Expedia Group Inc (EXPE) 2011 Q3 法說會逐字稿

Thank you for standing by.

Welcome to the Expedia, Inc.

third-quarter earnings conference call.

During today's presentation, all parties will be in a listen-only mode, and following the presentation the conference will be open for questions.

(Operator instructions).

This conference is being recorded today, October 27, 2011.

I would now like to turn the conference over to Alan Pickerill, Vice President of Investor Relations.

Please go ahead.

Good afternoon welcome to Expedia's financial results conference call for the third quarter ended September 30, 2011.

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

The following discussion, including any response to your questions, reflects management's views as of today, October 27, 2011, only.

We are 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.

We encourage you to periodically visit our investor relations site for important content including today's earnings release.

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 on this call will be against our results for the comparable period of 2010.

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

Thanks, Alan.

First, I would like to take a brief moment to welcome Mark Okerstrom as our newly appointed Chief Financial Officer.

Although Mark has only been in the role for a matter of weeks, he's been with the Company for over five years and has been a key member of our leadership team.

His knowledge of both the industry and our Company will prove invaluable in his role.

With that, let's jump into the call.

Our third quarter was a solid quarter with a number of key pieces of good news along with a handful of challenges.

Overall the revenue growth of 15% was quite healthy and we saw solid top-line results across all of our brands with the exception of Expedia, which, as we mentioned last quarter, is in the middle of a major transition.

Excluding the impact of the $12 million expense increase or occupancy tax settlement reserves, operating income before amortization grew 12% for the quarter, right in line with our forecast.

Including this item, OIBA grew 8%.

Adjusted earnings per share growth this year remains healthy at 13% for the quarter and 15% year-to-date.

Our brand results continue to be a tale of two cities.

Revenue for Expedia brand was down 1% year-over-year for the quarter while all of our other businesses grew at an impressive combined rate of 29%, demonstrating the real returns that we have created as a result of investments that we've made in those businesses.

The transmission of the Expedia platform remains a key initiative.

I'm pleased to report that our projects are on track and the playbook is being executed.

We have now largely completed the worldwide rollout of the end-to-end hotel product on the new Expedia platform and we have seen steadily improving conversion rates for our stand-alone hotel product since the beginning of the year.

Unfortunately, the financial benefits of these improvements has been largely offset by decreases in our air and package volumes.

Our focus is now on getting our air and [sand] path ready for migration early next year, building on our packages' platform for 2012 release and iterating on a fast switch basis for improvements to our bookings results.

We are in a build and execution mode and experiences in our other businesses leave us confident that the future payoff is going to come.

In terms of international expansion, we efficiently launched or joint venture with AirAsia at the beginning of the quarter and are off to a strong start.

The team is aggressively pushing forward and the exclusive AirAsia content is now available on nine sites in the APAC region.

We are proud to be partnering with AirAsia, and we have got the right team in place and we continue to be quite excited about this approach.

And remember, the joint venture is exclusively with our Expedia brand.

We also have Hotels.com, eLong and TripAdvisor with our completely separate efforts in the Asia-Pacific region.

So our overall approach to the region is quite broad.

It will require a lot of hard work and solid execution to ensure success in this fast-growing market.

TripAdvisor once again delivered robust growth with revenue growing 30% year-over-year.

We delivered a host of enhancements on the TripAdvisor site that have resulted in significantly higher rates of review collection.

We continued with our highly successful Facebook integration, having now personalized the TripAdvisor experience to over 57 million people, and we just announced our 10 millionth mobile app download.

We have also streamlined our hotel pages and limited the number of check rate auctions, both of which are aimed at improving the user experience.

We believe the letter changes have and will continue to have a negative effect on our monetization due to a reduction in click volume, which should be mitigated over the long term by increasing CBC as we will be sending higher quality clicks to our partner sites.

We're already starting to see this happening, but it's too early to fully qualify the net impact.

Overall, we do believe we can continue to grow the top line at healthy rates, even as we make these user improvements.

It's fair to assume that in the near-term, TripAdvisor's profit margins will be under a bit of pressure as the result of these user experience changes, slightly reduced spending from the Expedia brand, sales and marketing required to continue to expand aggressively into international markets and costs associated with being a stand-alone public company.

In closing, it's noteworthy to mention that we just celebrated the 15th anniversary of the Expedia brand, which is a good time to reflect on where we have been as a Company and where we think we can go from here.

Our employees have built a Company that we are very proud of.

We're the largest travel agency with annual gross bookings of close to $30 billion, and TripAdvisor is the world's largest travel media company with over 50 million monthly unique users and 50 million reviews and opinions in 30 countries.

Both of these businesses have significant competitive challenges, which frankly has always been and will always be the case and, at the same time, enormous opportunity.

We believe that the travel market will see a period of accelerated change and innovation over the next five years, much of which we plan to drive.

We're excited and energized by the challenges and opportunities ahead of us and we believe that we're positioned for success.

With that, let me hand it over to Mark.

Thanks, Dara.

I'm glad to be joining you this quarter and I look forward to meeting many of you that are on the call in the weeks and months ahead.

The headline is that, excluding the increase to our occupancy tax settlement reserve, the quarter came in largely as we had expected.

Gross bookings growth was driven by our hotel business, with room nights up 16% year-over-year and ADRs up 7%.

Remember that in Q2 we comped over the volcano and that in Q3, as Dara mentioned, we are not consolidating results of the joint venture that we have with AirAsia.

Normalizing for these two items would make the Q3 room night growth much more comparable to that of Q2.

Air and packages continued to underperform, in part on higher airfares, which were up 12%, contributing to a decline in total air ticket volume above 10% year-over-year.

From a revenue perspective, our direct growth drivers continued to be our hotel and advertising and media businesses.

Hotel revenue grew 18% this quarter, primarily on volume, representing our second-best rate of growth in almost four years.

Added media revenue growth was led by TripAdvisor, which grew third-party revenue 34% this quarter.

As Dara mentioned, the real story of our performance is told from a brand perspective as we're continuing to see very healthy growth rates for hotels.com, venere.com, Egencia, and our Expedia Affiliate Network business, each of which grew their gross bookings at a rate well above 30%, driving very strong OIBA growth.

The historical investments we have made in these businesses enable us to deliver solid innovations to market and drive this bottom-line performance.

So, if we execute as well on the Expedia playbook and get that business performing more in line with the others, we believe that we will drive excellent future results.

In terms of macro trends that we are encouraged by the developments of today, we have been reading the same headlines that you have been and continue to monitor the potential impact on travel broadly and more specifically on our volumes.

And though we have seen pockets of isolated weakness, primarily in southern Europe, we are hesitant to attribute too much to the economic climate.

However, we are certainly incrementally cautious relative to the last time we spoke to you.

With the exception of the increase to our occupancy tax settlement reserve, expenses grew largely in line with our expectations, especially as a percentage of revenue.

We, again, saw nice leverage in the cost of revenue line on some healthy credit card rebates and efficiencies in our customer support organization as well as some past -- as a result of some past investments we have made.

G&A grew faster than revenue, primarily as a result of the increase to the occupancy tax settlement reserve as well as higher consulting and headcount costs for the Expedia brand as we reorganized and reset that business for the future.

Over the long-term, we continue to expect to grow G&A slower than revenue.

Selling and marketing and tech and content also grew faster than revenue, as we expected, and as will be the case for at least the next several quarters.

Our effective tax rate was lower than we had expected this quarter, primarily due to favorable adjustments arising from our annual return to provision reconciliation, as well as higher international earnings.

We expect the Q4 effective rate to return to being near the high 20s.

Free cash flow has been quite healthy this year with growth of 28% for the first nine months of the year.

We continued share repurchases in the third and into the fourth quarter, buying back a total of 8 million shares for $224 million since we last spoke.

As we have said consistently over the years, we generate robust cash flow and as such can invest appropriately in the business while making opportunistic acquisitions and returning cash to shareholders through share repurchases and dividends.

We expect this to continue to be the case looking forward.

In terms of our financial expectations for full year 2011, we have had a few factors that have developed as headwinds since our last call.

These include foreign exchange trending against us, improved user experience efforts at TripAdvisor mentioned by Dara, the Q3 increase to the occupancy tax settlement reserve and an expense of roughly $7 million that we expect to take in the fourth quarter related to the move of our London office.

With full consideration of these factors, we expect to deliver full-year OIBA growth in the mid-single-digit range.

You can think of the Expedia transaction businesses as delivering full year 2011 OIBA that is flat to slightly down while TripAdvisor's full-year segment OIBA is expected to grow in and around 20%.

As a housekeeping item we have decided that following the spin-off of TripAdvisor, we will switch our primary operating profitability metric from OIBA to adjusted EBITDA.

TripAdvisor also expects to use an adjusted EBITDA measure going forward.

Also, as you like we saw in our S-4 filing, we do plan to retire our 8.5% notes prior to the spinoff of TripAdvisor.

The expense associated with this is expected to be slightly less than $40 million in the fourth-quarter.

We plan to exclude this item from OIBA and adjusted net income.

With that let's turn to questions.

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

(Operator instructions) Stephen Ju, Credit Suisse.

Can you -- it seems like your hotel room nights growth was fine, but air ticket volume saw some deceleration.

Will you help us reconcile what might be happening there?

Is this just a matter of hotel volumes charging ahead on the conversion rate lift you are seeing following the improvements to your technology platform and the air ticket volume weakness is really indicative of what may be happening in the general macroeconomic environment?

Sure, Stephen.

I think it's those factors combined.

When you look at the air environment, we are in an environment where average air ticket prices, average airfares are up 12%.

And the yields of -- the airline yields are at all-time highs.

So, to some extent, that has pushed out leisure customers.

Business customers, we are finding, are continuing to fly.

We are seeing good, solid volumes on Egencia, but our leisure customers are price-sensitive.

And as a result, in general we are seeing more weakness on the air side than the hotel side.

There are some other factors that are affecting our air volumes.

One is that, in general, some airlines are restricting their forward distribution on meta-search sites.

That hurts our traffic coming in.

And again, the airfare environment is another factor.

We have also introduced some fees on an opportunistic basis in some European points of sales, as well as some airline fees, for example, in the US, which help our revenue per ticket but certainly hurt our air ticket volumes.

And as you said, on the hotel side one thing that we are benefiting from is continued optimization on Hotels.com, on our EAN sites, on Venere, as well as Expedia end-to-end platform, which has successfully started to turn around conversion and turn hotel conversion positive, while we are not yet getting that benefit for Expedia on the air and the package side.

So one thing that we are really looking forward to are the potential positive benefits, and we are pretty darn confident that we will get those positive benefits for Expedia when we roll out the air platform early next year and the package platform in 2012.

Thank you.

Tom White, Macquarie.

A couple questions on the AirAsia JV -- on the last call you talked a little bit about the revenue headwind in the third quarter.

I was hoping you could comment a little bit on the expense impact or, I guess, lack thereof from the deconsolidation this quarter.

I know there were some areas of investment you guys were focused on in Asia Pac.

And then just secondarily on that, low cost airlines are pretty important components of the ecosystem in some of your international markets.

Is it possible you guys might look at other similar JVs in other key markets like that?

Sure.

In general, while we don't break out the AirAsia results, the general rule of thumb that you should use is that it's not consolidating the joint venture.

If the joint venture was consolidated in with our results, gross bookings and revenue would be growing faster by 2% on a year-on-year basis.

And the joint venture was profitable in the quarter.

So while there are expenses against it, revenues were in excess of expenses and it was OIBA profitable.

So it didn't quite hurt OIBA growth rates as much as it hurt top-line revenue growth rates.

But that's certainly something for you to keep in mind when you're looking at our numbers.

As far as LCCs go, they are very important to the ecosystem, especially in Europe and Asia.

We have been working to build out our LCC inventory in Europe, and I think the supply team has done a very good job there.

And in Asia, obviously we've started the AirAsia joint venture and we are getting the exclusive inventory there, which we think is an incredible long-term asset for building out the Expedia brand on a pan-Asian basis.

And there is no pan-Asian OTA, and I think this positions us in a unique way to win that race and that place.

At this point, we are going to see how the joint venture with AirAsia bears out.

There's a lot of work ahead of us.

We love having them as a partner, and to the extent that that works we are always open for something similar elsewhere.

But at this point it's not something that we are actively looking at.

Thank you.

Ross Sandler, RBC Capital Markets.

A couple questions -- so, Dara, you just mentioned that the JV was 2% of revenues.

So does that mean that room night growth would have been around 18% if we include APAC versus the 21% last quarter?

Can you give us an apples to apples comparison?

And then can we get an update on the spin timing?

And then, lastly, I think you said you were incrementally more cautious on southern Europe.

So can you just elaborate on that?

Which countries are you seeing it, and how much are things actually slowing down versus last quarter?

I'll let Mark take those questions.

Sure, okay, so first question, just about the impact of the AirAsia joint venture on room night growth -- there's a couple of things going on there.

I think, as Dara mentioned, there's about 2% of growth deceleration, if you will, resulting from the AirAsia joint venture.

In addition to that, we are -- in Q2, essentially we had the benefit of the volcano comp, which helped prop up growth rates, as did some timing on Easter.

So there's a few things happening.

If you normalize for those items, you get much closer to a comparable room night growth rate.

The spin timing -- so spin timing is, by and large, as we have been saying, we expect it to happen in Q4.

Things are tracking according to plan.

It would be the latter part of Q4, and we will be back to you with timing on road shows, etc., when we have more information.

And then on the comments on southern Europe, I would say that the slight decrease in growth that we've seen is something that we are watching pretty carefully.

The most significant factor that's affecting our lodging business, and the results are actually foreign exchange rates.

Foreign exchange was a pretty significant tail wind in Q2, and for the beginning of Q3.

And for Q4, obviously we are not expecting that tail wind, based on the comparable foreign exchange rates in Q4 of last year.

So this is a strange time.

From a week-on-week basis we will have a terrific week and we will have an okay week.

And I think it's just too soon to call a general trend.

But if you look at our numbers on the room night growth that Mark was talking about, in general, it's pretty comparable to what we saw in the second quarter with southern Europe just being incrementally a little bit weaker than we had seen earlier in the year.

Thanks, guys.

Naved Khan, Jefferies.

Can you guys break out the bookings growth on hotel.com?

And Dara, you spoke about the progress on Expedia.com early platforming effort.

Can you give us more insight into how exactly you are approaching this and what you saw in Q3 and how the trends looked like in October?

Sure.

On Hotels.com, Hotels.com came in Q3 just shy of 40% on a gross bookings basis.

Keep in mind that the comps for Hotels.com got tougher in Q3 versus Q2 because of, one, the volcano comps that Hotels.com enjoys.

And if you remember, last year in Q3 was when the Hotels.com platform started to really take off and started to really perform.

So the Hotels.com team now has to optimize the site and draw conversion above what was a pretty well performing site in Q2 of last year.

But we continue to see very healthy growth for Hotels.com, both on a top-line and on a bottom-line standpoint.

As far as the Expedia re-platforming goes, the approach that we've taken is to re-platform first the hotels path from an end-to-end bases.

And basically what we are doing is building out a completely new path on the new E3 platform, is what we call it, platform, and then pointing consumer traffic to that new path.

The advantage of the platform is quite simply that it's a platform where we can iterate on at substantially faster speeds than the old platform.

We do take our time to redesign what we think is a better, smoother experience.

And that significantly better experience along with an ability to iterate and introduce new feature sets more quickly to the site and test the efficacy of those feature sets has translated into steadily improving conversion on the hotel path since the beginning of the year and, in particular, since our introduction of that path on an end-to-end basis.

Honestly, it's not rocket science and it becomes a test-and-learn factory.

We are aided by the work that the Hotels.com and Venere teams have done because we look at what tests, what experiments have worked for them, and to some extent, we will copy the stuff that works for them and use their efforts as a guideline.

We plan to do the same thing for the aircraft which we expect to launch in the beginning of next year and the same thing for the package path.

In general, the air and package technologies are quite complex, but to date the Expedia technology team is really hitting their marks, so we are confident that they're going to hit their dates.

And then we'll start testing and learning, and hopefully we will drive similar conversion trends as we saw on the hotel path, although I will say that the macro trends on the air business, because of the air ticket prices, etc., are a bit more unfriendly than the macro trends on the hotel side.

Okay, and then in your press release you talk about competitive pricing actions in the hotel rooms and packages.

Can you go into more detail about what exactly you are seeing?

Are you being more promotional on the pricing front, or what exactly are you doing there?

Actually, we are being opportunistic.

Obviously, the ADR environment is pretty healthy in the industry, and we are being opportunistic in sourcing more promotional inventory.

In certain of our brands, discount brands, for example, the Hotwire brands, we are taking sometimes decreases in margin in order to deliver more attractive pricing to our consumers.

And I think you can see the result of those actions is very healthy room night growth, even in an economy that, while certainly not a blowout economy, does seem to be recovering.

Okay, last question for me -- can you just talk about Groupon and the Groupon partnership and what kind of results you are seeing there?

Yes.

It's early on the Groupon partnership.

We like the product.

You can see it on the site.

The sales are actually quite encouraging from Groupon.

The big question for us is, is it incremental or not, and how are the Groupon customers?

Are they coming back and using Expedia for their other travel needs in general?

The discount flash sale space for us is a pretty interesting space that we are taking on in a number of ways.

We have what we call ASAP yield, which is a sudden amazing price on Expedia.

We run 48-hour sales on Hotels.com.

We've got Travel Ticker, which is a piece of the Hotwire business which is a great aggregator and finder of deals out there on the web.

And increasingly, we are looking at mobile as a specific channel for kind of mobile-only type deals as well.

So our approach to this area is multipronged.

Groupon has been a strong partner for us, and I think over time and especially into next year, we're going to figure out what the best approach is going to be.

Thank you.

Justin Post, Bank of America Merrill Lynch.

I want to ask a couple questions on Google traffic trends and then maybe on TripAdvisor, your long-term margin outlook.

First, on Google I think in the fourth quarter you're comping some changes they made that might have negatively impacted TripAdvisor.

Is that going to help you as you think about year-over-year growth rates maybe into next year?

And anything from Google Flight Search, any thoughts on that?

And then TripAdvisor -- incredibly healthy margins, some of the highest we've ever seen for a click or advertising business, depending upon how you want to look at it.

But what do you think is the right long-term margin?

Can you help us at all understand your thinking there?

Sure.

As far as Google traffic, like you said, we should start to anniversary some of the changes that Google made as far as Google Local, etc., goes.

Note that Google Local rolled out over a period of time, and the vast majority of TripAdvisor traffic is actually international.

So I can't really characterize what that rollover looks like from a traffic perspective.

That said, I think the TripAdvisor numbers from a top-line perspective, from a CPC perspective, is self-evident that the business is healthy and growing nicely.

The one strategic action that TripAdvisor is taking as far as traffic goes is that, to the extent that the growth rate of free Google traffic has slowed down as a result of the changes in Google, and that's certainly something that we felt, TripAdvisor is more aggressively spending in paid search and SEM to offset some of that traffic, especially in international markets where the TripAdvisor brand is new.

And certainly, we see enormous, enormous opportunity.

So relating that to your margin question, at this point we are not talking about long-term TripAdvisor margins.

The TripAdvisor team, I think, as part of the spin process will probably talk to various investors and will do a bit of a roadshow, so they will have an opportunity to talk about their business.

But I do think that from a long-term perspective as the international business for TripAdvisor becomes a larger mix of the business, that tends to be a lower-margin business.

And you can anticipate that public company costs and some of the effects that we talked about from an Expedia spending standpoint for TripAdvisor are going to hurt TripAdvisor margins when it initially comes public.

But obviously, that stuff that will annualize over time.

The key for TripAdvisor is kind of user growth and the ability of that to monetize over a long-term perspective.

And those parts of the business are quite healthy.

From a Google Flights perspective, it's an interesting product.

It's an incomplete product.

It's fast, and that's interesting to us.

And speed is something that we are quite focused on, on a go-forward basis across all of our sites.

We are happy to see OTA links at the bottom of the Google Flight results, so happy that having that marketplace be a more open marketplace is a positive result for us.

And it's a product that we will continue to watch.

Right now, the results set is not a comprehensive result set.

And to the extent that the result set itself only includes supplier-direct results, we think that that product will be missing some of the lowest prices out there.

But at this point, it's just way too early to call.

I think that Google is an innovative player.

They have a dominant market position, and I think we will be hoping that they don't abuse that power and abuse that market position.

And otherwise, we will be watching their products on the go forward basis.

One more, if I may.

Do you think you are competing against booking.com in kind of new markets like South America and Asia?

Any advantages for your model or disadvantages versus kind of an agency model?

Are you really being aggressive with your agency model?

I think as far as booking.com goes, their results speak for themselves.

Their room night growth is significantly above the room night growth of really any other player out there.

Our room night growth is something that we are satisfied with and remains healthy.

But if you go by the law of averages, to the extent their overall room night growth is as high as it is, you have to assume that in new markets their room night growth is even higher and probably higher than our room night growth.

So we are -- in looking at the Asian markets, looking at the Latin American markets, the growth rates there for us are quite healthy relative to our overall growth rates.

But we absolutely believe that we can do better, and we are hard at work building out kind of systems and -- kind of systems and processes that will allow us to execute better to hopefully accelerate our night growth in the secondary and tertiary markets.

We think there's a lot of potential there.

Thank you, I appreciate it.

Herman Leung, Susquehanna.

Two quick ones -- first, I guess when you're spending this amount of money on the platform upgrade with Expedia performing down 1%, it should mark sort of a near peak of spending.

So wondering how much should these costs sort of subside as we look into fourth quarter and as we get into the first half of 2012?

And then second question is just on Marriott.

I think they talked about on their call that they extended a deal with booking.com and Priceline and the European regions and was in the process of working with you guys.

Wondering if you guys had an update on that and the timing of that.

And just a very quick follow-up.

Sure.

Mark, do you want to talk on expenses?

Sure, I'll take the expense one.

We have been building up the team and building up cost to some extent, to support the Expedia re-platforming throughout 2011.

That build is nearly complete, but of course we will be seeing the full-year impacts of that throughout 2012.

So, though we have built the infrastructure inside, you will see a little bit more, probably another good sort of two to three quarters of expense build that you will see in the year-on-year numbers.

But we don't expect kind of a continuing expense builds.

Based on similar to what you said, I think we've got the right number of people, right engineering team to build out these platforms.

We don't need to keep investing incrementally.

And you will see that in our P&L next year.

So if you think from an expense comp standpoint, the expense comps are going to be most difficult in the first quarter, and then the expense comps will ease as we move along the year because we don't have to keep building from where we are here.

As far as the Marriott deal goes, listen, I think that we look for full inventory, and I think the major brands look for full distribution.

It certainly doesn't surprise me that Marriott has an extended agreement with booking.com.

And our goal will be to extend our agreement with Marriott on a worldwide basis.

They have been a good partner.

They have terrific products, and I think the devil is going to be with what the economics around what the other terms are.

And, hopefully, we can get there with Marriott, as we have with many of our other partners.

Otherwise, we don't specifically talk about our relationships with one brand or the other.

Got it, thanks.

And then on the spinout date, I think -- thanks for giving us the timing for the latter part of Q4.

Wondering if you guys had received the kind of tax ruling that you guys had talked about and if there's any kind of indication that the SEC will sort of delay some of this stuff.

So we haven't received the tax ruling it, but there is no indication that that is going to be a significant issue, nor is there an indication that we're going to have any issues with the SEC in the near-term.

I think both of those matters are proceeding according to our plans, so no real big red flags there.

Great, thank you very much.

Mark Mahaney, Citi.

Two geographic questions, please -- you did talk about isolated pockets of weakness outside of southern Europe.

Was there anything else you want to highlight?

And then could you just talk about the Latin American market?

I know somebody asked about competition there.

But regardless of competition, what kind of traction do you think you are having in that market?

How does that market feel to you like it's developing versus the traction and success you've had in the Asia-Pacific market?

Sure.

As far as the rest of Europe, I'd say the most significant factor that's affecting us is -- there are two factors.

One is foreign exchange.

Foreign exchange was a significant tail wind.

It's not going to be as much of a tail wind going into Q4, which should hurt our ADRs on a year-on-year basis.

But I think, from a room night standpoint, that's a decent environment to work with.

In general, our European business is growing nicely, growing faster than our domestic business.

And we are quite confident of our execution there.

The Hotels.com team is doing very well.

The private-label business is growing at very, very high rates.

Egencia is growing nicely as well, along with Venere, and I think, again, the challenge for us comes through Expedia and the platform work there.

But we are confident that with some of the platform work and some better inventory going forward, we can continue to accelerate on the European side.

Agency bookings in Europe continue to be a positive factor, and we do expect agency as a percentage of our total business to keep growing, particularly in the European markets and secondary and tertiary destinations as well.

Another factor that is affecting Europe as well is that average room nights per transaction are coming down slightly.

We think that's a mix issue.

To the extent that we build bigger domestic European business, you are not going to have the week-long kind of stay to the US.

You will have, you know, the daytrip to, again, a secondary/tertiary destination.

So that's another small factor that we are seeing which actually is encouraging as far as our mix goes.

The Latin American market for us is a very significant market that we are relatively under penetrated in.

Hotels.com has a nice foothold in Brazil, and Expedia has a site in Mexico.

And we expect to go full-service in Brazil as well.

But I think, in general, Latin America is an under penetrated opportunity for us.

We have to continue to invest in marketing.

There are certain local players like Despegar who are very, very aggressive on the marketing side.

And we also have to build out some of our payment solutions in order to be more relevant for the local customer there.

It's a $70 billion marketplace, a lot of potential there.

I would say that right now we are more ahead in Asia than we are in Latin America, and Latin America is certainly an area that we are going to focus on.

We are focused on, but we are going to continue to focus on going into 2012 and 2013.

Thank you, Dara.

Bryan Nowak, Nomura Securities.

I have two quick ones -- first of all, I think you just mentioned that the European business is growing faster than the domestic business.

I was just curious.

Is that total area in hotels, or is it just hotels?

I'd be curious about commentary on European hotels versus domestic hotels.

And then the second one is on TripAdvisor with 30% growth this quarter.

I was just curious for any more color on differences in growth across the geographies in the US, UK and then the rest of the world.

Thanks.

Sure, in general, the faster growth rates in Europe versus the US are broad, both on the hotel side of the business and on the air side of the business.

In European air, we did introduce fees in certain regions to be kind of competitive with the other players out there, which hurt our European air volume to some extent.

But the European air capacity, I'd say, is a bit better as well.

So I'd say that the European strength is broad.

And again, it's a market that we are less penetrated in, it's a market that we are quite focused on, and so far we like the results.

As far as TripAdvisor goes, with the 30% growth, again, it's the same story for TripAdvisor.

Domestic is growing at healthy rates, but the UK and Europe in general growing a bit faster.

And the rest of the world -- Asia Pacific, India, China, etc., growing at substantial rates at lower profit margins than the US and Europe.

So TripAdvisor from that standpoint really doesn't look too different from the rest of our businesses.

China is a focus for us, and we are investing pretty aggressively in China, where we are not profitable but we are building good businesses, strong brands as far as daodao and [Kushingo] in China; we think it's well worth the investment.

Okay, thanks.

Kevin Crissey, UBS.

Do you have any potential acquisitions on the horizon?

There seems to be a lot of opportunities out there, at least for smaller players to help you build in some of these regions.

Yes.

We are always looking.

We've got a very significant cash position, and areas that in general we do look at are international markets.

We look at travel media.

We are certainly aggressively looking at the corporate travel business for smaller opportunities as well.

We haven't found any, at this point, that are of particular interest.

And to some extent, we are putting our capital where we think we see the greatest opportunity, which is some of the buyback activity that you've seen recently.

Switching over to air quickly, I guess two quick ones -- one is, do you -- if we were just to look at air as a standalone, is it profitable?

And secondly, if you could let us know how the status on the direct connects that you had announced with some of the US airlines?

Yes; the air businesses -- we don't really look at it as a standalone because a significant portion of our air business is our package business.

So if you include our air and package business, it is a profitable business.

It's a business and a value proposition that is important to our customers, and the package business allows Expedia to offer kind of a unique value that you don't see elsewhere, you don't see in hotel-only players, you don't see in supplier-direct, etc.

So it's a core part of our business.

We are investing in it as far as our air search times, as far as our air search paths.

And we think that we actually have the opportunity going forward to build what is a great air product.

I think at this point our air product can get a lot better.

I do think that, with the consolidation that you are seeing in the domestic airline space, air unit economics are going to be pressured on a go-forward basis, and that's something that we are going to have to deal with in Q4 and going into 2012 as we go into our planning cycles.

On the direct connect, we don't have anything to discuss at this point.

We're constantly in conversations with our airline partners as far as inventory goes.

We like our inventory position, and in general we have been very closely assigned with our GDS partners.

And I think, on a go-forward basis will be able to get the kind of inventory that we need, hopefully with our GDS partners on a go-forward basis.

We don't see that changing.

If I could just have one more follow-up on that, on the air side there are some proposals for some significant taxes on airline tickets and departures.

Does Expedia have a stance on those taxes that are being put out there?

It would be the equivalent of a couple of bucks a ticket, perhaps.

Listen, we don't have a specific stance on that.

I would let our air partners lead on that.

In general, higher air ticket prices are something that the leisure consumer is feeling the effects of and is suffering from.

And we don't think that adding taxes on top of that would be a good move going forward.

But this is not something that we are actively lobbying on in DC, so to speak.

Okay, thank you.

Scott Kessler, S&P Capital.

So two questions -- one, and I hopped onto the call a little late, so I apologize if these were addressed.

But the first question relates to expenses.

You detailed the OIBA margins for new Expedia, and I'm wondering if you highlighted or could highlight maybe one or two items that might have resulted in higher expenses than we were looking at.

Did E3, for example, have an impact?

And the second question I had is, has there been any impact related to the tragic flooding in Thailand on your business in Asia?

Sure.

So there are a couple items that impact expenses.

Obviously, I think the one most significant one that we mentioned at the outset of the call was the occupancy tax settlement reserve increase that you will see in G&A.

And of course, also in G&A, as we mentioned, there are a number of costs associated with the ramp up of essentially the new Expedia worldwide team, if you will.

And those are items that led to G&A growth, I think, that ended up being 38%, which is certainly something that we are not striving to continue going forward and we will expect to see leverage on that line going forward.

And additionally, on the expense side, generally in technology and content, as we mentioned earlier, we have been building up -- the team that has been working on the Expedia re-platforming effort.

We have got a great team in place, and we think we have by and large finished up building that team.

However, you will see us annualize those expenses into next year so that we do have the team fully built.

You will see some tough comps from us on the expense side for a few quarters yet to come.

As far as the Thailand floating goes, it's a tragic event.

But at this point, Thailand as a point of supply, so to speak, is too small to really affect our overall numbers.

We do see that when destinations get hit by events -- the Japan earthquake, etc.

-- often you see traffic patterns being diverted, although certainly overall traffic does suffer.

But at this point we don't expect the events in Thailand to be significant on a worldwide basis.

So if I could just follow up to clarify on the first item, so would it be fair to say that a lot of the upside to expenses in the quarter were related to the occupancy item that you referenced as well as new hires for a variety of different types of investments and upgrades?

Would that be reasonable?

Yes, I think that's reasonable to expect.

The occupancy tax item was $12 million, so that's obviously a significant item in the G&A line item.

And then, of course, we have been building, again, that headcount and other expenses for the Expedia business throughout the year.

So you have seen a significant portion of that in Q3, and again it's going to be annualizing those numbers throughout the next subsequent quarters.

In general, when you look at our model from a long-term perspective, we've done a good job on the cost of sales side.

So the cost of sales has grown slower than revenue in general.

Other than this quarter, our G&A expenses have leveraged against revenue.

Sales and marketing has de-levered against revenue in general.

When you look at our sales and marketing growth this quarter against last quarter, it has de-accelerated significantly, and hopefully we can move our sales and marketing growth to be more in line with revenue on a go-forward basis.

And on the R&D side, on the technology side, we have been very open with investors about our investments there that will start annualizing into next year, but we don't think that there's another round of big investment ahead of us.

And hopefully, those investments can turn into revenue.

We've seen that on Hotels.com.

We've seen that in our private-label business.

We've seen that in our corporate business.

And we are starting to see that in parts of the Expedia business.

And hopefully, that can roll out going into next year and we can get the high returns that we expect it to and, frankly, we do expect on a go-forward basis.

Great, thanks for the additional detail and rehashing some of those things I might have missed.

Next time, get on time, okay?

(Laughs).

Ladies and gentlemen, that is all the time that we have for questions.

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

Thank you very much for joining us on this quarter.

I think this is a bittersweet quarter because this is the last quarter in which we get to show off about all the great work that the TripAdvisor team has done, and they will get to get -- they will get to bask in the glory of their incredible execution.

So from that standpoint it's a sad day.

I just want to personally thank the TripAdvisor team for incredible performance from them as a team over the past couple of years.

We've learned a lot from them as far as all things search, etc., and they have been good friends and they will continue to be great friends and partners on a go-forward basis, so special thanks to that team.

And at the same time, I think for the Expedia team it will be an interesting kind of new birth of the Expedia going forward.

And we are very, very excited about all of the new products and technologies that we have to come out.

And we think that all of our brands can be substantially better consumer value propositions on a go-forward basis.

And to the extent that we build value for the consumers, we think good things will come.

So looking forward to see what the TripAdvisor team can do as a publicly traded company and looking forward to new Expedia and our growth ahead.

So thank you very much for joining us on the call, and we will be back next quarter.

Thank you.

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

We'd like to thank you for your participation and you may now disconnect.