn't get the kind of attention that it should.

Thanks a lot.

Scott, did we pay you to ask that question?

(laughter)

Not at all, but again, this is something where people ask about TripAdvisor, and the implication is that it is assumed that 40% revenue growth is the norm.

And obviously, I see very few businesses on an organic basis that are able to consistently deliver those types of results.

And I'm wondering if you could just talk a little bit about where this growth is coming from and what you see the trajectory to be over the next couple of years.

Yes, I think it's -- you know, the first thing that it starts with is a team, and I think we have an incredible team.

We've got 700 employees at TripAdvisor.

They are incredibly talented, kind of top -- from the top to the bottom.

And I think it comes from building great products that attract huge amounts of traffic from a user base that is very, very loyal to that product.

TripAdvisor, like many other products that have kind of -- that are built upon user-generated content, are very viral.

And they have positions that are very difficult to unseat.

If you've got 30 million reviews and you're looking for a hotel review, you are just going to go to TripAdvisor.

Chances are you're going to find great product there.

To the extent that you find great product and have a great experience, chances are you're going to write a review.

People like that new content, the search engine box, the Google box, the Bing box, etc., like that new content because it is great, it is relevant and it is new.

And so this kind of the new content coming onto the site feeds upon itself and has a self-reinforcing factor.

Now, what's different about TripAdvisor from most user-generated sites is that, whereas most UGC sites have a hard time monetizing, this is incredibly relevant information for people who want to travel.

It is very targeted.

So you have two weapons.

One is you have free content that is viral in nature and has increasing returns to scale.

And you have content that monetizes incredibly well.

So you put those two together, and you've got a great, great product to start with.

Then we add on top of that international expansion.

TripAdvisor is growing in Europe on a country basis, anywhere from 50% to 100%, its traffic.

It's going very aggressively into the Asia-Pacific regions.

We are losing a lot of money in China, and that's a good thing, because that means we're investing more aggressively in China than anyone else, we believe.

So you add kind of this organic growth to international market growth, which is very, very substantial, and you get a great combination.

You add to that new products -- so for example, Business Listings is a product that allows hoteliers to list their hotels, the URL, a phone number to call, right when someone is looking up a hotel.

It's a great product for the hotelier because they get direct distribution.

It's a great experience for the consumer because they can click right onto the hotel site rather than opening up a new window, etc.

And for us, it is a subscription model which is recurring revenue and is a very solid kind of product.

And we have already signed up 15,000 hoteliers, and that can increase by multiples and multiples.

Another new product, for example, is Vacation Rentals -- again, a subscription product that we think we can build up over years.

So I just think it's a combination of great, great base product, international markets that are growing even faster than a domestic business that is growing quite well, and then a number of new products that are launching as well.

And when you add it up together, you get very strong growth on a current basis, and I would say the kind of investment that will hopefully keep the growth going for many years.

It's an asset that we certainly don't take for granted.

And we think that as it gets bigger -- we frankly think it is one of the finest content media businesses on the Web, bar none, and we think it is only a matter of time before it gets recognized inside of our portfolio.

Great, thanks a lot.

Thank you.

Operator, any more questions, or was that it?

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

I would like to turn this call back over to Mr.

Pickerill.

Okay, thanks a lot.

Thanks, everybody, for joining us on the call today and for all the questions.

A replay of the call will be available, as usual, on the IR site, shortly after the call is completed.

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

Dara, any final--?

No, just a special thank-you to the Expedia employees for their efforts this quarter.

And we're looking forward to telling you all about the next couple quarters coming up.

Thank you very much for joining.

Ladies and gentlemen, this concludes the Expedia, Inc.

second-quarter earnings conference call.

Thank you for your participation, and you may now disconnect.