Expedia Earnings Call Insights: Agency Model and Recession Effects
Agency Model and Cash Flow:
Ross Sandler – Deutsche Bank: Guys, just two questions; first is, you – historically if we go way back in the day, you’ve been hesitant to move into the agency business in the U.S. at least. Can you talk about why you think now is the right time? And obviously, the new program is working well and improving conversion rates. But can you talk about how that might impact your cash flow as the mix of hotels shifts from merchant to agency? And then if we look at Expedia.com, can you guys strip out what the acceleration in the hotel business is, so what would the room night growth for Expedia this quarter versus last quarter or two quarters ago?
Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.
Dara Khosrowshahi – President and CEO: Sure, Ross. As far as the reason why now, to some extent we’ve taken our time in observing the agency model that we acquired Venere couple of years ago in Europe where the agency model is strongest, and we have seen the consumer preference, especially Europe – in Europe for agency. And I think we’ve told you for a long time that we are a marketer of hotel rooms, whether it’s merchant hotel rooms or agency transactions, we don’t particularly care. We want to market rooms to our global audience in whichever way that they want to consume them. The challenge for us was a pretty significant technology project that would allow us to have the flexibility to allow hotels who signed up for the ETP program to transact either in a merchant model or an agency model. The technology there is not simple. No one really has done it at scale before and we wanted to do it in a way that could scale on a global basis. And to kind of scale global technology projects like this are by no means simple. So, to some extent the timing was driven by the platform and by the technology and once we thought it was ready, once we had discussions with partners and hotels who are quite interested in it we thought we are ready to roll out. This comes with – the model comes with lots of other stuff your customer service has to change, your collections for commission is completely different for agency versus merchant. So, a lot went into this effort which is really invisible to the customer and invisible to the hotelier, but a lot of work has to go into the back kind of the backend in order to make this available on a scale basis. Mark, you want to talk about the cash flow?
Mark Okerstrom – EVP and CFO: Sure. Listen, I’ll just remind you that it is still pretty early on so it is pretty difficult to predict. It will depend on the adoption rates of the hotel collector agency model versus the merchant model and what we’ve seen so far is that and as Dara mentioned in domestic market we’ve seen people continue to prefer the merchant model and outside of the U.S. a preference for the agency model. And we also have a pretty large packages business that we hope will become even stronger as we roll into packages end-to-end products on Expedia. So, again it is difficult to predict. I would just say that the merchant model we believe is going to continue to have a pretty material role for our business going forward, but to the extent that we do shift more to the agency product, of course, that will have a negative impact on our working capital, but of course we’ve got a strong balance sheet, we’ve got significant liquidity. We have been obviously working on this as Dara mentioned for a long time and we think this is a great investment to the extent that we have to make an investment off our cash flow and balance sheet to make this possible.
Dara Khosrowshahi – President and CEO: Ross, as far as your question on the acceleration in the hotel business, we want to get out of kind of disclosing every quarter the room night growth for each brand. I think it’s safe to say that the Expedia brand room night growth continued to accelerate materially and the other brands continue their excellent execution as well, the Hotels.com brand, (EN), et cetera. So, for us to be able to accelerate our room night growth from 22% to 27% on stay basis means that everybody play their part.
Mark Mahaney – Citi: If I could just stick with the hotel room night growth piece, to what extent do you think that’s still being capped down by macro conditions in some of these markets? I would assume it’s maybe impossible to quantify, but a couple of points. Then if you think about the other levers that are actually leading to that – I know it’s very hard to call out market share gains, but do you have any commentary on what could be happening to that? It seems like you got a mix of much better execution, possibly some market share gains and still capped down by macro. Is that the right way to think about it?
Mark Okerstrom – EVP and CFO: Sure. It’s hard to say what impact the macro conditions are having on our business. As Dara mentioned in his prepared remarks, we haven’t seen a material change from what we’ve seen over the last quarter, which was isolated pockets of weakness in Southern Europe. More or less that continues. But listen, we’re accelerating more or less in all regions; Europe included. We think that based on what we think the market is doing; we are taking share in most of those regions, including the U.S. And what’s driving that, I would say it’s really we believe us executing on the playbook that we’ve worked out across our business which is a combination of great technology, great online marketing, and a great hotel business and playing that altogether. So, I think it’s just a combination of everything.
Dara Khosrowshahi – President and CEO: Yeah, I think Mark, I’d just add that I think that for the next year or so the trends that you’ll see from our business are going to be based more on our own execution and the playbook that Mark talked about than macro. And I think in addition, you’ve seen online travel agencies in general during good times and bad times, and we as a group tend to perform pretty well during difficult macro conditions. This is a pretty ‘recession-resistant’ type of business, and we don’t expect that to change going forward.
A Closer Look: Expedia Earnings Cheat Sheet>>