Expedia Group Inc (EXPE) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Expedia fourth-quarter 2012 earnings conference call.

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

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

(Operator Instructions)

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

Please go ahead.

Thanks, Alisha.

Good afternoon, and welcome to Expedia Inc.'s financial results conference call for the fourth quarter and year ended December 31, 2012.

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 responses to your questions, reflects management's views as of today, February 5, 2013 only.

We do not undertake any obligation to update or revise this information.

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

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

You'll 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 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 2011.

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

Thanks, Alan.

The fourth quarter finished off a very solid year for Expedia.

By the beginning of the year, we told you about five strategic focus areas for the Company.

First, turning around the performance of brand Expedia.

Second, growing our global hotel business.

Third, investments in, and execution on, key technology projects.

Fourth, further developing our international growth opportunities.

And fifth, succeeding in new channels such as mobile and social.

I'm pleased to report that we have executed effectively in each of these areas, which has resulted in continued acceleration in room night growth and revenue on a global basis.

Looking forward to 2013, our strategic priorities remain largely the same, which I consider a positive.

As they relate to brand Expedia, we can safely say that we have turned brand Expedia around; now we have to prove that we can grow it over a multi-year period, as we have with Hotels.com, EAN, and our other brands.

Much of our improved performance has been a result of investments that we have made in technology and content, upgrading global platforms across several brands, and creating or upgrading unified back-end systems to support our customers, suppliers, and transactional infrastructure.

The capabilities of our technology teams have improved dramatically.

Throughput is up, conversion is up, and we are increasingly confident in our ability to identify and deliver on new projects and products with real returns.

Just as importantly, our technology and business teams are working together more closely than ever.

The goal of our investments isn't technology for technology's sake, but building great products that serve and delight our customers in a highly competitive marketplace.

Looking ahead to 2013 and beyond, we see a market with significant challenges and great promise.

In terms of challenges, we expect competitive intensity to increase.

The European hotel business of our largest competitor recently introduced a brand marketing campaign in the US, and its parent company announced its intention to acquire the leading US metasearch player.

When taken together, these events create a much larger domestic competitor in terms of traffic, brand, and product.

We continue to see Google and Trip Advisor experiment and innovate with their products.

Both continue to be large and growing sources of traffic globally, and we'll be working with them while watching how their products and services evolve.

On a promising note, we are gaining share in the $1 trillion global travel market, and have significant headroom for further growth.

Our global hotel business continues to improve broadly.

Hotels.com continues its strong global growth; Expedia is accelerating with some early positive signs from the package business; EAN is successfully powering partner sites with a real focus on the best technology and service in the private-label space; Hotwire is expanding internationally; eLong has been taking hotel room-night share in the important and promising Chinese market; and Egencia continues to expand the number of business travelers it serves worldwide.

Underscoring all of this, we are signing contracts with more and more hotels under our ETP program, with almost 20,000 hotels now signed up, and one-third of those [logged] in production.

Excluding eLong, our hotel collect, or agency room nights, now make up roughly 10% of our total global room nights, and are growing at rates substantially faster than Expedia collect, or merchant room nights.

Last and certainly not least, we announced that we agreed to acquire a majority position in Trivago, a leading European-based hotel metasearch business.

Trivago is a high growth business that has built a strong brand and a major presence in several large European countries that are very strategic to us.

Our multi-brand strategy has always been driven by our knowledge that consumers love to shop around.

The Trivago business is one more way they can do that, and with their global growth ambitions, we are excited to see what that highly capable team can deliver as part of the Expedia family.

Thanks to the hard work and dedicated efforts of our global employees and partners, we had a strong 2012.

And although we are well-positioned to continue to grow, we know that our challenges moving forward will be greater than they ever have been.

Mark?

Thanks, Dara.

We were quite pleased with our results in the fourth quarter, which would have been even a bit better had it not been for Superstorm Sandy.

Total revenue grew 24% year over year, representing the fastest quarterly revenue growth in five years.

As has become a recurring theme, this growth was driven by robust hotel revenue growth of 25% on record room-night growth of 33%.

Domestic room nights grew 19%, while international room nights were up 49% for the quarter.

And at a brand level, our most significant brands continue to post very healthy room-night growth this quarter, with Q4 room-night growth coming in faster than Q3 in every major global region.

Revenue per room night continued to decline at rates similar to what we have seen all year, primarily driven by shifting hotel product mix, including the fast growth of our APAC hotel business.

As we've said in the past, we will gladly take lower revenue per room night in favor of expanding market share in these important markets.

Note that hotel revenue represented 74% of our total revenue mix for both the fourth quarter and for full-year 2012.

Revenue from our air business grew 10% year over year.

Ticket volume increased 12%, largely due to our VIA Travel acquisition, which we closed in Q2 of 2012, while revenue per ticket declined 2% for the quarter.

Other revenue grew 25% for the quarter, primarily on growth in corporate travel fees, again, as a result of our VIA acquisition.

We also saw solid performances for our insurance and advertising products.

Running through key expense categories, cost of revenue grew slightly slower than revenue in the quarter.

Consistent with last quarter, a fair bit of this growth was a result of the VIA Travel acquisition, without which cost of revenue would have leveraged significantly.

Our customer operations team has done a great job implementing new tools and processes that improve the customer experience, while at the same time leveraging our costs.

Overall, our recent customer satisfaction scores are at an all-time high.

As we expected, selling and marketing expense grew faster than revenue.

We continue to have a bias towards reinvesting marketing efficiencies back into the business in order to drive our top-line growth.

As we continue to improve our products and overall customer experiences across the globe, we are increasingly confident in our ability to generate returns for more aggressive spend in variable channels and emerging markets.

Most of the year-over-year dollar growth this quarter came from increased performance-based marketing from brand Expedia and Hotels.com.

We also paid out more in commissions on the growth of our Expedia Affiliate Network business.

Technology and content grew 32% year over year on higher headcount costs, driven by the investments we've been making in our key technology projects, and to a lesser extent, higher bonus funding versus last year.

Please note that as we release new technology, we also experience significantly higher depreciation expense associated with previously capitalized software development cost.

General and administrative expenses grew at the same rate as revenue this quarter, a bit higher than we like to see, driven by higher bonus funding relative to last year, the year-over-year impact of the VIA Travel acquisition, and professional fees associated with the Trivago transaction.

Excluding these items, G&A would've leveraged nicely.

You will also have noticed a $110 million charge that we recorded this quarter related to an unfavorable excise tax ruling in Hawaii.

In certain rare cases, we are required to remit cash ahead of contesting adverse tax rulings.

Suffice it to say, we vehemently disagree with the court ruling in Hawaii, and we plan to appeal.

I would also like to note that this excise tax matter is unique to Hawaii, and is unrelated to, and we believe will have no bearing on, the occupancy tax matters that have been raised in other tax jurisdictions.

Consistent with prior [practice], we have excluded this pay-to-play expense amount from adjusted EBITDA and adjusted net income.

In terms of capital allocation, over the course of 2012, we returned nearly $530 million to shareholders through a combination of buybacks and dividends, including our special dividend of $0.52 per share, which we paid out in December.

We also deployed over $200 million against acquisitions to further strengthen our competitive position around the world and our expected financial performance going forward.

Now I'd like to cover our financial expectations for 2013.

For full-year 2013, we are expecting to see adjusted EBITDA growth in the low-double-digit range, with the possibility of hitting the low teens.

In terms of specific line items, we are forecasting both cost of revenue, and general and administrative expenses, to grow slower than revenue.

We expect selling and marketing expenses to grow faster than revenue for the full year, especially in the first half, during which time you should expect year-over-year percentage growth broadly in line with what you have seen from us over the last few quarters.

If you recall the first half of 2012, we were more conservative on marketing spend as we worked on enhancing the brand Expedia product.

With much of that work behind us now, we expect to spend aggressively in marketing, both in variable channels and emerging markets.

We are forecasting technology and content expense to grow faster than revenue for the full year, but for the pace of that growth to moderate as we move through the year.

Note that tech and content will be particularly impacted by much higher depreciation, which has been growing significantly on a sequential basis for the past few years, and likely will continue doing so through 2013.

In terms of our expected tax rate for 2013, we are forecasting an effective rate in the range of 25% to 27%.

Over the past two years, we've had the benefit of some favorable discrete items, and we can't guarantee that will continue.

So, rolling it all up, we are expecting to deliver another solid year, with adjusted EBITDA growth building through the quarters, most of it coming in the back half of the year.

I will remind you that although we are carrying some nice momentum, Q1 will face particularly difficult expense comps.

And because it is the smallest seasonal quarter for EBITDA, growth rates can be highly sensitive to small variances in either revenue or expenses.

Note also that our financial expectations discussed today do not include any impact from the Trivago transaction, since that deal has not yet closed.

With that, let's turn to questions.

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

(Operator Instructions)

Ross Sandler, Deutsche Bank.

Two quick questions on the marketing and the room night growth.

So, your marketing mix is different than some of your larger competitors and smaller competitors, because your geographies and your channels are different.

But if you just take the room night growth acceleration combined with only slight marketing deleverage, you are clearly getting more efficient with your spend.

So can you talk about what is driving that efficiency?

And then the second question is, I think you said international room nights are accelerating in all regions 49% versus the 38% last quarter.

Can you just give us some more granularity on which regions outside the US are seeing the most acceleration?

Thanks.

Sure, Ross.

As far as the marketing spend and deleverage and efficiency there, I'd say it's a combination of factors.

One is that we are in general seeing higher conversion in some of our brands, Hotels.com continues to do really, really good work on the product side and the technology side to drive conversion.

Brand Expedia as well with newer technology platform has significantly more capability on that side and as a result, has been seeing conversion tailwinds as well.

So, the higher conversion allows us to spend up and spend up especially in variable marketing channels, but because we are spending up with higher conversion, we are able to offset some of that higher spend with higher revenue.

So, you don't quite see the marketing deleverage that you would expect.

Another factor behind our marketing mix is that we are looking more carefully at certain placement -- certain marketing placements that are, call it lower quality.

The capabilities of our marketing teams are analytics in general are better, and we are taking a harder look at our different marketing channels, different placements.

And trying to find the placements that aren't efficient and then get rid of those placements and reallocate the capital to placements that do tend to be more efficient.

So, those are the two positives.

The negatives that we have talked about are that we are seeing faster growth on variable channels, and variable channels tend to be less efficient for us.

And we are investing aggressively in foreign markets, especially emerging markets, and those emerging markets are certainly less efficient for us as well.

As far as the room night growth, internationally, all of the regions are doing better.

I think if you line up our regions, obviously in the US we've had very healthy growth.

The next largest region for us is EMEA and EMEA room night growth accelerated from Q4 compared to Q3.

And then of course Asia-Pacific with eLong, with Hotels.com performing really well, Ian is getting some leverage there with our area joint venture.

The Asia-Pacific numbers are accelerating and getting larger as a percentage of the whole.

And then of course, Latin America is a really promising market.

So, the growth rates have been improving broadly, and I think that's due to better process and better conversion and just better execution from the teams.

Great, thanks, guys.

Nice quarter.

Brian Fitzgerald, Jefferies.

I wanted to know if we could get any additional color on mobile?

What usage trends you're seeing maybe for mobile apps or maybe what percentage of mobile traffic is transactional versus browsing or comparison shopping?

Thank you.

Sure, mobile continues to be a nice tailwind for us.

We have on Expedia Inc.

level now over 20 million downloads of our mobile apps across the various brands.

Hotels.com, Expedia, Hotwire, all being aggressive on the mobile front.

ELong is being aggressive on the mobile front as well.

In general, mobile accounts for about 20% of our transactions.

I'd say that's a broad number higher in the US, lower outside of the US.

And the behavior -- the mobile behavior really hasn't changed much in that most of the mobile bookings, especially on handsets, do tend to be last minute.

I think the big difference that we see going into 2013 for mobile is really incorporating more responsive design into our various websites as it relates for tablet web.

We are seeing a real proliferation of different shapes and sizes of tablets.

And as opposed to designing different sites for the different tablets, our approach is going to be to come up with designs that can respond to the various tablet sizes.

We think it is a nice opportunity, we are really just getting started there.

So, we are optimistic on mobile.

We think it is a nice opportunity and should be a nice growth area for us.

Stephen Ju, Credit Suisse.

You are calling out the APAC as a good source of growth for you guys, but my understanding is that most of eLong's volume right now is travel domestically in China.

But I'm wondering how quickly outbound traffic out of China to your inventory base in the US and Europe is growing right now and what that opportunity might eventually be for you?

It seems like to me I see an amount of consumer spend on travel coming out of China should over the longer term approach that of the US and Europe.

Yes, I think, Stephen, you are exactly right.

The outbound volumes from eLong are growing very, very quickly.

But they are growing off of a small base right now.

If you compare eLong, for example, with Ctrip, I think Ctrip had a earlier focus on the outbound volume, eLong has been very much focused on the local Chinese consumer, and we thought that is the consumer that you hit first.

ELong now is working more closely with our other brands and working quite closely with our private label business with the Ian team, and the outbound business out of China is now starting to grow very quickly.

We think it is all large long-term opportunity, but we don't think it's going to be a significant percentage of our overall business in the next two to three years.

Thank you.

You're welcome.

Tom White, Macquarie.

One more on mobile and obviously the big shift to mobile Internet usage.

Can you provide a little bit of color about how we should think about how that affects your competitive positioning in international hotels, specifically European hotels?

And should we think about mobile making it -- the shift to mobile making it easier or harder for you guys to potentially take share from incumbents in that market?

And then also any color about how we should think about the payback period, if you will, for some of the investments in driving mobile app downloads?

Thanks.

Tom, I think it is too soon to tell and honestly, we are not that particular on our mobile investments to think about the differing results between the US and Europe.

We think mobile tends to be a natural opportunity for online travel agencies.

We -- because technology is our -- is core to what we do, I think you will notice that in mobile, the product coming out of OTAs in general has been very good.

We've seen some interesting players in there like Hotels Tonight, but we haven't seen that many disruptive technologies out yet on mobile, although I think it is still early.

So, it could --while it's a near-term opportunity, it could be a threat.

But I think just as you saw with broadband Internet OTAs gather the early share, I think mobile has been an opportunity for ourselves and our competitors to gain share early.

I think it's way too soon to say which OTA is doing better than the other players.

I think all of us in general are doing pretty well, and I think if you talk to any of the OTA players, they would all name mobile as one of their fast-growing channels.

As far as the payback period on the download investments, again, I would say too soon to tell.

We take a one-year view of things.

But we don't have enough history as far as looking at how a user who downloads an app, what their lifetime value is, and we are pretty early in having those kinds of measurements.

So, we really haven't developed what I would call mature framework at this point.

Okay, thanks for the color.

Naved Khan, Cantor Fitzgerald.

Couple of questions.

I saw a nice increase in the number of properties, wonder if -- wondering if you find any major agreements that caused this jump?

And then secondly, just on the Expedia Traveler preference program, it just seems like you are at this 20,000 mark and you have roughly 200,000 properties.

So, how aggressive do you expect to be this year in rolling it out?

Sure, thanks Naved.

One of the big reasons for the jump was the inclusion of eLong inventory for the first time.

I think as we mentioned a quarter or so ago, we did enter into a new arrangement with eLong where we are working much more closely with them.

We now have eLong inventory much more readily available on our Hotels.com site globally and we are working on it for Expedia, and then we just have some organic acquisition around the world as well.

With respect to ETP, I think it's too early to tell how quickly we will roll out.

I think as we said early on, we would be rolling out, really gated by a couple of things.

One was the results we were seeing as we rolled it out, and two was really just the operational complexity of making sure that you got all the hotels trained up and transfer of the new platform.

And that your new -- your internal processes feed around collections, et cetera, were up to snuff.

So far we like what we see.

As you can see versus last quarter, we have made some good progress on adding incremental hotels and we are going to continue to work throughout 2013.

But so far we are happy with it and would expect to see a similar, if not faster pace of rollout throughout 2013.

Okay then, and then quickly on the guidance, Mark, does it reflect the costs associated with the integration of Trivago or does it exclude it?

So there is nothing for Trivago in our guidance whatsoever right now.

And I think I would add that there is no intention of any kind of Trivago integration.

So, the business is going to be run separately, if we're lucky enough to have it as part of the family.

So, I don't anticipate any kind of integration cost anyway.

Thanks.

Brian Nowak, Nomura.

I have two.

The first, Dara, you sounded a little bit more cautious on the US.

You're mentioning competitive intensity increasing with Priceline's increased brand marketing and then the Kayak deal.

Are you seeing any changes in the market now with the shopper traffic, or is there anything that is making you sound more cautious, or is that me reading into your tone too much?

And then the second question on mobile, I guess I have to add to mobile just to follow suit, I would be curious your commentary on app versus browser mobile transactions.

Are you seeing a healthy mix of both, or is one of those channels really dominating the other one from a transactional perspective?

Thanks.

Sure, Brian.

As far as the US goes, I think it is reflective of what we see in the marketplace.

The -- we've got the biggest worldwide player in lodging, Booking.com, now with a pretty aggressive advertising campaign in the US.

They have been successful on a worldwide basis, and they certainly seem to be quite committed to the US market, and I think we have to take that very seriously.

So, that's really the only thing that it reflects, and we will see what happens.

But, good news is for us, our US volumes continue to move forward at very, very healthy levels, and we are hopeful that it continues.

On mobile, as far as apps versus browser, what we are seeing is that on smart phones, the split between apps and browser transactions tends to be around 50/50.

So, we see a balanced mix between the smartphone app and the browser and obviously, we are optimizing for both.

Tablet transactions tend to have a higher mix on tablet web.

And that is why what you will see is more of a focus for us on responsive web design because that captures not only the PC customer, but it can capture most tablet players out there.

Great, thank you.

Mark Mahaney, RBC.

Two questions.

Dara, you mentioned some positive signs about packages, could you talk a little bit more about the potential there?

It seems that packages has been plateaued as a percentage of overall bookings for a couple of years here.

Do think there's something new that can be done that would change that?

And then secondly, could you give any -- please, any macro color commentary on end market demand, particularly in Europe?

Anything that suggests you that demand has stabilized or has improved or is getting less worse, or is it pretty similar to what you saw earlier in the year.

Thanks, Mark, and welcome back.

Thanks, Dara.

You're welcome.

On packages, we are seeing some early promising signs.

And on the Expedia side, we've moved over essentially 100% of our package shopping over to the new platform.

And that has had some benefits as far as our ability to test and learn, just like we did on the hotel side and removing errors, et cetera.

It just -- the new platform allows us to be much more effective as far as the product that we present to the consumer.

We are hoping to move the entire package platform over on an end to end basis, but that is hard work.

And we hope to get it done sooner rather than later, but that is very heavy lifting from a technology basis.

I'd say package had some headwinds against it in that in general, in better times, suppliers are -- have less of an inclination to give deeply discounted inventory to players like us.

So, there is a headwind on the package side.

There is a tailwind, though, in that package bookings tend to be longer dated.

They tend to have higher ADRs and lower cancellation rates.

So, with some of our suppliers they are seeing more and more last-minute business.

And so they put a very significant amount of value to the package booking because it helps them get some early fill up of their hotels and then yield up as you get closer to the stay dates.

I think that our most significant opportunity on the package side is going to be in Europe.

European summer sun and beach destinations are destinations that we haven't really, I think, gotten our fair share of, and we are pretty focused in improving our inventory there, improving our lift into those beach destinations.

And we think that can be a pretty significant potential, although it is very, very early at this point.

We are optimistic, but we also realize that we are just -- we are sailing into the wind to some extent.

And then on market demand in Europe in general, I would say that -- Europe remains largely the same.

We saw a stable Europe last year.

We saw more weakness in southern Europe than, call it northern Europe, and we haven't seen much change.

That said, I think a lot of the operational improvements that we put in place have allowed us to grow faster in Europe in Q4.

So, we are cautiously optimistic there.

Doug Anmuth, JPMorgan.

Mark, if you could talk a little bit more about the EBITDA trajectory in 2013?

I guess in particular, you talked about lower growth in the first half.

Just trying to understand how much of that is in terms of maybe ranking via a priority, the reasons you are -- because of VIA Travel or still rolling off the platform costs and then also the higher sales and marketing, if you could help us sort through that a little bit?

And also, Dara, just on the ETP program, obviously the numbers are up good in terms of properties.

Can you talk a little bit about the consumer feedback that you are seeing there and the preference that customers are showing in terms of how they are booking?

Thanks.

Sure, so I think it terms of thinking through how 2013 will unfold, I think it is important to take a look at how 2012 unfolded.

Which, if you recall, the first couple of quarters, they came in a bit ahead of our expectations, largely as a result of us pulling back a bit on sales and marketing.

As we were turning around brand Expedia, we were a little bit more cautious.

That creates some pretty hard comps for us as we go into 2013.

The other factor that you mentioned was the addition of VIA Travel, and VIA Travel closed at the beginning of Q2.

Q2, in terms of revenue growth, is about 200 bips, Q3 300 bips, Q4 400 bips.

So, you saw this acceleration assistance, if you will, by VIA, which will get one quarter in Q1, but then it will dissipate.

And then I think the last big factor for 2012 was the fact that you saw brand Expedia really turn around, and it started to accelerate through 2012, and that will create harder comps for us as we move through 2013.

So, if you roll that forward then to Q1, what you might expect to see is -- and really rolling through 2013, is increasingly hard comps rolling through the year on revenue.

And increasingly, call it easier comps on expenses, which results in a bit of the backend weighted plan, and that is certainly what we are expecting.

I would add, though, that the one thing that you saw in 2012 which I would just caution you all about, that you may expect to see in 2013, is that the shape of 2012 did change as we moved through the year.

And that is because we have really shortened the cycle times around how quickly we make capital allocation and planning decisions and how quickly we are able to execute things.

This has been enabled by new business processes and really in large part by the technology platforms that we've got in place now that allow us to iterate and test and learn much more quickly.

So, as we move through 2012 we were able to, as we saw strong performance in the top line, take that money, reinvest it in things.

As we did the VIA Travel acquisition, we were able to make incremental decisions around technology integration, and we are going to continue to do that in 2013.

So, the guidance we are giving you today is really a reasonable view based on what we can see right now.

But we will be making decisions through the year and we will update you as we do so on the quarterly calls.

On ETP in general, the theory for us on ETP was -- and we've seen it in testing is that consumers prefer choice to either merchant or either agency and so far, that hasn't changed.

Obviously, we are not at the point now where we have a significant amount of our traffic on ETP, so I think it is too soon to either call it a success or not.

But the patterns that we saw which are hotels that are on ETP tend to produce better than hotels that are not.

That remains true, and we are seeing an increase in average booking value for hotels that move onto ETP as well and obviously, that makes the -- our ETP partners quite happy.

So, I would say momentum is good, but we are very, very early in the process right now.

Justin Post, Merrill Lynch.

Thank you, just a couple quick ones.

First, Dara, obviously you mentioned conversion rates improving.

When you think about the industry or your competitors, how much more room do you think you still have there?

How far along are you on the platform?

Or is it up and running now and you've got a lot of room on market share to grab, but not a lot of improvement still?

And then just on the ADRs, is that really geographical mix, or is there really pressure in any regions on ADRs?

Thank you.

So, as far as conversion rates go Justin, it's tough to tell.

The Hotels.com team has been executing on their product and driving conversion for a good two to three years.

Expedia, I would say, is in year one, and we are hoping that it is a multi-year journey.

I do think that it gets harder as the site gets better.

One factor for us in conversion in 2013 is really going to be, how does ETP affect conversion and how do we look at the quality of our inventory, the description of our hotels, pictures et cetera?

How can the quality of our supply help our conversion in addition to the technology work that we're doing on the front end?

So, we are hoping that it will continue to be a positive driver.

But it really is impossible to know when the music stops, so to speak.

Justin, on ADRs, it continues to be similar trends to what we saw last quarter, predominantly geo mix with really like for like ADRs staying pretty much where they had been in prior quarters.

Okay, and Mark, one follow-up.

As you mix shift to ETP, and I'm sorry if I missed this question earlier, could you talk about the puts and takes on conversion rates and maybe a little bit on cash flow?

Just remind us on how that could affect financials in 2013?

Thank you.

Sure, so let me start with free cash flow.

I think if you look at our year this year, you can see about $1 billion of free cash flow, of which a pretty significant chunk of the growth was driven by really working capital benefit.

Depending on how much we mix to agency, and I think as Dara said, right now if you exclude eLong, this quarter we are at about 10% agency.

Depending on how much we mixed agency, obviously, there would be an impact to working capital.

But I think if you look at our balance sheet, you will see we are well-capitalized to handle that.

With respect to the P&L, there are a couple of things I would call out, just to be aware of.

The most significant possibility of which is something we highlighted on the last call.

Which is that so far with Expedia Traveler Preference, which we have seen is -- it has been very popular with our chain partners, they have been great partners signing up on the program.

And we also, in our testing and what we've seen so far, have seen the most positive, call it volume response, from consumers outside of the US.

And when you take those two factors, and if you assume that there was a mix shift in our hotel business, more to chains, more in regions outside of the US, that could put pressure on our unit economics.

So, that is something that I would just keep an eye on.

I think you saw it this quarter, we had revenue per room night down about 6%, consistent with what we have seen in the past.

If ETP were to drive those mix shifts, you could see something in excess of that as we roll through 2013.

The other sides of that, of course, which are too early to tell the impact, is you've got collection rates that impact it that can show up in various spots.

You've got credit card fees and you've got customer operations cost, and more or less those things can generally end up being a wash on the P&L as you move things around in terms of geography.

So, it is too early to give you strict guidance on what will happen, but those are some of the things you might expect if we were to shift more so to agency.

But you are happy with ETP economics, obviously, right?

We are very happy with it.

I think we are -- we're doing this because we had a very positive consumer response in our tests.

Our suppliers like it, we are removing friction from the marketplace.

We think it is going to be great for the long-term prospects of Expedia.

Thank you.

Mike Olson, Piper Jaffray.

A couple of quick ones.

Are you acquiring Trivago because it gives you a better foothold in certain geographies or because it gives you exposure to growth of online travel ad spend through a leach end business as you had previously had exposure through Trip Advisor?

Or maybe which of those two factors are more important to you?

And then secondly, what is your assessment of the competitive environment in China that seems to have turned into a discounting war that is hitting the margins of some of the major competitors?

And does the opportunity there long-term just outweigh the near-term margin compression due to the intense discounting?

Is that how you think about it?

Yes, I think on Trivago, the reason why we bought it was because we thought it was a great product and they've got a great team.

It is as simple as that.

It is a very simple hotel product.

The inventory is quite broad because of the breath of suppliers that are in the Trivago marketplace, and that team has built a very good product and a terrific brand.

It so happens that it's -- Trivago is quite strong in the European markets that are strategic to us, but the first reason why we bought Trivago is because of the product and because of the team there.

As far as the competitive environment in China, the China market is -- it is an enormous market, it is an enormous long-term opportunity for us.

We have been gaining share in that marketplace against our largest competitor and in general in the marketplace for some period of time.

And we view the investments that we are making in China as certainly worthwhile, and we think that those investments are going to really set us apart from other global Internet players who really haven't had much success in China.

I think we are quite lucky to have the team in place in eLong, a team that is highly effective and executing quite well, and we are 100% behind them.

Heath Terry, Goldman Sachs.

I was wondering if you could just give us a sense of the three areas of macro, ETP, and the way you are allocating your marketing spend?

What would you say is the breakdown on what is driving the growth in room nights between those three?

Or perhaps you have another factor I didn't list?

Yes, I think the top factor is probably product and technology.

So, I think that is pretty significant factor behind our growth.

I think next is probably the, I guess if you call it the allocation of marketing spend, it has allowed us to spend increasing marketing monies in new channels out there.

Obviously, the macro environment is a decent macro environment for us and the other competitors out there.

ETP at this point is not a material factor in our results.

I think it will start to be material in the second half of next year, but at this point, it is really not material.

Kevin Kopelman, Cowen & Company.

Given the growing depreciation component of tech and content expense, can you talk about your 2013 CapEx expectations.

And how are you thinking about CapEx as a percentage of revenue now that you have most of the technology -- new technology platform built out behind you?

Thanks.

Sure, maybe I can help you with that.

The largest portion of our CapEx and the largest portion of the depreciation really is capitalized software development and other technology costs.

To help guide you with what to expect there, we are expecting cash technology and content expense.

It has actually began to leverage the back half of 2013, so hopefully that will give you some guidance.

I think the overall CapEx spend growth rates that you've seen over the last few years should start to moderate in 2013 as a leading indicator.

Okay, thanks, and then looking at the total CapEx captive line on the cash flow statement, do you have any target for the year, or is it too early to tell and too lumpy?

Thanks.

Yes, I think it is too early to tell and give you specific guidance on the line item.

Scott Devitt, Morgan Stanley.

Revenue per room night was down, but revenue margin improved and it had been trending negative.

So, I was just wondering what drove the improvement and how to think about that for 2013 for modeling purposes.

And then secondly, the related party spend was up, I think 8% year-over-year, and that had been declining since the separation of Trip.

And so I was just wondering if you could talk about the change there in the quarter and your perspective on ROI that you are getting from Trip going into 2013 now that you are a year away from this recent spend?

Thanks.

Sure, so with respect to your first question, the driver of the revenue margin expansion was simply product mix.

Just a strong hotel business with a less strong air business, essentially, and hotel is obviously at higher margin than air.

So, that was a quick answer to number one.

On number two, yes, Trip spend was up in Q4.

Trip Advisor continues to be a great partner of ours.

And I think the up spend you see is a combination of a couple of things.

One, I think we as a Company across the breath of our brands are getting better at being an independent third-party on -- in the Trip Advisor channel.

And generally what we find is the better we get in the channel, the more we spend, because we can drive more volume that delivers bottom-line profit for us.

So, that is factor number one.

Factor number two, which is a bit more isolated, is that brand Expedia has been accelerating.

And when they are growing and they see good returns, they generally see good returns across all channels, and that causes them to up spend.

I think the other factor is that the comps for Q4 -- in Q4 of last year we started spending down on Trip a bit.

So the spend comps on Trip start easing up and I think on a go forward basis, you are going to see more typical spend patterns on Trip.

Thanks, and if I could follow-up on that first question again.

Just to clarify, because the -- this mix dynamic, given the strength in your hotel business really throughout the year, I would've thought that that would've been driven -- the stronger revenue margin throughout the year.

Is there something that unique, or is that the rate of change in 4Q that drove it more strongly so it turned positive versus being negative in the first three quarters?

Sure, so it is really difficult to actually look at our revenue margins sequentially, and that is because the gross bookings is on a book basis and revenue is on a stayed basis.

So, that is why you see swings on a sequential basis.

The year-on-year fluctuations were much less than that, I think much more consistent in the direction we saw in Q4.

Chad Bartley, Pacific Crest.

This has been asked a few different ways, but in case there is anything else to call out.

I did want to ask about your international segments.

We saw good acceleration in room night growth.

I think if my calculations are correct, if you back out VIA, it looks like international bookings growth did slow very slightly.

Is that purely a function of mix and the impact on the ADR, or is there anything else to call out there?

Yes, I don't think if you take out VIA, I don't think our international room night growth slowed.

When we look at it brand by brand basis in general, most of our brands did better internationally in Q4 than Q3.

I was comparing room night acceleration versus a deceleration in bookings.

Okay, so yes, if you back out VIA out of international, it is a bit slower.

The biggest driver, though, between the difference between room nights and gross bookings is that gross bookings is overly offset or overly represented by air.

Our air business internationally is generally not as strong in our hotel business, and so that is really the driver behind that.

Okay, great.

I just wanted to make sure there wasn't was anything else going on.

No, that is it.

Michael Purcell, Stifel Nicholas.

I was wondering if, Dara, if we can go back to your opening statements just about -- it's clearly that you're gaining share by how fast you're growing in room nights and all your metrics within the global markets.

But I'm wondering if you could quantify for us how fast you think the OTA space in general is gaining share and how you're doing within that share gain?

And also if you could just give any comment about any impact you are seeing from Google's metasearch projects.

Thanks

Sure, I think the OTA space in general, what we observe is in the early days, OTAs gained a fair amount of share.

I would say probably starting six years ago or so, supplier direct started gaining more share from the OTA players.

And in the past couple of years, at least, we have seen OTA grow fairly broadly to be pretty healthy.

I think the right now, OTA, my guess is that OTA and supplier direct share growth are pretty consistent, and I think it is the general worldwide growth driver of higher Internet penetration.

And I think mobile penetration is probably a bit of juice behind it.

From a competitive standpoint, I think it is pretty tough to tell.

In the past couple of quarters, we have been doing well against some of the smaller competitors, but our largest competitor obviously has been growing room nights faster than we have historically.

We will see what that looks like in this quarter, it is just impossible to tell.

From a standpoint of the Google metasearch product, not much of a material impact.

Google meta continues to grow.

It is a fairly fast growing channel for us.

But right now, the amount of traffic coming from that channel is still pretty small compared to the classic paper click model that Google has in place.

It is a fast growing channel, we are working with Google on it, and we will see how it develops on a go-forward basis.

Great, thank you.

Thank you.

At this time, I would like to turn the conference back to Management for any final remarks.

Okay, thanks, everybody, for joining the call today.

As usual, we appreciate your interest in Expedia.

The replay of the call will be back up on the IR site shortly.

Dara, any closing comments?

No, just thanks to the Expedia worldwide employees to a strong year and hopefully, we will be able to keep it up for our shareholders in 2013.

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

Thank you for your participation.

You may now disconnect.