Expedia, Inc. Q4 2009 Earnings Call Transcript

| About: Expedia, Inc. (EXPE)

Expedia, Inc. (NASDAQ:EXPE)

Q4 2009 Earnings Call

February 11, 2010 11:00 am ET


Stu Hass – Investor Relations

Dara Khosrowshahi – President, Chief Executive Officer

Michael Adler – Executive Vice President, Chief Financial Officer


Mark Mahaney – Citigroup

Imran Khan – J.P. Morgan

Justin Post – Bank of America/Merrill Lynch

Ingrid Chung – Goldman Sachs

Ross Sandler – RBC Capital Markets

Aaron Kessler – Kaufman Bros.

Herman Leung – Duetsche Bank

Michael Millman – Millman Research Associates

James Cakmak – Sidoti & Co.

Michael Olson – Piper Jaffray

Scott Kessler – Standard and Poor’s

Sandeep Aggarwal – Collins Stewart


Welcome to the Expedia, Incorporated fourth quarter 2009 conference call. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Stu Hass.

Stu Hass

Good morning. Welcome to Expedia, Inc.’s financial results conference call for the fourth quarter and full year ended December 31, 209. I’m joined on the call today by Dara Khosrowshahi, Expedia’s CEO and President who is dialing in from our offices in London, and Michael Adler, our CFO.

The following discussion, including responses to your questions reflects management’s views as of today, February 11, 2010 only and we do not undertake any obligation to update or revise this information.

As always, some of the statements made on today’s call are forward-looking, typically preceded by words such as we expect, we believe, we anticipate or similar statements. Please refer to today’s press release and the company’s filings with the SEC for information about factors upon which we have based our financial expectations and that could cause our actual results to differ materially from these forward-looking statements.

You will find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release which is posted on the company’s IR website at expediainc.com/ir. I encourage you to periodically visit our IR site for important content including our updated investor presentation reflecting today’s Q4 results.

You may also have noticed we have changed the way we are distributing our earnings release. Rather than put the release out over the newswire, we are pointing people to our IR site where they can pull down the PDF version. You should expect us to continue this practice going forward.

Finally, unless otherwise stated, all references to cost of revenue, selling and marketing expense, general and administrative expense and technology and content expense excludes stock based compensation and all comparisons in this call will be against our results for the comparable period of 2008.

With that, let me turn the call over to Dara.

Dara Khosrowshahi

Thanks for everyone making time to join us this morning. I’m happy to kick things off today with a couple of significant developments on the capital structure side of things. First, we closed on a new three year, $750 million revolver which affords us well over $1 billion of liquidity even at the seasonal low point in our cash cycle; and combined with our ongoing cash generation, this ensures more than adequate capital to address Expedia’s internal investment opportunities as well as value and bolt on acquisitions.

Second, today we’re unveiling the company’s first ever quarterly cash dividend which is part of Expedia’s ongoing commitment to return excess cash to our shareholders.

Turning to results, Q4 caps a successful year for the company. Expedia delivered 2009 free cash flow of nearly $600 million despite the worst economic conditions many of us have lived through, and despite us cutting over $150 million in gross annualized fee revenue.

On the advertising side of the house, TripAdvisor’s growth accelerated to 29% on sustained traffic and quick growth as well as improved CBC’s. Trip recently launched its business listings product, a line of hotels to directly merchandise their websites and its telephone numbers and email.

And if you’ll forgive me on the shameless plug, first year listing subscriptions are starting as low as $300 through the end of February.

Overall, our advertising businesses now constitute about 11% of our revenues, representing significant differentiator versus our competition as well as a growing hedge against media rate inflation.

Expedia’s international businesses hit a record 41% of revenue in Q4 with Hotels.com now operating over 70 sites around the globe and our Expedia brand launching its 20th site in Mexico. Our travel planner Agencia meaningfully outpaced competitor growth in Q4 while adding nine additional countries through localized partnerships.

Looking forward in the first half of 2010, Expedia will open a new office in Switzerland that will serve as a global headquarters for our lodging supply group, both during Expedia’s presence in the heart of our most competitive battleground.

In closing, I’d like to comment on a frequent topic of investor discussion which is the notion of Expedia as a counter cyclical play. I want to reiterate that we are not concerned about our hotel inventory availability in an upturn. We made significant investments in PSG to ensure that we maintain industry leading access to inventory in all environments.

As importantly, we have a history of doing well in our rising ADR environments. To illustrate, take a look at Page 10 of the updated investor deck on our IR site where you’ll see some of our strongest growth which came during peak ADR periods. And here in Q4 ’09 we delivered the best hotel revenue growth in nearly two years, despite an improving ADR environment.

To be clear, we’re not seeing Expedia as a cyclical play either, but we are saying we demonstrated we can deliver growth in both downturns and upturns and we don’t expect that to change going forward.

Michael Adler

I’ll step through some Q4 analytics before covering 2010 expectations. First, revenue margin; Q4 revenue margin declined primarily due to our fee actions in the first half of the year. Q4’s decline was greater than Q3’s primarily due to airfares. Variances in fares meaningfully impact gross bookings, but have little impact on our revenues.

Holding all else constant, had air fares declined as much year over year in Q4 as they did in Q3, our revenue margins would have actually decreased less than the 98 bips we experienced in Q3. As we’ve said before, we continue to think that once we lap the bulk of our fee cuts in Q3 2010, an assuming that air fares don’t rise more than single digits, revenue margins will be flat to up in the back half of 2010.

Q4 ‘09’s rev margin decline is a great illustration that rev margin by itself if not a particularly useful metric with which to evaluate Expedia as there are so many factors that can influence one quarter’s rev margin from product mix to FX to chain hotel to advertising mix, and on and on.

It’s our position that if we continue to drive meaningful revenue and cash flow growth, over the long term quarterly revenue margins gyrations aren’t terribly important and bear in mind the most important driver of rev margin over the long term is supplier margins which have been stable.

Turning to OIBA margins, we drove 127 bips of leverage in Q4 due to continued efficiencies in products and marketing. To the downside, G&A and tech and content grew faster than revenue due to higher bonus accruals, depreciation from prior investments and higher legal fees and settlements with together made up roughly 70% of the total increase in these two expense categories combined. We expect to lever both G&A and tech and content in 2010 on more normalized comps and over the longer term.

On taxes, our A&I rate was lower than anticipated primarily due to a reduction in some tax reserves. In addition, we began to see some modest improvement in our effective tax rate in late 2009 due to certain changes in our business structure which will continue in 2010, and we think these activities combined with the relative earnings growth in our international businesses should help decrease our effective cash tax rate by a few hundred basis points below our typical A&I rate of 38% to 39% in 2010 and beyond.

Turning to 2010, although there is still significant uncertainty in the economy generally and travel specifically, we feel comfortable enough with the operational and financial improvements we’ve made in our businesses that we expect our 2010 OIBA growth rate to exceed our 9% growth in 2009. This assumes that FX rates don’t vary markedly from what we’re seeing today.

Before questions, some quick points on the first half of 2010. Keep in mind we ratcheted marketing spend down sharply in Q1 ’09 in response to the economic environment. In 2010, we’re returning to a much more typical seasonal spend pattern which means Q1 ’10 marketing spend will increase significantly from Q4 ’09, consistent with seasonality we observed in prior years. Therefore, we do expect to see selling and marketing grow in excess of revenue in Q1.

In addition, we’re making some investments in cost of sales that we are confident will deliver leverage in the second half of the year, but that will require a ramp up of certain expenses leading to slight Cogs deleverage in the front half of the year.

Lastly, we do expect to see full year free cash flow grow in line with or better than OIBA in 2010 with CapEx coming in around $100 million.

With that, let’s turn to Q&A.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Mark Mahaney – Citigroup.

Mark Mahaney – Citigroup

Could you give a little color on particularly international and European bookings and patterns that you’re seeing there, your success in building out more hotel inventory and what kind of success you’ve also had in rolling out more of an agency model in Europe?

Dara Khosrowshahi

As far as booking patterns, really Q4 was a pretty consistent quarter. The room night growth, air ticket growth that you saw for the quarter was fairly stable throughout the quarter. There wasn’t any significant upward movements or downward movements there.

The ADR environment certainly improved as the quarter went along. So ADR’s got better and so from a revenue standpoint, the merchant hotel business looked better as the quarter proceeded and certainly in January, we think those ADR trends are continuing. So the ADR headwind that we had all of last year should be easing up on a go forward basis.

As far as inventory on the European side, we’ve got about 16,000 agency hotels. We added 9,000 in Europe and we think we’re in a very good position from an inventory standpoint in 2010 to really start pushing more demand to the hotels from multiple channels, search engine optimization, SEM, brand channels, etc.

So we think ’09 was a good year for setting the infrastructure of the company etc. and gaining inventory, and we think in 2010 it’s time to execute and we’re pretty confident on where we are right now.


Your next question comes from Imran Khan – J.P. Morgan.

Imran Khan – J.P. Morgan

It seems like sales and marketing as a percentage of revenue continues to remain low. Can you give some color how the CPC trending does for Q1. What do you expect? Do you expect to make additional investment in off line advertising or are you looking at advertising on sales force? And advertising and media revenue growth accelerated to 18% I believe. Could you talk a little bit about what kind of trends you are seeing both domestic and internationally?

Dara Khosrowshahi

As far as sales and marketing, we are continuing to gain leverage and that’s very good news. It’s indicative of a couple of trends. One is we are getting much better at improving profitability on a channel basis and our data collection is better. I think the teams are more effective and so we are pushing out unprofitable spend and inefficient spend I think more effectively than we have in the past.

CPC trends have been quite friendly to us since the beginning of the year although I do believe that the CPC trends are going to get a little more difficult as 2010 progresses. But they certainly for 2009 they have been quite positive.

The other benefit that we saw on the marketing side is that we were able to cut brand spend because we decreased fees. Transaction growth was still very strong so the consumer value proposition of the product is better and we also have been able to shift some of our channels to cheaper channels, search engine again, search engine optimization, the email channels etc. have been pretty effective.

We think the advertising comps going into 2010 are going to be a bit tougher. Certainly in Q1 we were very conservative on brand spend in Q1 ’09 and as we feel better about the business now and in 2010 we certainly do, we do think that it’s time to reinvest in the brand which is why we’ll get some early marketing deleverage that Mike talked about.

But in general, from a long term perspective, we think that we can manage our advertising and marketing costs generally in line with revenue. Although again, the market will determine that to some extent.

We do have a great hedge and a great growth engine as far as TripAdvisor to add a Media business, really accelerated in Q4 and that was a reflection of very, very strong traffic growth at TripAdvisor, some new products that we are introducing, and also CPC’s for TripAdvisor getting better on a relative basis. They were still down in Q4, but they were down less in Q4 than they had been early in the year and we think that 2010 is just going to be a great year for TripAdvisor.


Your next question comes from Justin Post – Bank of America/Merrill Lynch.

Justin Post – Bank of America/Merrill Lynch

You did say, I just want to make sure; OIBA will grow faster than 9% this year. Is that a reflection of just what you’ve been saying consistently that better environments are actually better for Expedia? And it looks like there was a little disappointment. It was U.S. revenues. Was there any abnormal pressure on U.S. hotel nights in the quarter and do you see any pressure from some of the problems in Southern Europe for international going forward?

Michael Adler

We did say that we expect OIBA growth in 2010 to grow faster than 9% and there is a number of things that go into that and I’d point out that the comps will get more difficult for us on the top line for transactions as we comp the fee actions that began in Q1 ’09.

We also as I think I indicated earlier will be a tough marketing comp earlier in the year as we return to the normal seasonality of that spend. We will get some COG’s leverage in the second half of the year as opposed to the first half of the year.

The flattening of AVR declines that we’ve seen will put a little bit less pressure on revenue per room night and to your question about the environment, we obviously expect some level of volume impact as the AVR’s start to shift. But as we indicated on Dara’s comments, we expect to have strong inventory really in the environments.

On the second question on whether there’s any abnormal pressure on room nights, the answer is no. The room nights grew very similar levels in Q4 in the U.S. as they did in Q3 and similar to Q3, we did that in an environment where overall demand reported by Smith Travel was actually down so we continue to take a significant amount of share in this environment.

Dara Khosrowshahi

If you think about it on a merchant revenue growth standpoint, growing room night in a negative ADR environment provides a significant amount of profit pressure because there are other costs that come along with those increases; overhead costs, server costs, customer service costs, etc.

We’re getting back to an environment where we can grow room nights and we have either flat ADR’s or rising ADR’s from a profitability standpoint, it’s much friendlier to our P&L which to some extent, goes to the first question that you asked about our confidence in our OIBA growth and we think a balanced environment is good for us.

Justin Post – Bank of America/Merrill Lynch

In the quarter was Europe better growth rate in hotel nights than U.S. and any abnormal pressure in Southern Europe going forward?

Dara Khosrowshahi

Really the U.S. and Europe, the growth was quite balanced, so not big swings one way or the other and it was a pretty consistent quarter. Southern Europe we worry about to some extent on the economic front, but I think it’s too soon to tell and we certainly think that we’ve got a lot of upside in the whole of Europe as far as just executing better on the improved inventory that we have.

Justin Post – Bank of America/Merrill Lynch

Does your guidance include the $20 million one time marketing expense?

Michael Adler

Yes, it does.


Your next question comes from Ingrid Chung – Goldman Sachs.

Ingrid Chung – Goldman Sachs

I was wondering if you could talk about the bookings window and whether you’ve seen it lengthen or not and if so, I was wondering if that negatively impacted your net revenue rate in the fourth quarter and could be a benefit in the first quarter?

Dara Khosrowshahi

We’ve seen booking window lengthen slightly in kind of Q1’ish. I wouldn’t say that the lengthening was that significant in Q4 of ’09. It is not back to 2008 levels yet. Lengthening booking window and you said, does hurt revenue margins so to speak, but really the difference between Q4 and Q3 revenue margins was all about air ticket prices and nothing else.


Your next question comes from Ross Sandler – RBC Capital Markets.

Ross Sandler – RBC Capital Markets

A quick clarification on the revenue margin again. You stated that most of it was mix shift of air and then you mentioned in the prepared remarks or the press release the fee cuts. Can you talk about any other items that potentially impacted the revenue margin and how do those particular items change as we move into the first half before you anniversary the third quarter.

Michal Adler

On rev margin there was a slight mix shift in the air, but the item that we pointed out was actually air fares had been down minus 14% I think in Q3 but were only down minus 4% in Q4 and that actually ends up putting pressure on the revenue margins. We do expect air fares from this point on to be flattish to slightly up and that will continue to put some pressure on the air fares.

We also have a number of items that we discussed last quarter that still apply. We began consolidating cruise ship centers I think at the end of Q2, and cruise ship centers has a much lower revenue margin, but actually has a higher OIBA margin. So it’s a very profitable business for us, but when you just look at the revenue margin, it does have a negative impact.

We also are recording welcome rewards as a contra revenue and that is having an impact on the numbers as well. We are making some changes to that program that will improve the efficiency of that going forward, so we’ll have less headwind from welcome rewards going forward.

There is a chain hotel mix shift which is hard to predict how that will react moving forward. It really depends upon who’s most aggressive on pricing.

And then one correction, air fare was actually down more in Q3 than I’d indicated, down 18% versus the minus 4% in Q4.

Dara Khosrowshahi

I think when you pull that all together, once we anniversary a lot of these factors that come through which is really in the second half of the year, we anticipate revenue margins being stable to up.

Obviously the wild card in that is air ticket prices. If air ticket prices go up very significantly that will hurt revenue margins. If they go down, they’ll help revenue margins, but that’s really a wild card. That doesn’t have that much to do with the revenue margins on a fundamental basis.

Michael Adler

I’d point out one last thing, that in the first half of 2010 we expect rev margin on a year on year basis to be more similar to Q3.


Your next question comes from Aaron Kessler – Kaufman Bros.

Aaron Kessler – Kaufman Bros.

On the improvements on the rev part in the air rates, is it your sense that there is a more easy comps or are you starting to see acceleration or improvement in those rates? Also, can you give us a sense for Hotwire performance in the quarter?

Dara Khosrowshahi

As far as rev part goes, we think it’s a combination of both. Comps were certainly easier and you would see our movement in ADR. In Q4 of last year we moved down a bit ahead of industry, so I think the comps for us were probably easier than industry comps as well.

But the fundamentals we do think are getting a bit better especially on the business travel side. So when you look at Egencia for example, which is our business travel group, it’s really showing nice strength. It’s a combination of same store sales getting better, businesses starting to travel again, and also very strong sales on the new account front.

So Egencia revenue in Q4 was up 17% which is a pretty significant turn around from earlier in the year and that’s fundamental strength as well as easy comps. So it’s really a combination of both.

I wouldn’t say that things are super, but it’s a heck of a lot better than last year and I think everyone is feeling more stable and it’s back to managing the business.

As far as Hotwire’s performance, it continues to perform very, very well. We are seeing a little bit of weakness on the part side as fleets are lower. A lower percentage of our sales on the opaque front, and opaque is an incredible deal for consumers and as a result the more opaque we sell, the better for Hotwire.

And of course the Toyota recall in this first quarter hasn’t helped any because it brings down fleet sizes. It will help on the pricing front but won’t help on the volume front.

On the hotel side, Hotwire continues to be very, very strong, room nights up over 30%. So on balance we think Hotwire is good. The car size is going to be a little bit difficult in ’09 and in 2010.


Your next question comes from Herman Leung – Duetsche Bank.

Herman Leung – Duetsche Bank

You’ve been seeing very strong air volume continuously obviously impacting the revenue margin a little bit, but on the concession side, what are you expecting from override commissions in the first half for this year considering that the ramp up in the air transactions have gone up very significantly. Second, could you give us a sense of your early take away’s on the new campaign that you ran and some of the new tools that were introduced on the website including the hotel booking with the new pricing structure that you have. And then can you give us an update on package transactions and how they did both in Europe and the domestic regions?

Dara Khosrowshahi

As far as air volume goes and override payments, in general we have structured our various deals so that our revenue goes up or down 80% based on air volume and probably 20% based on air gross bookings. In other words, higher prices bringing in higher commissions for us.

So other than the fee cuts which were a negative as far as revenue on the air side, we don’t expect to see very significant changes in air revenue for tickets. Overall revenue on a go forward basis and certainly in 2010 is going to improve because of the lapping of the fee cuts. So we feel pretty good about where the air business is and certainly air revenue looks much better in 2010 than it’s been for awhile.

As far as the new campaign for Expedia, I think it’s a bit too soon to tell. It’s where you book matters campaign. We’re seeing searches for Expedia on Google up significantly. We’re seeing those searches out index the searches we see from the competition, but I think it’s really early.

I think the campaign is not as much of a price promotion campaign as we have had it in the past. It’s been more of a campaign of here are the many, many things that Expedia can do for you and we think that is a campaign that we can work with and build over a long period of time.

So I think it’s too soon to tell but we’re pleased with what we’re seeing. It’s also a campaign we can take international so we’re taking that campaign for example, we’re running spots in Scandinavia, etc. So I think so far so good, but we’ll be able to tell you the story in a couple of quarters.

On the package side, Mike you want to talk through that?

Michael Adler

On packages we saw a 33% transaction growth in the quarter and that’s an acceleration from Q3 ’09. On the revenue side, we saw revenue increase of 16%. There’s obviously a large difference between the transaction rates and the revenue rates and that is being impacted in large part by hotel pricing.

In terms of international versus domestic, we saw pretty good growth in both the U.S. and in Europe on packages in the quarter.

Dana Khosrowshahi

I think package revenue going forward, a significant component to package transaction revenue inventory that comes in, and that can be unpredictable on a seasonal basis, but we’re certainly encouraged by the strength that we saw in Q4.

Herman Leung – Duetsche Bank

On the European side, can you give us an update on the in-house SEM and SEO efforts and when we should start to see some of that kick in? Could we expect some more monetization in the back half of 2010?

Dara Khosrowshahi

You can certainly see the effect of the SEO efforts in both transaction growth and marketing efficiencies. One of the significant reasons why we are seeing marketing efficiencies is because a higher percentage of our transactions are coming through from the SEO channel.

One the SEM front step one, and I think it was quite an effective step was to get rid of inefficient spend. And again, that helped marketing efficiency in 2009 and step two is really going to be to try to grow revenue through the SEM channel, bid on more key words, bid on more geographies, bid on more languages, etc., and I think you will see that roll through in 2010.


Your next question comes from Michael Millman – Millman Research Associates.

Michael Millman – Millman Research Associates

Could you talk about what effect you expect on the shift in FX to have on the first quarter compared with the fourth, and also explain what’s happening in agency bottom line. Could you also talk to agency? I think gross bookings were up 25% but revenue was down 1%.

Michael Adler

On FX in Q4 we saw an extremely large impact on our business on FX and primarily due to last year we had a very large book to stay loss. There was a 20% increase last quarter in the U.S. dollar versus the pound, so the dollar strengthened. If you actually look at the full year, you will see that the impact was much more moderate. So that in some ways kind of adjusts for the severity of the Q4 move.

In terms of Q1, we would expect a lesser impact from FX. The relative differences in rates is not as large. Q1 ’10 as compared to Q1 ’09, as compared to Q4 ’09 to Q4 ’08, so we will actually expect perhaps some modest upside in Q1 from FX but nowhere near along the lines that we saw in Q4.

Dara Khosrowshahi

On the agency, it’s simply a function or air fees. So our taking out the fees affect our air business or air booking fees, and as a result revenue did not increase nearly as much as gross bookings. Going into, I’ll remind folks that we cut air booking fees on Expedia on March 11, so we would expect Q2 through Q4 gross bookings and revenue to move closer together mitigated either by movements up or down of air ticket prices.

If air tickets go up, gross bookings will tend to go up faster than revenue and the opposite is true if air ticket prices go down. Our gross bookings on an agency basis will tend to trail revenue. Revenue will look stronger.

Michael Millman – Millman Research Associates

And the broad question is, Travel Port announced that they’re not doing an IPO and I was wondering if you could talk about generally what trend do you see in how Expedia and others would deal with GDS’s or eliminate them going forward and what this might mean in terms of the bottom line?

Dara Khosrowshahi

I was reading the news as you were I suspect so I don’t have a lot of insight as to specifically why Travel Port pulled their IPO. I will say that in general, we do work with the GDS’s. They’re partners of ours and at least for the foreseeable future, unless things change, unless the nature of the industry changes, we think we’re going to keep working with GDS’s.

Our technology folks, I think where we add value is the consumer value proposition, building a better service, working our own infrastructure. We’re not particularly good in air connectivity. We’re good in hotel connectivity, but not particularly good in air connectivity. We don’t consider it a core function, so we will look to continue to work with our GDS partners and today, we’re working with Sabre, and we’re working with Travel Port as well so that we’re diversified in our base and we’re not dependant on any one players.

So that’s really all I can comment on as far as Travel Port and what they’re doing.


Your next question comes from James Cakmak – Sidoti & Co.

James Cakmak– Sidoti & Co.

You mentioned you think that you’re gaining share here, you gained share in 209. I was wondering if you could provide some insight into where feel you are gaining that share and where you expect that to trend going forward? And as far as the new dividend is concerned, can you take us through the process of putting that dividend policy in place and your overall view of potential M&A activity here in 2010.

Dara Khosrowshahi

On a share basis, it’s bit difficult to tell where we’re gaining share because we’re fairly early in reporting amongst OTA’s. I think if you compare our room night growth, the industry room night growth, it is up significantly. Our room night share in the U.S. is up 50% over the past two years and we know we’re selling many more rooms.

Where is it coming from? We think it’s probably coming from offline travel agencies and we think that we are winning share amongst online travel agencies as well. But other than that, it’s difficult to tell where it’s coming from.

Specifically in Q4 for example, in the U.S. we grew room nights 23% and based on Smith Travel Research rooms sold or demand in Q4 was down 1%. So we know we’re gaining share, and in general, as long as we’re gaining share, we’re happy and that’s our job and that’s something that we feel that we can execute on going forward.

We’re certainly gaining share on the air side as well. Fees help and we think as long as we keep building a great consumer value proposition, and I think in 2009 we made huge strides in improving our consumer value proposition, we think we’re just going to be just fine on a go forward basis.

You put that together with some of the royalty programs and just better execution across the board, we fell pretty good about our share prospects on a go forward basis.

As far as dividends go, really the thinking was pretty simple. We told you and our investors for some time that to the extent that we had excess capital, we would start to return it to our shareholders. One of the issues that we wanted to take care of was the renewal of our revolver.

Our revolver was up I believe in August of this year. We renewed it at $750 million over three years. We have over $600 million of cash in the books. The first half of the year we are going to see very significant cash flows coming in and we think free cash flow growth in 2010 is going to be very healthy, higher than OIBA growth, so we expect to have a fair amount of excess capital in 2010.

So we thought the dividend was a start of giving it back to our shareholders. It’s a start. It’s not the finish and our goal over the long term is to maximize shareholder value and that will be through dividends. It will be through acquisitions. It will be through buy backs and allotting the capital to the best part of that and in the long term we want to make our shareholders do well.

All of this is going to be in keeping with investment grade and we’ve had some really good news along that because liquidity, the fundamental liquidity of the company is pretty important to us. So we think this is just a start.


Your next question comes from Michael Olson – Piper Jaffray.

Michael Olson – Piper Jaffray

As far as improving hotel inventory in Europe would you be willing to share any metrics on just what hotel inventory growth has been in Europe versus Q4 of last year, just something to put some parameters around the inventory growth. And what would you say is the geography outside of Europe that you’re most focused on and can you share that?

Dara Khosrowshahi

We have not talked specifically about inventory growth in Europe. What we have shared is that agency inventory, we’ve got 15,000 agency hotels available now and the vast majority of those are in Europe, so other than that, we’re not going to share specifically where our inventory is.

Overall on a merchant basis, we added 22% to our hotel count and obviously we have the 15,000 agency hotels. So we’re pretty happy about that. And now we’ve got to get on to the business of selling them and making sure our inventory quality is high and also acquiring more hotels where appropriate.

As far as Europe goes and targeting Europe, I’d say southern Europe, Spain is a target for us. We think that in general our penetration relative to the market is a bit low and eastern Europe is a very big growth opportunity for us so we are continuing to acquire hotel inventory in eastern Europe and all across Europe.

Our anticipation is that for 2010 we’re going to add another 9,000 to 10,000 agency hotels in Europe, so it’s pretty consistent growth across the board.


Your next question comes from Scott Kessler – Standard and Poor’s.

Scott Kessler – Standard and Poor’s

Two questions on the corporate transactional front; the first is obviously there was the discussion about Travel Port and IPO not happening. Maybe it will. Would you ever consider taking TripAdvisor public and what are some of the things that we should think about in the context of your consideration of that? And in addition, you obviously have become a little bit more active on the M&A front in Asia and I was wondering how you think about that in the context of building your business in that part of the world.

Dara Khosrowshahi

As far as taking Trip public, we’ll be opportunistic. I think that Trip, I’d say the fundamental reason to take TripAdvisor public is if it is suffering as a result of being inside of Expedia and right now what I would argue is it isn’t.

Trip is operated very much on an independent basis. Steve and his team are running Trip as they would essentially a stand alone business. It has friends at Expedia which it knows that Expedia and Hotels.com and Hotwire are buyers of its advertising all the time and essential make a market, and it can very aggressively sell to third parties and it does.

And frankly, Steven and their team don’t have to be distracted by calls like this. They can worry about executing and they’re executing incredibly effectively and I think that the opportunity maybe at Trip is greater than it ever has been.

So for now, as long as Trip is executing well, I think it will remain inside the company. And as far as valuation issues and is Trip being valued at a high enough multiple, my experience in looking at companies being spun off is that the market is pretty smart. And whenever people spin off subsidiaries and they think that magically all of a sudden multiples are going to change, lo and behold they don’t, and there is a reason why the market is valuing a company at that particular valuation.

I think multiple changes based on long term performance and we’re hoping that our long term performance proves that the market is under valuing the stock at least from a short term perspective. And it will be up to us now to take advantage of short term market back and forth.

We don’t think the spin off is the solution at least near term. So that’s a long winded way of saying as long as TripAdvisor continues to execute, and I think it’s going to continue to execute, we’re very happy where it is.

The second issue for Trip just being inside the company is it provides us a great hedge against our most significant expense. Our biggest expense is sales and marketing. To some extent it is the least under our control. We’re really happy about where G&A is and where it is going forward and cost of goods are where they’re going forward.

Sales and marketing are based on external conditions and TripAdvisor provides us a terrific hedge. The revenue that we get from Trip is over 50% of the CPM and CBC marketing costs that we a have.

So we love having Trip inside here and we would be very happy and expect it to only increase as a percentage of the company as a whole.

As far as M&A’s goes, we think it’s a great opportunity. We’ve been focused on, first we’ve gone into the market so we know who the best players are. We will tend to put small money against acquisitions in areas like Asia because they are high return/high risk. We don’t want to bet the farm and we’re very happy with our newest addition in China on the Medisearch front and we’re going to invest in an appropriate basis.

So we’ll look in Asia but to the extent that we make bets, they’re going to be smaller bets because again, there is a fair amount of uncertainty there along with the potential that comes with it.


Your next question comes from Sandeep Aggarwal – Collins Stewart.

Sandeep Aggarwal – Collins Stewart

What percentage of your air bookings are done by phone and what kind of changes are you seeing in the customer behavior by elimination of the fees and comment on how that impact would be in 2010 because of the elimination of the phone fees.

Dara Khosrowshahi

We don’t disclose the percentage of air over the phone specifically but Mike do you want to talk about the elimination of fees?

Michael Adler

We again will start lapping the elimination of fees in the U.S. towards the end of Q1 and then we have made a number of other reductions around the world. So we do expect more significant air ticket growth year on year in the first half of the year, particularly in Q1 and Q2.

As Dara indicated earlier our economics on air have been stable absent the fee, and so we will expect, all things being equal, we would expect to return to some growth in air revenue next year, again post Q1 would be our most difficult comp or Q1 I should say our most difficult comp. So we will probably have a very modest increase in air revenue.

On the question about air bookings by phone, perhaps it’s precipitated by our removal of the booking fee by phone, and I believe we’re the only online travel agency not to charge a fee for booking on the phone. So we think that makes us very customer friendly. But we don’t think it’s going to be nearly as meaningful as the reduction/elimination that we made on the online fee as the very large bulk of our tickets are booked online.

But again, as Dara said, we don’t provide that exact detail.

Dara Khosrowshahi

In general, strategically we view the phone as a strategic channel. It’s a bigger channel on the hotel side than it is on the air side. Conversion rates on the phone are quite good, and we are making some really important investments as far as technology, phone technology so that our customer service improves.

Our customer service levels improve, we can hopefully drive conversion and you’ll see some of those costs come in the first half of the year but we think on a cost of sales side especially in the second half of the year, we’re going to have very good news.

I think that’s the last question. Thank you for joining us. Michael is there anything you need to add?

Michael Adler

I would also thank listeners and just remind them a replay will be available on the IR website shortly after the completion of the call.

Dara Khosrowshahi

To the Expedia employees, thanks for a strong ’09 and looking forward to ’10. Thank you.

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