Booking Holdings Inc (BKNG) 2005 Q2 法說會逐字稿

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  • Operator

  • Good afternoon, ladies and gentlemen, and welcome to the Priceline.com second quarter 2005 conference call.

  • At this time, all participants are in a listen-only mode.

  • Later, we will conduct a question-and-answer session and instructions will follow at that time.

  • If anyone should require assistance, please press star then zero on your touchtone telephone.

  • As a reminder, this conference is being recorded.

  • Priceline 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 and uncertainties and assumptions that are difficult to predict.

  • Therefore, actual results may differ materially from those express, 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 cause Priceline's actual results to differ materially from those described in the forward-looking statements, please refer to the Safe Harbor statements at the end Priceline's earnings press release, as well as Priceline's most recent filings with the Securities and Exchange Commission.

  • Unless required by law, Priceline 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's earnings press release, together with an accompanying financial and statistical supplement is available in the Investor Relations Section of Priceline's website located at www.priceline.com.

  • And now, I would like to introduce Priceline's speakers for this afternoon, Mr. Jeff Boyd, and Mr. Bob Mylod.

  • Go ahead, gentlemen.

  • - CEO

  • Thank you very much, and welcome to Priceline's second quarter conference call.

  • I'm here with Bob Mylod, Priceline's CFO.

  • Priceline continued to deliver growth in travel bookings and earnings in the second quarter of 2005.

  • Gross bookings of $569.5 million were up 20% year-over-year.

  • Pro forma gross profit of $65.6 million was up 20%, and pro forma net income was $16.8 million, or $0.41 per share, up 28% over last year.

  • Priceline's businesses continue to benefit from the introduction of new services and markets, a strong brand, and what we believe to be one of the most efficient cost structures in the market.

  • The principal driver of top line growth in Q2 was continued growth in hotel room unit sales, with agency growth rates for hotels aided by the inclusion of [inaudible] hotels and merchant growth, aided by sales of retail hotel rooms on Priceline following the new retail hotel service launch late in Q1.

  • U.S. hotel gross bookings also benefited from an increase in average [inaudible] room rates compared to last year.

  • The organic gross bookings growth rate in the second quarter 2005, compared to the same period in 2004, assuming acquired businesses were owned for the full periods in question and, excluding Priceline retail hotel business on Orbitz, which was restructured under our recent marketing agreement, was approximately 9%.

  • Our top line growth is reflective of a highly competitive market and the recent broad slackening of domestic growth rates for online travel agencies, tied to more effective efforts by supplier sites and fleeting customer loyalty at a time when many consumers begin the shopping process with a generic search query.

  • Priceline's strategy to diversify its services and markets through both internal service development and acquisitions, and to focus on a differentiated service mix to build loyalty is directly responsive to these trends.

  • 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 our retail merchant hotel service.

  • The change of mix in the second quarter is driven by the continued shrinking of the opaque air business, and a slight shifting of demand from opaque to retail services in Priceline's hotel and rental car paths, as a result of the new retail choice services.

  • Priceline's European business organic gross bookings growth in the second quarter 2005, compared to the same period in 2004, assuming, again, that acquired businesses were owned for the full periods in question, was approximately 65%.

  • That number would be significantly higher if you include the results of Bookings B.V., which we acquired last month.

  • We believe the Bookings business complements our existing European operations geographically and our inventory, on a combined basis, is the largest supply base in the market.

  • We believe that there are a number of integration and other opportunities available to Priceline Europe in the coming quarters, but also a great opportunity to continue building a large, profitable hotel business and, over time, a broader travel offering and European brand presence.

  • Priceline's retail airline ticket business performed well in the quarter given difficult market conditions and a primary focus on ad spend on the new hotel service.

  • 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.

  • Opaque airline ticket sales continued to decline in the quarter, roughly in line with our expectations.

  • 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 to their own websites.

  • Priceline's new hotel service continues to perform well on the Priceline hotel path.

  • Retail room night sales, not including Orbitz, more than doubled on a sequential basis during the quarter, though at the expense of some opaque volume.

  • We think this performance is indicative of good consumer acceptance of retail choice, and the new service is performing well in online channels where we are leading with the retail proposition.

  • We are also pleased to note solid growth in rental car unit sales due to good performance in both opaque and retail sales.

  • Our shop-compare-and-save campaign is now four months old.

  • While not the breakout success of last year's Shatner/Nimoy advertisements, the campaign has provided a solid base of support for our new services, as shown by significant retail sales of hotel rooms and rental cars on Priceline, accessible primarily through a shop-and-compare link.

  • The campaign was designed to allow promotional flexibility, and we recently ran a $10 Amex hotel promotion to spur trial of the new service, which has performed well.

  • We will continue to promote our distinctive service line and our core savings message through investment in offline channels.

  • Looking towards next year, we believe that our growing European operations, diverse product lineup, and new distribution opportunities provide a solid foundation for top line performance.

  • While there are a number of competitive concerns for online travel agency businesses, in general, we believe we are well-positioned to continue to deliver solid earnings.

  • We have a strong and differentiated brand and service lineup, new services and markets to spur growth, and low-cost operator positioning which has allowed us to deliver more consistent bottom line results than some of our larger competitors.

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

  • - CFO

  • Thanks, Jeff.

  • I'm going to give a brief review of our Q2 results and then I'll finish with some forward guidance.

  • Let me start with our Q2 gross bookings metrics, which came in within the range of guidance that we gave last month when we announced our acquisition of Bookings B.V.

  • As Jeff mentioned, gross bookings of $569.5 million represented a 20.3% growth year-over-year, and is reflective of the continually increasing contribution that retail services and geographic expansion are having on our results.

  • This is an operational dynamic that we have experienced for a number of quarters and we believe that our acquisition of Bookings B.V., which was completed on July 14, will further increase our participation in the larger retail markets, as well as in the faster growing international markets.

  • Before I move on to the rest of the income statement, I want add a few more details to the organic gross bookings growth that Jeff mentioned just a moment ago.

  • This is a metric that we have provided the past three quarters to give investors a clearer indication as to how all of our continuing operations, including those we were acquired within the last 12 months, have been growing on a year-over-year basis.

  • I highlight the words "continuing operations" because this organic growth rate metric has always excluded gross bookings associated with our Orbitz hotel merchant affiliate relationship, which, as we previously announced, was restructured at the end of the second quarter.

  • This relationship was responsible for approximately $18 million and $37 million of gross bookings during the second quarter and six-month periods of 2005.

  • As we mentioned in our press release, we have restructured our deal with Orbitz such that Orbitz is now pursuing their own merchant hotel relationships with the former hotel owners of Travelweb.

  • In exchange, Orbitz agreed to enter into an exclusive affiliate relationship with Priceline pursuant to which we will provide opaque travel services to Orbitz customers in 2006.

  • From a financial perspective, this will result in lower gross bookings in the second half of 2005 than we otherwise would have reported, but the impact on our bottom line is expected to be relatively minimal given the financial terms of the deal and the fact that we will see a commensurate decrease in the commissions that we were paying to Orbitz.

  • And we're particularly excited about extending our relationship with Orbitz and, hopefully, generating significant opaque gross bookings together in 2006.

  • And a few other comments about our gross bookings.

  • Gross bookings from our international operations totaled approximately $77.5 million in the quarter.

  • Substantially all of these bookings were generated within Europe and were hotel-related, and the vast majority of these gross bookings came from Active Hotels, which was acquired in the third quarter of last year.

  • Our organic year-over-year growth in international gross bookings, assuming we owned Active Hotels for a full year, represented a year-over-year increase of approximately 65%, which we believe makes us one of the fastest, if not the fastest growing online travel players in Europe.

  • Domestic organic gross bookings growth, excluding the aforementioned Orbitz affiliate relationship, represented a year-over-year increase of 3.4%.

  • Revenue of $267 million included $12 million of revenue generated from our international operations.

  • Our pro forma gross profit of $65.6 million, which excludes approximately $340,000 of non-cash acquisition-related amortization expense, included $11 million of gross profit from our international operations.

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

  • As for operating expenses, our advertising expense, consisting of our online and offline advertising activities, came in below our range of guidance.

  • For the first time in a number of quarters, we felt that we were not getting an adequate return given the level of our offline advertising investment, and so we elected to curtail some of our television advertisements during the back half of the quarter and divert a portion of those dollars towards online advertising.

  • This is one of the principal reasons for why our EPS came in at the very top of our range of guidance despite a shortfall in our expected gross profit.

  • Due to our decision to limit TV advertising during the quarter, the mix of our total advertising expense was slightly more weighted toward online than originally planned, as we focused a larger percentage of our advertising dollars towards our retail hotel services, which are driven primarily by online advertising.

  • Our other fixed expenses, which are comprised of personnel costs, G&A, information technology, and depreciation and amortization, collectively came in roughly $1.5 million less than our previous guidance.

  • The better than expected performance on expenses was driven by lower than expected personnel costs primarily associated with lower employee bonus expenses, partially offset by higher G&A expenses driven by litigation related activities.

  • We also recognized approximately $400,000 of income below the operating income line from income associated with Priceline Mortgage, which had a relatively strong quarter of mortgage originations.

  • Our pro forma income tax expense came in slightly higher than planned, consistent with our over performance on the pre-tax income line item.

  • We reported pro forma net income of $0.41 per share, which came in just outside of the high end of our previous guidance, and above first-call consensus estimates of $0.37 per share.

  • It also represented a 28% increase over last year's second quarter results, and a 34% year-over-year increase for the first six months results.

  • We reported GAAP net income of $0.29 per share, which was affected by a total of 4.4 million of net expenses, substantially all of which were non-cash in nature, as well as by the inclusion of 5.75 million shares of unissued common stock associated with our two convertible note offerings that we are required to use in the calculation of our GAAP EPS.

  • These shares are not issuable unless our stock price reaches a level of approximately $40 per share.

  • All of these pro forma adjustments that I just reviewed were in line with out prior guidance.

  • As for cash and cash flow, we had another good quarter in terms of cash generation.

  • We began the quarter with $265.9 million of cash and marketable securities, and we closed the quarter with $277.9 million of cash and marketable securities, representing an increase in cash of $12 million for the quarter, and an increase of cash of $30.2 million for the first six months of 2005.

  • Total capital expenditures in the quarter were approximately $2.1 million.

  • Now for a couple of quick comments on guidance.

  • Keep in mind that our guidance includes expected results from our acquisitions of Bookings B.V., which was acquired on July 14.

  • As Jeff mentioned, we are very excited about this acquisition because we think it is a hand-and-glove fit with our existing European operations.

  • Among many attractive elements to this acquisition, Bookings B.V. brings us significant market presence in European countries where we had not yet achieved critical scale.

  • Bookings B.V. also brings us unique hotel supply relationships that, when combined with our existing European relationship, give us what we believe is the widest breadth of hotel supply in all of Europe.

  • And, perhaps most importantly, just as was the case with Active Hotels, Bookings B.V. has an outstanding Management team.

  • They bring to the table unique talents that are very complementary to our management structure.

  • They've already assumed important senior positions within our European management team and are making significant contributions to our entire European enterprise.

  • With that little proviso, let me give you some fairly specific guidance for the third quarter and then some general full year EPS guidance.

  • We're looking for total third quarter gross bookings to grow by approximately 35% on a year-over-year basis.

  • While I'm not going to give specific guidance on domestic and international bookings, I can say that we expect our international bookings to more than double on a quarterly sequential basis, substantially as a result of the inclusion of a results of Bookings B.V. that we will recognize for the 79 days of the third quarter under our ownership.

  • We expect revenue to grow by approximately 2.5% on a year-over-year basis.

  • We expect pro forma gross profit dollars to grow by approximately 40% to 42% on a year-over-year basis.

  • As for Q2 operating expenses, we are targeting consolidated advertising expenses of approximately $25 million, with approximately 65% of that amount being spent on online advertising.

  • We expect sales and marketing expenses of between $10.8 million and $11.3 million.

  • We expect personnel costs to come in between $10.1 million and $10.6 million.

  • We expect G&A expenses of approximately $4.7 million to $5.2 million, information technology costs of approximately $2.4 million to $2.7 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.

  • The midpoint of this range represents a 30% increase over last year's third quarter pro forma EPS.

  • Pro forma EPS excludes the diluted impact of approximately $0.03 to $0.04 associated with the adoption of EITF 04-08, which, as I mentioned earlier, 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 analyst represented in our first call consensus EPS estimates.

  • Our pro forma EPS forecast includes an estimated cash income tax expense of approximately $1.25 million, comprised of alternative minimum tax in the United States and income taxes in Europe.

  • One further comment on income taxes.

  • Those that have followed us for a long time are generally aware that Priceline benefits from a very substantial tax net operating loss asset, which but for minimal alternative minimum taxes, has fully shielded our historical earnings generated within the United States from the payment of cash taxes.

  • This is a benefit that we will continue to enjoy for many years to come.

  • Given Priceline's historically volatile earnings history, we have maintained a full balance sheet reserve against this deferred tax asset, and, therefore, historically we have not recognized any significant GAAP income tax expense.

  • However, due to our recently increasing profits and the associated stability and the volatility and predictability of these profits we believe we are approaching a point where we may be required to reverse a portion of the balance sheet reserve.

  • If and when this event occurs our, GAAP net income will be substantially augmented by the impact of the reversal in the quarter in which it occurs, and then in subsequent quarters our GAAP net income will be reduced by GAAP income taxes that will be booked against the deferred tax asset.

  • Both the increase in GAAP net income in the quarter in which we reversed the reserve, as well as the decrease in GAAP net income in subsequent quarters from income tax expense, will be non-cash in nature.

  • Accordingly, as has been the case for many quarters, we intend to continue to report pro forma net income on a cash tax basis.

  • In this event that I have described will have no impact on either our historical or projected pro forma earnings.

  • Based on our current projections it is becoming increasingly likely that this event will occur in the third quarter.

  • Again, if the reversal of the deferred tax asset reserve does occur, it will have no impact whatsoever on our cash tax expenses, our cash flow from operations, or our pro forma earnings, but it will have an impact on GAAP results.

  • As for expected GAAP results, I'm not going to be able to give you specific Q3 guidance on this line item because we have not yet completed the purchase accounting associated with our acquisition of Bookings B.V.

  • As was the case with both our acquisitions of Travelweb and Active Hotels in 2004, our acquisition of Bookings B.V. is expected to result in significant and tangible assets that, for purposes of our GAAP results, will generate non-cash amortization expense in future periods.

  • As for full year guidance, we're slightly raising the upper end of our full year pro forma EPS guidance to reflect the over performance in EPS that we delivered in Q2.

  • Accordingly, our previous guidance of $1.20 to $1.28 per share of pro forma earnings is now $1.20 to $1.30 per share.

  • The midpoint of this range represents a 31% increase over 2004 full year pro forma EPS.

  • We are not at this point giving specific line item guidance for the fourth quarter.

  • Finally, I want to point out, as I have done on previous calls, that all of our aforementioned forecasts are based on 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 or Europe, would, in all likelihood, have a negative impact on the travel market, in general, and on our operating results, in particular.

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

  • Operator

  • [Operator Instructions.] Our first question is from Anthony Noto Goldman Sachs.

  • Your question, please?

  • - Analyst

  • Hi, Jeff and Bob.

  • I wanted to focus first on operating margins, pro forma operating margins this quarter, just over 6%.

  • The margins have continued to increase very nicely, especially with some of these accretive acquisitions as they leverage your scale.

  • How should we think about your operating margins long-term?

  • Could this be a high single digit, or a low double-digit margin business, and then I wanted to go back to the organic growth rates you mentioned.

  • If I heard you correctly, it sounds like the organic growth in the U.S. actually may have seen a year-over-year decline.

  • If that's true, could you comment a little bit more specifically on the domestic year-over-year declines, if that was the case, and then last, what do you see over the next 12 to 18 months as it relates to commissions on the agency air business, in terms of potential cost business from either direct connect or the airlines continuing to push down rates?

  • Thanks.

  • - CEO

  • Okay, Bob, why don't you do margins and domestic organic growth, and I'll do [inaudible.]

  • - CFO

  • Yes, Anthony.

  • It's very difficult to -- to give a -- a projected operating margin just because we have not been forecasting anything beyond -- at this point, the fourth quarter of 2005.

  • And that -- I will also say that what our ultimate operating margins are are going to be partly reflective of whatever our mix is going to be of -- of merchant versus agency and -- and opaque versus retail.

  • As you know, our opaque products where we are -- are -- are charged with the task of setting the price, among other things, of the product that we're sold, we recognize the full amount of the transaction as revenue where as on our retail services we essentially recognize only the net amount, the net amount of fees that we earn.

  • So the operating margin is ultimately going to be driven much more, if anything, by the mix of what that business is in the future.

  • As for the long-term operating margin expressed as a percentage of either gross profit dollars, or gross bookings, we're just not in the position at this point the give you much color on that.

  • - Analyst

  • Okay.

  • - CFO

  • As for domestic growth, we did not decline domestically.

  • The domestic organic growth was 3.4% year-over-year.

  • - CEO

  • And as to commissions on -- on agency business, I think we -- we've said previously that there -- there has been pressure and we expect there to continue to be pressure on the GDS economics that -- online travel agencies currently enjoy as the airlines try to push down the costs that they pay through the GDSs, the GDSs are looking for ways to mitigate the impact of -- of that pressure on them.

  • I think we're positioned a little bit uniquely because we have an opaque product that is marginable by us and, therefore, we have more to offer the airlines than just the straight distribution of a retail airline ticket, so we've got a little bit more -- more options in terms of trying to structure deals that are win-wins for both the airlines and ourselves, but it's our expectation that that pressure will continue, and I think the numbers that you've seen reported by us and by our competition reflects pressure on those retail airline margins.

  • - Analyst

  • Great.

  • Thank you.

  • Operator

  • The next question is from Justin Post of Merrill Lynch.

  • Your question please?

  • - Analyst

  • Thank you.

  • Can you tell us a little bit -- I know you gave some breakout on the gross profit number.

  • Any guidance you can give us, or help, on the decline from the opaque air on gross profit on a year-over-year basis?

  • And then secondly, the cash to acquire Bookings B.V., can you talk about is that all cash and what effect will that have on your income statement going forward?

  • - CEO

  • You know, I don't think we've broken out the absolute dollar declines in -- in the opaque business, but it certainly had an impact on our organic growth and that's one of the reasons the number's at that 3.4% that Bob gave a little bit earlier.

  • As to the second question.

  • - CFO

  • Yeah, we just -- we haven't -- I think we're trying to add as much additional disclosure and you probably noticed, Justin, that with this quarter we've added a lot more disclosure of the relative contribution in terms of revenue and gross bookings of our international operations versus our domestic, and we thought that was important, given the increasing exposure that we have internationally as a result of the acquisitions, but we just -- we haven't gotten into giving every bit of, you know, revenue and gross profit by each of the individual services that we offer.

  • We have continued to give unit sales of each of the services that we offer, but we have not and we are not going to be in the habit of breaking it out versus opaque and retail, especially given how integrated those offerings have become on our website.

  • You know, as for -- as for the cash associated with bookings, the -- the purchase price for bookings was 109 million Euros.

  • We financed that all with cash, but with a significant reinvestment by the Management at Bookings.

  • So they took a portion of the proceeds that they earned from the sale of the Company and reinvested it back into Priceline Europe, which is a holding company which consists now of Priceline.com Europe, Active Hotels Europe, and Bookings Europe.

  • They invested approximately $24 million back into that -- back into that acquisition.

  • So the way to look at it is a purchase price, a little north of $130 million of cash minus the $24 million reinvested by Bookings, if you're trying to figure out where our cash balances are, say, as of today.

  • - Analyst

  • And one last one, can you quantify the NOL that you have as of now?

  • That will be it.

  • - CFO

  • Yes, the way to look at our NOL is the first $69 million of net income, or pre-tax income, generated within the United States is -- is fully shielded from federal income tax with the exception of the alternative minimum tax where we've been running an effective tax rate of approximately, anywhere from 1% to 3% in any given quarter.

  • Now, in Europe we are a taxpayer.

  • Those NOLs do not shield European income.

  • We have generated some -- some tax shield associated with assigning intangibles, acquisition related intangibles, in Europe as well as some potential intercompany tax sharing arrangements, but we will be a taxpayer in Europe.

  • And so from a U.S. perspective, very little tax to be paid and in Europe, as we make more money there, you should see an increasing amount of cash taxes being paid.

  • - Analyst

  • Thank you.

  • Operator

  • Our next question is from Scott Barry of Credit Suisse First Boston.

  • Your question, please?

  • - Analyst

  • Thanks.

  • Just a couple questions, Bob.

  • You mentioned Active.

  • Was Active substantially all of the 78 million in international gross bookings in the quarter?

  • - CFO

  • Yes.

  • There's a little bit from Priceline Europe.

  • Historically, we have not provided gross bookings from Priceline Europe, but now that we're going to be providing international bookings we have now included that and you'll see in -- in our statistical supplement there's a slight difference in the historical gross bookings versus what you've seen historically, and the net difference there is basically Priceline Europe.

  • You'll see that's amounted anywhere from $1.5 million to $3 million of gross bookings per quarter.

  • So very minimal, as I said, the substantial majority of those bookings came from Active.

  • - Analyst

  • Great.

  • So that international revenue number you gave

  • - CFO

  • Yes.

  • International revenue of approximately $12 million.

  • - Analyst

  • Okay.

  • - CFO

  • And the substantial majority of that came from Active.

  • - Analyst

  • So that would imply some significant outperformance at Active, particularly in terms of the net revenue yield.

  • Is that a seasonal dynamic where that net revenue yield, or the revenue is a percentage of gross bookings is up, you know, 500 basis points sequentially?

  • - CFO

  • Keep in mind, I should first point out that that $12 million, when I say that -- that does include Priceline Europe and that's opaque revenue and as you know, we recognize opaque revenue on a gross basis, so you may want to focus more on the gross profit dollars of $11 million, and that's the number you should look at relative to gross bookings, but to your point, if you look at that number relative to gross bookings you should certainly see a sequential improvement versus Q1.

  • We talked about this in Q1 and I think some folks were maybe a little bit alarmed at a low percentage rate of gross profit dollars relative to bookings, and as I said on that call, that was more illustrative as how quickly Active has been growing its bookings and we recognize revenue on a when-stayed-basis, and bookings on a when-booked-basis.

  • So as long as bookings are accelerating, you will see a number that is artificially low if you're looking at the percentage of revenue expressed as a percentage of bookings.

  • - Analyst

  • Great.

  • And then two more, if I might, have you done anything to try to shift Priceline, prior Priceline Europe traffic to Active, or is that all organic growth at Active hotels?

  • - CEO

  • If you look at the Priceline.co.UK website today you'll see that the primary offering is now a disclosed offering powered by Active Hotels, and that's driven an improvement in conversion of Priceline.co.UK.

  • The opaque business is still there, we're still selling it, but the website is definitely generating some traffic for, for Priceline Europe.

  • - CFO

  • And that -- and that happened during -- really toward the latter half of the second quarter so when you're looking at -- if the question, Scott, is how much of the 77 is a result of a whole bunch of synergystic behavior between Active and Priceline, I would say the answer is very little.

  • We think that's a big opportunity going forward but it's really not on the Q2 numbers.

  • - Analyst

  • Okay, great, and then one last question, the merchant revenue is a percentage of merchant gross volume.

  • That had been declining year-over-year, in part because of the impact of Travelweb.

  • Would you expect that number to flatten out here, or do you think that that number may continue to -- to decline a little bit?

  • - CFO

  • I'm sorry, Scott, which metric are you talking about?

  • - Analyst

  • Merchant revenue as a percentage of merchant gross bookings.

  • - CFO

  • Yes.

  • I think that we have now started to comp Travelweb on a year-over-year basis you will see more of a stability there, and as I mentioned, we -- if you looked at our first six months results, that includes a lot of both revenue and gross bookings associated with our Orbitz relationship. 100% of the Orbitz relationship was represented by merchant's bookings.

  • There were really no agency bookings there, so as I said in my remarks, you'll see a -- obviously, a very significant quarterly sequential decline in those bookings in that revenue, although again, shouldn't have that big of an impact on our bottom line given that we were paying a fairly significant commission to Orbitz.

  • And again, I can't -- I'll just reiterate that that was done in the context of a -- of a hold deal whereby we're looking forward to providing opaque services to Orbitz in 2006.

  • So there was a little bit of a trading off -- trading off of bookings and revenues this year for bookings and revenue next year.

  • - Analyst

  • Okay.

  • Very helpful.

  • Thanks.

  • - CFO

  • Thank you.

  • Operator

  • Our next question is from Jake Fuller of Thomas Weisel.

  • Your question?

  • - Analyst

  • Good afternoon.

  • Could you give me a sense of how big GDS incentive revenue is for you?

  • And directionally, you know, up or down how much do you expect them to -- to maybe share the pain with you?

  • Have they talked about alternative models?

  • - CEO

  • You know, Jake, we have not broken out that level of detail and I'm not comfortable getting into a sort of forecasting of what those negotiations might be, because they're ongoing.

  • - Analyst

  • Okay.

  • In Terms of the Commission Rates On the Retail Business, Can You Give Me a Sense of What Active and Bookings B.V. together might look like?

  • I assume that the pulldown on bookings is going to be higher than it would be for your domestic business?

  • - CEO

  • I -- I think if you -- if you look at the -- the revenue and gross bookings numbers that we've -- we've published for Active and Bookings separately, you can glean that Bookings operates at a slightly lower margin than Active Hotels does.

  • I think there's an opportunity there over time to perhaps improve the percentage margin that the Bookings guys get over time, especially for hotels where they participate in both systems at different rates, but -- but we think the larger opportunity is really just to continue the organic growth of both of the businesses and -- and any margin improvement is something that we can look after over time.

  • - Analyst

  • Now, are both of those though, earning a higher commission rate than you get on your U.S. retail business?

  • - CEO

  • Yes, it's certainly a higher commission than domestic agency business.

  • It's not a higher margin than domestic merchant business.

  • - Analyst

  • Got it.

  • Okay.

  • Thanks.

  • - CFO

  • And I think it's also worth adding that it -- both Active -- while Active is higher than Bookings, their commission rate is higher, both are significantly lower than all of our competitors in Europe who are pursuing the merchant model over there.

  • So I think what -- what we feel good about is we are having -- the conversations, the types of conversations we're having here is how do we manage our commission rates, should we take them up.

  • It's, we feel very much like we're not under pressure to bring them down, which again, was something that unfolded very rapidly here in the U.S. so we feel very good about where our commission rates are relative to the market.

  • - Analyst

  • Thank you.

  • Operator

  • Our next question is from Imran Khan of JP Morgan.

  • Your question, please?

  • - Analyst

  • A couple of questions.

  • First, it seems like airline tickets units sold were down year-over-year basis.

  • If you can help us to understand that a little better?

  • And secondly, the terrorist attack in Europe, have you seen any impact in your European bookings in the month of July, and, if so, that rebounded and then I have a followup question.

  • - CEO

  • Sure.

  • In terms of airline tickets, the tickets are down, principally because the decline in the number of tickets we sold on the opaque side exceeded the increase in the number of tickets we sold on the retail side.

  • It's really just a -- it's an easing of the retail growth rates now that we're comping against a period when we were up and running at retail with the support of significant advertising and really running at very high growth rates last year.

  • Our comps have now become more difficult and the deterioration of the opaque tickets, as we mentioned in our remarks, has continued.

  • In so far as the impact of the terrorist attacks, it's very difficult with -- with growing businesses to -- to gauge the impact of -- of the attacks we -- we have not seen anything that tells us over the long-term across Europe that there's -- that there's a significant impact from the attacks.

  • I think there has been some short-term impact on bookings in London, in particular, but it's very hard for us to discern a material long-term trend from any of that.

  • - Analyst

  • In terms of, Jeff, you talked about opaque business being down but it's still in line with expectation.

  • Can you quantify how much it was down year-over-year basis?

  • Thanks.

  • Or give us some color on that?

  • - CFO

  • Yes.

  • Without sort of putting -- again, we don't want to get into the habit of giving individual sub-metrics by product, but we've been saying for quite a number of quarters that our opaque airline ticket business had been declining at significant double digit rates.

  • That continued to be the case in Q2, although I will say that we've started to reach a point where the business -- I think we actually reached it quite some time ago that the business has reached a small enough level that it's not materially impacting our overall financial results.

  • I'd also say it's reached a level where, take for instance, on a quarterly sequential basis, we did see our opaque ticket business increase on a quarterly sequential basis.

  • - Analyst

  • Great.

  • Thank you.

  • Operator

  • Our final question is from Aaron Kessler of Piper Jaffray.

  • Your question, please?

  • - Analyst

  • Just a couple of questions.

  • On retail hotel products, did we say incremental gross profits in the quarter [inaudible] and then, also, I assume the 3.4% domestic growth you referred to, that was revenue growth and gross profit growth organically year-over-year for that, as well?

  • Thanks.

  • - CEO

  • As to the first question, we've -- we have seen incremental gross profit from the retail hotel business.

  • There definitely has been some cannibalization of our opaque, but remember on a one-for-one basis that cannibalization itself is probably accretive to our gross profits because it's a higher ADR and the margin structures are just not that different.

  • So it's -- we're definitely getting contribution.

  • Another example of where we're getting contribution is the business that we're getting from online channels, we, as Bob mentioned in his remarks, we increased our spend in the online channels for hotel in particular.

  • We lead with the retail product in those channels, and we've seen a significant uptick in conversion and retail room nights booked from those efforts.

  • However, the number of opaque bookings that we're getting from these online channels has remained fairly constant, so we believe that a lot of the business that we're getting on the retail side from the online channels is -- is really very much incremental.

  • - Analyst

  • And -- and the 3.4%?

  • - CEO

  • Aaron, that was a gross bookings number, the organic domestic only gross bookings was up 3.4%.

  • We did not give similar -- we didn't give a similar organic growth rate for revenue and gross profit dollars.

  • - Analyst

  • That will be in the 'Q' though, we assume?

  • - CFO

  • We're not doing the organic growth, but we will be breaking out, for instance, the contributions of acquisitions

  • - Analyst

  • Right.

  • - CFO

  • Through our results as we did in the last quarter.

  • - Analyst

  • Okay.

  • Great.

  • Operator

  • This concludes our question-and-answer session.

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

  • This concludes the program.

  • You may now disconnect.

  • Good day.