Match Group Inc (MTCH) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Expedia second quarter 2005 earnings conference call.

At this point, all the participants lines are in a listen-only mode.

However, there will be an opportunity for your questions, and instructions will be given at that time. [Operator instructions.] I would now like to turn the call over to the Vice President of Investor Relations, Mr. Stu Haas.

Please go ahead, sir.

Mr. Haas, please go ahead.

Good morning, and welcome to Expedia Inc.'s financial results conference call for the second quarter ended June 30, 2005.

Joining us on today's call are Barry Diller, Expedia Inc.'s Chairman, and Dara Khosrowshahi, our CEO.

The following discussion and responses to your questions reflect management's views as of today August 2, 2005, only and will include forward-looking statements.

Actual results may differ materially.

Additional information about factors that could potentially impact our financial results is included in today's press release and the Company's filings with the SEC including IAC Interactive Corp.'s 2004 annual report on form 10-K as well as S-4, and amendments thereto, filed in relation to the spin-off transaction of IAC's travel, and travel-related assets.

As you listen to today's call we encourage you to have our press release in front of you which includes our financial results as well as metrics and commentary on the quarter.

During this call we will discuss certain non-GAAP financial measures.

In our press release and our filings with the SEC, each of which is posted on the IR website at IAC.com/investors, you will find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP measures.

The results to be discussed in this call relate to the travel and travel related businesses, subsidiaries, and investments that will be part of Expedia Inc. following the spin-off from IAC/Interactive Corp.

The spin-off is expected to occur next week, with IAC and Expedia Inc. beginning trading as independent public companies on August 9, 2005.

We strongly encourage you to review the sections entitled "The Spin-off" and 'Basis of Presentation" in today's earnings release for more details on how we are presenting results for the periods ended June 30, 2005.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2004.

And with that let me turn the call over to Barry for some introductory remarks.

Well, good morning, again.

At least I presume for some of you, probably many of you.

I think in the future probably we will not do these calls one after the other, but time will tell for the next quarter, but by the next quarter the companies will be formally separated, and I think that some of this [inaudible] trading and the other, kind of complications, confusions of just meeting the spin date will have passed us by.

So thanks for taking the time to listen in on this, though.

It's Expedia's first stand alone earnings call.

I want to make some very brief remarks before letting Dara take you through the businesses in the quarter.

Some seven months ago, back in December of 2004, we announced the intended spin-off of IAC's travel assets.

What the spin does, what it is intended to do, is to allow each of these companies to increase the clarity and focus of their operations.

Clarity for investors as they analyze historical results and forecast the future prospects of their respective entities, and focus for the management and employee teams as they go about the business of enhancing shareholder value over the long-term.

With an equity currency, it allows them the utmost flexibility to adapt to changing competitive landscapes.

What has not changed is the commitment of both IAC and Expedia to provide insightful disclosure to help investors assess these businesses.

All the good, all the [awards], for all to see.

And I hope you'll be more than pleased with what the Expedia earnings release in our call here today have to offer on that.

Earlier, we announced the renewal and the expansion of our strategic partnership with Microsoft MSN properties.

There's a separate release on this, but what's very exciting is the broadening of the relationship to include not just Expedia properties across the world, but also the other powerful brands under the Expedia umbrella, mainly hotels.com, hotwire and TripAdvisor.

Just as our diverse brand portfolio maximizes Expedia's relevance for travel customers, it also greatly enhances its appeal to travel suppliers and strategic partners such as Microsoft.

And the reason that I'm specially highlighting this today, as Expedia returns to stand alone public ownership, is that it all began with Microsoft.

Without their very early and consistent support for what was a totally unproven concept for online travel, there would be no Expedia.

It's really a great compliment to Microsoft that they nurtured that always messy and costly early effort during the primordial soup era of online commerce.

And then, that an extremely talented and entrepreneurial group of Microsoft engineers and product managers leveraged the combined power of the PC and the internet to transform the way people around the world plan and purchase travel.

Microsoft unveiled Expedia.com to the world in October 1996, and by early 2001 Expedia had leapfrogged its competitors and achieved the leadership position in online travel.

A tremendous feat that deserves our continuing respect for the founders and all who worked then and now at the Company during the formative years.

That leadership position, I might add, has held and steadily grown since 2002.

In fact, since the time IAC had the good fortune to acquire Expedia in full two years ago, at the $7 billion mark in gross bookings, we returned the new Expedia Inc. to the public markets with nearly doubled that level of gross bookings and a truly global position.

As we prepared a spin off the travel companies formally comprising IAC Travel, we are confident Expedia Inc. will continue to build on the legacy that sprang from Microsoft's early efforts.

So with that, over to you Dara, and the businesses.

Thanks, Barry, and welcome to everyone joining us in this morning's call.

I'm going to quickly review the financials and then move on to some more qualitative comments.

But as it does relate to our financials I do want to remind everyone that we're presenting our results on a combined historical basis for the businesses formally combining IAC Travel, excluding TVTS and Interval, and including TripAdvisor.

This was a good quarter for Expedia and we're very pleased with our first half performance.

Gross bookings for the quarter were 26% to just over $4 billion.

This is an acceleration from the year-over-year growth rates that we've seen in the prior two quarters.

International gross bookings grew strongly at 73% to $909 million, and domestic gross bookings grew to 17% to $3.2 billion.

As many of you know, gross bookings are the rawest indicator of commerce volume being generated throughout our worldwide point of sale, without regard to the economic benefit we derive from those transactions against our supplier partners.

Revenue, which is essentially Expedia's share of this gross bookings value, rose 14% in the second quarter to $555 million, primarily driven by the international merchant hotel business acquisitions and our air business.

Excluding the impact of acquisitions, second quarter growth was up 9%.

For the first half of our -- of 2005, our revenue growth was 16%, or 11% excluding the impact of acquisitions.

Continuing down the income statement, selling and marketing expense increased 10%, including a 60% increase in our international spend, as we continue to support these new businesses, build name recognition for Expedia in international markets, and prepare for future country launches.

As a reminder, second quarter 2004 included a reversal of a $6.4 million charge associated with the resolution of a contract dispute.

Excluding this one-time item, selling and marketing increased 67% versus the prior year period.

As a reminder from our Q1 call, we have made a conscious decision to more evenly spread our marketing spend throughout the year versus our past practice of front loading spend.

So we do expect to see higher growth in the back half of the year versus the 7% growth in the first half spend.

And given our desire to build our international presence and the continuing competitive environment in paid search and other online marketing vehicles, we do expect absolute amounts spent in sales and marketing to continue to increase over time.

I want to emphasize that the anticipated increases in the sales and marketing do not mean we are shifting our focus from continuing to drive efficiencies in our marketing spent.

We're pleased with our initial efforts on this front but we still have a lot of work to do to make sure we're driving efficient ROI with our marketing budgets.

G&A expense increased 16% versus the prior year.

The second quarter includes an estimated $1.2 million related to costs incurred in connection with the spin-off.

Please note, as you think about forecasting results, that G&A on a historical combined basis would not include any amounts we expect to incur going forward as a stand alone public company.

In addition, we do plan to increase our headcount in various areas, especially as we continue to invest aggressively in product development to ensure that we continue to deliver the best on-site experience that our customers deserve.

Operating income before amortization is the primary internal metric used to evaluate our business, and for the second quarter, it grew 15%, or 17% excluding $3.3 million in net benefit from acquisitions and a $6.4 million prior year benefit from the reversal of the contractual dispute.

For the first half of the year, OIBA grew 24%, or 21% excluding acquisitions and the reversal.

Operating income before [amort] margins continue to expand, up 147 basis points in the second quarter after adjusting for the legal settlement reversal.

Operating leverage, or flow-through, was 42% during the second quarter after accounting for these adjustments.

Operating income growth was 31% during the quarter, significantly higher than OIBA growth as amortization expenses were essentially flat versus the prior year quarter.

Below the operating income line, I also want to highlight some differences between the historical statements and what we anticipate going forward as a result of the spin.

First, our interest expense is likely to increase as we signed a $1 billion. five-year revolving credit facility on which we'll incur interest, facility fee, and other charges going forward.

We anticipate carrying an outstanding balance on the facility throughout the remainder of this year.

Further details about this facility and anticipated charges are included in our 8-K filings on July 14 and July 17 of 2005, was also an S-4 filing.

In addition, it is expected that post [then] we will begin with approximately $100 million in cash and cash equivalents and restricted cash, excluding the cash of eLong, which is shown consolidated on our balance sheet.

Therefore, the interest income that we earn going forward will be significantly lower than what we show on the combined historical statements.

Now let me talk a bit about business trends and what we see -- what we're seeing for the balance of the year.

We're obviously pleased with our year to date performance versus our first half expectations.

Early growth bookings result in July, however, have been affected by certain exogenous factors, including the bombings in London and hurricanes in Florida.

It's too soon to tell how and whether these factors will affect our balance of the year results, and as a result, we don't think it's appropriate to change our previously-stated outlook of mid to low teens OIBA growth for the full year at this time.

With that bit of housekeeping complete let me turn to the strategic and operational side of our business, and an update on the areas of focus we laid out on the last couple of calls.

As you heard earlier our international business continues to grow nicely, and international revenues as a percentage of total revenue increased to 21% from 15% in the prior year period.

While we're optimistic about our ability to grow our international business over the long-term, we have felt the effect as I mentioned of the recent events in London on our gross bookings growth.

Additionally, we do expect to continue addressing aggressively in China through eLong, to build awareness and our customer experience, well as our upcoming Asia Pacific markets.

Hotels.com continues to work largely behind the scenes on its hotel expert rebanding strategy.

We've seen improvements the last two quarters in gross bookings growth, and for the first time ever hotels.com eclipsed $500 million in quarterly gross bookings.

Hotels continued to add properties during the second quarter including the new Wynn Las Vegas and Mandalay Group properties in Vegas, as well as improved its hotel content.

We're hopeful that a rebranding execution in upcoming quarters will augment the positive growth trend, particularly as we approach the back half of the year with easier comparables for the hotels.com business.

On a supplier relations front, last month we announced the formation of a centralized global partner services group.

This is a key initiative for the Company as it brings our relationships with hotel, air and other travel suppliers under one roof.

This allows suppliers easier access to our multiple points of sale.

It also presents an opportunity for us to focus and improve our supplier relationship across all product groups in all geographies.

We continue to work closely with our supplier partners, and recently announced the addition of Budget, Payless, and Europcar to our Platinum marketing program, which guarantees rental car customers access to the same low rates found anywhere else, including the rental car companies own websites.

The program also features guarantees of excellent customer care and special offers for Expedia's customers.

Our decision to form the partner services group is the first and most tangible outcome of a strategic review we undertook back in May of this year internally code-named Project Apollo.

Apollo's charter was to find innovative ways to best leverage a company's core assets with particular emphasis on our ongoing branding strategy and resolving potential operating efficiencies arising from these brand silos.

While we're still under the early planned stages our preliminary estimates are that we could see $50 million or more in annual operating efficiencies.

We're early in the process so we do expect to see some of these early efficiencies to appear in 2006.

Project Apollo and the partner services group are both good examples of another piece of our game plan which is using the Company's scale to its advantage.

Similar to using scale, we're focused on improving markets efficiencies in 2005 and beyond.

First half sales and marketing as a percentage of revenue improved 255 basis points year on year, or 326 basis points, excluding the litigation settlement reversal in Q2 of 2004.

Some of this improvement is certainly due to more evenly spread marketing dollars and we don't expect at this time to see this large an improvement in the second half of the year.

But we also believe some of our work on improving [spent ROI] is bearing fruit.

We'll continue to remain focused on this as $1.00 of every $3.00 of our revenues goes to sales and marketing spend.

I'm going to close with the strides we continue to make on our wider-brand portfolio beginning with our flagship, Expedia.com where we saw strong gross bookings growth and continuing innovation, including the buildup of over 50,000 traveller reviews of properties.

These are highly qualified reviews, as we require the customer to log a paid stay at the property prior to submitting a review.

They are for real.

We also introduced our air seats going fast feature, where customers are alerted when a given fare has only a few seats remaining at that price.

In addition, just yesterday we introduced our hassle-free hurricane promise.

This promise is simply the latest reflection of our dedication on place -- on providing excellent customer service.

Should customers need to cancel or change their travel plans for destinations affected by hurricanes, Expedia.com travel specialists will waive any Expedia.com cancellation fees, advocate on behalf of the customers for travel partners to do the same, and provide new travel options for consideration.

All to help provide travelers peace of mind during this year's hurricane season.

We plan to continue innovating for our customers and suppliers and we plan to continue working hard to deliver best in class customer service.

Moving on to some of the other brands, I wanted to touch on TripAdvisor, the world's most popular travel information website.

I just checked the site before the call, and it now has over 2.3 million reviews and opinions of hotels, attractions and restaurants across the world.

We've recently enabled our travel enthusiasts to post photographs of their stay, which adds to the incredible variety of content that helps consumers when deciding what hotel to stay at and what to do once they get there.

Hotwire continues its strong execution in a tough environment with high low factors and low prices by augmenting their original opaque product with both semi-opaque and retail air offerings.

Despite these challenges, hotwire saw solid profitability gains in the first half of the year versus 2004.

The availability of opaque and semi-opaque products in the Expedia portfolio provides value to both our customers and our suppliers.

Classic Custom Vacation is executing on its path of profitability and its mission to tailor a luxury vacation for travel agent customers and ultimately the end consumer.

And, meanwhile, for Expedia Corporate Travel, or ECT, had another successful quarter signing up one of its largest clients to date, a global company with $30 to $40 million dollars annual travel spend.

ECT has worked closely with Southwest Airlines, and our corporate clients can now book Southwest within the ECT platform on any city pair served by Southwest.

From a leadership perspective we were very pleased last month to name Cheryl Rosner as the new president of ECT.

Cheryl was previously head of our hotels.com business in Dallas, and she brings extensive sales, leadership and travel industry experience to the ECT team.

In closing, I want to bring us back to Barry's opening.

In the post spin world Expedia Inc. will have a better opportunity than ever to leverage its brands and leadership position in the online travel industry.

We have a great base from which to build it, but we also have lots of executional challenges to overcome and we must do so in an environment that's very competitive.

So we're up for the fight and we're as focused as ever on growing long-term shareholder value.

Okay, Stu, let's take take some questions.

Great.

Thanks, Dara.

Let's move on to the Q&A portion of the call with Dara and Barry.

As a reminder, please limit yourself to one question.

Operator, will you please remind our listeners how to ask a question.

[Operator instructions.]

And first to the line Anthony Noto with Goldman Sachs.

Thank you, Stu.

Hi, Dara and Barry.

My first question is -- marketing has a obviously been a lever that you've been optimizing, and that's helped with profitability.

As I look at the gross bookings share of the major third-party travel aggregators, so IAC Travel in total, Orbitz, Priceline and Travelocity, it looks like, on a sequential basis, the Company's lost a little bit of share as you probably have traded off some share for profitability, and I'm just wondering, do you think you can continue to do that, and is that the plan as you try to smooth out the marketing spend?

And then, the second question as it relates to mix shift to agency revenue, it's obviously up on a year-over-year basis and it's hurting your net rate a little bit, is there a mixed shift to agency in that there's just a greater percentage of error tickets that are being purchased, or is there a mixed shift within hotels, in that people are shifting from merchant hotels to agency hotels, and if so, what's the underlying driver of that?

And then last, Dara could you clarify the point about hurricanes?

I cover Walt Disney Company as well, and last year the company was horrendous for hurricanes, in Florida specifically, with the month of August actually closing down the parks a couple of times, but I haven't seen any specific hurricanes in Florida this year.

Is it fear of hurricanes or actual events that we're not aware of?

Anthony, let me take those answers in opposite order.

So on hurricanes, what I was referring to is in July the -- the big hurricane in Florida, we certainly felt its effect and -- and it's anticipated effect.

It certainly wasn't as bad as people kind of anticipated it to be, so that -- that did affect our -- our July gross bookings.

Obviously, August will be what it is and we did feel it last August and again, we'll see what happens on a go-forward basis.

On the agency -- on your question on agency bookings, the -- the mix in shift relates to air tickets.

So one is the -- the number of air tickets increased 21%.

On a year-over-year basis, and also the average price per air ticket has increased very significantly year-over-year, which creates the mix in shift.

We are not seeing any kind of significant mix in shift between merchant and agency hotel bookings.

And then as far as the -- the share question goes, you know, let me first start by saying that the top priority for us is -- is not necessarily our competitors, but building a big business over the long-term, and -- and if we execute for our leisure customers or corporate customers or suppliers we think we'll be a winner long-term.

It's a huge market.

It's an $850 billion market worldwide and we think there can be plenty of winners out there.

But specifically in relation to share, what you do have to take into account is that a number of our competitors and the online travel space are building their base -- they're building their revenue off of much smaller bases than we have.

So, one of our competitors, for example, announced year-over-year pretty high percentage year-over-year increases and call it a $450 million increase in gross bookings quarter over quarter which is a big increase, but if you compare to our increase we actually increased our gross bookings by $850 million year-over-year.

So, I certainly don't -- from a dollar share standpoint we are gaining dollar share, from a percentage standpoint, because we are growing off of a much, much bigger base, the percentages look smaller, but we certainly are not losing dollar share.

And lastly, it's your point, which is you -- you have to keep profitability in mind.

Right?

Our long-term goal is to -- is to grow the business profitably and our -- our trailing 12 months operating income before amortization is over $600 million.

We have cash flow, free cash flow of $876 million in the last 12 months, so I think we are able to get profitable growth in a way that certainly our competitors haven't been able to match yet.

Great.

Thank you very much, Dara.

The next question is from Jake Fuller with Thomas Weisel.

Please go ahead.

Good afternoon, guys.

Could you talk to me a little bit about the trend in U.S. merchant room nights, was that flat, was that down, and also the scale of losses, if any, and the international and corporate side of the business.

What was the second question?

I'm sorry.

The scale of losses, if there are any, on the international and corporate side of the business.

Yes.

The -- the room night growth in the U.S., we don't specifically disclose that but it was consistent with Q1.

And it was -- so we have not seen significant trends there.

But overall room night growth, you saw the numbers, they're up 8%.

Obviously, the international growth is stronger than -- than domestic growth.

We are encouraged by the progress in hotels.com.

The room night growth there has improved quarter-on-quarter which has been partly responsible for -- for our gross bookings getting better this quarter than the last two quarters.

The international corporate business is -- is doing actually very well. e have a great management team there and -- and it is running the business at -- at close to break-even, so we -- the business is actually pretty large, it's scaling very well, it's executing nicely in France, we're expanding in England now, and we're looking across Europe to see what kind of investments are appropriate.

But, overall, we're very happy with -- with ECT worldwide and certainly in Europe as well.

Hey Dara, just to clarify, what I was longing at was also the scale of losses for your international leisure business with your corporate.

Historically you guys had talked about your U.S. business, and then, kind of everything else, and talked about what the scale of losses were for everything else outside of the U.S.

Yes, we make money internationally now.

So the -- the -- we have been -- international has been I'd say solidly profitable for the Company since Q3 of last year, so part of the margin expansion that you see in the business is driven by international on a year-over-year basis.

They're executing very well, and as of Q3 of last year we were profitable internationally and we continue to be profitable.

The biggest market for us internationally is the UK leisure market and that is significantly profitable.

The other markets are either unprofitable or not making a bunch of money, but it's really the UK market that's driving our international business from a profitability standpoint.

Great.

Thank you.

You bet.

The next question is from Justin Post with Merrill Lynch.

Please go ahead.

Two questions.

First, it looks like in the U.S. you had 17% bookings growth and 6% revenue growth.

Just wondering when you think revenues -- is it maybe sometime next year, revenues really grow in line with bookings?

Do you think there will ever be a catchup or do you think the merchant hotel inventory margins continue -- raw margins continue to trend down longer-term?

I think it -- there are so many kind of exogenous factors that affect revenue growth versus gross bookings growth that at this point it's very hard for us to predict.

One point is clearly this quarter the increase in air fares helped gross bookings grow, but since our revenue on the air business is based on unit economics, it really doesn't have that much of an effect on -- on revenue.

So, to the extent that we see an environment on a go-forward basis of increasing revenue per ticket on the air business, you would see our raw margins naturally decline.

It's a good thing for our partners, so we certainly like seeing higher ticket prices and certainly with the load factors we see today it's healthy for the business today it's healthy for the business in general.

It does cause lower raw margins for us.

'That is a factor that's similar again in the merchant hotel business, which is, as you see occupancy rates going up, the -- the hotel ADRs go up which is good for us, but in a -- if you step back and you look at the macropoint of view, as -- in a very strong occupancy type of an environment distributors would tend to get lower raw margins but higher ADR's would largely offset that, so you see that in our numbers as well, which is our revenue per room night on the hotel business is actually flat.

We're naturally hedged.

On the other side of the coin, if we do get into a -- a cyclical downturn which we certainly don't anticipate, you would see ADR's come down and you would probably see raw margins go up again.

So, a lot of that depends on exogenous factors that we certainly can't predict.

Okay, second question, just a housekeeping thing.

I think you said mid to low teens OIBA growth for 2005.

Is that off of a number, I think 553 for 2004, is that the number you're talking about?

Stu is checking the number but I believe that's correct, and we'll correct that if it's incorrect.

Okay?

Thank you.

Our next question is from Heath Terry with CSFB.

Please go ahead.

Great.

Can you talk about your position right now with -- as you try to expand relationships, particularly with the low cost carriers.

Obviously, Southwest as a pretty entrenched stance there, but as you try to expand the universe of airlines that you're working with, are you seeing any kind of softening of that stance with some of the others like JetBlue?

And then, if you could also talk a little bit about what you're seeing withinTripAdvisor, what's going on within the advertising business, rates, sell-through, that type of thing.

Sure.

As far as LCC's go, there's really no update to give you against last quarter or the last couple of quarters.

We believe that we have a lot to offer as -- as a distributor of travel products.

We have seen Southwest, for example, appreciate that in our corporate business and -- and we are selling Southwest in -- on ECT to our clients.

So we -- we're constantly talking to them.

We would love to be selling their product a well, and we think over the long-term. hopefully. we can come to terms.

As is, we're very happy with our air partners, we think we've got a great product.

You can see the gross bookings growth increases, our audience increases, etc., so it's not -- certainly it's not something that we're counting on.

The traditional air carriers are certainly, in our mind at least, reducing the differences, the cost differences that they historically had with LCCs. which we believe will make it more competitive going forward and that's something that we will -- will support.

TA's business is, just turning to TripAdvisor, the business is doing great.

Year -over-year growth rates are very good.

TripAdvisor at the moment is not increasing rates so much as -- as they are just very much focused on increasing the amount of content that they provide to their users.

We're pretty focused on international growth as well.

Putting up pictures, creating discussion groups, etc., for travel enthusiasts to participate in and right now a lot of our increases are volume increases which we think are pretty healthy.

Great, thank you.

You bet.

Next go to Scott Devitt with Legg Mason.

Please go ahead.

Thanks a lot.

Just a quick balance sheet question.

The -- in the past I think we had heard a $250 million number on a cash basis.

You ended the quarter at 328 and then I think Dara you mentioned $100 million in cash as well on the call, and I'm trying to think about how to think about that in relation to the deferred merchant bookings that were transferred over and are those merchant bookings actually being funded through the receivables line in current assets.

I'm just trying to circular around those three line items and particularly the -- the deferred merchant bookings, and then the receivables from IAC and subs at $2.4 billion.

Sure.

The -- I think what you should refer to is -- is our balance sheet, the pro forma balance sheet and the S-4 which will help you out.

If you look at the balance sheet, the balance sheet that we have in our announcement is the balance sheet in Expedia, Inc. as a sub of IC's, so it might be confusing to you, but that's something that you can do with Stu offline.

As far as the cash goes, the 250 was an initial estimate.

The final number is $100 million at the parent and then eLong has a bit over $100 million in cash as well.

We did go ahead and secure the bank line of $1 billion, so we think that we've got plenty of liquidity on a go-forward basis and the key for us is having liquidity.

You know that business on an annual business creates a whole bunch of cash flow, over $800 million in free cash flow.

So, we certainly don't need cash balances, what we want is liquidity.

The reason why we do want liquidity is that our cash flows are pretty seasonal.

Almost all of our cash flow comes in Q1 and Q2, and then in Q3 and Q4 our cash flow is flat to down.

But from an annual basis, we're certainly not a company that needs cash balances, and certainly one of the benefits of the spin-off is that we can use our stock for acquisitions if we need to, as well, on a go-forward basis.

On the deferred merchant bookings and -- and accounts payable balance, what I'll tell you is that on average, to the extent that our gross bookings line and to -- I'll explain it this way.

To the extent that our payables terms don't change and -- and the deferred kind of merchant bookings terms don't change, if we're -- if we are growing gross bookings on a go-forward basis, the business creates working capital.

So those two numbers tend to balance off on an annual basis, obviously there's seasonality, but as we grow the business, assuming no other changes in policy, the working capital will increase, which is a -- which is a reason for the high cash flow that you've seen for the business.

And just to answer a -- specify on a prior question, the OIBA base that we're talking about is 556.8.

The -- the low to mid-teens gross assets that we indicated.

And one follow up if I could.

What are your restrictions in terms of share buybacks?

We do have certain restrictions on share buybacks.

Greg, do you know specifically what they are?

I think they need to be in the open market repurchases and they're limited to approximately 20% of the outstanding but it's a difficult calculation.

It takes into account prior acquisitions.

It's around 20% in the year.

I thought there was a limitation post-spin in terms of time period before you actually could buy back shares.

It's just during the first year you have that limitation that they need to be in the open market.

Obviously we have a window restrictions, but --

None other than any other company does.

Right.

Thanks.

Our next question is from Doug Anmuth with Lehman Brothers, please go ahead.

Thank you.

Dara, you talked a lot about gaining greater efficiency in terms of sales and marketing spending.

Can you drill down on this a little bit, perhaps in talking about what you're doing offline versus online, and what you're seeing more specifically in the search base.

And then also a separate question, just going back to the merchant hotel business, is it -- is it fair to think about the split in terms of bookings between the major chains versus the independents and nonbranded as 80/20, as you've mentioned in the past, and where are we seeing more of the raw margin decline between those two sides?

Thank you.

The split between the major chains and the -- the independent hotels, is the major chains account for less than 20% of our merchant hotel business.

That has been pretty consistent.

As far as a raw margin decline, I -- I would guess that the -- we've seen more of a raw margin decline in the major chains, but that's something that, honestly, I don't have on me to quantify exactly what that number is, but we do think that there has been more of a decline as far as the major chains go.

On your marketing efficiency question, we're focused on all aspects of the business.

We're -- we are trying to -- to spend more on variable marketing expense so that we know that we're getting a return for that marketing spend.

We -- we look at both our offline and online channels as to how we can be more efficient going forward.

Obviously online and search engine marketing, we're driving efficiencies there.

That's a daily task of looking at what terms work, what terms don't work.

We're expanding the number of terms that we bid on so that we try to get the terms that are less popular, so to speak, and we're also working, for example, on the language that we have describing paid links as well.

We're testing what -- is it book on Expedia [inaudible] whatever language there is there, we're optimizing for.

So it's kind of a front to back optimization of all aspects of our marketing spend.

We're obviously pleased with results to date, and -- and we think there's more to go.

The other part of marketing that -- that I'd like to mention is that we are, going forward, going to spend a higher share of our marketing spend on CRM-type activities.

We think we are not where we want to be in e-mail marketing, developing customer loyalties, etc.

The advantage of that kind of marketing spend is that it's marketing spend that is direct to a consumer and you get a consumer directly rather than acquiring that consumer from a third party.

That is an area of real focus for us.

It's taken some up front investment and it will take some up front investment and we think it will pay out over the long-term.

Great, thank you.

Let's just do two more questions.

Operator?

Certainly, and we'll go to Bob Peck with Bear, Stearns, please go ahead.

Dara, could you give us an update on the status of your direct connection with hotels, and what upcoming potential targets you have there.

Additionally could you talk about hotel contracts coming due, and what's the current status of InterContinental, and then I have a follow up.

On hotel DC, we have -- we -- we don't want to give exact numbers, but we've had thousands of hotels on -- on direct connect and the status of our direct connect now is that it's not just about saving a connection which avoids kind of faxes etc., to the hotels.

We are direct connecting to the hotels' property management system, they are sharing their inventory with us, their rates with us, so that the -- the rates and inventory that we have available on Expedia is essentially the same rates and inventory that the hotels have on their own websites that they offer to their own consumers.

It's -- it is a key and that -- the hotels themselves want consistency across all of their sales channels and it's certainly something that is in our interest.

As far as InterContinental goes, you know, we -- we are -- we don't have a relationship with them.

The business is -- is obviously doing fine.

We've got relationships with every other major hotel chain.

Cendant, for example, which was a new ad, is doing great for us.

And we've re-signed a bunch of our hotel contracts and we're certainly open to talking to InterContinental.

Paul brown who runs our partner services group, this is something -- he actually used to work at InterContinental so I'm sure these are discussions that he'll have go forward, and if it makes sense for them and for us we'll be doing business going forward.

I can't tell you right now whether that's going to come to fruition.

One quick follow up here.

As far as -- what's the time line for integration of bookings to Sabre, and do you think somewhere down the line does it make sense, do you see enough synergies to acquire a GDS in the future?

As far as Saber goes, we have a good relationship and we continue to work with them.

I can't be -- I can't give you a specific timeline on that.

Long-term does it make sense to buy GDS, we're -- we're open to anything, but -- but I'll give you my opinion, which is I can see why GDS would want to buy us.

I don't necessarily see we would want to buy GDS.

We are -- we attract -- we have a direct relationship with our customers and obviously we will go with the connectivity solution that works for us, that works for our suppliers.

We're very happy with Worldspin, our partner right now, and, again, we have a good relationship with Sabre and expect to do so going forward.

Thanks, Dara.

Next question?

And we'll go to Paul Keung with CIBC.

Please go ahead.

Dara, what trends are you seeing on the site conversion rates among all your various sites, I guess the [inaudible] on hotels.com repositioning, and the second question, I think in your filings you mention some initiatives to reduce that slope period to improve the supplier relations, where are you with these initiates and how much longer should we expect that to sort of impact working capital and free cash flow?

Paul, can you -- let me answer your first question and then I'll ask you to repeat second one.

Conversion trends are stable.

We told you at the beginning of the year that year-on-year conversion comps were difficult for us because of the competitive environment, Direct Connect, etc., but the conversion trends that we see in Q2 are -- are stable with the trends that we've seen earlier this year and -- and that's the stabilization certainly that we're happy with.

We are optimistic about the hotels.com, the site re-launch and some of the activities there, so hopefully we can get a -- a positive change in conversion although, again, I can't tell.

What was your second question, Paul?

Yeah, in your filing you mentioned some initiatives to reduce that float period to improve the supplier relations.

Where are you with these initiatives, to what extent do you think it will continue to have some impact just on free cash flow and working capital?

I think, initiatives is a fancy word for -- for paying our suppliers on a more timely basis.

We -- we have to make sure that we're certainly getting the consumers' money up front and we just want to make sure that we're paying the suppliers on a timely basis.

It's a focus of ours as part of this Project Apollo which is. in general. making sure that execution across the Company improves and is consistent,and that's really what the initiative is about.

So it's an ongoing initiative.

I don't have a specific free cash flow number for you, but again, I don't expect to see huge changes there.

The biggest driver of free cash flow is gross bookings growth, and certainly we do expect to see gross bookings growth on a go-forward basis.

It just reduced the float modestly then, is what you're suggesting.

It might again, Paul it might.

It depends on the timing it depends on the particulars.

Okay.

Thanks.

I think that's it, operator.

Thank you very much for joining us and we will talk to you next quarter.

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