Expedia JPM Initiation

www.morganmarkets.com

North America Equity Research18 January 2012

Expedia, Inc

Initiation

UnderweightEXPE, EXPE US

Investments and Competitive Threats to Remain Elevated in Near-Term; Initiate at Underweight with $31 Price Target

Price: $29.69

Price Target: $31.00

Internet

Doug Anmuth AC

(1-212) 622-6571

[email protected]

Kaizad Gotla, CFA

(1-212) 622-6436

[email protected]

Bo Nam

(1-212) 622-5032

[email protected]

Shelby Taffer

(212) 622-6518

[email protected]

J.P. Morgan Securities LLC

YTD 1m 3m 12mAbs 2.3% 7.7% 6.9% 11.2%

Expedia, Inc. (EXPE;EXPE US)

FYE Dec 2009A 2010A 2011E 2012EEPS Reported ($)Q1 (Mar) - 0.28 0.13A 0.17Q2 (Jun) - 0.62 0.77A 0.72Q3 (Sep) - 1.08 1.25A 1.13Q4 (Dec) - 0.39 0.59 0.66FY 1.75 2.38 2.74 2.69Bloomberg EPS FY ($) 2.73 3.43 3.34 3.33P/E FY 16.9 12.5 10.8 11.1Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataPrice ($) 29.69Date Of Price 17 Jan 1252-week Range ($) 30.93 - 18.44Mkt Cap ($ mn) 4,134.96Fiscal Year End DecShares O/S (mn) 139Price Target ($) 31.00Price Target End Date 31 Dec 12

See page 23 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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Price Performance

We are initiating coverage of Expedia with an Underweight rating and December 2012 price target of $31. With an anticipated $31.1B in bookings in 2012 and strong brands with global scale, Expedia is focused on growing its hotel business and continuing to shift its bookings mix toward international markets. However, we believe strengthening the competitive positions of the Expedia brand and international operations will remain challenging and likely continue to weigh on margins over the next few quarters. Ongoing platform migration could ultimately improve Expedia bookings growth, but material benefits may not be realized until 2H12. Meanwhile, we also believe Google’s travel products pose a growing threat through theirintegration with core search.

Large international opportunity, but at high investment costs. We expect Expedia to continue to benefit from growth of the global online travel market of an estimated $360B+ in 2012, driven by the continuing shift of travel bookings to online channels. However, we believe the high investment needed to grow in new markets will weigh on margins due to marketing costs and increasing competition.As a result, we are forecasting EBITDA margins of 19.9% in 2012 and 19.4% in 2013.

Platform migration in progress, material benefit expected in 2H12. The Expedia brand has completed the migration of its hotel platform and is working to transition its air and packages businesses in early 2012. As the prior Hotels.com platform upgrade led to improved bookings growth and operational efficiency, we believe the Expedia brand upgrade could be beneficial to conversion rates and top line growth, though benefits are likely to come more in the back half of 2012.

Google threat continues to grow with core search integration. While Google’s travel products are still in early stages, the integration within core search poses an increasing threat to Expedia. Some advertising opportunities for Expedia may exist within certain Google travel products such as Hotel Finder, but we believe continued improvements to Google’s travel products may pose a greater risk over time.

Underweight rating and $31 PT. Our $31 year-end 2012 price target on EXPE is based on ~5x 2013E EBITDA of $766M. We believe a 5x multiple for EXPE 2013 EBITDA (vs. ~8x high growth Internet peers) is warranted given its lower revenue growth and margin headwinds. Our $31 PT implies a 10.5x P/E multiple on our $2.94 2013E adjusted EPS, below its peers trading at 16x.

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Doug Anmuth(1-212) [email protected]

Table of ContentsInvestment Thesis ....................................................................3

Risks to Rating and Price Target ............................................4

Company Description ..............................................................5

Expedia’s Business Lines .......................................................5

Merchant Vs Agency Business Models ....................................................................5

Expedia’s Competitive Advantage in Online Reach .................................................5

Large Global Market Opportunities.........................................8

Online Travel Growth Driven by Global Internet Trends..........................................8

Key Issues.................................................................................9

Assessing the Google Threat: Risks and Potential Opportunities ..............................9

Benefits from Platform Migration..........................................................................11

U.S. Hotel Market Less Attractive for Expedia ......................................................12

Competing Against Booking.com in Europe ..........................................................13

Investments in APAC and LatAm Markets ............................................................15

Financial Outlook ...................................................................16

Valuation .................................................................................17

Models .....................................................................................18

Data on cover reflect pricing as of 1/17/12’s close; all other data and valuation reflect pricing as of 1/13/12’s close.

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Investment Thesis

Initiating at Underweight on EXPE on increasing margin pressures

With an anticipated $31.1B in bookings in 2012 and strong brands with significant global scale, Expedia is focused on growing its hotel business and continuing to shift its bookings mix to international markets. However, we believe strengthening its international position remains challenging without a negative impact to margins due to the high investment required. Expedia is currently in the second phase of upgrading its main Expedia brand platform, which we expect to be a positive catalyst for growth, but material benefits may not be realized until 2H12. Meanwhile, Google’s travel products pose a growing threat through the integration with core search. As it is still early days for Google’s travel products, we believe Expedia has seen limited impact thus far. However, as Google’s travel products continue to improve and become more integrated, Google may pose a greater risk going forward.

Online leadership position supported by highly price sensitive travelers

At ~26M worldwide monthly unique visitors (UV), Expedia currently has over 2x UVs than any direct supplier in both the air and hotel business. Even with Best Rate Guarantee clauses in contracts with many hotels that stipulate third parties cannot undercut direct supplier pricing, Expedia remains an important source of information and bookings for consumers. Furthermore, we believe Expedia will continue to benefit from the ongoing migration of travel bookings from offline to online channels.

Large international opportunity to come at the cost of margins

According to the IDC, the $300B global online travel market accounted for 44% of the global eCommerce sales of $673B in 2011. Including corporate travel, we estimate Expedia’s core addressable market of global online travel sales to be $335B in 2011 and to exceed $360B in 2012 as travel bookings continue to migrate online. As the US and European travel markets mature, we believe the next areas of high growth are to come from APAC and LatAm. We expect these under-penetrated markets to become an increasing share of the global online travel market, driven by increasing broadband penetration, mobile adoption, and growing middle classes that are highly interested in travel. However, we believe it will require high levels of investment to enter these new markets, due to increasing competition from other U.S. OTAs as well as strong local players. Chasing growth in these new markets may pressure margins in the near term.

High exposure to difficult domestic market

The U.S. travel market is less attractive for Expedia as it is dominated by large hotel brands and consolidating airlines that are increasing investments to drive more online traffic to direct channels. Furthermore, STR estimates domestic hotel supply growth to slow from 1.9% Y/Y in 2010 to 0.7% Y/Y in 2011 and 0.9% in 2012. We believe decreasing U.S. hotel supply growth is likely to increase the difficulty in acquiring hotel inventory for the Expedia. In 3Q11, Expedia had 60% domestic and 40% international bookings and is targeting to grow international bookings to 50% of the mix over time.

Expedia, Inc.(EXPE)

Underweight

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Platform migration in progress, expect benefit in 2H12

Expedia has completed the full platform migration for its main Expedia brand’s hotel business, and will begin to migrate its air and packages businesses in early 2012. When the Hotels.com platform migration was completed, there was a period of delay following the completion from when benefits were realized. We believe the completion of the Expedia brand platform migration will be a positive catalyst for revenue growth, but material benefits may not be realized until 2H12.

Increasing threat from Google travel products

We believe certain Google travel products (Places and Flight Search) pose a growing threat to Expedia through the integration into Google’s core search – organic results are pushed below the screen, potentially resulting in a reduction in traffic to Expedia and higher traffic acquisition costs. Google’s products are still in early days and we believe Expedia has seen limited impact from Google’s travel products thus far. In our view, Google’s primary objective is to increase ad revenues from the travel vertical, rather than to move further down the bookings path. However, as Google’s travel products continue to improve and become more integrated within core search, Google may become a greater risk for Expedia moving forward.

Risks to Rating and Price Target

Faster than expected benefits from platform migration

Given Expedia’s prior experience with upgrading the Hotels.com platform, Expedia may be able to leverage material benefits to revenue from the ongoing Expedia brand platform migration, which is currently scheduled to be completed in early 2012. Material benefits ahead of expectations may drive upside to our revenue and margin estimates.

Potential upside in international bookings and AirAsia partnership

Expedia is investing heavily to engage in emerging international travel markets, specifically in APAC and LatAm. If Expedia is able to produce marketing efficiencies sooner than expected and drive incremental bookings at lower costs, we believe this will drive upside in revenues and margins. The recent launch of the Expedia and AirAsia joint venture may further benefit Expedia’s international expansion plans, as it may be able to benefit from AirAsia’s marketing experience in APAC.

Partnership opportunities with Google travel products

Expedia is currently exploring opportunities within Google’s travel products such as Hotel Finder. If Expedia’s links within Google’s Hotel Finder see material gain in online traffic, it may lead to an increase in bookings. Furthermore, if Google is able include Expedia booking links in Flight Search without causing friction with its airline partners, this may also result in positive growth in Expedia's traffic and bookings, alleviating some of the competitive threat from Google.

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Company Description

Expedia is a US-based online travel agency (OTA) that enables leisure and business travelers to research and book travel plans online. Expedia offers airline tickets, hotel reservations, and other travel products such as car rentals, cruises, and packages. Expedia operates a global network of brands and websites, including Expedia.com, Hotels.com, Hotwire.com, Egencia, and Venere, among others. Expedia generates 60% of its bookings in the U.S. and 40% from international markets, with over ~26M monthly unique visitors and travelers in over 70 countries.

Expedia’s Business Lines

Expedia is an online travel agency (OTA) that allows consumers to research and book travel plans online. Expedia operates a network of sites that offers airline tickets, hotel reservations and other travel services such as cruise lines, car rentals, and travel packages. Expedia's primary brands include Expedia.com, Hotels.com, Hotwire, Egencia, and has ~64% ownership of eLong in China. Within the OTA model, travel bookings are recorded through two primary business models, merchant and agency.

Merchant Vs Agency Business Models

For online bookings transacted through the merchant model, Expedia acts as the merchant of record. Expedia has higher flexibility to establish prices as it negotiates supply and pricing with airline and hotel suppliers, and is able to generate higher revenue margins compared to an agency model. As the merchant of record, Expedia must pay the associated credit card fees, but also receives a working capital benefit as it also collects the revenue from the customer and pays the supplier at a later time. As of 2010, 41% of Expedia's bookings were under the merchant model.

In the agency model, Expedia acts as an agent and passes the reservations to the respective airline, hotel, car rental, or cruise supplier in return for a commission fee. Since Expedia is not the merchant of record, it does not process the customer transaction and does not pay any credit card fees. While the majority of Expedia’s agency bookings are airline ticket transactions, the company is increasing its focus on hotel bookings. In Europe, priceline.com's Booking.com is the market leader in online hotel bookings and uses an agency model. In 2009, Expedia introduced its own competitive agency model for hotel bookings in the region, but has been slower to adoption due to competition.

Expedia’s Competitive Advantage in Online Reach

Online travel bookings have been driven by increased broadband penetration in key travel markets and consumers increasingly conducting travel research and bookings online. We expect growth in online penetration rates for travel bookings to continue to expand the online travel market, driving increased competition between the OTAs and direct suppliers of airline tickets and hotels. Though hotel and air suppliers have been making increasing investments into online booking channels, Expedia had greater online reach and traffic than any single direct supplier in the US (Figure 2).

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In the airline industry, there has been significant consolidation in carriers–mergers of Northwest and Delta, United and Continental, and Southwest and AirTran. Consolidation and challenging macro economic trends have led to significant cost cutting, resulting in higher air ticket fares and lower capacity as airlines try to maximize revenue per ticket. We expect this reduction in capacity to negatively impact Expedia, as less supply and higher ticket prices typically lead to lower air bookings, which may also adversely impact hotel bookings from reduced levels of travel. Expedia is further expanding its air business through international partnerships, such as with AirAsia, in an effort to drive incremental travel bookings in new regions. Expedia believes these partnerships may also offer insight into effective marketing strategies in foreign markets.

In 3Q11, Expedia generated over 75% of its revenue from hotels, compared to 9% from its air business. Expedia is highly focused on growing its hotels business, as it is not only its largest segment, but generates higher revenue take rates than the air business. We estimate Expedia's hotel take rates to be ~18%, and air take rates to be ~3%. As shown below, we estimate hotels pay higher costs when using OTA distribution channels (both merchant and agency) than bookings it generates on its own website, primarily due to OTA commission payments.

Figure 1: Costs to Hotel by Distribution Channel

Source: J.P. Morgan estimates.

Despite higher costs, hotels have increased their reliance on Expedia as an important distribution channel in filling rooms due to its global reach and effectiveness in filling rooms quickly. In November, Expedia had the highest unique visitors in the US, according comScore, compared to all the other major US OTAs, airlines, and hotel sites. It is this scale and reach that enables Expedia to be an effective distribution channel for both hotel and air.

Hotel Uses OTA Uses OTA

Website Merchant Agency

Price of Hotel Room $200.00 $200.00 $200.00

Estimated OTA Commission NA 18% 15%

Total Commission Paid to OTA $0.00 ($35.00) ($30.00)

Estimated % Credit Card Fee 2.5% 2.5% NA

Total Credit Card Fees ($5.00) ($5.00) $0.00

Total Costs to Hotel: ($5.00) ($40.00) ($30.00)

% of Price 3% 20% 15%<

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Figure 2: U.S. Monthly Unique Visitors, November 2011

Source: J.P. Morgan estimates, comScore.

Expedia Sites 13,025

Other OTAs Hotels

Priceline.com Incorporated 11,116 Marriott 4,350

Orbitz Worldw ide 9,715 Hilton Hotels 4,018

Travelocity 5,608 InterContinental Hotels Group 3,080

Airlines Starw ood Hotels And Resorts 2,333

Southw est Airlines Co. 9,210 Wyndham Worldw ide 2,173

Delta Airlines 5,177 Choice Hotels International 1,886

American Airlines 4,670 Global Hyatt Corporation 1,155

United Airlines 2,810 LQ.com (La Quinta Hotels) 911

JetBlue Airw ays 2,759 BestWestern Hotels 885

Continental Airlines Sites 2,512 Accor 682

Other

Kayak 5,628

Bing Travel 4,207

Google Places 2,724

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Large Global Market Opportunities

Online Travel Growth Driven by Global Internet Trends

According to the IDC, the $300B global online travel market accounted for 44% of the global eCommerce sales of $673B in 2011. Including corporate travel, we estimate Expedia’s core addressable market of global online travel sales to be $335B in 2011 and to exceed $360B in 2012 as travel bookings continue to migrate online. We believe the online travel market growth is outpacing the total travel market growth, driven by increasing online penetration across all regions of the globe. Expanding middle classes in emerging countries have increasing interests in travel, with mobile adoption driving connectivity in many new markets.

According to PhoCusWright, the US and Europe represent more than 75% of all online sales but account for less than 66% of global travel bookings. We believe accelerating online travel growth in emerging markets of APAC and LatAm will continue to drive growth and become an increasing share of the global online travel market as the US and European travel markets mature. Including corporate travel, the US online penetration in travel is mid-50%, followed by Europe in the mid- to high 30%s. Though online bookings in APAC and LatAm are small, these regions support growing travel markets and online penetration is rising quickly, accelerated by the adoption of connected mobile devices.

Figure 3: Global Online Penetration Rates for Leisure, Unmanaged Travel

$ in billions

Source: J.P. Morgan estimates, PhoCusWright.

Total Travel Markets 2008 2009 2010 2011E 2012E

US 274 233 255 271 288Europe 354 300 292 317 325

APAC 252 220 256 274 290LATAM 56 52 58 63 68Total 936 805 861 925 971

Online Bookings 2008 2009 2010 2011E 2012E

US (Incl. Corp Travel) 143 132 139 145 154

Europe 96 93 97 117 123APAC 36 40 53 62 71LATAM 5 6 8 11 14Total 280 270 298 335 362

Online Penetration 2008 2009 2010 2011E 2012E

US (Incl. Corp Travel) 52% 57% 54% 53% 53%Europe 27% 31% 33% 37% 38%APAC 14% 18% 21% 23% 24%

LATAM 9% 11% 14% 18% 21%Total 30% 34% 35% 36% 37%

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Key Issues

Assessing the Google Threat: Risks and Potential Opportunities

We believe Google and its efforts to build out its travel products are a growing concern to Expedia investors. Google has launched Places, Hotel Finder, and with the completion of the acquisition of ITA Software, Flight Search. As the interface and functionality of these products resemble OTA offerings, Google's potential impact to Expedia has been increasing. Not only is Google a potential competitor, but Google is also the largest source of traffic to Expedia. According to comScore, Google was Expedia’s highest source of online traffic, accounting for ~11% of Expedia’s global entries in October, compared to 15.4% a year ago.

Figure 4: Top 10 Worldwide Sources of Entries to Expedia Sites, October 2010

Source: comScore.

Figure 5: Top 10 Worldwide Sources of Entries to Expedia Sites, October 2011

Source: comScore.

In our view, Google’s primary objective in creating travel products is to increase advertising revenue from the travel vertical. While these travel products are still in early days and currently may not be as competitive to OTA offerings, it is the integration with Google’s core search that increases the threat to Expedia, in our view.

Google launched Google Places in June 2009 and began incorporating hotel information in 4Q10. One of the first hotels to sign on was Intercontinental Hotels Group (IHG) and BestWestern, displaying pricing directly in Places. The Places interface is integrated into core search, and is presented when it correlates with key search terms. Due to the space Places occupies beneath the paid ads, organic results are pushed below the screen and out of view. The impact of this is two-fold, as it reduces Expedia’s traffic from organic results, and potentially increases the cost of the paid links at the top due to higher competition for positioning.

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Figure 6: Google Places Integrated into Core Search

Source: Company website.

Following the close of the ITA Software acquisition, Google launched Flight Search in 4Q11 and integrated it into core search, also pushing organic results off the screen.Typing in phrases such as “JFK to LAX” will populate Flight Search within Google’s main search results, in the same way as it is done in Places. As Flight Search excludes all OTAs from booking links and currently does not offer any OTA participation except for ad links, this is a missed opportunity for traffic and a potential competitive threat to Expedia’s core business.

Google’s Hotel Finder strongly resembles an OTA interface, allowing users to browse hotels by destination and filter results by prices, class, user ratings, and Google Maps to narrow the geographic region of search. The reviews are sourced from Google Plus and Places and displayed prominently above links to third party review sites. The booking links include direct links to the hotel site, but the prices and availability shown are only from participating hotels such as Intercontinental Hotel Group and BestWestern Hotels. Unlike Flight Search, OTAs’ participation in the booking links is included, presenting a potential opportunity for Expedia to increase its participation and traffic generation from Hotel Finder.

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Figure 7: Google Hotel Finder

Source: Company website.

Currently, Hotel Finder is still in experimental stages and not integrated into core search. It is unclear at this point how Hotel Finder will continue to develop. Expedia has indicated it is exploring options to increase its participation within Hotel Finder as a potential source of traffic and bookings. While we acknowledge this to be a possibility, we believe it is too early to tell if Google will keep these travel products as stand-alone features, or if it combines them into a single travel product, with varying levels of OTA participation. In its current state, we believe Google’s travel products’ features lack many features and capabilities compared to Expedia, and do not believe it to pose a threat in the near term. Flight Search excludes all OTA bookings and only offers direct airline links and prices, while the rate of adding hotels to display pricing in Places and Hotel Search has been slow. However, we believe Google has the potential to become a larger threat in the long term as the products continue to develop and become more integrated within core search.

Benefits from Platform Migration

Expedia has completed the full platform migration for its hotel business, and will begin to move its air business in 1Q12 and packages thereafter. Expedia believes that the platform upgrade allows for faster implementation of improvements to its sites,as well as increased metrics, including conversion rates.

When the Hotels.com platform migration was completed, there was a period of delay following the completion from when material benefits to bookings were realized. We believe the completion of the Expedia brand platform migration will be a positive catalyst for bookings and revenue growth, but we believe material benefits may not be fully realized until 2H12.

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U.S. Hotel Market Less Attractive for Expedia

Hotel revenue managers often make decisions at the local property level, including the level of inventory to distribute through the OTAs. The reach and scale of Expedia's user base makes it an attractive option for hotel revenue managers to effectively manage the occupancy levels on a real-time basis. The high fixed cost nature of hotels allows managers to clear inventory through Expedia on short notice, despite the higher incremental costs per room. This is the reason that opaque channels, such as Expedia’s Hotwire brand, are often countercyclical in nature, as a weak economic environment leads to hotels offering more frequent and higher discounts to these channels.

Weak economic periods overlapping with high hotel supply growth created unique opportunities for Expedia and the OTAs to gain share. In the dot com bubble in the early 2000s and most recently during the financial crisis in 2008-2009, U.S. room night supply growth rates were at relatively high levels, between 2%-3% Y/Y, according to STR. The surplus in room night supply, coupled with a recessionary economic environment, led to lower occupancy and weak ADRs, negatively impacting the hotel industry. Hotel managers turned to the OTAs as channels to clear inventory and reach occupancy targets, often at great discounts. Expedia was one of the primary beneficiaries during these periods and gained significant share in the domestic market. This led to increased room night growth but lower revenue per room night due to lower ADRs.

Figure 8: Total U.S. Room Night Supply and ADR Y/Y Growth

Source: J.P. Morgan estimates, Smith Travel Research.

Looking ahead, STR estimates supply growth to decelerate to 0.7% and 0.9% in 2011 and 2012, respectively. Decreasing hotel supply growth increases the difficulty in acquiring hotel inventory for Expedia, making the U.S. hotel market more challenging. Furthermore, Best Rate Guarantees have since been enacted by several major hotel brands in their contracts with the OTAs, stipulating that room rates on third party sites cannot be lower than the hotel direct channel. The suppliers are

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increasing their investments into their own online channels, in an effort to generate higher margins and take back some share of the online hotel market.

One example of hotel supplier efforts to drive direct online traffic is the creation of the Room Key search site (www.roomkey.com), a collaborative effort by several major hotel brands. Choice Hotels, Hilton, Hyatt, InterContinental, Marriott, and Wyndham launched this joint venture on January 11, 2012, led by Pegasus CEO John Davis. Room Key is a hotel metasearch site that accesses the six hotel brands’ inventory. Within a few days of announcement, BestWestern joined the venture, contributing its inventory of ~4,000 hotels to the site. Though we believe Room Key is not as robust an offering as Expedia’s and do not expect any significant impact in the near term, this joint effort highlights the growing difficulty in the domestic hotel market.

Even with rising competition from the hotel suppliers, there are many new entrants into the domestic travel market. Priceline's Booking.com is making an aggressive push in the US market with its highly international user base and effective SEM strategies. Daily deal sites have been making inroads into the travel vertical with many daily deal brands offering travel deals, such as Gilt’s Jetsetter, as well as the introduction of smaller travel-only deal sites. Expedia is actively engaged in new opportunities in the daily deals market through many of its own offers through its brands and a partnership with Groupon called Getaways. However, we believe the rising competition in the highly penetrated U.S. hotel market will only become more challenging for the OTAs and Expedia will look for growth from more attractive high growth international travel markets.

Competing Against Booking.com in Europe

Globally, Expedia has a network of 145,000 hotels compared to 170,000 at PCLN, with a majority of the difference likely to be coming from Europe. Europe is a highly attractive hotel market for the OTAs, due to the fragmented nature of the hotel industry, earlier stages of online penetration in travel bookings, and a travel/vacation culture that tends to be more resistant to economic volatility. As shown below, PhoCusWright estimates the European hotel market to be 35% of total travel bookings, with 22% online penetration in 2010. As the offline bookings migrate online, we believe Priceline and Expedia to be primary beneficiaries of this shift. Expedia reported 3Q11 TTM share of total online travel bookings of ~6% in Europe, which compares to our estimate of Priceline share of ~11%+. We believe Priceline's Booking.com is aggressively defending its majority share of the European online hotel business. Given Booking.com's entrenched position and highly efficient operations, we believe Expedia is likely to be holding its share, while Booking.com continues to gain share in the region.

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Figure 9: Europe Hotel Market

$ in billions


The potential implications of the European debt crisis have been a growing concern for the European travel market. According to STR, European hotel ADR growth rates have been flattening as of November, which is also a seasonally weak month. Occupancy rates seem to be healthy and are still growing, but at decreasing rates. If the European debt crisis and foreign exchange concerns continue to weigh on the global travel market and lead to declines in travel bookings, Expedia’s revenues may be negatively impacted.

Figure 10: Europe ADR Trends

Source: J.P. Morgan estimates, Smith Travel Research

Figure 11: Europe Occupancy Trends

Source: J.P. Morgan estimates, Smith Travel Research.

Europe 2008 2009 2010 2011E 2012E

Gross Bookings 354.3 300.3 292.0 318.4 315.5

Online Bookings 96.0 92.7 97.3 117.3 125.0

Online Penetration 27.1% 30.9% 33.3% 36.8% 39.6%

OTA Hotel Bookings 12.4 12.8 14.2 15.9 16.4

Hotel Direct Website Bookings 7.5 7.1 7.9 9.4 10.0

Offline Hotel Bookings 104.0 84.9 79.5 84.7 82.9

Total Hotel Bookings 123.9 104.7 101.6 110.1 109.3

% of Total Travel

Share of Hotel Bookings

OTA 10% 12% 14% 14% 15%

Hotel Websites 6% 7% 8% 9% 9%

Offline 84% 81% 78% 77% 76%

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v-1

1

Occupancy Y/Y Chg

15



Investments in APAC and LatAm Markets

Online penetration in APAC travel is estimated by PhoCusWright to be 21% in 2010,lagging the US at 54% and Europe at 33%. However, in terms of total bookings size, total travel bookings of $256B make APAC nearly equivalent to the US. We believe APAC online travel penetration growth will likely occur at higher rates than the US at these levels, due to the rapid penetration of broadband and adoption of mobile devices in major APAC markets.

Figure 12: APAC Travel Market

$ in billions


Competition in the APAC region is very high, given strong local players such as Ctrip in China, Rakuten and Jalen in Japan, MakeMyTrip and Yatra and Cleartrip in India, and Wotif and Webjet in Australia. Beyond these local online travel companies, the US OTAs are all focused on aggressively investing in APAC.

Expedia currently has a presence in APAC through its Expedia and Hotels.com brands, Expedia Affiliate Network (private label business), and a 64% ownership of eLong (LONG). eLong is the second largest OTA in China behind Ctrip, which is primarily operated through call centers as online penetration rates are still low.eLong has been strengthening its position through strong room night growth, and Expedia has been keen to increase its ownership position as it continues to grow inthe region.

Expedia launched a joint venture in July with AirAsia, a low cost air carrier in the APAC region. AirAsia is focused on making travel more affordable for the rapidly growing middle classes in the region. AirAsia tickets are currently only available through direct sales and Expedia, increasing Expedia’s brand and profile. We believe there are opportunities for Expedia to leverage AirAsia's marketing experience and strategy in the APAC region, but such investments may come at a cost to overall margins in the next few years.

In LatAm, while the travel market is much smaller than in the US, Europe, and APAC, we believe there are major growth drivers to the travel industry over the next few years. Both the World Cup (2014) and the Summer Olympics (2016) will be hosted in Brazil, and we believe the travel market will greatly expand following these events. There are many favorable factors for Expedia to participate in this market,

2008 2009 2010 2011E 2012E

Total APAC Travel 252.1 219.5 255.8 273.7 290.4

Online APAC Travel 36.4 39.6 53.1 62.0 70.6


Total Airline Bookings 104.4 94.7 98.1 101.0 104.1

Online Airline Bookings 16.0 19.1 23.4 26.1 27.9


Total Hotel Bookings 68.4 60.9 62.6 65.1 68.4

Online Hotel Bookings 10.3 11.5 14.7 16.6 18.1


16



including an increasing hotel supply and rapidly rising online penetration. While we believe travel bookings may be small at this time, we expect online bookings to grow quickly and contribute to a larger portion of global travel.

Figure 13: Latin America Travel Bookings

$ in billions


Financial Outlook

4Q11 to partially reflect new revenue and cost structure post spin of TRIP

We are forecasting Expedia 4Q11 bookings of $6.2B (+7.6% Y/Y) and revenue of $811M (+10% Y/Y) for the continuing operations (excluding TRIP). Following the spin-off of TripAdvisor, we are forecasting margins to reset at new levels going forward. We look for 4Q11 EBITDA of $181M and EBITDA margins of 22.3%. For the full year, we are forecasting 2011 revenues of $3.47B, EBITDA of $744M, and EPS of $2.74.

New revenue and margin profile in 2012 as a stand-alone company

Following the spin-off of TripAdvisor, Expedia will have a new financial profile as a stand-alone company. We are forecasting 2012 bookings of $31.1B (+7.1% Y/Y) and revenue of $3.7B (+7.1% Y/Y). We look for EBTIDA of $740M at margins of 19.9% and adjusted EPS of $2.69.

Expect steady 2011-2013 revenue growth but growing margin pressure from international investments

We are forecasting 2011-2014 revenue CAGR of 6% but look for EBITDA margins to contract to 19.4% in 2013, due to continuing investments to expand into emerging international markets such as APAC and LatAm for the next few years. We believe Expedia will continue to return cash to shareholders through dividends and share buybacks, as it has done so historically.

2008 2009 2010 2011E 2012E

Total LATAM Travel 55.9 52.3 58.0 62.8 68.1

Online LATAM Travel 4.8 5.6 8.2 11.2 14.4


17



Figure 14: JPM Estimates

Source: J.P. Morgan estimates.

Note: Many estimates included in consensus likely still include TripAdvisor in Expedia

Valuation

$31 price target is based on ~5x 2013E EV/EBITDA

Our $31 year-end 2012 price target on EXPE is based on ~5x 2013E EBITDA of $766M. This compares to its high growth Internet peers at ~8x 2013E EBITDA. We believe EXPE will trade at a discount to its OTA peers given its lower revenue growth rate and margin headwinds from international expansion investments. Our$31 PT implies an 11x P/E multiple on our $2.94 2013E adjusted EPS, below its peers trading at ~16x.

Figure 15: Comps

Source: J.P. Morgan estimates, Bloomberg. J.P. Morgan ratings: OW = Overweight; N = Neutral; UW = Underweight. NC = not covered.

J.P. Morgan Estimates 4Q11E 2011E 2012E 2013E($ in millions except per share data)

Gross Bookings 6,190 29,052 31,121 33,462

Y/Y Growth 7.6% 11.9% 7.1% 7.5%

Total Revenue 811 3,472 3,721 3,950

Y/Y Growth 10.0% 14.5% 7.1% 6.2%

Adjusted EBITDA 181 744 740 766

Y/Y Growth 11.1% 5.3% -0.6% 3.5%

% Margin 22.3% 21.4% 19.9% 19.4%

Adjusted EPS $0.59 $2.74 $2.69 $2.94

Y/Y Growth 52.7% 15.1% -2.0% 9.4%

Consensus

Total Revenue 875 3,710 4,041 4,260

Adjusted EBITDA 197 867 925 909

EPS $0.70 $3.34 $3.33 $3.45

Prices as of Market 2012

Company 1/13/2012 Cap EV 2011 2012 2013 2011 2012 2013 2011 2012 2013 Revenue Growth Ratings Covering

High Growth Internet

priceline.com Inc PCLN $482.43 24,017 22,466 5.2x 4.0x 3.1x 15.0x 10.9x 8.2x 20.7x 15.0x 12.4x 21% OW Doug Anmuth

Ctrip.com International Ltd CTRP $24.31 3,490 2,875 5.2x 3.8x 2.8x 14.0x 11.1x 8.5x 17.2x 15.5x 12.6x 25% NC -

HomeAway Inc AWAY $24.93 2,009 1,197 5.2x 4.9x 3.7x 18.2x 16.7x 11.8x 50.6x 37.6x 28.2x 30% OW Doug Anmuth

Travelzoo Inc TZOO $30.85 492 460 3.0x 2.6x 2.3x 11.7x 9.3x 6.9x 22.5x 18.5x 14.4x 16% NC -

Orbitz Worldwide Inc OWW $3.98 413 744 1.0x 0.8x 0.7x 6.0x 5.0x 4.4x 39.8x 19.2x 13.0x 6% NC -

Mean 3.9x 3.2x 2.5x 13.0x 10.6x 7.9x 30.2x 21.2x 16.1x

Median 5.2x 3.8x 2.8x 14.0x 10.9x 8.2x 22.5x 18.5x 13.0x

Expedia Inc EXPE $28.70 3,994 3,456 1.0x 0.9x 0.8x 4.6x 4.3x 4.1x 10.5x 10.7x 9.8x 7% N Doug Anmuth

P/EEV/Revenue EV/EBITDA

18



Models

Figure 16: EXPE Income Statement

$ in millions

Source: J.P. Morgan estimates, Company data.

2010A 3/11A 6/11A 9/11A 12/11E 2011E 3/12E 6/12E 9/12E 12/12E 2012E 2013E 2014ERevenue 3,033.6 726.9 913.6 1,021.4 810.5 3,472.4 778.1 974.5 1,103.9 864.1 3,720.7 3,950.5 4,138.7

Cost of revenue 683.1 174.8 195.2 205.9 194.5 770.4 186.8 209.5 223.0 207.4 826.6 877.0 918.8Gross Profit 2,350.6 552.1 718.4 815.5 616.0 2,702.0 591.4 765.0 880.9 656.7 2,894.0 3,073.5 3,219.9

Operating ExpensesSelling and marketing 1,223.0 347.4 398.2 405.7 324.2 1,475.6 372.0 428.8 447.1 350.0 1,597.8 1,718.4 1,812.7

General and administrative 249.1 64.8 68.4 86.3 64.8 284.2 66.1 73.1 88.3 70.9 298.4 312.1 322.8 Technology and content 297.1 82.9 90.4 95.5 77.0 345.8 89.5 97.5 102.7 80.4 370.0 387.1 397.3

Amortization of non-cash distrib. & mktg - - - - - - - - - - - - - Amortization of non-cash compensation 59.7 17.3 13.5 15.1 15.0 60.8 16.3 12.7 14.3 15.9 59.2 65.1 71.6 Amortization of intangibles 37.1 8.0 7.0 8.0 9.0 32.0 7.2 6.3 7.2 8.1 28.8 25.9 23.3

Impairment of intangible asset - - - - - - - - - - - - - Depreciation - - - - - - - - - - - - -

Other (merger costs & restructuring charges) 5.54 1.1 2.1 5.1 - 8.33 - - - - - - - Other operating expenses 28.1 6.9 5.0 7.2 4.1 23.2 7.2 6.3 7.2 8.1 28.8 25.9 23.3

Less: Adjusted Stock-based compensation 52.5 14.8 11.5 13.0 14.4 53.8 16.3 12.7 14.3 15.9 59.2 65.1 71.6 Operating Income 500.8 35.3 144.9 207.8 131.4 519.4 40.4 146.7 221.4 131.6 540.0 564.8 592.1

Other Income (74.9) (35.09) (13.73) (9.47) (29.27) (87.54) (24.53) (24.38) (24.19) (24.09) (97.19) (76.74) (74.94) Income (loss) before taxes and minority interest 425.8 0.2 131.2 198.3 102.1 431.8 15.8 122.3 197.2 107.5 442.8 488.1 517.2

Provision for income taxes 120.3 (4.9) 32.2 35.6 29.6 92.5 4.0 30.6 49.3 26.9 110.7 122.0 129.3

Effective tax rate 28.3% NM 24.5% 17.9% 29.0% 21.4% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Minority Interest (3.9) (0.1) (0.5) (0.8) (2.0) (3.3) (1.0) (1.0) (1.0) (1.0) (4.0) (4.0) (4.0)

Net Income 301.6 5.0 98.5 162.0 70.5 336.0 10.9 90.7 146.9 79.6 328.1 362.1 383.9 GAAP Diluted EPS $2.09 $0.04 $0.71 $1.16 $0.51 $2.41 $0.08 $0.65 $1.05 $0.57 $2.34 $2.56 $2.70

Diluted shares outstanding 144.0 139.1 139.1 139.3 139.3 139.2 140.1 140.1 140.3 140.3 140.2 141.2 142.2

Pre-Tax Income 425.8 0.2 131.2 198.3 102.1 431.8 15.8 122.3 197.2 107.5 442.8 488.1 517.2

Plus: Non-GAAP Charges 52.5 14.8 11.5 13.0 14.4 53.8 16.3 12.7 14.3 15.9 59.2 65.1 71.6

Minus: Tax Effect 135.2 (2.7) 35.0 37.9 33.8 104.0 8.0 33.7 52.9 30.8 125.5 138.3 147.2

Adjusted Net Income 343.2 17.7 107.7 173.4 82.8 381.6 24.1 101.2 158.6 92.5 376.4 414.9 441.6Adjusted EPS $2.38 $0.13 $0.77 $1.25 $0.59 $2.74 $0.17 $0.72 $1.13 $0.66 $2.69 $2.94 $3.11

EBITA and EBITDA Reconciliation

Operating income 500.79 35.28 144.90 207.79 131.42 519.38 40.37 146.66 221.37 131.56 539.96 564.83 592.15 Amortization and other 87.75 24.21 18.47 22.24 19.09 84.01 23.43 19.01 21.49 23.98 87.91 90.95 94.87

EBITA 588.53 59.48 163.36 230.03 150.51 603.39 63.81 165.67 242.85 155.54 627.87 655.78 687.02 Depreciation 118.4 33.3 36.2 41.4 30.0 140.9 28.0 28.0 28.0 28.0 112.0 110.0 107.0

EBITDA 706.9 92.8 199.5 271.5 180.5 744.3 91.8 193.7 270.9 183.5 739.9 765.8 794.0

2010A 3/11A 6/11A 9/11A 12/11E 2011E 3/12E 6/12E 9/12E 12/12E 2012E 2013E 2014EY/Y GROWTHRevenue 11% 12% 21% 14% 10% 14% 7% 7% 8% 7% 7% 6% 5%

Cost of revenue 14% 12% 17% 10% 12% 13% 7% 7% 8% 7% 7% 6% 5%Gross profit 10% 12% 23% 15% 9% 15% 7% 6% 8% 7% 7% 6% 5%Selling and marketing expense 16% 20% 30% 16% 16% 21% 7% 8% 10% 8% 8% 8% 5%

General & administrative expense 2% 14% 10% 55% -13% 14% 2% 7% 2% 9% 5% 5% 3%Technology & content expense 10% 16% 26% 27% -2% 16% 8% 8% 8% 4% 7% 5% 3%

Net Income 41% -84% 25% 12% 48% 11% 118% -8% -9% 13% -2% 10% 6%GAAP Diluted EPS 43% -83% 29% 16% 53% 15% 116% -9% -10% 12% -3% 10% 5%Adjusted EPS 36% -55% 25% 15% 53% 15% 35% -7% -9% 11% -2% 9% 6%EBITDA 3% -12% 12% 4% 11% 5% -1% -3% 0% 2% -1% 4% 4%

% OF REVENUE

Cost of revenue 22.5% 24.0% 21.4% 20.2% 24.0% 22.2% 24.0% 21.5% 20.2% 24.0% 22.2% 22.2% 22.2%Gross profit 77.5% 76.0% 78.6% 79.8% 76.0% 77.8% 76.0% 78.5% 79.8% 76.0% 77.8% 77.8% 77.8%

Selling and marketing expense 40.3% 47.8% 43.6% 39.7% 40.0% 42.5% 47.8% 44.0% 40.5% 40.5% 42.9% 43.5% 43.8%General & administrative expense 8.2% 8.9% 7.5% 8.4% 8.0% 8.2% 8.5% 7.5% 8.0% 8.2% 8.0% 7.9% 7.8%

Technology & content expense 9.8% 11.4% 9.9% 9.3% 9.5% 10.0% 11.5% 10.0% 9.3% 9.3% 9.9% 9.8% 9.6%Operating Income 16.5% 4.9% 15.9% 20.3% 16.2% 15.0% 5.2% 15.0% 20.1% 15.2% 14.5% 14.3% 14.3%Net Income 9.9% 0.7% 10.8% 15.9% 8.7% 9.7% 1.4% 9.3% 13.3% 9.2% 8.8% 9.2% 9.3%EBITDA 23.3% 12.8% 21.8% 26.6% 22.3% 21.4% 11.8% 19.9% 24.5% 21.2% 19.9% 19.4% 19.2%

19



Figure 17: EXPE Revenue Analysis

$ in millions


2010A 3/11A 6/11A 9/11A 12/11E 2011E 3/12E 6/12E 9/12E 12/12E 2012E 2013E 2014E

GROSS BOOKINGS BY GEOGRAPHYDomestic 16,734 4,439 4,911 4,604 3,795 17,749 4,683 5,279 4,935 4,023 18,920 19,980 21,019 Y/Y Growth 15.9% 4.3% 9.9% 4.4% 5.5% 6.1% 5.5% 7.5% 7.2% 6.0% 6.6% 5.6% 5.2% Q/Q Growth 23.4% 10.6% -6.3% -17.6% -73.6% 12.7% -6.5% -18.5%

% of total bookings 64% 61% 62% 60% 61% 61% 60% 62% 60% 61% 61% 60% 59%International 9,227 2,855 3,040 3,013 2,395 11,303 3,083 3,216 3,290 2,611 12,201 13,482 14,830 Y/Y Growth 25.1% 20.2% 37.4% 21.4% 11.0% 22.5% 8.0% 5.8% 9.2% 9.0% 7.9% 10.5% 10.0% Q/Q Growth 32.3% 6.5% -0.9% -20.5% -72.7% 4.3% 2.3% -20.6%

% of total bookings 36% 39% 38% 40% 39% 39% 40% 38% 40% 39% 39% 40% 41%Total Gross Bookings 25,962 7,294 7,951 7,617 6,190 29,052 7,767 8,496 8,226 6,633 31,121 33,462 35,849 Y/Y Growth 19.0% 10.0% 19.0% 10.5% 7.6% 11.9% 6.5% 6.9% 8.0% 7.2% 7.1% 7.5% 7.1% Q/Q Growth 26.7% 9.0% -4.2% -18.7% -73.3% 9.4% -3.2% -19.4%

% of total bookings 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Seasonality 100% 25% 27% 26% 21% 100% 25% 27% 26% 21%

NET REVENUE BY GEOGRAPHY (EX TRIP)Domestic (ex TRIP) 1,873 438 524 570 467 1,999 464 560 607 491 2,121 2,198 2,270 Y/Y Growth 8% 4% 9% 6% 7% 7% 6% 7% 6% 5% 6% 4% 3% Q/Q Growth 1% 20% 9% -18% -1% 21% 8% -19%

% of total revenue 62% 60% 57% 56% 58% 58% 60% 57% 55% 57% 57% 56% 55%

International (ex TRIP) 1,160 289 390 451 344 1,474 315 415 497 373 1,600 1,753 1,869 Y/Y Growth 16% 29% 44% 25% 14% 27% 9% 6% 10% 9% 9% 10% 7% Q/Q Growth -4% 35% 16% -24% -9% 32% 20% -25%

% of total revenue 38% 40% 43% 44% 42% 42% 40% 43% 45% 43% 43% 44% 45%

Total Net Revenue (Cont Ops) 3,034 727 914 1,021 811 3,472 778 975 1,104 864 3,721 3,950 4,139 Y/Y Growth 10.6% 12.4% 21.5% 13.7% 10.0% 14.5% 7.0% 6.7% 8.1% 6.6% 7.1% 6.2% 4.8%

NET REVENUE AS % OF CURRENT PERIOD BOOKINGSDomestic 11.2% 9.9% 10.7% 12.4% 12.3% 11.3% 9.9% 10.6% 12.3% 12.2% 11.2% 11.0% 10.8%International 12.6% 10.1% 12.8% 15.0% 14.4% 13.0% 10.2% 12.9% 15.1% 14.3% 13.1% 13.0% 12.6%Total 11.7% 10.0% 11.5% 13.4% 13.1% 12.0% 10.0% 11.5% 13.4% 13.0% 12.0% 11.8% 11.5%

2010A 3/11A 6/11A 9/11A 12/11E 2011E 3/12E 6/12E 9/12E 12/12E 2012E 2013E 2014E

GROSS BOOKINGS BY SEGMENTLeisure 24,018 6,652 7,268 6,949 5,633 26,502 7,068 7,731 7,485 6,036 28,320 30,450 32,623 Y/Y Growth 17.6% 8.0% 17.3% 8.6% 7.1% 10.3% 6.2% 6.4% 7.7% 7.2% 6.9% 7.5% 7.1% Q/Q Growth 26.4% 9.3% -4.4% -18.9% -73.3% 9.4% -3.2% -19.4%

% of total gross bookings 93% 91% 91% 91% 91% 91% 91% 91% 91% 91% 91% 91% 91%Egencia 1,944 642 684 667 557 2,550 699 765 740 597 2,801 3,012 3,226 Y/Y Growth 40.5% 36.3% 39.9% 35.8% 13.0% 31.2% 8.9% 11.8% 11.0% 7.2% 9.8% 7.5% 7.1% Q/Q Growth 30.2% 6.5% -2.5% -16.5% -72.6% 9.4% -3.2% -19.4%

% of total gross bookings 7% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9%Total Gross Bookings 25,962 7,294 7,952 7,616 6,190 29,052 7,767 8,496 8,226 6,633 31,121 33,462 35,849

GROSS BOOKINGS BY AGENCY/MERCHANTAgency 15,412 4,143 4,473 4,114 3,590 16,320 4,660 5,097 4,935 3,980 18,673 20,412 22,226 Y/Y Growth 22.7% 5.7% 11.2% 3.9% 2.2% 5.9% 12.5% 14.0% 20.0% 10.9% 14.4% 9.3% 8.9% Q/Q Growth 18.0% 8.0% -8.0% -12.7% -71.4% 9.4% -3.2% -19.4%

% of total gross bookings 59% 57% 56% 54% 58% 56% 60% 60% 60% 60% 60% 61% 62%Merchant 10,550 3,151 3,478 3,503 2,600 12,732 3,107 3,398 3,290 2,653 12,449 13,050 13,623 Y/Y Growth 14.0% 16.1% 30.7% 19.4% 15.9% 20.7% -1.4% -2.3% -6.1% 2.1% -2.2% 4.8% 4.4% Q/Q Growth 40.5% 10.4% 0.7% -25.8% -75.6% 9.4% -3.2% -19.4%

% of total gross bookings 41% 43% 44% 46% 42% 44% 40% 40% 40% 40% 40% 39% 38%Total Gross Bookings 25,962 7,294 7,951 7,617 6,190 29,052 7,767 8,496 8,226 6,633 31,121 33,462 35,849

20



Figure 18: EXPE Cash Flow Statement

$ in millions


12/11E 3/12E 6/12E 9/12E 12/12E 2012E 2013E 2014E

Cash Flows from Operating ActivitiesNet income 70.5 10.9 90.7 146.9 79.6 328.1 362.1 383.9

Depreciation and amortization 39.0 35.2 34.3 35.2 36.1 140.8 135.9 130.3 Amortization of non-cash distribution and marketing - - - - - - - - Amortization of intang. Assets & non-cash comp. expense 24.0 23.4 19.0 21.5 24.0 87.9 91.0 94.9 Amortization of deferred financing costs - - - - - - - - Deferred income taxes - - - - - - - - Unrealized loss on derivative instruments - - - - - - Equity in (income) losses of unconsolidated affiliates - - - - - - - - Minority interest - - - - - - - - Other - - - - - - - -

Changes in working capital:Accounts and notes receivable 73.8 11.3 (68.7) (45.3) 83.9 (18.8) (53.1) (16.9)Prepaids and other assets - - - - - - - -

Accounts payable and accrued liabilities (231.6) (34.0) 157.5 74.2 (184.6) 13.1 123.5 5.7Deferred revenue - - - - - - - - Deferred merchant bookings (281.2) 85.9 99.1 126.8 (304.1) 7.7 (66.6) 54.6

Other, net - - - - - - - - Total change in working capital (439.0) 63.3 187.8 155.7 (404.8) 2.0 3.8 43.3 Net cash provided by (used in) operating activities (305.5) 132.7 331.9 359.2 (265.1) 558.8 592.7 652.4

Change in working capital as % of operating cash flow NA 48% 57% 43% 153% 0% 1% 7%

Cash Flows from Investing ActivitiesAcquisitions and deal costs, net of cash acquired - - - - Capital expenditures (37.8) (52.1) (59.1) (66.2) (38.6) (216.0) (220.3) (224.7)Purchases of marketable securities - - - - Proceeds from sale of business to a related party - - Proceeds from sale of marketable securities - - - - (Increase) decrease in L-T investments & notes receivable - - - - Transfers (to) from IAC - - - - Other, net 364.6 - - -

Net cash provide by (used in) investing activities 326.8 (52.1) (59.1) (66.2) (38.6) (216.0) (220.3) (224.7)

Cash Flows from Financing ActivitiesShort-term borrowings - - - - Proceeds from issuance of long-term debt - - - - Changes in restricted cash and cash equivalents - - - - Principal payments on long-term obligations - - - - Purchase of treasury stock - - - - Proceeds from sale of subsidiary stock, incl. stock options - - - - Excess tax benefit on equity awards - - - - Treasury stock activity (50.0) (50.0) (50.0) (50.0) (50.0) (200.0) (200.0) (200.0) Withholding taxes for stock option excercises - - - - Contribution from (distribution to) IAC, net - - - - Dividends paid to stockholders (20.0) (20.0) (20.0) (20.0) (20.0) (80.0) (80.0) (80.0) Other, net 0

Net cash provided by (used in) financing activities (70.0) (70.0) (70.0) (70.0) (70.0) (280.0) (280.0) (280.0)

Effect of exchange-rate on cash and equivalents - - - - - - - - Net change in cash (48.7) 10.6 202.7 223.1 (373.7) 62.8 92.4 147.7Cash & equivalents - BOP 1,265.2 1,404.8 1,415.5 1,618.2 1,841.3 1,404.8 1,467.6 1,560.0Cash & equivalents - EOP 1,216.5 1,415.5 1,618.2 1,841.3 1,467.6 1,467.6 1,560.0 1,707.7

Free Cash Flow CalculationNet cash provided by operating activities (305) 133 332 359 (265) 559 593 652 Capital expenditures (38) (52) (59) (66) (39) (216) (220) (225)Free Cash Flow (343.3) 80.6 272.7 293.1 (303.7) 342.8 372.4 427.7 % change NA -88.1% -37.0% -595.4% -11.6% -51.6% 8.6% 14.8%

as % of EBITDA -157% 88% 141% 108% -165% 46% 49% 54%Total Change in Working Capital (439.0) 63 188 156 (405) 2.0 3.8 43.3

Free Cash Flow less Working Capital 95.7 17.4 84.9 137.4 101.1 340.8 368.6 384.4 % change -7.7% -67.2% -38.6% -47.7% 5.7% -38.0% 8.2% 4.3%

21



Figure 19: EXPE Balance Sheet

$ in millions


9/11A 12/11E 3/12E 6/12E 9/12E 12/12E 2013E 2014E

Assets

Current Assets

Cash and cash equivalents 1,265.2 1,216.5 1,415.5 1,618.2 1,841.3 1,467.6 1,560.0 1,707.7

Restricted cash equivalents 18.6 18.6 18.6 18.6 18.6 18.6 18.6 18.6

Short Term inv. / Marketable securities 552.4 552.4 552.4 552.4 552.4 552.4 552.4 552.4

Accounts and notes receivable 357.5 283.7 272.3 341.1 386.4 302.4 355.5 372.5

Receivables from IAC and subsidiaries - - - - - - - -

Deferred tax assets - - - - - - - -

Other current assets 137.0 137.0 137.0 137.0 137.0 137.0 137.0 137.0

Total current assets 2,330.6 2,208.1 2,395.8 2,667.2 2,935.6 2,478.0 2,623.5 2,788.1

Property, plant, and equipment, net 307.4 315.2 339.3 370.4 408.6 419.2 529.4 647.1

Goodwill 2,869.1 2,869.1 2,869.1 2,869.1 2,869.1 2,869.1 2,869.1 2,869.1

Intangible assets, net 733.5 733.5 733.5 733.5 733.5 733.5 733.5 733.5

Long-term investments and other 301.9 301.9 301.9 301.9 301.9 301.9 301.9 301.9

Total Assets 6,542.5 6,427.8 6,639.6 6,942.2 7,248.7 6,801.7 7,057.4 7,339.7

Liabilities and Stockholders' Equity (Deficit)

Current Liabilities

Accounts payable 1,082.6 851.1 817.0 974.5 1,048.7 864.1 987.6 993.3

Deferred merchant bookings 1,051.2 770.0 856.0 955.0 1,081.8 777.7 711.1 765.7

Deferred revenue 16.7 16.7 16.7 16.7 16.7 16.7 16.7 16.7

Income tax payable - - - - - - - -

Short-term borrowings - - - - - - - -

Other current liabilities 340.0 340.0 340.0 340.0 340.0 340.0 340.0 340.0

Total current liabilities 2,490.6 1,977.8 2,029.7 2,286.2 2,487.2 1,998.5 2,055.4 2,115.6

Long-term debt 1,249.3 1,249.3 1,249.3 1,249.3 1,249.3 1,249.3 1,249.3 1,249.3

Other long-term liabilities (incl. credit facility) 104.9 482.5 681.4 686.8 695.4 707.5 744.3 782.5

Deferred income taxes 274.0 274.0 274.0 274.0 274.0 274.0 274.0 274.0

Minority interest - - - - - - - -

Total Liabilities 4,118.7 3,983.6 4,234.4 4,496.3 4,705.9 4,229.3 4,323.0 4,421.4

Preferred stock - - - - - - - -

Common stock 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4

Class B convertible common stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Additional paid-in capital 5,537.0 5,537.0 5,537.0 5,537.0 5,537.0 5,537.0 5,537.0 5,537.0

Retained earnings (792.6) (722.1) (711.2) (620.5) (473.6) (394.0) (31.9) 352.0

Accumulated other comprehensive income (loss) (11.3) (11.3) (11.3) (11.3) (11.3) (11.3) (11.3) (11.3)

Treasury stock (2,449.9) (2,499.9) (2,549.9) (2,599.9) (2,649.9) (2,699.9) (2,899.9) (3,099.9)

Other 140.2 140.2 140.2 140.2 140.2 140.2 140.2 140.2

Total Shareholders' Equity 2,423.8 2,444.3 2,405.2 2,445.9 2,542.8 2,572.4 2,734.4 2,918.3

Total Liabilities and Stockholders' Equity 6,542.5 6,427.8 6,639.6 6,942.2 7,248.7 6,801.7 7,057.4 7,339.7

-$ -$ -$ -$ -$ Balance Sheet Statistics and AssumptionsTotal cash 1,836.2 1,787.5 1,986.4 2,189.2 2,412.2 2,038.6 2,131.0 2,278.7Book value per share $17.40 $17.55 $17.17 $17.46 $18.13 $18.34 $19.37 $20.53Cash per share $13.18 $12.83 $14.18 $15.63 $17.20 $14.53 $15.10 $16.03Long-Term Debt/Total Capitalization 34.0% 33.8% 34.2% 33.8% 32.9% 32.7% 31.4% 30.0%

ROIC 11% 11% 11%ROE 13% 14% 14%

Sales 1,021 811 778 975 1,104 864 3,950 4,139Accounts and notes receivable 357 284 272 341 386 302 356 372 % of Sales 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 9.0% 9.0%Accounts payable 1,083 851 817 975 1,049 864 988 993 A/P DSOs 96.7 95.8 95.8 91.3 86.7 91.3 91.3 87.6 % of Sales 106.0% 105.0% 105.0% 100.0% 95.0% 100.0% 25.0% 24.0%Deferred merchant bookings 1,051 770 856 955 1,082 778 711 766 % of current quarter bookings 13.8% 12.4% 10.1% 11.6% 16.3% 2.5% 2.1% 2.1% % of Sales 102.9% 95.0% 110.0% 98.0% 98.0% 90.0% 18.0% 18.5%

Property, Plant & Equipment

Net PPE, BOP 307.4 315.2 339.3 370.4 408.6 419.2 529.4

+ Capital Expenditures 37.8 52.1 59.1 66.2 38.6 220.3 224.7

- Depreciation 30.0 28.0 28.0 28.0 28.0 110.0 107.0

- Unexplained PP&E - - - - - - -

Net PPE, EOP 307.4 315.2 339.3 370.4 408.6 419.2 529.4 647.1

22



Expedia, Inc.: Summary of FinancialsIncome Statement - Annual FY10A FY11E FY12E FY13E Income Statement - Quarterly 1Q11A 2Q11A 3Q11A 4Q11E

Revenues 3,034 3,472 3,721 3,950 Revenues 727A 914A 1,021A 811

Operating Income 501 519 540 565 Operating Income 35A 145A 208A 131

D&A 118 150 141 136 D&A 33A 36A 41A 39

EBITDA 707 744 740 766 EBITDA 93A 200A 271A 181

Net interest income / (expense) - - - - Net interest income / (expense) - - - -

Other income / (expense) (75) (88) (97) (77) Other income / (expense) (35)A (14)A (9)A (29)

Pretax income 426 432 443 488 Pretax income 0A 131A 198A 102

Income taxes 120 93 111 122 Income taxes (5)A 32A 36A 30

Net income 302 336 328 362 Net income 5A 99A 162A 71

Weighted average diluted shares 144 139 140 141 Weighted average diluted shares 139A 139A 139A 139

Diluted EPS 2.38 2.74 2.69 2.94 Diluted EPS 0.13A 0.77A 1.25A 0.59

Balance Sheet and Cash Flow Data FY10A FY11E FY12E FY13E Ratio Analysis FY10A FY11E FY12E FY13E

Cash and cash equivalents 1,244 1,787 2,039 2,131 Sales growth - - - -Accounts receivable 328 284 302 356 EBITDA growth - - - -

Other current assets 129 137 137 137 EPS growth - - - -

Current assets 1,702 2,208 2,478 2,624

PP&E 277 315 419 529 EBITDA margin - - - -

Total assets 6,651 6,428 6,802 7,057 Net margin - - - -

Total debt - - - - Debt / EBITDA - - - -

Total liabilities 3,914 3,984 4,229 4,323

Shareholders' equity 2,737 2,444 2,572 2,734 Return on assets (ROA) - - - -

Return on equity (ROE) - - - -

Net Income (including charges) 426 474 328 362

D&A 118 150 141 136 Enterprise value / EBITDA 0.0 - - -

Change in working capital 101 159 2 4 Enterprise value / Free cash flow - - - -

Other P/E 12.5 10.8 11.1 10.1

Cash flow from operations 777 920 559 593

Capex (155) (212) (216) (220)

Free cash flow 622 708 343 372

Cash flow from investing activities (818) 17 (216) (220)

Cash flow from financing activities 132 (233) (280) (280)

Dividends - - - -

Dividend yield - - - -

Source: Company reports and J.P. Morgan estimates.Note: $ in millions (except per-share data).Fiscal year ends Dec

23



Other Companies Recommended in This Report (all prices in this report as of market close on 17 January 2012)Google (GOOG/$628.58/Overweight)

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Market Maker: JPMS makes a market in the stock of Expedia, Inc., Google.

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Expedia, Inc., Google within the past 12 months.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Expedia, Inc., Google.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Expedia, Inc., Google.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Expedia, Inc., Google.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Expedia, Inc., Google.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Expedia, Inc., Google.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Expedia, Inc., Google.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Expedia, Inc., Google.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

Date Rating Share Price ($)

Price Target ($)

05-Jan-09 OW 8.79 12.00

19-Mar-09 N 8.16 9.00

01-May-09 N 13.61 13.00

31-Jul-09 N 20.71 23.00

19-Oct-09 N 25.50 28.00

29-Oct-10 N 28.95 31.50

0

12

24

36

48

Price($)

Aug08

May09

Feb10

Nov10

Aug11

Expedia, Inc. (EXPE) Price Chart

N $13

N $9 N $28

OW $12 N $23 N $31.5

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Jan 05, 2009.

mailto:[email protected]

https://mm.jpmorgan.com/disclosures/company

24



Date Rating Share Price ($)

Price Target ($)

05-Jan-09 OW 328.05 430.00

09-Apr-09 OW 372.50 409.00

17-Jul-09 OW 430.25 470.00

12-Oct-09 OW 516.25 503.00

16-Oct-09 OW 549.85 608.00

04-Jan-10 OW 626.75 623.00

19-Jan-10 OW 587.62 639.00

07-Jul-10 OW 450.20 566.00

16-Jul-10 OW 494.02 558.00

05-Oct-10 OW 538.23 569.00

15-Oct-10 OW 601.45 625.00

21-Jan-11 OW 626.77 706.00

13-Jul-11 OW 538.26 660.00

15-Jul-11 OW 528.94 707.00

10-Oct-11 OW 537.17 685.00

14-Oct-11 OW 591.68 705.00

13-Jan-12 OW 624.99 730.00

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com.

Coverage Universe: Anmuth, Doug: Amazon.com (AMZN), Bankrate Inc (RATE), Google (GOOG), Groupon (GRPN), HomeAway Inc (AWAY), LinkedIn Corp (LNKD), Netflix Inc (NFLX), Pandora Media Inc (P), Priceline.com (PCLN), QuinStreet, Inc. (QNST), ReachLocal (RLOC), Yahoo Inc (YHOO), eBay, Inc (EBAY)

J.P. Morgan Equity Research Ratings Distribution, as of January 6, 2012

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 47% 42% 12%IB clients* 52% 45% 36%

JPMS Equity Research Coverage 45% 47% 8%IB clients* 72% 62% 58%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

Other Disclosures

0

175

350

525

700

875

1,050

1,225

Price($)

Oct06

Jul07

Apr08

Jan09

Oct09

Jul10

Apr11

Jan12

Google (GOOG) Price Chart

OW $470OW $623 OW $569 OW $685

OW $409 OW $608 OW $558 OW $706OW $707OW $730

OW $430 OW $503OW $639OW $566OW $625 OW $660OW $705

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Jan 05, 2009.

mailto:[email protected]

http://www.morganmarkets.com/

25



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territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

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"Other Disclosures" last revised January 6, 2012.

Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

Expedia JPM Initiation

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