Match Group Inc (MTCH) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the InterActiveCorp Third Quarter Earnings Conference Call.

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

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

If you should require assistance during the call, please press the star key, followed by the zero.

As a reminder, this conference is being recorded today, Wednesday, November 3rd, 2004.

I'd now like to turn the conference over to our host, Mr. Roger Clark, Vice President Investor Relations and Finance.

Please go ahead.

Thank you, Chad.

And good morning, everyone.

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

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

Also, you're aware that there are risks and uncertainties associated with these forward-looking statements, and our results could materially differ from the views expressed today.

These risks have been set for the in our public reports filed with the S.E.C.

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

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

Good morning.

At least for about half the people.

Well, we can think that it is almost over.

But just think, tomorrow is probably Day 1 of Decision '08.

But down to us.

Our profit performance this quarter was good.

Our U.S. travel operations probably gave up some top line growth as we improved efficiency inside our merchant hotel business but we do have challenges in this one key area of our travel portfolio, which I'll outline in a moment.

Today's report should provide credibility certain to our statements of the last months.

Our travel businesses are fundamentally sound.

We continue to grow share globally.

We're now the third largest travel distributor on- or off-line.

And it's our realistic goal that we'll be Number One seller of travel worldwide within the next five years.

Before we take questions, as clearly as I can, I want to outline our challenges in travel and the plans that we have to overcome them.

The core issue is inside our merchant hotel business.

And our growth in domestic travel has slowed because of it.

The reasons are that our price advantage has weakened, as hotel occupancy has gone up and competition has increased, despite our ability to attract more and more customers to our store.

What are we doing?

First, on the merchant hotel supply side, we're mobilizing our 200 plus market managers to secure more hotel inventory at better prices both for regular hotel bookings and for packages.

Hotels.com and Expedia sales force is now integrated and in place.

But we needed a leader for this effort, and we've definitely got one in Expedia's new President Steve McArthur who is taking, as his first primary task, the improvement of our consumer pricing through better execution and by working with our hotel partners on all sorts of targeted local strategies.

We doubt we'll return to the discounting we saw in 2003 anytime soon, but we sure can be the most aggressive blockers and tacklers to our ground forces in every key categories.

Sorry, every key territory, I meant to say.

Second, on the consumer side, we're differentiating our products and services and offering consumers a experience they can't get anywhere else, like coupons to local restaurants and retailers through EPI, an IAC company which has relationships with more than 70,000 merchants in more than 160 US communities.

So far, fully one quarter of purchasing customers on hotels.com are downloading a coupon and we expect that we'll launch travel membership and loyalty programs and other cross IAC benefits that will give our consumers compelling reasons to shop with us.

Third, we continue to build out our packages offerings, which not only provide significant savings but offer our hotel and air supply partners a chance to distribute opaquely to our customer base.

This past quarter we launched a new feature in Expedia that shows customers their savings in real time.

In fact it is a average of $195, pretty compelling differentiator.

And that isn't ever going to be met by any meta-searching technology.

Packaging represents 20% of our travel revenue now, and it will grow as we're able to offer more and more unique content.

Overall, we book about 85,000 room nights and 45,000 air flights worldwide every day.

An average of over $35 million processed daily.

We work directly with consumers to book complex trips and we're increasingly helping customers book their full travel experience.

Take Hawaii as an example, where consumers are booking 2,000 local activities every day through our subsidiary Activity World or Las Vegas where Expedia now offers charter flights.

Somehow I just don't believe any net scraper is ever going to scale these heights of detail we've plowed into nine years of developing Expedia and our other travel businesses with more than 3,000 tech and customer service staff that every day provides a first-rate and trusted customer experience.

Not that we don't think that meta-search comparison shopping will not be a net service, it will, and be served to our Trip Advisor business right now the 11th most trafficked travel site offering this for hotels and will soon search for air.

As I said, our IAC travel businesses are fundamentally sound.

Hotwire just had the most profitable quarter in its history.

Though still it's a long way from reaching its maximum potential.

We continue to grow share overseas, in Europe we're now solidly profitable after a six-year investment.

We're Number One in the UK and we're just beginning to play in Asia through our stake in E-long, top travel provider in China.

What's true at IAC -- at IAC Travel is through -- is true throughout our company.

Of course we have our fair share of challenges with 45 brands operating in 28 countries.

But across it all, we have such enormous opportunity and over time we're going to get more and more benefit from the whole of IAC, and our growing macro knowledge base over so much of Internet commerce.

In financial services, our lending business is executing with excellence.

Most recently taking a big step in expanding its business with the announced acquisition of Home Loan Center, our real estate center is in investment mode, making solid methodical process, hitting its marks for home listing and building, what will be the complete interactive service for home buyers.

In local, we're just now getting the benefits of organizing our previously disparate efforts under one meticulously integrated executional roof.

Service Magic home's service products, EPI's discounts, Evite's services, and Trip Advisors rich reviews now round out City Search's steadily improving service where traffic is up 35% so far this year.

In Personals, while all our subscription growth has slowed, unfortunately much due to our own hand, where we invested in product development which resulted in a overly complex and cluttered user experience, we've made the necessary change, now we have leadership with real expertise in the subscription business and passion for the potential of personals.

And I believe that it is going to turn around in '05.

HSN and Ticketmaster are rock-solid cash generating engines, each with excellent management and clear strategies to use their infrastructure and expertise on- and off-line to launch new businesses and services.

We have a list, a long one, of growth initiatives underway and the very best opportunities have been distilled by a pretty stringent capital allocation process.

I think you all know we made a great many investments across the board last year, and these are all properly cooking along.

Of course, this puts pressure on near-term results.

And while our growth this year was not what we expected, the investment we've made, and the challenges we've begun to surmount will put us in a fine position for next year and beyond.

When I look at the company, I see the most extraordinary collection of interactive brands in the world, Number 1 or 2 in virtually all of our categories, worldwide reach, 19% of IAC's revenue is now from overseas huge opportunities, Europe being a much bigger travel market than the U.S. for example, real estate a trillion dollar market in the very, very beginning stages of internet development, local 100 billion category, only 2% of it online.

Massive scale for us.

We facilitate 180 million transactions annually worth $60 billion.

A pristine balance sheet with 4.5 billion in net cash and securities, 25,000 genuinely talented employees, the best collection of people power I've ever been associated with.

Every day we make progress mastering both the individual operating challenges, and the work of building intercompany bridges that cannot be crossed by our competitors.

In fact, IAC internal brands drove more than 185 million dollars in gross bookings to our travel sites this quarter, 523 million this year-to-date.

We're starting to use existing platforms to launch new businesses, HSN has started Quiz TV in the UK, building off its experience in Germany and using our existing Expedia infrastructure in London, our centralized partner marketing group will have about $18 million in sales at about a 60% operating profit.

We're starting to share best practices and lessons learned, including online search, affiliate and off-line markets, call centers, integration, international expansion.

We're starting to see talented employees move across our businesses in senior positions, dozens so far.

We're beginning to see real cost savings from our scale and infrastructure, over $100 million from strategic sourcing.

Yes, on all of the above, time will tell.

For opportunities, our investments, our promise as a company, but I will say we are arms, legs, knees deep in this everyday, and I'm convinced we're up to the executional challenge of running a multi-brand company.

One last note, before we turn this over to Mr. Khosrowshahi and some questions.

While our board has authorized additional share buybacks, the authorization does not necessarily mean that we're going to buy stock back more aggressively.

We know we have a conservative balance sheet, but we think that a solid foundation of capital, which at a later stage of development might be excessive, is entirely appropriate for a business as young and dynamic as ours in its opportunities and its uncertainties.

That said, our intention is to be opportunistic.

The purpose of the authorization is not to support the stock, either in its daily trading or through a public vote of confidence.

As we continue to use up our existing authorization, this new one allows us the flexibility to repurchase our shares in varying amounts whenever we believe those purchases represent our best use of cash at that time.

And with that, Mr. Dara, begin.

Thanks, Barry.

Just a quick clarification, the 100 million that Barry talked about is over three years that we're saving in strategic sourcing.

Well, thank you.

You're welcome.

I'm going to spend some time on IAC overall and then touch on some of our businesses and the trends that we see going forward.

Overall we had a solid revenue growth and margin expansion this quarter, revenue was up 13% on a comparable net basis to $1.5 billion, with operating income before amortization up 32% to $253 million, Margins expanded from 14% to 17%.

Now our comps against last year were helped by a $4.4 million net reserve adjustment at IACT and some charges that we took in Q3 of last year.

Excluding these, IAC operating operating income before amortization would have been up 23% and margins would have expanded from 15.2% to 16.6%, so very solid progress.

Operating income grew from 11 million to 112 million this quarter.

And GAAP EPS grew from $0.02 per share to $0.12 per share.

As the company grows, our non-cash comp, compensation and intangible amortization expenses make up a smaller percentage of our financial results.

Year-to-date cash from operating activities was $1.03 billion, of which we allocated $159 million for capital expenditures, $434 million for acquisitions and $430 million for buybacks, a very balanced capital allocation.

This quarter we bought back 7.7 million shares, which represents more than 1% of our capitalization.

Now, our year-to-date cash flow from operate being activities was down from the prior year period, mainly due to the following reasons: First of all, the increase in working capital from IAC Travel during this period, this nine-month period was 308 million versus 411 million in the prior year, this consists of deferred merchants bookings and revenue, as well as accounts payable and included expenses and other items.

Cash flow from increases in Ticketmaster client cash balances were 24 million lower this period, against the prior nine-month period and we also paid 50 million in cash taxes this year.

We told you we would be a cash taxpayer, and we are.

As far as last year, we didn't pay these taxes.

Now, onto our businesses.

Travel growth bookings were up 25% to 3.4 billion, driven largely by international which was up 78% or 100% year-over-year excluding TVTS.

Expedia Europe continues to execute and had its first quarter of solid profitability which is a big milestone for us.

They've done a great job.

We continue to invest aggressively overseas in order to grow our share in existing markets, and to expand into new territories, and the fact that our larger markets like the UK are profitable enough to support our younger businesses is very exciting.

Domestic gross bookings grew 16%.

We estimate that the hurricanes cost us 1 to 1.5% in bookings growth and will also have a lingering effect in Q4 as well.

Gross bookings growth from the U.S. has slowed, principally due to our merchant hotel business which was essentially flat on room nights, excluding Hotwire.

Worldwide travel revenue was up 24% on a comparable net basis to 570 million, with operating income before amortization up 27%, to 175 million.

This includes the 4.4 million net benefit that I talked about at the beginning of the call.

We've also pulled back some of our planned marketing in Q3 while we execute on our plans to improve our hotel product as Barry discussed.

It hurts the top line, but is the prudent thing to do.

In addition, based on all of the factors that Barry talked about we do expect that the travel environment will continue to be challenging for us in Q4.

As a reminder, in Q4 of last year both revenue and operating income before amortization were favorably impacted by approximately 22 -- by a $22 million liability reversal which will clearly impact these comps.

In the meantime, we will continue to develop our value proposition to both suppliers and consumers and add more and more features to packages that truly sets us apart from our competition.

For example, during Q3 Expedia.com added charter air from Mark Travels with Las Vegas vacation package offerings and IACT Europe became the first online operator to offer Euro Disney and Paris.

Intergroup Interval continues its excellent execution and corporate travel is progressing nicely.

We're top 20 corporate travel agency with 1600 corporate clients, including 16 Fortune 1000 companies.

We expect to have a client list which represents about 500 million in run rate gross bookings by year end.

We have also established a beachhead in Asia for a 30% stake in Elong which just went public.

As part of our relationship, Elong is going to help us source hotel and destination services inventory within China for all of our other sites; having local experts managing procurement will really help build out our product offering.

Elong will also become a hotels.com affiliate, which will allow Elong customers access to great deals on hotels outside of China.

Our expanding network of travel sites, not only expands our addressable opportunity in the $2.6 trillion worldwide travel and tourism market place but also provides lists for each of our other sites international destinations.

We think that we'll have the very best European hotel availability on Expedia because we're on the ground in Europe today.

Conversely our UK sites will have much better available in the U.S. than say a last minute.com for example.

This is the network effect in travel.

Let me talk a bit about our other businesses.

At HSN US, revenue was up 3% to 437 million, with operating income before amortization up 6% to 43 million.

We were clearly hurt by the hurricanes which cost us about 10 million in revenue for the quarter.

We also had to effect -- we also had to evacuate our campus twice which was a real disruption to our operations.

We told you our main priority this year was to invest in and strengthen our relationship with the customer and we've done just that.

Let me give you some examples.

Our abandonment rates for sales calls in Q3 were less than half what they were a year ago.

Service abandonment rates are less than one sixth of what they were last year.

And our customers are getting their packages an average of two days faster than they were last year.

While it is too soon to see quantifiable lists in and revenue as a result of these improvements, we think it's absolutely the right investment to make.

HSN international operating income before amortization was up sharply this quarter because of great performance at Uvia which has nice momentum going into Q4.

The positive momentum, however, will be offset by HSN Germany which continues to experience weakness due mainly to its wellness segment.

As a result we expect international Q4 operating income before amortization to be flattish compared with last year.

Ticketing revenue and operating income before amortization were essentially flat due to the continued weak concert environment in the U.S.

International growth was very strong however with revenue up 38%.

We're investing heavily in a host of new technologies at Ticketmaster to sell more tickets, better for our clients, which we think is key to our growth plans.

We don't expect the macro environment to get any better in Q4 and in addition will be hurt by the NHL strike so we do expect operating income before amortization levels in Q4 at about the same level as Q3.

Personals revenue was up 3% to 50 million with operating income before amortization down 54% to 4.5 million partially affected by some charges we took for closing non-core business lines.

We expect Q4 revenue to be flat or slightly down from Q3, and we expect operating margins to be adversely affected from the negative trends in the business and more restructuring that we have to complete in Q4.

And in both local and financial services we're very pleased with our progress.

Which in both areas is benefiting from a diverse portfolio and really great intercompany relationships, and it's showing up in the bottom line.

Overall, we're very happy with the quarter, and even though we came in above street expectations we are not raising our outlook for full year 2004 operating income before amortization of about a billion.

This is based on what we've discussed previously, the -- the domestic travel trends that we've talked about, the continued tough macro environment in the tickets business, continued restructuring, repositioning of our personals offering and negative comps at HSN Germany which had a pretty good Christmas season last year.

We anticipate tough Q4 comps, but we have plans to execute against each of these challenges and we think that our plans, along with very nice progress that you're seeing in international travel, local and media, and financial services should put off on very solid footing going into 2005 and beyond.

We'll continue to look to drive long term growth rates while at the same time watching the bottom line, as we did this quarter.

One more note.

We will no longer provide an outlook as we did last year in the form of the range for 2004.

We will work diligently to provide investors with financial information and trends as well as relevant operating metrics for our company, as we've done.

We'll also have a Investor Day in late spring, probably May, where we'll discuss our businesses and results, trends and initiatives.

We believe that this information and our historical results will provide the strong basis for investors to evaluate our business.

With that, I'll open it up to questions.

I would just ask that questioners restrict their questions to a single question, a single, single part question.

We want to get everyone, we want to get to everyone without having a marathon session.

With that, operator, can you open it up?

Thank you, sir.

Ladies and gentlemen, if you wish to ask a question, please press the star key, followed by the number one on your touch tone phone.

You will hear a tone indicating you have been placed in queue.

If you pressed the star one prior to this announcement, we ask that you please do so again at this time.

You may remove yourself from queue at any time by pressing star two.

If you are using a speakerphone, please pick up the handset before pressing the numbers.

Once again, if you have a question, please press the star one at this time.

One moment please for the first question.

Our first question comes from the line of Tom Underwood.

Please go ahead with your question.

Yes, thank you.

Barry mentioned a meta-search a couple of times or more in his comments and just wanted to follow up on that and ask what sort of impact do you think that meta-search will have on Expedia and other travel agencies in the next year?

Do you plan or participating with meta-search companies and how will it affect your relationships with portals such as Yahoo! owning Fair Chase?

Well, we have a -- we're -- we are a a fairly large advertiser on Yahoo!, we spend, I think, about 50 million dollars a year.

We think we're a good client.

We hope they think so too.

There is certainly precedence for competition in these areas.

That really does not disturb us.

I -- I think the thing to do is to look at the facts, which are a good basis then for anybody's speculation.

The first thing is -- is that meta-search sites like Fair Chase and Sidestep have been around for a very long time.

They haven't yet had much consumer adoption.

Yahoo! buying Fair Chase probably changes equation a little but I think that the facts are probably worth at least hearing.

Yahoo! currently I think in September had about 5.7 million unique users.

IACT overall had 23 million, 19 for Expedia alone.

We're growing faster, our uniques are up 33%.

I think their growth was about 17.

So what we have is a -- certainly a much smaller competitors, smaller competitors, God knows, can get big but they're growing at half our rate in audience.

But let's talk about the service itself.

All this time, years now, Yahoo! has been powered by Travelocity.

They are a very good competitor, I think they have a stronger consumer proposition than Fair Chase does.

We don't expect that new services that are going to be offered, you know, are magically going to, you know, become that much better a product all of a sudden.

Now, I would not underestimate Yahoo! or any stretch, or certainly any other competitor.

But I think that the rumors of -- are -- of our demise here are really inflated.

And I -- I don't think they're based upon at least the reality that we see.

In fact, as I think you all know, I mentioned that our Trip Advisor right now has a superior overall product, and I think -- than I think anyone else.

It has access to our inventory, which no one else is going to have and it already has 4.3 million unique users which, by the way, is pretty close to what Travelocity has right now.

Comparable to Yahoo! t

Sorry, Yahoo!

Travel, not Travelocity itself.

Right.

So I think that if you think about all of that, you'd say that while there -- it's a -- it's another bell and whistle.

There will be lots more to come.

But I think every time something comes up, hopefully, you know, we'll have a solution around it, ahead of it, et cetera.

I still think we're going to have the ability to serve the most travel for the most people.

Great.

Thanks.

Next question, please.

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

Please go ahead.

Good morning Barry, Dara.

Question on Travel again.

Barry, you articulated the challenges you face very well and how you are going to -- how you are addressing them, but one core challenge is that -- maybe I missed, but I didn't really hear discussed in detail is the fact that consumer behavior appears to be changing a little bit, hence the popularity of the search engines or the travel search sites as well.

It -- your -- your proposition for consumers appears to be very solid, as it was before.

But if the airline happens to be the beginning point of a search for customers, and these search engines can provide that more efficiently in the consumers' eyes, my question is how will you be able to change the consumer behavior to look at the whole package rather than start with the air which -- which it appears to be what they're doing?

So I'll just stop right there I guess with the question.

Well, I -- I think that certainly some people are doing it.

And I think that it probably will grow.

But I really believe that you've got to look at this whole trip idea.

Anything more than a -- than a kind of simple point-to-point search is more than likely going to be handled by somebody who can give all of the points of information, and do something else, which is what we're increasingly doing.

As I said earlier now, about 20% and is definitely going to grow.

And that's packaging.

Where, you know, when you think about our ability to offer a consumer the kind of savings we can offer, and these are not savings that are generated by opaque sites where in fact you do not know where you're going or what you are doing.

You get exactly what you want.

But because of packaging, and because it is such a good distribution channel for suppliers, you're able to generate real total savings to a consumer.

So I think that the -- that -- that, in fact, while -- while search is going to get better, I think Expedia in all the things it's doing is going to get better faster.

And I think we see it in various areas right now.

Thank you.

You're welcome.

Next question.

Our next question comes from the line of Bob Peck with Bear Stearns, please go ahead.

Hi, guys, first of all, great quarter.

Great to see the results come in.

What I really wanted to focus on was sort of the guidance for the year and what we're looking at is a year-over-year [OIVA] growth of 3%.

First of all, is that about right?

Do you think there's outperformance for that and what should we be sort of expecting for looking at '05?

I think that, again, the number that you should be looking at is the billion dollars.

And if that translates to around 3% for Q4 sounds right.

Now, again the -- the 3% is based on reported results.

There are a lot of numbers inside of that, including the 22 million, kind of positive adjustment that we had in Q4 of last year.

As far as '05 goes, you know, again we said that we're not going guidance.

I think that you can expect some of our smaller businesses today, financial services and real estate, local, et cetera, to become a larger part of our business -- business and boost our growth rate on a go-forward basis, and I think that if we execute on the domestic travel business, as -- as Barry talked about, we're going to be just fine.

Thanks, guys.

Thank you.

Next.

Our next question comes from the line of Anthony Noto.

Please go ahead with your question.

Thanks, very much.

Good morning, Barry and Dara.

My question is about organic growth, I know that you reported total net revenue growth of 12.6% year-over-year which slowed a little bit from June.

But I was wondering, can you give us the year-over-year growth in September without acquisitions, so your core business growth -- so we can get a -- a better understanding of where '05 might be when you anniversary some of these acquisitions.

And then free cash flow for the quarter, you didn't generate free cash flow in the specific quarter, and Dara I was wondering if could you provide a little more granularity on that.

Thanks.

Sure, on organic growth in Q3 revenue was up 8% and operating income before amortization was up 23%, this is pro forma, kind of the big deals that we did, Hotwire, Trip Advisor, LendingTree, et cetera.

So that's a pretty good proxy of the organic growth rate of the business.

As far as free cash flow for the quarter, again, the elements that affected that are the lower working capital increases at Travel, that's partly because of the growth bookings growth rate, decreasing on a year-over-year basis.

It's also because we've actually been paying payables to our suppliers on a more timely basis.

It's part of our -- getting our controls, especially at Hotels.com much tighter, and we think it's very important that we treat our suppliers well.

Last year we kind of had some payables hanging out there that should not have been hanging out there.

Parts that -- that's partly why last year's Q4 actually had a lower free cash flow, because we paid those payables.

We also had the Ticketmaster client cash balances, lower this quarter.

Than last year.

And also we paid $50 million in cash taxes.

Which we didn't pay.

So, you know, from a working capital perspective, Q1 and Q2 are very, very strong.

And then Q3 and Q4 get weaker, and then we've got these external elements in there which affected the Q3 free cash flow.

Next question.

Our next question comes from the line of Michael Savner with Banc of America.

Please go ahead.

Good morning.

Thanks, very much.

Barry and Dara, when you talk about the tighter environment for hotel inventory right now and that's part of what is slowing domestic growth, as we -- assumingly, it will eventually will hit a slowdown in the demand cycle, do we -- do you, envision that growth and gross bookings could again increase to 20%-plus or by that time we'll have a competition have increased enough that will limit the amount of organic growth even during lower demand cycles when there is more inventory, so I guess it is a long winded way of saying how can we think about growth and gross booking, both in the low and high demand cycles?

Thanks.

Well, think that in the high demand period, the thing that we have really spent, I mean the -- the amount of just work that has gone into what Steve McArthur and Cheryl Rosner who runs our Hotels.com business has done to organize the field supply force to get more inventory, better prices, et cetera, which is something that, in fact, we had not really been organized for.

In fact, what we had was a very distributed out to the edges sales force without any centralized goals, decision-making process.

And so one of the things we've done is to bring much of it back and to make the linkages much shorter so that you can get action/reaction really fast.

It's -- it's enormous amount of blocking and tackling.

But I -- I think that, combined with -- without question much more, and, you know, you can understand it historically why it didn't take place, but much more concentration on relationships with the people who are in supply.

All of us who have been in businesses between suppliers and distributors know, I mean I've been in it for decades in various ways, know that you've got to have solid relationships, because there's going to be supply and demand characteristics that change all over the place.

The range of them narrows when in fact the relationship is good.

So we've really begun that effort.

We're very sincere about it.

And that's not something we're just doing for the moment.

That's life at our company for the rest of life.

Because understandable, in the years before, when we had so much demand and actually the travel business was hurting so much and depended so much on that demand, that that was perceived not to be necessary.

I think it was a mistake.

And all of the people at -- at IAC Travel recognized that and are working hard at it.

So I think that we're going to have, maybe as long-winded as the convoluted as myself, I think it's in -- in -- in -- in tight supply periods it's definitely in the field.

That's where you're going to be able to get the opportunities for real growth.

Obviously the other side kind of takes care of itself.

Again, I think within rational reason of process when that happens, which is obviously inevitable if you look at the cyclicality of the hotel business, going back 100 years.

I think just in response to your 20%, whether we can be higher or lower than that, that depends really on the overall growth of the travel markets.

But you would think that distributors like us would grow possibly faster than the overall travel market in a loose inventory marketplace and when inventories are tight, we -- you know, travel agents might grow slower.

Thank you very much.

Our next question comes from the line of Paul Keung with CIBC, please go ahead.

Yes, when you evaluate the implications of meta-search and the implications of possibly not working with all hotel chains and suppliers, have demonstrated an ability to shift market share between your supplier shifts?

And then sort of the strategic level question is -- that is how do you measure whether your relationships with suppliers are actually as good as you want them to be?

Well, I mean, I think you -- you know, the measurement obviously is the basis, the amount of business that's that you -- that's coursing through them.

And obviously you've got all sorts of comps and historicals and things like that.

So we pretty much know.

We have been at a lot of metrics on this for a long time.

But I don't think there's any more sophisticated measurement of it, and I didn't quite understand what your question was on meta-search.

Paul, I think you asked whether we can measure our ability to shift market share?

Is that correct?

That's correct.

And the simple answer is on Hotels.com for example approximately 80% of the consumers who come to Hotels.com and search for hotels book -- book a hotel on the top two pages of Hotels.com, around 80%.

So there's no question that, if you are a hotel, that is on the fourth or fifth page, you are not going to get, you know, the kind of demand from Hotels.com or Expedia, for that matter, that you are going to get if you are in the top one or two pages.

So our ability to shift demand both on a micro and macro level is absolutely demonstrable.

Demonstrable.

Demonstrable, would be the way that would come out.

Is that what you asked on meta-search?

Because you asked something before that.

I want to be sure that I heard you correctly.

With that as the answer then, do you think that you'll be able to maybe shift -- have you been able to shift those on your first two pages and, you know, examples would be, like, your relationship to Intercontinental?

Is that going to change in your mind over time?

Well, right now, what we would very much like to have a relationship with intercontinental but they don't -- didn't represent very much of our business.

We don't have one.

And I -- I -- I'm not yet quite sure what you're really getting at on -- on meta-search.

If you are saying -- if you are asking about the -- the -- the ability to sort lower, I think Dara has asked -- has answered that.

But I don't get its relationship to meta-search.

Well, the relationship would be, you know, to what extent are you a unbiased site, and a biased site, to get the balance trying to drive traffic to your suppliers and trying to make sure that your consumers get the best deal, while maximizing profitability,right?

That's the normal equation.

And so I guess, I think you have to make a decision which direction are you headed in or is it really a function of both?

Well, look, I mean, it always is a function of both.

We are in -- we are certainly, for our -- for our consumers that we don't offer them best balanced answer, options to what they're -- they're looking for, we are certainly -- what we're not going to do in any way is make the consumer experience or what the consumer gets from us worse in any way.

Now, of course if we don't have the inventory, we can't sell it.

But I don't -- I don't really think that's probably an issue for us in terms of, so to speak, choosing one route over another route.

There is an absolute difference between meta-searching which just ranks the things and what we do.

When you are packaging, obviously you are making an editorial choice of something which you think your consumer is going to like.

And, Paul, the conflict is -- is not that significant just because we are choosy about who we choose as our supply partners, our hotel partners are great hotels in their marketplaces.

We're constantly getting feedback on -- on kind of the customer service side and to the extent that we get complaints about hotels, about the room, about how they've been treating our customers, you can bet that that feedback goes back to our market representatives, and we make sure that it does not happen again.

And if it does happen again, they won't be on the site.

But in general, these are -- these are great partners that we have and the -- the quality of our hotels is terrific.

And also I think in the area of pricing, I'll just add one thing, I mean, I think that -- that, you know, precision here on pricing, I mean, yes, of course, everybody certainly wants value.

And there is -- there are certainly segments that want the most value.

For that obviously it's why we have Hotwire.

Which -- which offers super value.

So I -- I think that -- that price is a component.

It's a very important component.

But I certainly don't think it's the only one.

Every piece of our research tells us this.

Okay.

Great.

That was the answer I was looking for.

Thanks.

Thank you.

Our next question comes from the line of Jeetil Patel.

Please go ahead.

My question relates to the travel side of the business.

International growth appear to be quite robust at 78%.

You know, you've hit profitability internationally and looks like the trends will likely continue.

But can you talk about whether, kind of looking at the balance of growth and profitability internationally, kind of which one do you tend to kind of lean towards today?

You know, obviously keeping a eye on both is key.

But, you know, do you kind of look at UK, you know, kind of being highly profitable as a way to support and scale up the market and the rest of the European countries that you are in, or is it going for profitability and scaling that, you know, at the expense of top line at this point in time?

Second, just a comment about -- just a -- trying to figure out on the 200 managers that you have in the field on the merchant hotel side here in the States, can you just characterize whether they're focused on, you know, securing new inventory and is that coming from the major chains, or is that coming from independents and, you know, kind of how is that developing today as you combine the sales forces?

Your answer to the international question, the -- the good part of coming out of a break-even or a loss situation is that we can, you know, the -- the -- our profitability internationally can increase while at the same time we keep making the kind of investments in order to grow the top line aggressively.

So the UK is really our profit engine internationally.

But we are, you know, by no means kind of milking it at the -- milking it for the other businesses.

The UK, we continue to invest very aggressively in marketing, and just because of our scale, because we have one technology platform for all of these businesses, we can indeed afford to outmarket our competition and outgrow them organically on a top line while being in a nice, profitable status.

Germany and France are losing money, as well as some of the new sites that -- at that we're launching.

So we think -- we think we're in a great situation where international profitability can improve and we can keep growth rates up at very, very high rates.

Obviously all the large numbers would suggest that the growth rates are going to come down to some extent.

But I think we're going to be gaining share internationally for a while, and at the same time increasing profits.

Yes.

We've -- we've -- as I said earlier, we've been investing now for six years internationally and it's -- it's -- it's finally swung Macro, a group, positive.

And if you look at the size of the market, every dollar that we've invested, or will continue to invest, and as Dara said in terms of this balance of -- of being able to invest some of our profits, that -- that -- that we've just started to get, but every dollar that we do invest is going to be worth it here.

This is a bigger market than ours.

Every -- we've told you before, that as we track this, as against Expedia's history in the -- in -- in -- in the United States, Expedia's history in the United States and this -- this effort, if you just lay it on a -- on a graph, four years ago, it is following in absolute lockstep.

The other thing is about Europe and hotels, whereas in the -- in the United States it is somewhat -- I mean, it is still fragmented, but there's certainly some concentration.

In Europe it's mostly, you know, in Paris, 2000 hotels or so, almost all of them are independents, we are great marketing partners for these people.

We think overwhelming it is worth it.

As far as the field sales force, it's both.

I mean, it certainly is with the -- with the relationships that we have with chains, which as you know, are about 20% of our business.

But the majority of our business, obviously, comes from independents, and it is those relationships in the field and those being able to have feet on the street, real relationships, gets you new inventory, gets you solid relationships that will work for you whether it rains or shines in terms of occupancy and demand.

So is it safe to assume that the key to growth is your sales force obviously adding independent rooms to the -- to the system as we go forward here?

It's a begin combination of adding independent rooms.

It's working on getting even better deals from our existing suppliers, so we're -- we're working at all levels, yes.

Yes, it's obviously both.

Great.

Thank you.

Our next question comes from the line of Douglas Anmuth with Lehman Brothers.

Please go ahead.

Thank you.

I wanted to touch base on the Ticketmaster segment, and specifically just looking at the margins in 3Q which were definitely lighter than we've seen over the last couple of quarters.

I was hoping that you could drill down on the drivers there and how we can expect these to trend going forward when we could see these reverse back up.

And also if you could comment on the tax rate which came in considerably lower this quarter than in the first half of the year.

Thank you.

On Ticketmaster, the -- the margin in Q3 really was -- it was down because of the depreciation expenses that I talked about, that are coming into the P&L as a result of the technology investments that we've made.

Also Ticketmaster is a significant leverage business.

There's a big fixed cost base.

And the incremental ticket above the fixed cost base has very, very high margin.

So when you get into a situation like Q3 where ticket sales were light, kind of the incremental lower ticket sales really does hurt your margin more on -- on -- on -- in a particular quarter.

So on a go-forward basis, kind of Q4, we don't expect margins to -- to change that much.

And going forward, I -- I think Ticketmaster we expect margins to be stable.

It's going to benefit from Internet penetration but it also has -- has investments it has to make in the business and partner loyalties that it has to pay.

We don't expect Ticketmaster margins to change significantly on a go-forward basis.

We also made investments in Ticket Fast, auctions and all the other things that we're doing to sell more tickets, which is a -- which is kind of our everyday mantra.

That and the fact that this is a very efficiently run operation, which has really been able to, over the years, get more and more, you know, out of this -- this ticketing world while delivering more and more services is the future of Ticketmaster.

So investments were also made in --

Absolutely.

In the period, and we think those are vital for the future.

I mean, one of the things that that's true for the company is that we made investments all over the place in this year, and we think it was the prudent thing to do.

It did slow down our growth.

But we think we're now so much better poised for '05 and beyond, because of the investments, and because we did it in a tough environment.

And just on the tax rate, the tax rate is -- is lower principally due to some tax exempt interest, bonds that we owned, and also the utilization of some foreign tax credits this quarter.

We expect it to be higher in Q4.

Next question please.

Our next question comes from the line of Lanny Baker.

Please go ahead.

Thanks a lot.

It's probably pretty straightforward.

But you have said a couple times that you, in the travel business focused on bottom line, giving up top line growth.

And that -- I see marketing expenses still growing faster than revenue.

I'm trying to reconcile what -- what -- what it -- can you -- can you elaborate a little bit on what kind of top line activities you forewent, if that's a word, in order to -- to improve the performance there and does that -- are you suggesting at that there were some things that were going on that might have occurred in the quarter otherwise that would have been unprofitable and there would have been extra revenue but it would have lowered bottom line?

I'm just not really clear on, from everything that you've said, what it was that you missed on the top line, I do not want to say missed on the top line -- you gave up.

I don't want to say missed, but gave up.

Okay.

Well, we went for less marketing.

Now, I mean in some of the details of it, you know, here -- here at least are a few of them.

I think you -- in general, we -- we could have spent additional monies on search marketing, and we are firmer on the margins that we demand from search engine marketing this year.

Marketing efficiencies year-over-year are lower.

It's due to a lot of the competitive effects that we talked about.

So we're able to get users to the site actually, you know, as cheaply or cheaper as the year goes on.

Our cost per unique user is not going up, but it's because the environment is more competitive, they are converting at a lower rate so marketing as a percentage of revenue goes up.

It's probably most -- most particularly in -- in the search SEM category.

Specifically.

And if we had pushed SEM, which we've done previously, if we -- if we pushed SEM, then probably there would have been much higher top -- top line.

But we thought that it was time for us to -- to start using more of these levers tactically, because, I mean, we certainly have got enough audience and we're in a supply constrained period and so it would make sense for us to do so.

The way that you're characterizing, sounds like it is more than a one quarter thing it is more of a inflection point in the way that you are running in the business?

Is that fair?

Yes, I think that you will look for us in the future, you can never say this in any kind of absolutes but I would think as a big general, and one that is certainly true on the operating level in IACT is we're going to -- we're going to strive for much more efficiency in our marketing and I think that that is absolutely an ongoing piece of work that is -- that -- that is mandatory.

We spend a great deal of money as a company in marketing.

And -- and -- and we've learned a lot in this particular year about it.

We are area going to keep applying it.

Thanks.

Our next question comes from the line of Mark Mahaney with American Technology, please go ahead.

Great, two quick questions, one on personals, just some of the details about how you plan on turning that around going forward?

And then secondly, any quick comments on the profitability outlook for corporate, where that is now and how long that's likely going to be in investment mode?

Thank you.

Just on personals, we -- we -- we have -- you know, Jim Safeco has come back and frankly it is too soon for us to lay out specific plans that we have.

Dara, just want to interrupt you, he is coming in in ten days and he has got -- actually it was going to be about two days ago, but he asked for, I think it was a ten-day or so postponement because he's coming to us with a very details plan, and I know some of the things that have gone into it.

And some of the things that they are -- that they are -- that they are dealing with, I will tell you this: His attitude, which we share, is -- things don't turn around in an instant, but he has brought fast, tough, fairly hard change to an organization that just didn't see enough of it.

And it's all probably going to come, I'm talking about the difficulty period of organization, is going to come in this 4th quarter, which is why the 4th quarter is not going to be a thrill.

But I think the goal is that the -- that the -- that the new year, that '05 is really going to be a turn with momentum in terms of everything they are applying and everything they are trying to do, details of which will come.

And on ECT, ECT is losing money.

We think that next year it's going to get -- get close to break even, or break even but, frankly, at that depends on how the business is trending.

We may decide to invest more in it, or we might decide to get it to profitability quicker.

And it all depends on our overall portfolio.

It's one of the benefits of having so many different businesses under the same roof.

So the trends are great.

Gross bookings are up 74% year-over-year, and -- and, you know, ECT is now a main line choice.

Top 20.

I mean --

Top 20.

And, you know, it competes for business from everyone.

You know, the idea that in about a year it got $500 million in gross bookings, it will have.

A 500 run rate.

Run rate in gross books is pretty remarkable.

We think it is worth investing in.

It has taken investment, will take some more investment, really wise thing for us to do.

Thank you very much.

Thank you.

We'll take, like, one or two questions more.

I think that will be it.

I mean, I can hear a shout from the countryside.

But let's proceed.

Our next question comes from the line of Heath Terry.

Please go ahead.

Thanks.

I was wondering if you could just talk a little bit about your -- your current relationship, to the extent there is one, with some the low cost carriers that don't currently participate on Expedia like Southwest and Jet Blue.

Is there a path that can you see to including their offerings on the site?

What do you think it would take to -- to get them on?

And how important is it to the -- to the future growth of the -- of the travel business to have the -- a full range of the low cost carriers available on the site?

We have a -- a private label arrangement with Jet Blue, and we certainly have them all corporately.

But, look, we would want to.

We think that as this world merges, where in fact the -- the -- that the -- that the principals of low cost spread probably everywhere, they are, and I think they are starting to see it in different places as they expand, we think that at some point, and we -- we would -- we think at some point, and I can't -- I hesitated because I was going to put a time on it, and I don't think it is rational to do it, but at some reasonably near point their expanding market is going to need a distribution partner like us.

And so we're there.

We have discussions with them.

And -- and we're hopeful.

But I think we're going to -- what we'll try and serve them on the White Label product which is very successful and see when and when this intersection will cross.

I'd also add that, you know, the low cost carrier phenomenon is expanding and there aren't only two low cost carriers out there.

There are a bunch of other low cost carriers out there, and they are using our distribution to gain significant share and they're great partners of ours, so while we may not work with a -- with the top two, we'll be working with Frontier and others, and -- and doing great business with them.

Great.

Thank you.

Thank you.

Last question, please.

Last question comes from the line of Brian Egger.

Please go ahead.

Good morning.

Actually most of my questions have been answered.

But just a quick follow-up question about your merchant retail raw margins, just wondering if you have experienced or if you expect to experience any further declines in the negotiated merchant markups with the largest hotel chains beyond that which I know we've already seen.

I know we've talked with that in the past.

Well, our margins obviously a mix of chains and the independents, and we've already talked about the -- the -- the percentages of -- of that.

I think that the -- that -- that we've said that raw margins are pretty stable.

They're down about 80 basis points this year.

Around the 100 basis points.

Well, tracking towards.

Yes.

I mean, they were -- flattening out the average on it so far.

And we think that that's -- that's probably sustainable.

In this environment, we don't think that they're going up.

But we think they're pretty stable, based upon everything that we currently know now.

Okay.

Thank you.

Thank you all very much.

We look forward to speaking with you next quarter.

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