Booking Holdings Inc (BKNG) 2013 Q2 法說會逐字稿

Welcome to Priceline Group's second-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'd like to introduce The Priceline Group speakers for this afternoon, Jeffery Boyd and Daniel Finnegan.

Go ahead, gentlemen.

Thank you and welcome to Priceline's second-quarter conference call.

I'm here with Priceline 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 second quarter of approximately $10.1 billion, up 38% year-over-year.

Non-GAAP net income was $508 million or $9.70 per share, up 24% versus prior year.

Second-quarter results surpassed FactSet Consensus Estimates of $9.38 per share and our guidance for the quarter.

Worldwide hotel room night reservations were 69.4 million for the quarter, up 38% year-over-year.

Our international business recorded 44% gross bookings growth on a local currency basis, roughly consistent with Q1's growth rate.

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 330,000 hotels and other accommodations, up 40% over last year.

Booking.com's growth in Europe has held up well this year despite continuing economic and political uncertainty.

We believe the steady international room night growth we have posted this year is driving 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 to more overall growth as they become a larger percentage of the whole Business.

We are investing in growing hotel and accommodation supply and in marketing, including Booking.com's offline marketing experiment in the United States, which we believe is contributing to the room night growth, Booking.com is seeing in the US.

Agoda delivered good room night growth in the quarter and continues to build its business as a leading site for age-specific bookers.

With Agoda and Booking.com, whose age-specific business does particularly well with international bookers, we believe the Group is strengthening its position in this part of the world with attractive prospects as the region grows.

Priceline's domestic gross bookings grew 12% in the second quarter, showing continued improvement, aided by growth in domestic rental car reservations as well as improved hotel room night gross bookings with Express Deals becoming a larger part of the opaque hotel business.

Priceline.com has done a good job building Express Deals for customers who want Priceline savings without the bidding and the response to some new ads we are running featuring William Shatner and Kaley Cuoco seems positive.

Merchant gross bookings growth of 30% continues to reflect growth at Agoda and RentalCars.com.

Growth in rental car days increased sequentially from 43% to 46%, driven by strong growth at RentalCars.com and continuing improved results at Priceline.com.

RentalCars.com continued to perform well as it builds out its international footprint.

We closed the Kayak transaction on May 21 and Dan will discuss the impact of including their financial results for the stub period.

Kayak is being run independently and we are encouraged as we start to look at opportunities to promote Kayak's growth.

The Group's business performance exceeded expectations in the quarter and operating margins, while down, came in within the range of our forecast.

Advertising efficiency continues to be an important variable, which is difficult to forecast with precision.

Efficiencies are impacted not only by changing business mix and competitive and seasonal factors but by substantial ongoing changes to our most important distribution channels, including the growth in mobile and changing interfaces at our largest partners.

Based on what we see in the marketplace, I believe our online and offline teams are executing well in a challenging environment.

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'll discuss some of the highlights and operating results and cash flows for the quarter and then provide guidance for the third quarter of 2013.

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

Kayak is included in our income statement from the acquisition close date of May 21 through the end of the quarter, as well as in our guidance for all of Q3.

Kayak revenue included in Q2 results net of inter-Company activity amounted to $31.1 million.

We will report Kayak's revenue for the first year to help investors understand the impact of the acquisition on our top-line growth.

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

Q2 was a strong quarter from a top-line perspective.

Hotel room nights booked grew by 38% in the second quarter, consistent with the unit growth rates achieved in both Q1 and Q4.

Our international business performed well in all of our key markets.

Our Priceline.com US business achieved accelerated room night growth in Q2 compared to Q1.

Average daily rates or ADRs for Q2 2013 were up on a local currency basis by about 1% for the consolidated Group.

Rental car days booked were up by 46%, reflecting strong results for both RentalCars.com and Priceline.com.

For the second quarter, compared to the prior year, the FX rate for the euro to the US dollar was favorable by about 2% and the FX rate for the British pound to the US dollar was unfavorable by about 3%.

As a result, currency exchange rates had little impact on our year-over-year growth rates expressed in US dollars for gross bookings, revenue, gross profit, adjusted EBITDA, and net income.

The FX rate for the euro to the US dollar was about 1% unfavorable to our guidance forecast assumption.

In summary, strong unit growth rates drove solid results compared to our guidance on all key operating metrics.

Q2 gross bookings grew by 38% compared to prior year.

Our Q2 international gross bookings grew by 44% on both a US dollar and local currency basis.

Gross bookings grew by 12% for our Priceline.com brand business in the US.

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

Gross profit for the quarter was $1.4 billion and grew 38% as compared to prior year.

Year-over-year gross profit growth for Q2 was hindered slightly by Easter falling on March 31 this year, which resulted in some revenue related to the holiday shifting into Q1.

The inclusion of Kayak in our results contributed about 3 percentage points of inorganic growth for the quarter.

Our international operations generated gross profit of $1.2 billion, which constituted an increase of 40% as compared to the prior year and an increase of 39% on a local currency basis.

Gross profit for our US business, including Kayak, amounted to $183 million, which represented 26% growth versus prior year.

Non-GAAP operating income as a percentage of non-GAAP gross profit amounted to 44.1% for Q2 compared to 48.2% for the prior-year Q2.

The operating margin declined by 410 bps compared to prior year but was near the better end of the range of 400 to 500 bps of operating deleverage assumed in our guidance forecast.

As we have discussed over the last several quarters, operating margins were impacted by lower year-over-year advertising ROIs, business mix, as well as offline advertising spend for Kayak and Booking.com.

Also as we discussed last quarter, Q2 margins are negatively impacted by an earlier Easter this year, which caused the shift of some gross profit into Q1 as well as a tough prior-year margin comp.

Other OpEx besides advertising delevered by 60 bps as we invested in personnel and other expenses to keep up with current and future business growth.

We excluded $6.4 million of deal costs incurred in Q2 related to the Kayak acquisition from non-GAAP net income because the expenses are not driven by core operating results and render comparisons with prior periods less meaningful.

Adjusted EBITDA for Q2 amounted to $621 million, which exceeded our guidance range of $560 million to $595 million and represents 26% growth versus prior year.

Non-GAAP net income also grew by 26% and non-GAAP EPS grew by 24%, reflecting the impact of higher fully diluted share count.

In terms of cash flow, it was a busy quarter.

We generated approximately $593 million of cash from operations during second quarter 2013, which is about 37% higher than last year.

Operating cash flow for the quarter benefits from our decision to pre-pay in the first quarter $224 million of income taxes for Booking.com in return for an early payment cash discount.

These taxes would otherwise have been paid monthly over the year and so second quarter and subsequent quarters of 2013 have a lower payment burden as a result.

We spent about $21 million on CapEx in the quarter and $193 million to acquire the remaining non-controlling interest in RentalCars.com.

We also paid cash of $328 million net of cash acquired and $1.55 billion in shares of our Common Stock and assumed Kayak stock options to close the Kayak acquisition.

As we announced in May, we completed a $1 billion convertible debt offering during the second quarter.

We believe this represents attractive financing for the Company with a coupon interest rate of 0.35% and a conversion price of $1,315 per share.

The debt has a seven-year term and generally cannot be converted prior to maturity unless our stock trades above $1,973 per share.

Concurrent with the offering, we announced an authorization from our Board of Directors to purchase up to $1 billion of our common stock.

We repurchased $347 million of our common stock in Q2.

The remaining proceeds, as well as our other cash and investments, totaling about $6 billion at quarter-close are available for general Corporate purposes, including additional share repurchases, acquisitions, and debt repayment.

Now for third-quarter 2013 guidance.

We are forecasting total gross bookings to grow by 27% to 34% and to grow on a local currency basis by approximately 25% to 32%, with US gross bookings growing by 5% to 10%.

We expect international gross bookings expressed in US dollars to grow by 32% to 39% and to grow on a local currency basis by approximately 30% to 37%.

Our Q3 forecast assumes that local currency ADRs for the consolidated Group will be up by about 1% compared to prior year.

Our Q3 forecast assumes that foreign exchange rates remain at the same $1.33 per euro and $1.55 per British pound as yesterday's closing rates, which result in average exchange rates that would be stronger by about 5.5% for the euro and weaker by about 2% for the British pound as compared to the prior year.

We have hedge contracts in place to substantially shield our third-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 third quarter.

We expect Q3 revenue to grow year-over-year by approximately 23% to 30% and gross profit dollars to grow by approximately 32% to 39%.

We expect about 250 bps of deleverage in non-GAAP operating income as a percentage of gross profit compared to prior year.

We assume that margins in Q3 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 continue our investment in TV advertising in the US market for our Booking.com brand and the inclusion of Kayak will also increase offline advertising compared to prior-year.

Other OpEx is stable as a percentage of gross profit, reflecting continued investment in people and related expenses to support business growth, offset by a favorable comp because Q3 2012 included a $13 million one-time payroll tax charge in the Netherlands.

Adjusted EBITDA is expected to range between $990 million and $1.055 billion, which at the mid-point represents 31% growth versus 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.

We are targeting non-GAAP fully diluted EPS of approximately $15.30 to $16.30 per share, which at the mid-point represents 27% growth over prior-year.

Our non-GAAP EPS guidance assumes a fully diluted share count of 53.3 million shares, based upon yesterday's closing stock price of $927.58 and reflects the impact of shares issued and options assumed as part of the Kayak acquisition, net of shares repurchased during Q2.

We forecast GAAP EPS between $13.75 and $14.75 per share for Q3.

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

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

Over the trailing 12 months, the Company has facilitated travel bookings accounting for about 234 million hotel room nights and total gross bookings of $33.7 billion.

I highlight that our guidance reflects deceleration and growth experienced to-date in the quarter and our expectation that such a large business comparing against high transaction growth rates will experience sequentially decelerating growth rates.

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

We will now take your questions.

(Operator Instructions)

Ross Sandler, Deutsche Bank.

Just two quick questions.

So we have seen, Dan, as you mentioned, we have seen a lot of change in some of your core customer acquisition channels -- so Google, HotelFinder going meta, TripAdvisor going meta -- do you guys view these changing dynamics as an opportunity for Priceline to take market share versus OTAs and supplier direct?

And then with the concept of changing dynamics in mind, how do you view your opportunity to gain market share in mobile versus maybe some of the smaller OTAs and supplier direct?

So with respect to the first channel, whenever you have changing interfaces in important advertising channels it represents both a risk and an opportunity.

We have done particularly well in the legacy environments and so we have risk when the interfaces changed but our teams have done a good job in executing against those changes and trying to build the processes and the understanding to do well in those marketplaces as they change.

The fundamental asset that we have is a great website that converts customers very well and that is an asset that has high value in all of these interfaces whether it's metasearch or pop-ups, we tend to do well once we get a visitor to the website and that continues to be a very important part of how we try to improve our product and help build share in these markets.

So we look at it both as a risk and as an opportunity and it's a given in our space that these markets will continue to change, that the media model businesses will continue to try to optimize for their customer flows and for revenue and all of us just have to be prepared to deal with those changes.

With respect to mobile, the teams have also done a very good job of building terrific mobile websites, building functionality in our regular websites that work well in a tablet environment and building mobile apps.

If you look at the number of downloads that we have as a Group, it's in the tens of millions and we're doing a good job in building apps that consumers want to download and our focus is really to try to build downloads so consumers will actually use those apps to buy product because they tend to be quite loyal and we're doing well there based on the disclosures that have come out from competitors in the space.

We're comfortable that we're tracking nicely in terms of mobile share.

Naved Khan, Cantor Fitzgerald.

Jeff, can you talk a little bit about the efficacy of your TV ad campaign in the US and how much did it contributed to the outperformance versus your own expectations in the quarter and how do you see it tracking going into the second half and then I have a follow-up?

So I assume you're asking about the Booking.com campaign here in the United States because keep in mind now we have three brands that are advertising -- Priceline, Booking, and Kayak.

As I mentioned in my prepared remarks, we're happy with the results we seen to date and we think that the ad campaign is contributing to the growth that Booking.com is seeing here in the United States so it's an ongoing experiment and we continue to monitor the results but we're pleased with what we see so far.

And you had a follow-up?

Yes, I do actually.

So just going back to your comments on your earnings call for the last quarter, you talked about seeing some easier comps in the second half for advertising just because you start to anniversary some of the spending that you had in the last year.

So are you still comfortable with that or how would you want to revisit that and give us an update on how you look at that?

The best update we have is the guidance that Dan gave to you for overall pressure on operating margins, which is going from 410 basis points in the second quarter to our guidance for approximately 250 basis points in the third quarter.

The components of that pressure, while lower than in the second quarter continue to be pressure on ROIs and as I've said in previous calls, we first and foremost want to make sure that we're adequately investing in distribution and building the franchise and while we haven't changed the fundamental way that we do that or the disciplines that we apply to that process, we want to make sure that we're adequately supporting the Business and so whether it's offline or online, if we think there's an opportunity to -- an attractive opportunity to spend money to build the Business, we'll do so.

Thank you.

Ron Josey, JMP Securities.

So two really -- they're combined.

The first is just on macro and, Jeff, you said that summer travel is off to a strong start and seeing sustained improvement in Europe -- you said good results over there.

Wondering if that's just -- if you're seeing maybe a change in macro in the travel vertical over in Europe such that things are getting better or you just know how to operate better in a challenging environment?

And then the second part of the question is, any update on say 3Q trends?

Some of your competitors that have been out there saying July might be a little bit slow?

Sure.

So with respect to the macro, what I said in my prepared remarks really is a good summary of how we look at it.

We still view it as a challenging environment from an economic standpoint because there is continuing economic and political uncertainty.

Having said that, the market has been relatively stable and I say relatively relative to six months ago and to parts of last year where we were having civil unrest in Greece and a lot more headline activity around the economy and the potential for sovereign default, those headlines have abated in recent months and so, as both Dan and I mentioned, we were relatively pleased with the growth rates that we saw in Europe and are not calling out any particular market or region as being particularly problematic compared to others.

With respect to the third quarter, I basically -- what we've said in the guidance is that we've guided to what we think are attractive growth rates.

They represent a deceleration from what we reported in 2Q and we said that that deceleration is something that we've witnessed so far in the quarter and I don't think we would go beyond that in terms of characterizing the month-to-month results.

Great, makes sense, thank you.

Mike Olson, Piper Jaffray.

Maybe a question on domestic -- then you've come in at the high end or above the high end of your domestic bookings growth over the last couple quarters and the mid-point of your domestic guidance, 5% to 10%, would suggest a 400 to 500 basis point deceleration.

Is there anything that you expect to change during the quarter that you're already seeing that may have changed in the quarter that leads you to expect decel or is it just more conservatism?

It's just deceleration in the business.

We think it was a great quarter in Q2 and we think the guidance for Q3 is strong.

Top end of that range would be very similar to the growth that was delivered in Q2 so really nothing in particular there, Mike, that we're calling out but just the expectation for some deceleration.

All right, thank you.

Heath Terry, Goldman Sachs.

Jeff, I know you've got a lot of questions around mobile but I'm curious if you take a step back and look at the broader impact that you see mobile having, particularly in the cost of customer acquisition as well as adding incremental users, especially now that Kayak is in-house, are you noticing that mobile in general is driving to you a newer or a different customer base than you've typically seen online and is it doing it at either a different cost of customer acquisition or do those customers have a different economic profile?

It really is still too early to say with certainty how mobile advertising and mobile customer flows are going to change acquisition cost.

The thing that is still -- and there's a couple of things that are still in play that we and others haven't figured out.

First of all, most major brands are investing heavily in mobile to make sure that they understand how the channel works and that they're holding share and that they are not missing something and those levels of spend and the efficiency of those spends may not be steady state.

They may be more aggressively spending in the early days of the development of the marketplace to build the capacity and the confidence to win in that marketplace over the long-term but you really don't know what the steady state spend is going to be because we're still early days.

Second thing we don't know is how sticky ultimately the customer is and you could hypothesize that app customers, for example, would be stickier.

If you get them the download and use the app, you don't have to pay for them again.

Therefore they would have high lifetime value relative to advertising cost and those theories are being acted out not just in the travel space but all over the Internet trying to figure out what the real value of an app download is and how to drive one that's effective in terms of usage and again I just think it's too early to map that out.

And finally a lot of this activity doesn't happen exclusively on the mobile device and people are still trying to figure out how to attribute marketing spend that results in a search on a mobile phone and a booking on the desktop or vice versa and that's stuff that we're all looking at and will get a lot better at so this is a field that is new, exciting, it's going to change, and we're very hopeful that we'll be able to execute effectively and build a nice loyal customer following in mobile but I really couldn't tell you right now whether it's over the long haul going to make our customer acquisition costs go up or go down.

No.

I appreciate that.

That's really helpful.

One other question, you've been able to -- a lot of focus obviously on advertising deleverage but you've been able to get for that additional advertising, accelerating growth, particularly from a bookings perspective.

Can you gauge for us your willingness to push that growth accelerator forward particularly as at least some of your competitors seem to be maybe pulling back a little bit?

We will try to be consistent and sustainable.

Those are the two things that we would try to focus on.

We're an opportunistic Company so if there's an opportunity to build business with these inefficiencies we'll take it but we want to make sure that we have a disciplined approach that we apply across channels and that we can stick with as the channels change and we want it to be sustainable.

I don't -- it's just like offline advertising.

You're not going to accomplish anything if you spend a tremendous amount of money in a given year but then you can't spend that money in a future year and so -- and by the way, there's been some variability in the television spend of our competition as they are trying to work their way through that, that variability doesn't seem to me to serve a brand well.

You want to have an advertising program that is sustainable over time so that whatever benefits you get from building your brand in the consumer's mind you can continue to reinforce and maintain.

Great, thanks, Jeff.

Really appreciate it.

Douglas Anmuth, JPMorgan.

Jeff, I was hoping you could help us understand the reasons for the Kayak slowdown that we've seen over the last few quarters and then also how you're thinking about the booking path for Kayak strategically going forward?

So with respect to Kayak's revenue, I'm probably not going to say much more than what's been reported publicly in their separate financials and the disclosures that Dan gave you because inter-Company advertising with Kayak is eliminated, you really can't get a good impression of the revenue trajectory just by looking at the stub revenue we reported and because we're continuing to evaluate how our brands work with Kayak and it's fair to say traditionally that Priceline Group brands were underrepresented in Kayak's products, that we didn't fight to our weight in their various marketplaces and now that we're one Company of course we're going to want to make sure that we have a reasonable share of Kayak's business given the size of our brands and that will benefit both our brands and Kayak.

That's how -- as far as we really want to go on that.

Okay, thank you.

Tom White, Macquarie.

Firstly, on EBITDA margins.

I was wondering if maybe you guys could talk about whether your margin expectations for the Business, say over the next couple of years, have changed in any way, given the fact that your overall unit growth rates haven't really decelerated to the extent you guys have talked about in the past and I understand you guys are making new investments in new geographies but how should we think about overall leverage in the model over the next couple years?

And then just quickly on China, it's been about a year since you announced the C TRIP partnership, any updated learnings you can share about the market there or has your view on how you want to participate in that market longer-term changed in any way?

With respect to long-term margins, I don't have any particular guidance for you.

I can give you an historical perspective which might be helpful for you coming to your own conclusions about where you think it's going to go.

For many years, we were very fortunate to be able to hold or even improve margins as the Business grew at very high rates and we felt that at that point in time, we were investing adequately in the Business and we were building very substantial share gains in the course of those years and at that time, we said it was our goal to deliver a growing Business and to essentially maintain our margins.

We haven't been saying that for the last couple of years and that reflects the statement that I've been making now for many quarters that to the degree that we think it's necessary to invest in people or in marketing or technology to basically capitalize on the global growth opportunity that we have, we are willing to do so and we will tip the balance between trying to improve operating margins versus growing the franchises where the opportunities are so attractive and important, we're going to tip the balance in favor of growing.

And that's particularly the right strategy for our Group given the fact that our absolute margins are so much higher than our nearest competitor.

We've got the resources to do it and shame on us if we didn't capitalize on that asset and use it to our greatest advantage.

I've also said that we don't foresee a situation where we're forced to completely capitulate on margins and not be able to deliver earnings growth as we invest in the business.

The model is still robust enough to do that and in fact we are doing it, so I don't foresee a time when we're in a position of an Amazon where the things they are working on are so big and costly and obviously have such massive potential that they are prepared for a period of time to in effect reinvest all of their earnings growth in those new opportunities.

I don't see us as being in that position at least not in the foreseeable future.

And there was a question about China there, a second question.

Dan why don't you--?

So we've had the partnership with C TRIP for the past year and we're very happy with the results to-date.

Our approach in China remains pretty consistent, which is continuing to add hotels in China to our extranet for Booking.com and for Agoda.com.

We've had good success with inbound travel into China and we've also had good success with Chinese travelers traveling within APAC and outside of the region and so we hope that over time we can continue to build our supply there and build our brand recognition with Chinese travelers and participate to a greater extent in the domestic market as well.

Great.

Thanks for the color, guys.

Mark Mahaney, RBC Capital Markets.

First, if you could talk a little bit more about the RentalCars.com strategy -- extent to the cross-selling opportunity, the unit economics, how attractive that segment is versus your core business?

And then secondly, Jeff, you described the US advertising -- the brand support, TV ad support -- for Booking.com as experimental, but it sounds like you're also making the comment that sustained branding helps businesses so when does the experimental stage end and when do you go to full-fledged advertising support for Booking.com in the US?

Okay, thank you, Mark.

So with respect to RentalCars.com, their business model is to build out a global platform for rental cars much the way that Booking.com has done for hotels and it's a very similar approach -- one product, simple website focused on conversion and with significant investment in online marketing to support building the customer base.

The unit economics for the rental car business while probably not as attractive to a degree as hotels might be, is certainly attractive enough especially in the international markets, to support that strategy and you've seen the unit growth that we've been reporting for rental cars Group-wide and RentalCars.com is a big part of it and doing very, very well.

Cross-sell has been a piece of that.

RentalCars.com is an option post transaction for Booking.com customers.

It also provides some support for US customers of Priceline.com and over time, it will advertise and be available on Kayak and so we'll promote cross-sell where we can, Agoda as well.

Keep in mind that because our biggest business is hotel, the cross-sell opportunity, while valuable and good opportunity is not huge because the cross-sell from hotel to rental car is not as material as it is for example, the cross-sell from an airline ticket here in the United States to rental car, but an opportunity that we value and that we're pursuing.

With respect to Booking.com, when does it not become an experiment?

The culture of Booking.com is that everything is an experiment permanently and that you're always evaluating what the return on investment is and all of the quantitative aspects of the spend and the impact on traffic and conversion on the website.

Having said that, Booking.com is going to have a decision to make as early as the end of this year as to whether they continue the campaign next year and that decision hasn't been made yet but as I said previously and in my prepared remarks we think the ads are contributing to the growth that Booking.com is seeing here in the United States and we're happy with the results so far.

Thanks a lot, Jeff.

Brian Fitzgerald, Jefferies.

As the industry is pushing on the various marketing channels -- offline, online display, search, et cetera -- are you seeing any different dynamics in terms of conversion rates and then maybe a little more specifically on mobile, are those conversion rates inflecting up or is it still more browsing in that channel?

Dan, you want to handle that one?

Yes.

We don't disclose our conversion rates by channel, Brian.

It's one of the areas that is a key area of competency for us.

We've got very well converting websites and it's one of our key efforts every day is to continuously improve the experience for our customers on our website and continue to add content to continue to push that conversion upward.

In mobile, it's more challenging because you've got a smaller screen and it's still earlier days, so as Jeff pointed to earlier, we're still learning there what's the best way to acquire traffic and then continuously improving it from a much earlier -- from a much more recent starting point, the experience for our customers as they land on those smaller screens, so it's ongoing and we hope that given the expertise we've developed over the years in desktop that we can transfer that to the smaller screen and also give our customers a great experience there.

Great guys, thanks for the color.

Michael Millman, Millman Research

I was wondering a couple things.

One, on Expedia's transaction preference promotion or maybe more than promotion -- practice -- if you're seeing effect on volume or margins.

Secondly, on rental cars, if maybe you can separate US and Europe in terms of availability and year-over-year price and even look at that in terms of retail and Express and maybe if there's any Name Your Own Price and just maybe you can help with why the cost of revenues in the quarter was down?

So Michael, maybe I'll try the first couple and then Dan can address the cost of revenue question.

So the first question you were referring to Expedia's Traveler Preference program, which is the program where they offer consumers the ability to book agency or merchant with the same hotel depending on what the traveler, whether they prefer to pay up front or pay at the hotel.

Expedia has been rolling that out.

It's benefited their results and so that's something that seems to be the case according to the disclosures that they have made.

It's hard to tell whether that has had an impact on our businesses.

As you've seen the results that we've reported, they've been fairly consistent and we're still in a position where we're gaining share despite the launch of that program.

Expedia has got a lot of more hotels to put in it.

We have a similar program here at Priceline.com in the United States where you can book both merchant and agency for the same hotel depending on traveler preference and we've been doing that for a couple of years now and we think it's a good feature and but I don't think that feature by itself has really changed Priceline's position in the US marketplace per se.

With respect to the rental car marketplace, the high-level commentary I can give you is that pricing has been a little bit stronger this year.

In the last couple of years, the pricing environment has been challenging for the rental car businesses but the pricing is firmer this year both in the United States and in Europe and -- but availability has not been a material issue for us at least, not so far this summer as you can see by the unit growth rates that we've reported in the last two quarters.

I just don't think you could get to that kind of growth unless you had some decent availability supporting it so those numbers give you the best indication of at least our experience with availability.

And Dan?

Michael, the cost of revenue decrease is driven by Name Your Own Price hotel business, so that business is continuing to decline and we report it in our income statement on a gross basis so the total value of the transaction is in revenue and then the cost that we pass on to the supplier is in cost of revenue and the decline there is what's driving the decrease in that line item.

Okay, thank you.

Ken Sena, Evercore Partners.

I was hoping that maybe on some of the unit growth figures, you could maybe talk a little bit about the impact of Kayak and what it had in the quarter and maybe if you could just provide it on a pro-forma basis?

We're not going to disclose the specific inter-Company unit transaction trends between other Group brands and Kayak.

And just to be clear, there is no room night bookings for Kayak itself.

It would just be through referrals to other Group brands but nothing in our unit growth is specific to the Kayak acquisition.

Thank you.

Scott Kessler, S&P Capital.

There's been some discussion about Asia and I'm wondering if you could provide some additional details about how you think Agoda is doing.

You obviously spoke to the alliance with C TRIP but any additional details as to opportunities that you see -- the nature of the competitive environment, the pace of growth that the market and you're experiencing there?

Any additional information will be appreciated?

As we mentioned previously, Asia is a very attractive market for Booking.com and Agoda.

We're fortunate to have two very strong brands that have emphasis in different parts of the market with Agoda serving -- a vast majority of its customers are APAC travelers traveling in the APAC region whereas Booking.com has a lot more international travelers coming into the region from outside.

We are very pleased with the trajectory for both of those businesses.

We haven't given color on unit growth rates for Agoda for a long, long time.

What we have said with respect to those markets, though, is that they are generally growing faster for the Group than our core markets and that continues to be the case so we're comfortable and encouraged by what we're seeing there for both Agoda and for Booking.com.

Thanks a lot.

Justin Post, Merrill Lynch.

Jeff, as you look out across your pipeline of hotels or just look at your share versus offline in Europe and Asia, do you feel like you still have plenty of growth ahead as you look out a couple years maybe give us a big picture of where you are today versus a couple years ago on that front and what would you do if the day ever came that you hit fully penetrated on the hotel market?

And then on the Kayak side, I know you can't give us specifics but is the Kayak acquisition material for gross profit guidance or for your booking guidance in 3Q?

Okay well I'll handle the first one, Justin, and, Dan, you can handle the question on Kayak.

If you look at the growth that Booking.com has been able to maintain for several quarters now, improving its inventory of hotel and accommodation supplies by 40% year-over-year in the second quarter, it shows that we're still able to add significant properties to the platform.

I've said before and I'll repeat that there is a diminishing return, that those properties tend to be smaller, have less rooms and potentially not as wide appeal as some of the properties that are already on the program but there's still a lot of room to add supply and, by definition, the supply we're adding are accommodations in hotels where we have zero penetration so and there's real opportunity to build our penetration in those properties.

There have been things published and we published a year or two ago a number from Eurostat trying to get our arms around what the market opportunity is and, suffice it to say, that we're currently not going to be in the business of doing that just because it's so hard to get data on how many hotels there are and how many nights are stayed in those hotels on a global basis but we certainly believe that there's a substantial opportunity for all of our brands to continue to grow their business.

Booking.com, as everybody knows, is now advertising in the United States and trying to build a stronger position here.

It's a market that Booking.com is a relative newcomer to and that represents a significant opportunity in what is one of the largest worldwide markets for accommodation and we are still in early days notwithstanding our success in Asia, given the size of that market, our penetration there is relatively low.

And South America, as well.

So there's just a lot of -- at least in our opinion -- a lot of opportunity out there for us to continue to build the Business and the new market strategy where we continue to invest in these new markets and try to build them aggressively so they get to be a larger size and they make more of a difference on total gross bookings, has continued to serve us well and we'll be focused there also.

And Kayak doesn't impact our gross bookings Justin.

We don't look at Kayak as a platform upon which a booking is made.

It may send a referral to other Group brands and they may get a gross booking and then that would show up in our numbers the way it always has in the past.

In terms of gross profit, we aren't giving guidance on that level of detail.

We will report Kayak's revenue, though, when we report the quarter but Kayak will be included in our gross profit net of revenue that it earns from other Group brands, which will be eliminated as inter-Company, so Kayak's numbers for last year are public record.

You could look at that and come up with your own forecast of what you think might be included.

Okay.

Great, I appreciate that and maybe one quick follow-up.

Could Kayak help the other Priceline brands as you utilize it more or would that be a small impact do you think?

It definitely can help to the degree that our brands are more effective in advertising on Kayak.

That will generate bookings and gross profit for those brands and market share for those brands, so it absolutely can help and Kayak is a big player here in the United States and so for the US business, the referrals from Kayak definitely matter and hopefully they will be very big business in Europe and globally over time and that will matter too and in the future -- right now it's relatively smaller in the international markets.

Great, thank you, appreciate it.

Brian Niemiec, Susquehanna.

Two.

Just going back to Kayak and how you think about growing it from here.

Do you think the Kayak current offering is strong enough to compete and win back traffic or do you think you need to add more content to it like the reviews or other content from Booking.com in order to really improve the visitor value proposition?

And then secondly, you talked a bit about non-European trends and the strong and the strength in the global conversion machine.

I was wondering if you could talk roughly about where you are in terms of conversion in the US and the emerging markets -- compare your conversion rates in your more mature markets?

And then is there anything you're seeing so far that makes you think that Booking.com conversion in these new regions couldn't reach the same levels that they are in Europe?

So with respect to Kayak, their content today is excellent and their business continues to perform well in the United States and outside the United States.

You can expect them to continue to optimize, experiment, add content over time, but that will be based on their view of the business as they develop it and it's certainly a benefit to Kayak to have potentially access to the substantial content that our other brands have to offer but it remains to be seen how or if that would be applied.

With respect to conversion, I don't think -- I wouldn't want to speculate as to what would happen to website conversion over time in markets.

There's no -- we have experienced improving brand recognition and business results as Booking.com and Agoda have expanded their businesses organically.

Same thing with RentalCars.com, so it would not be unusual to enter into a new market with a relatively unknown brand and have to invest significantly in marketing to build up the brand recognition to get you to a point where your efficiency starts to get to where you need them to be for sustainable steady-state business development, but I wouldn't go beyond that in terms of trying to predict what's going to happen in the marketplace from here on out.

Okay, thank you.

Eric Sheridan, UBS.

So following on some of the questions on marketing as well, Jeff, how are you guys going to evolve over time -- you're thinking about lifetime value of customer?

That's the biggest question we get from investors is some of these platforms continue to evolve and move down the advertising funnel.

How it will impact your decisions and your analytics around what they're delivering to you as opposed to what they are delivering today?

The only color I could give you there is that we spend money in online channels to build our brand and to bring in customers so we have a chance of making loyal customers that will come back to us directly.

And not all platforms work alike, as you look at that ultimate objective that we have in bringing customers into the website.

So as a for instance, a white-label relationship where nobody sees your brand has relatively less value than an integrated relationship where people are seeing your brand on another website and then actually coming to your website and experiencing your selection, your user interface, and ultimately your customer service.

So those factors are things that we absolutely look at.

I wouldn't say there's been a sea change in how we look at those factors.

We evaluate each advertising channel on its own merits and that's been part of our discipline for a long time.

Great, thank you.

Aaron Kessler, Raymond James.

A couple questions.

I may have missed it but did you give an ADR forecast?

And secondly, if you can talk a little bit maybe about in terms of Kayak and -- or sorry, in terms of Booking.com and maybe Priceline integrating inventory on the back end in the US, as well?

Oh, the ADR forecast, Aaron, was global ADRs up about 1% for Q3.

And Aaron, if you could clarify that second question?

Yes, maybe in terms of how maybe Booking.com and Priceline will work together in terms of integrating supply in the US for hotel supply?

If they are?

So today, Booking.com and Priceline have a separate and distinct inventory, separate and distinct contracting staffs, different people that approach the hotel.

The Priceline.com for years has offered Booking.com inventory as an option.

That was done originally to accommodate travelers who were traveling from the United States to Europe and has grown to be a broader relationship where global inventory is available to Priceline's US customers and Booking.com's inventory in the United States is available to Priceline customers as well who may want to book an agency property, and we're pleased with the way that integration has gone over the years and we think it's been helpful to both businesses and we expect it to continue.

And then finally, can you just make a comment on the opportunity for Kayak to expand greater in Europe.

Seems like it's still mainly a US-centric site.

But what's the opportunity to make it much bigger internationally?

As we said when we made the acquisition, there is an opportunity to try to help Kayak build its business around the world more quickly, more aggressively than it was able to do so as a separate company.

We have resources and assets in terms of operating businesses in a lot of these markets where we can be helpful in getting Kayak up and running and there's a lot of information that we can share on things that worked in markets for our brands and obviously we can provide content for Kayak's customers so that's something where we think we can be helpful and we intend to work to hopefully create a successful global expansion for Kayak.

Great, thank you.

And at this time, I'd like to turn the call back over to our speakers for any closing remarks.

Thank you all very much for participating in the call.

And ladies and gentlemen, that does conclude your program.

Thank you for your participation and have a wonderful day.

You may disconnect your lines at this time.