Booking Holdings Inc (BKNG) 2008 Q2 法說會逐字稿

Welcome to Priceline's second quarter 2008 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 and uncertainties and assumptions that are difficult to predict.

Therefore, actual results may differ materially from those expressed, implied or forecast 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 statement 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 Web site located at www.Priceline.com.

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

Go ahead gentlemen.

Welcome to Priceline's second quarter conference call.

I am here with Priceline's CFO Bob MYLOD.

Priceline reported consolidated gross bookings for the second quarter of $2.1 billion, up 71% year-over-year.

Pro forma gross profit of $254 million was up 64%, pro forma EBITDA was $101 million, up 75%, and pro forma net income was $78.5 million, or $1.55 per share, up 40% on a higher year-over-year share count.

First quarter results surpassed the high end of our guidance and first call consensus estimates of $1.41 per share due to better than forecasted results in Europe and the United States.

Our international business had an excellent quarter with 80% gross bookings growth.

International gross bookings benefited from robust demand, growth in new markets continued favorable currency exchange rates and results from Agoda, the Asian hotel reservation business we acquired last year that added gross bookings of $24 million in the quarter.

Priceline's domestic year-over-year growth rate accelerated to 59% in the second quarter from 51% in Q1.

Year-over-year growth of 98% in airline ticket sales clearly propelled bookings growth.

Domestic merchant gross bookings growth accelerated to 36% in the second quarter, a significant sequential improvement from 26% in Q1.

Improving merchant results were attributable to growth in sales in our opaque hotel and air services, and growth in package services and retail hotel merchant room night sales.

Our international business showed good second quarter growth rates in the large continental markets, and the results from new markets are making a larger contribution to overall growth as the total size of these fast growth markets becomes more meaningful.

Booking.com now has over 52,000 hotels in over 65 countries and continues to add inventory and build new destinations.

We continue to benefit from growing repeat business to Booking.com and other Booking.com branded sites, and we're able to maintain our marketing efficiencies, which is creating better than forecast operating margins.

Priceline's domestic business showed 59% year-over-year growth in the second quarter.

Consistent with our forecast expectations, growth in retail ticket sales has slowed now that we have passed the anniversary of the June 2007 removal of booking fees.

Despite this anniversary, we continue to see attractive domestic growth rates which we believe are supported by consumer demand for travel deals in a weak economic setting, attractive inventory from airlines and hotels using our services to round out demand and protect yields, and effective online marketing and brand promotions including fee reductions in retail hotels and our sunshine guarantee.

We believe the negotiator ad campaign has provided a versatile platform for effectively communicating our value proposition and strengthening our brand.

Our consolidated results again showed better than forecast earnings leverage in the quarter, with upside in Europe derived from attractive marketing ROIs and growing brand loyalty.

Accordingly, our current outlook for the second half of the year reflects operating leverage that is more consistent with first half trends, and represents what we believe is a good balance of investing in the business, and driving earnings growth.

As most publicly traded travel companies have reported, economic uncertainty and high fuel prices are affecting the broad travel market, and significant airline capacity reductions in the fall will also have a negative impact.

These conditions are not confined to the United States but are in evidence in Europe and other international regions.

The positive fundamentals driving our business have overshadowed these negative factors in the first half.

We believe these positive fundamentals position Priceline well for future growth and that our brands and services are particularly attractive to customers and suppliers in times of economic stress.

It is, of course, possible that the category and our business could suffer in future months to an extent that creates risk to industry forecasts and our own forecasts.

However, we do not believe that economic cycles or persistently high oil prices materially undermine the outstanding long-term opportunity that exists for Priceline to build out our international business by building share and brand in our core markets and achieving meaningful market share in new markets we're pursuing.

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

Thanks Jeff.

I am going to begin by touching on a few important financial highlights from the second quarter.

And then I will finish with some forward guidance.

I don't intend to go over each line item of our income statement as I think they are very well covered in our press release and our statistical supplement.

Instead I want to simply focus on the factors which affected our three most important profit drivers, namely, gross bookings, gross profit and operating expenses.

I will start with gross bookings which grew by 71% on a year-over-year basis, and came in right in the middle of our range of guidance.

We arrived at this growth rate by coming in slightly ahead of the high end of our range of guidance for our domestic business, and coming in right at the low end of our guidance for our international business.

I think Jeff pretty much covered all the reasons for our upside in domestic gross bookings so I don't intend to reiterate them here.

I did, however, want to spend a little more time discussing some of the variables that impacted our international gross bookings, which grew by 80% relative to our 80% to 90% guidance.

We believe that one important variable has to do with the fact that the Easter holiday season, which typically takes place in Q2, occurred in Q1 this year.

I mentioned on our last earnings call that this anomaly in the calendar would represent an additional forecasting challenge for us.

And indeed, we do think that part of our results relative to forecast were driven by this Easter effect.

We have also been highlighting, for quite some time, that our forecasts are highly influenced by two variables over which we have almost no control.

Namely, FX exchange rates, and average selling price of hotel room nights.

I want to briefly discuss how these two items affected our results relative to our prior guidance.

I will start with the FX impact.

Our gross bookings guidance was based upon an assumption that the euro to dollar exchange ratio would remain at 1.54 for the remainder of Q2.

The actual exchange rate was about 1.3% more favorable than forecasted during the quarter.

As for average selling price, our Q2 forecast was based upon an assumption that our average international selling prices would remain roughly flat on a year-over-year basis, consistent with where we finished Q1.

Actual average selling prices came in 1.5% below prior year levels, which more than offset the positive effect that FX had on actual gross bookings results relative to forecasts.

So there was a net negative impact with respect to the combined effect of FX and average selling price on gross bookings relative to forecast.

Of course, the most important metric is hotel room night unit sales.

And while this number was generally consistent with our forecast, we actually believe that unit sales were somewhat artificially depressed in June, especially in continental Europe because of softness in demand associated with the Euro Cup Soccer Tournament.

We also saw an increase in our reservation cancellation rate during the quarter which also knocked several percentage points off of our hotel room night growth.

While we think the impact from the Euro Cup is obviously temporary, we're watching the average selling price and cancel rate very carefully because we think both numbers could potentially be driven by what appears to be softening economic conditions in our core markets.

With all that said, we are generally pleased with what we have seen so far in Q3 with respect to international gross bookings.

And I will give more detail in a moment when we give guidance.

As for gross profit, we had another very strong quarter, with gross profit growing at 63.8% and coming in above the high end of our guidance.

This overperformance was driven by stable to improving core margins, both domestically and internationally, and also we saw a slight decrease in the average number of days that elapsed between the reservation booking date and the reservation consumption date which in turn caused a greater amount of gross profit to be recognized in the quarter as compared to plan.

compared to plan.

Finally, I want to talk about operating expenses which came in substantially lower than our guidance, almost entirely driven by positive variances in our international online advertising expenditures.

We mentioned on our last earnings call that we expected some of the efficiencies that we had achieved to date in our online advertising to reverse and diminish for the remainder of Q2 based upon various competitive factors.

In fact, this didn't happen and we were able to maintain our advertising ROIs throughout the quarter.

Moreover, we saw a healthy increase in the percentage of our business that comes to Booking.com on an organic basis.

The result of these two factors caused our online ad spend to come in well below plan which in turn grossed significant upside relative to our guidance.

As is the case in most businesses, there is an interplay between the amount of ad spend on the one hand and the amount of top line on the other.

And of course our business is no different.

This is especially true at Booking.com given that our entire advertising budget is online and therefore more variable in nature.

In Q2, we spent far less than planned on online advertising.

And while this certainly had some marginal effect on our gross bookings growth, our decision still resulted in market-leading top line growth during the quarter, and another quarterly sequential improvement in operating leverage.

We believe the business is now striking a good balance between market-leading topline growth rates on the one hand, and operating leverage on the other.

And based upon results to date, we are forecasting that we can maintain that balance for the remainder of the year, without deteriorating marketing efficiency.

We have continued to invest in the new supply distribution and geographic expansion for Booking.com and we will continue to do so going forward.

That pretty much covers the highlights of our earnings, and before I move on to guidance I will just share a few cash and cash flow items that are not covered in the press release.

During Q2, we generated approximately $89.9 million in operating cash flow, up 126% year-over-year after adjusting for several one-time items from last year that actually make our reported OCF growth rate even higher than the adjusted number.

As for our cash balances, we began the quarter with $560 million of cash and marketable securities, and we closed the quarter with $569 million of cash and marketable securities, representing a $9 million increase during the quarter.

Keep in mind that our cash balances were impacted by a couple of investing and financing activities during the quarter.

First, during the quarter we invested approximately $30 million to buy back a portion of our minority interest in Priceline Europe.

Second, we used approximately $50 million of our cash to repay a portion of the principal amount of our outstanding convertible notes during the quarter.

As a result, our convertible debt balances dropped from $570 million at the start of the quarter to $520 million at the end of the quarter.

We expect there to be more repayments of our convertible bonds during Q3 and beyond as our convertible note holders elect to convert their notes, or if and when we elect to call the notes.

Finally, total capital expenditures in the second quarter were approximately $4.2 million.

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

As you can see our operating cash flow, as well as our operating cash flow minus CapEx, have been running at very high annual growth rates which is reflective of the low capital intensity of our business model, and excellent execution, especially at Booking.com, with respect to receivables management and collection.

Accordingly we expect to deliver another year of very strong growth rates in both OCF as well as OCF minus CapEx for the full year 2008.

And now for a few comments on guidance.

I will start with some fairly specific line item guidance for the third quarter and then finish with some broader guidance for full year 2008.

We're looking for total third quarter gross bookings to grow by 44% to 54% on a year-over-year basis, with international gross bookings growing approximately 58% to 68% on a year-over-year basis, and domestic gross bookings growing by approximately 30%.

The international growth rates are consistent with a continuation of the year-over-year growth rate declines that we saw in Q1 and Q2, although we are calling for a slight flattening in the rate of decline in Q3, given some of the items I discussed earlier which we think depressed unit sales in Q2 at a more than what the normal rate might indicate.

And in fact, our July international gross bookings growth rate actually showed an increase, compared to June.

July also represents the single biggest month of the quarter, so we have slightly more visibility to full quarter gross bookings results as compared to last quarter.

We also expect that our markets outside of our core European markets, most notably our Booking.com business in eastern Europe, the U.S.

and Asia, as well as the Agoda business in Asia, will represent an increasing share of our international gross bookings during the remainder of the year.

And because these markets are growing at substantially faster rates than the average international gross bookings growth rate, we expect these newer markets to have a slightly offsetting effect to the decline in overall international gross bookings growth rates.

We believe that this, in turn, should cause the rate of decline in the international gross bookings growth rate to flatten as the remainder of 2008 unfolds.

As for domestic, you can see that our guidance calls for a fairly steep quarterly sequential decline in the gross bookings growth rate as we are now full anniversarying last year's launch of our no-fee retail airline ticket initiative, thereby making our comps much more challenging.

We're also seeing significant head winds in our rental car service due to supply challenges.

Specifically, our rental car suppliers have managed their fleets significantly downward versus last year in anticipation of softer demand and airline capacity reductions, which has hurt our ability to fulfill continued strong fundamental demand, especially in our opaque rental car business.

Finally, there is a great deal of industry-wide uncertainty as to how and to what degree the upcoming reductions in domestic airline capacity will impact travel demand in general.

We share this uncertainty.

And would point out that it makes our opaque airline business, which thus far has actually performed relatively well in the face of airline capacity reductions to date, more difficult to forecast than usual.

Having said all of that, we believe that if our forecast is achieved, it will result in a continuation of market leading growth rates in total domestic gross bookings for the remainder of the year.

We expect pro forma revenue to grow by approximately 30% to 35% on a year-over-year basis.

We expect pro forma gross profit dollars to grow by approximately 52% to 57% on a year-over-year basis.

As for Q3 operating expenses, we are targeting consolidated advertising expenses of approximately $93 million to $98 million, with approximately 92% of that amount being spent on online advertising.

We expect sales and marketing expense of between $21.5 million and $22.5 million.

We expect personnel costs, excluding stock-based compensation, to come in between $34 million and $36 million.

We expect G&A expenses of approximately $13 million to $14 million, information technology costs of approximately $6 million to $6.5 million, and depreciation and amortization expense, excluding acquisition amortization, of approximately $4 million.

We expect total below the line negative impact of approximately $600,000 which is comprised of net interest income, foreign exchange, hedging, income or expense, equity and income of Priceline Mortgage and minority interest expense.

We are targeting pro forma EBITDA between $133 million and $143 million.

And we are targeting pro forma EPS of approximately $2.00 to $2.15 per share.

Our pro forma EPS forecast includes an estimated cash income tax of approximately $30 million, comprised of international income taxes and alternative minimum tax in the United States.

Our pro forma EPS guidance is based upon a pro forma diluted share count of approximately 49.8 million shares which is based on last night's closing stock price of $111.72 per share.

As for expected GAAP results, we expect to report a GAAP EPS of $1.50 to $1.65 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 not cash in nature.

And now for a few comments on full-year 2008.

We are upping the low end of our prior total gross bookings guidance of between $7.5 billion to $7.9 billion for full-year 2008 to a range of $7.55 billion to $7.9 billion.

The mid-point of this range represents an expected annual increase of approximately 60%.

From a profit perspective, we are increasing our range of guidance from our prior range of $340 million to $365 million of pro forma EBITDA, to our new expected range of between $360 million and $380 million of pro forma EBITDA.

We expect that our full-year pro forma cash tax rate will be approximately 20% in 2008.

As for expected full-year pro forma EPS, we're increasing our range of guidance from our prior range of $5.25 to $5.65 per share to our new expected range of between $5.50 a share to $5.85 a share.

This pro forma EPS forecast would translate to GAAP EPS of between $3.75 per share and $4.10 per share.

Here are a few more clarifying points on the forward guidance I just gave.

First, the forecast for both Q3 and the remainder of 2008 assumes has the the euro versus dollar exchange rate remains at the same $1.55 per euro that exists as of today.

Second, our forecast assumes that the average unit selling prices of our domestic hotel service will be flat as compared to 2007 levels.

And the average unit selling price of our international hotel service will be down by about 1% to 2% year-over-year, which is basically where we were in the second quarter.

We don't anticipate seeing additional declines because of business mix.

More specifically, some of Booking.com's fastest growing regions, like for instance the United States, have higher average selling prices than the average.

So, while the core average selling prices are expected to be down by more than 1% to 2%, this mix point should have a slightly offsetting positive effect.

Fourth, you can see in the guidance that we're giving that we are no longer forecasting a decline in our operating leverage caused by a reduction in our online advertising efficiencies.

This has to do with our increasing belief that we should be able to maintain or come close to maintaining the relationship between online advertising and gross profit.

This is definitely a departure from our prior guidance, but we have experienced many quarters worth of results to now have a level of comfort to believe that the declines in online advertising ROIs in Europe that we have been anticipating should not be as significant as expected.

This factor combined with our increasing organic growth rates lead us to expect that our operating leverage will remain relatively stable.

I also wanted to repeat and emphasize a general cautionary point that we made on our last earnings call.

Up until this point, our businesses have performed very well in the current economic environments both here in the United States and abroad.

All the guidance that I just gave presumes that we will continue to operate in similar economic conditions as exist today.

For instance, as my guidance indicates we are projecting very strong year-over-year unit growth in both the U.S.

and Europe for the remainder of 2008 despite what could potentially be a worsening economic environment.

Our guidance also assumes no deterioration in the average selling prices of our service beyond the specific declines outlined in our guidance.

While we believe that our forecast assumptions are reasonable, there are broad industry trends within our various supplier networks that could potentially point and lead to further deterioration.

And as you can see from our Q2 results, average selling price and FX, which are two very critical variables over which we have very limited ability to control or forecast, can have significant impacts on our gross bookings.

While our numbers to date give us reason to believe that we should fare better than most other companies in our space, all of which will be affected by the same macro factors, we want to once again stress that we don't believe we're immune to or benefit from deteriorating economic factors.

Overall economic pressures that strain our unit sales, our average unit selling prices, or the value of the euro relative to the dollar would certainly put our forecasts at significant risk.

Before I turn the call over for questions, I wanted to underscore a point that Jeff made at the end of his remarks concerning our long-term outlook, especially as it relates to our future earnings potential.

While it is certainly too early to begin discussing our forecast for 2009 and beyond, I did want to at least mention that we remain very optimistic about our long-term top line and bottom line growth potential.

It appears that in 2008 we will deliver very strong EPS growth despite an extremely difficult comparable driven by a substantial increase in our diluted share count associated with our convertible notes.

We believe that our worldwide businesses continue to be poised to deliver market-leading top line growth beyond 2008.

Some of that growth is expected to come from our core US and European markets.

But an increasing share of that growth is expected to come from our newer markets, most of which are growing at very fast top line rates but have not yet reached an inflection point in scale that has allowed them to deliver the kind of operating leverage that we have seen in our more mature markets.

We expect to reach some of those inflection points in 2009 and beyond, which when combined with good growth in our core markets and a much easier share count comparable, should allow us to continue our record of strong earnings growth.

And with that, I would like to turn it over to questions.

Thank you, sir.

Before taking the first question, I would like to remind you that due to the number of people in queue for questions, and to make sure that everyone has an opportunity to participate, we're asking everyone to limit themselves to one question.

If time permits, you are able to requeue and we will go back to you if time allows.

Our first question comes from Scott Kessler at Standard and Poor's.

Thanks very much.

I guess, since I am only going to ask one question, I was wondering if you could talk about where you think you are in Asia right now as it pertains to Agoda and what you see the market opportunity there as opposed to what you have experienced in Europe.

And I guess really the crux of my question is, a lot of folks are wondering whether you're going to be able to replicate the success you have achieved in Europe through your acquisition strategy in Asia through Agoda and potentially other acquisitions.

And I am wondering how far along you think you are if you potentially need to fill additional holes in your geographic or services footprint and when we could expect to see material contributions from that business.

Thanks a lot.

Okay.

Thank you, Scott.

We are pleased with what we're seeing with Agoda so far.

It is reporting very nice growth in its gross bookings and I think it is doing that despite still having work to do in terms of the integration between Agoda and Priceline.com and Booking.com, and the potential long-term opportunity to have significant traffic flows among those three regions.

And significant work to do just in terms of building -- building supply and building infrastructure to scale the business and bring on new distribution.

So I think we're in the very early days of exploiting the opportunity at Agoda and we're very optimistic that we have got a very attractive market.

I don't think it is quite as attractive today as the European market in terms of the population and the relative wealth of the population, and the amount of travel that is going on today.

But I do think over the next several years, there is going to be very significant continued economic growth and growth in travel and growth in online travel.

So it is a very attractive market opportunity.

I wanted to remind everybody that Agoda is not the only way in which we're pursuing the market in Asia.

Booking.com has business there.

And we also think that there is great promise for that business, not only for business in Asia for Asian travelers but also, again, for European travelers who happen to be going to Asia.

So we certainly think the market is big, very attractive.

We're in the early days.

I don't have a projection for you in terms of when it will start to make a material contribution to the bottom line but we certainly do expect that to happen over time.

Thank you.

Our next question comes from Imran Khan of JPMorgan.

Yes, hi, thank you for taking my question.

Hi Jeff and Bob.

Question about eastern European -- non western European business for booking.

I believe, Jeff, you talked about in the past it's like 20% of your bookings, gross bookings.

So can you give us some color what kind of growth rate you're seeing?

In the past you talked about last year it grew 211%.

Maybe give some color what kind of fundamentals you're seeing for the non western European countries in terms of average daily rate and booking rate.

Thank you.

Just to clarify the data that we have issued previously, the chart that we showed at the Goldman Sachs Internet Conference showed that new markets, defined as eastern Europe, North America and Asia, represented, at the time, 20% of the business.

It showed that share that new markets represented, the business had increased fairly significantly from a year earlier.

And it showed that those markets were growing in excess of 200%.

We're not going to update those numbers specifically, although, I will say that those markets, as Bob mentioned, continued to grow significantly faster than our core markets.

And as they start to represent, and continue to represent a larger and larger portion of the whole business, should provide support for higher growth rates going forward.

I don't think we have ever given any guidance or commentary on ADRs by sub regions for Booking.com, and we're not of a mind to do that now.

Thank you, our next question comes from Brian Fitzgerald of Bank of America.

Thanks.

Can you give us a sense for how much of your customer base is the UK traveler?

And, maybe derivative of that, how much of your Europe bookings mix is travelers to the US and maybe to eastern Europe?

Yes, Brian, we don't break out region by region customer accounts other than I think what we have said, and it continues to be the case, that we think the amount of our business represented by the UK is a smaller percentage than we think our competitors.

The other thing I would say is that while business from Europeans traveling to the US is up very substantially, it is up very substantially because we had a very small base and, in fact, several years ago we literally had zero of that.

So, we continue to view the United States as a very big opportunity and we are still very much in the early innings in terms of building out our supply to go after that opportunity.

And of course with where the dollar is relative to the euro, we certainly think that the share of the European vacation wallet that is going to be represented by travel to the US is going to increase.

So we're going after that opportunity as fast as we can.

Thank you, our next question comes from Jennifer Watson at Goldman Sachs.

Great, thank you.

Can you elaborate a little more on the decision to spend a little bit less advertising dollars than what you had forecast and the ROI that you're actually seeing?

It sounds like it's within the bounds that you seen historically.

If it were to deteriorate, would you be more concerned about it deteriorating because the transaction value that consumers proceeded to make on your site would be down?

Or because of competitive reasons?

I don't think I want to try to get into parsing the impact of ADRs or the economy or competition on our marketing efficiency.

I think, as we mentioned in our prepared remarks, we're very comfortable with the balance that we have seen here over the first half of the year in our marketing ROIs and our top line growth rate.

And we have taken some affirmative decisions not to chase, for example, expensive affiliate business that would have been additive to our growth rate but would have provided what, in our view, was an inferior ROI and really not a good balance between growth and earnings.

And so, we have made some decisions in that regard and we're very comfortable with those decisions.

And I think the most important thing for investors to remember is, we are investing substantial amounts of money in our online market around the world.

We are prepared to make the investment to build distribution in new markets.

And, as you can see by the numbers I just mentioned in terms of the growth of our new markets and the amount of business that it now represents for us, that we're being very, very successful with those investments and we intend to continue doing them.

Yes, and I would just add that, at least in our view, the only material change to our forecast is that we are expecting lower online advertising expenditures.

The fact is is that we're essentially sticking with our prior range of guidance.

In fact we're increasing the low end of our guidance.

So, we think obviously that the growth rates that we're delivering in Europe are very good, and we are expecting very high growth rates in the second half, generally consistent with how we have been looking at the business for the last several months.

Thank you.

Our next question comes from Justin Post of Merrill Lynch.

Thank you.

Bob and Jeff, if you look at your ratio I of marketing spend to bookings -- getting back to the last topic -- it looks like the ratio is holding.

You could have driven more bookings had you spent more.

Is that not true?

Or you just can't really allocate the dollars right now on the search side?

And then second question, you said that things deteriorated in June.

Can you give us any kind of color on the relative deterioration versus April and how much of a bounce-back you've seen in July.

Thank you.

Sure, Justin.

I mean obviously when we gave our guidance, April was essentially done so we had actual results for April.

But the year-over-year growth rates in June were certainly lower than they were as we finished Q1 and as we moved into the first half of Q2.

It is hard to pinpoint why each month was the way it was.

We certainly do think that, as I mentioned, there was a bit of a forecasting challenge as a result of Easter happening in Q1.

Again, the impact of that would have been seen in April, but to the extent it had any additional impact on people's booking patterns for Q2, it is hard to pinpoint.

And then lastly, there is just no question because we could see it in our daily observations, that, as the Euro Cup, some of the big games of the Euro Cup were being played, we saw very significant declines during the several hours each day where those matches were going on.

So that's why it is not necessarily surprising for us to have seen actually a monthly sequential increase in July versus June.

And, at least as it relates to the marketing efficiencies, it is always -- the answer is, of course, you can always buy gross bookings.

It is very easy to do that.

But, our view is that we think we have established a very good return on investment dynamics was respect to our online advertising that is allowing us, as I said in the prepared remarks, to deliver top line growth rates that are market leading.

And our view ultimately is that we're in this business to make money, and generating bookings for the sake of generating bookings is not necessarily productive in general, but it could potentially impair the economics that we're already enjoying on our core business.

Thank you.

Our next question comes from Mark Mahaney at Citigroup.

Bob, you outlined some of the reasons why there may be some supply constraints in the rental car business.

Is there any particular reason that you wouldn't see that expand and particularly, obviously, in the airline seats itself getting inventory for the opaque air business?

Any thoughts on how much further that could spread and into hotels just in the US market?

Thank you very much.

Mark, it's Jeff.

I think the rental car companies have all, in their earnings announcements, reported that they have significantly downsized their fleets in anticipation of reduced capacity.

And we're starting to see the impact of that over the past month or so, and that impact continues.

And so I think the effect that we're reporting has happened.

And the rental car companies of all of our suppliers I think these days have the most flexibility in terms of their fleet size.

And I also think that there are some things happening between the rental car companies and the automobile manufacturers that make it a little bit more difficult for the rental car companies to have the kind of flexibility in upsizing and downsizing their fleets that they used to enjoy.

We have seen in the airline business, a very persistent reduction in domestic capacity, in particular, over the last couple of years.

And so having capacity come down is not something new.

And over the past 12 months or so, we have been pleased with the performance of our opaque airline ticket business, even in the face of these capacity reductions.

And keep in mind that the reason that the airlines are reducing their capacity is because they are trying to push up yields.

And when you're trying to push up yields, the opaque product gives you a great way to basically backstop the potential lower load factors that can result from raising your prices.

So it is a tool that should continue to be valuable to the airlines as they continue to reduce capacity.

The reason Bob called out this factor in his prepared remarks is that the capacity reductions that have been scheduled for the fall are bigger than what we have seen in terms of any one time reduction over the last couple of years, and so we thought it was important to point that out to investors.

And I think the other folks in our space, and, indeed, other travel businesses, have pointed out the potential for that to have an impact.

With respect to hotels in particular, it is much harder for hotels to take down capacity.

They can't wall-off the floor of a hotel.

Hotels don't go away.

So I don't expect to see the kind of reduction in hotel capacity that you have seen in rental car and airline tickets.

What happens in hotels is that the rate of adding new rooms slows down.

And I certainly think that is something that is possible.

Thank you.

Our next question comes from Michael Millman of Soleil Securities.

Thank you.

A couple questions.

Can you talk about what Expedia's purchase of Venere might mean now that they would seem to have a strong entry into the agency business as well as their existing business in merchant?

And then following up a bit on the air-rental car, could you give us some idea of the profitability of rental car -- a rental car versus a airline ticket?

Thank you.

Well, I will handle the first question and Bob can handle the second.

With respect to Venere, Venere has relatively larger market position in southern Europe than elsewhere.

And Booking.com has been very successful in building a big business in Italy, which is Venere's home market, and elsewhere in southern Europe.

And I think we probably have a significantly larger business in southern Europe than Venere.

So, we feel like we're in a very good position to continue competing with Venere, and compete with them successfully.

We also think that, given Venere's brand, that it is going to be relatively challenging to expand that brand to become a pan European brand beyond its strength in southern Europe.

Time will tell on that but that's our view and that informed our thought processes as we considered the process with Venere.

And as for the breakdown, we don't break out profit by product other than to certainly reiterate the point that in the US, by far, our single biggest profit contributor is our hotel business.

And internationally, it is our only contributor is our hotel business.

So while again we want to point out some of the risks we see with some of the other products, especially given that we do report the unit sales of them, it is still mainly about how we do in the hotel business, both here in the US and internationally that is going to drive our results.

Thank you.

Our next question comes from Scott Kessler at Standard & Poor's.

Hi, thanks.

I figured I would come back to the queue and just ask a little bit more about what you were talking about involving Europe and the online advertising spend.

Can you give us a sense as to how you have become so efficient in your spend and so targeted, and if you have been or will be able to apply similar practices in the US?

What's the discrepancy there if there is one?

Thanks.

I mean, Scott, it is hard for us to get on a public conference call and describe why we think we have been successful in online marketing because it is a very sensitive competitive situation.

I think I am comfortable saying that we have some very important assets that give us a lot to market which is 52,000 hotels in Europe, which is dramatically more than our nearest competitor, and a lot of outstanding content, and very broad geographic coverage.

And all of those things give you something, in effect, to market and a vehicle to market to very, very large numbers of folks.

And I think that has been very beneficial to us in Europe.

And I expect it will continue to be very beneficial to us going forward.

We also have a very capable and accomplished online advertising effort here in the United States, which is, as I mentioned in my prepared remarks, part of what is driving growth rates in the United States that are at many multiples of what our competition is delivering.

So I don't think that there is anything lacking in comparison on how the United States is executing on our distribution initiatives, especially given the competition that exists here in the United States and the maturity of the market.

Thank you.

Our next question comes from Scott Barry of Credit Suisse.

Hey, Jeff, and Bob.

Maybe on that marketing efficiency issue, how much of that comfort does come from what you're seeing in terms of organic traffic trends, primarily in Europe?

I think that's certainly a part of it, Scott, if it was simply that we were seeing our ROIs remain stable, which by the way, they have remained stable, I don't know that we would necessarily feel as comfortable.

But the fact is is that the percentage of our business represented by direct PPC campaigns, or direct to our own Web site, that number is just steadily been increasing and overall our dependence on affiliate network has been decreasing.

So as a larger part of our business is falling within the purview of either things that relate to brand loyalty or things that we are directly in control of in terms of our PPC, it gives us a little bit more comfort.

So again, we have been talking about ROI declines really for quite a long period of time.

And as the business has gotten bigger, and as that repeat rate has increased, and as the organic has gone up, it is just that, combined with the stability of our ROIs, has given us that comfort to believe that we can continue to generally maintain it.

It is not to say that it is going to absolutely stay where it is or go up.

There certainly could be volatility around it, but generally, if you look at the trend of organic and our PPC ROIs, it has looked fairly steady.

That does conclude the question and answer portion of our call, gentlemen.

Do you have any closing remarks?

Thank you all very much for your participation.

Ladies and gentlemen, that does conclude your program.

Thank you for your participation.

And have a wonderful day.

Attendees, you may disconnect your lines at this time.