Booking Holdings Inc (BKNG) 2010 Q2 法說會逐字稿

Welcome to Priceline's second quarter 2010 conference call.

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

These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.

Therefore, actual results may differ materially from those expressed, implied or forecasted, in any such forward-looking statements.

Expressions of future goals and similar expressions reflecting something other than historical fact are intended to identify forward-looking statements.

For a list of factors that could cause Priceline's actual results to differ materially from those described in the forward-looking statements, please refer to the Safe Harbor statements at the end of Priceline's earnings press release, as well as Priceline's most recent filings with the Securities and Exchange Commission.

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

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

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

Go ahead, gentlemen.

Thank you very much, and welcome to the Priceline Group's second quarter conference call.

I am here with Priceline's CFO, Dan Finnegan.

I will make some opening remarks, Dan will give a detailed financial review, and then I will sum up.

After the prepared portion, we will take questions.

The Group, consisting primarily of Booking.com, Priceline.com, Agoda.com, and now TravelJigsaw, reported consolidated gross bookings for the second quarter of approximately $3.4 billion, up 43% year-over-year.

Proforma net income was $158.2 million, or $3.09 per share versus the $2.02 the prior year.

Second quarter results surpassed first call consensus estimates of $2.65 per share and the high-end of our guidance for the quarter.

Worldwide hotel room night reservations were 23.2 million for the quarter, up 48% year-over-year.

We are pleased with the level of growth in room night reservations in the quarter, and with the degree of sequential deceleration as we start to come up against improving performance last year.

Our international business performed well, with 67% gross bookings growth on a local currency basis, a decrease from 73% in the prior quarter.

International gross bookings benefited from strong transaction growth in the back half of the quarter following the disruption caused by the Iceland volcano and an improvement in average daily rates.

This strength continues to date in Q3, and together with the recent strengthening in the euro and pound, results in a solid outlook for Q3.

Geographic expansion, growth in hotel inventory, growth in new markets, and adding results from Agoda and partial quarter results from TravelJigsaw also help drive strong top line growth in the second quarter.

Booking.com continues to build it's supply platform worldwide, with a hotel count of approximately 96,000 hotels in over 87 countries.

Agoda continues to build its business in the Asian region and reported its fourth consecutive quarter of triple-digit year-over-year growth in gross bookings, contributing to the overall international and merchant growth we are reporting.

I am particularly impressed with, and grateful for the performance of, the Agoda team, given the civil unrest in Bangkok, which caused the temporary closure of our office and squelched demand for Thailand, Agoda's most demanded destination.

TravelJigsaw joined our group in the wake of dealing with the disruption created by the Iceland volcano.

Nevertheless, the business delivered solid growth in the quarter and the Group now has a foundation of business in Europe and North America from which to build a global franchise in the rental car business.

Priceline.com's domestic gross bookings grew 20% in the second quarter, aided by strong hotel results and a significant year-over-year increase in airline ticket prices.

Merchant gross bookings increased 31%, as merchant hotel gross bookings, both at Priceline and Agoda, and the addition of merchant rental car bookings from TravelJigsaw, offset year-over-year decreases in opaque airline tickets and rental car sales, where reduced industry capacity continued to pressure inventory available for opaque discounting.

For the Group, consolidated operating margins improved during the quarter due to improvement in the international business.

As in Q1, domestic margins were pressured as airfare increases drove bookings growth, but not revenue growth, and marketing spend increased faster than gross profit dollars.

Global economic uncertainty continues to create volatility in financial markets and currency fluctuation continues to produce volatility in our translated results.

The widespread concern that a sovereign debt crisis in the eurozone would lead to fall-off in travel demand has not yet materialized and business results to date are encouraging.

That said, we remain concerned that government deficits and consequent austerity measures could impact economic recovery and travel demand in the future.

In summary, the business performed well in the second quarter, and is showing demands in pricing trends consistent with improving economic conditions.

I would like to thank my colleagues around the world for their hard work and dedication.

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

Thanks, Jeff.

I'll discuss some of the highlights and operating results and cash flows for the quarter and then provide guidance for the third quarter of 2010.

Gross bookings dollars grew by 43% for Q2 compared to the prior year, driven by strong unit growth and higher average daily rates for our global hotel reservation service.

Hotel room nights booked by 48% in the second quarter versus last year.

This represented deceleration from unit growth rate of 57% that we posted in the first quarter.

However, we were pleased with the way the business rebounded after the disruption in the early part of the quarter from the volcano.

So a sustained strength for our international business in the latter half of the quarter, which exceeded the level of room night growth we had assumed for Q2 guidance, and that momentum has continued so far into Q3, as we will see in a moment when we get to Q3 guidance.

ADRs were also an important driver of all of our performance.

ADRs were up by about 2% to 3% for both our international and domestic hotel services for Q2 2010, compared to the prior year second quarter.

The prevailing exchange rates when we reported our Q2 guidance on May 10 of $1.28 per euro and $1.48 per British pound formed the basis for our forecast for the remainder of the quarter.

Actual FX rates rates for the remainder of the second quarter were unfavorable to those rates.

FX rates for the second quarter were also unfavorable to prior year rates and therefore adversely impacted our gross bookings growth expressed in US dollars.

The average exchange rates for the euro and the pound versus the dollar were down by 7% and 4% respectively in the second quarter of 2010 versus the second quarter of 2009.

Our international gross bookings grew by 59%, and by 67% on a local currency basis for Q2 2010 compared to the prior year Q2.

Airline tickets booked were up by 4% in the quarter.

Rental car days booked were up by 32% versus second quarter 2009, reflecting the impact of TravelJigsaw.

TravelJigsaw, a UK-based merchant rental car reservation service, also contributed 43.9 million in gross bookings in Q2 since we acquired it on May 18.

We expect to continue to report gross earnings for TravelJigsaw separately for one year from acquisition to highlight the impact of the tradition to the consolidated results.

Our opaque rental car days and air tickets booked were down year-on-year due to supplier capacity reductions impacting inventory availability.

In summary, room night growth in ADRs were favorable to the assumptions used for guidance, resulting in performance that exceeded the top-end of our range of guidance in all key operating metrics from gross bookings to EPS.

Gross profit was $445 million, and grew 46% as compared to prior year.

Our international operations generated gross profit of $322 million and grew by 64% as compared to the prior year.

Gross profit for our domestic business amounted to $123 million, which represented a 14% growth versus prior year.

Total operating expenses were generally in line with guidance.

Online advertising expense, as a percentage of gross profit, was in line with the second quarter of 2009 and came in favorable to our guidance driven by better-than-assumed overall advertising efficiency.

We recorded below-the-line income in the quarter of about $1.7 million, which is favorable to the expense of $1 million we assumed in our guidance.

The variance relates mainly to FX hedging gains, resulting from the strengthening of the US dollar versus the euro from the date we gave guidance through the end of the quarter.

In summary, proforma EBITDA for Q2 amounted to $204 million, which exceeded our guidance range of $170 million to $180 million dollars and represents 62% growth versus prior year.

EBITDA leverage, or EBITDA expressed as a percentage of gross profit, expanded by 440 basis points in the quarter versus prior-year Q2.

In terms of cash flow, we generated approximately $187 million of cash from operations during second quarter 2010, which represents a 99% increase versus prior year.

We spent about $5 million on CapEx in the quarter and approximately $109 million net of cash acquired for the acquisition of TravelJigsaw.

Certain members of the TravelJigsaw and Booking.com's Management teams continue to hold a minority interest in the TravelJigsaw business.

The minority shares are subject to put-and-call provisions that will likely lead to them being purchased by Priceline.com over the next three years.

We spent about $6 million in Q2 to repurchase shares of Priceline common stock.

We also expended cash in the second quarter of $75 million related to conversions of convertible debt.

This amount was comprised of $47 million of cash to repay debt principal and cash delivered of about $28 million in satisfaction of the conversion value in excess of the principal amount.

Thus far in Q3, we've settled conversion notices with cash of $19 million for principle and elected to use cash of $72 million to settle the conversion value in excess of the principal amount.

By settling the conversion premium in cash, we avoid dilution that would otherwise occur upon issuing shares of common stock.

In addition, we have recently received conversion notices for $30.9 million principle amount of convertible debt, representing substantially the entire remaining outstanding balance of our older convertible bonds.

Therefore, at the end of Q3, we are essentially left with only the $575 million of convertible debt issued in March of this year remaining outstanding.

As of June 30, our cash and investments exceed our outstanding debt balance by about $595 million.

We also have our $175 million revolving credit facility that is undrawn and doesn't expire until September 2012.

Our proforma fully diluted share count was 2.3 million shares higher than second quarter 2009 due to a year-over-year increase in our primary outstanding share count, resulting mainly from shares issued due to debt conversions over the past year, and also due to the impact of higher share prices on fully diluted shares related to our in-the-money convertible notes.

The increase was partly offset by year-to-date repurchases of common stock in the amount of $125 million, and the use of cash rather than shares to settle conversion premium on converted bonds that I just discussed.

Now, for third quarter 2010 guidance.

Our forecast reflects the strong performance in hotel room nights booked that we have seen thus far through Q3.

It also includes a full quarter for TravelJigsaw.

Our forecast also assumes that exchange rates remain at the same $1.32 per euro and $1.59 per British pound as Monday's closing rates.

At or near these levels, exchange rates will have an adverse impact on our year-over-year financial results as expressed in US dollars.

Specifically, euro and pound average FX rates for the third quarter would be down approximately 9% and 4%, respectively, as compared to the prior year.

We have hedge contracts in place to substantially shield our third quarter net earnings from any further deterioration in the euro or the pound between now and the end of the quarter, but these hedges do not offset the impact of translation on our gross bookings, revenue and gross profit.

It is worth highlighting that the exchange rates we are using as the basis for our Q3 guidance are significantly stronger than the FX rates that were in effect when most analysts issue their forecast that are the basis for the consensus estimate for Q3.

FX rates when most analysts forecasts were last updated were in the vicinity of $1.20 per euro and $1.40 per pound.

Therefore, relative strength in our guidance for the quarter versus analysts' consensus, while certainly driven by expected continued strength in the fundamental performance of the business, is also driven by the stronger currency trends that have emerged in the past several weeks.

This also emphasizes how much of an impact foreign currency exchange rate fluctuations, which are outside our control and not indicative of the core operating results of our business, can have on our results expressed in US dollars.

We are forecasting total gross bookings to grow by 33% to 38%, with domestic gross bookings growing by approximately 13%.

We expect international gross bookings expressed in US dollars to grow by 46% to 51% as compared to last year, and to grow on a local currency basis by approximately 57.5% to 62.5%.

Our third quarter guidance assumes a similar rate of year-over-year increase for international hotel ADRs and further improvement in ADRs for our domestic business, as compared to the year-over-year ADR increases we experienced in Q2.

We expect Q3 revenue to grow year-over-year by approximately 29% to 34% and gross profit dollars to grow by approximately 43% to 48%.

For Q3 operating expenses, we are targeting consolidated advertising expenses of approximately $174 million to $179 million, with about $8 million of that amount being spent for offline advertising.

Online advertising expense as a percentage of gross profit is essentially in line with prior year Q3.

We expect sales and marketing expense of between $31 million and $34 million.

We expect personnel costs, excluding stock-based compensation, to come in between $56 million and $59 million.

We expect G&A expenses of approximately $21 million to $24 million.

We expect information technology costs of about $6 million, and depreciation and amortization expense, excluding acquisition amortization, of about $4.5 million.

We expect total below-the-line negative impact of approximately $10.5 million, which is comprised primarily of net interest expense, foreign exchange hedging loss, and a charge for proforma net income allocated to non-controlling interests.

We assume that losses will be incurred on our hedge contracts, since the FX rates assumed for guidance reflect a stronger euro that the rates that prevailed at the time we entered most of our hedge contracts.

Proforma EBITDA is expected to range between $327 million and $337 million, which represents 48% growth versus prior-year Q3 at the midpoint.

We are targeting proforma fully diluted EPS of approximately $4.78 to $4.98 per share, which represents 41% growth over prior-year at the midpoint.

Our proforma EPS forecast includes an estimated cash income tax of approximately $74 million, comprised of international income taxes and alternative minimum tax in the US, where we have a sizable NOL to reduce our cash tax liability.

Our proforma tax rate is increasing as compared to prior-year due to more significant growth in international earnings as compared to domestic earnings.

We expect TravelJigsaw to be slightly accretive to proforma EBITDA and EPS for Q3 and the second half of the year.

TravelJigsaw recognizes a significant portion of its annual proforma EBITDA and net income in Q3, as revenue is earned upon completion of high season summer travel.

Accretion to second-half earnings on a GAAP basis will likely be immaterial, due to the impact of amortization expense related to acquired intangible assets.

Our proforma EPS guidance is based upon a proforma diluted share count of approximately 50.9 million shares, which is based on Monday's closing stock price of $227.38 per share.

This is higher than our proforma share count of 50.2 million in Q3 2009 due to a year-over-year increase in our primary outstanding share count, resulting mainly from shares issued due to debt conversions over the past year, partly offset by year-to-date repurchases of common stock and use of cash rather than shares to settle conversion premium on converted bonds that I discussed a little while ago.

As a result of those early conversions, the difference between our primary and fully diluted share count has been narrowing, and our fully diluted share count will be less impacted by changes in our stock price going forward.

No shares will be included in our fully diluted share count related to our 1.25% convertible debt issued earlier this year, unless our stock price exceeds $303 per share.

These bonds are generally not convertible prior to maturity, unless our stock price exceeds $455 per share.

As for expected GAAP results, we expect to report a GAAP EPS of $4.06 to $4.26 per share.

The difference between our GAAP and proforma results is driven by proforma adjustments to exclude stock-based compensation, acquisition-related amortization, including amortization related to the acquisition of TravelJigsaw, noncash interest expense for amortization of debt discount, noncash gains or losses related to early debt conversions, certain noncash income tax expenses, and to include the impact on net income attributable to noncontrolling interests of certain of the aforementioned proforma adjustments to arrive at proforma earnings.

We also intend to address proforma results to exclude charges or benefits, if any, related to hotel occupancy tax adjustments, rulings or settlements.

As we have highlighted in recent quarterly earnings releases, the strong results in unit growth rates we have achieved for the past several quarters were to some extent helped by the impact of the global recession on the prior-year periods.

More difficult comps, in tandem with the sheer size of the business, make it highly likely that the recent pattern we have seen in the first two quarters of 2010 of decelerating unit growth rates will continue.

We believe that our comps become progressively more challenging throughout each quarter of 2010 and therefore our unit growth rates will sequentially decelerate in each quarter.

Our guidance assumes that macroeconomic conditions in general, and conditions in the consumer travel market in particular remain relatively unchanged.

I'll now turn the call back over to Jeff for some closing comments.

Thanks, Dan.

We are pleased with our results for the second quarter and the current trajectory of our international hotel business, which continues to take share in a competitive market.

Our business has been resilient because of the underlying forces that make the business grow.

The growth in global Internet usage and the move from offline to online travel bookings, the growth in our hotel supply and geographic expansion, and the efforts of our people to innovate, to improve our content and interfaces and to strengthen our brands.

We will now take your questions.

Thank you, gentleman.

(Operator Instructions).Our first question comes from Ingrid Chung of Goldman Sachs.

Thanks, good afternoon.

I was wondering if you could tell me about the geographic distribution of the strength in 2Q and as we look into 3Q.

Which areas -- which geographic areas are stronger and which ones are weaker?

Were they your nearer markets or more mature markets, and I was wondering if you could talk to when opaque could grow again?

Thanks.

Thanks, Ingrid.

Geographic distribution, as I mentioned in the prepared remarks, we saw very strong growth from Agoda in Asian markets and Booking.com is doing very well in Asian markets, too.

So new markets continue to, in general, grow at higher rates than the more established markets.

But given the size and the concentration of our business in Europe, by definition we had very strong results in Europe as well.

The -- with respect to the opaque business, the opaque hotel business had good growth in the quarter.

The air and rental car businesses are impacted by supply and we're starting to see some -- enough of an improvement in the broad markets for airline tickets and for rental cars that certainly capacity reductions year-over-year are waning fairly dramatically and in some cases, rental car companies are adding fleet for peak demand periods.

So I think that the improving conditions in the economy certainly could mitigate the capacity issues that we've been dealing with to a significant degree over the last couple of years.

Could I just follow up and ask, in terms of Agoda, do you think you're back to your growth rate pre all the political turmoil that was going on?

We don't really look at it that way because Agoda has been growing very rapidly and our expectation would be that its growth rates would just because of the law of numbers getting a little bit bigger, would decelerate.

So that's not the way we look at it.

One thing I can say, however, is that it certainly remains to be seen whether high-season travel in Thailand, which is a very important destination, will come back to the levels that we would expect to see.

We just won't know until we get there.

Having said that, and as I mentioned in my remarks, we're pretty impressed by the growth in the Asian business in general, given the weak demand in Thailand.

Okay.

As Jeff pointed out in his comments, Ingrid, we still had triple-digit growth in Q2 even with the civil unrest in Thailand, which is one of their biggest markets.

Okay, great.

Thank you.

Thank you.

Our next question comes from Imran Khan of JPMorgan.

Yes, hi.

Thank you so much for taking my questions.

A couple of questions.

First, it seems like on advertising, you've got some leverage as a percentage of gross profit on a year-over-year basis.

Just trying to get a better sense of what type of competition you're seeing for key word trends as the (inaudible) trends continue to improve, what's driving the leverage on the advertising side?

And secondly, trying to better understand the synergistic opportunities you see with TravelJigsaw.

Are you planning to integrate that with Booking, or do you plan to keep it separate?

Are you going to cross-sell inventories, any trend would be very helpful.

Thank you.

Okay, Imran.

With respect to leverage in terms of expenses versus gross profit, I don't want to get into a lot of detail about what the conditions and the market for keywords are, but it's a certainty that improving unit economics makes it a little bit easier to meet your ROI targets.

And we've been satisfied with the ROIs we've been achieving in the international business in particular, and brand building and repeat business is a very big piece of your overall efficiencies to make sure that you're not having to pay top dollar for every customer that comes into the door.

With respect to TravelJigsaw, we are going to work with that business in the same way that we've worked with Booking.com and Agoda.

They are -- they have a fair degree of operational independence.

We work with them to figure out specific areas where we might have some business processes and some intellectual property or some knowledge that could help them build their business and generate more growth and be more efficient in things like IT purchasing and that sort of thing.

Over time, we will look for opportunities for advertising their product on some of our other websites around the world, but that's not the principal driver of this transaction.

The principle driver is for TravelJigsaw is to build upon and expand it's international franchise in rental cars and to build its own brand and its own direct customer flows, but we'll obviously take advantage of any business that we can move back and forth.

And Imran, just to clarify, on online advertising, there was actually a very slight deleverage.

Total advertising expenses we did have leverage, and that's because offline, which only supports the US business, didn't grow, while we had significant growth in the business, particularly overseas.

Thank you.

Our next question comes from Mark Mahaney of CitiGroup.

Great, thanks.

I wanted to just get into the international report a little bit more.

You had deceleration, but it was less severe than the toughening comp and that's how your guide is, too.

Given -- even if you strip out a couple of the events like the impact from TravelJigsaw, did not the World Cup or the volcano have the impact you thought it would have?

And is there something going on particularly in terms of the Asia markets?

You mentioned Booking.com showing success there.

Do you think that you maybe hit critical mass, both for Agoda and for Booking.com in terms of Asia and that's what's behind the real lack of significant deceleration?

Thank you.

As Dan and I both mentioned in our remarks, we saw pretty good bounce-back in transaction growth in the aftermath of the volcano.

We, in our last quarter earnings, tried to estimate what the impact of the volcano might be and we really haven't re-addressed those numbers, so I can't tell you what the overall impact of that was that on the quarter and he we certainly don't have any quantification of the impact of the World Cup.

I think we're lucky to have a very diverse business, not just a nice business growing in Asia, but also a big business in North America, and I think that having broader geographic distribution and customer diversity would tend to reduce the impact of more localized events, like travel disruption from the volcano and maybe even to a degree the World Cup.

I wouldn't say that there's any particular inflection point in Asia.

As we've said in prior earnings calls, we've been performing well there for some time; it still represents a pretty small piece of the total puzzle.

So we're happy that it's contributing to high new market growth, but I wouldn't take it any further than that.

Thank you, Jeff.

Thank you.

Our next question comes from Justin Post of Bank of America.

Thank you.

Thanks.

A couple things.

First, couple of the business-focused hotels have suggested maybe offering less inventory to opaque channels or just online channels.

How dependent are you on just a couple of the major US chains, especially in Europe at all?

And then secondly, Google is going to be trying to improve their travel search capabilities and just wondering if you think about how much traffic you get from there.

Is it a significant amount of traffic from Google?

And if they do have a better consumer experience, how you would see that affecting your traffic over the long-term?

Thank you.

Okay.

Justin, with respect to hotel inventory for opaque, there's no question that improving conditions, improving occupancy has an impact on hotel demand for opaque distribution, and I might add that there's more competition in that space right now with Travelocity and Expedia now showing opaque pricing on their principle websites.

Having said that, we still have very solid conversion for our hotel product here in the United States and very good support for that product from the chains, although conversion in hotels is slightly down and you may have heard some comments to that effect in the Expedia conference call, but still very strong in our case.

With respect to Europe, the chains are not as important a lever in Europe.

And in fact, we believe and hope they represent an opportunity for Booking.com, who built its business over the years without material participation from the major US chains and has been able to, over the last couple of year,s sign agreements with the major chains and start to bring their inventory online.

It's published price inventory.

It's not opaque.

We're not offering opaque product on Booking.com, but I think the chain participation internationally is growing, not shrinking, and represents an opportunity for us over the next year or so.

With respect to Google travel search, they have been experimenting with vertical search in non-travel products and more recently in travel products with an experiment they are doing at hotels, and obviously their proposed purchase of ITA shows what their intention is in airline tickets.

If you look at the statements that Google has made in connection with the ITA announcement, they -- and other public statements on their behalf, they characterize the effort as a way to improve the user experience and potentially deliver a more qualified customer to their advertising partners, and in the travel space, the online travel agents, like ourselves, are some of their principle customers.

So at least by their words, they intend to build a better user experience so that they can deliver a more qualified customer to OTAs and suppliers.

So if that's how things shake out, I think it could be a win for Google, as well as a win for the online travel agents.

You've heard a lot of other people in the space express a concern that Google might someday sell tickets on their own or that they might start to not review ITA's agreements with some other third parties out there.

Google has expressed -- has denied that that's their intention and we take them at their word.

I think that over time, it could possibly represent a competitive threat, but that's not how they are characterizing it at this time.

And just to add, on access to hotel inventory internationally, the addition of the fact we're not looking for opaque inventory internationally, we also believe that we're one of the lower-cost distribution alternatives for hotels, and therefore, even in an improving occupancy environment, we would be less likely to have inventory pulled away from us.

Thank you.

Our next question comes from Ross Sandler of RBC Capital Markets.

Hey, guys.

Nice quarter.

Just two quick questions.

Can we drill down a little bit further on Europe hotel.

So you talked about Asia versus Europe.

What about -- can you talk about the growth you're seeing in your top 10 European markets versus the second-tier markets.

And then a second follow-up question for Dan, on the online marketing expense as a percent of gross profit, you have now seen basically flat, no deleverage in the second quarter, and you've got it the same for the third quarter.

This is a bit of a departure from the past couple-quarter trend.

So is it -- should we continue to assume some deleverage in the future or is the stronger unit economics from the ADR growth why you're seeing a lack of deleverage?

Any color there?

Thanks.

Dan, why don't you take the second one first?

Okay, Ross, on the online marketing, you're right, as our international business continues to grow at a faster pace, it's likely that we would, all else being equal, see some deleverage when looking at online advertising as a percentage of gross profit.

And it's also right to say that, to the extent that we have improvements in ADRs, that's an offsetting factor.

So, we've given you what we see for Q3 and we don't forecast beyond that, but your assumptions are reasonable.

And, Ross, with respect to market-by-market, as you know, we don't break out growth rates in our various markets, but as I mentioned in response to a previous question, we continue to see faster growth in general in some of our newer markets, such as Asia, but we also continue to see solid growth in our four Western European markets, and I think part of the reason for that is that we are continuing to add hotels not only in new markets, but in existing markets.

And we're also starting to see some benefits from customers that are booking hotels in -- the booker is located in new markets and they are booking if some of our core markets.

And finally, as I mentioned in my prepared remarks, the team is just doing a great job in innovating and improving the website and improving content and conversion, and that tends to promote growth in all of your destinations.

Thanks.

Our next question comes from Doug Anmuth of Barclays Capital.

Great.

Thanks for taking the question.

Two things.

First on the air tickets, you saw some modest reacceleration, and I think on an easier comp in 2Q.

Can you talk about whether you're seeing any impact from higher airfares on leisure travel?

And then secondly, can you give us some more color on Agoda's partnership with Universal Travel Group and how you're thinking about this strategically going forward.

Thanks.

Dan, why don't you take the airfare and I'll do leisure travel?

Doug, we are seeing some softness in airline ticket demand, given the increase in airfares.

And we also see some impact for our domestic business on online advertising expense as a percentage of gross profit, so those higher prices driving more clicks as people shop more and try and look for better prices out there.

So we are seeing some impact from that.

But, again, just to emphasize that airline tickets are a pretty small part of our total gross profit and that -- what we're seeing there in terms of softness is built into our forecast for Q3.

And with respect to Agoda and Universal Travel, they are building their distribution through other travel websites in the region and I think this just represents their continued progress on that front.

Okay, thank you.

Thank you.

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

Thanks a lot.

I wonder if you could provide additional details on Agoda or the Asia-focused business?

Essentially I'm curious to know if you could provide some additional metrics related to that particular set of operations.

And also, if you could talk a little bit about two key markets within that particular continent, obviously China and India.

I know there has been some discussion on these calls in the past about what you may or may not be trying to do at some point, whether it's now or later, in those particular areas.

Just wanted potentially an update.

Thanks a lot.

Scott, with respect to additional metrics on Asia, we are not breaking out our results by geographic location, generally with respect to the international hotel business going beyond domestic results and international results.

And while we want to give some color to what we think are pretty good growth rates for the Agoda business in Asia, we're probably not going to give additional metrics until the business gets to be of a size where it's truly material, because there's really no basis for treating that market differently than other markets that we're in that are much bigger and doing quite well and actually having more of an impact on the business.

With respect to key markets in Asia, I can say that we have pointed our strategy there more at the markets outside of China and India to date, and that we believe that the opportunity represented by those markets, that represent over 800 million people and very nice economic growth, we think is a great opportunity for us and we think it's a lot of work to do in the near-term.

The markets that are important to us in Asia in particular, the Thai market is a very important leisure destination, a lot lot of business in Singapore, Malaysia, Hong Kong.

We have some business in Japan.

Those are some of the markets that I would mention.

I would also say that we look at Australia and New Zealand as part of sort of the broader A-PAC and that's a market that we're focused on.

And while the population numbers in Australia and New Zealand are very small compared to Asia, the affluence there and the tendency of the population there to travel widely makes it an attractive market for us as well.

Jeff, thanks for the detail.

If I could just follow up really quickly, do you think that Agoda as a business and as potential growth continues to evolve, is going to be sufficient from, say, a size-and scale-perspective to attack these markets and others in Asia, or do you think that potentially additional acquisition activity might be appropriate, given the opportunities that lie there?

Thanks very much.

We think that Agoda is building the capability to be successful independently over the long-term and build a leading business in online hotel reservations in Asia.

And I can't predict today whether that will translate into broad success in China and India, but I believe that Agoda is building what will be a big business in Asia and they have the ability to do that without further acquisition.

And keep in mind that Booking.com is also building its brand in Asia.

And so we really have two independent efforts in that market and I think they are both well-positioned.

Thanks a lot.

Thank you.

Our next question comes from Mike Olson of Piper Jaffray.

All right, thanks.

Good afternoon.

I don't want to beat the new markets piece to death here, but what markets outside of Asia are of interest to you, if any, or is any newer market build out going to be in Asia?

I think if you went down the list of new markets for Booking.com in particular, Asia is an important new market.

I think the Middle East and Eastern Europe are both attractive new markets that can drive business.

We're just in very early days in South America and we think that has good potential over time.

And North America to a degree is a new market for Booking.com and obviously a very big market and represents an opportunity for Booking.com to build some business here, and, as I think people on the call know, we've been working on that through initiatives that primarily aimed at driving European customers to US hotels, but Booking.com is building out its hotel supply here and working on North America as a new market.

Okay, and then a real high-level one, do you think there's any truth to the idea that, given some uncertainty in the economy, that Europe travelers are traveling more within Europe versus internationally, and is that possibly having an impact on your Europe hotel bookings?

I have heard one other report of an international travel agency that's had their travel from Europe to the United States was down.

I haven't seen any other reports on that and I just can't comment on whether that speculation is true or not.

One thing I can say is I don't believe that the travel agent that made that comment said, and accordingly our business in Europe looks like it's a little better because Europeans are traveling locally.

Okay.

Thanks very much.

Thank you.

Our next question comes from Michael Millman of Millman Research.

Thank you.

Could you discuss what, if any, incremental business you're seeing from mobile devices and if that business is broadly similar to your current business, or are there certain focuses on that business?

And you mentioned that some of the other OTAs are now putting opaque options.

Are you seeing any impact from that either in availability of hotels and cars or in business flow or other?

Okay.

With respect to the first question, we are seeing, and I think if you talk to other online players, most who are participating are seeing pretty significant growth in visitation and, to some degree, business from mobile devices for companies that have put good apps in the App Store.

I think a lot of them have been reporting significant growth from obviously a very small base in business that's coming from iPhone applications.

With respect to the type of business that you're getting from those devices, I think that is very often driven by the functionality that you provide in the application.

So if, for example, your application is driven at last-minute and geographically-targeted business, for example, the way Priceline's iPhone app is, then you see a lot more last-minute business, you see a lot more local business, and because our app is pointed primarily at our name-your-own-price product, we see a bigger mix of name-your-own-price business.

So it's turned out to be a useful tool in trying to drive particular businesses, if that's consistent with how people are using the native functionality of the device.

I think that that will continue to be a growing part of the business.

The Android platform has got very wide distribution and is still in the very early days of really getting the number and the use of its applications out there.

But we think that's pretty good.

With respect to opaque inventory and whether we're seeing an impact of that, I don't -- first of all, the competitive efforts are principally in the area of hotel.

And Travelocity's Top Secret hotel offering is pretty new and we believe at this point in time pretty small-based on what we're seeing, and Expedia is essentially putting Hotwire on Expedia.com, and they have done that with different types of integration with links and so forth in the past.

And so it's not dramatically apparent to us that, in terms of what we're seeing in the business at this point, that we're losing a lot of business to those, but obviously it's a concern for the future.

Getting back quickly to the mobile devices, is the visitation typically incremental new business or is it some of your current customers?

I don't have any data to share with you that can prove that it's incremental or not.

But one thing we do believe is that if a particular competitor is very effective in a particular distribution channel, that can be an opportunity for share gain.

So these may be customers that would otherwise be in the online marketplace for travel, but the fight for share of that is being played out on a different battle field, and if you can be more successful, for example, in a mobile channel, you might be able to get a share gain.

Great, thank you.

Since it's last minute travel, Michael, and we didn't have an app before, now it gives a customer a good opportunity to find last-minute hotel rooms inventory, we could be getting some new business there.

Thank you.

And gentlemen, as there are no further questions in queue, were there any final thoughts?

Thank you very much for participating in the call.

Ladies and gentlemen, this does conclude your program.

Thank you for your participation.

You may disconnect your lines at this time.