Match Group Inc (MTCH) 2004 Q2 法說會逐字稿

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

At this time all telephone participants are in a listen-only mode, and later we'll conduct a question-and-answer session.

The instructions will be given at that time.

If you should require assistance during the call, please press star, then 0.

As a reminder this conference is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Roger Clark.

Please go ahead, sir.

Thank you, Lori, and good afternoon everyone.

Joining me on the call is Barry Diller, Chairman and CEO, Victor Kaufman, Vice Chairman, and Dara Khosrowshahi, Executive Vice President and Chief Financial Officer.

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

Also you're aware that there are risks and uncertainties associated 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 in the Investor Relations section of our website for all comparable GAAP measures and full reconciliations.

With that, Dara will make some opening comments, then we'll go to your questions.

Thanks, Roger.

I'm going to keep my remarks short so that we can have plenty of time to answer your questions.

Overall we had a good quarter with revenue up 17% on a comparable net basis.

As many of you are probably aware, as of Q1 we changed the way that our Hotels.com subsidiary recognized revenue for merchant hotel bookings.

So instead of recording the full price the customer pays for a room as revenue, we now record the net margin that we receive which we refer to as net revenue.

Since this was as a result of the change in Hotels.com business practices we have not restated the prior year's results.

When we discuss our revenue growth on a comparable net basis we compare this period's revenue to the prior-year's period on an apples to apples basis.

That is, if both were treated on a net basis.

So, while IAC's revenue was down 2% on a GAAP reported basis it was up 17% on a comparable net basis.

That is apples to apples.

None of this affects any of the results of our other businesses or our bottom line metrics.

Operating income before amortization came in at 250 million up 23%, significantly better than our previous expectations of growth at or slightly above our Q1 growth rate of 14%.

If you exclude a $6.4 million benefit that we recognized this quarter at IACT due to the resolution of a contract dispute, IAC's operating income before amortization growth would have been 20%.

This translated to adjusted EPS of 22 cents a share up from -- up 22% from 18 cents a share in the prior-period.

We also demonstrated the operating leverage in our business mix with operating income before amortization margins on a net basis improving from 15.8% and the year-ago period to 16.7% this quarter.

The diversification of our business mix allows us to use returns from one business, and this quarter, for example, Ticketmaster, which had very strong results, to invest in our other businesses such as local and media.

We also continue to demonstrate significant cash generation capabilities of our businesses with cash flow from operations of $975 million and free cash flow of $873 million over the first 6 months of the year.

Now, free cash flow in Q2 of '04 was lower than free cash flow in Q2 of '03 primarily due to lower growth in working capital this year because of very strong Q1 bookings in '04, and high deferred merchant bookings and payables at the end of Q1 of this year. (TM) Ticketmaster's client cash also decreased this quarter due to timing and we also invested in HSN U.S.'s new Tennessee Distribution Facility.

Remember, too, that our cash flows are seasonal with where the first two quarters of the year counting for the highest cash flow due to the Q1 and Q2 peak travel booking periods.

We do expect to pay cash taxes in Q3 and Q4 where as last year we were not a cash taxpayer.

Let me talk a little bit about travel now.

Gross bookings were 3.4 billion, up 31% versus last year and down slightly versus Q1.

This is the first quarter that we have reported a sequential growth bookings decline from Q1 to Q2 so some of you may be asking why.

Here are the reasons: First, our core business is starting to exhibit some of the normal seasonality of overall travel where Q1 is typically the strongest booking quarter and bookings declined throughout the year.

You're seeing this with a number of internet businesses like eBay that are taking on the characteristics of their underlying business as they mature.

Second, we deliberately trend some of our less efficient on-line marketing expenses which may have left some business on the table.

Third, we've been seeing as we discussed more competition from other third-party distributors, promotion by hotel chains with their own direct sites, and a more challenging supply environment resulting from recent increases in hotel occupancy rates.

Where as last year we saw a big jump in conversion from Q1 to Q2 as Hotels released more inventory for the summer periods we did not see that to the same extent this year.

Fourth, Q2 was a tough quarter for all the European travel players on-line and off-line.

While we didn't grow bookings quite as fast as we would have liked to we think we substantially increased our lead over our local competition.

And lastly Hotwire results have been relatively disappointed due to high loan factors for airlines this has resulted in lower than usual discounts on Hotwire versus airfares, which has hurt our consumer proposition, and as a result of bookings.

We don't know when this trend will reverse itself, but we are working actively with our airline partners to secure attractive inventory and improve our products.

Despite these issues we grew roughly in line with the other full-service players in the travel area.

Our growth booking led to travel revenue of 556 million up 34% on a comparable net basis and operating income before amortization of 171 million, up 29%.

Now, this implies an operating income before amortization margin of 29.5%, excluding the 6.4 million benefit that we recognized this quarter at IACT.

This compares to a 25.8% margin last quarter and a 32.1% margin last year in Q2.

Much of the margin contraction versus last year, however, is due to our continued investments in expanding the travel markets we serve.

If you exclude International, ECT, Classic Custom Vacations, and Hotwire along with the 6.4 million benefit we took this quarter, IACT core operating income before amortization margins would have been well-above 35%, and actually would have increased 1.6% against the prior-year-period.

So don't let our investments in these businesses lead you to believe that our core businesses are not sound.

We believe travel operating margins for the rest of the year should stay roughly in line, with our margins in Q2, again excluding the benefits.

And hotel well-margins continue to be in the mid 20% range down 80 base points over Q2 of last year, which is consistent with 100 basis points that we expected at the beginning of the year for the full-year.

On the International front Expedia launched new full-service sites in France and Italy and in the first 6 days after launch 50% of our air tickets in Italy were part of an E-package.

We also announced our first 4-A into the Asia/Pacific Region with our $60 million investment in eLong, the No. 2 on-line travel company in China.

The China travel market is the most exciting, fastest growing market in the world with 87 billion in travel booked 2003 growing to 300 billion in 2014, a minimal on-line travel penetration.

Going to on-line travel sector is certainly one of the more competitive spaces on the Internet with market dynamics that are still shifting, we are the only true global on-line player with robust and scalable platforms in leisure, business, premium, and discount travel.

Now, on to the rest of our larger businesses.

HSN U.S.'s positive momentum continues this quarter sales have been up an average of 11% over the past four quarters.

Operating margins in this quarter were lower than last year due to our customer service improvement initiatives, increased spending in our direct response television and catalog groups, and increased cable distribution costs.

Going forward we expect margins to improve in the second half of the year compared to Q2.

We are off to a great start to Q3 and have already had 2, $10 million non-computer days.

On the 18th of July, we had a $10 million day with sales up 56% versus last year and 45% product margins up 65%.

On the 24th we had another $10 million day with sales up 46% versus last year, 48% product margins, up 145% over last year.

So, so far we're having a great month and all of this is traditionally not a big shopping month.

The ticketing business grew operating income before amortization 29% on 4% revenue growth despite a difficult summer concert season.

We had a number of event cancellations that first ticket sales, but we were still able to draw great bottom line results due to terrific executions from the ticketing team.

As the business grows we continue to invest in new technologies such as ticket alert and auctions.

A little bit about auctions.

We launched them in late 2003 and to date have run 101 auctions resulting in average increase of 139% over the fixed price charge for similar seats by the venue.

Let me highlight one extraordinary example.

This last quarter we auctioned 60 tickets for 3 Stanley Cup final games.

Some of the seats were great, some were not so great.

They had a face value of $19,000, and we sold them for $125,000.

Those are all dollars going through our venue partners rather than scalpers.

Let me finish with our current 2004 outlook.

We're forecasting full-year operating income before amortization of approximately $1 billion.

We think we'll come in at the low-end of our original range predominantly due to a couple of our businesses, which I'll highlight.

First, we already discussed Hotwire.

And while we're working with our supply partners to improve our product and to improve our results we don't expect significant movement until Q4 or the beginning of next year.

Based on Q2 -- Second, based on Q2 and recent results we do expect some weakness at Hotels.com for the balance of the year due to a combination of higher marketing costs and lower conversion trends which we believe are due to tighter room inventory and availability at competitive pricing, and a larger Metropolitan areas where Hotels.com has had a very strong presence.

Third, as you know results at HSN Germany and Euvia, our German call-in business, have been disappointing both against last year's results and our expectations going into this year.

While we're addressing some of these issues and are building up our local merchandising team at HSN Germany, we don't think that this is a short-term fix.

We've seen some promising signs at Euvia due to recent changes we've made to our programming formats, but it's too soon to tell whether we'll have real traction this year or not.

Fourth, top and bottom line growth of match have also been weaker than we originally expected, and although we do expect to see some improvements from subscriber and revenue per subscribers for the balance of the year, we are behind where we wanted to be.

Playing catch-up against budgets in these kinds of subscription businesses is very difficult.

We continue to spend on the match international platform and are seeing nice progress there, although we're still a bit away from break-even.

Lastly, as I mentioned before, our international travel businesses were affected by a difficult travel environment in Europe that was very broad-based and pretty much hurt all the European travel operators on-line or off-line as best we know.

We are, however, off to a great start in July and under Simon, Breakwell, and [Tue,] we think we can reach profitability later this year and certainly in '05 and beyond.

Now, we don't take any of these issues lightly and are addressing all of them with a real focus and moment.

While they present execution challenges we think that these businesses can return to a growth path in relatively short order.

In the meantime with our core travel, ticketing, and U.S. electronic retailing businesses fundamentally sound, our developing finance, service, local, and media businesses starting to hit their strides and an incredibly strong balance sheet with $3.8 billion in cash and marketable securities we believe we are very well positioned for growth next year and beyond.

With that I will open it up to questions.

Operator?

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

You'll hear tone indicating you've been placed in queue and you may remove yourself from the queue by pressing the # key.

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Once again if you have a question please press star, then 1 at this time.

One moment, please, for the first question .

And our first question is from the line of Anthony Noto with Goldman Sachs.

Please go ahead.

Thank you.

Hey Dara, I was wondering, and I don't know if Barry is there so I'll direct this question to him as well.

But I was wondering if you could separate for us the differences between in the reduced outlook for the back half of the year?

My estimate is that you're calling for now 14% EBITDA in the back half of the year.

Could you provide some detail for us on what you expect in revenue growth for the second half of the year and separate for us what you see as cyclical challenges versus execution?

And then secondly, given the reduced outlook for growth in the back half of the year relative to your analyst day a year ago, you talked about long-term growth rates.

Have you changed those long-term growth rates?

And then I have a follow-up, thanks.

Anthony on the revenue side we haven't given any kind of revenue guns for the second half of the year.

But revenue growth should be similar to the first half except in Q4 where we had kind of an unusual reversal in Q4.

That was a $22.4 million item which threw things off.

As far as cyclicality goes, you know, Q1 tends to be a very, very strong booking quarter, but margins for travel tend to be lower than the rest of the year.

Q2 as you saw margins and travel came up, and we expect that margins for the balance of the year in travel are going to be roughly comparable to what they were in Q2.

So that's kind of the cyclicality.

We are going to see in -- for revenue in Q3 we are going see some of the effects of the gross bookings that you saw in Q2.

So the revenue is to some extent going to be trailing gross bookings growth and reflecting gross bookings growth.

We do think that, I mean, the cyclicality so to speak, there are no real structural issues here.

I mean, if you look at these and if you dig deep into this of course, there are some supply issues, and, of course, the second quarter was probably the deepest cut of it.

Certainly internationally where all travel was down and is beginning I think to rebound.

But other than that and other than Hotwire, which is definitely a significant issue, we don't think, again, it's structural.

We don't think it's long term.

We think that the supply issues that we have had that have given us a lesser discounts as the year progresses, we don't think it's going to come back fast, but we definitely think it will come back.

So I don't think there's anything in any of our businesses -- there's comparability, of course, given the kick from last year's war, fear, and explosion when we had all the inventory, all at really good prices.

To this second quarter where, in fact, we had in a sense the -- not the reverse of it, but just the comps piling over those comps was impossible.

The comps as the year go on I think, get better, and again I think the issues for us are that it's certainly an environment of competition.

But Expedia, and Hotels, and including Hotwire are travel services have I mean, have such a great lead and have maintained it, certainly maintained share, in this period, and are, you know, probably in terms of combined power 2 times plus the combined competition.

So the issue for us, of course, is the investments that we've made, the marketing that we've spent, as you know in the second quarter margins improved because we -- the marketing was somewhat more efficient so our margins have gone up.

There are no issues about gross margins.

They're coming down to within that 100 basis points we said we thought they would.

I think they've gone from 75 to 80 in the second quarter, down 75 to 80 base points, and that's okay.

The net margins are up from 25.8 to 30. -- 29.5, 30 -- sorry, I thought it was a little more than 29.

That includes the benefit, if you take out the 6.4 million, it is 29.5.

Oh, if you take that out.

If you add it in, it's what?

30 points.

Whatever, 29, 30.

So all of these issues that we have confronted really for this period of the year it's not going to -- what's not going to happen is, is that it's not going to reverse itself instantly in the third and fourth quarter.

But we think the third and fourth quarter is certainly going to improve.

And we think that we're certainly poised given the fact that our market -- that our share is completely stable and given that the reach, the demand, is there.

Actually, we've increased the demand by 20 some odd percent -- meaning the amount of people that go to Expedia, type it in or get to it is 20% greater than it was last year same-period.

Reach for SpeedyHotels.com combined Q2 with up over 30% versus last year so reach is very, very healthy.

So given those factors there's nothing in the businesses, the actual businesses themselves that concern us.

I was wondering given that cyclical challenges that you have, the competitive challenges that you have, and the amount of cash you have in your balance sheet, will you focus less on acquisitions, more on sort of operating through this environment?

And then could you update us on the stock repurchase program?

I know that you've bought 8 million shares quarter-to-date, which is down from 30 million shares in the back half of last year.

If you could just layout for us sort of the balance of running the businesses versus acquisition?

And then will you be more aggressive with the cash, and even thinking about if there's greater weakness than you think there should be in the stock how aggressive you could be?

Thanks.

Yeah, first of all in terms of acquisitions we've been very tight and focused on acquisitions.

I think people sometimes make a mistake with us because we talk about all ranges of things we could do and then, in fact, the things we do are extremely practical in terms of line extensions.

If you look at our acquisitions over the last period since we bought in the shares the acquisitions that we've made, which are total about a billion 2, over now I guess it's a little over a year-period, I think.

Go from including ServiceMagic which was just done, which is we think just a terrific local media business for us.

But in eLong in China, in travel, a perfect thing for to us do.

Activity World, [Ingensia,] travel pieces to add on to our European travel businesses, TripAdvisor, great book media business, and, I mean, I think it's, what, the 9th most visited site on the Internet.

Travel.

I'm sorry, travel on the Internet.

Thank you.

Certainly not the Internet.

Was a great addition for us.

Real-Estate.com and GetSmart for LendingTree's real estate businesses, very forced.

By the way I'm talking about acquisitions, the ones that I've just mentioned, the highest priced one was 200 million for TripAdvisor.

Hotwire which is certainly is having some early difficulty, but we think Hotwire plays in a niche that's going to be around forever and it will come through.

So our focus on acquisitions is going to be we think, other than things that could come along that you don't know about.

But instead our focus has been very disciplined over this last period we believe, to enhance the businesses we have, and to get into some nearby allied areas.

I think you would find us not like diving into, you know, to acquisitions that were so to speak, speculative or would make people think that we are simply extending an oar, just putting another oar in the water.

As far as stock is concerned the fact is that we would prefer, and if you say what do we really want to do with our capital?

Is we do want to invest in the business organically.

We want to grow through these complimentary acquisitions and we'll buy back stock opportunistically.

So we've done, so and certainly we'll continue to do so, and that's what you should really look to.

There's nothing more really to say about specifically.

We bought back 8 million shares this quarter, certainly bought back a lot last year, and you can look to us in the future to as I say, invest in our businesses and act opportunistically.

I also want to add to that that since our LendingTree acquisition every transaction that we have announced has been a cash transaction.

So we are able to use the free cash flow that our businesses throw off and allocate that capital to grow the business both internally and externally.

And our ability to fund these acquisitions through internally generate the cash, we think is a real advantage that we have over other competitors in the marketplace.

Next.

Thank you.

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

Please go ahead.

Hi.

It's Bob Peck here with Victor.

Just 2 quick questions and then I'll give it to Victor for a follow-up.

First, of all on the Revline, the Travel Revline, could you break out what Hotwire's revs were this quarter, as well as the FX benefit we saw?

And then I wanted to see if Barry, can give us more granularity on competition?

Where are you seeing the bulk of the competition coming from?

How are you being affected by the Marriott.coms versus say the Travelocitys of this world?

And then Victor Miller will take a question.

Just on the revenue side we don't break out revenue kind of by business line Hotwire, But on the FX side, we had a slight FX benefit, so around -- we had, for IAC Travel the FX benefit was around $6 million, so not including that the revenue growth would have been I think it's 33%.

Let me talk about competition a bit.

First of all Marriott is a very good partner of ours.

Look at the competition from the following areas.

First of all the hotel sites.

The Hotel sites a year or so ago to 2, 3 years ago were having a lot of difficulties.

The last thing they were going to do was to plows themselves into Internet life, to online life directly.

They have of course, improved their situations, Hotels are doing pretty well, occupancy rates are up, revenue -- REVPAR is up.

So Hotels have gotten themselves together in terms of their sites.

They don't account for a very large part of our business, these hotel chains, and while they're certainly more competitive and they're certainly rate issue -- one of the things that we believe and we have found is that people are on Expedia and on Hotels for more than simply the rate.

The issue is we certainly will have parody and we'll certainly have discounts where the discounts can be.

But we don't think the competitive environment vis-a-vis Hotel Direct sites is in any way changing the dynamics of the business.

You look at our competition.

Travelocity has definitely done better, Orbitz came out the other day and it's okay.

We don't see, frankly, I mean, we are maintaining our share.

We think that our share will probably drop a couple of points.

But our share is so -- we have such a wide leadership gap that that certainly doesn't concern us.

There's nothing that we have seen on the competitive scene that says to us that actually the structural strength of our businesses is at all in question.

We continue, as you know, to spend a lot of money in marketing.

We're going to continue obviously, to be aggressive, though we're definitely making marketing more efficient and we should and you will see that continue.

But I don't think that anybody is going to take, so to speak, share away from us through any marketing channel.

So I think while there is more competition what I also think is -- will happen is that this pie is going to grow larger, and it will digest itself fine with us maintaining our leadership.

We are already, I think, we're No. 4 in travel on- or off-line, maybe we're 5 moving to 4 or something.

But we have a very big travel business and we have a very diversified travel business.

Four different brands that serve each of the markets.

We are growing like crazy internationally.

We just started in China.

We've been making, I mean, if you -- just one issue, just look at international, and if you follow it, literally month-by-month and you back up 3 years, it is the same dynamics as took place in the United States in terms of adoption.

It is 3 times the size the United States, it has been operating at a deficit for us as we built the businesses.

Where No. 1 in the U.K.

We're No. 1 in Germany.

We just started Italy.

We just started France with our own sites.

So when you think about that, and you think about the fact that it's going to turn whether frankly it turns in the fourth quarter or the first quarter.

We really -- I don't mean to be cavalier about it at all, but we're neutral within reason to when it turns.

It will turn soon enough and once it does you'll see the same leverage characteristics as we saw in the United States.

We're such a big player in the United States that given what has gone on with supply, we think we've actually been doing quite well with this one Hotwire exception which we think is also over time going to improve itself.

Hotwire is not a very big contributor to the pie anyway in absolute dollars.

So when you look at that picture then you think that in competitive terms, while every day is a fight, as, of course, it is in any business.

But certainly business is doing well if it doesn't have competition then, you know, something is odd will be corrected later on so that's -- could I go on about the competitive issues.

But I think I've kind of given enough of a mouthful on that, unless there's a follow-up.

Barry, could -- this is Vick.

Commitment to Citysearch and then the process for brighter days in LendingTree.

And then on your investment you laid out a very convincing case why the Company should be able to grow 30% per year.

You went segment by segment, it was very discreet on how you could get there.

For the year -- in the year you're only going to be up 16% versus last year.

Are you still committed to that type of growth long-term?

Yeah, long term we think we're going to grow at really strong rates.

When we set out with these things as goals which is what we said they were, they were really good stretch goals.

We are going to continue to go towards the stretch goals.

We will not make it in a quarter or necessarily in a given year given all of the -- given the fact that we're in multiple businesses.

But we absolutely are confident that long-term we are going to grow at much greater than any, quote, normal rate of growth.

So the stretch goals we gave this first year we certainly haven't met them.

We will not meet them.

But nevertheless, they are not only there.

But I actually believe, and I think my colleagues all agree with me on this, is look at the business over the next years, and I don't think it's going to be 8 years from now.

I do think it's in the early years forward we're going to have really strong growth.

As far as Citysearch is concerned we have invested a lot, but we've actually grown our visits to Citysearch by 35%.

We announced a partnership with Ask Jeeves where they're going to license the local content and the business data.

They've got 20 million new hits a month.

So we think that's going to lift the business.

We've launched for those of you who go into these things at all go, I mean go in and look at Citysearch.

It has had -- do have frequent upgrades here.

It's had a very solid upgrade.

It looks really good.

It does what it's supposed to do with increase in accuracy.

We bought ServiceMagic which will add about 50,000 professionals to Citysearch 24,000 merchants and to entertainment publications 64,000 local customers.

So we're building up a really strong local merchant customer base to serve consumers and that plus the natural traffic that Citysearch is getting, plus the unnatural traffic that you partner with, and means and this PFP just like it is working for other people in the media business is that this pay per -- pay per performance system -- this circle is working for us.

We think that Citysearch is -- has got a very good chance.

I mean, it's going to be also a fight.

But it's a very good chance to be the leader in that local space.

And if it -- again we had thought maybe it will reach break-even in the fourth quarter.

I doubt that that will happen.

I think it will probably happen sometime during the first second, third quarter at -- I wouldn't say at the most.

But I think it will happen in the early part of next year.

And then I think if we continue to do the work, as well as we have done you'll start to see the leverage effects there.

As far as LendingTree we've just begun.

We did not buy LendingTree for the [reify] business.

We think the reify business will always be there to some degree but that's not the reason we bought it.

We bought LendingTree because we thought they were developing great new products, we thought that their entrance into real estate was utterly sound, with a great management group, and we think that LendingTree is not going to so to speak come through for us as a big profit contributor this year.

Maybe even next year.

But in the next couple of years LendingTree will come home.

So that's what I -- I think I've answered your questions but I haven't you'll nail me again I hope.

Thank you.

That was great.

Next question please.

Our next question from the line of Heath Terry with Credit Suisse First Boston.

Please go ahead.

Sure.

I guess one of the surprise -- negative surprises that you didn't have any control over this quarter was the cancellation of several concert tours and just kind of a weaker ticketing market overall.

When you look out at the schedule that is out there for the second half how does the concert schedule look?

What can we expect from the ticketing business particularly as maybe some of these canceled events start to get rescheduled?

I think our expectations for the second half of the year are modest growth.

This year is just not proving out to be a super strong concert season especially the big stadium shows aren't happening nearly as much as they happened last year, you have the big Bruce Springsteen shows, et cetera.

But despite that and because of actually really good results internationally as well with Ticketmaster we're able to drive, very, very good bottom line results.

So Ticketmaster is in a position where because of efficiencies because of increased Internet distribution as a percentage of the whole despite a difficult environment, we're able to drive very, very good bottom line certainly in Q1 and Q2.

And while we don't anticipate the season getting much stronger in the second half of the year we still think we should be able to have decent growth coming up.

The other thing is that, you know, tours as you say they get canceled they get put back on.

The vagaries of the tour business the for one thing, but the thing is that there's no question to us whether it comes back again in the, usually it doesn't come back again in the latter half of the year just because of summer touring and availability of audience.

But Netnet they're going to be -- definitely going to be going on tour.

Ticketmaster continues to leverage itself.

Continues to get into the business of selling tickets in auctions and in exchanges and adding all sorts of services and is a very, very well-managed business and they are.

They've done just a wonderful job not only on the cost side but also in delivering more and more services and making sort of a million 4 e-mails, I think it is, a month.

And what they're doing with alerting people to things they're interested in, and learning more and more about the audience that they serve, meaning the people who come into Ticketmaster and want updates and want information, all of these things I think make Ticketmaster a very well-run company.

Great.

Thanks.

Thank you for your question we'll go next to the line of Paul Keung with CIBC.

Please go ahead.

Question has to do with going back to Victor's question on your stretched goals.

Can you give us some color, just give us some things that you've seen that gives you confidence that you can actually accelerate growth in '05 and '06, to catch up to the numbers you have in the '06 numbers from the presentation last fall?

And then one follow-up after that that's more specific on the business line.

Paul, I couldn't understand your question.

I understood the first part, but I just didn't understand the last part of it.

Yeah, well -- can you tell us some parts of your business, reasons we have conviction why we'll see it accelerate growth rate in '05, '06.

In order for you to meet the expectations that you set forth in 2006.

Well, I think if you look through all of our businesses, I mean if you start really with our travel, we are absolutely confident that we will have sustained growth in '05 that we believe is much greater than this year.

We think that again, if you just look at international and its turn.

I think that the prospects for travel getting back to very strong growth are quite good.

HSN as we've talked about before is doing extremely well.

HSN, I think in HSN.com and the new businesses that we're developing in the dot com area I think are going to be able to give us a good deal of operating leverage.

Our real estate and LendingTree businesses we also think -- as we said we think our entrance into real estate just began.

We think it begins to not get into any kind of mature state, but begins to have real growth as we launch our new Real-estate.com, which I think we're doing in January.

I think that there are great prospects there.

We think that our local businesses, our Citysearch, et cetera, I spoke earlier, I think that Citysearch has the leverage to really -- will have the leverage to really begin to perform.

So, I think I could go through each of the pieces, but I think that at least as I say our own internal plots and plans are that we think that in '05, can't speak of '06, other than, I mean, it's a bit out there.

But we certainly think that in '05 that we have a possibility to get back to real, real substantial growth.

At least everything that we look at tells us that.

And more than that, and more than the fact that what we have been doing, I mean one of the things you do have to -- one of the things that is clear from all these figures is we've made investments in every area of our business this year.

We have been extremely aggressive to make these investments.

We think these are really sound investments.

And the indicators that we have are that where we have made investments it has begun to work.

These things do take some time, but this has been a year without any question where we have been very aggressive in making investments all across the boards.

And we think that's what we should do.

We should do it if again we have belief in these businesses and we do have belief in these businesses.

And the follow-up question is through the travel -- this quarter it looks like the flow-through was about 26% versus I think, last quarter was 17.

Is that number we're going to see accelerate through the back half of the year into next year?

And how does that number compare when you look at international versus U.S.?

Paul, are you talking about the increase in operating income before amorts?

Yes, the operating income before amorts.

I'm using the same metric you provided in the last call.

Sure, sure.

We do expect that to increase on a go forward base.

Again, we told you the flow-through was seasonally low, and that it should increase on a go forward basis, and as I went through in my remarks the reason why the flow-through is actually what it is, is because a number of our businesses, which are the developing businesses, Expedia Corporate Travel, Expedia International, Classic Custom Vacations, and Hotwire are having significant revenue increases for their bases.

Expedia International and Hotels International are just pretty big businesses that have flow-through essentially of zero or negative.

All right?

So if you actually look at the flow-through of the base business, the flow-through of the base business is significantly higher than the, I think it was the 27% number that you used.

So as, and this goes to what Barry was talking about, as international swings to break even as Expedia Corporate Travel, Classic, swing to break even and profitability you're going see flow-through increase at much, much higher rates.

So we think that we'll see some benefit of that in Q3, Q4 and we will see I think significant acceleration next year.

Next question please.

Thank you.

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

Please go ahead.

It had obviously an impact on growth rates and likely continues.

But can you kind of characterize of those 3 buckets what is kind of the bigger impact versus the lesser impact on the business.

I'm sorry.

I'm sorry.

I've got to interrupt you.

We only picked up your question about mid-way through we suspect so forgive us but could you start over?

Yeah, so, you know, when you look at the growth rates in the travel business and you talked about competition direct initiatives from the hotels, as well as supply and access to the given occupancy rates rising.

Can you talk about, you know, which of those 3 buckets which is having a greater impact and lesser impact?

And kind of how you see those three areas shaking outgoing forward?

And secondly, if you have less access to inventory and supply in the travel side can you talk about how it impacts the customer experience in terms of access to inventory and pricing as it relates to what you forward on to your customers in the business?

Well, first of all, I just want to be sure I got the 3.

I mean, the direct hotel sites as I said earlier , -- we really -- it's not the major part of our business, No. 1.

No. 2, we think that actually while there's more competition from them, it is not particularly affected us in terms of supply.

It affects us in terms of rate.

And we're affected beyond rate because obviously, there are less discounts as occupancy rates have gone up.

So I think your second was occupancy.

And that certainly has affected us.

I don't -- can't -- what was the 3rd one?

Just on the occupancy, the issue of occupancy is especially hits us more than our competitors because you're comparing us, our merchant hotel business versus last year which was post war where Hotels really did not have much demand coming into their system.

So they made available to us very, very high levels of inventory at extremely attractive prices so that the occupancy issue this year versus last year on a comparable basis, for us is going to look worse than let's say a competitor Travelocity who really didn't have a hotel business last year to speak of.

And so --

Nevertheless, there's no question but that occupancy levels have an effect on us.

The truth is though that for us the despite all of that, the truth is is that while we have not -- and again on comps the issue that I raised earlier and that Dara just accentuated, which was the extraordinary conditions of last year.

We actually think smooth out as the year goes on, we think ,in fact, our growth looks much more as against '02 than it does against '03.

And if you look at it in that relation it's damn good there's nothing wrong with it.

So that relates to occupancy.

Was there a 3rd area?

Just competition from other on-line travel offerings looking at the merchant hotel business as well.

I mean, Travelocity was not in the merchant business last year.

Its merchant business came from Hotels.com.

It is now in the merchant business.

So its comps year-over-year are going to be quite fantastic given that it was at zero.

So that's Travelocity and they're going to be competition.

Orbitz, I think Orbitz has, I really -- I would say that Orbitz is kind of, you know, at it's okay growth year-over-year but certainly has taken any share from us.

The truth is by and large as against our competition we have maintained share.

So the fact that we maintain share with Travelocity getting into the business and by maintain share I mean, you know, in substantial terms.

So I think that while the -- while the competition is there of course it's there, the issues for us in this year are somewhat unique as we've pointed out.

Challenges are unique.

So if occupancy rates remain exceptionally high what kind of -- will it --

-- we are getting supply by the way.

The issue, again I think that the one thing, I mean, these things get to be kind of said in extremists and should not be.

We have good supply.

We are not really supply constrained.

What we absolutely do have is we have a product in terms of pricing that to some degree is not as absolutely discounts appealing as it was last year.

So I don't think that what's going to happen to us is that we're going to get really supply constrained as the year goes on.

We don't see any indication of that.

As far as the competition I think everybody would say that while occupancy rates are where they are now, there's nobody sees any reason why they're going to decrease.

They also ebb and flow, which they've done historically for a very long period of time, and they will again.

And that's the nature of the businesses that at any given day, there's still plenty of unoccupied hotel rooms.

Some days there are more and that's when we help Hotels, and some days there are less, and that's when they help us.

Because we are good marketing partners to them.

I'll give you -- there's 1 actually -- I just want to find it for the actual stats, but I can kind of tell the story.

One thing again you think about with hotels is, you know, there are, of course, the franchises which -- the hotel chains which make up about, I don't know, less than 20% of our business.

But Hotels are still quite a fragmented area, and we have examples of really great marketing partnerships.

There's a new hotel in New York called the Alex Hotel that opened last year, and it's midsized four-star boutique hotel.

And we came into help them and propose this strategy that would get the hotel correctly positioned.

And in the 7 days that followed our putting this plan into effect we booked 542 hotel rooms, 265 on Expedia, 277 on Hotels, 3 times our sales of the previous 3 months.

Since that time when that happened, we booked 5,672 rooms and we now have an exclusive rate that can't be found anyplace else.

Now, we've got these relationships with thousands of hotels and they're going to continue.

So I think that plus the package business that we have developed, and we continue to accentuate, and will continue to grow, and are selling more and more things for people, providing more and more solutions for travel, is the reason that our travel businesses, all of them, are going to continue to have, I think, our leadership.

And they're going to continue to grow.

The other initiative that we didn't talk about with Direct Connect which is our building out the new trade technology and connecting our inventory systems directly with the local hotel inventory systems so that we are able to get, one, connectivity is real-time.

You don't send faxes back and forth.

And second, you're able to get inventory and pricing on a real-time basis.

Right now Hotels needs to kind of post their inventory and pricing on a special extra net that we have for Expedia and Hotels.

To the extent that we can direct connect into these hotel inventory systems then I think direct connect now -- where direct connected with around 15% of our hotels.

As of now we believe that we will get access to better inventory on a more real-time basis which is a real key for us on a go forward basis.

So I think the occupancy environment, it's something that we can certainly manage through with initiatives and also with people on the ground.

We've got hundreds of people.

As against everyone else, and this is true for all of our competition, we are the only player that's got -- we have over 200 people all spread throughout the United States, some spread in Europe, but I don't even think number counts the people in Europe.

Does it?

I don't think it does.

In any event we have a lot of people.

Their sole job is to manage, develop relationships locally in every large, medium market in the United States.

And again, over time the investment that we have made and not, and the investment we continue to make in making the product better and the service better.

Vagaries of the occupancy 1 year, the next are what they'll be.

But our travel businesses are going to keep growing.

And I don't think that there's a single fact that we see currently that says otherwise to us.

Next question, please.

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

Please go ahead.

Good afternoon.

Barry, let me try one last attempt on understanding your optimism on the travel sector.

Travel overall is booming again, ADRs are up, occupancy rates are up, yet your performance has you have indicated has been below your expectations despite the recouping of the entire InterActive Travel Group.

It used to be that Expedia and Hotels.com even in the bad times would do exceptionally well, yet it seems to me that in this market the ones that are winning are really just consumers and the intermediaries are in just a pretty tough spot.

So I'm trying to understand, (A) why you think this is temporary and it will go it seems to me a permanent change after competitive landscape?

And (B) if you feel that the current structure you have for the travel group is sufficient to meet the challenges?

Well, I really don't want to at all to be defensive about this.

I think that when you say that the consumer is the one that benefits, consumer always benefits when there's competition.

I don't think that that's the issue.

The truth is our travel businesses are growing.

You know, your expectations and anyone else's expectations be damned, they are actually growing.

Now, they have, we pointed out to you the comps over last year.

We said if you look at the travel business, really try and understand the domestic travel business, you will find that in '03 we had all the supply and hotels were desperate and so we had giant growth.

But if you look at it over '02, when the business was quite healthy in its growth, that's what we're tracking against.

That is not bad to us.

I can't say it any other way.

Now, let's look at the rest of our travel businesses.

Internationally we have given you every fact and figure.

I'd be damned if anybody can find a single negative with that other than the fact that international travel as such for one quarter was down.

Now, do you think really that international travel is not going to continue to grow as travel has always kind of grown and people are going to stop traveling?

I don't think so internationally.

So our leadership internationally in the investment that we've made as we've said is going to turn fairly soon.

That's only good news.

If you look at our starting Expedia Corporate Travel we have 1500 clients.

We are executing terrifically.

We have the best product by far, anyone will tell you that in corporate on-line travel that we get -- we're getting people, adoption to go on-line.

We're getting them up to, I mean, huge rates of adoption.

31% average overall.

It's incredible.

It is remarkable.

And, of course, it saves companies money over time.

And I think it is going to be, I mean, this is Expedia Corporate Travel we think some day is going to be, we said it will be half our business.

But it's going to be certainly a big contributor to us.

Guess what right now it is not making money because we're developing the business, which I believe is what we're paid to do.

So when I look at our travel businesses and our organization for travel, in IAC Travel with Eric [Latchford] as its leader.

And I look at how we're approaching each of the markets and how we're executed, I would tell you that my "optimism" I think is based upon very solid facts and figures.

And I could -- the problem I guess with it is -- and I don't think there's anything wrong with it -- we'll wait and see.

We'll wait and see what happens in the third quarter and the fourth quarter in terms of growth over the previous period.

And we'll look to next year and we'll see whether or not what I'm saying is going to come true.

I think the skepticism as I said before at other things, is okay, but that is how I and my colleagues feel about travel.

By the way, you know, we just made this investment in the eLong,.

We made 3 or 4 travel acquisition investments.

We're investing because we think we're going after continued gold.

That's what we believe.

It's a great category.

We're the leaders in it.

We're going to keep our leadership and because of that and because on-line adoption still, while it's been pretty good in the U.S. there's still much more room to go.

Safa, I'd just add, be careful not to take one quarter's results and make conclusions regarding changes in industry dynamics et cetera, based on one quarter's results.

If you remember Q1 everyone was like, "Oh, my God, travel margins are going to hell, et cetera," and we said, that is a purely seasonally -- it was elective and it was seasonal and I think we --

Sorry, Dara it was an elected in terms of our making investments.

The fact of the matter is you have said to us for 2 years that our margins are gross margins, our raw margins are going to deteriorate.

You've said it for 2 years.

You've asked us 47,000 times about it.

We have said 48,000 times we don't agree with you.

Two years later we are at again minus 80 basis points, we said it would be 100, and that was entirely acceptable to us, degradation.

Our raw margin -- net margins in the first quarter as an elective, we plowed money into marketing.

We plowed money into investment as we've said earlier all over the place.

In the second quarter those margins have gone from again 25% to 29%.

Just fine, thank you.

So I do believe that I don't -- I understand, scrutiny is fine by the way and we'll stay here, as Judy Garland once said at Carnegie Hall, "We'll sing all night."

So, you know, we want to answer all of your questions.

We don't want to answer them defensively.

But we certainly don't want to demonstrate anything than what we believe which is that -- which is what kind of we've been saying.

And the last point that I want to make, when we talk about investing in global travel, we're not investing globally just to prove out growth rates or set up growth rates on a go forward basis.

The difference between our global business and let's say, for example, Amazon or Yahoo investing in Europe is that our global businesses, were forming a network that are actually sending demand to each other.

So when we spoke to eLong, for example, one of the huge attractions to their having us as a partner was because they can now go to local hotels in China, and local airlines in China and say that, hey, we have demand coming from the U.S.

And we've got demand coming from Europe.

And there's no other local Chinese player who has that kind of demand coming in.

And you become a totally differentiated, you know, animal than any local player.

In Europe the demand that we have coming from our U.S. services, coming into England, into France, et cetera, is different and impossible to replicate by any other local travel players.

And also the travel players in the U.S. because they're behind so far.

So when this network of global travel companies which also includes leisure travel and corporate travel mature, and they are going to become profitable because we've seen kind of the revenue -- we've done it before, we've seen the revenue line.

U.K. is quite profitable today, we will have a true competitive advantage over anyone else out there.

We will have global demand intercepting that no one else has and I think that is a winning equation for the consumers and for us.

Okay.

Thank you.

Our next question is from the line of Michael Savner with Bank of America.

Please go ahead.

I'm going to continue down the same Road.

Just to try to really understand what's going on during the quarter and obviously the margin improvement I think at least was ahead of where we thought you would be.

But try and understand where the competition is coming from because it sounds like there's a couple different dynamics happening.

Obviously, you're facing increased competition from other third party operators, but that's a much smaller piece of the aggregate pie.

So when we think about what's really impacting your growth and obviously, with margins at least coming in ahead where we thought they would be.

Can you -- is it at all possible to try to quantify where your growth in bookings could have been if you had decided not to pull back marketing or if margins hadn't had been so high?

Because it seems like you probably had a little bit more given.

And I think you said you left a little on the table there.

And how you think about that delicate balance between how much you want to market and where you think your growth needs to be?

And I guess as a final kind of extension to that is, I think the original outlook was that margins could probably continue to tickup through the duration of the year.

Now we're looking at a good margin number in the second quarter, but expectations of that not changing.

So can you tell us if you've changed your strategy at all in terms of how you're going to market the business?

No, we haven't.

I think the marketing will get -- our hope is that the marketing gets more, more efficient as we go.

Or have gone.

No.

No.

I'm saying we'll get more efficient than now.

It certainly has gotten more efficient from the second quarter to the first quarter.

And again, you know, when you talk about this growth, and you really have to -- you can't do it in just a single quarter.

Given we've now said it many times that we think that growth comparisons over last year are probably, you know, I mean, that it is far better to look at growth over 2002 than 2003, using the explanations that we gave before.

As far as the growth for the rest of the year, in terms of whether we owe -- this last quarter whether we left money on the table, it's possible that we did.

We just thought that the one thing we wanted to do was to get our marketing in just a much more efficient balance.

We've achieved that.

And as we go on, as you say, it is of course a balance between what you spend and what you get.

But several of these areas that we've spent money in on the on-line marketing is getting to be probably not the most profitable channel.

So we're going to divert money into other channels.

One thing that we're absolutely certain of is that our awareness, we said the 1 issue for us is not reach, meaning the amount of people coming in the front door, the growth year-over-year is more than satisfactory, it's excellent.

The issue is conversion.

And over time what will happen with conversions, the dynamics of the business ebb and flow, is we think those conversion rates will again in the third and fourth quarter in terms of comps they will improve.

So I don't know that you can bore down on it any further, but if there is further boring down we'll be happy to do it.

Well, yeah that's what we like to do obviously, yeah.

In talking about the mix in a tighter environment for inventory, what is the -- what is your feedback on the large chains versus obviously your strength in independence?

And how much -- obviously it's not hard to imagine why tighter environments from the large chains put some pressure on.

But I thought a lot of the benefit here is that you're -- the independents, which I think make up probably closer to 80% of your business, at least that's the way you've disclosed it.

Are you seeing a tighter environment from that distribution as well?

From that channel as well?

Actually independents as a percentage of our merchant bookings have been increasing not decreasing quarter-over-quarter.

So as, you know, part of what you do in this kind of supply environment is you go out and you partner with more merchant hotels, and we've got 20,000 merchant hotel partners, which is much higher than any of our competitors.

And so, you know, we think that in this kind of environment what you focus on is executing on the ground, getting more merchant hotel partners, having better supply.

And, you know, in the meantime having relationships with the chains that are just fine.

The chains are great partners with us.

We have with I think maybe on even 1 exception really we have relationships with all of the chains.

We probably won't have a relationship with probably 1 of all of the chains at some point in time, I mean.

But right now we have relations with all of them.

We have good arrangements with most.

We do get supply -- look, we're going to get supply.

And we'll get it either from the chains to the degree that they are part of our business.

But the far greater part of our business is working with this fragmented market.

The truth, though, is, of course, that as occupancy goes up, and there are less things available, you're going to have some effect to that.

But that is, even at that it's never going to grow to the point that there aren't plenty of unsold rooms for us to market.

Now, just to stress this.

We certainly have a year-over-year difficult comp, as far as occupancy goes, which we believe is accounting for most of the perceived weakness, as far as top line gross bookings et cetera.

But the 2 areas where I say people are worried about are marketing and supplying what effect that has on conversions.

On the marketing side we're actually increasing our market efficiency quarter-on-quarter and Expedia has done a great job at Expedia marketing team, are focusing on that.

So that is something that we think is going to get better, not worse.

And on the conversion side actually conversion had increased in Q2 over Q1, which is partly seasonal.

But again that we think on the supply side, too, because we have teams on the ground, et cetera, it's something that we're going get better at.

And it's just a management issue.

As long as we've got demand and as long as we're able to point that demand in a particular direction we're going to have supply.

Sorry, is there anything more specific that we can tell you?

I mean, we can talk to you about our packaging business, which we continue to accentuate because when you have the packages you just have a much more appealing -- much more ability to price, so to speak.

And all the other things that we are doing but, in any event, what -- is there a more specific precise question we can answer for you?

No, I appreciate it.

I'll let someone else go ahead.

Thank you.

Okay.

Our next question is from the line of Lanny Baker with Smith Barney.

Please go ahead.

I have 2 quick questions.

One on the marketing side you talked about "getting more efficient" in the travel business.

Can you help us understand what made you more efficient?

Did you find some new better media vehicle?

Do you think you've hit brand scale where now it's really starting to pay off, and people recognize you, and you're getting some sort of goodwill out of the dollars you spent?

Was there a change in the pricing of paid search leads or something like that?

If you could help us understand that that would be great.

And secondly, in-home shopping network business you've highlighted overseas being kind of an issue and Germany being so competitive challenges.

What, you know, what's the solution there?

What's the answer?

How long does that go on?

I'll do the purchase and the segments because it's fresher for me.

And I think the tail end of it I did not hear.

So is you could just -- HSN International?

Yeah, HSN International, how long does that --

That's what I thought you --

To the extent that's robbing you of overall growth rate point.

There's no question that it is.

I mean, if you look at our domestic performance, our domestic performance is excellent.

We have one big problem and we've said it to you before, and it's not going to find a solution in probably the third quarter or the fourth quarter.

We think for sure it will begin to find the solution in '05.

There's nothing structurally wrong with it.

The truth of the matter is that the business was mismanaged.

We turned the management out.

We brought new management in.

We brought a new marketing -- sorry, new merchandising person in who's been there all of, I think 90 days, who is getting the product together.

I promise you this, we got full distribution in Germany, and we will be competitive in Germany, and Germany will turn.

It just won't turn tomorrow and currently it's terrible.

There's no question.

We blundered in that market and the fix isn't instant, but it will be there.

As far as marketing is concerned on travel, we do know that our awareness.

The appreciation of the brand continues to grow, unaided is just remarkably high that allows us to cutback some of the, so to speak, institutional on-air spend.

We're working to repeat customers.

Working on repeat customers and customer loyalty, and getting revenue per transaction, and capturing more market to cross-sell.

And there's no question that we are making some strides in paid search optimization, free search as well, shifting that.

We find paid search to be, as I said earlier, it's certainly less efficient.

It's getting to the point where there's no question we're beginning to divert money out of it.

And we'll continue probably to divert money out of it, and we don't think it's going to have a big effect on us at all.

As a matter of fact, that is an issue for us.

So I think it's the tinkering with it and the fact that there's no question, but that we electively chose in the first quarter to spend very large amounts in off-line media, as well as on-line.

Every area of media.

And we said during the quarter, I think when we talked to you about the first quarter, we said that we believed that the efficiencies would come on-line in ensuing quarters, and it certainly has.

We think it will continue by the way.

We don't think it -- we don't think it will reverse itself.

I think also international being part of the mix.

International is pretty early in its lifecycle so to speak, and certainly international marketing has Q2 over Q1 has been significantly more efficient.

And Q3 and Q4 we think we're going to make really, really good progress.

So having that as part of the mix as it gets larger and the marketing as a percentage of gross profit comes down overall for travel in IAC that's going to have an effect on marketing as a percentage of revenue as well.

Helpful.

Thanks.

Next question.

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

Please go ahead.

Yes, I had a couple on travel, but I've heard so much about it I'm going switch topics for the moment.

God, wow.

Look, by the way, I just want to say, we understand, I mean, travel's a complex business, it's a young business, and it's certainly a dynamic business.

And so we want to -- to the degree that we overexplain it.

We want to -- as I said we'll try so long as we can be relevant and not endlessly redundant.

We do want to make certain that people do not look at this quarter and say, "Oh, my God, is the travel business at risk?"

It isn't at risk, as far as we're concerned.

Sorry you said you weren't going to ask it, and I --

Well, if you're sending us in that direction, then --

No.

No.

No.

No.

Tom, go ahead.

And it is true, travel is the biggest segment that we've got.

But we've got lots of other businesses and we should talk about them.

Or anything else you want to talk about.

Well, I know travel better, but on the other businesses local services, changing competitive environment.

The recent announcements from Yahoo, Google, et cetera, how do you perceive the competitive landscape over there?

And what are the advantages that your local services division has over what's being created by the search providers?

Well, here's what I'd start with.

They've got no local customers really.

We've got right now we've got, I don't know, 25 -- 27,000 and I think that we're pretty sure that, that by the end of the year we'll have 37, I think it is, maybe I got the 27 to 37, but somewhere, you know, close to 40,000 locals.

We just bought ServiceMagic they have got 50,000 local customers and the relationship as entertainment, which will all be part of the same mix is an additional --

64,000, right?

Where did got? 64,000, sorry.

So we've got merchant relationships locally.

They're very tough to get.

We got also here again, we've got a lot of people on the street getting these customer relationships.

The customer relationships are going to come 2 ways.

One, they'll be -- they are door-to-door, it's a local business.

They'll also come on an auto sign and other things that will come over time.

But we are in many cases we've got these endless amount of stories, facts of us delivering more leads than they want to or can pay for.

As our customer base gets more distributed we'll be able to even that out.

But right now we are having very good relationships with our local customers.

Once you think you have those relationships I don't think they're going to be stolen away so easily by anybody else.

Because again, these are local businesses.

If you're a restaurant, if you're a plumber, if you're whatever, you really want (X) number of leads, and obviously that's what you can track for, up to a level.

And if you get them you're quite happy.

Well, we've got that circle going.

There's no question that we have the best local service in terms of content.

We also as I think most of you know, we really think we are going to be the local yellow pages.

And by that I mean, the local yellow pages filled with extra content, in terms of user reviews, in terms of added editorial.

And all sorts of things that we can add on that is not just going into Google and typing the Pageant Restaurant and getting 78,000 returns or even local returns that are not particularly relevant.

We also think that because of what we got with entertainment and discounts where we can offer very targeted deals, discounts, et cetera, to people looking for local goods and services.

So we think the tying together of this local network of ours people on the streets, real traffic growth, real customer relationships, certainly we have a big headstart.

Certainly Yahoo and Google are going to go into these businesses, but we've been building content at Citysearch now for about 7 years.

And the data that we give you go into Citysearch you look for a restaurant.

You look for a hotel.

You look for now with ServiceMagic a plumber.

You look for a maid service.

You look for construction services.

You look for any of the things that we are doing as we spread out this yellow page concept with the feet on the ground customers and traffic we're in a -- Look, we may not make it and we've made a big investment here.

But I would tell you that given where we are we are in a good position to be able to have pretty good barriers because once you work these relationships out it's not, you know, that easy to replicate the system.

We've got pretty good barriers and we will then get the leverage.

We will start once it begins to contribute, which we think it will be probably sometime in '05.

We're certainly very aggressive and we think we've got a good position.

We sure know that they're going to compete with us.

But again we've been concentrating in this area and we've got the content.

It's not that easy to get.

Okay.

Then as one kind of a little bit more detailed follow-up on that.

Speaking of the content do you think, is your current strategy to allow the search engine searches, such as Google to crawl deep into the content, and have that information available within the [algorithmic] search?

Or do you like cording off the content and having users come to either you or one of your partners?

We are thrilled to get all of -- we, by the way, you do it right now, you go into Google, you type in restaurant someplace Citysearch is going to come up in the algorithmic search either 1 or 2.

You do it in several other categories Citysearch is going to come up in the algorithmic free-search.

We have begun, and I think we're doing real good work here, in optimizing those channels.

We absolutely want the traffic from them.

And we believe that one of the advantages that we have is that we have a deal that we just announced with Ask Jeeves.

We think that there are all sorts of opportunities to do things with all of the portals, probably with the exception of Yahoo.

And, you know, we'll get some traffic from Yahoo one way or the other.

But I doubt that we'll get a partnership with Yahoo, which is understandable.

But we see no signs of any kind that Google doesn't think -- and isn't in symmetry with what we're trying to accomplish with our local service.

Great.

Thanks.

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

Please go ahead.

Thanks very much.

A lot of questions have been asked.

Dara, I think you said earlier that you were going to spend more on Hotels.com marketing in the second half.

Just curious where does this put us versus the 900 million as the target I guess that you introduced in November, and then kind of backed away a little bit from in the last call?

Sorry.

I was on mute.

We think consistent with last quarter.

We think we are going to come under the $900 million number, I'm guessing it's somewhere between 800 and 900 million, but well below 900.

The issue for Hotels is not necessarily that we're going to spend on marketing, but that the marketing cost of bringing in new consumers versus last year have gone up.

Especially because, you know, now that we don't have Travelocity sending us traffic we've been investing pretty aggressively in the Hotels.com brand.

And really kind of building it up.

Hotels.com brand it's only a year, year and a half old and because we are having to make up for the loss of the Travelocity traffic we are investing in that brand as we should.

As compared to year earlier periods the cost per user to bring to the site is going to go up.

But it doesn't mean that we're necessarily going to invest that much more in marketing and overall we're certainly going to come in below the 900.

Okay.

And then a follow-up on Ticketmaster if I could.

The volume was down a bit in the quarter, did that volume include new initiatives?

And to the extent did it or didn't could you talk about the contribution new initiatives and when you really think that will start to move the needle?

Well, it did include contributions from new initiatives.

And we think that overall new initiatives for this year are going to account for around 2% or so of our tickets.

Now, the 2% is actually a pretty good number because those are 2% tickets that would not have been sold by our venue partners.

So every ticket that's sold is incremental dollars to our venue partners and to the extent that we can prove out that we are able to sell tickets that they wouldn't otherwise sell our value to that venue partner increases very, very significantly.

Now, a lot of those initiatives are very new.

The e-mail programs are pretty new and growing, over 100% year-on-year.

The ticketing auctions are just getting started.

The exchanges are just getting started.

So these initiatives are very, very early in their lifetime so to speak, and we expect kind of a through [inaudible] from the initiatives to increase on a go forward basis.

We're also, you know, on a yearly basis we're taking share away from box office tickets, tickets that would otherwise be sold on the box office just because people like buying tickets on the Internet we're also introducing discounted ticket channels as well.

So everything that we're doing over the long term should allow us to grow our -- the number of tickets that we sell higher than the industry.

And also with the kind of leverage that the business model has the bottom line should certainly grow faster than the industry bottom line.

So we're pretty excited about Ticketmaster and its prospects.

Great.

Thanks very much.

Our next question from the line of Doug [Ammuse] with Lehman Brothers.

Please go ahead.

Great.

Thank you.

I hesitate to go back to the raw margins issue around the hotel business, but I'm going to give it a shot here.

Oh, please do.

And, you know, my question is that obviously I think we're seeing sort of a different business model between the brand of properties and those of the independents and smaller chains in terms of a commission basis versus a mark-up basis for the smaller hotels.

So I would say that, you know, we wouldn't really see an additional leg down in the margins on the branded side.

But my question really is what are you seeing in terms of your leverage and your positioning with the smaller chains?

And how do we really get comfortable and what makes so you confident that you're able to keep the raw margins in the mid 20s range with those smaller chains out there?

Thank you.

Well, the only thing that we would be able to tell you is what our current experience is.

Let's just first talk about the chains.

We have very good margins with the chains.

The margins that we have are -- up, are quite healthy.

So -- and we see no change there by the way.

We have as I said before we've got relationships with everyone of the chains, and you know their relationship to the business.

Now, as far as the independents are concerned again all the current data would tell you that, in fact, the margins with the independents and it's not I mean, it's not our leverage against them, it's just that we provide them a great service.

And we have relationships with 20,000 of them.

20,000 total hotels.

Sorry.

Around half of our relationships are with independents.

The relationship with independents to the total .

So we have got this enormous number of relationships locally and we've got people everyday who tend to them and we have seen no erosion in that.

I think as a matter of fact we've seen the opposite.

So I don't think, again, there are these changing, "characteristics" in terms of margins.

And if you just look at the conditions that have -- sorry, if you look at the numbers we have reported, as against the first quarter it's 10 basis points.

And as we said we thought that raw margins would come down from 25 to about 24%.

In terms of the contraction.

So --

the numbers aren't specifically there.

It's in the mid --

Well, whatever.

I'm not being exact specific of it.

What I'm saying is it's -- the idea of a one-point contraction, and we're less than that, which is by the way what we laid out, I think, in November.

Yeah.

And it's now July with all the conditions that everyone has seen in the travel business, and here we are.

So we again we do keep saying we don't see anything in the seas, anything that is telling us that we we have experienced here is going to change.

In terms of raw margins.

And I'd just add as it relates to independent hotels versus chain -- hotels that are part of chains, we're really the only national distribution available to these kinds of hotels.

So the value that we bring to them is very, very significant.

Barry's example, I think proves out that our ability to point significant amounts of volume to an independent at very good rates is incredible. 87% of our consumers have never stayed in a particular hotel before.

They're looking around for price.

They're looking around for availability.

And our competitors that have much smaller merchant hotel businesses really can't at this point don't have the scale and the feet on the street, so to speak, to go after the independents and work with them the way that we do.

So on a competitive basis et cetera, on a value basis, we think we have a lot to offer and we don't see that changing.

Great.

Thank you.

You're welcome.

Our next question is from the line of Brian Egger with Harris Nesbitt.

Please go ahead.

My questions have actually been all answered.

Thank you.

Okay, thank you.

And we'll go next to the line of Mark Maheney with American Technology Research.

Please go ahead.

Excuse me, Mr. Maheney, your line is open.

Yes, I'm sorry.

Can you hear me?

Yes, please go ahead.

Thanks Two real quick questions.

Organic growth is there any meaningful difference between reported and organic growth rate both top line and on the [oiba line].

And secondly, any just general comments on pricing that you're seeing as a major buyer of Internet advertising pricing, both in search and in branded advertising?

Thank you.

On organic growth if you don't include the significant acquisitions that we made last year, Hotwire and a couple of others, revenue growth for the quarter would have been 10%.

Operating income before amortization growth would have been around 18%.

On pricing I don't think that we have seen significant movement, as far as pricing on-line goes.

I think we've just gotten a lot more efficient, as far as spend goes.

So we've gone after -- we're buying many, many more key words than we have been in the past.

I think we buy over 100,000 key words and we're able to measure the effectiveness of those key words much more precisely almost on a real-time basis versus where we were a year ago.

So I don't think our getting better at on-line marketing isn't necessarily an issue of pricing it's an issue of just management and efficiency of that spend.

Thank you.

We'll do one more question.

Thank you.

Very good.

We'll go next to the line of Michael Melman with Melman Research Associates.

Please go ahead.

Thank you.

I guess sticking with travel.

The difference in the margin roughly 5 percentage points of margin was that all from more efficient marketing or is there something else involved?

And also, are we to some extent talking about a timing difference?

Some of the margin strength possibly in the second quarter was from bookings made in the first quarter and conversely some of the difficulty in having the right priced inventory is going to show up in the third quarter, and to the extent that consumers don't convert because they don't like the price, what do they do?

Do they not travel?

Do they go somewhere else?

Well, I mean, I think that if they -- a lot of people shop, one of the things that's always been true about on-line services is people shop more than one site.

The thing that Expedia I think, has been successful in doing is getting a lot of close of the brand awareness in the appeal of the service itself it's been getting, and is concentrating much more on repeat customers and loyalty, where other factors are at work other than just raw price.

But Expedia's always lived with this.

And Expedia's not necessarily been, "the lowest price of the lowest price" it's simply had the best interface.

The best service.

And so it has -- it certainly has had a great amount of people coming in the site from the very beginning at a very high ratio of people coming into the site and looking around and not buying anything whether they come back or not you don't exactly know.

But it's certainly true that if you don't have what the customer wants they'll go someplace else.

We don't believe that again, those dynamics are changing, meaning the dynamics of people coming to Expedia and a percentage of those people going elsewhere and booking.

And a percentage of those people staying with Expedia then having a good experience then coming back to Expedia.

And the same is true to a lesser degree with Hotels.

And what Hotels has done to compensate is all sorts of extra value-added things which it believes, again will be the appeal to the consumer where, in fact, the great price discounts that were available in different period of occupancy that the variance between the 2 will be made up by a better consumer experience.

Just two things to add to that is.

We certainly know that Internet shoppers shop around and the average Internet travel consumer shops at 3 sites before he or she makes a booking, and part of our strategy is to be 2 or 3 of those 3 sites.

So actually we've been focused on an initiative we can track, for example, on Expedia, what percentage of our consumers leave Expedia and where do they go to.

Do they go to Hotels.com, do they go to Travelosity, do they go Google, for example.

And we've been able, through promotion, of our various sites within the network actually double the percentage of consumers that go from one of our sites to shop at another one of our sites.

So if you go on Expedia and we have a customer who is shopping for a hotel and hasn't booked a hotel and for some reason hasn't found a rate that he or she likes.

We'll tell them, hey, can Hotwire offer you a rate that's attractive to you?

So our ability to move customers around our own proprietary network we think is a real significant upside to our go forward basis.

And already after a couple of quarters we've been able to measurably increase the amount of kind of cross-company traffic within the network.

As far as again the price competition the other area where I think we'll do more and more is packaging.

And with -- we're very much focused on the packaging product that at Expedia and packaging allows us to off for combined air and hotel product kind of opaque pricing that's at a discount to the pricing that a consumer could get on a stand-alone basis.

And actually we just launched a new product for Expedia packages, which is kind of a savings calculator.

Which allows a customer, you know, it tells you, hey, you just bought this air ticket or you're looking at buying this air ticket and this hotel and you're saving $232 off of the price of these products on a stand-alone basis.

So the more that we can package.

The more that we can send traffic around our own network.

And the more that we can use value-added coupons like EPI discount coupons the more we can differentiate ourselves from our competition.

And we think over a long-term perspective this is going to be kind of permanent advantage that we have against any of our competitors.

So we think we're very much well-prepared for an environment in which you've got consumers shopping.

It's our environment today and I think our position will only improve.

I think you had another question regarding Q1 versus Q2 margins.

And that's just the seasonality that we told you about in Q1, which is in Q1 tends to be a very high booking quarter, so we spend marketing money in that quarter.

The bookings come through, but the revenue typically isn't recognized until Q2.

So a lot of what we saw Q1 to Q2 was certainly better marketing efficiency from us, but also was just the seasonality where we had bookings that we had essentially paid for in Q1 coming through in Q2.

It was something that we expected, but it's totally consistent with what we expected.

But we also did good work otherwise on the margins as well.

And relate to that, the bookings for Q3 in some way less profitable.

You said you were going to have similar margins but that may be because of other factors less spent, somewhere better efficiency overseas.

But in terms of some apples to apples view or the core is 35% core, would you expect something like that in the third quarter given what kind of profitability that you have locked into the bookings at the end of the June 30th?

We don't give specific margin guidance for the quarter, et cetera, but this seasonal issue is most noticeable in Q1 and then going into Q2.

So for the rest of the year we do see margins that are roughly similar and you don't see this kind of a seasonal factor on a go forward basis.

There's some seasonality, but certainly not as much as this.

And a quick question.

Orbitz had said that they had execution difficulties with their merchant hotel business, that is, that they were not able to put up lower priced inventory as inventory sold out.

Do you have any of those issues?

None.

No, we haven't had any of those issues.

And actually that that's exactly why we think this new trade technology and our direct connect is really going to give us an advantage because we are going to be able to connect with the hotel inventory and kind of pricing systems on a real-time basis without putting a lot of pressure on the hotel systems themselves.

It's a very different architecture from what our competitors are building and we think going into next year when direct connect is a significant portion of our revenue it's really going to be a differentiator.

Thank you.

Thank you.

And thank you for spending all this time with us.

What we would say is kind of summation is the following.

We do feel we have had a good quarter.

We do not think it is a bad quarter or bad performance.

There is no question but that if you look and dive into the issues inside our travel businesses and you look at the comparability over the previous year and you look to some slower growth that, in fact, -- certainly not going to reiterate it for you and be endlessly redundant about it.

But we don't believe there's a single structural thing wrong with any of our businesses.

We did not have a poor quarter.

And we believe that we will again get back to good strong growth as the year and as the following year go.

But we -- we're happy, as I say, to have answered your questions.

We don't want to be defensive about this at all because as we said, we don't think we have anything to be defensive about except to explain to you what the issues are.

What the challenges are.

What we're doing about them et cetera, throughout all of our businesses.

And we'll be back the next quarter and the quarters after that talking to you and answering your questions and we will have what we have to report.

So thank you for talking with us.

Thank you.

And ladies and gentlemen that does conclude our conference call for today.

Thank you for your participation and for using AT&T Executive TeleConference.

You may now disconnect.