Booking Holdings Inc (BKNG) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Priceline.com's first quarter 2002 conference call. Priceline.com would like to remind everyone that this call may contain forward looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefor, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals, and similar expressions reflecting something other than historical fact, are intended to identify forward-looking statements. The following factors, among others, could cause Priceline.com's actual results to differ materially from those described in the forward looking statements. Adverse changes in general market conditions for leisure and other travel products, as a result of, among other things, terrorist attacks, hostilities, average changes in relationships with airlines and other service product providers, including, without limitation, the withdrawal of providers from Priceline.com systems, effects of increased competition, system related failures and/or security breeches, Priceline.com's ability to protect its intellectual property rights, losses by Priceline.com and its licenses, final adjustments made in closing the quarter, legal and regulatory risks, and the ability to attract and retain qualified personnel. For detailed discussion of these and other factors that could cause Priceline.com's actual results to differ materially from those described in the forward looking statements, please refer to Priceline.com's most recent filings with the Securities and Exchange Commission. Unless required by law, Priceline.com undertakes no obligation to update publicly any forward looking statements, whether as a result of new information, future events, or otherwise. And now, I would like to introduce Priceline.com's Chairman and Chief Executive Officer, Mr. Richard S. Braddock. Mr. Braddock, please go ahead.

Hi. I'm here as usual with Jeff Boyd, our President and COO, and Bob Mylod, our CFO, both of whom will also participate in the call later. For the quarter, we generated two cents per share on both GAAP and pro forma basis. This was our 4th quarter in a row of pro forma profitability, during which we have generated a GAAP profit in two of those quarters. We generated approximately $3.9 million in GAAP net income, which compares favorably to other internet companies with substantially higher valuations. Our revenue for the quarter came in within our range of guidance at $262 million, despite continued weakness in the airline ticket pricing environment, which has recovered less quickly than we had forecast. We are seeing signs of that recovery, which we see as inevitable as airlines raise prices and add capacity. Importantly, our margin percentage remained in the 16% range, as Bob will discuss. In summarizing our business results, the most important positive is the continued strength of our customer franchise. Our customer base now exceeds 13.5 million, and both visitors, up 13%, and unique offers, up 14%, continue to trend up versus a year ago. The quality of our repeat business, 63.6% for the quarter, continues to strengthen. Our bind rate for repeat offers exceeded that for new by over 20%. And March was the highest month in our history for repeat offer volume. Finally, fully 45% of our overall volume is now generated by customers who have bound, in other words, gotten tickets, rooms, rental cars, more than once. An important measure of customer loyalty, while also greatly enhancing their longer term financial value to us. Part of this is due to the growing impact of our on-line marketing activity, which generated nearly 20% of our offers, up from only 11% a year ago. I might add that our E-bay activity is still in its early stages, with its opportunity to improve substantially the reach of our business model, and had no significant impact on our numbers for the quarter. On a product basis, we continue to trend extremely strongly on hotel, and to a lesser extent our rental car activity. Our hotel units sold were up 110% versus a year ago, and these two together now comprise 66% of our total travel units. The soft spot in our business remains the air activity, with our bind rates suffering due both to lower offered quality as a function of low price expectations in the market, and pressure on inventory primarily due to airline capacity reductions, as we've outlined on prior calls. We'll talk a little more about our expectations for the air business later in the call. I'd now like to turn the call over to Jeff and Bob to provide some operating and financial commentary. Jeff?

Thanks Rick. Although continued weakness in airline ticket sales resulted in Priceline's 1st quarter revenues coming in at the low end of our guidance, we were pleased to report a 2 cent GAAP profit at the high end of our guidance, based on the strength of our hotel and rental car products, and solid expense discipline. Moreover, there are a number of things on the horizon which we believe will, over time, contribute to improved top-line performance. First, our hotel business continues its impressive growth, with room nights sold increasing 110% year over year. Priceline sold over 900,000 room nights in the 1st quarter, and today we are on track to exceed that number by an impressive margin in the second quarter. We will continue our strategy of supporting this product through increased marketing, and strengthening our hotel inventory, since it is clearly paying off. The solid growth of our rental car business continued in the first quarter as well, with rental days increasing 22% year over year. This business should benefit from cross sell as the airline ticket business improves, and we have seen some improvement in bind rates for rental cars in the second quarter as rental car companies increase their fleets following last year's downsizing. While the bind rate in our airline ticket business in the 1st quarter improved slightly from 4th quarter levels, this improvement under performed our expected seasonal upswing. Priceline did see signs of improvements in offer pricing throughout the quarter, which we believe may portend an improving pricing environment. However, the benefit of this improvement was limited by inventory constraints, particularly in the last two weeks of March, coinciding with Easter and Spring Break holidays. The slight decrease in our overall gross margin percentage in the quarter was principally related to our airline ticket business. Our guidance, which Bob will detail in a minute, presupposes that the bind rate will improve modestly throughout the quarter, consistent with results we have seen for April, and that revenue will benefit from the improved offer pricing we have seen. We believe that over time, improving conditions in the air travel industry will lead to a recovery of top line momentum for this business. We soft launched Priceline vacations and cruises in the 1st quarter. The vacation product allows our customers for the first time to choose the specific hotel they want for their vacation based on photographs and amenities content on our site. An increasing number of consumers are shopping for vacation deals on the internet, and our product provides consumers with choice and value. The vacation and cruise products are making a positive contribution now, and we are excited about our official launch with public relations and advertising in the next few weeks. We also soft launched our travel business with E-bay last month. The site is up and functioning well. And together with E-bay, we are working on a number of marketing initiatives and promotions to begin building that business. As E-bay's large user base becomes familiar with the products offered on co-branded E-Bay service, Power Deals by Priceline.com, we expect the business to grow and become a significant source of new customers. Our other online initiatives are proceeding well, including AOL, and today we source becomes 20% of our customers from online and e-mail initiatives. Our online initiatives, together with our new super computer radio campaign, have spurred consumer demand for our products with total offers in the 1st quarter of '02, growing 14% over the 1st quarter of '01, fueled principally by hotel and rental car customer growth, and strong repeat customer demand. During the quarter, we built on our strong customer franchise, now standing at over 13.5 million customers who have made guaranteed offers on Priceline, not just registered users. And our high-repeat rate, and the success of our on-line initiatives, continue to underscore the value we provide to our customers, and the strength of our Priceline brand. In summary, our hotel and rental car businesses continue to perform extremely well, and we expect improvement of the airline ticket business over time. With these products, and a strong value proposition and customer franchise, together with our new product and distribution initiatives, we believe we have the foundation for revenue growth going forward. Bob?

Thanks Jeff. Our 4th quarter revenue of $262 million represented a 3% decrease from the 1st quarter of 2001, and came in towards the lower end of the $260 to $290 million revenue forecast that we made on our last earnings call. Our pro form net income of 2 cents per share represented a 5 cent improvement over the 3 cent loss that we reported in Q1 of last year, and came in at the high end of the break-even to 2 cent net income forecast that we made on our last earnings call. It also represented, as Rick mentioned, our fourth consecutive quarter of pro forma profitability. We achieved these bottom line results despite pressure on both our top line and our margin line during the quarter, and we certainly believe that it demonstrates our ability to manage our company profitably in any operating environment. Finally, I did want to mention that our GAAP profit of 2 cents a share was the same as our pro forma profit. It is worth noting that it is our expectation that as we move through 2002 and beyond, there will be very little difference between our GAAP results and our pro forma results. Jeff and Rick have already spent a fair amount of time going over the many environmental factors that exist in our airline business, and which are responsible for literally all of the relative underperformance in the aggregate top line of our company during the quarter. I'm not going to spend much time adding to their remarks, other than to reiterate that we do indeed see signs of improvement in our airline business, and we expect to [INAUDIBLE] significant sequential increases in our airline revenue increases as we move through this second quarter. However, I did want to spend a few moments on our non-air products, which we believe have performed exceptionally, in spite of the weak airline environment, and which continue to represent an increasing share of our total company revenues. Specifically, our hotel product experienced a 122% year-over-year increase in booked reservations, which placed Priceline as one of, if not the fastest growing sellers of hotel rooms on the Internet. Our Rental car business, despite being very closely tethered to our airline business in terms of customer demand dynamics, turned in a 32% year over year increase in booked reservations. I mention these metrics because it is important to recognize that while our overall top line is relatively flat on a year over year basis, the comparison of total company year-over-year growth rates masks the extremely high growth that we have exhibited in two of our three travel products. Put differently, we continue to diversify our revenue streams such that an increasing share of our revenues and our gross profit will come from non-air products. We expect the diversification trend that accompanies the growth of our non-air travel services to continue, and as jeff mentioned, we are hard at work on augmenting that top line growth and revenue diversification with the introduction of new products and initiatives such as vacation packages, cruises, E-Bay, advertising, and international expansion, to name a few. None of these afore mentioned initiatives are material to our results today. But over the long-term, we believe they help Priceline to grow top line, even while managing through the structural debris of any specific travel verticle. As was the case with revenues, our Q1 gross profit of $42 million was essentially flat with gross profit in Q1 with 2001. Our gross margin came in at 16%, which while also flat with last year, did represent a decrease from the margin levels that we have reached in more recent quarters. Again, as was the case with revenues, the decrease in gross margin was driven almost entirely by the airline business, which continued to experience year-over-year decreases in average offer price, while also facing a more challenging supply environment as a result of airline passenger reductions. To a much lesser extent, our margins were negatively effected by margins in our European operations. Nevertheless, we were able to manage our margins to within our range of guidance of 16% to 17%, guidance that we have consistently maintained for well over the past year, due in large part to the continued robust margins of our non-air products, especially our hotel product, which delivered record gross margin during the quarter. Total 1st quarter pro forma operating expenses of $38 million came in $13.1 million, or 26% lower than the $51.1 million of operating expenses incurred in the 1st quarter of last year. Keep in mind that as a result of the completion of the acquisition of Priceline Europe at the end of the 4th quarter of 2001, our 1st quarter operating expenses include $2.4 million of expenses from our European operations, which did not exist in the 1st quarter of 2001. You will recall that in our previous earnings announcement, we committed to managing our European operations to lose no more than a penny per share per quarter. We successfully implemented our plan to significantly restructure Priceline Europe during the quarter, which allowed us to comfortably meet that goal. Sales and marketing expenses totaled $20.8 million during the quarter. Of this amount, $10.2 million was spent on advertising. Which again, was consistent with the guidance we gave on our previous earnings call. Other sales and marketing costs of $10.6 million, which are comprised of the bulk of our variable operating expenses, came in at 4% of revenues. This represents the lowest variable operating percentage in the four-year history of Priceline. Our strong performance here was primarily driven by a dramatic reduction in chargebacks -- [INAUDIBLE - BACKGROUND NOISE ON SPEAKERS END] fraud prevention initiatives, as well as by ongoing efficiencies in both operations and customer service. Because of our exceptional performance on this line item, our gross profit dollars, minus other sales and marketing costs, expressed as a percentage of revenue, was 12% in the 1st quarter, surpassing the 11.2% record that was achieved in the second quarter of 2001. Our systems and business development expense totaled $10.5 million during the quarter, which came in $600,000 lower than last year's Q1 levels, and also lower than our guidance, mainly due to our overperformance on our European cost reduction targets. Depreciation expense of $3.9 million was the largest single component of systems and business development expense during the quarter. Our general and administrative expense of $6.6 million came in $2.8 million or 29% lower than last year's Q1 levels, and also lower than our guidance, due again, to better then planned reductions in European G&A expense, and the ongoing benefits of last year's restructuring initiatives. Our 4th quarter pro forma operating income, before certain adjustments that I will review momently,totaled $4 million, which as I mentioned earlier represents our fourth consecutive quarter of positive pro forma operating earnings. Our Q1 pro forma EBITDA was $8.8 million. And our pro forma net income, after giving effect to $782,000 of interest income, and $492,000 of income from our ownership interest in Priceline mortgage, was $5.3 million or 2 cents for basic and diluted share. And now I'd like to very briefly discuss several additional expense items which affected our GAAP earnings during the quarter. We incurred $354,000 of stock based compensation charges and expenses associated with payroll taxes on employee option exercises. We also declared and paid a non-cash dividend on our preferred stock which amounted to $1.8 million. These expenses are excluded from our presentation of pro forma results. We also had adjustments to reduce previously recorded accruals, which have the effect of reducing expenses in the quarter. While these adjustments had a positive effect on our GAAP earnings, they are excluded from our presentation of pro forma results. Specifically, we adjusted $824,000 of expense accruals that were originally record in the 4th quarter of 2000 as part of our structuring and turn around plan, primarily related to the successful subleasing of office space we had vacated in connection with our restructuring in Q4 of 2000. After factoring in the net effect of these additional expenses and adjustments, our GAAP net income totaled $3.9 million, or 2 cents per basic and diluted share. As for cash and cash flow, we invested $3.5 million in capital expenditures during the 1st quarter. Although this amount was consistent with our guidance of $3 to $5 million of CAP-X, I did want to point out that our CAP-X did did increase from the levels in more recent quarters, as we stepped up our investment in some growth initiatives, such as our E-Bay partnership and our vacation package product, during the quarter. We began the 1st quarter with $164.6 million of cash and cash equivalents on hand. We closed the 1st quarter with $177.8 million of cash and cash equivalent. Again slightly better than our guidance of between $170 and $175 million cash. Finally, we closed the quarter with 229 million primary shares outstanding, and 360 employees. And now on to guidance. I'm going to start with specific line item guidance for the second quarter of 2002, and then finish with some fine remarks about the remainder of the year. We expect to record 1st quarter 2002 revenues -- I'm sorry, second quarter 2002 revenues of between $320 million and $350 million. The midpoint of this range represents a quarterly sequential increase in revenues of more than 25%. It is a forecast that is reflective of continued, albeit mild, improvement in our airline product metrics as a result of both seasonal and environmental factors, as well as continued overperformance in the year-over-year growth rates of our non-air revenue. It is also based on a forecast that calls for increased revenue in each successive month of the quarter, which is consistent with historical presidence. Moving on to specific line item forecasts for Q2. We expect gross margins to come in at approximately the 16% range that was achieved in the 1st quarter. As for operating expenses, Our largest component of sales and marketing is our advertising, where we expect to spend approximately $11 to $13 million during the first -- second quarter. We would expect other sales and marketing, which contain the bulk of our variable operating expenses, to come in at levels between 4 and 5 -- sorry, 4 and 4-1/2%, primarily driven by preserving the benefits of our chargeback prevention programs that I mentioned earlier. We expect both systems and business development expenses and G&A expenses to increase mildly from Q1 levels. We are projecting to earn interest income of approximately $1 million in the second quarter, and we expect to earn between $250,000 and $500,000 in income from our ownership in Priceline Mortgage, which does represent a decrease from Q1 levels, due to an industry-wide interest rate driven reduction in the demand for mortgages. Taking these numbers to the bottom line, we expect to earn between 3 and 5 cents per share of pro forma income in the quarter, including the effects of a 1 cent loss generated by our European operations. We expect to report pro forma adjustments of approximately $500,000 during the quarter. Which, as I mentioned at the outset of the call, means that there will be no material difference between our pro forma results and our GAAP results during the quarter. From a cash flow perspective, we expect to spend approximately $3 to $5 million on capitol expenditure during the quarter, and we expect to finish the quarter with approximately $185 to $190 million dollars of cash. As for other balance sheet items, Priceline is free of debt and began the second quarter of 2002 with $13.5 million of preferred stock held by Delta Airlines. As for the subsequent quarters of 2002, we are going to continue our practice of eliminating specific line item guidance to one quarter. However, we did say in our last earnings call that we are comfortable with the first call estimates of 12 cents per share, and we remain comfortable with those estimates. I'd now like to turn the call back over to Rick for some closing remarks, after which we will take some questions.

With the signs of recovery we have seen in the air business during the quarter, we've given a relatively wide range in our guidance on the revenue line that expect to generate a meaningful amount of gross income on both GAAP and pro forma basis within that range. In fact, we expect to generate positive GAAP earnings in all quarters going forward. We're encouraged by the continued strengthening of our customer franchise and brand, and see this, along with our strongly above average and customer-generated margin, as unique strengths of Priceline now and in the future. Our priority is now on generating growth in our top line, not only through continued momentum in our non-air products and the recovery of air, but also the expansion of several initiatives, including our E-bay relationship and our vacation packages, for which advertising will begin this month. With that, I'd like to thank you for listening, and open it up for questions.

Thank you sir. Ladies and gentlemen, at this time if you have a question, you will need to press the 1 on your touchtone phone. You'll hear a tone acknowledging your request, and your questions will be taken in the order they are received. If you are using speaker equipment, we request that you pick up the handset before pressing the number. In addition, if your question has already been answered, please press the pound key to remove yourself from the queue. One moment please for our first question. [PAUSE] Gentleman, our first questions comes from Anthony Noto. Please state your company name, followed by your question.

It's actually Gina Keats on behalf of Anthony Noto at Goldman. You talked about some of the improvements you've seen in published leisure air rates. Could you talk specifically about what could be driving that? We've obviously seen airlines banding together recently to raise bargain fares. If you can comment on that specifically, that would be great.

I think the first thing I would say in answer to that is that there's a certain financial inevitability, as I said earlier in the call, to the fact that airlines have to increase their prices. They basically, in effect, reloaded their planes, albeit at somewhat lower capacity. There's clearly still plenty of tensions in the historic ratio between business travel and leisure travel, and the airlines in aggregate lost over $2 billion last quarter. So there's no question in my mind that they have to increase their prices in order to get back to a financially respectable situation. The difficulty is that due to overlaps in OND's, or routes as they are probably more commonly known, the price increase activity is a little bit two steps forward and one step back. And it has certainly been intermittent to date. But having said that, we think the financial pressure is there, and we do see some pricing activity going on.

Okay, great. Thanks.

Thank you ma'am. Our next question comes from Paul Cohen. Please go ahead with your question, and please announce your company name.

Hi everyone. First question is on the European business. What percent of your gross bookings is Europe now, {INAUDIBLE] revenues, and how do you see that ramping up over the course of this year?

Go ahead, Bob.

I'll answer the first part, Paul. The -- Europe contributed $3 million of revenue to our 1st quarter results, so roughly 1%. And now Rick? So far as going forward.

I think the -- first of all, the progress in all the international activities, probably for everyone on the internet, is slower than anticipated and is slower still because of the collapse of the capital markets around internet activity in Europe before the business really got developed. And secondly, the fact that they've -- over there have also had plenty of turmoil as a result of post-September 11th activity. The ramp-up that we have will be a function of first, our satisfaction with the trajectories we established in the UK, which is really where we're doing our business today. And then in the speed with which we roll out into the rest of Europe. And that will, frankly, occur in response to results as opposed to off of projections. Oh, and you had another question.

yeah, the second question is on your gross margins. You're guiding us at about -- leaving about 16%, but you're seeing improving margins in your non-air, and your hoping for a ramp-up in pricing for the quarter sequentially. So, why the conservatism on the gross margin side? Or where else is the pressure coming from that I'm not seeing that from what you're telling me?

Yeah, Paul, I'll take that. Obviously we're trying to manage to two numbers, one is gross margin and one is bind. At certain periods in the year those two things can be mutually exclusive, in terms of both moving up at the same time. So we are -- we're primarily focused on bringing the bind rate up, as well as sort of preserving that 16% to 17% margin. So we're guiding obviously to the same number in Q2, which again, within the range of 16 to 17% we're comfortable with, as long as we're moving that bind rate up as we do it.

Okay, great. If you don't mind, one more question on the vacation side of business. Can you give us an idea where are you going to seek your inventory? Is it really going to be a mix -- what kind of a mixture are you going to see between going out to additional sources -- the wholesalers and consolidaters, versus securing inventory yourself? And what kind of margins -- do you see a margin difference between the two?

Paul, it's Jeff.

hey Jeff.

Initially, the inventory that we will be working with, and we are working with now on the site, is derived from our air and hotel inventory. And we, as you know, have some of the broadest inventory in scope, and some of the best pricing around that inventory of anybody on the internet. The nature of building these products is we have a very solid foundation to start with, over time, as we see demand coming in for specific locations, if we have difficulty meeting the demand, we will either fill it in directly with arrangements between Priceline and its suppliers, or with inventory from other consolidaters. And given the demand that we expect eventually to see in this product, I don't think we'll have difficulty in supplementing our inventory in places where it might not be adequate.

Okay. So no connection to additional channels just yet I guess?

No.

Thanks a lot guys.

Thank you sir. Gentlemen, our next question comes from Mark Mulhaney. Please go ahead with your question. Please announce your company name.

Thank you. It's Mark Mulhaney at Morgan Stanley. The on-line marketing channel looks like it's really worked for you. You had some data point in there about going from 10% to 20% of your customers -- your offers coming through online marketing efforts. How much higher do you think that could go, or how much higher would you like that to go? And could you talk about specifics about some of your on-line marketing channels that have been really working for you to date? Thank you.

Hi Mark, it's Rick. I think first of all, as you probably know from prior calls, our on-line marketing emphasis or increased emphasis is really driven by two things. One is the -- in effect, the repricing of the on-line environment, going from the healthy and old days of people paying ridiculously high tolls, I guess they were called in those days, without a performance characteristic to them. And all this to accomplish customer contacts in a -- because of the band width, the relatively non-attractive functional environment. And the repricing that has gone on more recently has changed the financial dynamics of marketing on the internet dramatically, and also changed the philosophies by which you can buy online space. So, you can actually, as you know, today get performance deals that are well priced, and you can monitor very specifically your progress and react accordingly. The second thing is -- as I mentioned in one of my parts of the call, as our customer base has grown, it's become more appropriate for us to market in ways that reach repeat customers. And obviously the most direct ways of doing that are our own website, and also e-mails to our customers. But another fruitful source of that is people who engage in internet e-commerce already, because they tend to be the kind of people who have come to Priceline before. So those two characteristics, the repricing of the environment and the growing attractiveness of repeat business as a marketing objective for us, all done in a more efficient way than more traditional marketing activities are, has driven our progress. We're probably have few competitors on the phone, and they do their own little monitoring, and we don't really get into specifically talking about individual sites and responsiveness. But it is a very attractive feature of on-line marketing that you can, in fact, as I just said, monitor your results, measure accordingly and rebalance your spending as you determine whether you can most effectively mind customers.

Great, thanks Rick. And then, just one question on E-bay. Can you set some expectations about when that -- you know, it just launched within the last month. When do you think that could -- or, when do you expect that to really ramp-up, and when do you think E-bay will get very aggressive in cross promoting that travel channel?

Oh, I think you'll see that happen this quarter, Mark.

Thank you very much.

Thank you sir. Gentlemen, next question comes from Jake Fuller. Please go ahead with your question, and announcing your company name.

Good afternoon. Jake Fuller here with [INAUDIBLE] Weisel. Can you actually run me through what I have to believe happens to ticket prices to get to your revenue guidance for the quarter? It sounds like maybe down -- you know, average price is down maybe 10, 11, 12% gets us there. What is your sensitivity on the earnings line to pricing assumptions?

Jake, we actually don't -- we don't have any heroic assumptions built into our revenue forecast in terms of average price per offer, because as Jeff mentioned, we've seen some nice recovery so far here in the 1st quarter and then through April. We are, as Jeff mentioned, projecting increased bind rates through the quarter, which frankly at this point has as much to do with supply factors as it does with demand factors. Hopefully, sort of looking at, you know, quarterly results over the last several two or three quarters, we've been able to demonstrate our ability to sort of manage our company to making, you know, to hitting our targets based upon various, you know. revenue outcomes. And we have several things at our disposal. One is our advertising spend. And we are uniquely capable, as you know, of managing our margin based upon the decision that we make for each customer. So, you know, the $320 to $350 million range, I think, you know, even at $320 or $350, depending upon how we manage each of those individual line items, we have the ability to make the three to five cent share that I mentioned.

Right, great. Thank you.

Thank you sir. Our next question comes from Justin Balda. Please go ahead with your question. Please announce your company affiliation.

Thanks very much. This is Justin Balda with Merrill Lynch. In terms of the quarter, it looks like you guys were relatively flat on the top line. I don't think you've provided revenue guidance for '02. Can you talk a little about what you think the long-term top line growth of the which is could be? You mention add bunch of different growth initiatives that you're currently working, including E-bay and the vacation stuff and international. But, given that we don't have a number to work with as far as guidance, can you help us conceptually think about what kinds of long term top line growth rates we potentially could get from you? Thanks.

Jeff, this is Rick. I am going to try to give you some encouraging words to answer your question, but I think as to long-term guidance, ourselves and other companies are probably going to be out of that business going forward. In terms of our growth prospects. I'd say first of all, my reasoning starts with the fact that we're coming out of a period where we've been effectively disadvantaged, both absolutely and relative to our competition, given the importance of the air product to us and the pricing in that category. As you I'm sure picked up, the other parts of our business are growing quite healthily, as is our overall customer franchise. I think that we have always viewed that we can create a meaningful growth rate out of the combination of -- in the short-term of the recoveries we're forecasting here. And the quarter-to-quarter will be a sequential increase in the range of 30%, plus or minus something or other. And then later, as the initiatives that Jeff spent the most time on, kick in. I think we're obviously expecting that we can grow -- even the business that we're fundamentally in today only, that being the travel business, fully flushed out for all the offerings, in double-digit revenue ranges. But we aren't going to give a specific number for that.

Okay, thanks very much.

Sure.

Thank you sir. Our next question comes from Holly Becker. Please go ahead, announcing your company name.

Hi. Can we get some guidance on the supply side? Have you found that there's any airlines that are, you know, taking any initiatives to limit the amount of off price or on-line supply that they're providing, given the load factors are up as much as they are right now? Is there anything that's concerning you on the supply side that's factoring into these forecasts? And then, I just have a follow on with marketing.

Holly, it's Jeff. I think what you've seen in the numbers that we posted for the 1st quarter reflects fairly consistently the way the airlines are dealing with Priceline. We have a number of carriers and a number of markets that continue to provide us with inventory and pricing very aggressively, because our product meets their specific needs to fill seats that would otherwise go empty. Conversely, and I mentioned this earlier in my remarks, as capacity has come down and you get into very tight holiday periods like Spring Break, where planes are flying north/south from New York to Florida, those planes do not have very many empty seats, and our carriers, therefore, do not have inventory for us, and for other providers opaque providers, in the booking classes where we book. So, I think airlines will continue to use us as they have in the past to fill the seats that would otherwise go empty. And because we have such broad participation from airlines, not all the airlines treat us in the same way at all times. So, if one airline has high-load factors, others may need passengers, and we can find seats with those airlines. I would expect that behavior to continue, and for the impetus for our business to improve will be as the airlines continue to add to capacity, and as they increase their pricing to raise their yields, as Rick said, that does have an impact on their demand. The demand especially in the leisure part of the plane is very elastic. They can use Priceline to fill up the seats as they raise their yields.

Okay. But there's been no kind of unified or airline specific initiatives that have kind of put down the gauntlet on providing inventory to Priceline recently?

No.

Okay. And then on the marketing side, you talked about your ability to sort of manage revenue and marketing as a faucet to manage the revenue line. And in the quarter, what we saw was that you didn't turn up the faucet, you kept the marketing lower than we thought, and revenue came in a bit lower than we thought. Can you just talk about that business decision and whether, going forward, you may continue to make the same decisions to manage for the bottom line, as opposed to potentially spending more to get the revenue higher?

Holly, it's Rick. I think, taking some of the numbers we just went through is the way to answer your question. Effectively, this quarter, we generated in aggregate offer business. In other words, the customer driven portion of our business opportunities, healthy increases versus prior year in offers. And we also had attractive bind rates in our hotel product and our rental car product, and not in our air product. Frankly, in the short term, it wouldn't have made a great deal of sense to generate a whole lot of extra demand when we were having the bind issues that were driven by the other factors we discussed in the call. So, frankly, it wasn't a hard decision for us to, in effect, rebalance the marketing. And we take some pride ourselves in being able to run that marketing budget and the activity on a rather timely basis as we go along, as opposed to having, sort of, a long-term formula for how we spend our money there.

Great. Can you tell us what percent of the marketing line is variable today because of these terrific deals you've been able to strike with the online?

Well, you know, the -- I think we don't really have cuts that disclose that number, and I probably wouldn't be able to tell you what that is. But I think the numbers for any marketer working on the internet are much more robust in terms of understanding not only what you're spending, as you say, on a variable cost basis for customers, but what you're getting for it in terms of response rates and the like. And so actually, it's -- the art of marketing as it relates to spending levels and the like, has to do more with the traditional forms than the internet, which is a very scientific medium from a measurement standpoint.

Okay, thank you so much.

Thank you ma'am. Gentlemen, our final question comes from Mark Rowen. Please go ahead with your question.

Thanks, Mark Rowen from Prudential. A couple of questions. My first one is for Rick, and it goes to the airline side of the business. You know, I'm looking at a chart of airline load factors, and it looks like it was about 70% in the 1st quarter, which historically is not really out of the norm, it's certainly up from the 4th quarter. But my question is, you know, Jay's original theory was that the incremental cost of putting an extra customer in a seat is minimal, and that -- so why won't the airlines lower their prices to you while you're protecting their brand at some kind of market clearing price to get their load factors up to 80 or 85%? And then I have a couple other questions if I could.

Mark, that's a trick trapped question to get all the airlines mad at me when I answer it. [LAUGHTER]

Which I'm about to do. I think what's happened is pricing, which should be a sharp-edged instrument for the airlines, has in the recent past, particularly since September 11th, become a blunt-edged instrument. And they really haven't discriminated as much among everyone as overall prices have fallen. And so the appeal of our opaque product has not really, on the way down, preserved the pricing advantages that we would have in what we think is a more normalized environment. And I think that's -- why I say that when airline pricing goes back up, differentials will widen. Because I think your point, which is philosophically absolutely correct, I think, will reassert itself. But as you know, you know, after September 11th, when there were a lot of people afraid to fly, the airlines cut their prices all over the place. And I think if you think about it, the people who were flying at that point were people who needed to fly, and you didn't need to cut their prices, And in the short term, it probably didn't get that many people back on the plane, although that is beginning to right itself now.

So, have you had conversations with any of the airlines about lowering their prices through Priceline to some kind of market clearing price? I mean, what's their resistance to that to get their load factors higher than where they're at?

Well, I think we have conversations like that in various forms with all the airlines. They're sort of ongoing conversations, and I wouldn't want to generalize about their response. I think it's a viable argument. Frankly, I'd say again, these airlines, in a period where in many respects it looks like they've recovered quite a bit, just lost $2 billion. And there is a couple of them now talking about going to the loan guarantee program, which was certainly onerously structured for the first one in there, America West. So I think we're not the -- we're not the lead item and -- on their route back, but I think we have a very viable role to play with them.

Okay, thanks.

Mark, send me some security, will you? [LAUGHTER]

My second question is, Jeff, you had mentioned that you were going to increase your inventory on hotels this quarter. Were you inventory constrained in the 1st quarter, or was demand the constraining factor? Could you have sold more hotel rooms if you had the right locations? And sort of related to that question, how much of a handicap is it that your two main competitors show the hotels that people choose, where you don't?

To the first question first. I don't view our results have been in any way hampered by inventory constraints in the hotel business. As you can see from the numbers, our bind rate for the hotel product was excellent, and we are always trying to add hotels to Priceline. We have over 8,000, and we're always trying to add more. And we're also always trying to, you know, improve the arrangements we have between our major hotel partners. And so that activity is ongoing, and we'll keep doing it. But I don't believe that we've suffered from serious inventory constraints. And in fact, we're binding very well in hotel. As to the second question, there probably are some advantages inherent in being able to market to a customer with a specific price tied to a specific hotel, and that's something that Priceline cannot do in the hotel product. But we've found other ways that are very effective to demonstrate the value of our product to customers to bring them in online, as well as through our offline channels. And as you can see, the result -- the business is growing at a very, very healthy rate. The other thing I'll mention on that front is that the fact that in our vacation product, the hotel properties will be disclosed. I think we'll have a beneficial spillover effect from a marketing sense, because customers will be able to see the very high-quality properties that participate in Priceline.com when they're shopping for a vacation.

Mark, this is Rick. If I could add one quick thing. I think the hotel business on the internet is in a much less mature state than the air business. As to the competition, and you know this number, but direct airline sites probably generate over a third of the airline traffic today, and there's no such phenomenon on hotels. So there's a lot of room in the hotel space on the internet today, and at least in the short and probably intermediate term, head-on-head competition isn't as relevant. And there's room, as you can see in the numbers, for a lot of people to grow well.

Okay. And then Bob, just a quick one for you. Can we assume that the revenue by segment was similar to the growth levels sequentially in year over year of your tickets sold and room nights sold, or was there significant changes in the average of each of those units?

On a year over year basis?

Yeah.

Year-over-year basis, you can do the simple math, which shows that, you know, our average revenue per unit did decrease. Now, as has been the case with previous quarters, most of that has to do with mix. I think it's safe to say that for the most part on a year-over-year basis, the average revenue per unit for each of the three segments have remained fairly steady, although, as I mentioned, air is lower than last year. Although -- hopefully we've demonstrated on the call, that the year-over-year difference in the decrease in average revenue unit for air was better in Q1 than it's been in each of the previous several quarters going all the way back to last summer, which is one of the things that makes us so encouraged about, you know, the recovery in airline in Q2. I don't know if that's helpful, but that's all I'm prepared to tell you about in segment information.

Okay, great. Thanks very much.

Thank you all for joining us, and We'll talk to you in another quarter.

Thank you sir. Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation, you may now disconnect.