North America Equity Research

18 January 2012

Initiation

Expedia, Inc
Investments and Competitive Threats to Remain Elevated in Near-Term; Initiate at Underweight with $31 Price Target
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 Googles travel products pose a growing threat through their integration 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 Googles 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 Googles 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 $2.94 2013E adjusted EPS, below its peers trading at 16x.
Expedia, Inc. (EXPE;EXPE US) FYE Dec EPS Reported ($) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY Bloomberg EPS FY ($) P/E FY 2009A 1.75 2.73 16.9 2010A 0.28 0.62 1.08 0.39 2.38 3.43 12.5 2011E 0.13A 0.77A 1.25A 0.59 2.74 3.34 10.8 2012E 0.17 0.72 1.13 0.66 2.69 3.33 11.1

Underweight
EXPE, EXPE US Price: $29.69 Price Target: $31.00

Internet Doug Anmuth

AC

(1-212) 622-6571 douglas.anmuth@jpmorgan.com

Kaizad Gotla, CFA

(1-212) 622-6436 kaizad.gotla@jpmorgan.com

Bo Nam
(1-212) 622-5032 bo.nam@jpmorgan.com

Shelby Taffer
(212) 622-6518 shelby.x.taffer@jpmorgan.com J.P. Morgan Securities LLC
Price Performance
30 26 22 18
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

Abs

YTD 2.3%

1m 7.7%

3m 6.9%

12m 11.2%

Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date

29.69 17 Jan 12 30.93 - 18.44 4,134.96 Dec 139 31.00 31 Dec 12

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

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. www.morganmarkets.com

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Table of Contents
Investment Thesis ....................................................................3 Risks to Rating and Price Target ............................................4 Company Description ..............................................................5 Expedias Business Lines .......................................................5
Merchant Vs Agency Business Models ....................................................................5 Expedias 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 1/17/12s close; all other data and valuation reflect pricing as of 1/13/12s close.

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Investment Thesis
Expedia, Inc. (EXPE)
Underweight

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, Googles travel products pose a growing threat through the integration with core search. As it is still early days for Googles travel products, we believe Expedia has seen limited impact thus far. However, as Googles 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 Expedias 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.

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Platform migration in progress, expect benefit in 2H12 Expedia has completed the full platform migration for its main Expedia brands 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 Googles core search organic results are pushed below the screen, potentially resulting in a reduction in traffic to Expedia and higher traffic acquisition costs. Googles products are still in early days and we believe Expedia has seen limited impact from Googles travel products thus far. In our view, Googles primary objective is to increase ad revenues from the travel vertical, rather than to move further down the bookings path. However, as Googles 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 Expedias 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 Expedias international expansion plans, as it may be able to benefit from AirAsias marketing experience in APAC. Partnership opportunities with Google travel products Expedia is currently exploring opportunities within Googles travel products such as Hotel Finder. If Expedias links within Googles 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.

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

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.

Expedias 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 Expedias 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.

Expedias 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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Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

In the airline industry, there has been significant consolidation in carriersmergers 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
Hotel Website Price of Hotel Room Estimated OTA Commission Total Commission Paid to OTA Estimated % Credit Card Fee Total Credit Card Fees Total Costs to Hotel: % of Price $200.00 NA $0.00 2.5% ($5.00) ($5.00) 3% Uses OTA Merchant $200.00 18% ($35.00) 2.5% ($5.00) Uses OTA Agency $200.00 15% ($30.00) NA $0.00 ($30.00) 15%

<

($40.00) 20%

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.

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

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

Expedia Sites Other OTAs Priceline.com Incorporated Orbitz Worldw ide Travelocity Airlines Southw est Airlines Co. Delta Airlines American Airlines United Airlines JetBlue Airw ays Continental Airlines Sites Other Kayak Bing Travel Google Places
Source: J.P. Morgan estimates, comScore.

13,025 Hote ls 11,116 9,715 5,608 9,210 5,177 4,670 2,810 2,759 2,512 5,628 4,207 2,724 Marriott Hilton Hotels InterContinental Hotels Group Starw ood Hotels And Resorts Wyndham Worldw ide Choice Hotels International Global Hyatt Corporation LQ.com (La Quinta Hotels) BestWestern Hotels Accor 4,350 4,018 3,080 2,333 2,173 1,886 1,155 911 885 682

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

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 Expedias 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

Total Travel Markets US Europe APAC LATAM Total Online Bookings US (Incl. Corp Travel) Europe APAC LATAM Total Online Penetration US (Incl. Corp Travel) Europe APAC LATAM Total
Source: J.P. Morgan estimates, PhoCusWright.

2008 274 354 252 56 936 2008 143 96 36 5 280 2008 52% 27% 14% 9% 30%

2009 233 300 220 52 805 2009 132 93 40 6 270 2009 57% 31% 18% 11% 34%

2010 255 292 256 58 861 2010 139 97 53 8 298 2010 54% 33% 21% 14% 35%

2011E 271 317 274 63 925 2011E 145 117 62 11 335 2011E 53% 37% 23% 18% 36%

2012E 288 325 290 68 971 2012E 154 123 71 14 362 2012E 53% 38% 24% 21% 37%

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

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 Expedias highest source of online traffic, accounting for ~11% of Expedias global entries in October, compared to 15.4% a year ago.
Figure 4: Top 10 Worldwide Sources of Entries to Expedia Sites, October 2010
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 15.4% 12.6%

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

12% 10% 8% 6% 10.8% 8.6%

5.2%

4.3%

4.2%

3.1%

2.5%

2.5%

4%

4.0%

3.1%

2.2%
Logon

2.0%
Orbitz Worldwide

1.9%
CBS Interactive

2.5%

2% 0% Priceline.com TripAdvisor Sites Microsoft Sites Facebook.com Google Sites Yahoo! Sites

1.7%

1.7%

1.3% Kayak.com Network

1.1% CBS Interactive

Priceline.com

Facebook.com

Google Sites

Yahoo! Sites

Microsoft Sites

Expedia Inc

Kayak.com Network

Logon

Source: comScore.

Source: comScore.

In our view, Googles 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 Googles 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 Expedias traffic from organic results, and potentially increases the cost of the paid links at the top due to higher competition for positioning.

Orbitz Worldwide

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

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 Googles 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 Expedias core business. Googles 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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North America Equity Research 18 January 2012

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 Googles 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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Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

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 Expedias 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

5% 4% U.S. Supply Y/Y Growth 4% 3% 3% 2% 2% 1% 1% 0% 2011E -1% 2012E 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

12% 10% 8% 4% 2% 0% -2% -4% -6% -8% ADR Y/Y Growth 6%

U.S. Supply Y/Y Growth

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

ADR Y/Y Growth

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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North America Equity Research 18 January 2012

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 Expedias 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 Gilts 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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North America Equity Research 18 January 2012

Figure 9: Europe Hotel Market

$ in billions

Europe Gross Bookings Online Bookings Online Penetration OTA Hotel Bookings Hotel Direct Website Bookings Offline Hotel Bookings Total Hotel Bookings % of Total Travel Share of Hotel Bookings OTA Hotel Websites Offline
Source: J.P. Morgan estimates, PhoCusWright.

2008 354.3 96.0 27.1% 12.4 7.5 104.0 123.9

2009 300.3 92.7 30.9% 12.8 7.1 84.9 104.7

2010 292.0 97.3 33.3% 14.2 7.9 79.5 101.6

2011E 318.4 117.3 36.8% 15.9 9.4 84.7 110.1

2012E 315.5 125.0 39.6% 16.4 10.0 82.9 109.3

10% 6% 84%

12% 7% 81%

14% 8% 78%

14% 9% 77%

15% 9% 76%

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, Expedias revenues may be negatively impacted.
Figure 10: Europe ADR Trends
110 105 100 95 90 85 80 10% 5% 0% -5% -10% -15% -20%

Figure 11: Europe Occupancy Trends

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -15% 5% 0% -5% -10% 10%

Jan-09

Sep-09

Nov-09

Jan-10

Sep-10

Nov-10

Jan-11

Sep-11

Nov-11

Jan-09

May-09

Sep-09

Nov-09

Jan-10

May-10

Sep-10

Nov-10

Jan-11

May-11

Sep-11

Mar-09

May-09

Mar-10

May-10

Mar-11

May-11

Mar-09

Mar-10

Mar-11

ADR (EUR)

Y/Y Chg

Occupancy

Y/Y Chg

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

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

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Nov-11

Jul-09

Jul-10

Jul-11

Jul-09

Jul-10

Jul-11

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North America Equity Research 18 January 2012

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

Total APAC Travel Online APAC Travel Online Penetration Total Airline Bookings Online Airline Bookings Online Penetration Total Hotel Bookings Online Hotel Bookings Online Penetration
Source: J.P. Morgan estimates, PhoCusWright.

2008 252.1 36.4 14.4% 104.4 16.0 15.3% 68.4 10.3 15.1%

2009 219.5 39.6 18.0% 94.7 19.1 20.2% 60.9 11.5 18.9%

2010 255.8 53.1 20.8% 98.1 23.4 23.9% 62.6 14.7 23.5%

2011E 273.7 62.0 22.7% 101.0 26.1 25.9% 65.1 16.6 25.5%

2012E 290.4 70.6 24.3% 104.1 27.9 26.9% 68.4 18.1 26.5%

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 in the 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 Expedias 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,
15

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

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

Total LATAM Travel Online LATAM Travel Online Penetration

Source: J.P. Morgan estimates, PhoCusWright.

2008 55.9 4.8 8.5%

2009 52.3 5.6 10.7%

2010 58.0 8.2 14.1%

2011E 62.8 11.2 17.8%

2012E 68.1 14.4 21.1%

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.

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Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Figure 14: JPM Estimates

J.P. Morgan Estim ates ($ in millions except per share data) Gross Bookings Y/Y Growth Total Revenue Y/Y Growth Adjusted EBITDA Y/Y Growth % Margin Adjusted EPS Y/Y Growth Consensus Total Revenue Adjusted EBITDA EPS
Source: J.P. Morgan estimates. Note: Many estimates included in consensus likely still include TripAdvisor in Expedia

4Q11E 6,190 7.6% 811 10.0% 181 11.1% 22.3% $0.59 52.7%

2011E 29,052 11.9% 3,472 14.5% 744 5.3% 21.4% $2.74 15.1%

2012E 31,121 7.1% 3,721 7.1% 740 -0.6% 19.9% $2.69 -2.0%

2013E 33,462 7.5% 3,950 6.2% 766 3.5% 19.4% $2.94 9.4%

875 197 $0.70

3,710 867 $3.34

4,041 925 $3.33

4,260 909 $3.45

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
Company High Growth Internet priceline.com Inc Ctrip.com International Ltd HomeAway Inc Travelzoo Inc Orbitz Worldwide Inc Mean Median Expedia Inc Prices as of 1/13/2012 PCLN CTRP AWAY TZOO OWW $482.43 $24.31 $24.93 $30.85 $3.98 Market Cap 24,017 3,490 2,009 492 413 EV 22,466 2,875 1,197 460 744 EV/Revenue 2011 2012 2013 5.2x 5.2x 5.2x 3.0x 1.0x 3.9x 5.2x 1.0x 4.0x 3.8x 4.9x 2.6x 0.8x 3.2x 3.8x 0.9x 3.1x 2.8x 3.7x 2.3x 0.7x 2.5x 2.8x 0.8x EV/EBITDA 2011 2012 2013 15.0x 14.0x 18.2x 11.7x 6.0x 13.0x 14.0x 4.6x 10.9x 11.1x 16.7x 9.3x 5.0x 10.6x 10.9x 4.3x 8.2x 8.5x 11.8x 6.9x 4.4x 7.9x 8.2x 4.1x 2011 20.7x 17.2x 50.6x 22.5x 39.8x 30.2x 22.5x 10.5x P/E 2012 15.0x 15.5x 37.6x 18.5x 19.2x 21.2x 18.5x 10.7x 2012 2013 Revenue Growth Ratings 12.4x 12.6x 28.2x 14.4x 13.0x 16.1x 13.0x 9.8x 21% 25% 30% 16% 6% OW NC OW NC NC Covering Doug Anmuth Doug Anmuth -

EXPE

$28.70

3,994

3,456

7%

Doug Anmuth

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

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Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Models
Figure 16: EXPE Income Statement
$ in millions
Revenue Cost of revenue Gross Profit Operating Expenses Selling and marketing General and administrative Technology and content Amortization of non-cash distrib. & mktg Amortization of non-cash compensation Amortization of intangibles Impairment of intangible asset Depreciation Other (merger costs & restructuring charges) Other operating expenses Less: Adjusted Stock-based compensation Operating Income Other Income Income (loss) before taxes and minority interest Provision for income taxes Effective tax rate Minority Interest Net Income GAAP Diluted EPS Diluted shares outstanding Pre-Tax Income Plus: Non-GAAP Charges Minus: Tax Effect Adjusted Net Income Adjusted EPS EBITA and EBITDA Reconciliation Operating income Amortization and other EBITA Depreciation EBITDA 2010A 3,033.6 683.1 2,350.6 3/11A 726.9 174.8 552.1 6/11A 913.6 195.2 718.4 9/11A 1,021.4 205.9 815.5 12/11E 810.5 194.5 616.0 2011E 3,472.4 770.4 2,702.0 3/12E 778.1 186.8 591.4 6/12E 974.5 209.5 765.0 9/12E 1,103.9 223.0 880.9 12/12E 864.1 207.4 656.7 2012E 3,720.7 826.6 2,894.0 2013E 3,950.5 877.0 3,073.5 2014E 4,138.7 918.8 3,219.9

1,223.0 249.1 297.1 59.7 37.1 5.54 28.1 52.5 500.8 (74.9) 425.8 120.3 28.3% (3.9) 301.6 $2.09 144.0 425.8 52.5 135.2 343.2 $2.38

347.4 64.8 82.9 17.3 8.0 1.1 6.9 14.8 35.3 (35.09) 0.2 (4.9) NM (0.1) 5.0 $0.04 139.1 0.2 14.8 (2.7) 17.7 $0.13

398.2 68.4 90.4 13.5 7.0 2.1 5.0 11.5 144.9 (13.73) 131.2 32.2 24.5% (0.5) 98.5 $0.71 139.1 131.2 11.5 35.0 107.7 $0.77

405.7 86.3 95.5 15.1 8.0 5.1 7.2 13.0 207.8 (9.47) 198.3 35.6 17.9% (0.8) 162.0 $1.16 139.3 198.3 13.0 37.9 173.4 $1.25

324.2 64.8 77.0 15.0 9.0 4.1 14.4 131.4 (29.27) 102.1 29.6 29.0% (2.0) 70.5 $0.51 139.3 102.1 14.4 33.8 82.8 $0.59

1,475.6 284.2 345.8 60.8 32.0 8.33 23.2 53.8 519.4 (87.54) 431.8 92.5 21.4% (3.3) 336.0 $2.41 139.2 431.8 53.8 104.0 381.6 $2.74

372.0 66.1 89.5 16.3 7.2 7.2 16.3 40.4 (24.53) 15.8 4.0 25.0% (1.0) 10.9 $0.08 140.1 15.8 16.3 8.0 24.1 $0.17

428.8 73.1 97.5 12.7 6.3 6.3 12.7 146.7 (24.38) 122.3 30.6 25.0% (1.0) 90.7 $0.65 140.1 122.3 12.7 33.7 101.2 $0.72

447.1 88.3 102.7 14.3 7.2 7.2 14.3 221.4 (24.19) 197.2 49.3 25.0% (1.0) 146.9 $1.05 140.3 197.2 14.3 52.9 158.6 $1.13

350.0 70.9 80.4 15.9 8.1 8.1 15.9 131.6 (24.09) 107.5 26.9 25.0% (1.0) 79.6 $0.57 140.3 107.5 15.9 30.8 92.5 $0.66

1,597.8 298.4 370.0 59.2 28.8 28.8 59.2 540.0 (97.19) 442.8 110.7 25.0% (4.0) 328.1 $2.34 140.2 442.8 59.2 125.5 376.4 $2.69

1,718.4 312.1 387.1 65.1 25.9 25.9 65.1 564.8 (76.74) 488.1 122.0 25.0% (4.0) 362.1 $2.56 141.2 488.1 65.1 138.3 414.9 $2.94

1,812.7 322.8 397.3 71.6 23.3 23.3 71.6 592.1 (74.94) 517.2 129.3 25.0% (4.0) 383.9 $2.70 142.2 517.2 71.6 147.2 441.6 $3.11

500.79 87.75 588.53 118.4 706.9

35.28 24.21 59.48 33.3 92.8

144.90 18.47 163.36 36.2 199.5

207.79 22.24 230.03 41.4 271.5

131.42 19.09 150.51 30.0 180.5

519.38 84.01 603.39 140.9 744.3

40.37 23.43 63.81 28.0 91.8

146.66 19.01 165.67 28.0 193.7

221.37 21.49 242.85 28.0 270.9

131.56 23.98 155.54 28.0 183.5

539.96 87.91 627.87 112.0 739.9

564.83 90.95 655.78 110.0 765.8

592.15 94.87 687.02 107.0 794.0

2010A Y/Y GROWTH Revenue Cost of revenue Gross profit Selling and marketing expense General & administrative expense Technology & content expense Net Income GAAP Diluted EPS Adjusted EPS EBITDA % OF REVENUE Cost of revenue Gross profit Selling and marketing expense General & administrative expense Technology & content expense Operating Income Net Income EBITDA 11% 14% 10% 16% 2% 10% 41% 43% 36% 3% 22.5% 77.5% 40.3% 8.2% 9.8% 16.5% 9.9% 23.3%

3/11A 12% 12% 12% 20% 14% 16% -84% -83% -55% -12% 24.0% 76.0% 47.8% 8.9% 11.4% 4.9% 0.7% 12.8%

6/11A 21% 17% 23% 30% 10% 26% 25% 29% 25% 12% 21.4% 78.6% 43.6% 7.5% 9.9% 15.9% 10.8% 21.8%

9/11A 14% 10% 15% 16% 55% 27% 12% 16% 15% 4% 20.2% 79.8% 39.7% 8.4% 9.3% 20.3% 15.9% 26.6%

12/11E 10% 12% 9% 16% -13% -2% 48% 53% 53% 11% 24.0% 76.0% 40.0% 8.0% 9.5% 16.2% 8.7% 22.3%

2011E 14% 13% 15% 21% 14% 16% 11% 15% 15% 5% 22.2% 77.8% 42.5% 8.2% 10.0% 15.0% 9.7% 21.4%

3/12E 7% 7% 7% 7% 2% 8% 118% 116% 35% -1% 24.0% 76.0% 47.8% 8.5% 11.5% 5.2% 1.4% 11.8%

6/12E 7% 7% 6% 8% 7% 8% -8% -9% -7% -3% 21.5% 78.5% 44.0% 7.5% 10.0% 15.0% 9.3% 19.9%

9/12E 8% 8% 8% 10% 2% 8% -9% -10% -9% 0% 20.2% 79.8% 40.5% 8.0% 9.3% 20.1% 13.3% 24.5%

12/12E 7% 7% 7% 8% 9% 4% 13% 12% 11% 2% 24.0% 76.0% 40.5% 8.2% 9.3% 15.2% 9.2% 21.2%

2012E 7% 7% 7% 8% 5% 7% -2% -3% -2% -1% 22.2% 77.8% 42.9% 8.0% 9.9% 14.5% 8.8% 19.9%

2013E 6% 6% 6% 8% 5% 5% 10% 10% 9% 4% 22.2% 77.8% 43.5% 7.9% 9.8% 14.3% 9.2% 19.4%

2014E 5% 5% 5% 5% 3% 3% 6% 5% 6% 4% 22.2% 77.8% 43.8% 7.8% 9.6% 14.3% 9.3% 19.2%

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

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Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Figure 17: EXPE Revenue Analysis

$ in millions
2010A GROSS BOOKINGS BY GEOGRAPHY Domestic Y/Y Growth Q/Q Growth % of total bookings International Y/Y Growth Q/Q Growth % of total bookings Total Gross Bookings Y/Y Growth Q/Q Growth % of total bookings Seasonality NET REVENUE BY GEOGRAPHY (EX TRIP) Domestic (ex TRIP) Y/Y Growth Q/Q Growth % of total revenue International (ex TRIP) Y/Y Growth Q/Q Growth % of total revenue Total Net Revenue (Cont Ops) Y/Y Growth NET REVENUE AS % OF CURRENT PERIOD BOOKINGS Domestic International Total 16,734 15.9% 64% 9,227 25.1% 36% 25,962 19.0% 100% 100% 3/11A 4,439 4.3% 23.4% 61% 2,855 20.2% 32.3% 39% 7,294 10.0% 26.7% 100% 25% 6/11A 4,911 9.9% 10.6% 62% 3,040 37.4% 6.5% 38% 7,951 19.0% 9.0% 100% 27% 9/11A 4,604 4.4% -6.3% 60% 3,013 21.4% -0.9% 40% 7,617 10.5% -4.2% 100% 26% 12/11E 3,795 5.5% -17.6% 61% 2,395 11.0% -20.5% 39% 6,190 7.6% -18.7% 100% 21% 2011E 17,749 6.1% 61% 11,303 22.5% 39% 29,052 11.9% 100% 100% 3/12E 4,683 5.5% -73.6% 60% 3,083 8.0% -72.7% 40% 7,767 6.5% -73.3% 100% 25% 6/12E 5,279 7.5% 12.7% 62% 3,216 5.8% 4.3% 38% 8,496 6.9% 9.4% 100% 27% 9/12E 4,935 7.2% -6.5% 60% 3,290 9.2% 2.3% 40% 8,226 8.0% -3.2% 100% 26% 12/12E 4,023 6.0% -18.5% 61% 2,611 9.0% -20.6% 39% 6,633 7.2% -19.4% 100% 21% 2012E 18,920 6.6% 61% 12,201 7.9% 39% 31,121 7.1% 100% 2013E 19,980 5.6% 60% 13,482 10.5% 40% 33,462 7.5% 100% 2014E 21,019 5.2% 59% 14,830 10.0% 41% 35,849 7.1% 100%

1,873 8% 62% 1,160 16% 38% 3,034 10.6%

438 4% 1% 60% 289 29% -4% 40% 727 12.4%

524 9% 20% 57% 390 44% 35% 43% 914 21.5%

570 6% 9% 56% 451 25% 16% 44% 1,021 13.7%

467 7% -18% 58% 344 14% -24% 42% 811 10.0%

1,999 7% 58% 1,474 27% 42% 3,472 14.5%

464 6% -1% 60% 315 9% -9% 40% 778 7.0%

560 7% 21% 57% 415 6% 32% 43% 975 6.7%

607 6% 8% 55% 497 10% 20% 45% 1,104 8.1%

491 5% -19% 57% 373 9% -25% 43% 864 6.6%

2,121 6% 57% 1,600 9% 43% 3,721 7.1%

2,198 4% 56% 1,753 10% 44% 3,950 6.2%

2,270 3% 55% 1,869 7% 45% 4,139 4.8%

11.2% 12.6% 11.7% 2010A

9.9% 10.1% 10.0% 3/11A 6,652 8.0% 26.4% 91% 642 36.3% 30.2% 9% 7,294

10.7% 12.8% 11.5% 6/11A 7,268 17.3% 9.3% 91% 684 39.9% 6.5% 9% 7,952

12.4% 15.0% 13.4% 9/11A 6,949 8.6% -4.4% 91% 667 35.8% -2.5% 9% 7,616

12.3% 14.4% 13.1% 12/11E 5,633 7.1% -18.9% 91% 557 13.0% -16.5% 9% 6,190

11.3% 13.0% 12.0% 2011E 26,502 10.3% 91% 2,550 31.2% 9% 29,052

9.9% 10.2% 10.0% 3/12E 7,068 6.2% -73.3% 91% 699 8.9% -72.6% 9% 7,767

10.6% 12.9% 11.5% 6/12E 7,731 6.4% 9.4% 91% 765 11.8% 9.4% 9% 8,496

12.3% 15.1% 13.4% 9/12E 7,485 7.7% -3.2% 91% 740 11.0% -3.2% 9% 8,226

12.2% 14.3% 13.0% 12/12E 6,036 7.2% -19.4% 91% 597 7.2% -19.4% 9% 6,633

11.2% 13.1% 12.0% 2012E 28,320 6.9% 91% 2,801 9.8% 9% 31,121

11.0% 13.0% 11.8% 2013E 30,450 7.5% 91% 3,012 7.5% 9% 33,462

10.8% 12.6% 11.5% 2014E 32,623 7.1% 91% 3,226 7.1% 9% 35,849

GROSS BOOKINGS BY SEGMENT Leisure Y/Y Growth Q/Q Growth % of total gross bookings Egencia Y/Y Growth Q/Q Growth % of total gross bookings Total Gross Bookings GROSS BOOKINGS BY AGENCY/MERCHANT Agency Y/Y Growth Q/Q Growth % of total gross bookings Merchant Y/Y Growth Q/Q Growth % of total gross bookings Total Gross Bookings

24,018 17.6% 93% 1,944 40.5% 7% 25,962

15,412 22.7% 59% 10,550 14.0% 41% 25,962

4,143 5.7% 18.0% 57% 3,151 16.1% 40.5% 43% 7,294

4,473 11.2% 8.0% 56% 3,478 30.7% 10.4% 44% 7,951

4,114 3.9% -8.0% 54% 3,503 19.4% 0.7% 46% 7,617

3,590 2.2% -12.7% 58% 2,600 15.9% -25.8% 42% 6,190

16,320 5.9% 56% 12,732 20.7% 44% 29,052

4,660 12.5% -71.4% 60% 3,107 -1.4% -75.6% 40% 7,767

5,097 14.0% 9.4% 60% 3,398 -2.3% 9.4% 40% 8,496

4,935 20.0% -3.2% 60% 3,290 -6.1% -3.2% 40% 8,226

3,980 10.9% -19.4% 60% 2,653 2.1% -19.4% 40% 6,633

18,673 14.4% 60% 12,449 -2.2% 40% 31,121

20,412 9.3% 61% 13,050 4.8% 39% 33,462

22,226 8.9% 62% 13,623 4.4% 38% 35,849

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

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Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Figure 18: EXPE Cash Flow Statement

$ in millions
12/11E Cash Flows from Operating Activities Net income Depreciation and amortization Amortization of non-cash distribution and marketing Amortization of intang. Assets & non-cash comp. expense 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 Prepaids and other assets Accounts payable and accrued liabilities Deferred revenue Deferred merchant bookings Other, net Total change in working capital Net cash provided by (used in) operating activities Change in working capital as % of operating cash flow Cash Flows from Investing Activities Acquisitions and deal costs, net of cash acquired Capital expenditures 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 Net cash provide by (used in) investing activities Cash Flows from Financing Activities Short-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 Withholding taxes for stock option excercises Contribution from (distribution to) IAC, net Dividends paid to stockholders Other, net Net cash provided by (used in) financing activities Effect of exchange-rate on cash and equivalents Net change in cash Cash & equivalents - BOP Cash & equivalents - EOP Free Cash Flow Calculation Net cash provided by operating activities Capital expenditures Free Cash Flow % change as % of EBITDA Total Change in Working Capital Free Cash Flow less Working Capital % change 70.5 39.0 24.0 73.8 (231.6) (281.2) (439.0) (305.5) NA 3/12E 10.9 35.2 23.4 11.3 (34.0) 85.9 63.3 132.7 48% 6/12E 90.7 34.3 19.0 (68.7) 157.5 99.1 187.8 331.9 57% 9/12E 146.9 35.2 21.5 (45.3) 74.2 126.8 155.7 359.2 43% 12/12E 79.6 36.1 24.0 83.9 (184.6) (304.1) (404.8) (265.1) 153% 2012E 328.1 140.8 87.9 (18.8) 13.1 7.7 2.0 558.8 0% 2013E 362.1 135.9 91.0 (53.1) 123.5 (66.6) 3.8 592.7 1% 2014E 383.9 130.3 94.9 (16.9) 5.7 54.6 43.3 652.4 7%

(37.8) 364.6 326.8

(52.1)

(59.1)

(66.2)

(38.6)

(52.1)

(59.1)

(66.2)

(38.6)

(216.0) (216.0)

(220.3) (220.3)

(224.7) (224.7)

(50.0) (20.0) (70.0) (48.7) 1,265.2 1,216.5

(50.0)

(50.0)

(50.0)

(50.0)

(20.0) (70.0) 10.6 1,404.8 1,415.5

(20.0) (70.0) 202.7 1,415.5 1,618.2

(20.0) (70.0) 223.1 1,618.2 1,841.3

(20.0) (70.0) (373.7) 1,841.3 1,467.6

(200.0) (80.0) 0 (280.0) 62.8 1,404.8 1,467.6

(200.0) (80.0) (280.0) 92.4 1,467.6 1,560.0

(200.0) (80.0) (280.0) 147.7 1,560.0 1,707.7

(305) (38) (343.3) NA -157% (439.0) 95.7 -7.7%

133 (52) 80.6 -88.1% 88% 63 17.4 -67.2%

332 (59) 272.7 -37.0% 141% 188 84.9 -38.6%

359 (66) 293.1 -595.4% 108% 156 137.4 -47.7%

(265) (39) (303.7) -11.6% -165% (405) 101.1 5.7%

559 (216) 342.8 -51.6% 46% 2.0 340.8 -38.0%

593 (220) 372.4 8.6% 49% 3.8 368.6 8.2%

652 (225) 427.7 14.8% 54% 43.3 384.4 4.3%

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

20

Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Figure 19: EXPE Balance Sheet

$ in millions
9/11A Assets Current Assets Cash and cash equivalents Restricted cash equivalents Short Term inv. / Marketable securities Accounts and notes receivable Receivables from IAC and subsidiaries Deferred tax assets Other current assets Total current assets Property, plant, and equipment, net Goodwill Intangible assets, net Long-term investments and other Total Assets Liabilities and Stockholders' Equity (Deficit) Current Liabilities Accounts payable Deferred merchant bookings Deferred revenue Income tax payable Short-term borrowings Other current liabilities Total current liabilities Long-term debt Other long-term liabilities (incl. credit facility) Deferred income taxes Minority interest Total Liabilities Preferred stock Common stock Class B convertible common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Other Total Shareholders' Equity Total Liabilities and Stockholders' Equity $ Balance Sheet Statistics and Assumptions Total cash Book value per share Cash per share Long-Term Debt/Total Capitalization ROIC ROE Sales Accounts and notes receivable % of Sales Accounts payable A/P DSOs % of Sales Deferred merchant bookings % of current quarter bookings % of Sales Property, Plant & Equipment Net PPE, BOP + Capital Expenditures - Depreciation - Unexplained PP&E Net PPE, EOP 1,021 357 35.0% 1,083 96.7 106.0% 1,051 13.8% 102.9% 811 284 35.0% 851 95.8 105.0% 770 12.4% 95.0% 778 272 35.0% 817 95.8 105.0% 856 10.1% 110.0% 975 341 35.0% 975 91.3 100.0% 955 11.6% 98.0% 1,104 386 35.0% 1,049 86.7 95.0% 1,082 16.3% 98.0% 12/11E 3/12E 6/12E 9/12E 12/12E 2013E 2014E

1,265.2 18.6 552.4 357.5 137.0 2,330.6 307.4 2,869.1 733.5 301.9 6,542.5

1,216.5 18.6 552.4 283.7 137.0 2,208.1 315.2 2,869.1 733.5 301.9 6,427.8

1,415.5 18.6 552.4 272.3 137.0 2,395.8 339.3 2,869.1 733.5 301.9 6,639.6

1,618.2 18.6 552.4 341.1 137.0 2,667.2 370.4 2,869.1 733.5 301.9 6,942.2

1,841.3 18.6 552.4 386.4 137.0 2,935.6 408.6 2,869.1 733.5 301.9 7,248.7

1,467.6 18.6 552.4 302.4 137.0 2,478.0 419.2 2,869.1 733.5 301.9 6,801.7

1,560.0 18.6 552.4 355.5 137.0 2,623.5 529.4 2,869.1 733.5 301.9 7,057.4

1,707.7 18.6 552.4 372.5 137.0 2,788.1 647.1 2,869.1 733.5 301.9 7,339.7

1,082.6 1,051.2 16.7 340.0 2,490.6 1,249.3 104.9 274.0 4,118.7 0.4 0.0 5,537.0 (792.6) (11.3) (2,449.9) 140.2 2,423.8 6,542.5 1,836.2 $17.40 $13.18 34.0%

851.1 770.0 16.7 340.0 1,977.8 1,249.3 482.5 274.0 3,983.6 0.4 0.0 5,537.0 (722.1) (11.3) (2,499.9) 140.2 2,444.3 6,427.8 1,787.5 $17.55 $12.83 33.8%

817.0 856.0 16.7 340.0 2,029.7 1,249.3 681.4 274.0 4,234.4 0.4 0.0 5,537.0 (711.2) (11.3) (2,549.9) 140.2 2,405.2 6,639.6

974.5 955.0 16.7 340.0 2,286.2 1,249.3 686.8 274.0 4,496.3 0.4 0.0 5,537.0 (620.5) (11.3) (2,599.9) 140.2 2,445.9 6,942.2

1,048.7 1,081.8 16.7 340.0 2,487.2 1,249.3 695.4 274.0 4,705.9 0.4 0.0 5,537.0 (473.6) (11.3) (2,649.9) 140.2 2,542.8 7,248.7 $

864.1 777.7 16.7 340.0 1,998.5 1,249.3 707.5 274.0 4,229.3 0.4 0.0 5,537.0 (394.0) (11.3) (2,699.9) 140.2 2,572.4 6,801.7 $ 2,038.6 $18.34 $14.53 32.7% 11% 13% 864 302 35.0% 864 91.3 100.0% 778 2.5% 90.0%

987.6 711.1 16.7 340.0 2,055.4 1,249.3 744.3 274.0 4,323.0 0.4 0.0 5,537.0 (31.9) (11.3) (2,899.9) 140.2 2,734.4 7,057.4 $ 2,131.0 $19.37 $15.10 31.4% 11% 14% 3,950 356 9.0% 988 91.3 25.0% 711 2.1% 18.0%

993.3 765.7 16.7 340.0 2,115.6 1,249.3 782.5 274.0 4,421.4 0.4 0.0 5,537.0 352.0 (11.3) (3,099.9) 140.2 2,918.3 7,339.7 2,278.7 $20.53 $16.03 30.0% 11% 14% 4,139 372 9.0% 993 87.6 24.0% 766 2.1% 18.5%

1,986.4 $17.17 $14.18 34.2%

2,189.2 $17.46 $15.63 33.8%

2,412.2 $18.13 $17.20 32.9%

307.4

307.4 37.8 30.0 315.2

315.2 52.1 28.0 339.3

339.3 59.1 28.0 370.4

370.4 66.2 28.0 408.6

408.6 38.6 28.0 419.2

419.2 220.3 110.0 529.4

529.4 224.7 107.0 647.1

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

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Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Expedia, Inc.: Summary of Financials

Income Statement - Annual Revenues Operating Income D&A EBITDA Net interest income / (expense) Other income / (expense) Pretax income Income taxes Net income Weighted average diluted shares Diluted EPS Balance Sheet and Cash Flow Data Cash and cash equivalents Accounts receivable Other current assets Current assets PP&E Total assets Total debt Total liabilities Shareholders' equity Net Income (including charges) D&A Change in working capital Other Cash flow from operations Capex Free cash flow Cash flow from investing activities Cash flow from financing activities Dividends Dividend yield FY10A 3,034 501 118 707 (75) 426 120 302 144 2.38 FY10A 1,244 328 129 1,702 277 6,651 3,914 2,737 426 118 101 777 (155) 622 (818) 132 FY11E 3,472 519 150 744 (88) 432 93 336 139 2.74 FY11E 1,787 284 137 2,208 315 6,428 3,984 2,444 474 150 159 920 (212) 708 17 (233) FY12E 3,721 540 141 740 (97) 443 111 328 140 2.69 FY12E 2,039 302 137 2,478 419 6,802 4,229 2,572 328 141 2 559 (216) 343 (216) (280) FY13E 3,950 565 136 766 (77) 488 122 362 141 2.94 FY13E 2,131 356 137 2,624 529 7,057 4,323 2,734 362 136 4 593 (220) 372 (220) (280) Income Statement - Quarterly Revenues Operating Income D&A EBITDA Net interest income / (expense) Other income / (expense) Pretax income Income taxes Net income Weighted average diluted shares Diluted EPS Ratio Analysis Sales growth EBITDA growth EPS growth EBITDA margin Net margin Debt / EBITDA Return on assets (ROA) Return on equity (ROE) Enterprise value / EBITDA Enterprise value / Free cash flow P/E 1Q11A 727A 35A 33A 93A (35)A 0A (5)A 5A 139A 0.13A FY10A 0.0 12.5 2Q11A 914A 145A 36A 200A (14)A 131A 32A 99A 139A 0.77A FY11E 10.8 3Q11A 1,021A 208A 41A 271A (9)A 198A 36A 162A 139A 1.25A FY12E 11.1 4Q11E 811 131 39 181 (29) 102 30 71 139 0.59 FY13E 10.1

Source: Company reports and J.P. Morgan estimates.

Note: $ in millions (except per-share data).Fiscal year ends Dec

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Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

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 research.disclosure.inquiries@jpmorgan.com with your request.
Expedia, Inc. (EXPE) Price Chart

N $13 48 N $9 36 Price($) 24 N $28

Date
OW $12 N $23 N $31.5

Rating Share Price ($) OW N N N N 8.79 8.16 13.61 20.71 25.50 28.95

Price Target ($) 12.00 9.00 13.00 23.00 28.00 31.50

05-Jan-09 19-Mar-09 31-Jul-09

12

01-May-09 N 19-Oct-09 29-Oct-10

0 Aug 08 May 09 Feb 10 Nov 10 Aug 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jan 05, 2009.

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Doug Anmuth (1-212) 622-6571 douglas.anmuth@jpmorgan.com

North America Equity Research 18 January 2012

Google (GOOG) Price Chart

1,225 OW $470OW $623 1,050 OW $409 OW $608 875 OW $430 700 Price($) 525 350 175 0 Oct 06 Jul 07 Apr 08 Jan 09 Oct 09 Jul 10 Apr 11 Jan 12 OW $503 OW $639OW $566 OW $625 OW $660 OW $705 OW $558 OW $706OW $707 OW $730 OW $569 OW $685

Date 05-Jan-09 09-Apr-09 17-Jul-09 12-Oct-09 16-Oct-09 04-Jan-10 19-Jan-10 07-Jul-10 16-Jul-10 05-Oct-10 15-Oct-10 21-Jan-11 13-Jul-11 15-Jul-11 10-Oct-11 14-Oct-11 13-Jan-12

Rating Share Price ($) OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW 328.05 372.50 430.25 516.25 549.85 626.75 587.62 450.20 494.02 538.23 601.45 626.77 538.26 528.94 537.17 591.68 624.99

Price Target ($) 430.00 409.00 470.00 503.00 608.00 623.00 639.00 566.00 558.00 569.00 625.00 706.00 660.00 707.00 685.00 705.00 730.00

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jan 05, 2009.

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 stocks 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 analysts coverage universe can be found on J.P. Morgans 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
J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 47% 52% 45% 72% Neutral (hold) 42% 45% 47% 62% Underweight (sell) 12% 36% 8% 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 research.disclosure.inquiries@jpmorgan.com. 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
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North America Equity Research 18 January 2012

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North America Equity Research 18 January 2012

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