Booking Holdings Inc (BKNG) 2007 Q2 法說會逐字稿

Welcome to Priceline's second 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 earning press release, together within the Company, financial and statistical supplement, is available in the Investor Relations section of Priceline's website, located at www.priceline.com.

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

Go ahead, gentlemen.

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

I'm here with Priceline CFO, Bob Mylod.

Priceline reported gross bookings for the first quarter of $1.235 billion, up 33% year-over-year.

This quarter is our first with over $1 billion in gross bookings, a significant milestone for the Company.

Proforma gross profit of $155 million was up 46% and proforma net income was $47.3 million or $1.11 per share, up 102% over last year.

The sequential increase in proforma gross profit from Q1 to Q2 was 49% and proforma net income more than doubled.

Second quarter results showed good earnings leverage and surpassed the high end of our guidance due to better than forecast earnings in both our domestic and international businesses.

Priceline's gross bookings growth rate was driven by 93% growth at booking.com, which, again, exceeded our growth expectations in the second quarter.

Bottom line, over performance was attributable to bookings growth at booking.com, growth in domestic gross profit and expense efficiencies.

Booking.com continues to benefit from positive e-commerce and travel market trends in Europe, integration activities and strong management execution.

Booking.com now has over 35,000 hotels in 53 countries and continues to build supply and distribution in important new markets, including the United States and going forward, the Pacific Rim.

Booking.com also continues to focus on online brand building and building repeat business, the benefits of which are evident in more established markets but we believe still to come in newer markets.

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.

As foreshadowed in our previous guidance, gross bookings for Priceline's domestic business were negatively impacted by the loss of the OPEC and travel web business from Orbitz and weak airline ticket sales.

Nevertheless, we reported an 11% increase in domestic proforma gross profit as our domestic hotel and rental car businesses continued to perform well, showing continued growth in units and gross bookings.

The growth in gross profit, together with the benefit of expense efficiencies, contributed to domestic earnings growth which we believe is at the highest first half rate for the leading OTAs.

Our statistical supplement contains data reflecting the impact of the Orbitz business on bookings and gross profit, which shows continued organic growth in the hotel and rental car business.

We believe our domestic ad campaign, The Negotiator is doing a good job of reinforcing our distinctive positioning at the value end of the U.S.

market.

We are encouraged by these results and will look for ways to build on this strength.

Priceline's global hotel room night sales for the second quarter exceeded 7.2 million room nights, an increase of 45% over last year.

With positive organic growth trends domestically and continued high growth rates internationally, our intention is to build on our leadership position in worldwide hotel sales through investment in people, product, marketing and geographic expansion.

With a large U.S.

and European customer base and the most supplier-friendly array of services, we believe that we are well-positioned to build on our extensive inventory and content and capitalize on global growth in online travel bookings and international travel.

Hotel sales now account for well over two-thirds of Priceline's total gross bookings and over three-quarters of our gross profit.

We believe our hotel business is well-positioned given its strong, historical growth trajectory and that should translate to improved consolidated financial results going forward.

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

Thanks, Jeff.

The second quarter of 2007 was another strong quarter during which we set new all-time quarterly records for gross bookings and proforma gross profit EBITDA net income and EPS.

We're particularly pleased by the earnings records, given that they were achieved in a quarter that is not our seasonally strongest.

Most importantly and I will get to this in a moment, when I get to guidance, we expect the momentum to continue into the third quarter and through the remainder of the year.

Internationally, booking.com, once again, turned in gross bookings growth that significantly exceeded our expectations, a phenomenon that has occurred for literally every quarter since the formation of booking.com.

But Q2's performance stood out among all of these great quarters because of the return to quarterly sequential increases in the annualized gross bookings growth rate on both the dollar and local currency basis.

Specifically, our international gross bookings grew in U.S.

dollars by 92.7% year-over-year, a growth rate that was driven by strong room night sales and a healthy year-over-year increase in unit prices and which allowed us to significantly strengthen our position as the largest online hotel reservation booking service in Europe.

And as Jeff mentioned a moment ago, this quarter's performance wasn't just about top line growth, it was also about the demonstration of operating leverage.

Our international management team continues to focus on operational execution and expense management, which is driving this operating leverage, yet, at the same time, they continue to make significant investments in human resources, geographic expansion and technology infrastructure that we hope and expect will position our international operations for further future growth.

In the United States, substantially all of our financial metrics came in at or above planned.

Most notably, our U.S.

operations continue to perform very well within the service offerings that are our most profitable and highest margin, most notably our hotel service.

The discipline with which we have approached our online advertising expenditures in the U.S., something we have been talking about for the last several quarters, continues to pay dividends.

While this discipline has come at the expense of some gross bookings, particularly within our airline service offering, it has helped deliver EBITDA and earnings growth that we think is at industry leading levels.

As for the specifics, our consolidated gross bookings of $1.2 billion grew 33% year-over-year and were substantially ahead of our forecast, due almost entirely to the international over performance that I just discussed.

Our gross profit over performance was even more favorable.

Specifically gross profit dollars of $154.9 million grew by 46% on a year-over-year basis and came in $10 million higher than the mid-point of our prior guidance.

As for our Q2 proforma operating expenses, despite the exceptionally large upside in our gross bookings and gross profit performance, we were able to keep our Q2 advertising expense of $53 million within our prior guidance.

This was certainly the biggest contributor to the operating leverage that we exhibited this quarter.

Moving on to the remainder of our proforma expenses, the sum of personnel costs, SG&A, depreciation and amortization and IT expenses, came in towards the low end of our prior guidance, which further added to the quarter's operating leverage.

Our proforma income tax expense actually came in higher than our prior guidance due to the strong pre-tax income performance in Europe, where our NOLs do not apply and where we are a taxpayer.

We also incurred approximately $475,000 of losses associated with foreign exchange hedging activities due to increases in the value of the euro and the pound, the two principal 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.

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

We reported proforma net income of $1.11 per share, which, as Jeff mentioned, represented a 102% year-over-year growth and handily bested both our guidance and first call estimates of $0.89 per share.

We reported GAAP net income of $0.79 per share, up 182% versus last year and substantially higher than our $0.52 to $0.62 guidance.

The GAAP results were favorably impacted by an additional $2.8 million of benefits that we recognized from the excise tax refund initiative that we discussed in great detail on last quarter's earnings call.

This benefit was partially offset by $381,000 of additional expenses related to our year 2000 securities class action settlement that we discussed in great detail, also on last quarter's call.

GAAP results were negatively impacted by approximately $6.3 million of acquisition-related amortization and $3.5 million of stock-based compensation expense.

Both of these expenses were non-cash in nature.

GAAP diluted share count reflects the full amount of stated dilution related to our convertible notes.

As I have mentioned in significant detail on previous earnings calls, we have effectively reduced a portion of this share dilution through hedging arrangements with third parties.

The benefit of the hedging transactions will not be recognized under GAAP until the maturity dates of the underlying convertible bonds, but the economic reality of the convertible bond hedge is that our diluted share count has been reduced by approximately 1.5 million shares and accordingly, consistent with past quarters, this amount is eliminated from our proforma share count.

Conversely, GAAP diluted share count excludes approximately 500,000 shares of unvested, restricted stock related to employee compensation plans.

These shares and their associated dilutive impact are included in our proforma share count because it is our expectation that these shares will ultimately be vested and outstanding.

As for cash and cash flow, we generated approximately $9 million in operating cash flow during the quarter.

Keep in mind that our operating cash flow was negatively impacted by the securities class action settlement payment, net of excise tax refund receipts that were paid and received respectively during the quarter.

These items netted to approximately $33.4 million of cash outflows during the quarter.

Operating cash flow before these items was $42.3 million, up 68.4% year-over-year.

As for our cash balances, we began the quarter with $457.6 million of cash and marketable securities and we closed the quarter with $451.6 million of cash and marketable securities.

The small decrease in cash was driven by the aforementioned payments associated with our securities class action settlement.

It was also driven by $15 million that we used to repurchase a portion of the minority interest in our international operations not owned by us.

We generated approximately $2.1 million from the exercise of employee stock options and we repurchased approximately 200,000 of our stock during the quarter-- $200,000 of our stock during the quarter.

Total capital expenditures in the second quarter were approximately $3.3 million, this amount includes all money spent on capital equipment and internally developed software.

And now for a few comments on guidance.

We're looking for third quarter gross bookings to grow by approximately 43% to 46% on a year-over-year basis, with international gross bookings from booking.com growing approximately 85% to 90% on a year-over-year basis, and domestic gross bookings growing 10% to 15%, an increase due in part to the summer air fare sale we have been running.

As you can see, this represents a substantial quarterly acceleration in our annualized growth rate, which is primarily reflective of the continued expected momentum from booking.com.

We expect proforma revenue to grow by approximately 20% to 25% on a year-over-year basis.

We expect proforma gross profit dollars to grow by approximately 50% to 54% on a year-over-year basis.

As for Q3 operating expenses, we're targeting consolidated advertising expenses of approximately $64 million to $67 million with approximately 85% of that amount being spent on online advertising.

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

We expect personnel costs, excluding stock-based compensation to come in between $21.5 million and $22.5 million.

We expect G&A expenses of approximately $9 million to $9.5 million.

Information technology costs of approximately $3.5 million to $3.9 million, and depreciation and amortization expense, excluding acquisition amortization of approximately $3.5 million.

We expect total below the line positive impact of approximately $1 million which comprises net interest income, foreign exchange expense, equity and income of Priceline mortgage and minority interest expense.

We're targeting proforma EPS of approximately $1.21 to $1.31 per share and our proforma EPS forecast includes an estimated cash income tax of approximately $14 million comprised of alternative minimum tax in the United States and income taxes in Europe.

Our proforma EPS guidance is based upon a proforma diluted share count of approximately 43.6 million shares.

The mid-point of our proforma EPS range represents a 75% increase versus last year's third quarter.

As for expected GAAP results, we expect to report GAAP EPS of between $0.90 and $1.00 per share.

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

GAAP results will also be negatively impacted by the inclusion of approximately 1.5 million shares of additional unissued common stock associated with our convertible note offering that is fully hedged but that, as I just mentioned, we are required to use in the calculation of GAAP EPS.

While we are not going to give detailed line item guidance for the full year 2007, we are comfortable giving the following bookings and proforma EPS guidance.

To summarize where we were before today's earning announcement, we have been forecasting full year 2007 gross bookings of between $4.1 billion and $4.25 billion.

We are now upping that target to approximately $4.5 billion to $4.65 billion, of which approximately $2.45 billion to $2.55 billion is expected to come from booking.com.

As for EPS, we have been forecasting proforma EPS of between $2.90 and $3.10 per share.

We are now targeting proforma EPS of approximately $3.50 to $3.65 per share.

This is based on a proforma effective cash income tax rate of approximately 17%.

The slight upward revision in our cash income tax rate guidance is due to the fact that most of the earnings upside is being generated internationally, where we are a taxpayer.

GAAP EPS is expected to be approximately $1.82 to $1.97 per share.

The proforma 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 of our outstanding convertible notes and stock options, net of the favorable impact of our convertible note hedges, based upon the actual year-to-date trading prices of our stock and an assumption that the future trading price of our stock for the remainder of 2007 will be equal to yesterday's closing stock price of $61.72 per share.

As I've discussed exhaustively in previous earnings calls, our diluted share count has and will continue to be affected by the inclusion of additional shares associated with our convertible debt.

The amount of additional shares is, in turn, directly impacted by movements in our stock price, which is a good segue to an update that I wanted to provide with respect to our statistical supplement.

We have added a couple of new sections to our statistical supplement to better aid investors in their analysis of our business.

The first new section gives investors a grid that shows what our potential diluted share counts would be for Q3 2007, full year 2007 and full year 2008 based upon various hypothetical stock prices.

As we have said in previous earnings calls, we are not going to get into the practice of predicting our stock price, but hope that this detailed data gives investors, who have their own price targets a guide post that they can use to forecast our proforma EPS on an ongoing basis, and then Jeff just mentioned in his remarks, the second new section in our stat supplement.

The new section gives an update to investors on how our Q2 results were impacted by the loss of the Orbitz affiliate business that we had last year but did not have this year.

As Jeff mentioned, we think the data shows that the fundamentals of our domestic business in 2007 are actually a little stronger than our reported numbers might indicate, due to the significant distortion that the Orbitz business had on comparable gross bookings numbers last year.

We will continue to provide this Orbitz data through year-end.

And finally, I will point out as I've done on previous calls that all of our aforementioned forecasts are based upon an assumption that we will continue 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 likelihood have a negative impact on the travel market in general and our operating results in particular.

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

(OPERATOR INSTRUCTIONS)

Our first question comes from Anthony Noto of Goldman Sachs.

Your line is open.

Thank you very much.

Hi, Jeff and Bob.

A couple of questions, your guidance, obviously you outperformed in the quarter, are relative to the mid-point driven and the gross bookings line by international, but when I look at your increased guidance, which is obviously pretty significant it looks like you've also increased your guidance for international--I mean for domestic, by quite a bit.

Specifically, I think, at your old mid-point, your international gross bookings was 71% growth and now it's 86%.

Your old domestic was down 5.5% if I'm doing the math right, it's now up 5.2%.

So, I was wondering if you could just talk about your gross bookings swing domestically there.

Obviously you're seeing good strength in rental cars and merchant hotels, as you mentioned and you're seeing good strength in profitability, but does that assume an improvement error or is it just lapping the Orbitz loss in the back half of '06?

And then I have a follow-up.

Sure, Anthony, it's Bob.

I will take that one.

Yes, I think obviously, yes, inherent in the forecast is an expectation that some of the difficult numbers we've been experiencing domestically are going to improve.

We talked a little bit about it in our remarks in the sense that our non-air businesses have and continue to perform very well and they have despite the loss of the Orbitz businesses, they've been showing very healthy year-over-year numbers and obviously if you look at it excluding Orbitz it looks even better.

You probably are aware that during the course of the summer, we've been running an air fare sale where we've been giving customers a break on the processing fee associated with the purchase of retail tickets and that's certainly has given us a little bit of a bump in airline ticket gross bookings.

Not really going to impact our bottom line, in fact, while that has helped our ticket sales, it has not helped our bottom line, in fact, we probably have lost a little bit of money running that promotion during the summer.

Really two follow-ups, I apologize.

The first is there's a concern that internationally there will be increased competition from the likes of Expedia and Orbitz.

I wanted to get your perspective, Jeff and Bob, if you look back to the United States, in like '99 and 2000, while there was a fair number of online travel companies competing for the secular growth, the actual investment being made by all of them grew the market fast enough so the rising tide lifted all boats.

Do you think we're in that situation internationally and so as these other companies become more aggressive with marketing and supplier relationships, it actually helps build awareness of the market and grows the online shift, or do you think you run into competitive factors that are more representative of the U.S.

the way they are in say, '05 through '07?

I think it's very difficult to try and draw comparisons between the way the U.S.

online travel market grew and particularly the hotel business, and what's going on in Europe.

There are just so many different dynamics, including very different hotel supply environment, as well as the complexity of dealing with a number of different countries.

So, I think it's really very hard to try to analyze the prospects of the European market by looking at the history in the U.S.

market and in particular, there are a lot of things driving growth in the United States, like the ability and practice of some hotels actually discounting in mainstream retail channels, which really has had very little impact, at least in our opinion, on growth in the European business.

So, I think they are really two very different things.

The second thing I will say is I think that the size and breadth of the European market, in terms of the population, the number of vacation days, the underlying trends in terms of the growth of internet penetration, broadband, usage and the comfort of Europeans in e-commerce itself transactions, credit cards, etc., all of those provide a great tailwind, I think, to all the businesses in the marketplace, and it's a big market and as you can see, based on the results Expedia announced earlier in our results, there is room for more than one company to do very well there.

Great, thank you.

Thank you.

Our next question comes from Chris Gutek at Morgan Stanley.

Your line is open.

Thanks, hi, guys.

Let me just start with a follow-up on Anthony's question which is still focusing on Europe.

You guys had talked at some length about the--the industry growth and the drivers behind that, but from the Company's specific perspective, the year-over-year growth comparison became more difficult in Q2 versus comparison in Q1 and yet you still accelerated the bookings growth in Europe.

So could you elaborate a little bit more on what you guys are doing company-specific to continue to so meaningfully outperform the market growth?

And I know your guidance numbers for the full year sort of speak for themselves, for Europe, but if you could talk a bit more qualitatively about the longer term growth potential for the Company as opposed to the market opportunity?

In other words, for how much longer can the Company continue to grow so much faster in the market and what really is the driving force behind that?

We're not going to try to predict or guide to any longer term numbers than what Bob gave in the guidance portion of the call, but I think there are a couple of things that are helping booking.com do well.

First is we have a very supplier-friendly model compared to the merchant model that the competition uses in Europe.

Our hotel partners control their rates in pricing and inventory and find it very easy to deal with our business there.

Secondly, we have a very consumer-friendly model.

It's an agency model so they don't have to pre-pay, and for most of our customers, the cost of the hotel stay is probably the biggest single cost in their travel plans or in their vacation, and so, we think it's meaningful that they don't have to pre-pay.

We have to compete for inventory, we're well-positioned to do that because we basically are a lower cost distribution channel than the other options that the hotels may have, whether it be offline consolidators or our online competitors, and finally, we've--I think our team here has done an excellent job of building out Pan-European business with demand coming from a lot of different countries, it's really very, very attractive for the hotels to do business with us.

So I think those are some of the things that are driving the growth rates that we've been reporting internationally and we are working to build on those strengths, in particular, as I mentioned in my prepared remarks, to start to develop new markets and build up to size and strength of those markets so that at some point in time, they will become sizable enough to really make a contribution to our overall growth.

On that latter point--sorry, Bob, were you going to say something?

Nope.

Jeff, on that latter point, in terms of the Company gaining scale in some of these countries, I'm curious for--to what extent the intention is to take advantage of that growing scale?

To increase market--to continue to spend aggressively on marketing and drive high growth, as opposed to, as the Company gains scale maybe letting margins in some of those smaller countries, where the customer is currently subscale and probably (inaudible) in the margin front, let those margins ramp up more aggressively.

How do you trade off the growth versus margins in the medium to longer term?

In terms of building out the international hotel business, our bias is going to be towards growing the business, growing the footprint and not necessarily trying to squeeze every last dollar of net income out of it.

We think there is significant opportunity, internationally, not just in Europe, but in the United States, where our Europe source business is still relatively small, and in Asia, I mentioned the Pacific Rim in my remarks and in other countries outside of Western Europe, where the hotel business is pretty small and we intend to invest to build those markets up we think the opportunity to grow organically with the booking.com model has been demonstrated by the success we've had in building it organically across Europe.

Right, okay, great.

Thanks a lot.

Thank you.

Our next question comes from Mark Mahaney at Citigroup.

Your question, please.

Great, thank you very much.

Jeff, you made a quick reference early on to the Pacific Rim.

Is there anything you could talk about there in terms of an update on--on market strategies, and then Bob, any thoughts on how far you could extend--how long you could extend the cutback in the customer processing fee for--is this--it's been something of an experiment for you, although I think you've done this on and off in the past, does it feel like the business is at a point where you actually could eliminate that completely, going forwards for the business?

Thank you.

Okay, I will hit the first one and Bob will do the second.

In terms of the Pacific Rim, we already have inventory in Asia and in particular in--in some of the principal capitals, Singapore, Hong Kong, Taiwan and we are going to increase our efforts to build in the first instance, supply there, so that we can have more inventory to offer to principally U.S.

and European travelers.

We're interested in the market in Australia, New Zealand, our competition is already there in one way, shape or form, and we think there is an opportunity for us to build the booking.com business there organically, as well.

And before I answer that question, just to follow up on Jeff, Jeff also mentioned the United States as being an important area for growth, and I think we've spoken historically, Mark, when we form booking.com through the investments and Bookings BV and active reservations, neither company was doing basically doing any business in the United States, and that's a very important destination for Europeans, especially so given what's been going on with the euro relative to the dollar.

So, that's one area of growth that sort of was a greenfield for us that's not necessarily greenfield for some of our competitors and is sort of contributing maybe little bit to some of the--or that we hope to continue to allow us to grow at above markets rates.

As for the fee mark, you're right, historically over the past many summers we have tried to institute some sort of a promotion related to airline ticket sales, hotel rooms.

This is one of those promotions.

In terms of our ability to keep doing it, I think obviously the numbers that you see for Q2 as well as inherent in the guidance for Q3 show that I mentioned earlier that running this promotion allowed us to get a little bit of a bump in airline ticket sales that helped our gross bookings and are presumably going to help our unit, but it's not generating the amount of extra ticket sales are not overcoming the lost revenue and gross profit associated with the foregone processing fees.

So, I think the answer is obviously we have the ability to do it but that's more reflective of how small that business is relative to the other businesses.

As Jeff mentioned in his remarks, and as we've mentioned really sort of exhaustively over the last year, the airline ticket business is just not much of a big driver over overall results anymore.

So, it's one of those things where depending--no matter what we do, either way, it wouldn't really--it's not expected to drive sort of big changes in consolidated results.

And just one quick follow-up on that.

Booking.com sales to--bookings to Europeans traveling to the U.S., is there any way to measure that materiality so far and is that actually big enough to have caused that acceleration?

How early are you in that opportunity and how big could that be of booking.com's bookings in the future?

It's immaterial to the historical results, including the Q2 results, Mark, but, again, we know, obviously, it's a very big market.

I wouldn't want to quantify how big it could be, but, again, it's a material--it's a big market, lots of Europeans are traveling to the United States, we assume that that's an important part of Expedia's business, for instance, we're quite sure that that's probably a bigger business for them than it is for us, so we just view again that that's an opportunity for the future along with some of these growth initiatives in--outside of Europe and that's why you'll see in our remarks that we're really sort of now speaking about booking.com not so much necessarily as a European business, but really as an international business.

Thank you, Bob.

Thank you, Jeff.

Thank you.

Our next question comes from Justin Post at Merrill Lynch.

Your question, please.

Thank you.

It looks like you're kind of guiding to what looks like an acceleration in total bookings.

Does that also imply an acceleration in hotel room nights from the second quarter?

I think you've already gone through some of the drivers, but is that what you're kind of looking for for the next two quarters, based on July results so far?

Justin, I don't want to get into sort of specific unit metric guidance because we didn't give that form of guidance, but, obviously inherent in our ability to maintain these growth rates, again, Jeff mentioned it his remarks, that increasingly we're becoming a hotel business, a worldwide hotel business that happens to sell some airline tickets and rental cars in the United States.

So it would be hard for us to achieve any of these number without continued strong numbers in hotels.

Okay, and what kind of new inventory were you able to add?

What are you most happy about as far as what countries or what types of hotel inventory you added to your sites in the second quarter?

I think if you look at our last publication of hotel numbers, you can see that the European numbers have come up by a few thousand hotels.

Some of those hotels are in newer markets, some of them are in existing markets.

I think in terms of what--what we're more and more excited about, though, is getting real inventory in some of the newer markets and starting to see some gross bookings flow to that inventory.

Not, as I said before, because it has a significant impact on our gross bookings growth today, but it holds the potential that these new markets could be the source of growth in the future.

Okay, I don't know if you will answer this, but we'll ask.

Any relative bookings size in the U.K.

versus overall or the U.K.

growth rate versus the overall growth rate?

No, you're right, we're not going to answer it.

I guess we reiterate what we said historically which is we believe that we have a higher exposure in concentration to the continental Europe countries, which are the fastest--which are faster-growing than the U.K.

and, again, we think that's one of the reasons why our growth rates sort of have looked higher than the competition.

Not to say, obviously that U.K.--it's an very important market for us, and we couldn't have these growth rates if the U.K.

wasn't also performing very well.

It's just that some of the continental Europe markets have been growing at triple digit rates.

Okay, and then any impact from Expedia?

They talked about spending more in the second quarter.

What's that doing to the search marketing landscape in Europe at this point?

I don't think we want to get into a lot of detail about what we're seeing in the search market, just because it's so competitive to give insights as to what we're seeing, could have an impact on what somebody else does.

Okay, last question.

You've got the--looks like the debt in the short-term--I mean short-term liability column in the balance sheet, is there any meaning for that to be in the short-term section versus the long-term?

Yes, Justin.

The reason for why it's classified as short-term is because the stock price, at least as of the first and second quarters, had traded at prices above which the convertible note holders are allowed to convert their stock if they so choose, and because they have that right, we're required under GAAP to classify that debt as short-term.

It's not our current expectation that much if any of that activity would happen, given where our stock price is trading, given the fact that the convertible notes are trading at higher prices than the components of the convertible would trade, if we were to deliver cash and stock, if they were to convert.

So as long as the converts continually to trade above that price, we expect that they--that the majority of them would stay outstanding--the substantial majority of them would stay outstanding despite that classification on the balance sheet.

Thank you.

Thank you.

Our next question comes from Aaron Kessler, Piper Jaffray.

Your question, please.

Thanks.

Great quarter, guys.

A couple of questions.

First, the third party data that we're looking at suggests a very strong traffic growth to your U.S.

website.

Can you give us a sense, if you just saw a similar trend and if that was due to air fare sale or something else?

Then a couple of follow-up questions.

We typically don't--don't rely or comment on the third party traffic data because very often it's completely different from what we see internally.

As you can see by the domestic gross booking numbers that we reported the domestic gross bookings were not up substantially, so there's probably a bit of a disconnect there.

Great, and in terms of the clarification for your booking.com hotel number, I think you said 35,000, are those all direct relationships or are some of those through a GDS system?

And on the international side, can you comment on any country specifically where you were seeing strong upside from?

Thank you.

They're all direct relationships, the inventory is propriety and it's loaded into the booking.com extra net.

With respect to country strength, again, we, as Bob mentioned, there are some countries in Europe that are growing, continental Europe, that are growing at triple digit rates.

Beyond that, I don't think we want to make any further comment.

Great, and finally, can you just give us a sense for at what point maybe a portion of incremental profits into maybe branding advertising in Europe as opposed to maybe more online advertising?

Is that an option at some point here for you guys?

We don't look at it as an either/or.

We believe that we're generating some significant brand equity through our online marketing and we really don't have any plans at this point in time to spend a significant amount of money in offline branding.

It's very expensive and the complexity of the market makes it very difficult to efficiently roll out TV, radio campaigns and the like.

Great, thank you so much.

Thank you.

Our next question comes from Imran Khan at JPMorgan.

Your question, please?

Yes, thank you for taking my questions.

A couple of questions, first I think--trying to understand--if I look at your marketing dollar, you're controlling the marketing spending pretty closely.

I was trying to understand your unaided branded awareness or organic traffic of growth in your site, in international market, and secondly, if I look at the growth of the gross bookings, could you give us some sense, is it the growth coming from the additional users or is driven by increased conversion of the users?

Thank you.

In terms of brand awareness, we--we do some tracking of that domestically, but I don't have a real correlation for you in terms of what we're spending and what we're seeing in those metrics.

What I can tell you is that we believe we are benefiting, as I mentioned, in my prepared remarks, from increasing repeat business in our core European markets.

And as for the second question, Imran, without sort of getting into specifics, I think it's really a combination principally of new customers that obviously we're acquiring through online means, but lots of initiatives associated with repeat customers.

As Jeff said, we don't view online advertising as pure just sort of dollar spend for customer acquisition.

We think there's a lot of branding components to the things that we do and so a lot of our initiatives are focused on getting customers who do business with us to repeat with us or to come directly to our website and that's very, very important because it's extremely competitive in the online advertising market, in Europe.

It's competitive here, it's competitive there and so then the last component is also a conversion.

We're like every company in Europe and in the United States.

We pay a lot of money to get these customers to come to our websites, and so, we have lots of conversion initiatives underway that have yielded some dividends and hopefully will continue to on an ongoing basis.

A follow-up housekeeping question.

What was your international revenue this quarter?

International revenue was $90.4 million.

Okay.

Thank you.

Our next question comes from Jake Fuller at Thomas Weisel.

Your line is open.

Yes, I guess from a broader standpoint, cash position continues to build, that level relatively low, any broader plans, acquisitions, buybacks?

Jake, I think we--we continue to operate in a--in a market where there are opportunities for consolidation and we are active on the corporate development front to keep our eyes out for opportunities for us.

I wouldn't comment specifically on share buybacks other than to say that we've disclosed previously that there's an authorization out there that we could use if we chose to.

And going back to the for sale issue, have you seen any step up in the attachment rate?

So, as you run the sale, drive ticket volumes up, if you cross sell into the hotel product, what's helping drive those volumes?

It's something that we're looking at very carefully, but probably not comfortable making a lot of comments on that.

Okay, thank you.

Thank you.

Our next question comes from Scott Kessler at Standard and Poors.

Your question, please.

Thanks a lot.

I'm actually going to kind of connect the dots on a couple of questions that were already asked.

I think it's fair to say that one of the reasons you've been so successful in Europe is because you made to very shrewd acquisitions and obviously I think the next frontier to some extent from a geographic perspective is Asia.

Would you be looking at specifically acquisitions in Asia to help you build both branding as well as the supplier relationships that you might be looking for there?

Thanks a lot.

I guess, Scott, if you look at our history, we've been--we've been willing to look at local businesses and if--if they fit within our business model and our culture and are additive to our efforts at geographic expansion, that's something we would be interested in.

So, I certainly wouldn't preclude that as a possibility.

And just a follow-up, I think, Jeff, you referenced the fact that you are push into Asia right now is kind of more organically focused.

Is that simply because that is the current strategy, or is that really your preference at this point?

I wouldn't express it as a preference or as exclusively our strategy.

I think we're--we think there's an opportunity to build organically and if we can find acquisitions that allow us to accelerate that process or give us scale or a larger footprint more rapidly we would consider that, as well.

Helpful, thanks a lot.

Thank you, our next question comes from Michael Millman at Soleil Securities.

Your question, please.

Thank you.

I was curious as to whether you believe or think that there's some similarity in the European hotel business with Sea Trips hotel business and sort of related to that, they said last night that about 80% of their business is repeat business and it takes about a year and a half for a hotel property to mature in terms of getting an average number of hits and stays and that once it hits maturity, it doesn't change all that much.

Can you comment as to whether you see the same type of thing in Europe?

I mean we really haven't studied the business of Sea Trip to try to see if there are any parallels in what they're seeing and what we're seeing.

So, I really can't help you with that.

Other than to say, obviously, it's two very different markets, in terms of geography.

Slightly different models, also in terms of sort of how the business is conducted and I think--again, I'm not all that close to their numbers, but I think our growth rates in Europe are substantially in excess of their growth rates in Asia, and when you're growing as fast as we're growing, the implication obviously of that is, is that we have a lot of new customers coming into our website.

So, we certainly don't have 80% of our business coming from repeat customers.

We think, obviously, that's just a function of how quickly we're growing because of new customers.

As we said, though, obviously, one of our most important initiatives is to cultivate that repeat customer because we know how important that customer is and what--how high the ROIs are on repeat customers.

And I appreciate your--that answer.

In terms of your guidance in Europe, are you assuming that pricing growth remained--ADR remains about the same?

It looks like for the first half it's been around 20% in U.S.

dollars.

I would say we are assuming that the pricing continues to be similar to the pricing that is in the current market, I think your 20% number is a little bit high, Michael.

Average ADRs in Europe on a local currency basis are running about 5% up year-over-year.

Obviously with currency that's--that helps that number, brings it into a double-digit number, but not close to 20.

So, just to understand your answer, when you said it's based upon the current price, in other words, your guidance is not assuming any increase in FX or any benefit from FX or from ADR growth?

That's right, it's based upon roughly the same in terms of FX and current ADRs that we're seeing currently for the remainder of the year.

And the U.S.

and this follows some of the earlier questions and maybe some incredibility about the market because you're up strongly--Expedia.com was up strongly, Hotwire was up over 50%.

The U.S.

market isn't growing that fast, suppliers don't seem to be losing.

Where is the business coming from?

Or who is it coming from?

Well, I mean I think in the case of Hotwire being up 50%, a significant portion of that business came from us because they got the Orbitz business and we don't have it anymore.

As to Expedia's total domestic growth rate, I think that's pretty much in line with market numbers and the balance of the growth and what's really driving the high rates is European, which is a new market which is providing new business for players like us, perhaps at the expense of offline travel and consolidators.

But certainly is not a share game in Europe among the online travel --

Sorry, I meant only in the U.S.

Yes, Michael the U.S., just to clarify, our gross bookings were down 4% year-over-year.

So, again, we think a lot of that has to do with the loss of the Orbitz business, but if you're trying to sort of add up the growth rates on a consolidated domestic basis of us, Expedia and Orbitz, I think it would show that the domestic business is a significantly slower grower than outside of the U.S.

Right.

Thank you very much.

All right.

Gentlemen, I show no further questions at this time.

Did you have any closing remarks?

No, thank you all very much for attending the call.

That does conclude our program.

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

Attendees, you may disconnect your lines at this time.