Booking Holdings Inc (BKNG) 2014 Q2 法說會逐字稿

Welcome to The Priceline Group's second-quarter 2014 conference call.

The Priceline Group 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 forecast in any such forward-looking statements.

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

For a list of factors that could cause the Group'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 the Group's earnings press release, as well as the Group's most recent filings with the Securities and Exchange Commission.

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

A copy of the Group's earnings press release, together with an accompanying financial and statistical supplement is available in the For Investors section of The Priceline Group's website, www.PricelineGroup.com.

And now, I'd like to introduce The Priceline Group's speakers for this afternoon, Darren Huston and Daniel Finnegan.

Please go ahead, gentlemen.

Well, thank you very much.

Welcome to The Priceline Group's second-quarter conference call.

Thank you for joining us before the markets open this morning in New York.

I'm here in Amsterdam with Priceline Group's CFO, Dan Finnegan.

The Group reported consolidated gross bookings for the second quarter of approximately $13.5 billion, up 34% year over year, or about 32% on a local currency basis.

Non-GAAP net income was $667 million, up 31% year over year, and earnings per share was $12.51 up 29% versus prior year, surpassing FactSet consensus estimates of $12.06 per share and our guidance for the quarter.

Our customers booked accommodation reservations for 90 million room nights in the quarter, up 29% year over year.

Booking.com's platform now has over 525,000 hotels and other accommodations in 205 countries, up 58% over last year, reflecting Booking.com's continued aggressive push to extend its lead as the world's largest brand for booking accommodations.

Following the success of Booking.com's first offline advertising campaign in the US last year, and the encouraging early results this year of the campaigns in Australia, the UK, and Canada, we launched TV advertising in Germany a few weeks ago.

These offline branding efforts, together with our substantial long-term investments in online brand building, product innovation, and best-in-class customer service have helped to grow our mix of direct business.

We believe the healthy balance we have between a strong direct business and first-time customers acquired online are critical to sustained and profitable growth, and are helping us increase market share in every market we operate in.

Another area of investment and innovation for Booking.com has been vacation rentals.

We are rapidly expanding our footprint of vacation rentals, and we now have over 190,000 directly bookable self-catered properties.

In the last 12 months, our customers spent over $4 billion on vacation rentals that they booked primarily through Booking.com, but also on our experimental site, Villas.com.

We are encouraged by these early results, but also recognize there is still much left to do.

We expect to make significant progress in how we grow, merchandise, and expand our vacation rental offering in the coming months.

Agoda.com was negatively impacted by the civil unrest in Thailand but, nevertheless, delivered good transactional growth in the quarter.

Both Agoda.com and Booking.com continue to strengthen the Group's position in the Asia-Pacific region, particularly among international travelers.

We are making excellent strides in north Asia, and Booking.com has become the largest online accommodation service in Australia.

This region of the world continues to contribute to higher overall Group growth, as it increases its share of our worldwide business.

Priceline.com posted solid 21% growth in gross bookings, with strong results in its retail offerings.

The Name Your Own Price business, however, continues to be under pressure, given the tighter availability conditions present in today's robust travel environment.

Priceline.com's hotel results, when combined with Booking.com's success in North America, continue to reflect hotel market share gains.

RentalCars.com delivered good results in what has become a more competitively intense marketplace.

Having transitioned from an entirely semi-opaque offering to a retail offering, our team is now focusing on striking the right balance of savings and transparency, to deliver the right product at the right time.

I have high confidence in our team's ability to successfully make this transition.

Kayak again delivered an impressive bottom-line quarter, while also accelerating its top line.

Targeted expansion in Europe, with a dedicated offline advertising presence, is yielding favorable results, and we look forward to building the Kayak franchise across Europe, in an aggressive but profitable manner.

Success on mobile remains critical to all of our brands.

Mobile has become a very material and fast-growing booking channel for the Group, and we believe we are on the right path of offering best-in-class experiences, without bias to interface chosen by the customer.

We prefer to earn our customers' loyalty over the long term, by exceeding their expectations, time and time again, rather than relying on short-term channel specific incentives.

We view the mobile opportunity through this lens, and are taking a disciplined approach to driving lasting, sustainable customer engagement with our Company's brands.

China is also critical for the future.

As we announced last week, the Group expanded its relationship with Ctrip, the largest online travel agency in China.

We invested $500 million through a convertible bond, and Ctrip granted the Group the right to obtain up to 10% of Ctrip's outstanding stock through a combination of this convertible bond and open-market purchases.

The Group will also have the right to appoint an observer to the Ctrip Board of Directors.

By getting closer together, both we and Ctrip see ways that we can offer our customers the absolute best choice of accommodations and experiences.

This collaboration will bring more guests to China, and more Chinese to the rest of the world, in the coming months, quarters, and years.

I look forward to executing against this next stage of our partnership, and continuing to learn from, and work with, James and his leadership team in Shanghai.

Finally, I'd like to welcome the OpenTable team to The Priceline Group.

We closed on the acquisition in late July, and have already begun the groundwork to realize the global potential we see in this adjacent marketplace.

The OpenTable team, meanwhile, has been working hard on expanding our mobile payments app, known as Pay with OpenTable, beyond the pilot launch in San Francisco earlier this year.

Today, we are announcing that Pay with OpenTable is now launching in New York.

We are also confirming our plans to roll it out to 20 other cities across the US before year end.

Early results show that everyone wins with Pay with OpenTable.

The restaurant gets faster table turns, the servers get better tips, and the guests leave far more satisfied.

Since many of you on the call are from San Francisco or New York, we welcome you to try this experience yourselves.

It's really quite satisfying, and we believe it has great potential.

The Group's business performance exceeded expectations in the quarter.

We remain committed to making the smart investments in marketing and people, and 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.

Dan?

Thanks, Darren.

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 2014.

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

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

Room nights booked grew by 29% in the second quarter, with solid performance across all our key regions.

Average daily rates, or ADRs, for Q2 2014, were up on a local-currency basis by about 3% for the consolidated Group.

The FX rate for the Euro to the US dollar was favorable for the second quarter, compared to the prior year, by about 5%; however, the Euro weakened versus the dollar as compared to the $1.39 exchange rate that prevailed at the time we gave Q2 guidance.

As a result, currency exchange rates helped year-over-year US dollar growth, but had a slightly negative impact compared to our guidance.

Q2 gross bookings grew by 34% compared to prior year.

Our Q2 international gross bookings grew by 36% in US dollars, and by about 35% on a local-currency basis.

Gross bookings for our Priceline.com brand business in the US grew by 21%.

Performance was strong across retail air, hotel, and rental car verticals, including the benefit from increased advertising placements within Kayak.

Hotel express deals also performed well, but our Name Your Own Price hotel, air, and car services were all down year over year, due to limited availability of discounted rates, and share shift to express deals.

I highlight that Name Your Own Price impacts merchant gross bookings, and disproportionately impacts merchant revenues, since we record Name Your Own Price revenues on a gross basis, while our other revenues are recorded on a net basis.

Gross profit for the quarter was $1.9 billion, and grew 36%, as compared to the prior year.

The inclusion of Kayak in our results contributed about 3 percentage points of inorganic gross profit growth for the quarter, and a later Easter this year also benefited Q2 growth.

Our international operations generated gross profit of $1.65 billion, which constituted an increase of 38% as compared to the prior year, and 36% on a local currency basis.

Gross profit for our US business, including Kayak, amounted to $230 million, which represented 25% growth versus prior year.

Non-GAAP operating income amounted to 42% of gross profit for Q2, which is 210 bps lower than last year.

Operating margins were impacted by 76 bps of deleverage in offline advertising, mainly related to our Booking.com TV campaigns and the inclusion of Kayak offline advertising.

Online advertising expense, as a percentage of gross profit, delevered by 50 bps compared to prior year, mainly due to lower ROIs, partly offset by the favorable impact of including Kayak.

The inclusion of Kayak benefits this metric through the anniversary of the acquisition because Kayak spends relatively less on online advertising as a percentage of gross profit, and spending by our other brands for ad placements on Kayak is eliminated from our consolidated results.

Other OpEx also reflects some deleverage because it includes $5.6 million of one-time deal costs incurred in Q2, related mainly to the OpenTable acquisition.

OpEx also includes the impact of our investment in people, offices, and IT-related expenses to support our business growth.

Operating margins came in about 100 bps better than our guidance forecast, due mainly to less year-over-year decline than assumed in online advertising ROIs.

Adjusted EBITDA for Q2 amounted to $809 million, which exceeded the top end of our guidance range of $775 million, and represents 30% growth versus prior year.

Non-GAAP net income grew by 31%, and non-GAAP EPS grew by 29%, reflecting the impact of the higher fully-diluted share count.

In terms of cash flow, we generated approximately $690 million of cash from operations during second-quarter 2014, which is about 16% above last year.

We spent about $32 million on CapEx, and we repaid about $59 million of our 2015 convertible notes upon early conversion by their holders.

Our cash and investments amounted to $7.2 billion at quarter end, with about $1.8 billion in the US.

In July, we used our US cash and $995 million borrowed under our revolving credit facility to fund the $2.5 billion of cash paid to close the OpenTable acquisition.

Our credit facility does not expire for over two years, and represents low-cost borrowing, at about 1.4% interest.

Our credit rating was recently upgraded by S&P to BBB+, and terms in the investment grade and convertible debt markets continue to be very attractive.

We will evaluate all longer-term financing options available to us going forward.

Before I cover third-quarter guidance, I'd like to spend a few moments on recent strategic transactions and their impact on the forecast.

We lapped the Kayak acquisition that we made on May 21 last year, so there is no inorganic benefit to top-line and bottom-line growth in Q3.

We have also seen a meaningful benefit to our online ad efficiency over the past year from Kayak's impact on this metric, as I mentioned a moment ago while discussing Q2 results.

This year-over-year benefit no longer exists in Q3.

OpenTable is included in our forecasted results from the acquisition close date of July 24 through the end of the quarter.

It is only a couple of weeks since the deal closed, so we are in the process of charting a path forward with the OpenTable team, but we intend to increase investment in Q3 and coming quarters, to position the business for future growth.

We expect that the impact of the OpenTable acquisition on our non-GAAP EPS for Q3 will be slightly accretive.

In Q2, we also acquired certain businesses that provide hotel marketing services, including Buuteeq.

Our Q3 forecast includes the operating expenses for these businesses as they build and refine their services over Q3 and coming quarters to go to market.

We believe that our hotel marketing services team will create compelling offerings for our hotel partners and help us deepen our relationships with them on a mutually beneficial basis.

Lastly, we just recently announced an expansion of our partnership with Ctrip.

We have great respect for the Ctrip team and are excited at the prospect of partnering more closely with the leading online travel agent in China.

We invested $500 million of our international cash in a Ctrip convertible bond.

Ctrip also granted Priceline Group the right to purchase their shares in the open market over the next year so that, combined with shares underlying the convertible bond, Priceline Group could hold up to 10% of Ctrip's outstanding shares.

The impact of the enhanced partnership is reflected in our guidance forecast, but is not expected to have a significant impact on our near-term financial results.

For Q3 guidance, we are forecasting total gross bookings to grow by 19% to 29% in US dollars, and by 18% to 28% on a local-currency basis, with US gross bookings growing by about 10% to 15%, which reflects lapping certain ad placements on Kayak.

We expect international gross bookings to grow by 22% to 32% in US dollars, and by 21% to 31% on a local-currency basis.

Our Q3 forecast assumes that local currency ADRs for the consolidated Group will be up by about 3%, compared to the prior-year period.

Our Q3 forecast assumes that foreign exchange rates remain at the same $1.34 per euro and $1.68 per British pound as Friday's closing rates, which would result in average exchange rates that would be stronger by about 2% for the euro, and about 9% for the British pound, as compared to the prior year.

I highlight that the euro exchange rate assumed in our forecast is about 3% weaker than the $1.39 exchange rate that prevailed at the time we reported Q1, and most analysts last updated their forecasts.

We have hedged contracts in place to substantially shield our third-quarter EBITDA and their earnings from any fluctuation in the euro or 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 15% to 25%, and gross profit dollars to grow by approximately 21% to 31%.

We expect that declines in our Name Your Own Price service will impact revenue growth rates in Q3.

We expect 350 to 400 bps of deleverage in non-GAAP operating income as a percentage of gross profit compared to prior year, primarily due to lower online ad ROIs, increased offline spend, and increased investment in other operating expenses.

Our Q3 online advertising forecast reflects our actual results to date, and assumed further pressure throughout the remainder of the quarter, based upon the trends we have experienced over the last couple of years.

We estimate that the Group will spend roughly $130 million for offline advertising over the back half of the year, with more than half the spend coming in Q3, which puts us near the high end of the full-year range we previously provided.

We are pleased with our forecasted operating margins as we make the investments for future growth in OpenTable and hotel marketing services that we said we would make at the time of the acquisitions.

Adjusted EBITDA is expected to range between $1.265 billion and $1.365 billion, which at the midpoint represents 18% 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 $19.60 to $21.10 per share, which at the midpoint represents 18% growth year over year.

Our non-GAAP EPS guidance assumes a fully diluted share count of 53.4 million shares, based upon Friday's closing stock price.

We forecast GAAP EPS between $17.86 and $19.36 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.

In summary, we believe that our forecasts reflect another quarter where we would sustain our market-leading top-line growth rates, while maintaining strong bottom-line growth, and market-leading profit margins.

The advertising investments assumed in our forecast are consistent with our past practice of following a disciplined and sustainable approach to support our brands, while striking a reasonable balance between growth and profitability.

We believe that investments in restaurant reservation and hotel marketing services will plant seeds for future growth.

Our guidance reflects our actual results to date and our expectation that such a large business, comparing against high transaction growth rates, will experience a pattern of sequential deceleration.

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)

Our first question comes from Justin Post of Bank of America Merrill Lynch.

On the OpenTable acquisition, can you tell us how you plan to report that in your financials going forward, how we should be thinking about modeling it, and then how you've incorporated that in your gross profit growth, and EBITDA growth, and the EPS growth guidance for Q3?

Thank you.

Hi, Justin.

We'll report it in revenue, gross profit and in our EBITDA bottom line.

It won't show up in our gross bookings or in our room nights obviously, so those are key metrics that we always point to for the top line health of the business, so those will be unimpacted.

For the first year, we'll likely report the revenue that is generated by the business, so you have a read on the inorganic impact on our growth rates.

We won't break out their profitability separately.

We may break out specific metrics from time to time, like restaurant count or seated diners, but I wouldn't think that we're going to be reporting on those consistently, quarter to quarter.

Okay.

Is there a benefit in your EBITDA or EPS in Q3?

There is.

So as I said in the prepared remarks, we've included OpenTable from the acquisition close date of July 24 through the end of the quarter.

Now, our forecast does reflect our expectation that we're going to make investments in the business, as we said at the time of the acquisition, particularly in the area of international growth, and so our forecast also reflects those investments.

Great, thank you.

Thank you.

Our next question comes from Doug Anmuth of JPMorgan.

Just wanted to ask about the marketing environment, and Dan, if you could just go into more detail on your comments on ROI and what you're expecting in Q3 here?

And also I think, Darren, you talked about disciplined approach on mobile, if you could elaborate on that a little bit as well?

Thank you.

Thanks a lot, Doug.

So in terms of the marketing environment, I'd say on the online side it's obviously a very competitive environment, but relatively stable.

I'd say we're being, like always, a little bit prudent, because we don't completely control that environment, and if within the next six weeks it changes, we want to make sure that we reflect that in our guidance, but nothing other than that specifically to report.

Obviously the offline marketing is the stuff that we completely control, and that's an area where we have decided we're still within the range, but on the higher end of the range we gave on offline marketing, and we're making investments specifically by with Kayak and Booking.com in Europe, and we've actually seen some really nice results from the investments we've made to date, and we're deciding to double down a little bit on that on the back end of the Summer.

Those are the two things as it relates to marketing.

I'd say also, from an online perspective, of course we're in this competitive environment, but we also mentioned our direct business is increasing quite nicely.

That's the kind of effect you'd want to see if you do a lot of offline marketing.

This is also a bit of a mobile effect.

More of our business on mobile comes direct, but I think that's a real healthy trend for the future.

Of course, we want to continue to bring new customers into the franchise, and that's why we do marketing, but those customers are sticking to the platform and coming back directly, which is a real positive sign.

And just a final comment on the mobile front.

We continue to feel really good about our mobile products, both our web-based products and our app product.

We don't talk about the percentage of our business that gets done on mobile, but it's definitely in line with the other players in our industry, and we continue to see really significant growth on mobile going forward, and that's not just us, we're seeing that everywhere we buy demand, and it's really the nature of the customer's transition to more of a multi-screen environment versus just a pure desktop business.

Great, thank you.

Our next question comes from Mark Mahaney of RBC.

Your line is now open.

Two questions, please.

Darren, on the direct approach that you're talking about, this direct business, could you quantify how much of your business now you would say is direct?

And I assume you mean people coming directly to your brands rather than coming to you through search engine marketing channels?

And what learnings do you have about how these -- the loyalty of these customers, the profitability of customers that come to you directly versus through the other channels you used in the past?

And then just briefly on Ctrip, it sounds like it's not that material, but could you talk about the mechanics of the deal, and maybe it's not that changed from what you've had in the past, but how should that impact, if it's successful, how should that impact your bookings revenue and earnings five years down the road?

Thanks.

Thanks a lot, Mark.

I'd say first, on the direct approach, we don't like to reveal the exact percentages we get direct and what we don't.

The way we do think about it though is it's all of the free demand that we get, basically people coming and typing in Booking.com, or coming to our app.

We often also now include of course SEO, e-mail, there's a bit of a debate on the SEM, we spend our own brand, because it's very high ROI, but we do consider that indirect, because we are buying the customer, but those customers, obviously if they type Booking.com into a search engine, and pick our ad we do pay for them, but it's at a lower rate, and that obviously helps us the more that do that, versus finding us in other ways.

But generally speaking, it's a positive trend but we like to, of course, keep a good balance.

We are also pushing account sign-up more on Booking.com and our other brands, and a much higher percentage of our customers now use accounts, and those accounts are also used to experience the brand more than just a booking brand, as to get their confirmation when they arrive on site.

It's also for us to give them other offers.

We give our account holders discounted rates, things like that, and that's also improving the business that comes back to us through account holders, who generally tend to book more direct than they do through paid channels, because they have an established relationship with us.

And then on to Ctrip, the mechanics are, basically, Ctrip is a channel for us, we -- if a Ctrip customer books a Booking.com or an Agoda hotel room, then we record that, and then the cost of marketing is what we pay Ctrip in terms of the revenue share.

It's a typical affiliate relationship, and that we hope gets better and stronger, because in this next phase of our relationship, we're really working closely with Ctrip to both brand, so that the Ctrip customer knows they are booking on Booking or Agoda, but also to improve the content that's being used to market international accommodations to Ctrip customers.

The other side of this deal, which actually is completely new, is us using Ctrip's properties and using those on Booking.com in a reciprocal fashion, so we will have customers who come from overseas, and may want to stay in a really small village in China, which may not see a lot of international demand, and we'll be able to offer them a product that is actually supplied by Ctrip, but we end up doing the booking, and they, of course, pay us back for that customer, as well.

So I obviously, we see, even regardless of the Ctrip deal, Chinese bookers are one of the fastest growing bookers on all of our properties, particularly on Agoda and Booking, and we think that this will only accelerate that.

And of course tapping into China is going to be a huge benefit, both because they're a great source of bookings, but also, we're running a global business here, and we believe 5, 10 years down the road, it would be hard to say you're global, if you are not big in China.

And this is just a next step for us in what will likely be a series of steps, as we move closer and closer to Ctrip over time.

Thanks, Darren.

Thank you.

Our next question comes from Dean Prissman of Credit Suisse.

So Darren, just sticking with Ctrip, obviously given the market opportunity of outbound demand from China, I think the strategic motivations for the enhanced distribution agreement are very clear.

However, could you shed some light on the strategic motivations underpinning the investment in the Company?

And then I think you previously indicated that when you acquired Kayak, The Priceline Group's brands were underrepresented as advertisers on the platform.

To what degree are you fully represented now, and if not, can you give us a qualitative sense on how much runway remains?

And then I have one follow-up afterwards, thanks.

Okay I would say first of all on the Ctrip deal, our original relationship in 2012 was commercial, and it was fairly arms length.

It was really meant to test the international product of Ctrip, and also to build a relationship between the two companies, to see -- a lot of this does come down to cultural match, and can we work together, and can we build trust together?

And this next wave was really a next step, and we felt that making an investment in Ctrip, along with the commercial relationship, also allowed us to go much deeper in the commercial relationship.

It was also something that was important to Ctrip as well, and I think also in a North Asian context, taking a minority share is a positive next step, that shows that we're also aligned with their success.

The Ctrip becomes more successful, and we become more comfortable on the commercial side, pushing our brands to one another's customers.

But that's really the reason behind it.

I think it's a very safe investment, in the way that we built it, it gives us a lot of options going forward.

Both sides retained a lot of flexibility in both running our own businesses, but also, I mentioned to James, we're almost like second cousins now, we're not necessarily married, but we are certainly related, and that also for our employees on both sides, I think as a camp, they then understand really the relationship between the two companies is more special than a standard arms-length commercial relationship.

And your second question was, Dean, was on Kayak?

Yes.

I would say it's funny, because we go back and forth.

As you know, at the Group we run our brands very independently, and I give Steve a hard time, all the time.

I would say we have reasonable representation on Kayak.

We don't do anything with Kayak to tilt the playing field at all.

We keep a very strong Chinese wall between the work that they do with many of our competitors, who are also advertisers on Kayak, and we haven't done anything to change those dynamics.

But I would say at this point, relative to the market share that we have, and particularly in the United States, where Kayak is strongest, our brands are reasonably represented.

But I always believe we can do more, but I think about that more in an arms-length way of how can Booking and Agoda and Priceline work even closer with Kayak, to get a more meaningful share of their business?

But our share on Kayak, I would say, is as representative as we are on, say, Trip Advisor, or other platforms that aren't owned by the Group.

Great and just final question being, I was wondering if you could quantify the impact that the Agoda headwinds you called out had on your room night growth in the quarter?

No, we wouldn't separately break that out.

It's hard to quantify an impact too, Dean.

We can see when a market is impacted the growth rate suffers, but we don't know to what extent those people are instead going and staying in Malaysia or Indonesia, so we don't put out a quantification on that.

One thing I would just highlight is that Agoda, in Asia generally, what we saw, because of the issues in Thailand, but there were also issues in Vietnam, et cetera, and also the Malaysian air tragedy, the original one.

Chinese bookers are among the biggest bookers in the region, and many of them decided to travel into North Asia.

So we both saw great business in North Asia, but a lot less in Southeast Asia, so generally that would balance out.

But Agoda has the other issue that they are very strong with bookers in Southeast Asia, and there was some nervousness among bookers in Southeast Asia, given everything that was going on there.

But as I mentioned as well, we do hope that is abating, and we do see some positive signs that that particular situation won't impact us as much going forward.

Thanks.

Thank you.

Our next question comes from Tom White of Macquarie.

Your line is now open.

Just on the issue of direct versus paid traffic, it seems like you are benefiting from your recent branding campaigns.

But, my question is on the metasearch channel.

A lot of those guys are also investing considerably in consumer marketing.

Can you maybe comment a bit on whether that channel, the metasearch players, is increasing as a percentage of your mix, or is your direct traffic gains coming primarily from traditional paid search or affiliate channels, other channels?

And then just quickly on the hotel marketing services opportunity, the acquisition of Buuteeq seems interesting, maybe just a bit more color on the strategy there, and potential synergies?

Thanks.

Yes thanks, Tom.

We, generally speaking, among our paid sources of demand, meta has been quite strong, although I would say a little less so in the last few months, in terms of its percentage.

Probably the biggest weakness in terms of growth has been Google and PPC overall, and I think that reflects as much Google's shift from desktop to mobile.

We do think in all these channels, by the way, that we are increasing our share of these channels.

But I should also flag that metasearch is not that critical to our business.

It's an important channel, but PPC and even our affiliate business would hold up to our overall metasearch business.

So that's a little bit of color there.

And when you compare direct to overall paid, our direct business is growing faster than our paid business.

And then when it comes to hotel marketing services, we don't want to reveal too many cards here, but right now, before we acquired Buuteeq and Hotel Ninjas, we already had a number of products we were selling B2B, basically to hotels.

We do a lot of white label sites for the chains in other languages; we also have a product, both Agoda and us, called a booking button, that allows hotel websites to add booking functionality at no cost to their websites.

All of these are things we're doing to increase our value to hotels, but now, we're looking at cloud-based solutions to really help hotels improve their own direct marketing over time, and there will be more to report on that in the coming months and quarters.

Great, thank you.

Our next question comes from Ross Sandler of Deutsche Bank.

You line is now open.

So I had a question on the offline marketing versus the online marketing.

So you're now about two years into the offline campaign, and can you broadly talk about how you're measuring success with the program, and at some point, do you expect to see your online marketing start to show leverage, when combined with this pace of offline marketing, as we've seen with some other companies?

It doesn't look like it's showing up yet in the financials, but maybe on a country-by-country basis, are you seeing that?

And then second question is, for the customers that you're bringing direct from these new mobile channels, can you just talk about how the LTV or the purchase frequency compares to customers that have come in historically under the PC channel, as you measured it?

Thanks.

Okay, Ross.

First of all, on the offline versus online, there's a set of macro measures that are important, and then there's a set of micro measures.

Let me start with the micro measures.

They are about how you spend, and the media you use, and the ROI you get from running an ad on this channel versus that channel.

That's all a very sophisticated set of measures that helps you improve the ROI you get from offline in the short and medium term.

The macro measure, of course, if you add online plus offline in any market, you want to be able to return -- increase your return on overall advertising in that market, and often that takes some time.

It can be 6 months, 9 months, 12 months, 24 months.

But that's ultimately the goal, and if we don't achieve that, if ultimately we can't get a market from a level of return before we did offline to a higher return after we did offline, then that wasn't a good investment to make.

We're still early on, even though it feels like we've been doing this for a long time.

Many of our markets, even Australia, which is our second market, hasn't even lapped a year, but we feel relatively confident that over time, we can improve our return on advertising in every market, using a positive mix of marketing tools including offline and online marketing, but that -- again, this is early learning and we're quite positive, but more to come.

As it relates to mobile, you always have to go into the different aspects of mobile.

Lots has been written about last-minute booking.

Obviously, if you look on a per-transaction basis, and this is now mostly mobile phones, a last-minute booking is usually for one night, and on average, our bookings are two nights or more, so that immediately makes it a less-valuable booking.

But what you don't know is, if that's Dan, for instance, booking a last-minute booking, he may be a customer, that his next booking may be a five-night booking and you've got to be careful that you don't under-attribute the value of finding Dan on his cell phone and the next time finding Dan on a PC.

The other thing I would say about mobile is, that's a very specific thing, around last-minute booking, but we've also seen a trend where people are doing more and more early booking and a lot of that is happening on tablets, as they are earlier in their research process, and we find that tablet-based booking is, as, if not at times, more valuable even than PC bookings.

So you shouldn't just paint all of this stuff with a single brush.

And you have to look into the economics of each channel, and then obviously what you're willing to pay vis-a-vis the attribution of the customer, when you go out and try to find that demand.

I hope that's helpful.

Yes, very helpful, thanks.

Our next question comes from Heath Terry of Goldman Sachs.

Your line is now open.

I was wondering if you could give us a sense, from maybe a more macro perspective, as we look at occupancy rates at record highs, and the increases that we've seen in ADRs, do you have a sense of whether or not that's been a positive or negative headwind for your business?

And to the extent we think about how this is going to have an impact over the next year, whether or not we're seeing any crowding out of the leisure market, as occupancy rates hit that level, and you start to see the less price-sensitive business market continue to take share versus leisure.

Okay, thanks, Heath.

I'll jump into that one.

So first of all, the important thing is not to paint too much of a brush on things geographically, because the US market is very different than many other markets.

You've got extremes like, if you look at four-star and five-star hotels in China they are still running a very low occupancy, because that's a market that's over-built, and then you have different destinations.

Some are very business-oriented, some are very leisure oriented, like in Orlando, and some are a mix, if you look at a city like New York.

Also, leisure customers also tend to be valuable customers to hotels.

It depends on where their business customers are coming from.

Business customers will sometimes pay higher ADR, but in some hotels, the leisure customer may be worth more, depending on how the business customer was acquired.

In our business generally, our business works well positively with the cycle, meaning if ADRs go up then our commissions are higher.

But we also have a counter cyclicality, which is in low-demand periods, we obviously get better availability, and that helps our opaque business and other high-discount products build supply.

So we're able to be, a little bit, we can ride the cycles quite well, because of these countering effects and I don't believe that we're seeing an environment almost in any market where we are feeling crowded out of demand.

Certainly, right now as we speak, this is high season in Europe, literally this week, and we still have availability in most markets in Europe, and then we're going to go in obviously, into the fall and we're going to have a lot more opportunity to sell a lot more product.

Great, thank you.

Our next question comes from Naved Khan of Cantor Fitzgerald.

Dan, just going back to your comments about Kayak, and seeing a top position in that business, were you sort of referring to the business on a gross basis or just on a net basis?

And then regarding the expansion in Europe for Kayak, do you plan to focus more on the hotel side or on the air side, and can you just sort of clarify that for us?

Yes, I would say the comments with Kayak on gross or net are both the same, and then regarding their expansion, I think the team is still working that out.

In Europe, they've been in the advertising, if you see it, it's been more of an air message that's then taken into hotels, but they are experimenting with various types of copy to see which works best.

Okay, great.

Our next question comes from Brian Fitzgerald of Jefferies.

Thanks.

Two quick follow-ups on OpenTable.

You mentioned rolling out Pay with OpenTable in San Francisco and New York, and 20 other cities by year-end.

Any additional color on other facets of the integration timeline, or focuses there, and when you expect to see the real meaty plan to leverage your benefit from the acquisition?

So that's one follow-up.

And then the second one, to Doug's question on advertising ROIs, last quarter you mentioned a conscientious decision to invest in variable channels.

Are the ROIs you see there inherently higher than in other channels, and that's why you decided to focus there, or do you believe you can extract better results from these channels, than the market of your competitors?

Thanks.

Okay Brian.

I'd say first on OpenTable, yes, we certainly haven't been, we did a lot of planning, and we're now in the execution phase of those plans.

As we highlighted during the acquisition, there's really three areas we're focused on.

One is international expansion, so we're in the middle of those plans, really exciting and that's an issue of product, getting all the language translations.

An issue of which cities, how fast, but I expect that we'll be through the fall get ourselves aligned, and begin executing fairly forthrightly.

The second area is co-marketing and that's something that's in the plans right now, co-marketing is really -- if you're a Booking.com guest from London staying in New York, co-promoting the OpenTable App and the restaurants around your hotel, for instance, and those are tests that we hope to put in play pretty quickly.

And then finally was the payments area, and you have the update on that.

So I feel really good about where we are and there's lots of work to do.

The teams are now moving between San Francisco and Amsterdam, in particular, doing a lot of learning and a lot of things that come into play.

And I think by 2015, I hope, we'll be in full rollout of those plans.

As it relates to ROIs and variable channels, there's a lot that goes into ROIs.

Certainly it's a very competitive environment, and the costs of buying a booker have been going up.

We try to counteract that by increasing investments on our website so they convert better, which we've been seeing some good success with, but also building more direct business, so that we rely less and less on the paid demand, which is allowing us, basically creating currency to more aggressively go out and find those customers through paid channels.

Not much else to it other than that.

Obviously, we try to balance ROIs against the various sources of demand, and we both evaluate the ROI of the demand, and then also the importance and strategic nature of the demand.

Is it something that we're buying where we get full access to the customer, and can cross market to them, et cetera, or is it a source that doesn't allow us near as much freedom to build a long-term relationship with that customer.

And that's how we set our ROI targets, and we're quite disciplined as a Company around that.

And basically making sure that -- we don't really look at lifetime value, although we value that, we're looking at how we earn money on every single conversion that we buy.

Great, thanks, Darren.

Our next question comes from Ronald Josey of JMP Securities.

Great.

Thanks for taking the question.

So more a high level question, Darren.

We're now in a few years into the expansion of Booking.com here in the US, and I'm just wondering what the impact has been from other international markets, as more hotels come here, or are available here domestically?

And specifically the demand from call it Europe and South America coming here, and then vice versa.

And then also just a real quick follow-up on the marketing line.

I think you said TV in Germany, I understand you are marketing more in TV here, but why Germany now?

Thank you.

Thanks, Ron.

Let me first address the US.

We announced on a previous conference call the US is now Booking.com's largest destination market and certainly, we've had historic business that comes in from Europe, and that generally lands in a few obvious destinations, New York, Washington DC, a lot of East Coast destinations, Orlando.

But recently, we've seen a significant impact from guests from Latin America.

I was recently in Miami talking to some hoteliers, and they think we're the Brazilian OTA, which of course we are.

But that's how they think about us, because it's the guest that shows up from Booking.com.

And then out on the West Coast, a significant increase with Asian guests and Pacific guests from Oceania in the San Francisco and Las Vegas, et cetera.

So I feel a lot better about the international demand we're bringing in the United States, but even more importantly, what I get excited about is, we're getting more US guests staying in the US.

It's probably one of our fastest-growing markets is American domestic travelers discovering the tremendous flexibility of pay when you stay, instead of paying ahead, and really loving the diversity of properties that we have on our site, and that's really the thing that's creating a tipping point in the US market for us.

We're now at a level of accommodation and property options that I feel very proud of, and the US is right up there with some of our more mature European markets in terms of what we can offer our customers.

But much, much more to do.

And then Germany, the decision really was, we came into the UK which is a fairly, we call it in quotes, mature market for us.

But we saw some really positive results there, because even despite how successful we've been in the UK, our aided awareness was not near where we wanted it to be.

But we've seen some acceleration in the UK as bookers.

And we decided to go into Germany, Germany has been a market for us in Europe that we do well in, but we under-index relative to what we do in the rest of Western Europe, primarily because we have some domestic competition and a lot of Germans, surprisingly, just travel to Germany.

But the campaign so far has done a nice job, and it's very early days of introducing Germans that you can use Booking.com as you love to travel to Italy or Spain or to France, but it's also a great tool to travel within Germany as well, so that was -- really it was the next largest obvious market for us in Europe, given where our aided awareness and our penetration is, relative to others.

Thank you.

Our next question comes from Michael Millman of Millman Associates.

Your line is now open.

First, wanted to follow up on an earlier question regarding the mobile, and particularly same-day mobile.

I was wondering if there's a back end of cancellations that maybe going to others?

I guess I feel that it's unusual all of these people continue to travel without reservations.

And secondly, on US car rental, also, to what extent are you seeing growth, if you're seeing growth in mobile, and to what extent are -- you mentioned that opaque is less available.

To what extent therefore are you seeing more increased pricing, and to what extent are you seeing higher mileage cars, and how is that affecting the interest in people renting?

Thank you.

Thanks, Michael.

I'm going to take the first one, and let Dan take the second one.

Yes, it's an interesting question you ask about last minute booking on mobile.

Knowing what I know, there are some cities in Europe that it's dangerous to show up, and not have a booking, and if you arrive at the airport, because it can literally be close to all sold out in certain seasons.

But it is a very spontaneous thing.

And the other thing about accommodations is, unlike in a lot of other aspects of travel, you can get a last minute booking for potentially less than you would get a booking you made 7, 14, 21 days in advance.

Now it's a little bit of a risky proposition, but at the end of the day, the hotel room needs to fill a room.

And also the reason people use apps for this is if you walk into a hotel and say I need a room, they aren't necessarily going to give you the price that's published on the internet, because you're standing in a hotel room and you need a room.

And a lot of people use apps and OTAs in particular to try to get a really good price at the last minute.

But it is a little bit of a gamble and you have to be smart about how you do it.

But you can truly get a lot of great deals last minute, in this particular aspect of travel.

And Michael as far as the questions on US car rental, so car rental tracks similarly to the rest of our services, in that mobile is growing much faster, as more people are adopting -- doing booking on mobile devices and research on mobile devices, so we're growing very fast there, and we're pleased with the offerings that we have, particularly at Priceline.com, for US car rental.

We did say opaque is less available, so you are seeing that paired with increased pricing, and just a very healthy travel environment.

It also drives up pricing, particularly on our opaque services, because we were unable to get the same level of discounts that we've gotten in the past, and so we're unable to give the level of discount that we typically could, and that drives up the pricing there.

I don't have any information for you, really, in terms of higher mileage cars being used to a greater extent.

Sorry, I can't help you with that one.

Great, thank you.

Our final question comes from Kevin Kopelman of Cowen and Company.

Your line is now open.

Can you give us more color on your alternative accommodations initiative, especially how the Villas.com launch performed versus your expectations?

Thanks.

Thanks, Kevin.

Yes, we gave a little bit in my comments, I had mentioned to you that in this, what we call vacation rental space, we're already a very large player.

As we went a couple years ago from being completely about hotels to non-hotels, it was a very natural migration for us to go into non-hotel categories like resorts and motels, et cetera, to get into what we would call more self-catered products, like apart-hotels, vacation rentals, apartments, et cetera, so this has been a long term journey.

There's a lot to do, because there are a lot of challenges around vacation rental bookings, who's going to show up with the keys?

Who's changing the sheets?

A lot of vacation rentals need deposits, and there are some things in the market have been built up in a way where the renter expects to dance back and forth with the guest on e-mail, or by phone, until they finally come to some kind of settlement.

And our business is purely about booking, and getting an instant confirmation, and requiring vacation rental owners to keep a live calendar that's real and pricing that's real, and everything you would expect in a modern e-commerce business.

So there is many challenges, but we're now doing a real significant amount of business in this space, and Villas.com specifically is just one of many tactics we're taking to try to really prove out and test various options for being successful in the vacation rental space, and so far we're really pleased with the results of that effort.

But again, it's part of a much broader set of actions that we're taking.

Having vacation rentals on our site has proven to be a great synergy for people, who are just looking for a place to stay.

We even find that people with families may think they are going to Barcelona and they are going to stay in two or three hotel rooms, and they end up in a home by the beach, at potentially a cheaper price if they are a large group.

So for many people, it's even an upgrade.

When you're on leisure travel, it's just been really, really hard in the past to book and to feel secure about your booking, and that's something that we're, as a Company, trying to change.

Thank you.

Thank you.

And at this time I'd like to turn the call back to management for any closing comments.

We want to thank everyone for joining this call, and we look forward to delivering a very strong Q3.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program, you may all disconnect.

Everyone, have a wonderful day.