Booking Holdings Inc (BKNG) 2007 Q3 法說會逐字稿

Welcome to Priceline's third 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 statement provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are not guarantees of future performances and are subject to certain risks, uncertainties and assumptions that is 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 the Safe Harbor statements at the end of Priceline's earnings press release, as well as Priceline's most recent filings with the Securities & 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 speakers for this afternoon, Mr.

Jeff Boyd, and Mr.

Bob Mylod.

Go ahead, gentlemen.

Thanks very much.

Welcome to Priceline's third quarter conference call.

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

Priceline reported gross bookings for the third quarter of $1.4 billion, up 54% year-over-year.

This represents a significant increase in the growth rate from 33% in the second quarter which is attributable to continued high growth rates in Europe and a significant improvement in domestic bookings growth.

These trends contributed to sequential accelerating growth in both pro forma gross profit and pro forma net income.

Pro forma gross profit of $202 million was up 65% in the third quarter versus up 46% in the second quarter.

Pro forma net income was $71.5 million, or $1.58 per share, up 119% over last year versus up 102% in the second quarter.

Third quarter results showed good earnings leverage in both the domestic and international businesses, and, again, surpassed the high end of our guidance.

Priceline's gross bookings growth rate was driven by a 98% growth at booking.com which, again, exceeded our growth expectations in the the third quarter, and by a turnaround in domestic gross bookings from down 4% in the second quarter to up 19% in Q3.

Bottom line over performance was attributable to bookings growth at booking.com, growth in domestic merchant bookings of 15%, and expense efficiencies.

We believe that booking.com is benefiting from positive e-commerce and travel market trends in Europe, integration activities, good performance in new markets, and strong management execution.

Booking.com now has approximately 38,000 hotels in 60 countries.

Our international supply team has quickly strengthened supply in core markets and rapidly established a presence in many new markets in Europe and beyond.

We also announced during the quarter a marketing partnership between booking.com and KLM underscoring the value of our inventory and content.

We were pleased to announce today our acquisition of Agoda, an Asian online hotel business that will be an important part of our expansion into Asia.

While Agoda is relatively small today, we believe there is an opportunity to build in the region with Agoda by using our worldwide inventory and demand and know how to offer the most complete and compelling inventory and content to customers traveling in Asia.

Agoda will operate with its independent management structure as part of our international business.

We expect that our international and U.S.

teams will help Agoda build its business.

We are very pleased to welcome Michael Kenny, Rob Rosenstein and the Agoda team to our worldwide hotel business.

As foreshadowed in our previous guidance, gross bookings for Priceline's domestic business showed significant improvement from the prior quarter due to increased retail airline ticket sales under our "no fee" promotion and increased merchant sales.

Despite the lingering impact of losing Orbitz, we reported a 24% increase in domestic pro forma gross profit as the growth in our domestic hotel and rental car businesses overshadowed the loss of margin associated with dropping the retail air processing fee.

The growth in gross profit, together with the benefit of expense efficiencies, contributed to domestic earnings growth at the highest levels achieved this year.

We're pleased with the momentum our domestic business showed in the third quarter and announced recently that the retail airline ticket fee waiver was being made permanent.

We believe this will continue to promote good site conversion, provide new marketing opportunities as the ticket shopping landscape changes and ultimately strengthen our value brand.

I want to mention a few items on the U.S.

supply front.

Priceline now offers over 55,000 hotels in its U.S.

programs.

In the last several months, Priceline has concluded participation agreements with American Airlines, Delta Airlines and Continental Airlines supporting both our retail and opaque services.

While we have the leanest supplier relations staff of the major companies in this space, we believe our hotel, air and rental car teams are clearly doing a great job of energetically promoting the value of Priceline's low cost distribution and revenue management benefits to our travel partners.

Priceline's global hotel room night sales for the third quarter exceeded 7.9 million room nights, an increase of 52% 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 the Agoda transaction, we can now extend our focus in the large, attractive Asian market.

We are now addressing a number of markets that are undergoing unprecedented expansion of economic activity, Internet usage and travel.

Our international hotel business has the support of major brands and extensive hotel supply and customer flows in the United States and Europe, and a growing source of supply and customer flows in Asia.

While the stand alone performance of these businesses has created significant earnings growth, I believe more can be accomplished when each region is more extensively leveraging the assets of the other regions.

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

Thanks, Jeff.

Third quarter of 2007 was another strong quarter, our seasonally strongest, during which we set new all-time quarterly records for gross bookings, gross profit, EBITDA, net income, and earnings per share.

Internationally booking.com once again turned in gross bookings growth that significantly exceeded our expectations driven by increasing repeat rates, brand awareness, and conversion rates and steady gains in our worldwide supply.

The growth was additionally fueled by continued strength in hotel room night unit prices which were up approximately 5% year-over-year, as well as by continued strength of the euro and the pound relative to the dollar.

All of these factors combined to give us gross bookings growth at booking.com of 97.9%, which for the second consecutive quarter actually represented a quarterly sequential increase in the annualized gross bookings growth rate.

We continue to make very significant investments in people and infrastructure at booking.com and those investments are ongoing.

Despite those costs associated with these investments, booking.com demonstrated continued operating leverage in the quarter which drove record profits.

In the United States all of our financial metrics came in well above our plan.

From a top line perspective, we continue to have difficult top line comparables due to the elimination of our marketing deal with Orbitz this year.

However, despite that head wind, we think that our domestic business turned in market leading growth in gross bookings due to the positive customer response to our "no-fee" retail airline ticket initiative and the continued momentum in our merchant products.

This continued growth in our merchant businesses drove increased gross profits and gross margins that more than offset the modest gross profit declines associated with the "no-fee" initiative.

From an expense perspective, we continue to benefit from the domestic expense discipline programs, especially as it relates to advertising and marketing, that we launched about this time one year ago.

As a result, the U.S.

business demonstrated even more operating leverage than our European business, thereby causing our U.S.

operating income to increase on a year-over-year basis by several multiples of our U.S.

gross bookings growth rate.

I won't go into each line item of the P&L, as I think they're very well covered in the press release and our stat supplement, but the general take away is that we did substantially better than forecast with respect to gross bookings, revenue and gross profits and most of our operating expenses.

I will point out that we had several negative expense variances relative to our forecast, but all of the negative expense variances were driven by factors that drove our profits upward.

Specifically, our personnel expenses came in higher than forecast because we accrued higher than expected performance-based employee bonus expenses due to the large upside in operating profits during the quarter.

Second, our pro forma income tax expense 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.

Finally, we incurred approximately $1.4 million of losses associated with foreign exchange hedging activities due to the increase 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 more than offset by favorable FX earnings translations for our European operations which flowed through each line item of our income statement.

As I mentioned earlier, 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.

From an EPS perspective, the only other negative variance relative to forecast was in our share count.

Our pro forma diluted share count increased by 8% on a year-over-year basis, which was higher than expected due entirely to the significant increases in our stock price which we have experienced as of late and which has resulted in increasing amount of shares associated with our convertible debt to be counted in our diluted share count.

Despite this head wind, we reported pro forma net income of $1.58 per share, which as Jeff mentioned, represented 119% year-over-year growth and handily bested both our guidance and First Call estimates of $1.28 per share.

We reported GAAP net income of $2.27 per share, up 116% versus last year and substantially higher than our $0.90 to $1 guidance.

The GAAP results were favorably impacted by an additional $47.9 million reversal of the balance sheet reserve that we have with respect to our deferred tax asset which reflects our growing optimism about our ability to generate sustained U.S.

pre-tax earnings which would allow us to utilize a greater percentage of our significant NOL assets.

As was the case both last year and the year before, we're eliminating this positive impact from our pro forma EPS because the benefit is non-cash in nature and will only be realized as we generate future taxable income within the United States.

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

Both the increase in GAAP net income this quarter as well as the decrease in GAAP net income in subsequent quarters from income tax expense will be non-cash in nature.

Accordingly, as has been the case for many quarters, we intend to continue to report pro forma net income on a cash tax basis, and this event I described will have no impact on either our historical or projected pro forma earnings.

All of the other pro forma adjustments to our P&L and share count were generally consistent with our prior guidance.

As for cash and cash flow, we generated approximately $61.7 million in operating cash flow during the quarter, up 77% year-over-year.

The growth in cash flow lagged the growth in earnings due principally to the seasonal build up receivables associated with our European hotel commissions.

Q4 is the quarter during which most of the commissions generated in Q3 will be collected, so we expect that there will be a roughly reciprocal impact in the relationship of operating cash flow to pro forma earnings in Q4.

In other words, we expect that operating cash flow will exceed pro forma net income in Q4, thereby bringing our second half operating cash flow to roughly similar levels as our second half pro forma net income.

As for our cash balances, we began the quarter with $451.6 million of cash and marketable securities, and we closed the quarter with $518 million of cash and marketable securities representing a $66.4 million increase.

Total capital expenditures in the first quarter were approximately $5.5 million.

This amount includes all moneys spent on capital equipment and internally developed software.

Finally, with respect to our balance sheet I wanted to highlight that our current accrued liabilities increased due to a $61 million payable associated with the buyback of minority interest in our principal international subsidiary during the quarter.

The actual cash payments for the buyback occurred in October, so in Q4 you will see a decrease in this liability along with a decrease in cash associated with the payments.

Now for a few comments on guidance.

We're looking for fourth quarter gross bookings to grow by approximately 50% on a year-over-year basis with international gross bookings from booking.com growing approximately 90% to 95% on a year-over-year basis and domestic gross bookings growing 15% to 20%.

We expect pro forma revenue to grow by approximately 22% to 26% on a year-over-year basis.

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

As for Q4 operating expenses, we're targeting consolidated advertising expenses of approximately $51 million to $54 million with approximately 85% to 90% of that amount being spent on online advertising.

We expect sales and marketing expenses of between $12.5 million and $13.5 million.

We expect personnel costs, excluding stock-based compensation, to come in between $23 million and $24 million.

We expect G&A expenses of approximately $10 million to $10.5 million, information technology costs of approximately $4.2 million to $4.5 million, and depreciation and amortization expense, excluding acquisition related amortization, of approximately $3.6 million.

We expect total below the line positive impact of approximately $1 million to $1.5 million which comprises net interest income, foreign exchange expense, equity and income of Priceline Mortgage and minority interest expense.

We're targeting pro forma EPS of approximately $0.77 to $0.85 per share and our pro forma EPS forecast includes an estimated cash income tax of approximately $8 million comprised of alternative minimum tax in the United States and income taxes in Europe.

Our pro forma EPS guidance is based upon a pro forma diluted share count of approximately 47 million shares which is based on last night's closing stock price of $90.31 per share.

This share count represents a substantial increase on both an annual and quarterly sequential basis due to the increase in treasury stock method shares associated with our convertible debt caused by the substantial increase in our stock price.

As for expected GAAP results, we expect to report a GAAP EPS of between $0.51 to $0.59 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 also be negatively impacted by the inclusion of approximately 1 million shares of additional unissued common stock associated with our convertible note offering that is fully hedged but that we are required to use in the calculation of GAAP EPS.

We are not at this point giving specific guidance for 2008.

Our plan is to do that when we announce our Q4 results next February.

However, I did want to offer a few qualitative comments that will hopefully assist analysts and investors for working on their own earnings projections for Priceline in 2008 and beyond.

The first has to do with top line growth.

As Jeff mentioned in his remarks, we think that we have reason to remain optimistic that we can continue to deliver market leading gross bookings growth rates in the coming year.

One reason has to do with simple math.

Specifically, over the past couple of years our gross bookings from booking.com have grown from being a relatively small fraction of our consolidated gross bookings to a point that booking.com now represents a majority of our consolidated gross bookings.

Given the growth rates that we have experienced and continue to experience at booking.com, and given our continued commitment to the international arena as evidenced by our acquisition of Agoda today, we expect that the mix of our business will continue to become increasingly skewed towards international.

Having said that, I will repeat a statement we've been making for several quarters now, namely that our international business has become a very big multi-billion dollars gross bookings business, and the law of large numbers inevitably dictates our international gross bookings comparables will be more difficult in 2008.

Again, it is our hope that the impact that these declines will have on our consolidated gross bookings will be tempered by the mix point that I just made, but you should expect our gross bookings forecast for 2008 will call for significant declines in the international gross bookings growth rates as compared to 2007.

Secondly, due to the continued growth of our hotel services on a worldwide basis, we expect an increasing amount of our gross profit to be generated by hotel.

However, when looking at gross profit expressed as a percentage of gross bookings, we think that the positive impact that we should see on this metric from this mix shift towards more hotel will be offset by a countervailing mix shift towards agency bookings which are expected to grow at a substantially faster rate than our higher margin merchant bookings.

This is particularly true with respect to our "no-fee" retail airline ticket service in the U.S., which is our lowest margin service and which is expected to deliver significant year-over-year growth in gross bookings in 2008.

Third, as I have mentioned many times on previous calls all of our financial metrics have been positively impacted by the very strong appreciation of the euro and the pound relative to the dollar.

Our policy has been and continues to be to not pursue any long-term hedging activities with respect to foreign currency.

With an ever increasing majority of our profits denominated in foreign currency, our profits will become increasingly subject to changes in FX.

Fourth, with our stock now trading well above the conversion prices of our convertible bonds, some of the holders of our convertible bonds may elect to convert their bonds prior to their maturity date, and, in fact, we have seen a small trickle of this activity already.

This activity is very hard to predict, but I did want to point out that our net interest margin could potentially be impacted by this activity to some degree in 2008 and beyond.

Fifth, I spoke earlier about the great operating leverage that we have achieved in 2007 with respect to our U.S.

businesses.

This was due to the improvements in marketing efficiencies brought about by the elimination of the Orbitz relationship and a tightening of ROI standards with respect to our online ad spend.

With those efficiencies now accomplished, in 2008 it is our goal to maintain those operating leverage metrics.

Specifically, we expect our operating profits will grow at roughly the same rate as our gross profit in the U.S.

As for our international business, we expect to continue to invest heavily in people, infrastructure, and, of course, marketing.

One of the big wild cards that impacts operating leverage has and will continue to be the cost of customer acquisition.

Our assumption has always been and will continue to be that the market will get increasingly competitive with respect to online spend.

Now I'll caveat that by pointing out that we have not yet seen anything in our current business trends that point to significant upward pressure in our cost of customer acquisition, and we are constantly working on conversion initiatives to offset this pressure if and when it comes.

But investors should expect that our forecast will call for increased customer acquisition costs in 2008 which could put slight downward pressure on our international operating leverage in 2008.

Lastly, international operating leverage will be negatively impacted by the results of Agoda.

Agoda is basically in a break even position as of now from a profit perspective.

We expect Agoda to turn a pro forma profit in 2008.

However, Agoda is also in a very steep growth curve in terms of investment, so while Agoda will be neutral to slightly accretive to earnings, we expect that Agoda will have a slight negative impact on our operating profit expressed as a percentage of gross bookings and gross profit.

As for taxes, we continue to expect that our effective cash tax rate will increase in 2008 compared to 2007 as our foreign sourced earnings, which do not benefit from our NOL tax shield, grow at a faster rate than our domestic earnings.

Lastly, 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.

We have updated the grid in our statistical supplement to show investors what our potential pro forma diluted share counts would be for Q4 2007 and full year 2008 based upon various hypothetical stock prices.

As we've said in prior calls, we're not going to get into the practice of predicting our own stock price, but we hope that this detailed data gives investors who have their own price targets a guide post they can use to forecast our pro forma EPS on an ongoing basis.

And then finally, I will point out as I have done on previous calls that all of our forecasts are based on an assumption that we'll 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.

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

(OPERATOR INSTRUCTIONS) Holding for questions.

Our first question comes from Anthony Noto of Goldman Sachs.

Your question, please?

This is actually Jenn Watson in for Anthony.

Can you elaborate a little bit on the trends you're seeing domestically across different products, hotel as well as airline?

Obviously, the 23% year-over-year growth in airline tickets and the acceleration in gross bookings would suggest you guys are gaining share.

If you could just talk about that a little bit more, that would be great?

Sure.

I think the gain in retail airline tickets speaks for itself.

We also showed a 15% increase in merchant gross bookings which we think shows nice momentum in those products.

The only other comparables that we have out there in terms of gaining share is Expedia which it looks like they also had a good quarter domestically.

Our airline ticket business grew a little bit faster, but you have to keep in mind we're very, very much smaller than they, but we certainly don't think we lost share in these products.

Have you guys done a lot of marketing around the "no-fee" or is it kind of a word of mouth?

Are you seeing people come to this site for retail and booking merchant?

Well, we had some marketing around "no-fee" back in the summer when we launched it as a promotion, but we haven't done any real offline marketing, or specific online marketing since then.

We certainly have the "no-fee" feature prominently displayed on the website, and I think that helps our conversion.

We also have historically seen people come in and shop for retail airline tickets, and either move onto other things like a merchant product or a package, but we also encourage people who buy retail airline tickets to also buy a rental car, for example, so all of those are things that we continue to try to do now that the sales are moving up here a little bit.

Great.

Thank you.

Thank you.

Our next question comes from Chris Gutek of Morgan Stanley.

Your question?

Hi, guys.

Nice quarter.

Maybe to follow-up a little on the booking fee situation.

It seems to be a bit of a reversal from your comments on the second quarter call where you seem to suggest that the elimination of that high margin revenue stream was not a particularly good trade off versus the modest boost to volume, but now you've taken a different view, permanently eliminating.

Can you elaborate behind the strategy there?

Yes, I don't think anything we said in the second quarter was intended to do anything other than communicate in response to a specific question whether the uptick in volume had paid for the money it cost in taking the fee out, and we said, then, that it did not.

If you look at it very specifically transaction to transaction.

Our observations over the course of the time that we've been operating with "no-fee" is that we certainly have seen an increase in conversion which has turned around sort of continuing decline in airline ticket sales for us.

We've been satisfied generally with the operating momentum of the domestic business as a whole while we've been operating with "no-fee," and finally, we've concluded that having generally lower prices than the other major OTAs is very consistent with our brand positioning, and good for the long-term health of our brand.

Makes sense.

I guess just to put more color around it, could you give us a rough sense for the U.S.

air product prior to the elimination of the booking fee roughly how much revenue and profit you were getting?

And then maybe to elaborate a bit, or expand the discussion a bit into Europe, since some of some of your competitors seem to be eliminating some booking fees in Europe that would be at risk if that got eliminated?

I will answer the second part first which is we don't have booking fees in Europe.

It is one of the things we think makes us -- one of several reasons for why we think our product is doing so well over there.

As for the specific profitability of our airline ticket business, Chris, we don't break out profit by product.

Again, just to elaborate on what Jeff said, if you look at the pure economics of switching to "no-fee," and I will reiterate what I said on the call, it certainly probably cost us a little bit of money.

Said differently, we didn't sell enough tickets to offset the loss in fee, but I think we took the view that that loss was modest enough relative to what we thought it was a very important brand positioning point.

We have always tried to stake out Priceline as trying to own the value category, and we think that move was very consistent with that, so for us it was an investment worthwhile relative to that brand positioning.

Okay.

Great.

And then final question, and I will let you move on.

The merchant growth was very strong in the quarter, and I guess it is not completely clear to me why we saw such a big improvement.

I wouldn't think the elimination of booking fee would necessarily drive much better merchant business?

Yes, I wouldn't necessarily connect one with the other.

We have had good momentum in our merchant, hotel and rental car products now for several quarters.

They've been performing consistently well and growing nicely organically.

I think that really is the trend that you're seeing.

I think it is similar to the point I made in my prepared remarks about just mix.

Over many years now, the rental car and hotel businesses have been growing at a much faster rate than in some instances our declining merchant airline ticket business.

And as those quarters progress, the comps have gotten easier from a mix perspective, and so I agree with Jeff, we don't really think it is driven so much by the tie-in with "no fee" as much as it is by just the very good execution of those two products generally.

Okay.

Great.

Thanks.

Thank you.

Our next question comes from Aaron Kessler, Piper Jaffray.

Your question, please?

Great quarter, guys.

Couple questions.

First, on the Agoda business, can you give us a sense for what practices you can take that you've learned from booking.com and apply them to Agoda?

Also are all the revenues agency-based there and in which countries are they strongest in and I'll have one follow-up question?

Why don't I hit the first one and I'll let Bob do the second.

In terms of business practices, it is really not so much a function of practices as it is a function of giving them access to added customer flows who were looking for hotels in Asia they can book for them.

So Priceline has a lot of customers in the United States and in Europe who are interested in travel to the region and now we're going to have a lot more hotel inventory to show them as we progress with the integration.

And by the same token they have growing customer flows in Asia that are not only interested in Asian hotels but interested in travel to Europe and the United States and we think we have leading inventory to help them convert those customers.

We're certainly going to try to help them on the IT front and marketing and all the various business practices that we have, but they'll also have to make sure they're taking those things and shaping them and tailoring them so that they work in the Asian market.

In terms of sort of how we're going to report their revenue, they are a merchant -- they operate under the merchant model.

You will see the Agoda revenues and gross bookings appear in the merchant line item.

As far as specific countries, we're not going to get into specific exposure to the specific countries other than to say that they really operate on a pan-Asian basis.

The business is headquartered in Thailand and has significant presence also in Singapore.

Those are two important countries, for instance, but I wouldn't want to leave people with the impression those are the two countries.

It is really on a pan-Asian basis which would include, ultimately, we think, China where we already have a presence there and hopefully that's going to be an important part of our growth story on a go-forward basis.

Great.

And then, Bob, do you happen to have the international revenues, agency revenues and gross profits and while you're looking that up, for Jeff, in terms of investments in Europe, at what point do you become too profitable where your margins are too high and you maybe say it is still a big opportunity and we need to maybe increase our investments there?

I think we're going to be in the mode of investing for some time to come in the international business, and it is not just in Europe.

It is in other geographic regions.

I think we have a business that's growing very rapidly, and you tend not to be able to hire people as rapidly as you like.

It's difficult to make all the investments you want to make.

So I don't think we're going to get to a decision point around whether we're investing enough until we get to the point where we're really comfortable we're able to make all the investments we want to make.

Right.

And then international revenue, Aaron, $131.8 million in the quarter, and gross profit of $130.9 million.

Do you happen to have the agency part of international, I guess it is all agency, right?

Agency, right.

Okay.

Thank you.

Yes, we have a tiny, tiny bit of merchant associated with the Priceline brand, but it is mainly the booking.com brand.

Got it.

Thank you.

Good quarter.

Thank you.

Our next question comes from Justin Post of Merrill Lynch.

Your question, please.

Thanks for taking my question.

First on Asia, are you going to disclose how much you paid for that and is that the agency hotel model you're kind of duplicating from Europe?

Terms of the disclosure, we have filed an 8-K that has the purchase price and earnout structure in it, so that information is available in the 8-K.

Yes, and specifically we paid a little over $15 million up front of cash, and then the earnout structure really is based upon the performance of the business over a three-year period, and the earnout could be up to in excess of $140 million depending upon the achievement of a combination of both gross bookings and profit targets.

So again, that sort of over a three-year period, but the up front cash component was about $15.7 million.

Give or take.

Is is the model pretty similar to your European model where you have a lower take rate and kind of a hotel friendly model?

Well, we believe it is a very hotel friendly model, but it is different.

It is a merchant model at Agoda, and they've been successful in achieving significant growth although at small numbers with that model, and I think we will have an opportunity to observe over time which model has better customer acceptance, better website conversion, and allows to us build up our supply the most rapidly.

So I wouldn't say we've decided definitively that Agoda is going to shift to an agency type model any time soon.

And in terms of take rate, they've been operating now and growing their supply with the margins that they're receiving and it is not, in our opinion, critical that they be exactly the same as what we're getting from booking.com.

Just to be clear, Agoda is going to be one of really two brands that we are going to be using in Asia, so booking.com, obviously, as we mention on our last call is already has a presence in Asia, and is growing very rapidly in Asia, so we've sort of have a two-brand strategy in Asia, which is going to be booking.com and Agoda

Okay.

Very good.

Let's talk a little bit about one your competitors.

They're investing north of what looks like $150 million in technology spend, and yours is maybe one-tenth of that.

Would you look at your technology spend as the same -- do you classify it the same as on your income statement, and do you think that you need to do more investments there and with your websites do you have the same ability to maybe optimize that they're trying to build over there?

Can you comment on the relative amount of investment you're doing on the tech side?

Well, first of all, I don't think that the differences are principally due to any difference in how we account for things.

So I think we're all essentially counting the same way.

Keep in mind that the challenges and the things that the larger competitors are solving for are very different from what we're solving for.

For example, you've got a number of acquisitions that our competition have made, and over time they're trying to put a lot of these different entities that is are operating on different IT platforms onto one platform.

And that's highly complex and it costs a lot of money because the platform has to be flexible enough to take into account all the specific business requirements of all of these different businesses all over the world.

That's something that we don't have to do.

We don't intend to do.

It is not something that's part of our business plan.

Our platform works.

The booking.com platform works extremely well.

We've been able to build linkages between the platforms and will continue to do so, but we're not going to try to build a single platform that all of our businesses can operate on.

Second of all, our business, our international business in particular, is much less complex.

We don't sell airline tickets.

We don't package.

We don't have rental car.

We're not selling airline tickets services based on a bunch of potentially complicated customer service flight alerts out to cell phones and that sort of thing.

So we're really not competing with the larger players on some of these customer service initiatives that are very important to their brand, but not as important to our brand that really stands for certainly lower prices and value here in the United States and internationally the most extensive and best hotel content available.

Great.

Thanks and congratulations on a good quarter.

Thank you.

Our next question comes from Brian Fitzgerald of Banc of America.

Your line is open.

Thanks, guys.

You mentioned that you're working to optimize acquisition costs.

I was wondering if given the efficiency of e-mail as a marketing channel, do you believe this is an area you can better leverage dry bookings either through internal efforts or acquisition, and then could you give any color on key word pricing trends, either domestically or internationally that you were seeing?

Thanks.

Why don't I do the first one, and Bob will do the second.

As to e-mail, we agree with you.

We agree with you.

We think it is an excellent and highly efficient customer acquisition channel.

It is something that we have a lot of experience with here in the United States as an older and more mature business.

We've just had a lot more time to work on our e-mail executions, and I think that's one of the areas where we can be helpful in trying to work with the international businesses over time to build out their e-mail distribution and make that a more important part of their customer acquisition.

And we've seen some evidence that that's helping internationally at booking.com, but keep in mind that in the United States it is easier to acquire a large list of customers in your e-mail list because, essentially, you can require the customer to opt out of e-mail where as in Europe they have to affirmatively opt in.

It is not quite as easy to develop the large lists internationally.

Okay.

As for key words, sort of a difficult question to answer.

I think I listened to Expedia answer the question last night.

I thought I'd probably give a very similar answer which is we always assume it is a very competitive market, it has and will continue to be, and so there is constant upward pressure on online key word costs or really sort of any costs of customer acquisition.

So what we've tried to do both in the United States and internationally is to set ROI hurdles that we try and stick by which basically means we have to do a really good job on building our supply, on merchandising our website to offset any increases in key words, and I would say thus far, and I think the numbers sort of speak for themselves, we've been able to do that.

As I said in my remarks, we will continue to expect and plan that it will be getting more and more competitive over time for customer acquisitions, so that's why we have so work harder and harder on repeat usage and those merchandising points that I made to offset that.

Great.

Thanks, guys.

Thank you.

Our next question comes from Mark Mahaney of Citigroup Investments.

Your line is open.

Great.

Thanks.

Jeff, you reminded people of the value proposition, the deep value proposition of Priceline.

In a macro environment we're seeing in the U.S.

of rising airline prices and rising ADRs, is there any particular reason why that shouldn't be as beneficial for you as it was during that last cycle?

And then, secondly, in just in the European market, any new thoughts on expanding beyond hotels, any new calculus as to is that a question of when or is it still a question of if?

Thank you very much.

Sure.

I mean, we've always said that as prices go up, the potential value of our discounts to customers go up, and that's particularly powerful, potentially, and other pressures from high fuel prices and the like.

So we think there is a consumer benefit there, and we also think that we offer a revenue management benefit to our suppliers as they're pushing their prices up which they need to do to cover rising fuel costs, certainly in the case of the airlines.

If their load factors start to dip a little bit or if they see any softness in advanced bookings for particular flights and destinations, they can load some discounts in with Priceline and we can help fill those seats up, and we like to think that we're helpful in an environment where our suppliers have to push prices up to cover their costs.

In the context of the international business for the time being I think you should assume that we're going to stay focused on hotels.

We've got such a material growth opportunity there, and it is by far the most attractive segment of the market.

We think it is a good idea to keep trying to prosecute that business without getting distracted on others.

Thank you, Jeff.

Thank you, Bob.

Thank you.

Imran Khan of JPMorgan, your line is open.

Hello.

This is Bridget [Weishaar] in for Imran.

A quick question.

It seems like the competitors are starting to lower their fees internationally.

Have you felt any pressure on your take rate there?

Again, at least we know that was sort of going on in as early as Q2 and certainly throughout Q3, and obviously in Q4.

So I think the numbers that we've reported and the guidance that we're giving for Q4 wouldn't necessarily dictate that we're seeing any sort of a dramatic change in our trajectories as a result of any competitive moves.

Okay.

And then a follow-up question.

In terms of your marketing in internationally, are you still focused on Internet marketing or would you ever consider doing more branded marketing offline?

We've certainly much more focused on online marketing.

I wouldn't expect us to get involved in very broad offline television, radio type campaigns any time in the near future.

It is very expensive.

We seem to be getting good repeat business based on the online marketing that we're doing, so what that tells us is we are having having success at building a brand with online spend.

If we can continue to be successful in building the brand equity, we really don't need to go offline.

Great.

Thank you.

Thank you.

Our next question comes from Jake Fuller of Thomas Weisel.

Your line is open.

Hey, guys.

A bit off the beaten track, but on the advertising front, we're seeing a lot of activity out there, some of these next generation meta search sites evolving.

I know you all have done a lot on that front too with My Travel Guide and PriceBreakers.

Has that become a material business for you at this point?

Are you planning to put a lot more into that?

I wouldn't say that it is a material business for us at this point in time.

Certainly site advertising across all of our brands is driving revenue for us and we're making money on it, and it is additive, but it is not material.

We agree with some of our competition that it represents a significant opportunity for us going forward because we've got massive traffic and a lot of properties including our international business that today essentially have no advertising revenue associated with them.

So we look at it as an attractive field and something that represents some opportunity for us in the future.

As you think about your incremental M&A dollar, is it more going to to be focused on the international markets than on things like advertising?

I wouldn't necessarily say that we look at our dollars and are saying trade offs of advertising versus acquisitions, advertising versus -- when you say M&A, you mean literally asset acquisitions, right?

Yes, I am sorry, I misspoke.

In terms of things you could acquire, the opportunities that you see in front of you, acquisition or advertising driven revenue models that might be available to acquire or international acquisitions, any preference on that front?

No, again, I think you can assume that we have a very, very active corporate development function that's looking at anything that we think could be complementary to our business, additive to our business, and we look at that almost separate and apart from how we think about how we're investing online.

I think our goal is to grow our business organically basically as fast as we can while maintaining the ROI discipline that we've been able to achieve here, and then we're also looking at acquisitions, as well.

Great.

Thank you.

Thank you.

Our final question comes from Chris Gutek of Morgan Stanley.

Your line is open.

Thanks, Bob.

So a follow-up here.

In the press release, you guys mentioned that the U.S.

operating margin is improving, I think, substantially is the word you used.

I am wondering if you can put at least some rough quantification around that and if you could also give us a rough sense for how your margins are trending in Europe?

And to push my luck here a bit, if you would be inclined to give us where you think margins can go with maturity a couple years down the road?

What kind of a target would be?

I'm not going to answer the second question, Chris.

Again, we're just not giving out any sort of guidance beyond 2008, and I am probably going to not also answer your first question other than to say that we had several hundred basis points of operating margin improvement in the U.S.

The one thing I said in my remarks was that our operating profit grew at several multiples of the growth rate of our gross bookings, so that -- I think that sort of helps tell you that we had very, very material increase in operating leverage in Q3 in the United States.

That is helpful.

In Europe just to try to follow up a little bit, would you say you're getting closer to a mature company margin in Europe or by contrast, given the high revenue growth, is maturity still years away from a profitability perspective?

Well, again, as I said in the prepared remarks the big wild card there is going to be the cost of customer acquisition over time and how well we do on cultivating repeat usage.

I would say if we can maintain our ROI targets which, obviously, they've been very attractive, then I would say there is certainly more operating leverage in that model from an OpEx perspective because the rest of our costs are not completely fixed, but personnel costs and IT costs and depreciation costs, those are very leveragable in general.

The big wild card is the cost of customer acquisition, and I just wouldn't want to predict where that's going to go over the next several years, but I certainly hope that even if that cost goes up, that we're not completely done on the point -- we're not done in terms of operating leverage.

But, again, I did want to point out as I did in the prepared remarks that if you look at our performance this year, we've had a huge jump in operating leverage, no question about it, driven again by both Europe as well as again very big movements in operating leverage in the U.S.

And I just didn't want people to start extrapolating that number for this year into next year because we won't -- the comps will be much more difficult in the U.S., and again at least our plan will be to call for a higher cost of customer acquisition in Europe, which will, again, that could have some downward pressure on that operating leverage point.

Got it.

Thanks.

That does conclude our Q&A session.

Thank you, Mr.

Boyd.

Thank you, Mr.

Mylod.

Ladies and gentlemen, thank you for your participation in today's program.

At this time, you may disconnect your lines.