Booking Holdings Inc (BKNG) 2007 Q1 法說會逐字稿

Welcome to Priceline's first quarter 2007 conference call.

Priceline would like to remind everyone that this call may contain forward-looking statements, which are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are not guarantees of future performance, and are subject to certain risks, 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'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's earnings press release, as well as Priceline's most recent filings with the Securities and Exchange Commission.

Unless required by law, Priceline undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

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

Now I would like to introduce Priceline's speaker for this afternoon, Mr.

Jeff Boyd.

Please go ahead.

Thank you very much, and welcome, everybody, to Priceline's first quarter conference call.

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

Priceline reported gross bookings for the first quarter of $998 million, up 34% year-over-year.

Pro forma gross profit of $104 million was up 43%, and pro forma net income was $17 million, or $0.43 per share.

First quarter results surpassed the high end of our guidance due to better than forecast earnings in both our domestic and European businesses, and exceeded First Call Consensus estimates of $0.27 per share.

Priceline's gross bookings growth rate was driven by a 91% growth at Booking.com, which again exceeded our growth expectations in the first quarter.

Bottom line overperformance was attributable to European bookings growth, growth in domestic gross profit, and marketing efficiencies.

Priceline's domestic growth rate was 1% in the first quarter, a decrease from 12% in Q4.

Merchant gross bookings were up 8% in the first quarter, a decrease from 18% growth in Q4.

The previously announced termination of the Orbitz opaque and travel web relationships, and forecasted weakness in retail airline ticket sales were responsible for slowing domestic growth.

Booking.com continues to benefit from positive Ecommerce and travel market trends in Europe.

Booking.com is building supply, content, and distribution across Europe, which is contributing to growth of the business.

We also continue to see benefits from integration activities, product enhancement, and marketing efficiencies.

Booking.com continues to focus on online brand building, building repeat business, and bringing in more destinations and hotels, with a network now including over 32,000 hotels in 54 countries.

Our European management and employees continue to execute well in building market leadership in key Western European markets, and planting seeds for future growth in newer markets.

Our supply and distribution teams are building strong local relationships based on our supplier friendly model.

The team has also done a good job scaling the business and achieving integration benefits and objectives.

As expected, gross bookings for Priceline's domestic business were negatively impacted by the loss of the opaque and travel web business from Orbitz.

We decided last year not to renew the opaque transaction with Orbitz, and have increased the return on investment hurdles in other online channels.

These steps have reduced gross bookings especially in airline tickets, which accounted for the majority of Orbitz's opaque business, and in retail tickets where reduced GDS economics magnify the effect of higher ROI requirements.

Despite the loss of Orbitz's business, our domestic hotel and rental car businesses continued to perform well in the quarter, showing solid growth in units and gross bookings.

The strength of these businesses is evident in the 8% growth in merchant bookings, and 11% growth in pro forma domestic gross profit dollars in the quarter.

The performance of our merchant business together with the benefit of greater marketing efficiencies, contributed to better than expected domestic earnings and importantly, our airline ticket business hardest hit by the aforementioned changes, made a significant contribution to growth and earnings.

We believe that the favorable results we are seeing in the business coming directly to Priceline.com, rather than through branded affiliates like Orbitz, are being driven by our new advertising campaign, the Negotiator featuring William Shatner, and good execution in other online channels.

We continue to roll out new creative for 'The Negotiator,' and are seeding the campaign in other media.

We are also pursuing new online partnerships at reasonable rates in an effort to replace some of the lost Orbitz' business over time.

Finally, we continue to build content and functionality aimed at enhancing customer loyalty, and expect to deploy some of these programs later this year.

With these initiatives, the momentum of our domestic merchant business, and improved customer acquisition costs, we expect domestic earnings growth to continue for the balance of 2007.

Priceline's objective is to be the leading domestic online destination for value conscious leisure travelers, and the leading online hotel reservation service in Europe.

We continue to show superior growth and profitability in Europe, and the domestic business is contributing nicely to growth in earnings.

We continue to be pleased with Priceline's combined financial performance.

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

Thanks, Jeff.

First quarter of 2007 was another strong quarter, during which we were able to continue the strong earnings momentum on both sides of the Atlantic, that we had established during the fourth quarter of 2006.

Internationally, Booking.com once again turned in gross bookings growth that significantly exceeded our expectations, and that further added to our already formidable position as the largest online hotel reservation booking service in Europe.

That top line growth combined with great operational execution and expense management, was the single biggest contributor to the upside in consolidated pro forma earnings for the quarter.

In the U.S., Priceline's earnings results also grew significantly on a year-over-year basis, coming in higher than our expectations, and because incremental operating income generated within the U.S.

is essentially free of tax, because of our significant NOL tax assets, our U.S.

operations also played a big part in our earnings upside.

Let me quickly go through some of the details of the quarter and then I will get to guidance.

I will start with total gross bookings of $998 million, which grew by 34% year-over-year.

In our last earnings call we projected that our European businesses would generate 477 to $491 million of gross bookings in Q1.

That guidance was based upon an assumption that we would experience fairly material monthly sequential declines in our annualized gross bookings growth rates in Europe.

In fact, while we did indeed experience monthly sequential declines, the rate of decline was not as steep as anticipated, and accordingly our European gross bookings growth rate came in at 91%, substantially above our forecast of between 75 and 80%, which drove European gross bookings of $520 million.

As for our domestic business, to recap what Jeff just mentioned, our gross bookings came in pretty much where we expected, although we did a little bit better with respect to our hotel and rental car services, and we came in below expectations with respect to the sale of airline tickets, which is evidenced by the 12.2% year-over-year decline in unit sales of airline tickets.

While we were generally disappointed with this result, keep in mind that the airline ticket service represents a small fraction of our domestic profitability, and an even smaller fraction of our consolidated profitability.

Moreover, the shortfall in airline ticket sales relative to our forecast, came more from the very low margin retail airline ticket service, than it did the higher margin opaque airline ticket service.

Consequently, the lower than expected airline ticket sales had a negligible impact on overall results.

As for revenues the strong gross bookings performance led to an 18% revenue growth which was in excess of our 15% guidance.

As for gross profit dollars, again gross bookings overperformance coupled with a favorable shift in mix toward the higher margin merchant products, including retail merchant hotels, allowed us to deliver pro forma gross profit dollars and growth, that also came in substantially ahead of the high end of our guidance.

As for our pro forma operating expenses, our Q1 advertising expense of $43.3 million came in below our prior guidance, which given that it is the largest of our expense line items was a big driver to our profit upside.

This was gratifying for several reasons.

First, as we have mentioned for several quarters now, our goal domestically is to focus with even greater intensity on achieving operating leverage and higher return on investment.

We clearly achieved this in Q1.

Jeff detailed this point with his discussion of the Orbitz online ad deal, but I want to also stress that the improvements in domestic online ROI generally came across the board.

Second, while the European market is certainly becoming more and more competitive with respect to online spend, we remain disciplined in sticking to our ROI targets, and in fact did a little bit better than planned.

Finally, as you can see from overall gross bookings growth, none of these online marketing efficiencies came at the expense of our overall growth targets.

Moving on to the remainder of our pro forma expenses, the sum of personnel costs, G&A, depreciation and amortization, IT expense, and sales and marketing expense came in roughly in-line with our prior guidance.

Our pro forma income tax expense actually came in higher than our prior guidance, due to the strong pretax income performance in Europe, where our NOLs do not apply, and where we are a tax payer.

We also incurred approximately $300,000 of losses associated with foreign exchange hedging activities, due to the increase in the value of the Euro and the pound, the two principle foreign currencies with which we transact in Europe, relative to the dollar.

These losses were generally offset by favorable FX earnings translations for our European operations which flowed through each line item of our income statement.

As I mentioned on our prior earnings call, our general goal with respect to FX is to hedge a substantial portion of our expected near term earnings mainly through the use of fairly plain vanilla forward contracts.

Therefore, while there were FX gains achieved by the Euro and the pound against the dollar during the first quarter, the impact to our Q1 EPS was not material due to the offsetting impact of our hedging activities.

Our European gross bookings metric was positively impacted by FX in the first quarter, and our statistical supplement shows our European gross bookings growth rates on a local currency basis.

We reported pro forma net income of $0.43 per share, which as Jeff mentioned, represented 126% year-over-year growth, and handily bested both our guidance and First Call estimates of $0.27 per share.

We reported a GAAP net loss of $0.44 per share for the quarter, driven principally by our previously announced settlement of the Securities class action lawsuit that dates back to the year 2000.

The cost of the settlement and associated legal expenses, net of offsetting insurance proceeds was approximately $55 million.

None of the cash associated with the legal settlement has yet been paid, so the settlement appears on our balance sheet as an accrued expense.

It is our expectation that the cash payments net of the offsetting insurance contribution will be paid in the second quarter.

The Securities litigation settlement expenses were partially offset by income that was recognized with respect to an excise tax refund that was confirmed by the Internal Revenue Service several weeks ago.

As I discussed on a prior earnings call, we received the favorable ruling from the IRS last year, 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 that ruling, we had been remitting such a tax to the IRS, and recognizing the expenses associated with the tax, as a deduct to our merchant revenues.

Upon receipt of the ruling, we immediately stopped remitting the taxes, and then pressed for a refund of the amounts that we had paid previously.

Approximately $15.9 million of the refund appears as revenue in our GAAP P&L, and another $2.8 million appears in our interest income line item, as the IRS paid us for foregone interest on our refund.

The cash from the excise tax refund had not been paid as of the end of Q1, so it appears on our balance sheet as another current asset.

The cash refund was actually received in April.

Finally, our income tax expense was positively impacted by the net cost of the legal settlement, net of the excise tax refund by approximately $14.4 million.

So the negative after tax impact of the legal settlement, net of the excise tax refund was approximately $22 million, and all of these items have been excluded from our pro forma results, because of their one-time nature, and their lack of comparability to prior periods' results.

GAAP results were also negatively impacted by approximately $5.9 million of acquisition related amortization, and $3.2 million of stock-based compensation expense, which reflects the impact of the adoption of FAS 123(R) last year.

All of these expenses were non-cash in nature.

GAAP results exclude approximately 3.9 million shares of common stock equivalents associated with our convertible bonds, employee stock options, and unvested restricted stocks, due to the anti-dilutive impact that the inclusion of the stock would have had on our GAAP loss.

As for cash and cash flow, we generated approximately $18.8 million in operating cash flow during the quarter, which consistent with our historical operating cash flow results was slightly in excess of our pro forma net income.

You will probably notice that our OCF was roughly flat versus last year.

Keep in mind that in last year's first quarter there was no cash outflow associated with the payment of income taxes, versus a $6.6 million outflow this year.

Also, the comparability of this year's first quarter OCF versus last year's was distorted by the payment of the payment of approximately $5.5 million in performance based employee bonuses in Europe, that were accrued last year and paid in the first quarter of this year.

In last year's first quarter there were no such payments made in Europe.

As for our cash balances, we began the quarter with $434 million of cash and marketable securities, and we closed the quarter with $457.6 million of cash and marketable securities, representing an increase in cash of $23.6 million in the quarter.

We generated approximately $7.6 million from the exercise of employee stock options, and we repurchased approximately $1.4 million of our stock during the quarter.

Total capital expenditures in the first quarter were approximately $2.2 million.

Now for a few comments on guidance.

We are looking for second quarter gross bookings to grow by approximately 23 to 28% on a year-over-year basis, with gross bookings from Priceline Europe growing approximately 72 to 76% on a year-over-year basis.

You will note that this guidance implies a decline in our domestic gross bookings, although it is our expectation that our higher margin merchant gross bookings will be roughly flat with last year, despite the loss of the Orbitz business, which was a significant contributor to domestic merchant gross bookings last year.

We expect pro forma revenue, which excludes the benefit of additional excise tax refunds that are expected in Q2, to grow by approximately 10 to 15% on a year-over-year basis.

We expect pro forma gross profit dollars to grow by approximately 34 to 38% on a year-over-year basis.

As for Q2 operating expenses, we are targeting consolidated advertising expenses of approximately 52 to $55 million, with approximately 75 to 80% of that amount being spent on online advertising.

We expect sales and marketing expense of between 13 and $14 million.

We expect personnel costs excluding stock-based compensation to come in between 19.5 and $20.5 million.

We expect G&A expenses of approximately 8 to $8.5 million.

Information Technology costs of approximately 3 to $3.2 million, and depreciation and amortization expense excluding acquisition amortization of approximately $3.2 million.

We expect total below the line positive impact of approximately $1.3 million, which comprises net interest income, foreign exchange expense, equity and income of Priceline Mortgage, and minority interest expense.

We are targeting pro forma EPS of approximately $0.80 to $0.90 per share, and our pro forma EPS forecast includes an estimated cash income tax of approximately $7 million, comprised of alternative minimum tax in the United States, and income taxes in Europe.

Our pro forma EPS guidance is based on a share count of approximately 42.9 million shares.

The midpoint of our pro forma EPS range represents a 55% increase versus last year's second quarter.

As for expected GAAP results, we expect to report a GAAP EPS of between $0.52 and $0.62 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.

GAAP results will be positively impacted by additional receipts of excise tax refunds in the amount of approximately $3 million.

While the refund is cash in nature, it is excluded from the pro forma results, due to its one-time nature, and its lack of comparability to prior year results.

Finally, GAAP results will be negatively impacted by the inclusion of approximately 1.4 million shares of additional unissued common stock, associated with our 2006 convertible note offerings, that we are required to use in the calculation of GAAP EPS.

As I have mentioned on our prior earnings calls, because of the convertible note hedges that we have in place, the 2006 convertible notes do not begin to become dilutive, unless and until our stock reaches a level of $50.47 per share.

Therefore the share count used in computing pro forma EPS includes the Treasury Stock method dilutive impact of our two most recently completed debt traunches, only to the extent that our stock exceeds $50.47 per share.

While we are not going to give detailed line item guidance for the full year 2007, we are comfortable giving the following bookings and pro forma EPS guidance as outlined in our press release last week.

To summarize where we were before our earnings announcement, we had been forecasting full year 2007 pro forma EPS of between $2.60 and $2.90 per share.

We are now targeting pro forma EPS of approximately $2.90 to $3.10 per share.

This is based on a pro forma income tax rate of approximately 15.5%.

GAAP EPS is expected to be approximately $1.25 to $1.45 per share, primarily as a result of the same non-cash items that will impact Q1, as well as the shareholder litigation settlement and the excise tax refund.

We expect to achieve full year gross bookings of approximately 4.1 to $4.2 billion.

The pro forma EPS guidance for the full year 2007 is based upon a diluted share count of approximately 42.6 million shares, which includes a calculation of the economic dilutive impact of all our outstanding convertible notes and stock options, net of the favorable economic impact of our convertible note hedges.

Based upon actually year-to-date trading prices of our stock, and an assumption that the future trading price of our stock for the remainder of 2007, would be equal to yesterday's closing stock price of $62.54 per share.

This calculation produces an average trading price for the year of $58.59 per share.

The share count in today's guidance is a slightly higher share count than the one that we shared in last week's preannouncement to our share count, due to additional treasury stock method shares that have been added to our share count, due to the increase in our stock price following last week's preannouncement.

Despite the slight increase in share count, we remain comfortable with our $2.90 to $3.10 range.

That leads me to a couple of final points that I would like to make about our forward-looking earnings for 2007 and beyond.

The first point is essentially a repeat of a point I made on last quarter's earnings call with respect to our diluted share count.

On that call, I spent quite a bit of time talking about the potential dilutive impact that our outstanding convertible notes could have on our pro forma diluted shares outstanding and therefore our pro forma EPS.

Given the current trading levels of our stock, the diluted share count used to compute both GAAP and pro forma EPS, will be more affected by movements up or down in the future trading price of our stock.

As I also mentioned, we do not want to get into the business of projecting our stock price, so instead we wanted to give you some numerical guideposts, to use to allow investors to better understand the potential dilutive impact to EPS, that our convertible notes could have on our diluted share count.

Specifically, at an average stock price of $50 per share for the full year 2007, the share counts that I just quoted for our full year 2007 pro forma EPS guidance would be reduced by approximately 1.8 million shares, and therefore our diluted share count would be approximately 40.8 million shares.

At an annual average stock price of $60 per share, the share counts would be increased by 300,000 shares, and therefore our diluted share count would be approximately 42.9 million shares.

At an average annual stock price of $70 per share, the share counts would be increased by 1.8 million shares, and therefore our diluted share count would be approximately 44.4 million shares.

Finally, at an average annual stock price of $80 per share the share counts would be increased by 3 million shares, and therefore our diluted share count would be approximately 45.6 million shares.

As you can see, the higher our stock price goes, the more shares get included in our pro forma diluted EPS calculation, although as you can also see, the relationship is not linear, and the number of additional marginal shares decreases at ever higher stock price levels.

The second point has to do with our income tax rate.

As most of you know, because of our significant NOL tax assets the U.S., we are not much of a cash taxpayer in the U.S., other than on a small alternative minimum tax basis.

On the other hand, our NOLs do not apply in Europe, and we are therefore a significant payer of cash income taxes there.

In recent years, our effective cash tax rate has increased significantly because of the increasing share of consolidated pretax profits that are generated in Europe.

Yet in 2007, our guidance for our cash tax rate assumes that this trend will stop, and that there will be little change in the rate in 2007 versus 2006.

This is due to our ongoing efforts to grow our domestic pretax income at significantly higher rates in 2007 than in 2006.

And while pretax income is likely to grow at a faster rate in Europe than in the U.S.

in 2007, the respective growth rates are expected to be much more similar than in past years, and therefore we do not expect to see much of a change in our consolidated cash tax rate in 2007.

However, it is our current expectation that in 2008 and beyond, Europe will grow its pretax income at significantly higher rates than the U.S.

And therefore, it is our expectation that our cash tax rate will increase in 2008 and beyond, as our European business generates an ever increasing share of our pretax income.

So while we are not going to get into a discussion of EPS for 2008 and beyond, I hope that this discussion of share counts and tax rates are helpful to investors that are engaging in such a discussion.

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

And with that, we would be happy to answer your questions.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS)

First question comes from Aaron Kessler of Piper Jaffray.

Your line is open.

Thank you.

Good quarter guys!

First, could you give us a sense for what the housekeeping, what the international revenue number was, and then on in terms of a brand awareness, can you give us a sense of aided or unaided brand awareness bookings has in Europe at this point, and then I have one follow-up question.

Sure, I'll take the first one.

The Europe revenues for Q1 were $48 million, and the gross profit dollars were $47.1 million.

And Aaron, as to the brand awareness, we don't have the same kind of research for Europe that we have for the United States.

We use that principally here to track the impact of our offline marketing, and we don't do any offline marketing in Europe.

I think you can get an indication of that from looking at some of the published traffic data that is out there for the Booking.com sites, as compared to some of the other online sites.

Would you imagine at some point you would ultimately increase the brand awareness to protect your brand.

I mean if you can do some search marketing and gain share, would you at some point consider doing more brand advertising in Europe?

The way we look at that at this point in time is we, there are a lot of things that we are doing and can do to build the brand and build awareness without getting into television and magazine advertising, which the complexities of the European market make that very expensive, and sometimes not that effective.

So we are principally engaged in efforts to build repeat business and customer loyalty, based on online advertising and based on their experience on the website.

Thank you and good quarter.

Thanks.

Thank you.

Our next question comes from Anthony Noto of Goldman Sachs.

Your line is open.

This is actually [Jen Watson] in for Anthony.

Quick question on the higher net revenue rates in most of merchant and agency bookings this quarter.

Can you just discuss the factors that drove that, and if they are sustainable throughout the year?

Sure, Jen.

I would say with respect to merchant, our merchant products, I would say we generally have experienced a slight increase in our core raw margins.

And with respect to the net revenue rate on agencies, that is more driven by seasonal factors, as well as sort of the relative growth rates on a quarter by quarter basis.

So because we did experience a sequential decrease in our gross bookings, remember, because we recognize revenue on a stayed basis, there will always be a little bit of a lag effect.

You should always see the revenue, if gross bookings are declining sequentially, the revenues would not decline quite as fast in the same quarter.

On a year-over-year basis though with agency bookings, I see a net revenue rate extended about 140.

Is that year-over-year expansion likely to continue?

I think there is more of an impact with respect to Q1, and you shouldn't necessarily start extrapolating with that trend.

Okay.

Thank you.

Thank you.

Imran Khan of JPMorgan.

Your line is open, sir.

This is [Bridgette Wiesher] calling in for Imran.

We have a quick question about the international performance.

It is consistently stronger than we all expect.

Could you give any indication what you think it will be going forward, and if you are seeing different performance in different countries?

I think we have given guidance as to a range of gross rates for the second quarter, and so that represents our best estimate today.

In terms of specific countries, I think our experience has been consistent over the last few quarters, that the growth rates in continental Europe tend to be higher than the U.K., which is a more mature market.

And as I mentioned in the prepared remarks, we continue to try to build business albeit from a small base, in some of the newer markets as you travel east, and some of those markets do have a higher growth rate but again it is from a very small base.

Okay.

And the operating leverage, could you discuss in more detail where you got that from, and how we should look at that going forward through the year?

Sure.

Well, with respect to the U.S., I think w have been trying to alert investors at least for two to three quarters, that our goal and it really started in the fourth quarter of last year, but certainly into 2007, is that domestically we are very much trying to manage our business for above market growth and earnings domestically.

Even if that potentially comes at the expense of a little bit of top line growth, and so that's why if you look at our domestic gross bookings, while they were flat, our earnings grew at substantial rates, and that is very consistent with how we have been trying to manage the business and that's as a result of as we mentioned in our prepared remarks, more stringent ROI requirements with respect to online spend, and of course very careful expense management overall, which is something really that has been a part of Priceline going all the way back to the year 2000.

In Europe, I would say the leverage again was driven by very good ROIs with respect to online spend, better than we had planned.

But with respect to fixed costs, if anything that was really driven by, since we probably didn't hire as many people as quickly as we expected, we have very, very big growth plans in Europe, to sort of support the ongoing growth that we have, and our goal is to hire people basically at this point almost as fast as we can.

And maybe we probably did not hire at the rate that we expected in Q1.

Our goal is to catch up to that because again we think the opportunity is large in Europe.

So while we had very, very good leverage in Q1, I would not say that in Europe we have yet reached a point where we are in the U.S., where we are really trying to go for leverage.

Our goal is to go for growth in Europe.

It just so happened that expenses didn't quite catch up to our growth in Europe in Q1.

But our goal is to build out those markets across Europe, and there will be some expenses associated with it.

Great.

Thank you.

Thank you.

Our next question comes from Chris Gutek of Morgan Stanley.

Your line is open.

Thanks, hi, guys.

Nice quarter.

Couple of follow-ups on the previous line of thinking.

First, focusing back on the U.S.

a minute.

Could you elaborate how you are thinking about the optimal tradeoff between growth in margins for the U.S.

specifically do you think you can further cut back in the marketing and further boost margins meaningfully?

Or conversely are you a little bit unhappy with the kind of growth you are seeing, and you would like to maybe spend a little bit more, get the growth rates back up.

How much more opportunities are there for to you tweak that optimal mix of growth versus profitability?

You know, I think there is a couple of points I would make in response, Chris.

The first is we do look at the different lines of business a little bit differently.

Going back several years ago for Priceline, we experienced substantial year-over-year declines in our opaque airline ticket business, and yet we were able to significant growth in opaque hotels and opaque rental car.

While we are a little bit disappointed to see the year-over-year decline in airline tickets, it is much more important for us to have better trends in hotels and rental cars.

I think I said in the prepared remarks that we saw unit growth for hotels and rental cars, and that growth was at respectable levels, given what we understand about the growth otherwise in the marketplace.

So I think while we are disappointed to see the airline ticket growth disappear and shrink here in the first quarter, as we mentioned, most of that is tied to Orbitz, and to really declining margins in retail tickets.

We are absolutely not going to chase that business at a loss.

We don't think that is the right way to run a business.

Our experience tells us it is not necessary for us to do that, in order to maintain relevance and continue growth in the hotel and rental car businesses, which are really much more important to driving our overall profitability.

And I think maintaining high relevance and brand loyalty with our customers.

Okay.

Maybe just talk, a similar conversation in the European business and maybe to the extent you're several years behind in Europe where you are in the U.S., could you elaborate a bit on the opportunity to increase penetration in the larger markets, and to get into some newer markets, in terms of how many years does it take before your European business looks like your U.S.

business.

How many multiples of the current size in Europe can it be as that plays out over the next few years?

We think there are just so many differences in the marketplace that it would, we don't really look at Europe and say okay, how much is this like the United States, and how can we map a path to the same levels of maturity we see here in the United States.

Because of the relative youth of the market, because of basic travel trends, because of the complexity that different languages, and different countries and cultures, inject into the process, we just think it's a fundamentally different opportunity.

The size of the opportunity is bigger.

The population is at least as big, and there is more leisure travel because there is more holidays.

The value of the service that we provide is higher for customers, because they need the information we provide, and it's higher for suppliers because they really don't have the ability in general to reach complex European demand on their own.

So we really believe it is just fundamentally different, and if you look at the relative penetration of online travel in some of the less mature markets in eastern and southern Europe, that is essentially an untapped opportunity in our opinion.

So we just think there is a lot of runway, and we also think that the market, the general travel market is basically developing a little bit differently there, because of the very significant penetration of low cost carriers.

It has really made travel much more affordable.

It has changed the way people book travel.

They have gotten used to the idea of being able to book a low cost airline ticket virtually at will.

The principal shopping ends up being around the hotel, and we have got a great product to meet that demand.

Quick one for Bob.

Do have you the legal cost on an after tax basis for the settlement?

Well, I gave the components.

I didn't break out the tax effective legal for just the legal settlement.

I did for that including excise taxes.

Maybe I could follow up with you, Chris.

It will certainly be in the Q that we file tomorrow.

Okay.

Great, thanks.

Our next question comes from Paul Keung of CIBC.

Your line is open.

This is [Monuresh Masureka] calling for Paul Keung.

Expedia mentioned today that their investment in Europe's second tier markets is a long road ahead, and today they are really only making initial steps in the U.K.

What do you think are the values to entry for new entrants, to your strong niche in the secondary and tertiary markets in Europe?

I think that it represents an advantage to us in some markets to be a first mover in terms of supply and inventory.

My belief is that those markets are, they are available if somebody wants to go out and try to get supply out of it.

I am sure Expedia will be reasonably successful in doing so.

I don't think there is a huge barrier to entry to doing so.

I think we have got an inventory position there that's defensible and attractive for us.

I would add to that, that I think there is a general view out in the market that Priceline Europe is all about tertiary markets, and obviously that is an aspect of our business, but we are obviously, given our gross bookings in Q1, we are at a $2 billion plus run rate of gross bookings.

You don't get that big being in the tertiary markets.

So the major markets are very, very significant big contributors to us.

I think investors are somewhat a little bit misled into thinking that our gross bookings are driven by a bunch of cities that no one has ever heard of.

The biggest cities, Paris, London, those are our most important cities in terms of gross bookings.

Thank you.

Thank you.

Thank you.

Our next question comes from Mark Mahaney of Citigroup Investment.

Your line is open.

Thank you very much.

Just one question on Europe.

Can you just give us an update on your thinking about different products outside of hotels.

You are clearly at a scale now and a size where you probably could advance aggressively into some other travel products.

I think you already do a little bit of that.

How do you think about the trade-offs, in terms of doing that, and the competitive advantages you would bring to some of those other segments?

Thank you.

You know, I think going back to the comment I made, Mark, about the differences between Europe and the United States, we really don't have a view that the airline ticket business there is sufficiently attractive that we would try to start up a greenfield operation in airline tickets.

You know, given the growth rate that we have in hotels and we think the great promise that that market continues to hold at this point in time, we are probably going to stay focused on hotels.

I wouldn't say never with respect to any other products, but we think hotels is the most attractive market for us right now.

Thank you, Jeff.

Thank you.

Our next question comes from Justin Post of Merrill Lynch.

Your line is open.

Hi, this is James Sanford for Justin Post.

Couple really quick questions.

One, on the Orbitz falling off this quarter, can you provide us any details, I apologize if I missed it, on what the U.S.

growth might have been, excluding the Orbitz on an organic basis?

And secondly, it sounds like the U.S.

hotel industry is starting to reach a more stable sort of environment from a supplier perspective.

Even with REVPARs potentially coming down.

How does that impact Priceline going forward, if conditions from suppliers start to improve?

I will answer the second question first, and then maybe Bob can hit the first one.

I think the conditions in the hotel market are attractive for online travel agents, and attractive for hotels, quite frankly.

We are starting to see new supply come on with REVPAR growth moderating a little bit here.

I think the value of the distribution we bring to the hotels is probably enhanced a little bit, and people start to focus a little bit more on getting share versus absolutely maximizing their yields.

So I think it is a good market both for hotels, and a good market for us to demonstrate the value of our distribution to hotels.

With respect to Orbitz, we are not quantifying it, only because it is impossible to quantify how much of the Orbitz traffic was essentially cannibalistic.

As you probably remember, that deal was branded.

And so certainly some of the folks that came to us through Orbitz, would have come to us anyway by just coming directly to our website.

All of the Orbitz business appeared as merchant gross bookings, and as you can see, we had the Orbitz business in Q1 of last year, we did not have it in Q1 of this year.

Nevertheless, our merchant gross bookings were up, as Jeff mentioned.

They went from 266 million to 287 million, despite the loss of Orbitz.

So I think that tells you obviously that there was some dilutive impact to the Orbitz deal, not to mention obviously how much we had to pay for it.

Now the Orbitz business did get off to a slow start last year, so the impact of losing Orbitz for Q2, Q3, and Q4, will have more of an impact to our merchant gross bookings than they did in Q1.

But again, it is very difficult to quantify it on a dollar by dollar basis, given sort of the cannibalism point I made.

That is great.

Thank you.

Thank you.

Our final question comes from Michael Millman of Soleil Securities.

Your line is open, sir.

Couple questions as well.

Could you tell us what the ADR increase was in Europe, and sort of related to that, how much growth comes from adding new hotels versus getting more concentration in the bulk of the hotels you do business with?

We don't break out the ADRs for our markets.

I mentioned that we continue to sign up hotels and we are over 30,000 now, and we certainly believe that is helpful to our conversion, and making both the old active hotels inventory and bookings hotel inventory together, available together to all of our customers has helped our conversion in the latter half of last year, and certainly continues to help us now.

Well, in that connection, can you give us some idea, or quantify the conversion rates and/or the repeat rates?

Again, we view that information as sensitive competitively, and don't break it out.

Okay.

In regard to talking about the comment on Expedia, do you see and your comment on Ryanair, do you see their deal with Ryanair helping them get into some of those markets in which you presently are playing?

I think Expedia and hotels.com have a big enough footprint, and enough demand to basically contract for inventory and availability without doing the deal with Ryanair.

I think where Ryanair will probably help them is in their most dense destinations, and I am not sure whether that foots with secondary or tertiary markets or not.

I suspect they are really flying to the primary leisure destinations in Europe.

And I think you said that in '08 you expect the European earnings to significantly outpace the domestic with the '06 but not like '07.

Is there something in particular that you should emphasize that is happening in '07 in domestic, to make it presumably it's profit move ahead, kind of on a one-year basis?

I wouldn't characterize what is going on in the United States, as something that is really on a one-year basis.

I think Bob's comment on the tax rate really is more driven by the very significant disparity in gross booking growth rates that you are seeing between Europe and the United States.

But moreso in '08 than '07?

When you expect the bookings growth rate to be slowing in Europe?

But again, the bookings growth rate is also slowed in the United States, and you can see that in the first quarter results.

And finally, can you give us an idea or at least ranking the revenue profitability in the U.S.

between the merchant hotels and merchant cars?

We don't break out profitability by segment but I think we have certainly said on several previous earnings calls, that the very significant majority of our gross profit dollars and profit in the U.S.

is driven by products not related to our airline ticket service.

Can you break out between hotel and cars, percentage?

Well, obviously we break out unit sales.

When you look at rental car days, that is basically 100% of those rental car days are generated within the U.S.

That is the most we can give you, Mike.

Okay.

Thank you.

All right.

Gentlemen --

I think the operator said that was the last question.

Thank you all very much for participating in our call.

Ladies and gentlemen, that concludes our program.

Thank you for your participation, and have a wonderful day.

You may all disconnect at this time.