Booking Holdings Inc (BKNG) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to priceline.com's first quarter 2005 conference call. [OPERATOR INSTRUCTIONS]..

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 certain risks, uncertainties and assumptions that are difficult to predict.

Therefore, 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.

For a list of factors that could could cause priceline.com's actual results to differ materially from those described in the forward-looking statements, please refer to the Safe Harbor statements at the end of priceline.com's earnings press release as well as 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.

A copy of Priceline.com's earnings press release together with an accompanying financial and statistical supplement is available in the investor relations section of Priceline.com's website, located at www.priceline.com.

Now I'd like to introduce priceline's' speakers for this afternoon, Mr. Jeff Boyd and Mr. Bob Mylod.

Gentlemen, you may begin.

Thank you very much.

Welcome to priceline's first quarter conference call.

Priceline continued to deliver strong growth and improved earnings in our first quarter of 2005.

Gross bookings of $507 million were up 41% year-over-year.

Pro forma gross profit of $58 million was up 34% and pro forma net income was $8.4 million or $0.21 a share, up 60% over last year.

Priceline's businesses continue to benefit from the introduction of new services and markets, a strong branded marketing message, and our commitment to apply our financial resources to build the business.

The principal drivers of topline growth in Q1 were as follows:

First, continued growth in agency airline tickets, partially offset by a continuation of the long-term decline in merchant opaque air sales, although the percent rate of decline improved during the quarter as we are now comping against quarters with low conversion rates.

And second, continued growth in package sales and in hotel room unit sales with agency growth rates for hotels aided by the inclusion of Active Hotels and Travelweb, which we acquired last year.

The organic gross bookings growth rate, assuming acquired businesses were owned for the full periods in question, excluding Orbitz business travel for Travelweb, which will not likely continue past this year, was approximately 23%.

We are pleased with our topline growth, which we believe compares favorably to the competition, and remains strong despite the recent slackening of domestic online travel market growth rates.

From our perspective it underscores the importance of the execution of our strategy over the last two years to diversify our products in markets, through both internal product development and acquisitions.

As has been the case for several quarters, the growth rates for our agency business, which is comprised of retail services, significantly exceeded the growth rates for the merchant business, which is comprised of the opaque services and the Travelweb merchant hotel service.

Implicit in this change of mix is the continued shrinking of the opaque air business, albeit at reducing rates, and a general shifting of demand from opaque to retail services as the result of our focusing development efforts and marketing primarily on retail choice over the last two years.

Even with our recent focus on retail services, we believe that our opaque services give us an exceptionally differentiated savings message that is and will continue to be a key contributor for generating traffic, some of which will generate opaque bookings, and some of which will ultimately drive retail bookings.

While the financial characteristics of opaque and retail services are different and sometimes materially so, we do not manage our operations to maximize one form of transaction over another.

Rather, we are striving to let consumers make the choice, which we believe serves the best interests of the business and the brand in the long run.

Looking forward, we believe growth rates should benefit from growth and retail hotel room night sales from the launch of retail choice on Priceline.

The declining proportional significance of negative opaque air comparisons to our total gross bookings growth, and the increasing significance of higher growth rates at Active Hotels, as that business grows in size and contributes more meaningfully to consolidated bookings.

Priceline's airline ticket business continues to perform well, emphasizing the benefit of service choice.

Total tickets were up 20% year-over-year.

As we stated in earlier calls, the growth rate is easing as we are now comping against quarters that benefited from the launch of retail choice.

The opaque airline ticket business continues to provide one of the last outposts of discounting for suppliers and customers.

It has performed in line with our modest expectations in the last two quarters, and we expect the negative impact of this business on our overall growth to fade in coming quarters.

As I have said in previous calls, the financial difficulties of the airlines compounded by high fuel costs, will continue to present challenges for online travel players as airlines seek ways to reduce the cost of selling tickets through intermediary channels and ramp their investment in driving traffic to their own websites.

We launched our new retail hotel offering on priceline in late March.

This was earlier than we expected and put us in a position to accelerate some of the marketing costs associated with the launch to the first quarter.

While this added to our advertising expense in Q1, it should allow us to spend more for working media in Q2, within our planned advertising budget.

The new services performed well on the Priceline hotel path.

Between 5% and 10% of booking customers are buying retail hotel on a given day, and opaque path drop-off has been at lower levels than that.

We think this performance is indicative of good consumer acceptance of retail choice even with an interface that gives retail less prominence than on our air path.

A number of folks have asked if this treatment is the final integration.

Simply put, we will continue to test different looks to ensure easy navigation, and optimize path conversion.

Active Hotels continued its strong performance in the first quarter, and as expected, contributed nicely to our overall earnings.

They continue to benefit from high market growth rates in Europe and are building the business in the U.K. and making progress on continental Europe.

We think it is particularly encouraging that Active's direct business to owned websites is one of their fastest growing channels, as they are rightfully getting more benefit for the outstanding content they offer.

Our new ad campaign launched nationally a few weeks ago and I hope you have seen the new ads.

We are excited about our shop, compare, and save campaign because the Priceline message is now consistent across all services, and because the message is new for Priceline and different from the competition.

The message of choice and savings continues to help us rise above the clutter of homogeneous online travel advertising, and we think William Shatner and our new creative will help us cut through to deliver that message.

Moreover, with the excellent content now available on Priceline hotels, Active, and Mytravelguide, we are able to more effectively access and serve customers who shop for online travel through search and similar channels.

There is a large segment of the market using the web-defined information about hotels and other destination services.

Our name-your-own-price product does not serve this need, but our new product does, giving us access for the first time to an important segment of the market.

We are pleased with the interest generated so far from the relaunch of our hotel service and the new advertising.

While it is too early to predict the ultimate performance of the new service and campaign, beyond the modest contribution inherent in our forward guidance, we are optimistic that the new service in advertising will do well.

We believe the investments we are making in new services and markets and in building and expanding our brand will continue to pay dividends in the form of strong topline and bottom line performance.

I will now turn the call over to Bob for the financial review.

Thanks, Jeff.

I'm going to give a brief review of our Q1 results and then I'll finish with some forward guidance.

Let me start with our Q1 gross bookings metrics which exceeded the high end of our prior guidance.

Total gross bookings of $507 million represents over 40% growth year-over-year, and is reflective of the continually increasing contribution the retail services are having on our results.

This is an operational dynamic that has been unfolding for a number of quarters, and with the launch of retail hotels at the end the first quarter and the continued strong growth rates from our European operations, which are primarily retail-driven, we expect this dynamic to continue playing out through the remainder of 2005.

Let me also say that while our growth has been fueled by our retail service development and acquisition activities over the past year or so, our core opaque services continue to serve as the cornerstone of our main brand attribute, which is that Priceline stands for the best place to save money on travel.

With that said, I'll briefly cover a few of the main income statement drivers for Q1.

Our pro forma gross profit of $58 million, which excludes approximately $400,000 of non-cash acquisition-related amortization expense, came in towards the high end of our guidance and was fueled by our strong bookings performance.

As has been the case for a number of quarters, we experienced large gross profit declines in our opaque airline service, which were more than offset by strong growth from retail services in the United States and in Europe.

Results from Active Hotels continue to perform above our expectations for the second consecutive quarter since the acquisition in September of 2004.

Needless to say, we continue to be very pleased with the business dynamics in Europe in general, and with the performance of Active Hotels in particular.

As for operating expenses, our advertising expense consisting of our online and offline advertising activities, came in at the high end of our guidance at $21 million.

The mix was slightly more weighted towards offline than originally planned because we accelerated the launch of our shop and compare advertising campaign, originally expected in Q2 into Q1.

This had the effect of reducing Q1 EPS by approximately $0.01 to $0.02 per share.

The year-over-year increase in consolidated advertising expenditures is almost entirely driven by the online spending of Active and Travelweb, both of which were acquired subsequent to Q1 of last year.

Our other fixed expenses, which are comprised of personnel costs, G&A, information technology and depreciation and amortization collectively came in roughly $1 million less than our expectations.

We recognized approximately $500,000 of expenses below the operating income line from losses associated with foreign currency translation and hedging activities.

While this had the effect of reducing our pro forma EPS by 1 penny per share during the first quarter, we expect a charge of this magnitude to be one time in nature, and we would expect any future FX related charges to be offset by higher than expected earnings from our European operations, as a result of favorable currency translations.

Our pro forma income tax expense came in lower than planned, primarily as a result of a substantially lower than expected tax rate at Active Hotels.

Consequently, our pro forma tax for Q1 consisted entirely of expenses associated with the alternative minimum income tax in the United States.

We reported pro forma net income of $0.21 per share, which was within our guidance and above first call consensus.

We reported GAAP net income of $0.10 per share, which was effected by $4.3 million of net expenses, substantially all of which were noncash in nature and were in line with our guidance.

As for cash and cash flow, bed a very strong quarter in terms of cash generation.

We began the quarter with $247.7 million of cash and marketable securities, and we closed the quarter with $265.9 million, representing an increase in cash of $18.2 million during the quarter.

Total capital expenditures in the third quarter were approximately $4.1 million.

This is higher than in previous quarters for three principal reasons.

First, our capital equipment purchases for full year 2005 are more heavily skewed to the first quarter this year, as compared to prior years.

Second, Q1 represents the high water mark for capitalizable activities associated with the development of our retail hotel service which was completed and launched in Q1.

Finally our Capex included the activity from Active Hotels.

While I expect 2005 full-year Capex to exceed 2004 levels, I do expect that quarterly Capex levels for the remainder of 2005 will come in lower than Q1 levels.

Now for a couple of quick comments on guidance.

I'm going to give you fairly specific guidance for the second quarter, and then some general full-year EPS guidance.

We're looking for second quarter gross bookings to grow by approximately 25% on a year-over-year basis, and we expect revenue to grow by approximately 5%.

We expect pro forma gross profit dollars to grow by approximately 25% on a year-over-year basis.

As for Q2, operating expenses, consistent with our past practice, Q2 ad spend levels should be somewhat higher than Q1 levels in anticipation of the strong summer booking season and in support of the launch of our new shop and compare ad campaign.

We're targeting consolidated advertising expenses of approximately $23 million with slightly more being spent offline than online.

Again the year-over-year increase in advertising expense will be entirely driven by the growth in online spending for Travelweb, which we did not own for the entire quarter last year, and online spending at Active.

We expect sales and marketing expenses of between $10.5 and $11 million.

We expect personnel costs to come in between $10 and $10.5 million.

We expect G&A expenses of approximately $4.5 to $5 million, information technology costs of approximately $3 to $3.2 million and depreciation and amortization expense, excluding acquisition related amortization of approximately $2.6 million.

We're targeting pro forma EPS of approximately $0.34 to $0.40 per share.

Pro forma EPS excludes the dilutive impact of approximately $0.03 to $0.04 per share associated with the adoption of EITF 0408, which requires that we treat our two convertible debt issues on an if converted basis, regardless of where our stock trades.

This is consistent with the methodology used by the analysts represented in our first call consensus EPS estimates.

Our pro forma EPS forecast includes an estimated cash income tax of approximately $200,000 in the quarter, comprised entirely of alternative minimum tax in the United States.

As was the case in Q1, we did not expect to have any meaningful income tax expense on foreign sourced earnings in Q2, due to lower than effective tax rates.

Net pro forma adjustments associated primarily with acquisition related noncash amortization and stock based compensation, are expected to total approximately $3.5 to $4 million in the second quarter.

As for full-year guidance, while we are not at this point giving specific line item guidance or quarterly EPS guidance for the second half of the year, as you may recall, last quarter we said that we were comfortable with the 2005 First Call consensus estimates for pro forma earnings per share, which were a $1.18 per share at that time.

The First Call consensus estimate for pro forma 2005 EPS has since moved up to $1.20 per share.

We are comfortable with that revised estimate , which as I mentioned a moment ago, excludes the dilutive impact associated with EITF 0408.

Our guidance continues to reflect minimal net impact from our hotel retail integration launch.

Following the same strategy that we pursued with our air retail product launch last year, we plan to iterate our way towards the ultimate website presentation of our hotel retail service offering.

We've started with subtle integration and progressively and judiciously we expect to become more aggressive with the prominence of the retail service to the extent it is additive to the company's results.

I'd also like to remind you that in the event that we witness overperformance in our 2005 operating income as the year unfolds, we intend to reinvest some of that overperformance back into advertising, just as we have done in previous periods.

As we've discussed in the past, our continued market share gains are a testament to our belief that our advertising dollars have been and continue to be an outstanding long-term investment for us.

Finally, I want to point out as I've done on previous calls that all of our forecasts are based upon an assumption that we will continue operating in a consumer travel market that is roughly similar to the current one, and any geopolitical instability or terrorist event, particularly within the United States, would in all likelihood have a negative impact on the travel market in general, and our operating results in particular.

With that, we'd be happy to answer your questions.

[OPERATOR INSTRUCTIONS].

Our first questions come from Imran Khan of JP Morgan.

Your question please.

A couple of questions.

First is a housekeeping question.

Bob, did you give out your organic growth for the gross bookings this quarter?

Yes, we did at 23%.

Okay.

And second question is, like could you talk a little bit about your cross-brand strategy between Active Hotel and Travelweb?

I think you were doing that.

Secondly, since last call, now you launched your hotel retail product have your expectations changed in terms of success you might have from the hotel product?

Finally if you can talk about what kind of trend you're seeing going into the summer of Q2 and going into the summer in the travel business.

Thanks.

Okay.

In terms of Active and Travelweb integration and branding strategy, we are still in the early days of that process.

We actually have recently relaunched priceline.co.uk in the U.K.. the website is heavily branded Priceline, but the inventory available, as a primary option, is Active's retail inventory.

That launch is a week or so old, and we'll see how the results go, but we fully expect the business there to improve based on the availability of the broader Active Hotels content.

Hopefully that will beneficial not only to Active's business, but to Priceline's name-your-own-price opaque hotel business in the U.K..

We have a number of other product integration plans in place for future periods.

We have not completely finished our thinking around how branding will go in Europe, though.

We haven't decided, for example, whether to invest in Active Hotels as an offline brand to try and make it a subbrand of Priceline and all of those things are to come in the future.

With respect to the hotel success, as I mentioned in my remarks, we're happy with what we've seen so far on the website, between 5 to 10% of hotel bookings on any given day are going to the retail product, which indicates to us that consumers are finding the product and are using it and converting on it, when it's the right product for their trip.

We're still very early into the new ad campaign.

It's only been running for a few weeks, four or five weeks now.

The hotel advertisement has really only been out for a couple of weeks.

So it's too early to see to say what the long-term impact of the relaunch is.

We continue to be optimistic and, I think our guidance for the second quarter is assuming that there will be a modest contribution from retail hotels and I also think it's assuming that travel trends, you asked about the summer, continue to be strong.

If you look at hotel and airline reported results, the travel market continues to be strong and our guidance assumes we will continue to participate in that business.

Okay.

Thank you.

Our next question is from Anthony Noto of Goldman Sachs.

Your question, please.

Hey, Jeff and Bob.

I have a series of questions, but I prefer to ask them one and let you answer it and then I'll follow up, if you don't mind.

You have a diversification of different types of pricing, as well as category sales.

Can you comment at all on whether the number of items per transaction has grown and sort of where that trend is now versus where it was a year ago?

Yes.

The number of transactions -- the number of items per transaction has been growing on Priceline consistently because packages themselves are one of our fastest growing product lines.

We also have recently launched the destination services content on our packages path and very recently on our air path.

As we sell tours and trips and airport transfers, that adds to sort of the number of transactions where people are buying more than one thing.

It's a very important metric, and it's growing.

As it relates to the rental car business, just following up along that thought process.

It looked like the rental car days booked grew about 5% year-over-year.

I wanted to make sure that's accurate and I'm not missing some anomaly in the comparison, but how do you think about that growth rate throughout the rest of the year?

Is it something you can get back to double digits and leveraging the packages or other marketing initiatives?

I think it certainly can do better.

It could do better on the cross-sell and the attachment, but I also point that demand for our rental car business has been more volatile just independent of what happens on priceline.com.

If you go back and look at the numbers over the past two years, you will see quarters where it trails down a little bit and then quarters where it picks back up.

So I don't necessarily think that 5% is the permanent unit sales growth rate for rental cars, and in fact, if you look at the -- one of the first ads we ran in the new campaign for the first time in a long time actually gave some coverage on the television on the rental car business.

I think you can see that as representation of our confidence in the product, which continues to have great inventory and great pricing and great positioning in the market

As it relates to the other products, airlines and hotels, hotels look like an accelerated 52% year-over-year growth, which may reflect some of the benefits of Active, et cetera.

How do you leverage that type of growth rate into the airline business?

Which, now that you've anniversaried the retail overs it looks like it will trend into the teens business.

Is that something on the airline specific could be a 20-plus growth business in leveraging and sort of cross-selling and also anniversarying the challenging comp of retail air launch a year ago?

I think that to the extent you're talking about hotel room sales on priceline.com's own website, that gives you some leverage to cross-sell.

There is a pretty decent cross-sell from hotel rooms to rental cars.

There's really not much from hotel to air.

I think it also bodes well for the business in general just to drive more traffic to Priceline, especially traffic that's coming, looking for a retail option because they'll learn we have retail options across all the products.

On the Active side, that upside is probably a longer-term upside.

It will take a while before we really have the kind of integration where Active is effectively generating a lot of demand in Europe for U.S. travel and effectively channeling that demand to us.

I think that is something that will happen over time, but I think it will take us a while to get there.

Great, and indulge me for one last question.

You mentioned, Jeff, on the call the slackening in domestic growth rates, but then you also mentioned just in the question-and-answer session here still robust travel.

Would you clarify what you meant by slacking in domestic growth rate -- was that for competitive online travel companies, and i.e., Priceline's not seeing it, or have you seen some what of a slowdown?

I think if you look across the spectrum of online travel agents who have been reporting their results for the last couple of quarters, there's definitely been an easing of overall market growth for domestic online travel.

The European and foreign businesses continuing to grow at very, very high rates but the purely domestic business organically is not growing as fast this year as I think people probably expected it to at this time last year.

I'm just making a comment on results that have already been announced by the competition.

Gotcha.

Thank you very much.

Our next questions comes from Aaron Kessler of Piper Jaffray.

Your question please.

Thanks guys.

Couple of questions.

Following up on Anthony's question for growth in the domestic market.

How is '05 as we get some of these new initiatives underway?

How do you think you can continue to grow I guess above an issue of growth rates as we've seen from some of your competitors over the last few quarters.

What drives you to make 15-20% long term growth?

I mean, without putting my finger on a long-term growth rate for the market or for Priceline, I think it will continue to be true next year what is true this year, which is domestic growth is going to be aided by market growth.

There's still going to be attractive underlying growth rates in the market, but to really see exceptional performance, you have to have new products, new services, fresh messages, and that's the reason we've been able to outperform the competition over the last 12 to 18 months as we've been able to get into some new markets and expand our footprint.

The retail hotel product that we launched a few weeks ago, is just another step in that effort to try to continue to drive growth with new ideas and new products.

Great.

Do you happen to have some of the -- housekeeping question -- do you have the organic hotel units in the quarter?

Is that something you give out?

We did not.

We haven't given that out.

Over time given that, as Jeff mentioned in his remarks, we are ultimately indifferent to the type of product our consumers are buying, the service that our customers are using, our goal is to maximize bookings, maximize unit sales, regardless of whether they're retail or opaque.

So that's what we're focused on

On the taxes, is that a new tax rate, the 200,000 for Q2?

Is that at a similar level we should assume for the remainder of the year, or is it just that tax is going up for Q2?

We didn't give specific line item guidance on taxes, but as I said, the effective tax rate of foreign sourced earnings is far lower than we expected.

It travels -- that carries over into Q2.

We'll have some benefit of that going forward, but over time and certainly as we get to the end of this year and definitely into '06, that'll creep up, and we'll give further guidance on that probably next quarter

Great.

Thank you

Our next question comes from Justin Post of Merrill Lynch.

Your question.

Thank you.

First question, can you talk a little bit about the opaque air decline?

Can you tell us if it’s still in double digits, and any color on what percentage of revenues that makes up.

I know you haven't provided that in the past.

We haven't provided what percentage of revenues are represented by opaque air, Justin .

We have said, we continue to experience significant declines in revenue, and without sort of putting a number on it, I think we would define significant as being double digit, but as Jeff mentioned those declines have been declining.

The percentage declines have been declining as the comps have started to get a little bit easier.

Make no mistake about it, it is still a shrinking business as Jeff mentioned.

is there anything in the airline industry you could foresee in the next six quarters or so, kind of turning it around, or is it status quo for here for a while on that?

I think you've seen in the recent month or so a number of fare increases that have actually stuck among the major carriers, reflective of high fuel prices and, a real desire to try to move yields up.

I think those are positives.

We think over time our opaque product really is a tool that the airlines can use to help them backfill demand when they want to raise their published prices.

I think, as I mentioned in my remarks, it does remain one of the last outposts of discounting for the major carrier, and they continue to use it as a revenue management tool for their benefit and I think if you saw yields improving significantly, that would be a good sign for our opaque airline ticket business.

Great.

Then the difference between the 23% organic, and the 40% reported as far as bookings.

Is that active in Travelweb?

Is there anything else we're missing in there?

It's basically active in Travelweb.

Great.

And can you give us any color on traffic conversion rates?

Have you expanded your product offering, you might have commented a little bit on this earlier, have you seen conversion go up across the Priceline site and do you have any positive implications from that?

We saw last year, very significant conversion improvements with the addition of retail airline tickets on the air site.

As it turns out, our opaque hotel product converts traffic very, very well.

It's extremely high conversion rates on that path.

As I said in the prepared remarks, we're selling 5 to 10% retail hotel rooms any given day, and the opaque path drop-off was at rates lower than that, so that implies a small benefit and conversion.

Thank you.

Your next question comes comes from Michael Millman from Soleil Securities.

I have a couple also.

The other day Expedia said that they were seeing wild increased agency air business they were seeing reduced revenue per ticket, and I think they were talking about not -- talking about the opaque.

Are seeing that, or can you discuss that a bit?

I didn't read that transcript very carefully, but I think what Expedia said is that their total margin on airline ticket sales had gone down, and I believe that they said the principal reason for that was declining opaque sales as a percentage of total sales.

They get a higher margin on the opaque sales than they do on the retail and maybe even a declining margin on their opaque business because they have launched a new opaque product that really is semi-opaque with time-bands.

The margins they're able to take on that business are lower, at least according to the way I interpreted the remarks they made in their conference call.

In that connection, do you have a competing product, a time-band type product?

We don't, and in fact we've watched that very carefully, and will continue to watch it very carefully, but our belief is what's most important is having an opaque product with the best prices and the best prices are not available in that time band product.

Having a retail product with the best prices and the best prices are not available on Hotwire's retail product because it only includes the carriers that participate in their opaque.

I think we have a superior product on both counts

Could you -- you mentioned that there didn't seem to be much of a cross-sale market between hotel and air, which I guess seems surprising.

Am I missing something, or should I not be surprised?

The question that I answered was a question that specifically asked whether increasing hotel sales were going to be a lever to drive sales of other business.

Our experience has been when people come in to buy a hotel room, more often than not they've already bought their airline ticket.

Now if someone is coming in to buy an airline ticket, you have a very good chance of cross-selling that hotel room to that customer, and that's one of biggest sources of demand for packaging for us and for others, is people coming in to buy an airline ticket.

It's important to look at it from the perspective that I was answering the question from

And is that airplane ticket typically, as far as you know, being bought by -- from other third parties, or is it being bought from the supplier?

It could be any one of those.

Okay.

Thank you.

Next question comes from Scott Barry from Credit Suisse First Boston.

Your question please.

Bob a question for you, if I might.

Can you discuss the dynamics impacting the percentage of agency gross bookings you dropped to the agency revenue line.

Maybe specifically was there some kind of seasonal impact in 4Q?

And --

You're looking at relationship of revenue to bookings?

Just on the agency side.

You're getting to the heart of it, which is, recall that Active, we recognized revenue with Active when the customer uses the service, stays at the hotel room.

Obviously, the booking number happens.

We recognize a booking metric when the customer books the reservation.

So if you look at the difference between Q4 and Q1, which are the two quarters where we've owned Active, sequentially, revenues for Active were down, but bookings were up consistent with the guidance that we gave.

So that's going to have an impact if you start to look at the relationship between agency revenue and agency bookings.

So then the back half is more -- is seasonally stronger for -- it's counterseasonal?

Definitely.

You should expect to see the agency revenue in Q2 and Q3 driven principally by active.

You should see a -- again, without giving specific line item guidance, you should see that agency revenue number go up smartly because of the way that revenue is recognized, and given that the summer season is sort of at their peak season in Europe, you'll see substantially higher revenues in Q2 and Q3 from Active than you did in Q1.

Okay.

Great.

Thanks a lot.

Our next question is from Paul Keung of CIBC.

Your question.

Good afternoon.

Few questions on Active specifically.

Can you comment on trends that you're seeing customer acquisition costs and market efficiency in Active?

The second one on that is what growth are you seeing in Active on a direct versus affiliate channel, and I guess tying back to Scott's question does that mean your marketing spend will also have that sort of unusual pattern, because of affiliate commissions?

I think the first two questions can -- I can deal with with the same answer, which is, as I mentioned in the call, Active's direct business is one of the its fastest distribution channels, and because direct business by definition doesn't carry an affiliate commission with it, that means that it has a positive impact on their acquisition cost.

So I think they're in a position where they're getting the benefit of that growth in their direct business, and they also continue to convert very well, which allows them to sign up with affiliates at attractive CPAs in a competitive sense because even if their CPA is lower than what a competitor is offering, when they convert much better, the affiliate makes more absolute money working with Active.

And then, Paul, as it relates to the actual expense, the online advertising expense associated with Active, it's again, it is a little bit similar to the answer I gave to Scott Barry, which is, it is certainly seasonal in nature, although probably a little less seasonal because we do recognize advertising expense at the time that the booking is made; not at the time that the customer stays.

So as I mentioned, we had very good bookings from Active in Q1 and as a result, online advertising expense was a robust number.

We certainly expect it will go up in Q2 and Q3 because many of our customers both here and in Europe book in very, very close proximity to their time of travel.

So it will go up seasonally, but it will be probably a little -- it will less severe than the movement in revenues.

Okay.

So, Jeff, it is safe to say we haven't seen inflation channelled specifically to the affiliate channel on a CPA basis outside of the direct, is that correct?

I don't think we've seen significant inflation in their CPA costs.

Okay.

Thanks.

Our final question is from Jake Fuller of Thomas Weisel partners.

Your question, please.

Good afternoon, guys.

Couple of things on this new site you're launching, the MyTravelGuide, does that factor into your expense equation or is that not a major contributor here over the near term?

Jake, there are expenses associated with MyTravelGuide's development that are included on our expense line.

They're not gigantic, but they do represent an investment which we've made, and we think it's a good investment.

We like the business.

It's getting great traffic, it's got good content on it.

We look at the results that are implied at Trip advisor, based on Interactive's recent announcement and we think it seems to be a terrific business.

Is there any revenue contribution built into the mix at this point for it, or is it still development stage?

Is there a hard launch planned for that at some point in the near future?

We do have a hard launch planned for it.

I can't tell you exactly when that will be, and we intend to roll MyTravelGuide out in phases.

The product that's up there is pretty good right now, but we intend to add elements of personalization and community that are intended to not only differentiate it from the competition, but to make it stickier for customers to use.

So there will be a hard launch.

As to the revenue contribution, we've been fairly conservative.

There's some in there, but it's not significant.

Bob, do you want to add to it?

We certainly had some contribution in Q1 for instance, we expect that we'll -- obviously our goal is for that to become more meaningful over time.

But it's not -- similar to our expectations for the contribution of the retail hotel service, it's not a meaningful driver for the comfort level that we have for the $1.20.

In the revenue model there, who pays you in MyTravelGuide?

How are you generating revenue?

There's three different ways.

One is we can refer a customer to priceline.com and book a travel product for that customer, and make money that way.

The second is, we can get paid a payment per click from other online travel agents and suppliers that we refer traffic to, and we're doing that today.

If you look on the site, you're see there's a number of OTAs and suppliers up there.

Finally there's advertising revenue.

Just Google ad words and banners, that sort of thing which we also have

I guess last question for you.

On the guidance it like looks to me like it implies a fairly meaningful rampup sequentially in interest income in Q2.

Is that a fair assessment?

No.

Okay.

I have to go back to the drawing board in my math then.

Thanks, guys

In a word, no, but I would say, Jake as I did mention, in Q1 we had a very large expense at the other income, other expense line item primarily associated with FX, which as I mentioned we don't expect to see in Q2, and we do expect to see continued low effective tax rates on a pro forma basis.

Okay.

Go back to the drawing board on that one.

Thanks.

Have a good days, guys.

Thanks, Jake.

Gentlemen, at this time I'm showing no further questions.

Would you like to proceed with any closing comments?

No.

Thank you all very much.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may now disconnect.

Good day.