Match Group Inc (MTCH) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the InterActiveCorp fourth quarter earnings release conference call.

At this time all participants are in a listen-only mode.

Later we will conduct the question-and-answer session.

The instructions will be given at that time.

As a reminder, today's call is being recorded.

I would now like to turn the conference over to Roger Clark, VP of Investor Relations and Finance.

Please go ahead sir.

Thank you, and good morning everyone.

Joining on the call today is Barry Diller, Chairman and CEO, Victor Kaufman, Vice Chairman, and Dara Khosrowshahi, EVP and CFO.

As you know we may, during this call, discuss our outlook for future performance.

Also you are aware there are risks and uncertainties associate with these forward-looking statements and our results could be materially different from the views expressed today.

These risks have been set forth in our public reports filed with the SEC.

Finally, we will also discuss certain non-GAAP measures and I refer you to our press release and the Investor Relations section of our website for all comparable GAAP measures and full reconciliation.

With that Barry Diller will make some opening remarks.

Thank you.

This is such a great finish to such a tough year of transition.

It's a transition from seven years building up these assets into our first year as an operating company and our first year of real integration of these businesses.

We had said all last year that integration was going to be a bitch, and it did not disappoint.

So the fact that we performed so well during the year is a witness to both the strength of the businesses and the great people that are spread throughout our 26,000 employees.

The results, particularly the fourth quarter, where we had told you the last time we met in this kind of warm and cozy environment, was that we'd end the year at anywhere between 72 and 75 cents a share.

So to come in at 81 cents, or 77 cents not including certain items, so far beyond our internal projections underscores our ability to execute while carrying out a complex integration job.

We did think we had the strength to do it and reach specific milestones for each of the businesses.

We sold more than $10 billion in travel worldwide this year, making this one of the top five travel agents in the world online and offline.

Ticketmaster finished the year really sprinting, up 47% for the quarter and operating income, before amortization, or the unfortunately sounding shorthand OIBA, and 33% for the year.

HSN is finally fulfilling its promise and is performing with real merchant sensibility.

For those of you who go back years on these calls and remember me saying over and over again that once we fixed HSN's structural problems we would start to soar.

HSN this grew 19% in the last quarter and 17% for the full year in its U.S. operations and January is blowing through the wall with greater growth than in any single month last year.

So we did have a hell of a year, as in hell to get through as well as great to report.

Revenue is up 36%, OIBA up 131% in the last quarter and free cash flow of over $1 billion 100 million for the year.

And, for those of you disbelievers, we bought back another 19 million shares of stock, bringing our total sales, total for this year to 41 million shares at an average price of 33.50 per share.

And we did nothing of any short-term to stop our progress in building up all our businesses to their fullest potential.

So, now, we're organized, and we're ready for 2004.

And we are here to reconfirm our range of 1 billion to 1.2 billion in OIBA.

We've told you our goal is to deliver almost 3 billion by 2008, which is growth of nearly 30% a year.

We can't tell you what's going to happen in any particular quarter or year, but we do think it's going to range between 25 and 35%.

Now, these crystal ballings aren't, of course, worth the air they're written on.

No one can predict the future.

But it is our honest guess, based upon everything we know.

As for 2008 it's an awful long way from now, but without any question it is our goal and we're going to do everything legal to get there.

By any measure, growth like this over such a length of time is awfully powerful.

As to quarterly variances, we believe in '04's first quarter we'll probably be flat to slightly up versus 2003.

The essential reason is the difference between the perfectly perfect good storm we had in travel for the first quarter of '03, the war was looming, direct sites were not being active, and most of our competitors weren't spending any real marketing dollars.

We think this quarter our marketing efficiency will be more comparable to the second half of 2003.

Other first quarter comparisons pale a bit from one-time payments from vendors and other inconsistencies, including for the first time EPI being included this year for its traditional money losing quarter.

So quarters aren't necessarily neat.

But, you know, who cares, since we expect much more significant growth throughout the rest of the quarters as our businesses have more normal comparability than the prior year.

Now I think we ought to cut from the general to the very specific.

And, of course, the biggest specific is travel, though I do promise you it's not the only thing we're paying attention to.

Nevertheless, we think there are about four core questions in travel.

Those that we ask, and we get asked about all the time, so we thought we'd just answer them.

First, are we losing share to direct sites or will we long term?

Direct sites have had an uptick in share but that is a reflection of their becoming much more active from a period of no activity at all.

We think that nothing can replace a broad travel site omnibus choice, convenience, and ability to sell packages and multiple components.

The fact is that the people who come to our sites are mostly brand agnostics particular, and the people who go to the direct branded supplier sites are kind of brand loyal.

The percentages might shift around a bit, but the essential dynamic won't.

Secondly, are we losing share to Travelocity or Orbitz?

We believe we can hold or build our overall share this year.

Our competitors can probably grow some lines of business at a higher percentage rate because they are certainly starting from a much lower base, but we've got greater resources and we can add a greater volume of bookings and therefore maintain or grow our share.

This is true in the United States but it's certainly true internationally.

Third, what is happening to raw margins?

While they're currently stable, on a blended average basis, we're prepared for them to come down modestly, maybe 1% this year, but please understand on this margin issue we aren't in denial.

We understand the skepticism but we can only tell you that visions of serious margin deterioration are not, in our opinion, realistic.

In this last quarter, hotels.com gross profit margins and Expedia raw margins were essentially flat to last year.

The thing is that we believe that if the big chains sell aggressively through our channels that's going to bring our margins down somewhat but it will also increase our volumes.

If they choose to be less aggressive, our mix is going to shift to higher margin hotel product but probably at a lower overall volume, essentially we'll make up for any margin loss with greater volume.

We are starting multiple new businesses from international, Expedia Corporate Travel, and we're continuing to build the package business.

Fourth, what will happen to marketing?

What are we going to spend?

Well, we're going to lower our marketing spending as a percentage of revenue over time.

This, we believe, this won't be true in every quarter and probably not in quarter 1 of this year versus last year when we had an unbelievably efficient marketing spend.

But we think that we'll be close to an equilibrium for the balance of the year.

Beyond the four questions you should all know that we believe we can go travel at our stated rates while being good partners to our suppliers and giving the best experience and service to our consumers.

It's really true that we bring new customers to our suppliers.

And one of our big objectives this year is to have all of our supply partners realize that and for us to really work to smooth out every working relationship that we have.

We've announced an agreement with Marriott last week to distribute their hotels through our merchant program on both Expedia and hotels.com.

We now have deals with the five major hotel chains, as well as thousands of different independent hotels and smaller chain operators.

Now I'm going to bop around to other subjects before we get down to general questioning.

During the last year we along with you speculated that on or air electronic retailing may not be core to our overall interactive strategy.

We're now here to say we believe that it profoundly is because convergence is happening even more rapidly than we thought a year ago.

Broadband and interactivity will increasingly come together with HSN On-Air, so the difference between online and offline is going to disappear in the final evolution.

We believe this area, both inside HSN and in other online goods categories, is one of our most exciting growth areas.

For a minute, I'm going to digress and talk about the market and the economy.

Now, I am certainly no Greenspan, nowhere near, but I do want to comment on this current market of ours.

We're on our way into a new bubble, and bubbles eventually get pricked.

To me that's certain.

Two other consequences are also certain.

One, Internet growth and e-commerce and advertising great future is guaranteed, absolutely guaranteed.

Secondly, this growth will also produce an endless number of brainless ideas, short-term greed, ridiculous valuations, investor speculation, and craziness in all the other lovely horrors we seem to have so quickly forgotten.

Of course, some companies are going to survive and thrive, and, therefore, provide real returns to investors, but they're going to be the minority.

The rest, and much of the market that supported it, will end in tears.

We survived, we actually thrived the first time around the cool aid market, by staying grounded and making sound bets on real business, and we do not intend to lose that discipline.

It's one reason we de-emphasize acquisitions and we've been so focused on internal growth.

But I wouldn't for a second believe that we will ever pass up opportunity or that we'd be unwilling to be as creative as the markets allow.

We've been through these waters before, and with our unique Internet expertise ever more confidently deployed, the thing is we ought to navigate through this environment better than anyone else, and we're going to be creating catalysts for shareholder value as we go.

We're going to be even more aggressive in how we will build up businesses organically, both through line extension and through developing new categories.

Today we put Anne Busquet in charge of leading our efforts, Citysearch, EPI, and Evite.

With all the doubters about our Citysearch investment, still yet to pay off one dime, I'm going to say again and again that people live locally, and local Internet services will play the central role in making those lives so much easier than today and to eventual great profit for those with the forbearance to do the enabling.

For merchants, we can offer traffic and transactions, discounts through EPI, or pay per performance advertising through Citysearch, right now, all without any additional up-front investment.

For consumers, we provide information, choice, editorial, and user reviews, and savings, savings, savings, which is the secret sauce of every category that's gone on line, all on a local level.

Consolidating these efforts under a proven leader is going to make '04 the year this unique value proposition for consumers and local businesses begins to become a reality.

In this company, when you think about it, we've got 2700 employees, dedicated to product development, the technology, and marketing.

We've got a skill set expertise and size that is unmatched in the online world, and there's no area in which we won't put it to good use, whether it's broadening the appeal of HSN.com, to more than the core HSN customer, or building Expedia Corporate Travel, creating value-added technology tools for Ticketmaster to sell more ticket better, or developing a differentiated real-estate solution with real savings for consumers.

For sure, we are the number one Internet travel company.

But we are a lot more than that.

We're a goods retailer, ticketing company, subscription company, membership company, discount, a search business, all online.

The reality is that our broad experience set and business intelligence and data is unmatched, and that's this last year of organizational knitting is paying off.

Our coordinating sourcing efforts continue with over 75 million of savings over the next few years and we have really truly just begun to scratch the surface of this.

The biggest stretch goal we have for the year, the primary groundwork of the company, is the development of opportunities that can only be found in the relativity of one of our businesses to another for the benefit of the whole and to create structural advantages that our competitors cannot replicate.

I would repeat the sentence, but I've gone on long too long, and you've got the transcript.

But I could not underscore it more.

This activity is not going to be rushed unnaturally, and it isn't going to be measured in quarters.

Being a service to more and more consumers in more and more categories as the natural convergence of the Internet brings everything together is the fundamental organizing principle for the company.

We are now and forever committed to harnessing the power of interactivity to make people's lives easier everywhere and every day.

Dara Khosrowshahi is now going to tell you a little more about the financial metrics and the trends that we see, then all of us are going to answer your questions.

Dara.

Thank you, Barry.

Let me start with the big picture first.

Overall revenue and operating income before amortization, as Barry said, grew 36% and 131% for quarter, respectively.

Adjusted EPS was at 29 cents per share for the quarter and 81 cents for the year.

Now, our results were affected by two positive adjustments that we want to point out.

The first was an adjustment to accrual of certain supplier liabilities, which resulted in a pretax benefit of $22.4 million related to past balances.

The second was a lowering of our estimated state tax rate.

Our geographical business mix has shifted significantly since the VUEDO, which has brought our state taxes lower, and this adjustment resulted in a reduction in our deferred tax liabilities of approximately $13 million, which hit the P&L and resulted in a much lower than normal tax right in Q4.

If you exclude these two positive items, adjusted EPS would have been 25 cents for the quarter and 77 cents for the year, still higher than the range we had previously expected.

Now, I'll take you quickly through our segment results and highlights which were strong virtually in every area.

Travel continues to be a growth engine with revenue up 37% and OIBA up 80% over the comparable period last year, not including their adjustment for supplier liabilities.

The results were driven by our merchant, hotel, and package business, big growth internationally and very strong results at interval.

We achieved this despite the termination of the Travelocity loss agreement with hotels.com in September, which will continue to impact us on a comparable basis into the first half of 2004 and a pretty competitive travel environment.

Our package revenue was up 58% in Q4.

This continues to be a real growth area for us.

In 2003 we sent more than 2400 people to the alter with our wedding trips, nearly 65,000 people to Walt Disney World.

We sold 900 tours of Graceland and 3300 helicopter tours of New York City.

More and more, Expedia is about the whole trip, multiple components and rich content.

Interval continues to strength online with online exchanges up 107% year-over-year.

And the International's booking growth rate actually accelerate.

We were up 104% year-over-year for ISE Travel International, and International now represents 15% of all of travel's gross bookings.

Expedia is now Europe's most visited full-service online travel site with more than 3 million visitors to its site in the U.K., France, Germany, and Italy in November 2003 per Nielsen net ratings.

Expedia Corporate Travel continues along with 1100 clients and Safeco being the latest large company to name ECT as it's preferred travel vendor.

ECT clients have an 80% online tool of option rate, well beyond industry average.

It's not just about having the online tools available, it's about having online tools your employees will use, and that's where ECT wins.

Electronic Retailing worldwide revenue was up 14% and operating income before amortization was up 35% in the quarter.

U.S. momentum continued with 11% top line growth and 19% OIBA growth against pretty tough comps.

HSN.com revenue grew 28% and HSN.com now accounts for 15% of HSN's domestic sales.

HSN had a record $30 million day on December 6th with a big Gateway computer sale and sold the record 200 million in December.

We're also making significant investments in customer service.

We have a new deal with UPS, which will shave up to two days of shipping time to our consumers at no increased cost to the customer.

Ticketmaster continued its strong run with a record 100 million tickets sold in 2003.

The quarter was driven by international growth, online migration, higher revenue per ticket and strong on sale for live events like the Radio City Christmas Spectacular, Shania Twain, Ringling Brothers Circus, Lion King, and the Florida Marlins. 21 teams are now enrolled in team exchange including the Lakers and the Celtics and we processed 33,000 tickets from session to date.

Ticketfast is now enabled in 1100 venues and customers printed more than 7 million tickets at home in 2003, up 190% from 2002.

On the cross-company front, we're selling Ticketmaster tickets in the Expedia purchase stream and Ticketmaster is now referring customers who are buying ticket outside their billing address to Expedia for travel arrangements.

So if you are in New York and you're buying ticket to a concert in L.A., we'll try to back your travel for you.

We do anticipate fewer stadiums tours in 2004. 2003 was a record year.

But we still expect to deliver high single-digit growth rates for Ticketmaster as we do continue to invest heavily in technology.

On the Personal side, revenue increased 29% although OIBA declined 20%.

This is due to increased investment in building out the domestic and especially the international operations and charges for closing certain U.K. operations of uDate in Q4.

Paid subscriber count increased 30% or 18% excluding uDate.

We continue to launch great product.

We launch a personality matching technology, the first of its kind, that pairs up single using Ph.D.-designed compatibility tests and we launched a pilot for online speed matching.

Users of this service are charged a separate monthly subscription fee, which enables them to meet and talk to multiple dates all from the comfort of their own homes.

On the LendingTree front, as expected fourth quarter results were impact by lower demand for mortgage products, particularly in the refinancing.

The refinancing conditions adversely impacted close rates overall and drove them down although close rates actually improved year-over-year.

We do expect the weakness in the refi market to continue into 2004 but that should be offset by improved conversion metrics and higher volume and purchase mortgages, home equity loans, and real-estate transactions.

Purchase mortgages, which accounted for approximately 30% of our mortgage volume in the first three-quarters of 2003 accounted for 45% of volume in Q4 and are running at 55% of volume in January.

So we are building up purchase mortgages and reducing our dependence on refi pretty quickly.

We also acquired GetSmart, which allows us to offer services to a broader group of consumers and lenders as well as Realestate.com, which is a natural base for creating a broad-based real-estate destination.

EPI had a strong quarter and is making progress migrating its business online, sold approximately half million books on line this year.

On the cross-company front EPI integrated hotels.com into its book and its web product and is running bookings at 300 hotel bookings a day.

EPI members also have access to discounted Ticketmaster inventory as well as HSN and LendingTree offers in the Entertainment Book.

We're also integrating EPI merchant discounts into the Citysearch merchant profiles.

There's a lot of work to be done here.

Citysearch continued its progress and launched dramatically redesigned site in Q4 with search as its main navigation vehicle.

PSP revenues in Q4 were up 14% sequentially from Q3 and we increased the customer PSP locations to 24,000 locations, 3,000 more than at the end of Q3.

We continue to be the local content leader and added nearly 2 million user and editorial ratings during 2003.

Overall, as Barry mentioned, we had over a billion one in free cash flow in 2003 and a $3.3 billion of cash and cash equivalents on our balance sheet not including our VUE securities.

We're in a great position to continue to make aggressive investments in our businesses, technology, marketing, international expansion and customer service all the while growing our bottom line.

We've never been in a better position going forward.

With that I will open it up for questions.

Operator?

Ladies and gentlemen, if you would like to ask a question at this time, please press star 1 on your touch-tone phone.

You will hear a tone indicating that you've been placed in queue, and you may remove yourself at any time from that queue by pressing the pound key.

If you are using a speaker phone you may need to pick up the handset before pressing the numbers.

Again to ask a question, please press star then 1.

Our first question comes from Anthony Noto with Goldman Sachs.

Thank you very much.

Barry, on last call and Analyst Day and today and in the press release you talk about increased competition in travel and also building relationships with suppliers.

Since that time you've had some management changes at hotels.com, you've moved further down the path of integrating what you plan to integrate thus far for hotels.com in the Expedia business.

Wondering if you could do two things.

First, update us on where you are on your key objectives in integrating the business in 2004.

Second, what impact do you think you've seen on the businesses from the management changes.

And I guess one other thing, qualitatively do you feel more confident now since that time has transpired in 2004 about adjusting the specific issues that you mentioned just qualitatively.

And then Dara's remarks, wondering if you could comment on international level profitability and when you expect that to reach profit, specifically in the travel business.

And also on the working capital trends, specifically what's changing in your working capital, are you seeing any payment term changes with the hotel vendors and the suppliers?

Is there anything else going on in your working capital from a revenue recognition standpoint or deferred liabilities?

Thanks.

Got anything else, Anthony?

No, we're happy to comply.

First, on the integration, I mean, integrations are terrible.

They are very difficult to pull off.

I think it's actually a great testament to the people at Expedia and hotels, that with all this change and with the founders of the business leaving because that was inevitable once you began to take the steps that we took, and with all of that change that actually, in fact, that while there's no question but that there was a period of time when people were completely distracted, the fact that they found their desks I think is a miracle.

The truth is that we managed through it pretty well.

As Eric Blachford, who really led this effort said, the first stage of this was to figure out what to do.

The second stage was to actually implement it.

Both those things have taken place.

And now it's really execution.

I have such confidence in the leadership of Expedia in terms of their ability to execute and Expedia, meaning in Eric Blachford, who runs IC Travel, has such confidence in Cheryl Rosner, who's running hotels.com, that I think as this settles down and time settles everything down, but as this settles itself in and it does begin to execute and hotels.com is able to have a differentiated brand using the same supply system, using the joint supply system as Expedia, which we think is long-term more efficient, better for everybody, better for supply, better for everyone, that this is going to turn out just fine.

I mean, it's never pretty to look at as you go through it but as I said I don't want to be redundant about it, I think that the progress that they've made to this date has just been really good.

I think that kind of answers both those questions, so Dara if you can do the latter.

Sure.

On the international profitability, from a raw margin perspective, the international businesses are even, as far as profitability is concerned, with the domestic businesses, but we are spending significantly more in marketing as a percentage of gross profit internationally.

The businesses are much earlier in their development phase, so from a bottom line perspective, the international businesses are less profitable and we expect them to get more profitable next year as they kind of grow into the overhead and the marketing gets more efficient.

Aren't they following an interestingly, when we looked at it the other day, there's this track where, in fact, you look at Exspedia and its development over the first couple of years and then you look at International?

We plotted the International sales growth versus Expedia, and it looks identical to Expedia, I think it's around two years ago as far as what sales growth looks like, and actually the marketing efficiency - -

Didn't it actually.

Recently it exceeded it.

The marketing efficiency looks like it's actually better.

So our hopes - -

History is a prelude, which sometimes it is, often it is, when you get it right, it ought to be okay.

On the working capital front, Anthony, there have been no changes as far as turns, et cetera.

Fourth quarter is historically a fairly low working capital quarter, as a lot of people were coming off of the high travel quarters, and were paying lot of supplier bills, et cetera.

So fourth quarter happens to be negative.

We also added Hotwire to the fold as well, so that has some negative working capital in the fourth quarter.

Q1 and Q2 on the travel side are very, very strong working capital quarters.

So look for good working capital coming up next year.

Great.

One other issue, if you will indulge me, Barry, you had mentioned flat Q1 versus Q1 of 2003.

My sense is you're referring to earnings per share, but probably on EBITDA you would be up on a year-over-year basis given the share counts.

Is that correct?

Anthony, I'll answer that question.

We were talking about OIBA, and I'll lay out some of the issues there with a little bit more specificity.

First of all, like Barry talked about, Q1 of '03 we had very, very high marketing efficiency, which we don't believe that we will be able to replicate our marketing efficiency in Q1 of '04 is looking a lot like kind of Q3 Q4 of '03, so we're going to definitely have difference there.

We will also suffer because of the loss of the Travelocity deal as well because we had Traveocity in Q1 and Q2 of last year, so Q1 '04 will suffer because of Travelocity.

Then in EUVIA last year in HSN International we had a one-time payment from a vendor of around $6.5 million, which was a one-time number we recognized in Q1 and we kind of pointed it out, but we're not going to see that payment this year, so that's going to hurt on the comps.

Ticketmaster as well, last year in Q1 we told you that a lot of the acts were actually moving up on sales to beat the war, so to speak.

So we believe there was around a $5 million shift in OIBA from Q2 to Q1, so again, that's not something that's going to be replicated.

Last year, Barry mentioned EPI, which will be included in our Q1 this year and will have losses of around 11 to $12 million this year versus last year of not being included at all.

EPI, as you know, loses money Q1 through Q3, then makes a whole bunch of money in Q4.

So all of those elements kind of put together gets you to a flattish quarter.

EPI would be a really bad business if not for the fortunate mix in the fourth quarter.

So much for quarters but they are what they are.

Great.

Thank you, guys.

You're welcome.

Next question.

Our next question is from the line of Paul Keung with CIBC.

Two questions.

One on International.

Can you comment on the acceleration of your bookings are you seeing strength by region or is it across the board.

And when I look at the unit economics in the international business is that comparable or is there even greater opportunity?

The second question is on the personals, we're seeing a lot of traction in growth in a lot of newer personal type of business models out there.

Are you seeing dilution at this point as far as how the newer competitors impact that model?

On the International front we're seeing very broad strength but I would point out, the German market is a market in which we're seeing real success even though Germany has a pretty high percentage of online users compared to the rest of Europe, they run low as far as Internet transactions compared to the rest of Europe.

And for some reason it seems in Q4 and Q1 we've just had a lot of traction in Germany, and actually the spend is accelerating there.

As you know, Germany is actually the biggest travel market in Europe.

So we are seeing gross bookings acceleration there and we're putting a lot of marketing money against it but we think it's a worthwhile long-term investment, and there's a lot of room to grow in Germany.

On Personals, Match.com, Match.com consistently has added subscribers over the last six months.

It added, I think, net 35,000 subscribers in January, and it's certainly getting competition.

The only thing I can say about that is, so long as it adds subscribers, it's at 900 - - what is it?

939.

939,000 people every month adding net subscribers, not losing subscribers.

So it's going to have competition.

As I said, so long as it can add subscribers we're quite reach.

Paul, I didn't answer your unit economics question.

On international unit economics, look very much like U.S. unit economics.

The big positive international is that the hotel markets are even more fragmented internationally than they are domestically.

Much higher percentage of hotels tend to be independents, and those hotels are looking for distribution and looking for marketing, and we're there to bring it to them.

Next question.

Our next question comes from the line of Victor Miller with Bear Stearns.

Please go ahead.

Good morning, Barry.

Hi, Victor.

Interactive trades of discounts Yahoo, eBay, and a 50% discount of its 5-year OIBA growth rate target that you mentioned this morning, what factors are driving that right now and how do you hope to narrow that valuation and/or the growth rate gap?

And then Bob Peck is going to have one follow-up.

Thank you.

I think there's an evolution here.

First of all, the thing I would say is, us acting consistently.

One of the things we did at the end of the year is we thought of one goal, really, for each of our businesses if you could really crunch everything down into just saying one thing you wanted each of them to do.

And we came up with things for all of our businesses, and the one thing we came up with for IAC was consistency.

We have obviously undergone a transition over the last year.

We are a, even though we are a kind of simple business in that all of our businesses relate to the Internet we are lot of complicated business doing that.

So, I think it takes time for people to do two things.

First of all, to understand how these businesses relate to each other.

And that's the work really of the next year as I mentioned earlier.

How do they rerate to each other and how is the whole in this case, really not only greater than the parts, but really the whole can't be competed with.

While the parts certainly can we have competition in every year, no one's got the reach we've got, no one's got the relationship with consumers that we have in so many different areas.

So I think people have got to understand it and settle with it, and I think also one of the issues for us is that because we are in so many different business sectors, again, all through this pipe, I think there's so much detail to it that in a way it's a bit of red meat to the market in that you're throwing out all of this information for people to take in, and there's a lot of discounting that goes on and I think the skepticism is fine, but I think it's a bit like kind of bobbing at apples.

What we've got to do is what we've been doing, which is this last period a bit turning inward, getting the place to function correctly, getting this one company concept to work, and doing these things of integration that are really the guts work.

And we pass through the toughest part of that, so this is kind of the - - we think this is the setup year, this is the year to act with this kind of consistency.

I talked about before, and we think we do that and if we don't turn sharp corners, except for some great opportunity, which is always possible, I would believe on the up side, but, I mean, we don't surprise them and do things like that, that people will begin to look at us, and they'll take some of this discounting that they do off of us.

So it's a little bit comprehensive, and I didn't mean to go on too long with it but that's about the best answer I can give.

Victor to do you have any take on this from your point of view?

No, I think that acting more consistently will be important.

I also think that during this year, we're going to be able to show through various metrics and ways in which we operate how things fit together and how these businesses will really grow and sustain quite a huge business over time.

Does that give it to you?

This is Bob Peck.

A follow-up question.

A lot of talk about the corporate space, corporate travel segment.

Could you maybe give us a little more color as far as how large is that segment, how penetrated is it and where you sort of see that going and particularly how the growth within the corporate segment and international may be offset some of the competition you're seeing in your traditional domestic travel business?

Well, corporate travel for us, we're very young at this, and it's really just beginning.

As we've said, we think that over a long period of time corporate travel is going to be half our business, so we certainly believe in it.

We've got, I think, over 1100 accounts that are now part of ECT.

Like any beginning effort it is proving that you can be of service.

These are not decisions that are made like you buy coffee.

These take a long time to work through.

Cycles I think something like nine months in client acquisition.

And then you've got to prove the service through.

So the work that's really been done by the group and by Matt, who runs it, if you get the service right, get the sales force right, begin to prove it through, and begin to build it.

I didn't hear the last part about internationally, so, maybe, Dara, did you?

No.

The specific international thing ,I'm sorry, I just didn't pick it up.

The question is when the international business and the growth in the corporate and the packaging business really overwhelm any potential theoretical loss from the individual travel business, the core business that you have.

One of the things that we think, I talked earlier, there's no question we are diversifying.

We got into - - it purely is an elect active.

Our businesses are doing great.

We got into corporate travel a couple years ago in terms of its embryo saying we were going to attack on it.

And as you know, we've acquired Hotwire, we've consolidated everything.

So I think that it's, as you go it's going to be a mix of kind of the core businesses and new businesses, and it's certainly going to be outside the United States where the growth track is promisingly huge.

And I think what happens is that, again, over time, we're already at this level.

I think what we've got to do is keep proving to consumers what a great service Expedia is.

Of course it's going to have competitive pricing but it's just a great service, as is Hotwire, as is hotels.com, as is Interval as it comes more on line.

We've got to do that and prove to suppliers what is factually true, which is that we're really good marketing partners.

I think if we do those things then, like any business that's grown large, this is no longer some small-time business.

This is a real big business.

We really do believe it's going to get bigger.

But the only way it's going to get bigger is if we really, really work.

I want to say it because I want to keep saying it because it's got to get to be really resounding.

We've got to be of service to consumers, we've got to have great relationships with suppliers, all those things we've got to do.

If we do that, the thing's going to grow, and balance, you know, as anything balances.

Old businesses, new businesses, et cetera.

Victor.

One of the things we're doing, we're spending this year over a hundred million dollars on growth businesses that are going to pay off in the future, and we're going to spend significant money.

So I think all of this leaves us, when we talk about where we think this business can be over the next five years and kind of the growth rate, to have real confidence that we can achieve those goals.

Thanks very much.

Next question, please.

Our next question comes from the line of Jeetil Patel with Deutsche Bank Securities.

Please go ahead.

Can you talk about, broadly, overall online landscape how it's shaping up after post-analyst meeting, what you've seen to date in terms of marking vis-a-vis some of your friends in the industry as well as on the hotel relationship side, any changes in terms of how your competitors are approaching the market that may be different or unique here over the past couple of months.

And secondly, as you look at the travel business can you just give us a sense of, you know, in terms of ranking, between Expedia, Hotwire, hotels, and Interval, how do you think growth rates play out for 2004?

Not percentages, but just how they rank out qualitatively.

Well, you know, I kind of talked all this, but, you know, in the earlier part of this, I said that we've got the five top hotel chains.

We've just announced the new deal with Marriott.

Talked about our supplier relationships.

Our competition, certainly we have, and will continue to have more competition.

How could we not?

I mean, certainly Travelocity is a solid, good competitor, and so is Orbitz, but we've said we think we can maintain and grow our share.

So the issue for us, without being overly redundant, we don't see anything - - one thing we see from the fourth quarter is the fourth quarter was better than we thought it was going to be at let's say the one-month, one-third part, half part of the quarter, from where it ended up.

We told you that the margins for both Expedia and hotels were flat from a year ago.

We know there's enormous concern about margins, and we keep - - people say to us that will you stop not telling us that margins are going to crash, because they say it's not credible, and we keep saying, well, here's the deal, people, it is not only credible, it's true, they haven't.

We don't anticipate that - - everything we know says that we do not - - that we do not anticipate that they will, so at least in that area, you know, we couldn't be firmer about what we're telling you.

So I think I've kind of answered it again.

Dara remarks anything on that last piece, if you understood it?

Sure, as far as the growth rates, Hotwire is probably going to grow faster than the others just because it's growing from a smaller base.

Expedia and hotels.com are going to grow, we think, at similar rates, although hotels.com growth rate is going to be affected by Travelocity and losing the affiliate agreement.

Then Interval is going to come in, and just because interval is a hybrid online/offline business, so it's not quite the pure play as the other businesses.

If you asked me to rank them, that's how I'd rank them.

Quick follow up, direct connectivity, how strategic is that technology platform that you're creating and how far are you along in, you know, I think you already talked about this, but do you think that that process will be complete by year end in terms of having it out in the marketplace and fully deployed?

It's definitely out in the marketplace now.

As far deployment is, I don't know if we've got anything specific on the deployment, although I think we recently announced another few large chains that had gone with new trade connection.

Like anything we think it will be picked up over time and adopted, and it's a great tool for everybody.

It stops the fax business, which is the way the whole thing used to run, and is really solid technology, so nothing's going to stop its everyday kind of connectivity.

Just on specifics, Hyatt and outrigger have direct-connected to Expedia through the new trade technology and we expect to roll it out very aggressively this year.

We're not sure exactly what the roll-out is going to be but it will be multiples of we are right now because the technology is there and it's now just a roll-out issue.

The big push here is cost, the transaction savings for the hotels.

We think that new trade can save up to 7% of transaction processing cost, which obviously is a big deal for hotels and makes them a better partner on a go forward basis.

Next question please.

Our next question comes from the line of Safa Rashtchy with Piper Jaffray.

Good morning.

Could you talk about the growth rate that you expect to see in the core on-line travel?

I understand you look at the entire travel group as one entity, but in reality they do operate in different areas with vastly different growth rates.

It would help us enormously if we could have a sense of how you're seeing the online part of your travel sector growing along with compared to industry.

And a quick follow-up, if I may, Barry, especially in light of your talk about the emerging bubble, can you update us on your view on acquisitions going forward and how you intend to add additional verticals to the current setup?

Thank you.

Safa, just on the growth of our core business, it's very difficult to predict growth but our expectation is that our core business in the U.S. is going to grow as fast as the overall online travel market in the U.S., so we're aiming to retain share internationally and with corporate travel, et cetera, we expect supercharged growth, we're investing very, very heavily, so the overall growth rate we expect to be higher than the domestic on line travel growth rate.

That's how we're playing it.

On acquisitions, look, here is what we can say about this beyond what I said before, which is that the - - one thing I can tell what you we're not going to do.

We are not going to pay valuations we think make no sense.

We recognize that people who've invested in businesses and have an IPO market where they're looking at going out at some, I mean, just stuff that makes, of course, no sense, we're hardly going to take them out before their time at the level before - - we're not hardly going to interrupt that process before these businesses go out.

And we've already within through this now, I don't know, Victor, would you say ten times in the last six or eight months, where - -

At least.

Where we get into discussions with people and they say, well, you know it's a billion, billion two, billion three.

How much are you making?

We'll make maybe a million four this year.

You go, well, no, I don't think so.

So what we're doing is a series of things.

First of all, there are, we believe, and we are in discussions with businesses, that we think we can acquire on a sound basis.

So I do think that's going to happen.

Secondly, we've reorganized all of our strategic planning and strategy and interactive development in the company in a way that on one side, mergers and acquisitions group, on the other side the interactive development group.

The interactive development group in this company is going to start businesses.

They are going to start business that we believe in, we will fully finance those, they are in areas, either some are in some slight extension to what we do, some are in totally different, as would you say, you know, hopeful verticals, hopeful stand-alone side business, I say hopeful only because, you know, a vertical is a high known word, that will start with our capital, we will find entrepreneurs to run them, and we'll build businesses on our own.

And I do believe that from small to medium to large, opportunity is going to come up, we're not hungry for it in that sense, but opportunities are going to come up that will be sound, hopefully.

So I can say it this way.

Those we'll do.

The ones that make no sense make no sense.

Hopefully, we ought to be able to tell the difference.

I think we've always said that we're willing to walk away from anything if it makes no economic sense, and that won't change.

Next question.

Our next question comes from the line of Gordon Hodge with Thomas Weisel Partners.

Please go ahead.

Good morning.

Just want to clarify one more time just on the OIBA, the first quarter.

I gather when you're talking about flat you're talking about flat versus reported of 173.9 last year.

Correct me if I'm wrong, unless it were a pro forma number.

Also, if you could just talk although bit more about seasonality of EPI, and Dara, I don't know if you have the quarterly progression from last year that would help us a lot.

Thanks.

EPI, I'll do this.

The way EPI works is it basically sells its subscription.

They all kind of turn to account in the fourth quarter, and the rest of the year is the planning process for that.

There is some summer business that they have been able to do in a couple of other categories that are not tied to the fund-raising part of selling the actual Entertainment Books.

Dara, you want to talk about the rest of it?

Let me add to that.

On EPI, part of the reason, for example, the first quarter, we'll have such a large loss is that we're spending money on moving EPI on line, and all of their initiatives.

Cost money, good money, that will pay off later but we are definitely spending in that area.

But I guess, was last year an up year for EPI in terms of profitability in aggregate?

In aggregate the growth of EPI has been approximately 3 to 5%.

That's kind of the organic growth of EPI.

Historically EPI, as I think most of you know, one of the things about EPI, good and bad, I mean, the good is that it's, it was like a rock.

It had a great business selling seven, eight million books a year, year in and year out, really good sales force, but very little growth, 99% offline, actually really totally offline, our work is to bring it online.

We think that when you bring it online, we think that when you tie to the Citysearch and are able to throw - - and everything else, by the way, in our little vineyard, and you're able to throw targeted discounts to people online instantly we think the business, frankly, explodes.

Now, when does this happen?

Not right away, that's why we're investing, as Victor said, in the first quarter, that's why, as the year goes on, the reason we put this under Anne Busquet, not that there's anything about the really good leadership of Alan, but EPI, Citysearch and Evite need to be under one roof for exactly these purposes.

What we have in Entertainment publications is an actually truly unique discount product that is very, very local.

And if we can take that, and instead of having a fat book, which is not a terrible thing, but it is a fat book, and make that an online experience, and we can tie to the Citysearch, and tie it to lots of other of our service, for instance, at Expedia, you're going to New York, or you're going to Ohio, and we can throw you a targeted discount either a second before you leave, when you get there, et cetera.

So it has to me explosive growth.

I went on a bit about it but I do think people should understand our strategy with regard to these things.

Just to add, its core business is earning exactly what we thought it would when we bought the company so we're very pleased.

Just on Barry's EPI example we actually have a pilot now where if you do back a hotel on hotels.com in New York or in Ohio you will get sent to you a couple of offers to eat at restaurants nearby for 50% off.

So it's live now and we're pushing this today.

As far as your question on the OIBA comp, that is correct.

The 173.9 is what we're talking about.

Thank you very much.

Next question.

Next question comes from the line of Darrell Smith with J.P. Morgan.

Please go ahead.

Two questions.

One is, with your recent Marriott deal you announced last week, clearly you get more guaranteed volume but it also appears you agreed to not cut direct deals with the franchise properties.

Given the predominance of franchise hotels in the U.S. hotel business, how much is this type of deal hurt your ability to stabilize your long-term gross margin trends?

Secondly, if you look at the HSN business, EBITDA or OIBA numbers expand while gross margins actually fell.

What is behind that margin expansion here and why are we not seeing gross margin expansion given the product shift to higher margin product?

Thanks.

Wait, wait.

Sorry.

Dara, go.

On the second pointed, gross margins increased.

They didn't decrease.

So I'll look into that, or maybe you can talk to IR about that.

The point of the deal with Marriott we now have deals with the five major chains but those five major chains account for less than 20% of our book net revenue, so there's still a significant amount of fragmentation, and actually on a go-forward base even though we certainly want to have deals with all five chains we don't think it's something that we need from a consumer standpoint, that there's plenty of choice to go on.

So the Marriott deals, the other deals, really don't push down our margins that much because we're not dependent on them.

And they're - - sorry, go ahead.

Sorry.

Next question.

Our next question comes from the line of Peter Mirsky with Oppenheimer.

Thank you very much.

Couple quick things.

On Ticketmaster, what was the percentage of tickets sold on line?

Second, share buybacks, any thought on increasing your buyback?

Finally, Barry, you talked a lot about the local service segment.

Obviously the opportunity's significant but does the increased opportunity, in your mind, increase your tolerance for losses?

Okay.

Well, having been thrown by third, I would like to ask you what the first question was.

What was the first question?

The first question was Ticketmaster.

Ticketmaster is about 50% online, and, you know, it speaks.

Sometimes you get up to 85%, huge online for certain events and stuff, but the average is about 50%.

It's pretty good.

One of the things people don't understand about Ticketmaster is that its distribution infrastructure is very broad.

It is not only telephone-based, Internet based, et cetera, but it's got thousands of outlets for people who actually walk and talk and buy ticket at the same time.

So the 50%, we think, will maybe go up a bit over time.

It will search spike up higher even than it is now at various times but that's kind of a healthy thing.

As far - - and I wrote down the second one and I can't read my writing.

Buybacks.

Aha, buybacks.

We bought back, for those of you who thought we never would, and we're always looking at the capitalization, we've talked endlessly before, no reason to talk about it now, about how strong we are in terms of that, to some degree, some would say overcapitalized, and we talked about lack of acquisitions.

Now, you can, therefore, kind of think through that one and see what we'll do in this area, because obviously we're not going to make any announcements in this regard.

We're certainly going to be opportunistic about it.

Victor to anything else to say about it?

No, just really to repeat that we have three uses for our capital, invest in our own businesses, invest in acquisitions or buy back stock, and think as we've done in the past we'll use all three.

Now, let me turn to the third, which is appetite for losses.

Let me be clear with you about a couple things.

First of all, Citysearch itself is planned to break even at, I think, I don't know, is it the third or 4th?

To reach break-even by Q4 but we do expect losses during the year.

We'll probably have some more losses.

By the way, every quarter has been less of a loss than the previous quarter.

We expect that's going to continue.

On our way towards Citysearch itself breaking even.

And if Citysearch itself breaks even it will tell you a great deal, we think, about that category.

Separate and apart from that we think local is a great area, and we're going to make investments there.

Now, that's investments, investments, I don't see any reason not to look at them as losses.

We look at them as opportunities.

I mean, it is a totally different category.

And we've got enough room, we believe, to achieve the growth we've talked about while making prudent investments in lots of areas, and local certainly is one of them.

How much, et cetera, et cetera, we can't really tell you now but we have not at all lost our appetite.

But I would tell you that if we did not - - if we were not able to bring the city seven basic service, which is now generating real revenue, to bring that basic service into line with break-even and profitability, then that would dim lots of our hopes elsewhere.

It just, in a way, it's a way of differentiating the two.

One, it's got a lot of discipline on it, and the other, which is the local area itself, we can find ways to invest there that we think make sense we're going to do so.

Great.

That's actually exactly what I was looking for.

Thank you.

There was also another question about gross margins that I misunderstood.

I thought the gross margin question was about the company about HSN, the question was about HSN gross margins, why it went down and why our OIBA margins went up.

The Q4 margins went down because we add lower percentage of jewelry sold in Q4 and a higher percentage of electronics, which were very successful, and even though gross profit margins went down we were able to push much more sales and the HSN cost base is relatively fixed, so the higher sales number was able to translate into a higher OIBA margin.

We also had relatively less depreciation than we had last year because are some conservatism in cap ex, so all of those together helped us push OIBA margins up.

The other thing, HSN is just executing really, really well.

Tom McInerney, Marty Nealon, the new President of HSN, are a go-forward, great team, great business person tied to a great merchant.

You could not be in a better position than where we are, and the whole place is working.

Our reentry into selling computers, this time as against last time when it was primarily used to really just push, push the top line while really cratering the bottom, it was not a sound business, this time it's really a sound business.

I mean, we sold I think just in the last few months alone, $40 million of computers between the two sales, and you look at that product that we offer, and the way we explain it and sell it, it's a great medium to do so.

We end up with $25 million dollars, $16 million days on one product line, I mean, it's pretty good.

So we think electronics this time and the diversity of electronics that we're offering is much, much healthier.

Gateway's been a great partner to us, and that's what I know about that.

Dara remarks anything to add?

No, just the small electronics, computers, were $42.5 million in Q4.

Off by 2.5 million?

I'm not ashamed of that.

Let's do one or two more questions and then we'll leave you be.

Our next question comes from the line of Tom Underwood with Legg Mason.

I was trying to get a better understanding of the magnitude of the lack of advertising effectiveness for travel in Q1, just in terms of your expectations.

I believe the you did about $104 million in terms of OIBA and travel last year on $545 million in revenue, which was under the old accounting, but still it appears that if you were to maintain comparable margins you would have, while excluding the overhead, you'd have an incremental $60 million or so in operating income before advertising that you could either spend in advertising, which would hopefully have some return, or have it come down to the bottom line.

Just wondering what you think about - - well what OIBA will look like for travel services in the first quarter and if you could just give us a little bit of clarity in terms of the magnitude of the advertising effectiveness.

We don't break out OIBA by segment quarterly, so I can't be specific about the numbers but the advertising shortfall, it's not really a shortfall, it's continued - - if we assume that our advertising efficiency stays similar to what it was in kind of Q3/Q4 it's just got going to match up to the advertising efficiency that we saw in Q1 of last year.

It's a very tough comp to go against and that along with the loss of Travelocity, which was a pretty efficient channel, combined to make at tough comparable for travel in Q1.

There are additional negative comps as well as we went through EPI as I listed, so all that together gets you to the flattish Q1 is.

One thing I'm going to add to this on marketing, just for a minute.

We seem to scare a lot of people when we talked a few months ago that we add marketing budget that was in excess of $900 million.

In a way, I did it because I just wanted people to understand just how large an enterprise this is getting to be and how many areas we were in.

My view is, any company that could aggressively make that kind of plan for marketing certainly expecting to solidify its growth, it share, et cetera, et cetera, but you have to understand in marketing, in terms of laying it out for the future, already that marketing budget when it gets worked into everything I think has come down by some amount, and it's, as Dara said, he said, you know, marketing, follow the money it's opportunistic and often contradictory.

Meaning contradictory in the sense that at some point you're going for this and you're going for one thing where you have a marketing plan and it may contradict some other metric that you're using.

The truth is, is that we do, through our various areas of activity, we know a lot about this area.

We know, I think on on-line marketing, I'm not saying there ain't somebody who those more than us, but we really do know a great daily about on-line markedly.

Offline, we're up there with the rest of the dopes, making spots, trying to do the best we can to excite the consumer on an institutional basis or on a generic basis.

Marketing should not, I think, be misunderstood by people that in some way we're either shoving some dumb money into the middle of the table and it's going to sit there in some pot just to be picked apart for the year.

Everyday it gets adjusted, some of it you can look at on an every hour base and tell exactly what it's delivering.

And the offline, you can't do that.

So it's something that I think it's hard for people, and given these big gross numbers, probably just kind of mistakes meaning.

So there it is on marketing.

Great.

And then just was wondering as a follow-up if you could give us a little bit better idea of how travel is now structured upon the integration of hotels.com into Expedia.

In other words, what portion of hotels.com is being handled out of Bellview and what portion is Cheryl responsible for?

Is that primarily the marketing side, and have supplier relations pretty much moved to be one entity at this point?

We've said this before but happy to repeat it again for clarity.

Supply is being handled by, one, actually - - I mean, independent group in the sense that the supply is delivered to both Expedia and to hotels.com by one organization led by Lloyd Frank, the founder of our hotel merchant business, and does he live in - - I don't know where he lives.

He could live in Africa, but he spends most of his time in Seattle.

But Cheryl Rosner is responsible for the brand, and is responsible for all marketing, and making the product, the hotels.com product differentiated and as appealing as it can possibly be to consumers.

And operation in technology also report into one IACT group.

It hasn't been fully integrated, but it will be integrated as it makes sense on a forward basis.

One last question.

That will be from the line of Doug [INAUDIBLE] with Lehman Brothers.

Thank you.

In the earlier days of the merchant model some of the properties did take on a slightly higher percentage of prepaid rooms with inventory risk.

Just wondering going forward if you can see any scenario in which the inventory risk could increase or if that's come up in recent discussions for contracts.

The answer is who knows.

Right now we're in a pretty good position as far as the value proposition that we give to our hotel partners and we don't have to take much inventory risk, but on a go-forward basis we're going to be flexible and we'll look at it.

Right now, it's just not something that's asked for, and as far as negotiations go it's not something that we need to do.

With that, thank you all very much for your time.

Appreciate your listening to us.

We'll be because again next time, so in the interim, the IR department, Roger, Erin, et cetera, are available to talk to you and answer your questions and we'll certainly answer any questions that we have.

So thank you very much, have a nice day.

See you soon.

Ladies and gentlemen that does conclude our conference for today.

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