Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to Expedia, Inc. Third Quarter 2006 Conference Call. (Operator Instructions). As a reminder this conference is being recorded today, Thursday, November 09, 2006. I would now like to turn the conference over to Stu Haas, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to Expedia, Inc.'s financial results conference call for the third quarter ended September 30th 2006. Joining me on today’s call are Barry Diller, Expedia’s Chairman and Senior Executive; Dara Khosrowshahi, our CEO; and, Michael Adler, our CFO. The following discussion including responses to your questions reflects management's views as of today, November 9, 2006 only. As always, some of the statements made on today’s call are forward-looking, including our comments on financial expectations, operational performance and margins, planned investments and spending, platform improvements, systems upgrades, growth of business lines, financial performance and dilution. Actual results may differ materially. We do not undertake any obligation to update or revise this information to reflect future events or circumstances. Please refer to today’s press release and of the Company’s filings with the SEC, including our Form 10-K for the year ended December 31, 2005, for additional information about factors that could potentially affect our financial and operational results. During this call we will discuss certain non-GAAP financial measures including OIBA, free cash flow, adjusted net income and adjusted EPS. In our press release, which is posted on the Company's IR website at expediainc.com/ir, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with the most comparable GAAP measures. We encourage you to review the section entitled “Basis of Presentation” in today’s earnings release for more details on how we are presenting results for some periods. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2005; and with that, let me turn the call over to Dara.

Thanks, Stu, and thank you to everyone for making the time to join us on the call. Mike will cover the financial details of the quarter later, but I did want to add that through expense control, and continued mix shift towards our international and merchant hotel businesses, we delivered operating income before amortization for the quarter consistent with our full year expectations. I am the first person to acknowledge that it’s difficult to get excited about OIBA shrinking year-on-year, but we are fairly confident than absent some democratically adverse outcome in a remaining airline discussions, we are on a path for OIBA growth in 2007, and beyond. The good news for Expedia is that our international businesses as well as Hotels.com, TripAdvisor, and ECT are all executing well and growing at healthy rates. The bad news is that our domestic Expedia.com business, which is also our largest P&L, continues to perform at unsatisfactory levels. While gross bookings growth for our non Expedia businesses actually accelerated from Q2 levels. Expedia.com’s growth rate continued to slow pulling down overall sequential bookings growth. So, the story for our company and our absolute focus over the next few quarters is turning around Expedia.com as we did last year with Hotels.com., while at the same time, continuing to execute at our other brands, and geographies. Not an easy task by any means, but one that we are certainly up for. Now let me give you a quick update on working stand with our airline economies in light of recent airline and GDS discussions. While the airline environment has certainly been challenging as of late, it we think that we may finally be seeing some light at the end of the tunnel. We now have the option of flowing segments through three GDS providers, in…

Thanks Dara. Hello everyone. I am going to review the results for the quarter enclosed with an update on financial expectations for the full year. Let me begin with gross bookings. Worldwide gross bookings were up 8% for the quarter split between 2% domestic growth and 29% international. While international growth is similar to levels we have seen for the past few quarters, domestic growth continued to decelerate in Q3. Some of this is a natural deceleration for Hotels.com as they anniversary high growth quarters. But most of the deceleration is due to Expedia.com. Excluding the Expedia.com points of sale, our worldwide gross bookings growth would have roughly doubled the 8% we are reporting today. So, what are we seeing at Expedia.com? At the top of the funnel we continue to see relatively flat year-on-year traffic to the site. We have been encouraged by positive results from our efforts in SEM and e-mail. But these gains have not been enough to offset the declines we have seen from our MSN and affiliate channels. We don’t anticipate much improvement in traffic in Q4, but we are looking forward to launching a new brand advertising campaign in January. Brand spend will be a key part of our marketing strategy going forward as we feel we may have pulled back too sharply in 2006 from what can be a very efficient marketing channel. Some of the traffic flatness at Expedia.com is borne of a conscious decision on our part to shift domestic spend to more efficient uses in Hotels.com. Direct spend for Expedia.com was actually down 5% year-over-year as we move spent to Hotels.com which was the higher revenue per transaction due to a greater mix of merchant hotel revenue. As mentioned under Q2 call, we had expected our package pricing actions during…

Thank you. Good afternoon to everybody. Our sausage-making in this particular case our sausage-making is not been pretty, it's been extremely difficult, but I think its beginning to come out in somewhat finished links. I think the work of the last year and a half, it slowly as I think you can see -- I think you can see that there is beginning traction here and we made many, many changes most recent in Expedia.com itself, which was fairly expensive. But I think we now have with Expedia.com which was our only real problem and we had of course issues about investment all over the place but the only real operating problem we had with Expedia.com. It now has new leadership, lots of changes underneath. All of which I think are with people that we really do have great confidence in. I think you never going to actually tell about this stuff, but I think that's the end of it, meaning the end of big change. I think that the team that Dara has all across now, is a permanent team. And I think most of there, the work isn't done but I think that the great disruption is done. And so, I think that we will, and it wont happen, never happens that quickly and it won't be I think probably settled in people's mind outside the company. I think that everybody can maintain their skepticism about Expedia.com and the drags that they associate with the business. But I have growing confidence that it is without question going to improve. So, and we will back to real growth next year. So, with that I think it's best we take some questions. So, I guess Mr. Stu you do that part, so go ahead.

Great. Thanks Barry. Let's move on to the Q&A portion of the call with Barry, Dara and Mike. As a reminder please limit yourselves to one or two questions, so we can fit more questionnaires into the call today. Operator, would you please remind our listeners how to ask a question.

Thank you. Ladies and gentlemen at this time we will begin the question and answer session. (Operator Instructions). And our first question comes from Anthony Noto with Goldman Sachs please go ahead.

Great thank you this is actually [Aaron McCann] for Anthony. I guess the first question I have is, I wondered if you could discussed the effectiveness of your marketing spend. It looks like this quarter sales and marketing were up to 5% of growth bookings and yet we continue to see a deceleration in growth and I wonder if you can comment on when you expect to see the benefit from that marketing spend.

Well I think a significant amount of the sales and marketing spend relating to gross bookings and the revenue growth that you are seeing is actually due to a mix shift here, Aaron. We mentioned in Q2 that we were light on international marketing as it related to the World Cup happening and that Q3 we were going to increase the spend and we did just that. International sales and marketing spend on international points of sale is less efficient than sales and marketing spend on domestic points of sale. But as you can see by the acceleration in international gross bookings growth, it has been effective and it is something that’s working and we are going to do more off. So there is certainly a mix shift there. I would say similar thing regards to Hotels.com, which is we have been spending more on Hotels.com brand marketing. Again, that tends to be a higher percentage of Hotels.com revenue than what you see on Expedia.com. So a lot of what you are seeing is mix shift, the incremental spend is positive. All that said, we do believe that we can do better on the Expedia.com side as far as off line brand marketing goes and it’s certainly something that we are working on.

Great and it looks like you continued to see good growth internationally and you mentioned that you plan to introduce Expedia in Japan and India in 2007, are there other geographies that are attractive and that you consider then, I am thinking I guess more specifically about Latin America?

We are looking at Latin America. We do -- we do some business in Latin America on the Hotels.com side. We have a site hotelis.com and we are going to look at the Latin American countries opportunistically. I will say that from a priority standpoint, we are always setting priorities at this company the Asia Pacific markets in total are kind of the next large marketing segment that we are going to go after. The biggest issue that we have with the Latin American countries is that credit card penetration is quite low there. And, many -- as you know, most of the transactions on the various sites are done by credit cards. So as long as credit card penetration is low, we probably won't go in, in a big way. We will just go in opportunistically.

Great, thank you very much.

You bet.

Thank you. Next question comes from Justin Post with Merrill Lynch. Please go ahead.

Yeah. Couple of bigger picture questions. We have seen hotel occupancies kind of level off on a year-over-year basis. I am wondering if that could start to help your net rates a year or two down the road once your current agreements kind of run out or if you just going to stop seeing pressure there? And then, secondly, have you seen any pickup in booking trends? Some of your competitors have mentioned things got a little bit better on September relative to the first part of the third quarter?

As far as occupancies go and leveling off, from a macro standpoint, that's a good trend for us. I will say that our PSG group, our Partner Services Group has done a really, really good job in securing inventory in both primary and secondary and tertiary markets as well. So, we really have not had any real issues as far as inventory availability goes. And inventory availability is very good. As far as the economics of the business go long term, I think that the economic relationship that we have with our suppliers is appropriate. I think we bring a significant amount of value as far as being not only a national, but an international platform and being largely variable as far their spend on our cycle. So I think we bring a ton of value there; and to the extent that occupancy rates are leveling off, we think that our hotel partners are going to be looking for our help, and we are going to be there for them. As far as booking trends go, September versus the other months, I don’t want to comment on individual months, and I don’t want to comment on kind of forward booking trends. Mike talked about our expectations for the year as far as 5% to 10%. We removed the lower end of the range. So, our expectations are pretty consistent with where our business is going right now.

Okay. Thanks, Dara.

You bet.

Thank you. Next question comes from Mark Mahaney with Citigroup. Please go ahead.

Great, thank you. Can I ask you a comment just on one of the numbers that transactions growth year-over-year was flat, should we attribute that mostly solely to the weakness in the Expedia business in the US? Is there any other thing -- any other way we should think about that? And then one question on a loyalty program, you've now have got sounds like the ideal partner you have talked about, rolling this out in a careful phased way. How should we think about how aggressive you will be with this program 12 months from now in terms of international markets and different brands? Thank you.

Sure. As far as transaction growth goes, I don’t want to pin this only on Expedia.com, but obviously, transaction growth at Expedia.com domestically has been weaker than transaction growth on our other brands or internationally. So, the majority of the slowdown that you see in transaction growth is due to Expedia.com. We are on it. We have got a team that’s very much focused on it and I am confident that we can turn this around. As far as Citi goes, we believe that they are an ideal partner. And as to our aggressiveness, I think it depends on how things go. The last time that we talked to you, we said that we are going to roll this out, we are going to test and learn. We are going to see what kind of -- how we can change our traveler behavior and how we can hopefully affect and in general higher royalty amongst our travelers. And that's really what we are going to be focused on as far as the ThankYou program goes. As to where we are going to expand it, I think that we are going to go to new brands, for example, Hotels.com before we go internationally, just because Citi has such a strong presence nationally here. So, I think that you will see a brand extension before we go international with it. And another steps certainly that we are looking at right now is introducing an Expedia and/or perhaps Hotels.com branded credit card, which will allow consumers who use that card to get double, triple points et cetera to really, really increase the velocity of the points that they receive when they book on our sites. So, that's kind of the steps that we are looking at with ThankYou. We are pretty pleased with it so far, and we are optimistic on what we can achieve. We think it will take a bit of time, but we are pretty excited.

Thank you very much.

You bet.

Thank you. Next question comes from Imran Khan with JP Morgan. Please go ahead.

Hello. This is [Bridget Alicia] calling for Imran. First question, could you give us an idea about any trends you have seen in your conversion, some advertising?

Conversion from advertising, you mean site conversion in general?

Yes.

Okay. Conversion over the year has not changed significantly one way or the other. And now it differs by site, by point of sale and so it's very difficult to kind of generalize conversion. But I were to characterized for Expedia.com domestically, the biggest issue that we have is increasing the traffic to the site. Conversion, we don’t is an issue; we think we can get it better and we are working on it. But it’s really about bringing more traffic to the site and increasing our direct type in traffic.

Okay a follow-up question to that. It seems like MSN is generating a little bit of weakness. Do you have any ideas for replacing it as a traffic source?

You know we are focused on executing with MSN and working with the team to improve it, as a traffic generator and as a transaction generator for us. We are always looking at new channels for traffic. So, we don’t view one channel as necessarily replacing another channel, we view it as additive. An example of that is Hotwire's deal with Orbitz. It's a new channel for Hotwire, it is incrementally additive but I think really what we are focused on, MSN is working with them to start building transactions back up and we think we can get there.

Alright thank you.

You bet.

And the next question comes from Aaron Kessler with Piper Jaffray, please go ahead.

Hey guys couple of questions, first in the international growth; can you give us -- how that’s performing versus your expectations going into the quarter and what other areas we should be looking to, to expand that, I think you mentioned a couple of them, maybe if you can just extend some more into Eastern and Continental Europe. And second one, can you just give us an update on the search pricing environment, whether it's little more rational this year and finally on Priceline's call yesterday, you did mention that, I guess from [disdain] on their Orbitz relationship, they mentioned it wasn’t essentially feasible at the rates, maybe you have got better rates or can you comment a little on what you are seeing there, thanks.

Sure Aaron, on international I guess the results have been as expected. We took a little bit of a risks as far as increasing the marketing spend, and in various geographies. And I think the team there executed very well in pulling through nice gross bookings growth, pretty much across the board as a result of those increasing spends. We are very pleased with the progress of Hotels.com. Internationally we did a mini re-platforming for Hotels.com to make the site more feel friendly to improve the consumer experience and we are certainly seeing the rewards of that, and we are rolling that out across Europe. So, right now we are really happy with how the international markets are doing. We are happy with how the European markets are doing. And I think we are looking at the Priceline growth rates with envy and asking ourselves, how can we get those growth rates? I think the team is really challenging themselves and while we are improving, I wouldn’t say that word, in anyway happy or satisfied. So, I think more to come, our expectations are for better growth going forward internationally and I think the team is really challenging themselves. As far as search pricing goes, I don’t want to comment specifically on how this quarter went versus another quarter. What I would say is that, in general search terms, there continuous to be increase or inflation in search terms. And I think that our search team does a great job of optimizing around that inflation. The optimization is in two parts, one is which terms are you going to bid for and where do you want to be as far as you want to be first or second or third, etcetera and which search engine to use and also working on the conversion of the landing pages, once someone types in or clicks on a search term. So, while there is inflation, we have a great team working there that that is overall getting pretty good efficiency out of the search engine marketing channel overall. I think your third question was on the Orbitz deal, is that correct?

Yes, I know Priceline have backed out of that deal, and offers a competitive win for you, or I think it was getting too expensive for them to keep up that deal.

I don’t know whether it was a competitive win, but it was a win. And, the economics that we offered Orbitz were pretty similar to the economies that we had them two years ago. And, so we're pretty confident that it is a channel that is going to work for us and be profitable with us. If it didn’t work for Priceline, then the conclusion that you would draw is that Hotwire must converting better than Priceline, because I don’t think that Orbitz would take a less economically attractive deal.

Right. Okay, thank you.

You bet.

And your next question comes from Christopher Gutek with Morgan Stanley. Please go ahead.

Thanks, just a couple of quick questions. I know you guys aren’t giving detailed guidance for the next year yet, but I think you did suggest at the end of your prepared comments that you think margins could be margins down modestly in '07 versus '06. I am wondering if you could just comment on the kind of speculation or suggestion that maybe the Company's economic model in terms of margins of cash flow were put in place several years ago with better spy in terms of the hotel and air inventory. And going forward with relatively tight supply that there is sort of a trade off between growth and profitability and to get real top-line growth, you might to have to give up more in terms of margins going forward. I am wondering if you can kind of comment on that in terms of general expectations for margins longer term relative to growth longer term.

Yes. On revenue margins for '07, we are anticipating on the air side, the margins reducing in a similar amount that has occurred in '06. We think that by the long-term nature of the contracts that we have entered into and are continuing to negotiate that we are optimistic that we will see a leveling off of that in '08. In terms of the hotel revenue margin, and I think as Dara mentioned earlier, we think that the economic relationships we have on the hotel side are appropriate at this time and really reflect the value, the value that we are delivering to the hotels.

Chris, just a comment on that further, it's Dara; what we are solving for long term is the amount of cash that this business draws off. We kind of don’t care whether its high margins or low margins or high revenue growth or low revenue growth, we are solving for long-term cash generation and optimizing long-term cash generation. It may happen that we may have an environment where dropping margins is going to really drive revenue growth, which is going to result in higher profitability, we will do that. The opposite may be true as well. So, it's very difficult to comment on long-term trends in margins without knowing what's happening. We have some partners that we do business with today, within our margins are actually increasing. Now the production in their particular hotels is increasing dramatically as well. So, it's win-win situation. They get a ton of volume from us, we get higher margins from them and we both win. So, it's going to depend on the particulars, and we will act accordingly. Just one of the other interesting aspects of our business is that we think we have a real advantage and that we do have a global platform here, and we are constantly -- you guys don't see it but we are constantly testing stuff in countries outside the US as far as how do our margins affect our revenue growth, higher booking fee, lower booking fee, higher margins with hotels, lower margins with hotels it's something that we are starting to do -- that we started to do and I think we can learn a lot more about kind of the revenue -- the effect on revenue and margins and the trade-offs there. So, I think -- frankly, I don't think we are smart enough right now and I think we are going to get much smarter about that over the next years.

In the context of getting smarter, I mean, do you think you have enough visibility going forward? Subsequently you report Q4 results, you can give more detailed guidance for '07 then there is a relatively limited guidance you gave for '06 or just kind of the multi-year process to kind of get smart and figure out the optimal way to maximize that cash flow and therefore the guidance will be somewhat limited going forward?

I think there are two factors to that, one is that, I think, we are getting better at forecasting in general. This company as far as being a public company is a fairly young company. So, I do think that we are going to get better of that. The second is our view of guidance, and you put those two together and you are going to get the formula as to what we are going to tell you next quarter. I can't tell you right now what that will be.

Okay. And finally two quick balance sheet questions, could you guys comment on the potential for additional goodwill and intangible write-downs relative to company's market cap? And then could you also comment on the optimal capital structure now that you have done that [deal]?

Okay, I will take the first question relating to the goodwill. We are performing the annual assessment which we do each year at this time and it's premature for us to comment on a non-cash impairment to goodwill as we are still making that assessment. I will say that the things that are looked at as a part of that analysis are disclosed in our 10-K, are discount to cash flow characteristics of the company and in market comparables. And that’s all we will be looking to during the Q4 period.

Barry do you want to talk about capital structure?

Wait a second there I am. I was on mute so no one would hear all the noise I am making. We are in a very good shape obviously. We have a good amount of cash. We have little debt. We do think that when it's appropriate we will -- we would think we would take on some leverage. The business is stable enough for us to do so. I would think that for normal purposes it would be at about two times that’s what we have been historically comfortable with. We have not really ever gotten there, but at least intellectually what we are thinking is about right. We might go higher than that for a period of time. But we would look to pay it down to two times. And we are not anxious right now about that, and we are obviously right now quite comfortable in our current structure.

All right. Thanks guys.

Thank you.

Thank you. Next question comes from Robert Peck with Bear Stearns. Please go ahead.

Hey Dara. Just a quick follow up on previous question, when you talked about keyword pricing and in your point of view, is there any sort of irrational exuberance there or do you think it's just the time you are getting the ROI investments? Number two is, could you quantify to any degree you can the changes in the GDS agreements and how that is affecting some of the numbers going forward? And lastly, could you talk about the integration of lastminute.com how that’s affecting you from a competitive point of view? Thanks.

Sure. As far as the keyword pricing goes, are we seeing any irrational exuberance? I would say less than what we have seen in the past, but this is an awfully big marketplace. This is $900 billion worldwide market; you are going to get all sorts of new entrants and new players in it everyday. And frankly, we can’t really tell when someone is being irrationally exuberant or not because we don’t understand how they are converting one way or the other. The keywords go up and down based on various factors; for example, the terror alert had effect on keyword pricing this quarter. So it goes up and down but we actively manage it; we are good at it; and we are not seeing anything strange going on so to speak. As far as the GDS agreements go, I don’t want to comment on the specifics of that economics. I think you all know that the GDS economics relating to -- their economics relating to the airlines took a hip and we were -- some of those economics were passed on to us which has affected our revenue per ticket. That said we think we are in a pretty good spot and that we have newer agreements with Sabre and Amadeus. We are sending segments over those partners and actually we are now in conversations with another GDS partner who is at least offering to us pretty attractive economics as well. So we will see whether we are getting business with yet another GDS provider or not. Fundamentally, we believe in multi GDS connectivity, and we will construct the flow over segments depending on what is economically best for us. So in general, we would like to position there. Lastly, I think you talked about the integration of lastminute, honestly, we don’t have a lot of visibility into how lastminute is doing or what lastminute is doing. I heard Sabre's call and it does seem that they are having some integration pains. I can say that, our international group is doing well, and we are confident, and we are executing, but we know that there are ton of challenges there as well. So, we are pretty -- we are more focused on what we are doing more than what's happening to third parties.

Thanks Dara.

You bet.

Thank you. Next question comes from Michael Millman with Soleil Securities. Please go ahead.

Thank you. International, I guess, a couple of things, one is, can you talk a bit about the international profit, now that you have significant spend there, so related to your Hotels.com and I didn’t quite get the number, I think, you said Hotels.com represented about 60% of international hotels but --

No. Michael just to correct that one real quickly is that we said that Hotels.com growth rate in Europe was 60% year-over-year the gross bookings growth rate. That was what the 60% referred to. Did we say anything else Mike or Stu on that -- on Hotels.com?

[Percentage] for presentation of the whole number.

Okay.

Okay. Well, that might partly answer; what do you think is the prospects for getting it up to the 120 the price line is talking about? And in terms of just a book keeping item, where's TripAdvisor; is that in domestic [cesspool] between the two segments? And then the other question, just following on something that you just said, regarding where you give you lot of business to hotel, you can make -- it sounded like, you can make more and they can make more, does this suggest that your focus should be on narrowing relationships, so that you can maximize the potential for them in you?

Sure. Let me take those on. Mike, as far as TripAdvisor goes, correct me if I am wrong. TripAdvisor isn’t domestic.

Yes, yes.

So, Michael, even though TripAdvisor does have international revenues and we believe that those international revenues are going to increase. All of it is in domestic right now, just because of kind of accounting systems issues, etcetera. We may break that out at some points. Okay.

So that suggests that the business for those bookings, travel business growth domestically was even less than suggested?

TripAdvisor will not affect our domestic or international gross bookings rate, because it doesn’t show up in gross bookings.

No, I didn’t -- but I meant in terms of the revenue since it --

Revenue, correct. That would be true to the extent that TripAdvisor revenue internationally was growing faster than TripAdvisor revenue domestically. I just think that overall TripAdvisor is a pretty small mix as a whole. So, you are not going to see significantly different trending from what we are telling you about.

Okay.

But to the extent we get that information, we will talk to you about it. On international profitability, I don't want to make specific comments there; I think that international has now broken out as a segment, so we do talk about profitability, right. Mike?

Yes, in the Q.

Yes, its -- we are -- here is what I will tell you is that it is -- international is nicely profitable, the bulk of our profits come into UK and for Hotels.com and in the other markets most of them are breakeven to slightly profitable and we are really focused on improving growth there rather than getting immediate profitability. But I would think that our European profitability is significantly higher than most of our competitions probably other than Priceline's because I know Priceline does -- is very strong internally as well. And then I think you said, when do we get to the 120% on our international, I asked that question to half of our team in Europe all the time. So, when we do we will let you know, we are growing off of a pretty big base. And actually, if you look at the dollars, the dollar increase in international gross bookings, last quarter Priceline and we were pretty equal and this quarter actually on internal gross bookings I think we are a bit above where Priceline was. So, as far as the dollars that we are adding, we are actually adding more dollars relative to Priceline than last quarter, it doesn't mean that we are doing this job, our job as good as we can, but it does mean that our execution is getting better and we are pretty pleased with that. Lastly as far as doing business with individual hotels and how deep we go, frankly, that’s a balance between optimizing your profitability and optimizing the traveler experience. So our job is to make sure that travelers who come to our side get a broad base of hotel choices for them. And depending on the city that may mean 400 hotels to a smaller market which may mean 20 hotels. And we want to optimize around that. So everyday we are thinking about how deep or how broad we go and frankly, we don’t want to fall to one thought or the other and depending on the market it may mean different things.

Thanks. Great. Thank you.

You bet

Thank you. And at this time we will turn the conference back to Stu Haas, please ago ahead.

Thank you for joining us on the call today and for your questions. A replay will be available on the Investor Relations website shortly after the completion of this call. We certainly appreciate your interest in Expedia Inc. and look forward to speaking with you again next quarter.

Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, that will conclude the Expedia Inc. third quarter 2006 conference call. We thank you again and at this time you may disconnect.