Booking Holdings Inc (BKNG) 2013 Q1 法說會逐字稿

Welcome to the Priceline Group's first quarter 2013 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 statement 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 the Priceline Group speakers for this afternoon, Jeffrey Boyd and Daniel Finnegan.

Go ahead, gentlemen.

Thank you.

Welcome to Priceline's first quarter conference call.

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

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

After the prepared portion, we will take questions.

The Priceline Group reported consolidated gross bookings for the first quarter of approximately $9.2 billion, up 36% year-over-year.

Non-GAAP net income was $297 million, or $5.76 per share, up 35% versus prior year.

First quarter results surpassed FactSet consensus estimates of $5.27 per share and our guidance for the quarter.

Worldwide hotel room night reservations were 63.2 million for the quarter, up 38% year-over-year.

Our international business recorded 43% gross bookings growth on local currency basis, consistent with Q4's growth rate.

Hotel room night growth rates in the latter part of the quarter were better than expected, as our forecast for deceleration proved conservative.

Growth rates benefited from good results in Europe, and continued high growth rates in Asia-Pacific and the Americas.

International gross bookings also benefited generally from growth in hotel supply and strong results at RentalCars.com.

Booking.com's platform now has over 295,000 hotels and other accommodations, up 40% over last year.

Booking.com's growth in Europe has held up well despite the weak economic conditions, particularly in southern countries, and negative new cycles relating to the politics of the debt crisis.

Absolute transaction in the local currency growth rates in Europe and non-Euro markets were steady on average in Q1, leading to no deceleration in room night growth for the consolidated Group, and we believe market share gains.

Booking.com continued its aggressive development of markets outside Europe.

These markets continue to grow faster than the core European markets, contributing more to overall growth as they have become a larger percentage of the whole business.

Investment in this effort includes people to build out hotel supply and marketing spend, including Booking.com's offline marketing experiment in the United States.

We are pleased with the results of these efforts to date, and with the resulting levels of room night growth we have sustained over the last year.

Agoda delivered good room night growth in the quarter and is building a leadership position in many of its Asia-Pacific markets, particularly for Asia-Pacific bookers.

With Agoda and Booking.com, whose APAC business does particularly well with international bookers, we believe the Group has built a valuable franchise in this part of the world with attractive prospects as the region grows.

Priceline's domestic gross bookings grew 9% in the first quarter, due to growth in domestic rental car reservations, as well as improved hotel room night gross bookings aided by growth in the Express Deals service.

We are pleased with priceline.com's progress building Express Deals, and the response to its new ad campaign featuring William Shatner and Kaley Cuoco.

Merchant gross bookings growth of 27% continues to reflect growth at Agoda and RentalCars.com.

Growth in rental car days increased sequentially from 37% to 43%, driven by strong growth at RentalCars.com and improved results at priceline.com.

While the first quarter is seasonally the smallest earnings quarter for RentalCars.com, the business continued to perform well as it builds out its international footprint.

We have now received the necessary approvals for the Kayak transaction, and currently expect to close the transaction on May 21.

As we have said before, consistent with our history with Booking.com, Agoda and RentalCars.com, Kayak will be operated independently by current management, and we are excited to welcome them to the Group.

The Group's business performance exceeded expectations in the quarter, and pressure on operating margins in the first quarter did not materialize to the degree forecast.

As you know, it is difficult to forecast future marketing efficiencies, given changing business mix and competitive and seasonal factors.

However, it is important to keep in mind that this quarter-to-quarter variability in operating margins is not reflective of any change in our philosophy, but building our business and brands by investing in geographic expansion and supply, product and service innovation, and customer acquisition, or in how we carry out that philosophy.

I want to thank our employees 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 will discuss some of the highlights and operating results and cash flows for the quarter, and then provide guidance for the second quarter of 2013.

Growth rates mentioned in my remarks are in relation to the prior year comparable period, unless otherwise indicated.

Q1 was a strong quarter from a top line perspective.

Hotel room nights booked grew by 38% in the first quarter, consistent with the unit growth rate achieved in Q4.

Our international business saw solid growth rates in all our key markets.

Our priceline.com business achieved accelerating retail and opaque room night growth in the quarter.

Average daily rates or ADRs for Q1 2013 were up on a local currency basis by about 1% for the consolidated Group.

Rental car days booked were up by 43%, accelerating compared to the Q4 growth rate of 37%.

RentalCars.com and priceline.com's rental car services both posted strong quarters.

For the first quarter compared to the prior year, the FX rate for the Euro to the US dollar was favorable by less than 1%, and the FX rate for the British pound to the US dollar was unfavorable by about 2%.

As a result, currency exchange rates did not have much impact on our year-over-year growth rates expressed in US dollars for gross bookings, revenue, gross profit, adjusted EBITDA, and net income.

In summary, strong unit growth rates drove Q1 gross bookings growth of 36%.

Our Q1 international gross bookings grew by 43% in US dollars, and on a local currency basis.

Gross bookings grew by 9% for our priceline.com brand business in the US.

Good performance in both retail and opaque reservation services contributed to year-over-year growth.

The acceleration in growth compared to the 4% growth rate for Q4, was driven primarily by hotel and rental car reservations.

Non-GAAP gross profit for the quarter was $1.03 billion, and grew 39% as compared to prior year.

GAAP gross profit for the quarter was $1.01 billion, and grew 36%, as compared to prior year.

GAAP gross profit includes an accrual in Q1 in the amount of $20.5 million for travel transaction taxes, primarily related to unfavorable rulings in the state of Hawaii and the District of Columbia.

Non-GAAP gross profit, non-GAAP operating income, adjusted EBITDA, and non-GAAP net income are adjusted to exclude the impact of the charge.

Consistent with past practice, we exclude significant charges and credits for judgments, rulings, and settlements related to travel transaction taxes because the amount and timing of these items are unpredictable, not driven by core operating results, and render comparisons with prior periods less meaningful.

Year-over-year gross profit growth was helped to an extent by Easter falling on March 31 this year, which resulted in some revenue related to the holiday shifting into Q1.

Non-GAAP operating income as a percentage of non-GAAP gross profit amounted to 35.1% for Q1, compared to 35.8% for the prior year Q1.

The operating margin declined by 70 bps compared to prior year, but was better than our guidance forecast.

Margins were impacted mainly by deleverage in advertising expense.

Online advertising grew faster than gross profit due to lower year-over-year advertising ROIs, and the continued mix shift in our business to our international brands, which drives our business to a greater degree through online advertising.

In addition, we continue to experience faster growth in pay channels for certain of our brands.

We launched our first Booking.com TV advertising campaign in the US in Q1, which also contributed to the pressure on operating margins versus prior year.

On the positive side, operating margins were better than our forecast due to less online advertising deleveraged than forecasted, and some favorability in other operating expenses.

In addition, the aforementioned shift of some Easter gross profit into Q1 benefited operating margins in Q1, and we observed pressure on operating margins in Q2, in each case compared to the prior year.

Adjusted EBITDA for Q1 amounted to $368 million, which exceeded our guidance range of $316 million to $346 million, and represents 36% growth versus prior year.

Non-GAAP net income grew by 35%, including a higher year-over-year cash tax rate due to growth in our international operations relative to our US business, which has a lower cash income tax rate due to our US NOL.

In terms of cash flow, we generated approximately $183 million of cash from operations during first quarter 2013, which is about flat with last year.

We have prepaid income taxes of $224 million in the quarter from Booking.com, in return for an early payment cash discount.

We made a similar prepayment last year in the amount of $166 million.

These taxes would otherwise have been paid monthly over the year, until subsequent quarters of the year will have a lower payment burden as a result.

We spent about $15 million on CapEx in the quarter.

Our cash investments of $5.2 billion as of March 31, 2013 is available for general corporate purposes, including share repurchases, acquisitions, and debt repayment.

Now for second quarter 2013 guidance.

We are forecasting total gross bookings to grow by 30% to 37%, and to grow on a local currency basis by approximately 27% to 34%, with US gross bookings growing by 5% to 10%.

We expect international gross bookings expressed in US dollars to grow by 36% to 43%, and to grow on a local currency basis by approximately 33% to 40%.

Our Q2 forecast assumes that local currency ADRs for the consolidated Group will be up less than 1% compared to prior year.

Our Q2 forecast assumes that foreign exchange rates remain at the same $1.32 per Euro and $1.56 per British pound as yesterday's closing rates.

Which would result in average exchange rates that would be stronger by about 3% for the Euro, and weaker by about 3% for the British pound as compared to the prior year.

We have hedge contracts in place to substantially shield our second quarter EBITDA and net earnings from any fluctuation in the Euro or the pound, versus the dollar between now and the end of the quarter.

But these hedges do not offset the impact of translation on our gross bookings, revenue, gross profit, and operating income, and do not hedge our earnings beyond the second quarter.

We expect Q2 revenue to grow year-over-year by approximately 15% to 22%, and gross profit dollars to grow by approximately 26% to 33%.

We expect 400 to 500 bps of deleverage in non-GAAP operating income as a percentage of gross profit compared to prior year.

We assume that margins in Q2 will again be impacted by deleverage in online advertising expense, due to lower year-over-year ROIs, business mix continuing to shift to our international brands, and to pay channels for certain of our brands.

We will also continue our investment in TV advertising in the US market for our Booking.com brand.

Although this spend contributes to the pressure on operating margins in the near-term, we believe that investing in the growth of our biggest brand in such an important market will yield a healthy return over the long-term.

Our forecast reflects growth in personnel and other expenses, as we continue to make the investments necessary to keep up with current and future growth.

As I mentioned a moment ago, Q2 margins compared to prior year are expected to be slightly impacted by the shift of some Easter gross profit into Q1 in 2013.

Adjusted EBITDA is expected to range between $560 million and $595 million, which at the midpoint represents 17% growth versus prior year.

We are targeting non-GAAP fully diluted EPS of approximately $8.87 to $9.45 per share, which at the midpoint represents 17% growth over prior year.

Our non-GAAP EPS forecast includes an estimated cash income tax rate of approximately 16%, comprised of international income taxes and alternative minimum tax and state income taxes in the US.

Our non-GAAP EPS guidance assumes a fully diluted share count of 51.6 million shares based upon yesterday's closing stock price of $735.27 per share -- for the stock.

We forecast GAAP EPS of $7.87 to $8.45 per share for Q2.

The difference between our GAAP and non-GAAP results is driven by non-GAAP adjustments that are detailed in our earnings release.

As Jeff mentioned, we received final regulatory approval of the Kayak acquisition earlier today.

Our guidance for Q2 does not include Kayak or any related deal costs.

We will include Kayak in our consolidated results from the expected May 21 closing date forward.

We believe that the impact of the Kayak acquisition on our non-GAAP EPS for 2013 will be de minimus.

We are pleased by the strong and steady unit growth the Group has delivered over the last several quarters, and that is inherent in our forecast.

Our guidance reflects our expectation for sequentially decelerating growth rates for a very large business, comparing against high transaction growth rates.

We are still concerned about economic conditions on a worldwide basis, and in Europe in particular.

Our forecast does not assume any material change in macroeconomic conditions in general, and conditions in the consumer travel market in particular.

Given the uncertainty surrounding worldwide economic conditions, particularly in Europe where much of our business is concentrated, we believe the variability around our guidance is elevated.

We will now take your questions.

Thank you, sir.

(Operator Instructions)

Our first question comes from Eric Sheridan of UBS.

Sir, your line is open.

Thanks.

I wanted to talk a little bit about Booking.com in the United States, and early days, what you are seeing there from your experience?

And how you are measuring the return on the advertising spending in that market?

And how you think about that type of brand advertising offline on a global basis going forward?

Thank you.

I think, Eric, we are looking at this as an experiment, where our approach will be to very carefully measure what the impact of the spend is, not only on direct business to Booking.com, but in the performance of the brand in all of the other channels in which it advertises aggressively.

The results of that, of that process of evaluating the data will take place over the course of the year.

And how we will proceed afterwards is, will be driven by the data.

Obviously, the Group has very substantial experience advertising in the United States on the priceline.com brand.

And I think the team here has done a good job of very efficiently using a mix of offline and online to drive brand awareness, and really effective online advertising.

And that ultimately is, the goal is to try to demonstrate that the Booking.com spend offline will have a positive ROI.

But we haven't taken any decisions about that, given the sort of stage of the process that we are in.

But as Dan and I both mentioned, we were happy with the results that we have seen in the Booking.com business outside of the core European market including North America, and we are excited to continue the experiment.

Great, thanks.

Thank you.

Our next question comes from Brian Fitzgerald of Jefferies.

Your question, please?

I just -- a consistent theme is to deleverage yourselves, and other people in the industry are seeing it across the advertising.

If you had to hang your hat on, is it impacted more by perhaps Google or other intra-industry competitive pressures?

Or is it more the secular shift into emerging markets, and you want to get in front of and brand it out there, and so that is a more costly advertising dollar?

I think it would be a mistake to try to attribute it to more or less to any one.

We do, we have a competitive marketplace and that is certainly reflected in competition for, for clicks and key words in some of the biggest and most popular travel markets that we operate in.

We have other markets where there is pressure on hotel average daily rates, where there is a lot of competition by local players.

Where your brand may not be as strong, and so conversion is not as strong as it is in other markets where you have been operating for a longer time.

So, all of those things have had an impact, as well as the unique competitive behavior of each player in the space who has got their own approach, and their own specific goals that they are trying to accomplish with their marketing spend.

Great.

Thanks, Jeff.

Thank you.

Our next question comes from Naved Khan of Cantor Fitzgerald.

Your line is open.

Thanks.

So just a couple of questions.

First, in the UK, is a very tough comp because of the Olympics last year, and then I have a follow-up.

The -- I think the -- it is always very difficult to assess the impact, positive or negative, of an event like the Olympics or World Cup soccer.

So, I think it is fair to say that we haven't, in preparing our guidance made any real account for the fact that the Olympics were last year.

Okay, thanks.

And just then on mobile, can you talk about how your different brands are performing relatively, in terms of the full penetration in the mobile channel, and specifically what you see out there?

I think that our brands are doing a good job in mobile.

I think that the level of progress is different at different brands, depending on the markets that they are primarily operating in.

In the United States and Western Europe in particular, I think we have outstanding apps and mobile functionality, and the share of the business that is being transacted in mobile channels has been growing very steadily, and I think compares well to some of the numbers that have been published out there by others in our space and in similar spaces.

We feel like we are pushing out distinctive functionality that, that is attractive to users.

And it is still a relatively new market, so we are working very hard to try to figure out what the most efficient distribution methods are and so forth.

The hotel space is typically, is first in line here, and I think relatively more advanced than the area of the rental car space.

And I don't think that is a vastly difference between us and our competition.

And obviously, we are primarily focused on the hotel space because that is our most important market.

Thank you.

Thank you.

Our next question comes from Heath Terry of Goldman Sachs.

Your line is open.

I was wondering if you could give us a sense of where, as Booking grows outside, outside of Europe and particularly grows in the US, how your macroeconomic exposure is changing?

Because, obviously, with Booking growing in the US, that still sort of falls under, at least as we see it, international revenue.

Has that shifted enough that there is a difference in where your real macro exposure lies, versus the way things are presented in the financials?

I think, Heath, our ultimate goal is to have the broadest possible diversification of macro risks that you can have with a truly Global business.

Our more specific issue over the last couple of years has been the relatively high concentration of the Booking.com business in Europe, as Europe has going through its issues concerning sovereign debt.

And we have consistently said, and shown that the percentage of the business of Booking.com that is in Europe is shrinking every quarter, just because its business outside of that region is growing faster than the Europe business.

And that condition and circumstance remains true for the first quarter.

I think it is a harder, it is a harder question to say, are we therefore exposed to different macroeconomic risks as our exposure in the United States grows?

And as a pure statement of fact, the answer to that is, yes, we have greater risk in the United States as our business in the United States grows.

But I am much, much happier, and I think it is much better for the business as a whole, to have a business that is ultimately as broadly diversified as the travel market that we serve.

And I think growing our business in the United States is necessary to accomplish that goal.

Great, thanks.

And just one other question.

With the increase in marketing spending that we are seeing, we are also seeing an increase in the rate of growth in Bookings.

Wonder to the extent that all of this focus around deleverage on the advertising line has been there, should we continue to expect over time that we do see more of a top line benefit from these investments being made?

Even if it is on a delayed basis, particularly around some of the offline advertising spend, like the television campaigns?

Well, Heath, the way I would answer that is, I think that we have gotten a very good performance from our colleagues who are managing the advertising, both online and offline for our brands around the world.

You look at the absolute size of our Business, and to date, I think what we could fairly describe as pretty modest deceleration of a very big business.

I think the Business as a whole is performing very, very well in balancing the desire to build the franchise and drive high levels of growth on the one hand, and deliver operating margin and profit to shareholders on the other hand.

If we could be criticized for how we are balancing that, I think the only fair criticism would be that we are not spending enough money.

And that we are pushing too much towards the margin side.

I am very comfortable with the balance we are striking.

And I tried to make it clear in my prepared remarks, that neither the results that we are reporting, nor what we are guiding to is representing any change in philosophy on our part.

We are current course and speed, continue making the investments that we think will pay off, not just in terms of growth today, but in terms of earnings down the road.

And I think we are doing a decent job of striking that balance.

Great.

Thanks, Dan.

Thanks, Jeff.

Thank you.

Our next question comes from Mike Olson of Piper Jaffray.

Your question, please?

You indicated in your comments that you continue to see economic uncertainty in certain regions and that could result in variability in results.

And that makes sense.

But would you say your level of concern related to economic uncertainty is higher than what it was when you reported Q4 three months ago, or is it a level of uncertainty consistent with what you felt over the last three months?

And I guess to add on to that, similarly, you have a Q2 comp for international Bookings growth that is significantly easier than Q1.

Based on that, other than kind of the law of large numbers, what are the reasons that you anticipate a deceleration in international Bookings growth for Q2?

Thanks.

So, on the first question, the best way I can answer that is to say that we have been pleasantly surprised with the resilience of the traveling consumer that we serve, really in all our markets through times of economic uncertainty.

Travel is, we are leisure travel guys, and it is a compelling activity and people are -- they are traveling and booking hotel rooms and rental cars and airline tickets, despite some fairly shaky economic circumstances.

I don't think it would be fair to say that I feel differently about that than, or Dan feels differently about that than we did three months ago.

I think it is about the same, and the language we read in the script, it is exactly the same as what we read three months ago.

So, I think we feel the same.

But we are gratified by the resilience of the traveler worldwide.

With respect to the second quarter comp, we look at the performance of the business in the second quarter last year.

And the absolute growth rates that we achieved were, in our opinion, pretty impressive.

And we also delivered strong operating margins which represented an improvement year-over-year.

And so, we feel like that, that is a -- a very solid comp against which we have to perform this year.

Thank you.

Thank you.

Our next question comes from Tom White of Macquarie.

Your question, please, sir?

So you have talked now about lower advertising ROIs year-over-year for the past few quarters.

Independent of geographic mix, has there been any change in kind of the trajectory of those ROI declines?

Are they worsening?

Are they stable?

And has there been any significant recent changes, what goes into that, say between cancellation rates, the bidding environment or your conversion rates?

And then just quickly, offline advertising, it looks like there is a little over $20 million in incremental spend versus 4Q.

Is that kind of the new run rate we should think about going forward?

Thanks.

The online advertising ROIs, Tom, we didn't call out any significant change in trend there.

Jeff pointed out last year we had a very strong operating margin.

We had decelerating growth rates last year.

So that typically drives favorability in the margin, because you have got checkouts that were booked in prior strong growth quarters, and then deceleration generally ties together with lower spend in that quarter.

So I think that is, that is more of a driver, together with, we talked about a little bit of a shift of Easter gross profit out of Q2 into Q1 this year.

Those would be the bigger factors, in terms of the margin deleverage from Q1 to Q2.

In terms of offline advertising, we said that the run rate would be similar to what you have seen in the past for Priceline, and so that would be a good guide to look at there.

Okay.

Thank you.

Thank you.

Our next question comes from Ross Sandler of Deutsche Bank.

Your question, please?

Thanks.

I just had two questions.

One on the follow-up from the TV campaign, and then one on search marketing.

So on the TV campaign, do you have any idea of how Booking.com's brand stacks up against some of the other brands in Europe, from an unaided awareness perspective, given that you have chosen not to do brand building in those markets?

And then on the search question, are you testing the new Google-enhanced campaigns in any of your markets yet?

And could this change from Google have any impact on ROIs, and what percent of your transactions are coming from tablet?

Thank you.

So with respect to the Booking.com brand awareness in Europe and other markets outside the United States, I don't have that data with me.

It is something that we track.

And I think Booking.com has done a great job of building awareness through its online campaigns in Europe, and by virtue of the quality of its user experience and repeat customers.

And I think it is safe to say that the awareness that Booking.com enjoys in Europe, especially in the markets where it has been operating for a long time, is certainly ahead of what it is here in the United States.

And the question is, as to whether there is an opportunity to try to take further steps to try to further improve that brand awareness is something we continually think about.

But I think we are approaching it in a thoughtful way, to use a television market that we are very familiar with here in the United States, and a very big homogenous advertising environment where you can just very, very efficiently get your message out, and see what that does as I have discussed before.

With respect to Google enhanced campaigns, we typically are very active in advertising in, and testing and experimenting with all of the new opportunities and tools that Google provides to advertisers.

I don't have anything quantitative to say to you about how much that is, and whether it is good or bad, but we certainly are working with it.

And that is just part of our everyday work with Google.

Thank you.

Thank you.

Our next question comes from Mark Mahaney of RBC Capital Markets.

Your line is open.

Thanks.

Two questions, please.

First, on the Rental Cars business, I know you probably won't quantify the contribution.

But could you provide any more color around that business, the economics of that business, how it compares to some of the other products that you sell?

Are any particular geographic regions where the RentalCars.com property is doing better?

And then secondly, you recently put out a press release that indicated that mobile as a channel was something like mid teens of your total bookings.

It is a pretty large number.

Does that have any material impact one way or another on your advertising ROI?

Does an increase -- does a mix shift toward mobile channel negatively or positively impact that in any material way?

Thank you.

Dan, why don't you do the first one, and I will do the second.

On the Rental Cars business, Mark, we don't disclose a lot of data on that.

What we have said in the past is that our Merchant businesses are typically kind of high teens margins, and RentalCars.com is also very healthy margin and a profitable business for us.

It is still particularly concentrated in Europe.

But the team has done a great job in expanding the business outside of Europe.

They are expanding into the US, Australia.

So, they continue to just expand into additional markets and perform very strongly, and grow well within their core European market, as well.

And as the business grows, as we see with our other businesses, typically there is room for margin expansion together with that.

And we are pleased with the margins that the business has delivered to date.

And Mark, with respect to mobile, I am not sure about the press release that you quoted.

But I think we are, we certainly are driving a substantial share of the hotel business, in particular through mobile, and we are very excited and pleased by how that is going.

With respect to the impact on advertising -- and maybe I can address a question that Ross also asked that I didn't really cover in my answer to his question -- the search advertising in particular on mobile devices is in its very early days.

And I think you have heard from others that when you look at a tablet as a mobile device, it tends to, tends to look an awful lot like a desktop, in terms of who is using it, where, and what the experience is.

And so, we are probably seeing much more integration of search marketing programs that we are already involved in on tablets today.

With respect to the handsets on the other hand, I think search marketing is still very much in its early days.

Like everybody else, we are investing in it.

But the -- I don't believe that what is going on in the mobile market right now is in any way a prime driver of our broad experience, in terms of advertising efficiency.

Thanks, Jeff.

Thanks, Dan.

Thank you.

Our next question comes from Justin Post of Merrill Lynch.

Your question, please?

Questions.

First, I don't know if you commented on this, but does your outlook assume any deceleration in bookings growth or conversion rates on ad spend in the last two months of the quarter?

We know it is a very back-end loaded quarter.

And then secondly, on cash flow, uses of cash, post-Kayak, you are going to have several billion dollars of cash.

If you could tell us the amount you will have.

And are there some strategic opportunities that you see, Jeff, looking forward in international markets to kind of deploy that cash over time?

Obviously, you can't tell us what you are thinking about.

But do you see opportunities to use that cash, or do you think about returns to shareholders?

Thank you.

Why don't you answer the first one.

I will answer the second.

We are not going to parse it month by month for you, Justin.

We did say that our guidance does assume sequential deceleration.

That is generally been our mindset.

It is a big business.

It has posted strong growth rates in the prior year, and so we assume sequential deceleration.

We don't talk about what we are seeing for conversion, so we didn't give any guidance there.

I can't really help you further with that, other than we gave you the broad advertising efficiency guidance.

And with respect to cash use, we do believe that there will be opportunities in the future to deploy our cash, and our international cash in particular, either through investing in the business, in growing the business, or in acquisitions.

And as you mentioned, I can't get specific with that, but we do believe there are attractive businesses out there.

We have been reasonably acquisitive as a Company.

We haven't done a ton of them, but we are always very active in the market.

And with respect to other uses of cash, as we have said before, we have been buyers of our common stock and repurchase from time to time.

We have an authorization outstanding that is a matter of public record.

And that will continue to be the case, but that is something we evaluate from time to time.

Great.

Appreciate it.

Thank you.

Our next question comes from Ron Josey of JMP Securities.

Your line is open.

Thank you for taking my question.

I wanted to switch topics a little bit, and talk a little bit about Asia and South America, particularly as we exited summer travel months in those geographies.

And I am wondering if you can talk a little about, maybe what you saw this past summer season down there versus the prior year, maybe in terms of like share gains and growth?

Thank you.

So, I think those markets continue to be very, very attractive markets as internet penetration grows, and as they benefit from fundamental economic growth and gaining affluence.

Couple of comments, I think we did well in both markets.

Based on the data available to us, in terms of market share, we are comfortable with how we are proceeding.

There are a couple of specific challenges in those markets that we, and I think everybody else has to deal with in Asia-Pacific.

It is a very, very competitive market.

And as we have said in previous calls, the absolute economics, in terms of the pricing of hotels, and the competition down there makes it, makes it potentially more expensive to build your brand.

And we are happy and prepared to bear that expense, but that is definitely a condition in the marketplace.

As I said in my prepared remarks, I think between Agoda and Booking.com, we are building an outstanding franchise in that region.

And with respect to South America, there are unique operational issues that are brought to bear there.

Particularly in Argentina where the government policy is very, very disruptive to International businesses.

Makes it very, very difficult to bring people into the country to help build your Business.

Obviously, makes it very difficult to repatriate earnings.

It is just a very challenging environment for businesses in Argentina.

And that is something that we all have to deal with.

Having said that, we are working very hard to build our Business there.

We have a very natural position from which to build, because we have so many customers, both in Europe and in North America who have logical links and travel to South America.

And that is a great footprint from which we can build to go in there, with really a great market share of international travelers who are in the region, And I think that has been an advantage for us.

But those operational challenges are there.

Thank you.

Thank you.

Our next question comes from Scott Devitt of Morgan Stanley.

Your line is open.

Thank you.

I was wondering, Jeff, if you could talk about the, any greater competition from Expedia that you are seeing, as it relates to the agency program that they have launched in Europe?

And any effect that could be having on CPCs in Europe.

And then secondly, I think you referenced multiple times on the call, the strength in the Rental Cars business, and Expedia had noted some weakness due to supply constraints.

And wonder if you had any view on the differences there in your business, versus what they experienced in the quarter?

Thank you.

For, Scott, on the competition question, Expedia is a very strong company, and they have been competing very aggressively against us for quite sometime.

Their agency program dates back to the acquisition of Venere, which is many years ago now.

So, we think we have been doing a decent job in the face of very robust competition from Expedia.

With respect to Expedia traveler preference, the -- that program, even though they have been at it for a while, in terms of hotels that are fully involved in it, it is still a pretty small number.

So, they have got a lot of hotels that are providing agency, but the number they are providing both and offered on a combined basis is still relatively small, compared to 295,000 hotels that Booking.com is operating with.

We had experience with that product here in the United States, because we offer it on priceline.com.

We think we understand how it works, and we are comfortable that we have got the product and the service to compete very effectively with that going forward.

I can't answer the question as to whether that particular program is having any impact on how they are behaving in online marketplaces of -- even if -- we don't know that.

You just can't ascertain that based on the data that we have in the marketplace.

With respect to rental cars, we are operating a different business from Expedia.

RentalCars.com is a little bit of a different animal than Expedia or Hotwire, although I do know that Expedia owns CarRentals.com, but I think the footprint around Cars.com is quite different and has been on a very nice, consistent growth path since we acquired them, and we are happy with what we are seeing there.

With respect to the domestic rental car market, we have had good results in the quarter, as Dan mentioned, for domestic rental car.

And we can really only speak for ourselves, and what we are seeing.

But we did, we had a good quarter.

The performance of the Domestic Rental Car business actually improved sequentially, and we were pleased with what we saw.

Thank you.

Thank you.

Our next question comes from Douglas Anmuth of JPMorgan.

Your question, please.

My question, I just wanted to ask at a high level, how you would think going forward about the margin compression, once you start to lap your increased levels of spending?

Thanks.

Well, Doug, Jeff said I think in our last call, and I will say it again, just mathematically as we start to comp against Q3 and Q4, where our ROIs were under pressure and we saw our margins coming down year-over-year, that will provide an easier comp.

So, we are not going to give guidance beyond this one quarter.

But just from a mathematical perspective, that is clearly an easier comp for us.

Thank you.

Thank you.

Our next question comes from Ken Sena of Evercore Partners.

Your line is open.

Hi, thanks.

Just in your prepared remarks, you talked about room night growth and your belief that you were gaining share.

I was just wondering if you could provide a little bit more about your confidence in that?

And also any specific territories where that might be happening more than others?

Thank you.

Well, our share gain comment is based on best information we have at the highest level.

We see the absolute growth rates that our competition is reporting.

And we see our growth rates being higher.

And at the very highest level, we say, okay, we probably took some share there.

Our folks out in the field have their own data.

But we don't have anything that is more specific than that, than we would say to you here on a conference call.

Great.

Thanks.

Thank you.

Our next question comes from Aaron Kessler of Raymond James.

Your line is open.

Yes, hi.

A couple questions.

First, can you comment a little bit more just on the Express Deals?

It looks like you may be pushing that a little bit more on your site.

And just maybe how you view that, versus kind of Name Your Own Price going forward?

And just in Europe, maybe just curious on your thoughts on the vacation rental market, how you view that market?

And that it looks like you may be going downstream to more a bed and breakfast to add more inventory that way?

Thank you.

So Dan, I will hit the Express Deals question, and you can talk about vacation rentals.

So we, we have definitely worked hard to find the optimal way to promote Express Deals on the website.

And that is a function of sort of continuous experimentation, to see what gives us the best conversion.

We have a fabulous group of really loyal Name Your Own Price customers who want to use that product, who are comfortable with it, who feel they can find the best savings.

And we want to make it as easy as possible to find what they want, too.

So we have got a very strong desire to, to serve our Name Your Own Price loyalists.

But we also want to make sure that a new customer coming into the website understands where to find Express Deals.

And that is especially the case for somebody who may not be comfortable bidding.

So it is really, it is a process of experimentation.

And what you see today, is going to be different a month from now.

And hopefully, we will be engaged in the process, where we are just constantly making that presentation better and more engaging for the consumer.

And in terms of vacation rentals, Booking.com has done a great job over the last few years of -- we changed our language a little bit.

We used to talk about hotel count.

Now we talk about hotel and other accommodations.

So, they have been fanning out and adding bed and breakfasts, and hostels and guest apartments to the website.

And our hope over time is that we would continue to add all types of properties that our customers are interested in staying in, and can be booked over the internet.

So, I think we will continue down that path, and they have done a great job til now.

Great.

Thank you.

Thank you.

Our next question comes from Stephen Ju of Credit Suisse.

Your line is open.

Jeff, interested in what you said earlier about not spending enough.

Do you feel like the markets globally are ripe enough that you might be walking away from some of your long-term growth potential by not grabbing land fast enough?

And Dan, I think you said in your prepared remarks that you paid $224 million in taxes for Booking.com versus $166 million last year.

So if I am doing my math correctly, it is implying an FX impact of 35% growth rate in operating profit dollars, assuming no material change to the tax rate.

So this implies about north of 40% on an FX-neutral basis for Booking.com.

Is this somewhere in the ball park?

Thanks.

So I will let Dan answer the cash flow question.

Why don't you do that first.

I wouldn't necessarily assume that, Stephen.

So, the amount that we pay, is subject to what the tax authorities ask us to pay.

The growth in the amount certainly is because the Business is growing, and the tax liability for the year will grow.

But you can't -- it is not that clear-cut that you can draw that relationship.

And with respect to the comment on not spending enough, as I tried to say, I think we are, we are trying to strike the right balance here.

And certainly the opportunity that we have in front of us, especially in a lot of the new markets where we are spending is just so attractive, that I think it would be a mistake for us not to go at that aggressively or to be timid about it because we were worried about a few basis points of margin deleverage.

And so, I think we are doing a good job of striking the right balance.

And I think if you look at our growth numbers, and how we are performing vis-a-vis share against the other players in the space, who by way are also investing aggressively to try and penetrate these markets, I think it is demonstrative of us doing a decent job of striking that balance.

Okay.

Thank you.

Thank you.

Our next question comes from Bill Lennan of Monness Crespi.

Your line is open.

Thank you.

On the margin compression topic, which seems to be top of mind for everybody, we talk a lot bit about the cost side and efficiencies.

There is very little discussion about pricing.

So if you talk to hotels, you talk to a hundred, it's a small sample size for what you have signed.

But there is a perception that there is a gap between what you charge, and what your biggest competitors charge.

So I have just a couple questions on that.

One, what is your pricing -- how has your pricing behaved over the last year or so on an apples-to-apples basis?

Are you taking it up at all?

And two, if you did choose to raise price, how would you assess your pricing power?

Specifically if you told a typical hotel, we are taking you from X to X plus 2%, what would their alternatives be?

Where would they go?

I think the short answer to that, is that we are not looking to try to drive higher margin through increasing costs to hoteliers.

That, that is not part of our strategy at this time.

I think it is true that some other players in the space charge hotels more.

When that is the case, we like to take advantage of that disparity, so that we can compete more aggressively for availability and rooms at times of high occupancy.

If we have significant market share, and I think with that comes a responsibility to be good partners with our hotels.

And I don't think it would be consistent with that, to think that it would be a great idea for us to do some sort of across-the-board price increase, just because we were worried about our margins coming down 200 basis points.

Then one more on cost if I might.

Also, we focus a lot on online advertising, which, of course, is a huge piece of it.

But I wondered if in aggregate some of the smaller costs, I am just wondering how they are behaving.

I am thinking what you pay people, occupancy.

What is the upward pressure on those costs, or your opportunity to realize some margin from, say, not the top five costs, but costs number 5 through 20 in the bucket?

I think we have done a pretty good job over the last number of years in scaling versus our non-advertising costs.

We have had quarters where the non-advertising operating costs go up a little bit, because we need to staff up in advance of high season growth, customer service requirements, aggressive hotel supply goals that we have set for the teams, and we are prepared to do that.

But over the long-term, those costs have scaled nicely for us, and should scale nicely in the future.

The very substantial part of that is personnel.

And we think that to the extent that we are going to be looking for scale there, it is not going to be by trying to put pressure on compensation to our colleagues.

I think we have the best people.

We want to have the best people, and we want to pay them well.

So it is really more about efficiency, and how you do your business.

Thank you.

Thank you.

And our final question for the evening comes from Kevin Kopelman of Cowen.

Your line is open, sir.

Hi, thanks.

I had a question on currency impact.

It looks like you are expecting a 3 percentage point currency benefit on bookings growth in Q2.

Are you expecting a similar currency impact on gross profit growth in the quarter?

Yes, Kevin.

That currency benefit would impact all of the lines for our Booking.com business.

Got it.

Thanks.

You're welcome.

And at this time, I would like to turn it back over to management for any closing remarks.

Thank you all very much for participating in the call.

Thank you, gentlemen, and thank you, everyone, for your participation.

This does conclude your program.

You may disconnect your lines at this time.

Have a great day.