Booking Holdings Inc (BKNG) 2005 Q3 法說會逐字稿

Welcome to priceline.com, Third Quarter 2005 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 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 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 fillings with the Security 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.

And now, I'd like to introduce the Priceline speakers for today -- for this afternoon, Jeff Boyd and Bob Mylod.

Go ahead, gentlemen.

Thank you very much.

Welcome to Priceline's Third Quarter Conference Call.

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

Priceline significantly out performed our original expectations in the third quarter of 2005, due to strong growths in our European operations and solid domestic results.

Gross bookings of $611 million were up 40% year-over-year.

Pro-Forma Gross Profit of $80.9 million was up 57% and Pro-Forma Net Income was $19.3 million or $0.47 per share, up 68% over last year.

Third quarter results include results of Active Hotels acquired in September of last year and 79 days of results from Bookings B.V. acquired in July of this year.

Priceline's organic gross bookings growth rate in the third quarter of 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 22%, a significant improvement from the 9% reported in the second quarter primarily due to the acquisition of Bookings B.V. and evidence of the growing importance of our European operations.

Priceline's European business had an excellent quarter, with $165 million in gross bookings up approximately 76% organically versus last year and a sequential improvement from 65% in the second quarter due to the inclusion of Bookings B.V.

We experienced particularly strong growth rates in Continental Europe as compared to the more mature U.K. market where growth rates are lower and the London market was negatively impacted by the subway bombings in July.

We believe there is great promise in this growing market, and Priceline Europe is in a strong position to lead with what we believe is the largest proprietory inventory and strong distribution.

Despite the substantial investment being made in building European supply and distribution, the business is making a material contribution to our overall profits.

We are also excited by the opportunity to integrate the Active and Bookings inventory and cross-sell European and U.S. inventory which should benefit next year's results.

We announced today that Stef Norden is assuming the role of CEO of Priceline Europe.

Andy Phillips will remain as a Director of Priceline Europe.

Stef and his team have done a terrific job building Bookings B.V. and I think all of our European team will do a great job in his expanded role.

Priceline's third quarter domestic gross bookings increased 5% over the previous year, a slight improvement from the second quarter.

Merchant gross bookings decreased 4% versus last year due to continued shrinking of the opaque air business.

A reduction in Orbitz sales for Travelweb under the contract amended previously announced and the continuing shift in mix from opaque to retail services tied to the launch of retail choice options and shop and compare advertising earlier this year.

While there is no doubt that the new service and advertising cost some opaque sales, organic retail hotel sales, excluding Orbitz, more than doubled year-over-year for each of the last two quarters and now represents over 17% of total domestic hotel gross bookings.

Growth and gross profit contribution from the combined opaque and retail domestic hotel business benefited from this retail growth as well as strong ADRs and stable margins.

Rental car unit sales increased 24% due to strength in both opaque and retail sales.

Priceline's total airline ticket sales decreased 6% due to reduced opaque ticket sales.

As you can see form our strong consolidated results this quarter, declining gross profit contribution from the opaque air service is having a lesser impact on overall business results given the size of that business today.

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.

That said, we believe the opaque air service still presents unique revenue management opportunities for airlines and unique savings opportunities for consumers.

We are working with our airline partners on ways to build inventory for Priceline and improve distribution costs for airlines.

We are also working on an improved interface and functionality in support of the airline ticket service.

I also wanted to note that Priceline Mortgage contributed to income with a better than expected third quarter.

We continue to be pleased with Priceline Mortgage's ability to profit when short-term changes in interest rates stimulate refinance -- refinance activity.

We aimed our marketing efforts in the third quarter at driving demand for the new retail hotel service.

We are particularly pleased with the results of our online hotel campaign where the new service is converting well and with the results from $10 AMEX Retail Hotel promotion, run in the quarter, which was successful in driving significant new consumer trial of the service.

Looking forward there are a number of significant new marketing opportunities we intend to pursue.

We plan continuous website improvement and new service functionality and a tighter linking of our offline marketing message and the user site experience.

We intend to increase online marketing efforts given the massive content added over the past year.

We intend to drive white label market share gains with our New FlexRez(sm) Product and best-in-class inventory.

And we also intend to build cross-Atlantic sales of European and U.S. inventory.

In our opinion, this represents a very substantial market opportunity.

With the complete repositioning of our public company peers now in view, following the announcement of Cendant's spinoff of its travel business, the significant differences, for better or worse, between Priceline and its competition are very clear.

Our third quarter results underscore these differences.

Our brand is rooted in consumer savings and our service mix and presentation reflect that fact.

We have a lean cost structure and a relatively transparent and consistent mix of business.

Our tradition of supplier friendliness has created positive supply dynamics in an otherwise tense environment and as a result we have best-in-class inventory.

Our European hotel business is different for both suppliers and consumers and those differences are driving significant growth.

We are not tied by corporate ownership to any GDS, and thus our motivation to build the business is absolutely single-minded and our financial future is not directly tied to the fundamental prospects for the GDS.

We are smaller, which means that sound business execution and opportunistic transactions can make a bigger immediate difference to our results and we should be more nimble to grab business opportunities unfettered by daunting multi-platform integration imperatives.

We believe that on balance these differences are a strong net positive for Priceline; and that to view our prospects as a derivative of or tied to industry peers would be a mistake.

Given the opportunities before us, we believe we are well-positioned to prosper in 2006 and beyond.

Accordingly, our Board has authorized the company to repurchase up to a total of $50 million of Priceline stock.

With purchases being subject to management's discretion.

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 Q3 results and then I'll finish with some fourth quarter guidance.

Let me start with our Q3 gross bookings metrics which came in well in excess of the guidance that we gave on our Q2 earnings call.

As Jeff just mentioned gross bookings of $611 million represents 40% growth year-over-year.

We're particularly gratified that the over performance came from both our domestic and our European operations.

Domestically our gross bookings grew by 5% year-over-year despite the fact that bookings from our opaque airline business and bookings from our restructured hotel affiliate relationship with Orbitz declined by approximately $25 million on a year-over-year basis.

Bookings from retail services and a strong rebound in rental car sales more than offset those declines.

In Europe continued great execution by our management team coupled with outstanding overall market dynamics allowed us to generate bookings that comfortably exceeded our $155 million-plus guidance.

Revenue of $258.8 million included $27.8 million of revenue generated from our international operations.

Both of those numbers exceeded our prior expectations.

The over performance was consistent with the over performance on the gross bookings line.

In addition, revenue in Europe came in even higher than gross bookings would suggest primarily due to seasonal factors that I want to take a moment to describe in more detail.

As most of you know, we report gross bookings for virtually all of our businesses including our European business at the time that our customers book their reservations.

For our retail hotel service in general and our European hotel service specifically, we recognize revenue not when the customer books his or her reservation but rather when the customer checks out of his or her hotel room.

Because third quarter represents a substantially disproportionate share of full year travel consumption our revenue in Europe increased at a faster quarterly-sequential rate than our gross bookings.

Said differently, customer room night checkouts were greater than consumer room night reservations booked in the quarter.

This is the principal reason for the fairly large increase in our net revenue expressed as a percentage of gross bookings for the quarter in Europe.

In addition, our core net revenue margins also increased modestly on a sequential basis.

This is not seasonal in nature, and it is our hope and expectation that we will hold on to this increase in net margin on a go-forward basis.

Our Pro-Forma Gross Profit of $80.9 million which excludes approximately $900,000 of non-cash acquisition-related amortization expense, included $27.1 million of gross profit from our international operations.

Our core gross margins in all of our respective businesses remained fairly steady.

As for operating expenses, our advertising expense of $27.2 million came in higher than our previous guidance.

The increase was driven almost entirely by increases in online advertising primarily associated with our European and domestic retail hotel services.

As has been the case for a number of years, we took the opportunity to invest a portion of our gross profit dollar over performance back into advertising.

And with the momentum that our retail hotel services have demonstrated, we focused this investment in their direction.

Our other operating expenses collectively came in roughly $1.5 million higher than our previous guidance.

The variance was driven almost entirely by higher compensation costs associated with an accrual for performance-related employee bonuses that are expected to be paid at year end.

Our Pro-Forma Income Tax Expense came in higher than planned -- consistent with our over performance on pretaxed income.

And finally as Jeff just mentioned, Priceline mortgage quietly delivered a very strong quarter of earnings and our share of those earnings essentially offset the minority interest expense associated with our Priceline Europe operations.

We reported Pro-Forma Net Income of $0.47 per share, which came in well in excess of the high end of our previous guidance and 27% higher than First Call consensus estimates of $0.37 per share.

It also represented a 68% increase over last year's third quarter results.

I think it's also worth noting that with one quarter left in the year, our first nine months Pro-Forma Net Income of $1.09 per share is already 14% higher than last year's full-year Pro-Forma Net Income per share.

We reported GAAP Net Income of $3.71 per share for the quarter, which was affected by several items that I'd like to quickly review.

The biggest item by far was the reversal of a balance sheet reserve against our deferred tax asset.

This item had the affect of increasing our GAAP Net Income by a total of approximately $160 million.

I mentioned on our Q2 earnings call that this event might occur, but for those you that are new to the Priceline story, I'll quickly reiterate the circumstances that have led to this event.

Our balance sheet contains 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.

However, given Priceline's historically volatile earnings history, which included many years of lawsuits, we had maintained a full balance sheet reserve against this deferred tax asset.

And therefore historically, we had not recognized any significant GAAP Income Tax expenses in years in which we had achieved pretax income.

However, due to our profitability in recent years and the likelihood that our U.S. operations will achieve future sustained profitability, we concluded in the third quarter that it was appropriate to reverse a portion of the balance sheet reverse.

As you can see, this had a dramatically positive impact on our GAAP Net Income for the quarter.

As we said would be the case on our last earnings call, we're eliminating this positive impact from our Pro-Forma EPS because the benefit is non-cash in nature and will only be truly realized as we generate future taxable income within the United States.

On a go-forward basis our GAAP Net Income will be reduced by income tax expenses that will be booked against the deferred tax asset.

Both the increase in GAAP Net Income this quarter, 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 intent to continue to report Pro-Forma net income on a cash tax basis -- and this event that I have just described will have no impact on either our historical or projected Pro-Forma Earnings.

Our GAAP results were also negatively impacted by approximately $5 million of acquisition-related amortization expenses primarily associated with our acquisitions of Travelweb, Active Hotels, and Bookings B.V., $1 million of convertible preferred-stock dividends, and $1.3 million of stock-based compensation expense.

All of these expenses were non-cash in nature.

We also took a onetime $2 million restructuring charge in the third quarter related to future lease commitments that we have on abandoned office space.

And finally, our GAAP EPS results were negative impacted by the inclusion of 5.76 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.

As for cash and cash flow, we began the quarter with $277.9 million of cash and marketable securities and we closed the quarter with $175.6 million of cash and marketable securities representing a decrease in cash of $102.3 million for the quarter.

As you know, we invested approximately $114 million to acquire Bookings B.V. during the quarter.

Excluding cash used to acquire Bookings B.V., our cash balances increased by $11.7 million during the quarter and they have increased by approximately $42 million for the first nine months of 2005.

Total capital expenditures in the third quarter were approximately $1.8 million.

And now for a few comments on guidance.

We're looking for total fourth quarter gross bookings to grow by approximately 25% 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 both our domestic and international bookings to decline on a quarterly sequential basis consistent with seasonal patterns.

We expect revenue to grow by approximately 5% on a year-over-year basis.

We expect Pro-Forma Gross Profit dollars to say grow by approximately 25% on a year-over-year basis.

As for Q4 operating expenses, we're targeting consolidated advertising expenses of approximately $21 to $22 million, with approximately 75% of that amount being spent on online advertising.

We expect sales and marketing expenses of between $7.9 and $8.2 million.

We expect personnel costs to come in between $11 and $11.5 million.

We expect G&A expenses of approximately $5.1 to $5.4 million, information technology costs of approximately $2.5 to $2.7 million, and depreciation and amortization expense, excluding acquisition-related amortization, of approximately $2.5 million.

We're targeting Pro-Forma EPS of approximately $0.24 to 0.28 per share.

The midpoint of this range represents an 18% increase over last year's fourth quarter Pro-Forma EPS and a 40% increase in full-year 2005 Pro-Forma EPS as compared to 2004.

Our Pro-Forma EPS forecast includes an estimated cash income tax expense of approximately $1.7 million comprised of alternative minimum tax in the United States and income taxes in Europe.

It also includes approximately $700,000 of combined interest and minority interest expense.

As for expected GAAP results, we expect to report GAAP EPS of approximately $0.06 to $0.10 per share.

The main differences between our GAAP and Pro-Forma results will be driven by the aforementioned inclusion of non-cash stock-based compensation, acquisition-related amortization, and income tax expense.

I'd also like to point out as I did last quarter that our fourth quarter Pro-Forma EPS estimate includes the negative impact associated with our restructuring of our Orbitz agreement at the end of the second quarter of this year.

The new agreement had the affect of reducing our revenue and EPS in the fourth quarter of this year.

In the fourth quarter of last year, we estimate that the old Orbitz Hotel affiliate agreement generated between $0.02 and $0.03 of our $0.22 of total EPS.

And in this year's fourth quarter, we estimate that the Orbitz Hotel affiliate agreement would have generated an additional $0.02 above and beyond the guidance that I'm giving today.

We made this tradeoff in order to secure what we hope will be a very successful affiliate relationship with Orbitz, pursuant to which Priceline will become Orbitz's exclusive provider of opaque services for airline tickets, hotel rooms and rental cars in 2006.

So in a very real sense, we traded off some revenues in the fourth quarter of this year in exchange for hopefully more revenues next year.

Which brings me to the subject of next year's projected earnings.

We're not at this point going to give 2006 earnings guidance, but I will say that growth drivers such as our European operations, our broad array of retail services, and an integrated and completely unique marketing message give us confidence that there is plenty of bookings and earnings growth in Priceline's future.

Assuming we hit the midpoint of our Q4 guidance for this year, we will have grown our Pro-Forma EPS by 100%, 100%, and 40% for the last three years respectively.

Thus delivering our investors a three-year compounded average growth in Pro-Forma EPS of 78%.

While we don't expect to continue to achieve such heavy growth rates on a go-forward basis, we certainly believe that we have many opportunities to grow our business substantially.

And we certainly hope that our third quarter results are demonstrative of the leverage in our expense structure and the earnings power of our business if and when we mine these opportunities.

And as Jeff just mentioned, one of the opportunities that we believe we currently have is to invest in Priceline stock.

Relative to some of the acquisition candidates that we've been evaluating lately, Priceline stock appears to us to represent superior long-term value.

And with our large cash balance and strong cash flow, we intend to capture some of that value for our investors should the opportunity continue to present itself.

Finally, I want to point out, as I've done on previous calls, that all of our aforementioned forecasts are made based upon an assumption that we will continue operating in the consumer travel market that's roughly similar to the current one.

And any geopolitical instability or terrorist event in the United States or in Europe 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?

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Imran Khan, from J.P. Morgan.

Your question, please.

Hi, guys -- congratulations, good quarter.

Questions on your online advertisement cost.

It seems like online advertisement cost went up pretty significantly during the quarter.

I was wondering what made you decide to spend -- increase your spending on online advertisements and are you seeing a better conversion on the online advertisements and which area of online advertisement are you doing, branded or searched?

And secondly, I was wondering, -- I do understand the seasonality part of the business, but you had a very strong growth -- like almost your gross booking rate acceleration and revenue acceleration, but if I look at the guidance, it seems like you are expecting significant deceleration.

So I'm trying a bit to understand the guidance for Q4 -- whether it is conservative or are you seeing anything in the month of October that makes you track like that?

Thanks.

Let me take a stab at those, and maybe Bob can jump in at the end.

On the increase in online advertising costs, the biggest driver of that sequential increase is adding results from Bookings B.V., which gets most of its business through online channels.

And if you look at our business in Europe just in general, it's got very significant affiliate business as well as search business.

So its online distribution is fairly broad.

In terms of the deceleration in gross bookings, I think the principal driver in that is that we are now lapping the acquisition of Active Hotels last year, and so we are comping now against a quarter that included a full quarter's results or most of a quarter's results of Active Hotels.

Yes, I would say because we've now owned Active Hotels for just a little bit more than a year and Bookings for a little -- over a few months, we're still frankly better -- coming to better understand what the seasonal patterns are of our European business relative to the U.S.

It's clear that it's much more seasonal in nature, that the summer months result in much, much greater hotel stays in Europe as compared to the U.S. from a leisure perspective.

So in some sense I think the Q3 results here are reflective of the fact that, as I mentioned in my remarks, the stays were a little bit higher than we expected.

Presumably, some of those stays we were projecting to happen in Q4.

They happened in Q3.

But if you look at the business on a whole for the last six months, the collective business is running very substantially ahead of last year and is projected in Q4 to continue to run very substantially ahead of last year's Q4 numbers.

Okay, and Bob, last question.

You said that your GAAP earnings would be somewhat impacted by tax expenses going forward.

Can you give us some sense how much tax expenses we should build into our model?

Yes, I think for GAAP purposes you should assume that we're essentially a full taxpayer at the prevailing Federal rate.

But again, for cash-tax purposes, which is how we're going to report Pro-Forma Earnings, the alternative minimum tax rate for earnings generated within the United States is anywhere from sort of the 1 to 3% range; and then in Europe we have a little bit of tax shield and a few intercompany -- we have an intercompany capital structure that generates a little bit of tax shield.

But, for the most part we're pretty much a full taxpayer in Europe and the prevailing full rates there are about 30%.

Now, that's not to say again, that if you were to look at our income tax in Europe and divide by 30, that that would get you what our -- 30% that, that would get you what our pretax earnings are in Europe, because it would be missing some of the intercompany arrangements that I just mentioned.

But hopefully, that give you a little bit of help.

Right, thank you; that's very helpful.

Thank you.

Our next question comes from Anthony Noto, from Goldman Sachs.

Your line is open.

Thanks.

Hi, Jeff and Bob -- a couple of questions.

I was wondering if you would comment a little bit on what the impact on the business was both in the quarter and maybe in the outlook from the hurricanes and from the London bombing -- if you could quantify it at all?

And then the second question, I know that you gave the growth rate for the business as if you had owned Bookings B.V. a year-ago.

Could you tell us the ballpark amount of gross bookings that contributed in the quarter?

I have one follow-up on direct connect -- thanks.

Let's me start, Anthony, with the impact of hurricanes and the London bombing.

New Orleans is an important, both business and leisure travel destination, and that's been essentially shut down even though hotels are opening there.

They're generally being used for government and other relief personnel.

The impact of New Orleans in our business was very low single digits in our best estimation, and that's a very soft estimate.

And I think the impact of the hurricanes that affected Florida at least for the time -- for the week or so during which they were there is probably similar, low single digit percentages for those weeks, but they tend to come back pretty, pretty quickly.

As to the terrorists events in London, we did see an impact in reservations in London as a result of the bombings, but Priceline Europe's hotel business is fairly broadly based with the combination of Active Hotels and Bookings, and you could see that they were able to outperform our original expectations on gross bookings growth despite the negative impact of the bombings.

And then on your last question, Anthony, we're really -- we're not in this quarter or in future quarters going to try to attempt to segment what bookings in Europe are coming from Active verses Bookings versus Priceline Europe, because basically the first step we've taken in the integration process is to combine the sales teams and supplies teams from these two businesses and essentially taking an approach of looking at the progress that either company had made in whichever country -- in whichever relevant country we're talking about and focusing our calling cards under the brand that had made the most progress.

So, for instance, in the United Kingdom in London, where Active obviously had a big part of this business, it's very much sort of an Active business.

Whereas in the Netherlands, or Germany, or Spain where Bookings had made more progress, we've essentially curtailed some of the developments efforts at Active towards exploiting those market opportunities.

And so, we really as a management team here, as well as over there, look at Priceline Europe as Priceline Europe and not a combination of three separately run businesses at this point.

Got it, that makes sense.

I was wondering if you could also comment on the need or desire to try to build Direct Connect over time, given the greater mix that you will have on retail error and the industry trends that we may see with airlines and GDSs?

Thanks.

I think that the primary issue in terms of airline connectivity continues to be one of price and not necessarily technology, and that the airlines, if they can get the distribution costs that they believe are appropriate, are going to be less focused on having an absolute direct connect to every major travel agent with which they do business.

Having said that, the playing field here is really very fluid.

These things are being discussed among airlines and GDSs and online travel agents sort of as we speak, and we've got a very open mind and there are just a number of ways we could do it and we wouldn't foreclose ourselves any particular option.

Great, thank you

Thank you, our next question comes from Aaron Kessler, from Piper Jaffray.

Your line is open.

Hi, Jeff and Bob.

Great quarter – a couple questions for you.

Can you give us -- you sound much more optimistic today then maybe you did six months ago on the domestic environment even.

Is the optimism a reflection of some of the new initiatives you were working on or is really a reflection of the overall market picking up?

I think the way I would respond to that question is that six months ago we were on the cusp of launching a new retail hotel service and really could only estimate what the impact of that would be and how -- what the consumer acceptance would be and so forth.

And we now have several months of experience with the product on Priceline, and I think we recognize the opportunities inherent in having just a great product to offer consumers in a variety of distribution channels.

And I think we've got a lot of opportunities ahead of us to really get the presentation of our full product line to customers right and consistent across Priceline on the one hand but also to now use the significant content we have to much better participate in online search channels.

Great, and then can you talk a little just about any of the hotel occupancies, what practices you have for hotel inventory?

Has it changed over the last six months or so?

So, the reported occupancy rates for hotels are high and have been very, very strong, but I must say we've been very pleased with the conversion we've been able to experience on our opaque Name Your Own Price hotel product, which continues to be very, very solid.

We just haven't seen up until this point a material negative impact of high occupancies on our overall opaque conversion.

On the retail side, we generally have solid inventory and it's very, very competitive with what the rest of the market has.

We think our distribution channel is among the most attractive for the hotels because the Travelweb model was the one they built for themselves.

And so inventory has been, has been good despite higher occupancy rates.

Okay, and then quickly on the Travelweb, any comments on how that's doing in the quarter?

Well, as I mentioned in my prepared remarks, if you back out the changes in the Orbitz deal that Bob discussed in detail, that business -- the retail business at Travelweb has grown at 100%-plus in each of the last two quarters.

So, we've been able to build that into a significant business in a short period of time.

And as I said in my remarks it's now 17% of our total hotel gross bookings so it's moving the dial.

Right.

And I'd also point out as I did on the earlier question about our European operations segments of it.

We really at this point don't look at Travelweb as a business or a business segment.

We think of it as our Priceline Hotel Retail Service.

Travelweb had been headquartered in Dallas, Texas.

Those headquarters have been shut.

We don't have presence down there anymore.

We run it all from here, and it's really part of -- it's no longer Travelweb, it's Priceline Hotel Retail Services.

Great, thank you.

Thank you, our next question comes from Jake Fuller, from Thomas Weisel Partners.

Your line is open.

Okay, good afternoon guys.

Question for you on the retail hotel product launch.

I guess last quarter you maybe expressed some reservations about how the initial part of that marketing campaign went or the response to that campaign.

You throttled back the advertising a little bit.

It looks like you put some advertising back in behind that program.

Are you seeing something different?

Jake, we were satisfied with the response to the initial product launch, but the problem was that it was not as big a hit as the retail air launch, and we explained why we thought that might be the case before we did the launch.

But, I don't think we really were disappointed with the consumer acceptance of the product.

We just didn't have the instant homerun that we had when we relaunched the air product.

What we've seen in the last several months is a continued good consumer acceptance of the product and sort of a nice steady build in online market penetration especially in search markets where is your content and your relevance is the key to converting an online search customer.

Now that we have the content and now that our marketing programs are getting ramped up and working well, we see a real opportunity there for us.

We also mentioned the FlexRez(sm) product, which is brand new.

It was launched weeks ago, but that gives us an opportunity to get into the white label business with a product that is essentially self-served by the affiliate so they can get access to our booking engine and to our content.

And once we're able to harness the power of all the affiliates out there who love to sell hotel rooms on their own specific sites, whether it be a tourist bureau or a site that focuses on a particular destination, that represents another market that is brand new for us and we should be able to gain some share there.

You mentioned the white label service and Marriott recently made an announcement that they have a product called FlexRez, allowing people to book things other than hotel rooms on their site, coincidence in name?

It could be a coincidence.

We have an excellent relationship with Marriott that goes back many, many years.

They're one of our great partners in the opaque as well as in the retail product.

They were a founding shareholder of Travelweb, and we announced previously that we provide vacation packages inventory on Marriott.com.

So, I won't say anything more than that.

Great -- thanks, guys.

Thank you, our next question comes from Scott Devitt, from Legg Mason -- your question please.

Thanks, a question about the European operations.

When you bought Bookings and Active, I think the take rates we something in the range of 11% and 14% respectively, and you noted that you thought that it would be possible to bring up the Bookings commission level closer to Active possibly, and then that you also thought that even Active was below the industry in Europe.

And I'm wondering if you've been able to see a benefit there yet or if you expect to in the future?

Yes, we did say all those things, and as I mentioned in my remarks, Scott, the net revenue rate, which would be revenue expressed as a percentage of bookings, the core -- that core margin did increase in the quarter separate and apart from the seasonal factor that I mentioned as well.

If you were to compare the revenue associated with a stayed booking as opposed to do a booked booking, if you will, that rate did increase.

And it's reflective of really both factors, a slightly better margin at Bookings and a slightly better margin also at Active.

And I would, I'd reiterate what we said back then which is, both companies are pursuing a model -- and again, I shouldn't -- I'll even correct myself.

Our company, Priceline Europe -- because again, these operations are very melded -- we're pursuing a margin structure or a commission structure if you will in Europe, that is still far, far below what our competitors are pursuing.

And as Jeff mentioned, one of the hallmarks we think of our strategy, of our brand is supplier friendliness.

And we think that, that margin structure that we are pursuing in Europe is setting us apart and probably is very contributory to the above-market growth rates that we've been experiencing over there.

Because it's given us great supply -- better supply we think than anybody else -- any other online player.

And that in turn has given us a great ability to market the product in ways that we don't think our competitors can.

Just one follow-up around the gross profit breakdown of the business.

As you mentioned growing EPS significantly over the past several years.

It seems like there's been a transition from being an airline intermediary to almost a hotel intermediary with some airline bookings and rental cars.

I was wondering if you'd be willing to touch on the breakdown of gross profit from the three different travel segments?

We haven't and don't break out the gross profit contribution by segments, but there's no question that the importance of the hotel business has grown at Priceline even predating our acquisitions of Travelweb, Active Hotels, and Bookings B.V., and the importance of that business, obviously, has continued to grow with those acquisitions.

We still view ourselves as a full-service travel site here the United States.

Our airline ticket business and our rental car business and our packages businesses are all very, very important in terms of their contribution to traffic and customer flows as well as to our operating results.

Thanks.

Thank you, our next question comes from Justin Post, from CIBC.

Sir, your line is open.

This is James Stanford, for Justin Post, from Merrill Lynch.

Just a quick question on the opaque air bookings and stabilization for the quarter.

What are your thoughts about going forward in that business through 2006?

Thank you.

I think going back to the remarks I said that the opaque air bookings were down, and that's the continuation of a long trend of year-over-year decreases in gross bookings in that particular product line.

We've been able to fill in the gap over the last couple of years by significantly growing our retail air business, but -- we, we have not made any predictions as to that business particularly going forward into next year.

I would repeat what I said in my prepared remarks, which is the business is now gotten to a size where decreases in bookings on a year-over-year basis don't have that big of an impact on our consolidated financial results because as you can see despite that decrease we've had an excellent quarter at the bottom line.

But we haven't made any predictions as to what's going to happen to that business going forward.

Thank you.

Thank you, our next question comes from Scott Barry, from CSFB.

Your line is open.

Thanks, two quick questions.

This a -- Jeff, maybe you can comment on this?

This automated extranet model that you're employing in Europe, it looks incredibly scalable.

Would you be willing to comment on what EBITDA margins might look like in a business like that at maturity, or how that might compare with your domestic business?

And then secondly, just any plans you have to rollout the priceline.com brand in Europe and what tactical steps you might be taking?

Why don't I answer the first, and maybe Jeff can take the second.

I wouldn't want to give a terminal EBITDA margin, Scott, but what I would say is I would be in very fervent agreement with your statement that we think that they've built a very scalable not only extranet technology but approach to market in general from both a supply and demand generation perspective.

They're very lean.

They have a very similar cost-conscious mentality because all of them were former entrepreneurs who owned their own business and every penny counts.

And in addition as I think you know, our Management Team in Europe owns that business.

They own a very significant percentage of Priceline Europe individually, and as a result their destiny is very directly tied to how that business does separate and apart from how Priceline on an overall basis does.

That's not to say that they're not interested in Priceline as well.

They also have equity compensation packages and stock option arrangements associated with Priceline, but we very specifically tailored the ownership of Priceline Europe to try and continue to harness the entrepreneurial spirit of the management team over there.

So, it's a very lean cost-conscious mentality and a very scalable model.

So we -- again, you probably are hearing lots of buoyance here.

We're very excited about our European opportunity for a whole host of reasons, including its scaleability.

As to the brand question, I think over time it's our intention to build the recognition of the Priceline brand in Europe.

We've got two businesses that have very significant distribution and have done a good job at starting to build some customer loyalty for their direct-to-consumer businesses, but over time our investments will be towards a Priceline brand.

Great, thanks very much.

Thank you.

That ends the time for our Q&A session.

On behalf of priceline.com, we'd like to thank you for your participation in today's conference.

At this time you may disconnect your lines.