Booking Holdings Inc (BKNG) 2006 Q3 法說會逐字稿

Welcome to Priceline.com Third Quarter 2006 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 Security Litigation Reform Act of 1995.

These forward-looking statement are not guarantees of future performance and are subject to risk, 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 facts are intended to identify forward-looking statements.

For a list of factors that could cause Priceline.com actual results to differ materially from those described in the forward-looking statement, please refer to the Safe Harbor statements at the end of Priceline.com earnings press release as well as Priceline.com most recent filings 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 earning's press release together with an accompanying financial and statistical supplement is available in the Investor Relation section of Priceline.com's website.

Located at www.Priceline.com.

Now, I would like to introduce Priceline speaker's for this afternoon Jeff Boyd and Bob Mylod.

Go ahead gentleman.

Thank you.

Welcome to Priceline.com Third Quarter Conference Call.

I am here with Priceline CFO, Bob Mylod.

Priceline reported solid gross bookings growth in both our Domestic and European operations for the third quarter.

Gross bookings of $903 million were up 48% percent year-over-year.

Pro forma gross profit of $122 million was up 51%, and pro forma net income was $30 million or $0.72 per share.

Third quarter results surpassed the high-end of our updated guidance due to better than forecast September results and exceeded first call consensus estimates of $0.67 per share.

Third quarter results include results from bookings BV, acquired in July of 2005.

Priceline.com organic gross bookings growth rate assuming acquired business were owned for the full period in question and excluding the retail hotel business on Orbitz for the third quarter was 45% a sequential increase from 43% in the second quarter.

Marking our fifth consecutive quarter of accelerating organic growth.

Priceline Europe had an excellent quarter with $398 million gross bookings and an organic growth rate 121% accelerating from 117 % in the second quarter and significantly in excess of that reported by our competitors..

Priceline domestic organic growth rate was 13% in the third quarter a slight decrease from 17% in Q2.

Merchant gross bookings were 13% in the third quarter and improvement from 5% growth in the second quarter.

Improving merchant results were attributable to strong growth in retail hotel merchant room night sales.

Growth in unit sale of OPEG services and higher airfares and room rates.

Our business in Europe continues to benefit from positive e-commerce market trends in Europe and success in the faster growing continental markets, which are accounting for a growing portion of total sales.

We also continue to see benefits from integration activity, including combing the hotel inventory of bookings in active and creating European demand for US hotels and US demand for European inventory.

Priceline Europe os also benefiting from growing repeat business and business coming to our branded sights particularly Booking.com and other booking branded sites, where we are focusing our online brand building.

Business through these channels represents approximately 75% of total bookings including approximately 15% of the business received from co-branded affiliates.

The remaining business comes through affiliate channels that do not show our brand on their sights.

We are also bring our supplier friendly model to more destinations and hotels with the network now including over 25,000 hotels.

It bares mentioning that with $398 million in European gross bookings this quarter Priceline Europe has reached a size where it will be difficult to match the high growths of the previous three quarters and our forecast accordingly are based on lower targets.

Priceline Domestic business had another good quarter.

Our diverse selection of retail and OPEG services provides consumers choice for changing travel market conditions, which benefits Priceline business in long run.

Our OPEG services had a good quarter as evidence by the growth reported in merchant bookings.

Our OPEG airline tickets service showed growth in the quarter versus the third quarter in 2005 as our airline partners took advantage of revenue management opportunities when advance booking softened coming into the fall.

Although, keep in mind second half 2005 provides very soft comparables for this business.

We were also please with growth in OPEG hotel and rental car bookings in the quarter, especially, as I have mentioned before given that our web site now gives dramatically more prominence to the retail service compared to last year.

Since our last call there have been some developments on the subject of GDS incentives.

Priceline is now booking tickets through both SABRE and World Span.

SABRE has signed a long-term agreement with American Airlines and now offers it's agencies access to content from all US mainline carriers.

We also announced a long-term agreement with Northwest Airlines covering both OPEG and retail tickets.

We have made good progress and talks with a number of our other airline partners that strike the right balance, a full content for our customers and low cost for our airline partners.

We will work to complete those agreements through year end.

Also I mentioned on our last call, we have been seeking greater efficiencies in our online marketing spend.

Tipping the scales more in favor of the return on investment versus volume.

We began this process in the third quarter and saw a positive impact as online marketing cost came in at the low-end of our forecast range.

Looking toward next year we decided not to renew our online partnership with or ORBITZ.

Well ORBITZ is a good source of traffic wen you factor in the likely delusion, meaning customers that we paid ORBITZ a commission for that would have shopped at Priceline anyway.

The transaction did not meet are ROI hurdles.

While this decision may cost us up to approximately 5% of merchant volume next year taking into account estimated delusion it frees up substantial dollars for investment in other online channels.

We intend do aggressively seek opportunities providing a better return on our marketing dollar.

We've are taking other steps to build on our domestic momentum next year.

We are working on a number of enhancement to our website and e-mail programs to deliver a more personalized experience to our customers.

While we believe providing lower prices than our competition drives significant customer loyalty the enhancements also provide a platform for value added promotions and services targeted at our most loyal customers.

These initiatives are aimed squarely at customer retention and conversion.

As previously reported we are in the final stages of a thorough review of Pricelines brand position and offline advertising.

We met with a number of highly qualified agencies in an effort to refine our distinctive market position and develop impactful and flexible creative approach we hope will help expand the market for our services.

We are excited with the results and should have new on this front in the coming days.

Price line's objective domestically is to be the leading online destination for value conscious leisure travelers.

We believe our solid domestic growth is helping us consolidate that positioning and we made good progress against our marketing and airline supply objectives during the third quarter.

Our objective in Europe is to be the leading online hotel reservation service.

We continue to show superior growth and profitability in Europe, and I believe our team in Europe is doing an excellent job integrating the business and building our brands.

We are pleased with Priceline's combined financial performance.

Which is made possible and an attractive refinancing and share repurchase transaction which Bob will describe in detail together with the financial review.

Bob?

Thank, Jeff.

We are going to start with a brief review of our Q3 results and then I'll go over the highlights of that recently completed recaptilization and then finally I finish with some forward looking guidance.

Jeff pretty much covered the details of our top line results so I won't repeat them here.

I did; however, want to once again highlight that the results from Priceline Europe exceed the highest end of our expectations.

In our last earnings call, we projected that Priceline Europe would generate $360 to $390 million of gross bookings in Q3.

This was based upon assumption that the Q2 analyzed organic growth rate of 117% would represent the peak growth rate for European business.

And that the law of large numbers and difficult comps would start to work against us thereby causing this growth rate to decline in Q3.

But, in fact. this didn't happen.

Instead Priceline Europe's analyzed organic growth rates actually accelerated in the quarter to 121% which drove total European gross books of nearly $400 million for our seasonally strong third quarter.

Gross bookings were particularly strong in the month of September, which in turn, translated to higher gross profit and earnings than expected.

As Jeff also mentioned, the forward guidance that I'll give in a few moments for Priceline Europe assumes that our analyzed growth rates will decline starting in Q4 and continue to decline throughout 2007.

I have said on past calls that this decline is a mathematical certainty given the sheer size of our European operations.

More over our comparables will get increasingly difficult as the next several quarters unfold.

In fact while we are generally very pleased with the October gross bookings in Europe as expected they grew at significantly lower analyzed rates than in Q3.

We expect that trend to continue for the remaining two months of the quarter.

As for gross profit dollars the strong gross bookings performance aloud us to deliver gross profit dollars that came in substantially ahead of the high-end of our guidance.

Again the up side was driven primarily by our strong results in Europe.

As for our Q3 operating expenses.

Our Q3 advertising expense of $41.2 million came in towards the lower end of our prior guidance.

Which was very contributory to our earnings up side.

Given that the relatively low advertising number obviously did not come at the expense of gross bookings or gross profit dollars.

This was particularly the case during the last half of the quarter for our domestic business, where as Jeff just mentioned we began more proactive manage our ad spend to achieve a more optimal balance between gross bookings growth on the one hand and earnings growth on the other.

Personnel costs of $18 million came in above our prior guidance due almost entirely to higher than accruals for employee performance bonuses that are accrued throughout the year paid at year end based upon full year profit results.

Our Q3 general and administrative results of $8.3 million also came in above our prior guidance.

This was principle caused by approximately $500,000 of fees and expenses that we incurred for professional services associated with the secondary offering of stock by our two largest share holders, Hutchison [Wampoa] and Chung Kong during the quarter.

All of our other operating expenses came in within or below our prior guidance.

Pro forma income tax expense came in higher than expected due to the strong pre-tax income performance out of our European operations.

We reported pro forma net income of $0.72 per share which as Jeff mentioned came in above the high end of our previous range of guidance and was also an excess of first call consensus estimates of $0.67 per share.

We reported GAAP net income of a $1.05 per share for the quarter, which also came in substantially above the high end of our prior range of guidance and, in fact, exceeded our pro forma but results.

The main contributor to this earnings up side related to an additional referral of our balance sheet reserve against our deferred tax asset associated with historical net operating losses.

You may recall that in last years third quarter we for the first time reversed a portion of what had been a full reserve against our NOLs because we had demonstrated sustained pre-tax income and we've concluded that this income would continued to be sustained in future periods.

During the third quarter of this year, we reevaluate the level of the remaining balance sheet reserve to take into account, among other things, first, the impact that our third quarter re-capitalization is expected to have on projected domestic operating income, second, current business prospects and finally, additional NOLs that we believe that we are more likely than not to recognize from state income tax payable.

The net impact of this evaluation exercise caused our deferred tax asset to increase by $44 million during the quarter.

Of this amounts approximately $28 million came as a results of balance sheet reverse reversals that flowed through our income statement.

The remaining $16 million came as a results of a balance sheet adjustment to our paid in capital and did not impact earnings.

As was the case last year, when we first recognized income associated with are deferred tax assets we are eliminating this positive impact from our pro forma EPS because the benefit is non cash in nature and will only truly be realized as we generate future taxable income within the United States.

On a go forward basis, our GAAP net income will continued to be reduced by income tax expenses that will be booked against this 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 this has been the case for many quarter, we intend to continue to report pro forma net income on a cash tax basis, and this event that I have describe will have no impact on either our historical or projected pro forma earnings.

GAAP results were also positively impacted by two additional tax related items.

First we received a favorable ruling from the IRS on whether or not federal transportation excise taxes are due and payable on the gross profit that we earn on the sale of merchant airline tickets.

Prior to receiving this ruling we had maintained a balance sheet reserve of approximately $1.6 million for this exposure because the IRS ruled in our favor we reversed the entire amount of the reserve into revenue; however, we removed this item from our pro forma results because of its one time nature.

Second, we received approximately $1.7 million of state franchise tax credits in the quarter and again we removed this item from our pro forma results because of its one time nature.

GAAP results were negatively impacted primarily by approximately $6 million of acquisition related amortization expenses primarily associated with our acquisition of Travel Web, Active Hotels, and Booking BV, $3.5 million of stock base compensation expense, which reflected the impact of the adoption of FAS 123R earlier in the year and $1.1 million impairment charge that we recognize on the carrying value of our investment of Priceline mortgage.

All of the expenses were non cash in nature.

GAAP results were also negatively impacted by the inclusion of be 5.76 million shares of un issued common stock associated with our two convertible note offerings that we were required to use in the calculation of GAAP EPS.

These shares were not issuable unless our stock were to reach a level of approximately $40 per share.

The average trading price of our stock during the quarter was 30.62 per share.

As for cash and cash flow, we generated approximately $35 million in operating cash flow during the quarter.

Thereby bringing our operating cash flow for the first nine months of 2006 to approximately $80.3 million, which represents a 63% year-over-year increase.

Total capital expenditures in the third quarter with approximately $3.3 million.

Also during the quarter we expended approximately $18 million of cash to purchase a portion of the minority interest in Priceline Europe from the minority shareholders of Priceline Europe.

As of the end of the quarter, Priceline own approximately 94% of Priceline Europe.

That brings me to a discussion of our Q3 recapitalization activities.

There were quite a number of transactions in the quarter that I impacted both our debt and equity capital structures.

I will discuss them in the order in which they took place.

First, in the the beginning of September our two largest shareholders, Hutchison [Wompoa] and Chung Kong Limited, sold approximately $9 million shares of our common stock pursuant to a secondary common stock offering.

As a result of the traction, Hutchison [Wompoa] and Chung Kong's combine ownership in Priceline dropped from approximately 33% to approximately 10%.

We believe that the sale of the Hutchison Chung Kong stake will help to alleviate some of the perceived overhang associated with such a compensated position by one shareholder.

It also increased the public float in our common stock which hopefully over time will lessen the volatility in the trading of our common stock.

In mid-September, we launched and then later completed a private placement of $345 million of convertible notes.

We decide to pursue this form of financing to take advantage of what we believe were very attractive terms availability in the convertible debt markets.

Half of the notes or $172.5 million have a 50 basis point annual interest rate and and a five year maturity.

The remaining half have a 75 basis point annual interest rate and 7 year maturity.

All of the notes have a stated conversion price of $40.38 per share, and call for cash settlement of the principle amount and settlement in shares of Priceline common stock for the conversion value above the principle amount , if any.

Simultaneously, with the closing of the note offering we entered into a hedging traction pursuant to which we effectively increased the conversion price of the new notes to $50.47 per share.

The purchase price for the convertible note hedge was approximately $37.4 million.

Also, simultaneously with the closing of the note offering we purchased approximately $130 million of our common stock, pursuant to our stock buyback program.

Then finally we paid approximately $9.3 million of fees and expenses associated with the note offering.

Then in early October we launched an offer to exchange 100% of outstanding 1% and 2.25% convertible notes,with a total principal amount of $225 million.

For new notes that have substantially identical terms as the outstanding notes other than conversion features that call for cash settlement of the principle amounts and settlements in shares of Priceline.com common stock for the conversion value above the principle amount, if any.

The exchange offer expired last Monday night and I am pleased to report that 100% of the note holders elected to exchange their old notes for the new notes.

So to summarize, sources and uses of cash, we had $345 million of cash inflow from the new notes offering.

We had $37 million of cash out flow from the purchase of the convertible note hedge, $130 million of cash out flow from the stock repurchase and $9 million of cash out flow from fees and expenses.

Because the exchange offering resulted in a like for like exchange there was no cash expended in that traction other than a $350,000 exchange fee that we paid to the note holders in order to induce them to exchange.

Thus, we had net inflows of cash of approximately $169 million as a result of our recapitalization activities thereby bringing our current cash balances to approximately $400 million.

Our total gross debt outstanding is now $570 million, and therefore our net debt... ie our gross debt minus our cash balances is approximately $170 million.

Now that is a fairly clinical summary of what we did and I would like to now highlight two critical goals that we think the re-capitalization allowed us to achieve.

First, has to do with increasing other financial flexibility.

Prior to the re-capitalization our cash balances were roughly equal to our debt balance.

Yet the maturities of our debt were starting to loom on the horizon.

Specifically our $125 million of 1% convertible notes become due in the summer of 2008.

Our $100 million of 2.25 convertible notes become due in January of 2010.

By completing the new note offerings we were essentially able to extend out the average maturity dates of our convertible notes and increase our cash balances, such the we still expect to have very significant cash balances even after we repay $225 million of convertible notes that mature over the next three years.

The second goal pertains to limiting shareholder dilution.

Prior to the recap, our outstanding convertible notes had approximately 5.8 million underlying shares that were to become issuable in the event that our stock traded to levels of approximately $40 per share.

For years our stock had traded very significantly below that $40 per share level and therefore we excluded these shares in our calculation of pro forma EPS.

However, with our stock trading up substantially in recent months the likelihood of those 5.8 million shares becoming issuable had greatly increased.

By completing the exchange offer we effectively eliminate a 5.8 million share over hang that was to occur at a stock price of $40 per share.

On the new issue of notes we further limited share holder dissolution by purchasing the convertible note hedge such as the shareholders will experience no economic dilution, whatsoever with respect to the $345 million of newly issued notes, unless and until our stock trades at prices above $50 per share.

Then finally, our $130 million stock repurchase in the quarter have the effect of reducing our out standing share count by almost 4 million shares or roughly 10% of our shares outstanding.

I think It demonstrates our confidence in the long-term prospect of our business and it also helped to eliminate potential short selling of our stock in the open market by the buyers of our convertible note offering.

I hope you agree that all this activity very much resulted in the achievement of our goal to limit shareholder dilution.

As you might imagine it is expected to have a significantly positive impact on our projected earnings per share.

Which now leads me to a few comments on guidance.

As you may recall prior to the launch of our recapitalization in September we provided preliminary EPS guidance for both Q4 of this year as well as for full year 2007.

That guidance did not take into account the perspective impact from all the recapitalization activity that I just described.

While the operating assumptions associated with prior guidance are for the most part fundamentally unchanged.

We are now updating the guidance to reflect the impact of the recapitalization activities, as well as to provide more granular detail for our projected Q4 results.

We are looking for fourth quarter gross bookings to grow by approximately 30% on a year -over-year basis.

We've expect Q4 gross bookings from Priceline Europe of approximately 280 to $300 million which represents 77 to 89% year-over-year growth.

And is very much reflective of our earlier comments regarding an expected quarterly sequential decrease in the annualized growth rate of Priceline Europe.

We expect revenue to grow by approximately 15% on a year-over-year basis.

We expect pro forma gross profit dollars to grow by approximately 35% to 40% on a year-over-year basis.

As for Q4 operating expenses, we are targeting consolidating advertising expenses of approximately 33 to $36 million with approximately 85% of that amount being spent on online advertising.

We expect sales and marketing expense of between 10 and $11 million.

We expect personnel costs to come in between 16 to $17 million.

We expect G&A expenses of approximately $7.2 to $7. 7 million.

Information technology costs of approximately $2.6 to $2.8 million and depreciation and amortization expense excluding acquisition amortization of approximately $2.7 million.

We are targeting pro forma EPS of approximately $0.36 to $0.42 per share and our pro forma EPS forecast includes an estimated cash income tax of approximately $2.8 million comprised of alternative minimum tax in the United States and income taxes in Europe.

As for expected GAAP results, we expect to report GAAP net income of $0.13 to $0.19 per share.

The difference between our GAAP and pro forma results will be driven primarily by the inclusion of acquisition related amortization stock based compensation and certain income tax expenses all of which are non cash in nature.

While we are not going to give detailed line item guidance for 2007.

Again, we are updating our 2007 pro forma EPS forecast primarily to take into account the impact of the recapitalization activities.

To summarize where we were before today update we had been forecasting full year 2007 pro forma EPS of between $2.15 and $2.40 per share.

We are now targeting pro forma EPS of approximately $2.37 to $2.67 per share.

GAAP EPS is expected to be approximately a $1.24 to $1.54 per share primarily as a result of the same non cash items that will impact Q4.

It is important to note that the EPS guidance that I just gave for 2007 is based upon our current diluted share count of approximately 39 million shares.

That share count is in turn based upon a calculation of the diluted impact, if any, of all of our outstanding convertible notes and stock options based upon yesterday's closing stock price of approximately $40 per share.

Because all of the conversion prices of our convertible notes are at roughly the same price as the current trading price of our stock our convertible notes currently have very little dilutive impact on share count and EPS.

However, if in the future our stock trades above the current share price are diluted share count will increase by the net number of shares that will become issuable to our convertible note holders.

To try to put some numbers against these words.

If our stock were trade up to $50 per share, the in the money value assignable to our convertible notes would under the treasury stock method result in a 2.8 million share increase to the current diluted share count of approximately 39 million shares.

Now, I just mentioned earlier that we purchased a convertible note hedge to protect ourselves from some of the potential dilution associated with our new issue of convertible notes.

However, under GAAP the impact of the convertible note hedge is not recognizable until the maturity dates of the convertible notes.

Said differently under GAAP there is a temporary timing difference between the immediate inclusion of additional common shares underlying our convertible notes on the one hand and the deferred reduction of shares associated with our convertible note hedge on the other.

When factoring this bond hedge into the $50 stock price example that I just went over the 2.8 million share increase in diluted shares outstanding will be ultimately be offset by 1.6 million share reduction in diluted shares from our bond hedge.

Some of the math is somewhat complicated, the basic point I am trying to convey is because of the the large increase in our convertible notes outstanding our future EPS will be more affected by the trading price of the common stock than it has in the past.

Finally, I want to point out as I have done on previous calls that all of our at foremention forecasts are based upon an assumption that we will continuing operating in a consumer travel market that is roughly similar to the current one.

Any terrorist event particularly within the United States or Europe would in all likely hood have a negative impact on the travel market in general and our operating results in particular.

With that we would be happy to answer your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Anthony Noto of Goldman Sachs.

Thank you very much.

This Aaron for Anthony Noto.

I was wondering if you could give us your perspective on penetration on the European market for online hotel bookings and what year would that be similar to in the US if we would try to make an--- Secondarily how do you thing about the next opportunity to expand internationally and which markets are appealing?

For example, South America versus China China versus other possible opportunities?

Thank you.

I think for purposes of the first question, I don't have exact statistics at the tip of my fingers, but on line hotel penetration in Europe is significantly behind what we have experienced here in the United States.

We have said very roughly speaking it is three years or even more behind.

I think the level of penetration is very different depending on what country you are talking about in a more mature market like will UK.

The penetration of online hotel sames would be higher.

As you move through western Europe towards eastern Europe it gets lower and lower.

There is some published data which I could gets for you if you want to look at their estimates on it.

In terms of the next markets, we have identified eastern Europe and southern Europe as the most immediate opportunities at this point in time.

We have a joint venture in Hong Kong as many of you know that represents an opportunity to participate in a very small way at that market at this point in time.

We are over a longer period interested in China in particular.

I think the great thing about the model in Europe is its can be expanded to other geographies even if the market opportunities are smaller.

It can be expanded efficiently by opening an office and building some supply and opening up a web site in a local language.

Thank you very much.

Other next question is from Aaron Kessler of Piper Jaffray.

Thanks, could quarter.

Can you give us an update on wha your seeing on the competition if your believe your taking share in the quarter.

Also for the last two to three quarters you have been talking about expansion into eastern Europe, what do we see or is that more of an 07 story?

On the convertible with the share reduction with the bond hedge, is that affect the pro forma share as well as the GAAP shares in a similar manner?

I will take the first two and Bob can address the last.

With respect to share in Europe based on the result results that have been released by SABRE it seems clear for online hotel sale also we have taken a very significant share at least from last minute.com in the most recent quarter.

Based on the numbers that have been reported by the others, it is heart for me to believe that their growth rights will be anywhere near our growth rate in Europe.

We are taking a significant share in hotel sales from the other large online travel say .

With respect to eastern Europe we have inventory and distribution in a number of the eastern European countries today, but the size of the business is not large compared to the size of our business in western Europe.

We are operating there now it represents in terms of a growth more of a opportunity in the future than a huge contributor to what we are reporting now.

I think our plan with respect to share count is to essentially treat the bonds hedge under the GAAP net thought but to make sure we highlight what the reduction would be.

For pro forma purposes we don't necessarily intends to back that out.

Given there an economic perspective those shares are not expected to ever be issued we will highlight that and leave it up to the investments communities to make their own decision.

Any update on the estimate of what inter nation at Europe will accounts for in 2007.

At least two-thirds of the second half of this year any out look what 2007 will look like?

Not right now.

We gave that number for 2006.

We are trying to limit the guidance for 2007 to EPS.

As we get closer to next year and next year,we will give more guidance.

Given that Europe continues to grow we certainly expect they will continue to represent an increasing percentage of profits.

Great, Thank you.

Our next call comes from Mark Mahaney of Citigroup.

Thank you.

I am going over the recap the clinical survey was help full a lot of detail.

The advertising mix is clearly towards on line advertising.

Its sounds like it is part of a rethinking or looking at new initiatives.

Would one of those be rethinking the marketing mix and shifting some of that back to offline?

What are the current NOL.

For your EPS guidance next year what tax rates is assumed for that?

Could could you repeat that last part, Mark.

For your EPS guidance for next year what tax rate is assumed.

On the marketing question, mark, I think we have seen a very significant shift of our spend towards online.

That has been related to very specific things the first is the rapid growth of our business in Europe that lasting through online channels.

The second is increasing online spent here in the United States.

I think what we have said in the last call and this call is that we are focused much more on getting efficiencies out of our online spend.

I have don't think that means we are going to take significant amounts of money from online channels and move them offline.

But we are going to be more important opportunities towards the online span and look for ways to do more than pure customer acquisition but rather customer acquisition very efficient branding which has been successful in Europe was we get a larger percentage of business through repeat yourself now because we have started to get some success in building or brands through online advertising there.

For your question about deferred taxes, Mark, I think you know for cash tax purposes the very substantial majority of the income tax you see relates to income taxes that we are paying in Europe.

The NOL deferred tax assets does not shields us from taxable incomes in Europe.

In the United States it does.

We have a very large NOL.

It is many hundreds of millions of dollars that we have available to use.

Sit somewhat limited by an annual use of approximately north of $60 million for US domestic purposes..

As I think you probably also can surmise we are earning far less than that domestically.

We do not have on the balance sheet the full amounts of that tax asset.

We are not currently earning close to that rate.

Part of the exercise we go through is to look at our deferred tax asset relative to earnings and make sure that fairly represents what we think we are going to earn in the U.S. that we think we are more likely to earn in the US.

As for tax rates for next year a lot of that is going to come to the mix of business from Europe versus the U.S.

We are not in a position to give you that number.

Thank you.

Our next question comes from Heath Terry of CSSB

I was wondering if you would talk as you look to optimize your return to to the sad advertising things.

Can you talk about the channels that are most effective.

On line is the biggest one.

But specific verticals win on line when it is search or portals or certain other types of sites that you have find are more effective.

Yes, I think we certainly like everybody in this space are significant players in search and a very significant piece of the optimization activity there has more to do with what we do with a click once we get it than with the search terms that you buy because they are public and everybody is buying the same terms.

We are spending a lot of time trying to improve our conversion.

There are also a lots of non search channels that we are in and are interested in.

I don't want to go through a details listing because I think there is some competitive sensitivity to that information.

We are looking for other channels and we are very active in the once that everybody is aware of.

Trip advisor and sites like that.

So within search even though at least keyword pricing is going higher, it is what you are doing on your end once you get one of those clicks it is delivering a higher return on investment?

I don't want to make pay comment about where keyword pricing is going.

There is no question we have been spending a lot of time this year and will continue to try to build content and do things that improve or conversion once we get the customer over to our sights.

From a competitive standpoint how would you characterize the differences the competitive differences between European and US markets.

Do you see Europe evolving more towards what we see in US now or is that a different market for the foreseeable future?

I think specifically with respect to hotels, there is a significant difference in the competitive landscape for a couple of reasons.

One is that the supply environment is very complex, and it is dominated by small independents hotels who are not going to have as much money to invest in their own direct distribution.

The suppliers will not be directly in competition with the online travel agents in Europe as the major hotel chains are in the United States.

Our product and our business in Europe is positioned to provide help to hotel companies that can't reach the demand.

A hotel company here in the United States can get business by buying an advertisement in Google.

In Europe you have to be in a position to not only understand what to buy in 15 or 20 different foreign languages but translate your content into those different languages and have the bandwidth and expertise to optimize your advertising in all of those different countries to get the same impact and customer flows and efficiencies we can deliver to you for a reasonable commission while allowing you to maintain your pricing and keep control.

I think if service that we provide to the hotels is more valuable in Europe than it may be perchieved to be to the major chains here.

Thank you.

Our next question is from Chris Tupek of Morgan Stanley.

Thank you I have a couple other quick questions.

Bob, recognizing you have given very detailed guidance for Q4 I curious to drill deeper on, the results you have seen in October and the advance bookings for the holiday period is that consistent with the mid point of the guidance range for Q4 or do you assume some deceleration and if that deceleration doesn't happen are you likely to again beat your own guidance.?

Idon't want to answer the first question about where we think we are going to come out in our range.

What I can say is from a seasonal perspective, October is the strongest month of the and November less strong than from a bookings perspective so said differently with October done a higher percentage of the quarter is what we expect the total quarter to be is booked.

So I guess you good argue that we have slightly more visibility for the quarter.

I sort of leave it at that.

For the US merchant business the gross bookings organically we up about 13% in the quarter and then the sentence in the release and goes on to say and talks about strong results in OPEG versus a retail merchant but does not quantify could you give a little bit of a sense in term of what the US merchant OPEG business is doing versus the retail price disclose business.

Let me try, if you look at the things that the biggest contributor was the merchant retail hotel business and I think after that I would put hotel and rental car in terms of top line growth in term of top line growth and then after that I would put OPEG air.

As for retail, retail hotel and retail rental car have also behaving very strongly so to the extent that we had weakness or any products it would have been in retail airlines tickets but we think there was a mix shift there as we have the value conscious consumers in the face of some higher airline ticket prices that did come back and name there so it is.

That business is very small but as Jeff mention it did grow on year-over-year basis in the quarter which we wer cautiously optimistic and happy about.

Okay.

Finally, the tightness of inventory issue in the summer the past summer you did see tightness of inventory more so domestic versus Europe, if you could comment about that domestic versus Europe and then if we go in to fall, winter and look forward to next how are you thinking about the difference in tightness of inventory US versus Europe?

When your hear us taking about tightness of inventory in the United States sometimes we will be taking about airline load factors which were very high in the summer.

Had an impact on our OPEG business and I think had impact on packages bookings across the industry.

In terms of hotel high occupancy has driven higher prices but our inventory position has generally remained strong here in the United States and we have not identified an inability to find rooms for people in our hotel business domestically.

We expect there to be high occupancy rates here next year and I think the hotel business is expected to be strong in Europe too.

We are very well positioned to continued to get good inventory from our hotel our hotel partners because we provide the most supplier friendly alternative to them among the distribution options that are available.

We are much lower cost in Europe than consolidators.

We are much lower cost to the hotel than the other online travel agents.

Even in a constrained environment I think we stand a good chance of having good availability.

Great.

Thanks.

Our next question is from Justin Post of Merrill Lynch.

Going back to the US growth rate we have got you better than the competition and better than the industry this quarter.

Do you think you are percentage, which seems to be a trouble are for some of your competitors is actual lower as far as percentage of revenue or profitability.

Have you seen any new competitors trying to duplicate your model as far as the low price provider at the hotel at this point?

Has that helped your sales growth at all over the last couple of quarters?

On the first question as a percentage of our total business our airline ticket for Priceline than for our competition.

The amount of exposure that our income statement has to the air business is smaller than our competition, but I 'll add to that , it is my believe that the competition's air lind ticker business over the last couple of quarters have all grown more rapidly than ours have.

I think that this is just a part of the way we manage our business and how much money we spend on advertising air.

Your second question.?

In Europe have you seen competition offering rates in like the 12 to 14 % rate as far of the charge to hotels, any new competition?

I am not aware of any new competition but there is a lot businesses that have been operating for several years that have an agency model and have competitive commission structures, they have been there and they are still there.

They tend to be strong in particular countries versus having a Europe wide business but they have been there.

I have not seen any evidence of major US online travel agents doing that.

The tech spending is around 10 million this year, any new tech projects around the corner for the next couple years, any new areas you need to invest in.

Then any quantification of the cross boarder impact on revenues over the last couple quarters?

Our quarterly tax spend has been fairly stable and static for a number of quarters, now having said that with the growth tha we are experiencing in Europe we are buying equipment and adding more licenses so it is reasonable as your looking to next year to expect that number will go up but Iwouldn't articulate that we are looking at any sort of dramatic step function increase.

I think we are trying to manage the business from the expense perspective and get the leverage, that one of the lines where we are looking for a lot of leverage , I think we have gotten historically and it is our expectation we will continue to get that on a go forward basis.

Same goes true for capital expenditure, I think one of the things we are so proud about both here in the US and Europe is that even though our business is bigger today than it was three years ago.

If you go and look at our cash flow statement you can see that we have managed our capital expenditures very careful and I think that is a real testament to our technologist both here and in Europe.

We think that is one of our core strengths and continue to leverage next year as well.

Okay.

Cross boarder has that helped your US sales growth rate material at all over the last couple of quarters?

The cross boarder business is booked in Europe because it represents whether it is a US hotel or a European hotel it is booked in the European system and then European environment.

So tha is primarily; located on there gross bookings.

Okay.

Thank you.

Our next question is from Imran Khan with JP Morgan.

Hello this is Bridget calling in.

Two quick questions has there been any shift in strategy for offline advertising?

Are the TV campaigns going to continue?

The second question is there any update in the GDF negotiations?

Sure.

In terms of strategy shift in online.

As I mentioned in my he -- excuse me offline.

As I mentioned in my prepared remarks.

We have been through a process of interviewing agencies and looking at different approaches for our account.

That process is going well.

We had a number of highly qualified agencies and we have seen some exciting ideas.

We haven't finalized our decision on that front.

As I mentioned in earlier we will have something to say about that over the coming days and we are excited about what we intend to do.

I wouldn't anticipate any huge shift in our approach to using television.

We will continue to be advertising on television, and I think you can expect us to try to push and capitalize on what makes us different from the other online travel agencies which is our great savings and value.

In terms of GDS up days, we have got deals with SABRE now, G2.

World span.

We have alternatives to allow us to book in the channels that are your airline partners prefer and where we can find the best eke economics.

We continue to work to enter into long-term agreements that provide access to the full content and meet the cost reduction needs.

I mentioned the deal with Northwest Airlines that brings them back into retail after being out for several years.

Thank you.

Our final questions comes from Scott Devitt of Legg Mason.

Thank you.

It is Stifel Nicolaus.

I have two questions.

The first is a follow up to an earlier question regarding the strength in the merchant business in the merchant business in the US.

It is a positive surprise, given how strong the travel market is.

I was wondering if you could talk about any incremental supply that you have received in that area or changes in conversion rates in the hotel business on a year to year basis and how contributory ORBITZ was to the opening business in the you would US.

The way that I would that, Scott, is that we have seen in the hotel and rental car business consistent use by our partners of the OPEG revenue management tool.

It has allowed them to increase prices and increase their RevPAR while providing us within vendor that has delivered solid conversion for us.

So conversion has been strong in hotels and rental car.

On the airline side, earlier this year conversion was tough.

It had very high load factors.

As we came into the fall season, there are some revenue management opportunities for the airlines that they all saved themselves of.

With respect to ORBITZ we said we thought maybe 5% of merchant gross bookings were in play for next year.

That is a rough estimate.

It tells you is that ORBITZ was certainly contributory to our merchants business this year.

You saw an acceleration of the growth rate between if second and third quarter.

We've do not believe that ORBITZ business played a significant role in that acceleration.

On acquisitions you have been very successful with the two you have done in Europe.

I was wondering with the change in the valuation of the company the willingness for future acquisitions and if that is a positive signal, what the intentions would be in terms of size, small tuck in dealings versus larger, strategic acquisitions.

Thanks.

We have been fairly consistent in our acquisition strategy over the past three or four years.

We have looked for transactions that provides us with new products like travel web and the retail hotel business like the European hotel business ,new distribution again, net that criteria and provided us with access to customers we were not currently transacting with and new markets and they were accretive.

I think that our approach to transactions would be similar.

We will look for things that provide access to new distribution and new products and that allow us to get into new markets that we are not currently involved in and that will be accretive to the business and that is something that served us well so far.

I think we will continue to go down that path.

I want make a comment as to size.

We don't have any rules that say it has to be this big or it can't be any bigger than that.

We will look attractions we think make sense and that we can afford and represent a good balance of risk and reward.

Thank you.

There concludes the question and answer portion or our program.

Gentlemen would you like to continue with any closing remarks?

Thank you all very much for attending the call.

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