Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (12-03-08 05:40 AM)

The Daily Magic Formula Stock for 12/03/2008 is Priceline.Com Inc. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

General

We are a leading online travel company that offers our customers a broad range of travel services, including airline tickets, hotel rooms, car rentals, vacation packages, cruises and destination services. In the United States, we offer our customers a unique choice: the ability to purchase travel services in a traditional, price-disclosed manner or the opportunity to use our unique Name Your Own Price ® service, which allows our customers to make offers for travel services at discounted prices. Internationally, we offer our customers hotel room reservations in over 60 countries and 22 languages.

We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include, among others, the brands Booking.com and Active Hotels in Europe and Agoda in Asia. Our goal is to be the leading worldwide online hotel reservation service and be the top online discount travel agent in the United States. At present, we derive substantially all of our revenues from the following sources:

• Transaction revenues from our Name Your Own Price ® airline ticket, hotel room and rental car services, as well as our vacation packages service;

• Commissions earned from the sale of price-disclosed hotel rooms, rental cars, cruises and other travel services;

• Customer processing fees charged in connection with the sale of both Name Your Own Price ® and price-disclosed airline tickets, hotel rooms and rental cars services. Priceline eliminated processing fees for its price-disclosed airline ticket service in June 2007;

• Transaction revenue from our price-disclosed merchant hotel room service;

• Global distribution system (“GDS”) reservation booking fees related to both our Name Your Own Price ® airline ticket, hotel room and rental car services, and price-disclosed airline tickets and rental car services; and

• Other revenues derived primarily from selling advertising on our websites.

For the year ended December 31, 2007, we had revenues of approximately $1.4 billion comprised of “merchant” revenue, “agency” revenue and “other” revenue. Merchant revenues are derived from transactions where we are the merchant of record and are responsible for, among other things, collecting receipts from our customers and remitting payments to our suppliers. Merchant revenues, which represented the substantial majority of our total revenues in 2007, consisted of: (1) transaction revenues representing the selling price of Name Your Own Price ® airline tickets, hotel rooms, rental cars and price-disclosed vacation packages services; (2) transaction revenues representing the amount charged to a customer, less the amount charged by suppliers in connection with the hotel rooms provided through our merchant price-disclosed hotel service; (3) customer processing fees charged in connection with the sale of Name Your Own Price ® airline tickets, hotel rooms and rental cars and merchant price-disclosed hotels services; and (4) ancillary fees, including GDS reservation booking fees related to certain of the transactions described above . Agency revenues are generally derived from retail travel related transactions where we are not the merchant of record and where the prices of our services are determined by third parties. Agency revenues consisted primarily of: (1) travel commissions; (2) customer processing fees; and (3) GDS reservation booking fees related to certain of the aforementioned transactions. Other revenues consisted primarily of revenue from advertising on our websites.

Priceline.com was formed as a Delaware limited liability company in 1997 and was converted into a Delaware corporation in July 1998. Our common stock is listed on the NASDAQ Global Select Market under the symbol “PCLN.” Our principal executive offices are located at 800 Connecticut Avenue, Norwalk, Connecticut 06854.

The priceline.com Business Model

We offer customers the ability to make hotel reservations on a worldwide basis primarily under the Booking.com and Agoda brands internationally and primarily under the priceline.com brand in the United States. In the United States, we also offer customers the ability to purchase other travel services, including airline tickets, rental car days, vacations packages, destination services and cruises, through both a traditional, price-disclosed “retail” manner, and through our proprietary demand-collection system known as Name Your Own Price ® . These services are made available over the Internet through websites that we own or control, and are provided by major travel suppliers, including more than 60,000 hotel properties worldwide. We believe that the combination of our retail price-disclosed model and our Name Your Own Price ® model allows us to provide a broad array of options to value-conscious travelers, while providing us with diverse streams of revenue.

International: Price-Disclosed Hotel Services . We offer a retail, price-disclosed hotel service in Europe and Asia through our international operations, which we have developed through recent acquisitions. In September 2004, we acquired Booking.com Limited, a Cambridge, England-based Internet hotel reservation distributor, and in July 2005, we acquired Amsterdam-based Booking.com B.V., one of continental Europe’s leading Internet hotel reservation services, with offices primarily in Amsterdam, Barcelona, Berlin, Loule, Paris, Rome and Vienna. All of our European operations, including Booking.com Limited and Booking.com B.V., are majority-owned by us. In November 2007, we acquired Agoda Company, Ltd. (“Agoda”) and AGIP LLC (“AGIP,” and together with Agoda, the “Agoda Companies”), an Internet hotel distributor with operations in Singapore and Thailand. We work with over 60,000 chain-owned and independently owned hotels offering hotel reservations on various websites and in multiple languages. For geographic related information, see Note 19 to our Consolidated Financial Statements.

Our international business — the significant majority of which is currently generated by our European operations — represented approximately 55% of our gross bookings in the year ended December 31, 2007, and contributed more than two-thirds of our consolidated operating income during that period. We expect that throughout 2008 and beyond, our international operations will represent a growing percentage of our total gross bookings and operating income.

United States: Retail Travel Services . In the United States, we offer customers the ability to purchase price-disclosed hotel rooms, airline tickets, rental car days, vacation packages, destination services and cruises at retail prices. In these transactions, the customer typically selects airline flights, hotel reservations, rental car or other travel itineraries from an array of results produced in response to the customer’s request. These results include the identity of the travel supplier, the exact price of the itinerary, and other details relating to the itineraries. In some circumstances, the customer pays us at the time of reservation, and in other circumstances, the customer pays the travel supplier directly at the time of travel.

United States: Name Your Own Price ® Travel Services . We have developed a unique pricing system known as a “demand collection system” that uses the information sharing and communications power of the Internet to create a different way of pricing services. We believe our services have created a balance between the interests of buyers, who are willing to accept trade-offs in order to save money, and sellers, who are prepared to generate incremental revenue by selling their services at below retail prices, provided that they can do so without disrupting their existing distribution channels or retail pricing structures. Our demand collection system allows consumers to specify the price they are prepared to pay when submitting an offer for a particular leisure travel service. We then access databases in which participating suppliers file secure discounted rates not generally available to the public, to determine whether we can fulfill the customer’s offer and decide whether we want to accept the offer at the price designated by the consumer. For most of these transactions, we have discretion in supplier selection and are the merchant of record in the transaction. Consumers agree to hold their offers open for a specified period of time (generally, not longer than one minute) to enable us to determine whether we can or want to accept the offer. Once fulfilled, offers generally cannot be canceled — thereby making such purchases generally non-refundable. This system uses the flexibility of buyers to enable sellers to accept a lower price in order to sell their excess capacity. We believe that our demand collection system addresses limitations inherent in traditional seller-driven pricing mechanisms in a manner that offers substantial benefits to both buyers and sellers. We believe that the principal advantages of our system include the following:

Cost Savings . Our Name Your Own Price ® demand collection system allows consumers to save money in a simple and compelling way. Buyers effectively trade off flexibility about brands, service features and/or sellers in return for prices that are lower than those that can be obtained at that time through traditional retail distribution channels.

Incremental Revenue for Sellers . Sellers use our Name Your Own Price ® demand collection system as a revenue management tool to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. We require consumers to be flexible with respect to brands and service features. As a result, our Name Your Own Price ® system does not reveal sellers’ brands to customers prior to the consummation of a transaction, thereby protecting their brand integrity. This shielding of brand identity and price enables sellers to sell services at discounted prices without cannibalizing their own retail sales by publicly announcing discount prices and without competing against their own distributors.

Proprietary Seller Networks . We have assembled proprietary networks of industry leading sellers that represent high quality brands. By establishing attractive networks of seller participants with reputations for quality, scale and national presence, we believe that we foster increased participation by both buyers and sellers.

We often refer to services offered through our Name Your Own Price ® service as “opaque” services because all aspects of the travel service are not visible to the consumer before making an offer.

The priceline.com Strategy

The online travel category has continued to experience significant worldwide growth as consumer purchasing shifts from traditional off-line channels to interactive online channels. Priceline.com has been a leader in the deep discount segment of this market in the United States and in the hotel reservation market internationally. Our strategy is to continue to participate broadly in online travel growth by expanding our service offerings and markets.

Become the Leading Worldwide Online Hotel Reservation Service . The size of the travel market outside of the United States is substantially greater than that within the United States. Historically, Internet adoption rates and e-commerce adoption rates of international consumers have trailed those of the United States. However, international consumers are rapidly moving to online means for purchasing travel. Accordingly, recent international online travel growth rates have substantially exceeded and are expected to continue to exceed the growth rates within the United States. Prior to 2004, substantially all of our revenues were generated within the United States. For the year ended December 31, 2007, o ur international business — the significant majority of which is currently generated by our European operations — represented approximately 55% of our gross bookings, and contributed more than two-thirds of our consolidated operating income during that period. We expect that throughout 2008 and beyond, our international operations will represent a growing percentage of our total gross bookings and operating income. Because of what we believe to be superior growth rate opportunities associated with international online travel, we intend to continue to invest resources to increase the share of our revenues represented by international consumers and capitalize on international travel demand.

We believe that the positioning of our Booking.com hotel reservation service gives us a foothold into a broader international market. We intend to use the Agoda Companies, our recently acquired online hotel distributor with operations in Singapore and Thailand, to further develop our operations throughout Asia, where Internet penetration is growing at a substantially greater pace than in the United States over the last several years. We have begun, and intend to continue, development of the means to share hotel availability among our brands, which we believe will allow us to monetize demand across international markets. In addition, from time to time we explore strategic transactions and acquisitions that, among other things, allow us to provide our services to new markets. We believe that by promoting our brands worldwide, sharing hotel supply and customer flow and applying our industry experiences in the United States and Europe to other international regions, we can further expand our service internationally and become the leading worldwide online hotel reservation service.

• Continue to be One of the Top Online Travel Businesses in North America for Value-Conscious Leisure Travelers . Our Name Your Own Price ® demand collection system in the United States allows consumers to save money in a simple and compelling way. Buyers effectively trade off flexibility about brands, service features and/or sellers in return for prices that are lower than those that can be obtained at that time through traditional retail distribution channels. We have expended significant resources to allow us to introduce price-disclosed retail services in the United States to our consumers to compliment the Name Your Own Price ® service. We believe that by offering a “one-stop-shopping” solution to our customers, we can simultaneously fulfill the needs of those customers who are prepared to accept the unique restrictions of our Name Your Own Price ® service in exchange for receiving significant savings relative to retail prices, as well as those customers who are less price sensitive and require the certainty of knowing the full details of their travel itinerary prior to purchasing. In June 2007, we eliminated booking fees on price-disclosed retail airline tickets as part of our strategy to provide value to our customers.

We intend to enhance our service offerings continually, particularly our retail offerings, by adding competitive functionality, adding competitive content at competitive pricing, adding and improving the content and merchandising on our website as well as cross-sell opportunities to maximize customer conversion.

• Competitive functionality: We continue to expend significant resources to remain competitive in terms of the features and functionality we offer our customers. For example, since launching our domestic retail air service, we added the ability to search for flexible dates or alternative airports, book one-way and multi-destination itineraries and easily make modifications to search criteria. We intend to add additional functionality such as the ability to search child and senior fares and to access real time seat maps.

• Competitive selection and pricing: We believe that having a wide selection of travel options at competitive pricing is critical to our success. For example, in June of 2007, we eliminated booking fees on price-disclosed retail airline tickets, added JetBlue fares to both our retail price-disclosed and Name Your Own Price ® airline ticket services and added over 10,000 additional hotels to our domestic vacation package service. In addition, we have renewed or entered into new agreements with several of our major airline and hotel suppliers, which we believe improved our access to a better selection of travel alternatives and pricing.

• Content and merchandising: As part of our evolution to a “one-stop-shopping” website, we have added thousands of pages of content to allow customers to research destinations and hotel properties before booking a reservation. We offer property descriptions, maps, images, and user reviews whereby our customers can benefit from the experiences and opinions of other customers. In the United States, we introduced “PriceBreakers sm ,” which is a presentation of selected travel itineraries at discounted prices that is updated daily. We intend to continue to improve our content and merchandising with more comprehensive descriptions, more and higher quality images, and more user reviews, which we believe will improve conversion of users shopping on our website.

• Cross-sell opportunities : We also cross-sell different travel components to maximize the revenue we generate from each customer in the United States. We have developed and implemented functionality that allows customers to “add-on” travel components to their selection, both during the shopping experience and at time of purchase. For example, customers can add a rental car reservation to their air or hotel reservation, or a hotel reservation to their air reservation. Customers can also add destination related services such as shuttles, tours and activities. Additionally, we cross-sell opaque services on our retail path and retail services on our opaque path. For example, an unsuccessful opaque air customer may be offered a price-disclosed alternative, while a retail hotel shopper may be offered the Name Your Own Price ® alternative for greater savings. We intend to further enhance these cross-sell opportunities across all of our services.

We strive to be the preferred discount distribution channel in the United States for airlines, hotels and rental car companies. Our Name Your Own Price ® service protects supplier brand and published pricing and our packages and other merchandising provide access to the brand neutral leisure traveler at attractive distribution costs.



CEO BACKGROUND

Jeffery H. Boyd , age 51, has served as a Director of priceline.com since October 2001. Mr. Boyd has been President of priceline.com since May 2001 and Chief Executive Officer since November 2002. Mr. Boyd was President and Co-Chief Executive Officer from August 2002 to November 2002 and Chief Operating Officer from November 2000 to August 2002. He previously served as Executive Vice President, General Counsel and Secretary of priceline.com from January 2000 to October 2000. In 1995, Mr. Boyd joined Oxford Health Plans, Inc. as its Executive Vice President, General Counsel and Secretary, where he served in such capacities through December 1999.

Ralph M. Bahna , age 65, has served as a Director of priceline.com since July 1998 and Chairman of the Board of Directors since April 8, 2004. Since 1992, Mr. Bahna has been the President of Masterworks Development Corp., a company he founded to develop an international group of hotels named Club Quarters TM . Club Quarters are private, city-center facilities designed for the business travelers of cost conscious organizations. Since 1993, Mr. Bahna has served as the Chairman of Club Quarters TM . From 1980 to 1989, Mr. Bahna served as the Chief Executive Officer of Cunard Lines, Ltd., and the Cunard Group of Companies. Prior to Cunard, Mr. Bahna was employed by Trans World Airlines, Inc., where he developed and launched its highly successful Ambassador Service.

Howard W. Barker, Jr. , age 61, has served as a Director of priceline.com since January 2003. Mr. Barker was a partner of the auditing firm KPMG LLP from July 1982 until September 2002, when he retired. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants and the Florida Institute of Certified Public Accountants. He currently serves as a member of the Board of Directors of Medco Health Solutions, Inc. where he chairs the Audit Committee and is a member of the Compensation Committee and a member of the Board of Directors of Chiquita Brands International, Inc., where he chairs the Audit Committee. He has also served as Treasurer and a member of the Board of Directors of Senior Services of Stamford and served as President and a member of the Board of Directors of the Volunteer Center of Lower Fairfield County, Connecticut from 1990 to 1996 and member of the Board of Directors of the Darien United Way and Person to Person from 1997 to 1999 and 1998 to 2000, respectively.

Jan L. Docter, age 58, has served as a Director of priceline.com since November 2007. Mr. Docter currently serves as a consultant to several companies, including Booking.com B.V. Mr. Docter has been self-employed since mid-2006. Mr. Docter served as the interim Chief Financial Officer of Corio NV, a Dutch real estate investment company, from mid-2005 to mid-2006. From 2003 to mid-2005, Mr. Docter was self-employed. Prior to that, he was Chief Financial Officer of Getronics NV, a Dutch information and communications technology services company, from 1988 to 2003. From 1985 to 1988, he was Chief Financial Officer of Centrafarm Group NV, a European producer and distributor of generic pharmaceuticals and other drugs. From 1979 to 1984, he served in a variety of financial positions for the recording/entertainment company Polygram NV. Mr. Docter also was an Industry Special Grants Officer for the Dutch Ministry of Economics Affairs.

Jeffrey E. Epstein , age 51, has served as a Director of priceline.com since April 2003. Mr. Epstein is Executive Vice President and Chief Financial Officer of Oberon Media, Inc., a leading global provider of casual games and game platforms, which he joined in April 2007. From June 2005 until its sale in March 2007, Mr. Epstein was Executive Vice President and Chief Financial Officer of ADVO, Inc., the largest direct mail media company in the United States. Mr. Epstein was the Chairman of the Board, Acting President and Chief Executive Officer, or member of the Board of Directors of Revonet, Inc., a B2B marketing and database company from January 2004 through June 2005. Mr. Epstein was the Senior Vice President and Chief Financial Officer of VNU’s Media Measurement and Information (MMI) Group, whose businesses include Nielsen Media Research, from March 2002 until December 2003. From March 1998 to February 2002, Mr. Epstein held senior management positions with DoubleClick, including Chief Financial Officer. Mr. Epstein is a member of the Board of Directors of MDC Partners Inc., a marketing communications company with over 30 businesses, including Crispin, Porter & Bogusky.

James M. Guyette , age 63, has served as a Director of priceline.com since November 2003. Mr. Guyette is currently Chairman, President and Chief Executive Officer of Rolls-Royce North America Inc., a world-leading supplier of power systems to the global aerospace, defense, marine and energy markets, a position he has held since 1997. Prior to joining Rolls-Royce, Mr. Guyette was Executive Vice President – Marketing and Planning for United Airlines. He held a number of other senior roles in his nearly 30 years with the carrier. Mr. Guyette serves on the boards of Rolls-Royce plc, International Aero Engines and PrivateBancorp Inc. He is a member of the Boards of Directors of the Wings Club, the Smithsonian Museum – Air and Space Museum Board, the U.S. Chamber of Commerce, the Flight Safety Foundation, St. Mary’s College – Moraga CA – Board of Regents, and is a member of the Board of Governors for the Aerospace Industries Association.

Nancy B. Peretsman, age 54, has served as a Director of priceline.com since February 1999. Since June 1995, she has been a Managing Director of Allen & Company LLC, an investment bank. Prior to joining Allen & Company, Ms. Peretsman had been an investment banker since 1983 at Salomon Brothers Inc., where she was a Managing Director from 1990 to 1995. Ms. Peretsman serves on the Board of Directors for several private companies. She is a member of the Board of Trustees of The New School. Ms. Peretsman is a Trustee of the Institute of Advanced Study, and a member of the Board of Trustees of Princeton University. She is also a National Board Member of Teach for America.

Craig W. Rydin , age 56, has served as a Director of priceline.com since January 2005. Mr. Rydin has been Chairman of the Board of Directors of The Yankee Candle Company, Inc. since February 2003, and its Chief Executive Officer and a director of Yankee Candle since April 2001. Prior to joining Yankee Candle, Mr. Rydin was the President of the Away From Home food services division of Campbell Soup Company, a position he held from 1998 to 2001. From 1996 to 1998, Mr. Rydin served as the President of the Godiva Chocolatiers division of Campbell. Prior to his position with Godiva, Mr. Rydin held a number of senior management positions at Pepperidge Farm, Inc., also a part of Campbell. Mr. Rydin serves on the board of Philips-Van Heusen (PVH – NYSE) and is a member of their compensation committee.

Set forth below is biographical information for executive officers of the Company (each an “executive officer”), other than executive officers who are nominated to serve as Directors of the Company and whose biographical information is set forth above.

Daniel Finnegan , age 46, has been the Company’s Senior Vice President, Controller and Chief Accounting Officer since October 2005. Mr. Finnegan joined priceline.com in April 2004 as Vice President and Chief Compliance Officer. Prior to joining priceline.com, Mr. Finnegan served as Chief Financial Officer for CS Technology, Inc., a consulting company, from October 2000 to April 2004 and as Chief Financial Officer for Coty US, Inc., a manufacturer of cosmetics and fragrances, from November 1996 to October 2000.

Brett Keller , age 40, has been Chief Marketing Officer of priceline.com since January 2002. He previously served as Senior Vice President, Marketing of priceline.com and in other positions from February 1999 through December 2001. From 1997 to 1999, Mr. Keller served as Director of Online Travel at Cendant.

Peter J. Millones , age 38, is Executive Vice President, General Counsel and Corporate Secretary of priceline.com. Mr. Millones has been General Counsel and Corporate Secretary of priceline.com since January 2001. He previously served as Vice President and Associate General Counsel of priceline.com from March 2000 to January 2001. Since 2003, Mr. Millones has been responsible for priceline.com’s U.S. human resources department. From September 1995 through March 2000, Mr. Millones was with the law firm of Latham & Watkins.

Robert J. Mylod Jr. , age 41, has been the Chief Financial Officer of priceline.com since November 2000. From May 2000 to October 2000, Mr. Mylod was acting Chief Financial Officer for WebHouse Club, Inc., a privately held e-commerce company and a licensee of priceline.com. From January 1999 to May 2000, Mr. Mylod held several different positions within priceline.com’s finance department, including Senior Vice President, Finance. Prior to joining priceline.com, Mr. Mylod was a Principal at Stonington Partners, a private equity investment firm that manages over $1 billion of institutional capital dedicated to venture capital investments and leveraged buyouts. Mr. Mylod is on the board of directors of EverBank Financial Corp.

Stef Norden , age 39, has served as Chief Executive Officer of Booking.com B.V. since July 2003. From February 2002 to June 2003, Mr. Norden co-owned Bookingsportal B.V., which was an affiliate of Bookings. From 1998 to 2000, Mr. Norden served as a director of BBV, an integrated optics company of which he was a co-founder. In 2000, BBV merged with Scotland-based Kymata and was subsequently acquired by Alcatel.

Ronald V. Rose , age 57, has been the Chief Information Officer of priceline.com since March 1999. From September 1995 to March 1999, Mr. Rose served in various capacities with Standard & Poor’s, a financial services company, including Chief Technology Officer of Retail Markets. While at Standard & Poor’s, Mr. Rose led the development of many Internet initiatives within the Financial Information Services area and chaired the Internet Architecture Council.

Christopher L. Soder , age 48, has been President, North American Travel since February 2007. Mr. Soder was Executive Vice President, Travel Services from March 2005 to February 2007 and had been Executive Vice President, Lodging and Vacation Products from July 2002 to March 2005. From February 2000 to July 2002, Mr. Soder was President of priceline.com’s hotel service. Before joining priceline.com, Mr. Soder was Western Region Vice President, Business Markets, for AT&T, where he was responsible for the company’s complete technology portfolio sales to over 20,000 business customers across a 10-state region.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

General . We are a leading online travel company that offers our customers a broad range of travel services, including airline tickets, hotel rooms, car rentals, vacation packages, cruises and destination services. In the United States, we offer our customers a unique choice: the ability to purchase travel services in a traditional, price-disclosed manner or the opportunity to use our unique Name Your Own Price ® service, which allows our customers to make offers for travel services at discounted prices. Internationally, we offer our customers hotel room reservations in 60 countries and 22 languages.

We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include, among others, the brands Booking.com and Active Hotels in Europe and Agoda in Asia. Our goal is to be the leading worldwide online hotel reservation service and be the top online discount travel agent in the United States. At present, we derive substantially all of our revenues from the following sources:

• Transaction revenues from our Name Your Own Price ® airline ticket, hotel room and rental car services, as well as our vacation packages service;

• Commissions earned from the sale of price-disclosed hotel rooms, rental cars, cruises and other travel services;

• Customer processing fees charged in connection with the sale of both Name Your Own Price ® and price-disclosed airline tickets, hotel rooms and rental cars services. Priceline eliminated processing fees for its price-disclosed airline ticket service in June 2007;

• Transaction revenue from our price-disclosed merchant hotel room service;

• Global distribution system (“GDS”) reservation booking fees related to both our Name Your Own Price ® airline ticket, hotel room and rental car services, and price-disclosed airline tickets and rental car services; and

• Other revenues derived primarily from selling advertising on our websites.

Over the last several years, our business has transitioned from one driven primarily by domestic results to one driven primarily by international results. Prior to 2004, substantially all of our revenues were generated within the United States. In September 2004, we acquired Booking.com Limited, a U.K.-based online hotel service, in July 2005, we acquired Booking.com B.V., a Netherlands-based online hotel service, and in November 2007, we acquired Agoda Company, Ltd. (“Agoda”) and AGIP LLC (“AGIP,” and together with Agoda, the “Agoda Companies”), an online hotel service with operations in Singapore and Thailand. During the year ended December 31, 2007, our international business — the significant majority of which is currently generated by our European operations — represented approximately 55% of our gross bookings, and contributed more than two-thirds of our consolidated operating income during that period. We expect that throughout 2008 and beyond, our international business will represent a growing percentage of our total gross bookings and operating income.

International Trends . The size of the travel market outside of the United States is substantially greater than that within the United States. Historically, Internet adoption rates and e-commerce adoption rates of international consumers have trailed those of the United States. However, international consumers are rapidly moving to online means for purchasing travel. Accordingly, recent international online travel growth rates have substantially exceeded and are expected to continue to exceed the growth rates within the United States. In addition, the base of hotel suppliers in Europe is particularly fragmented compared to that in the United States, where the hotel market is dominated by large hotel chains. We believe online reservation systems like ours may be more appealing to small chains and independent hotels more commonly found outside of the United States. We believe these trends have enabled us to become the top hotel service provider in Europe, and will allow us to successfully expand our service offerings internationally beyond Europe.

As our international operations have become significant contributors to our results and international hotel bookings have become of increased importance to our earnings, we have seen, and expect to continue to see, changes in certain of our operating expenses and other financial metrics. For example, because our international operations utilize online affiliate and search marketing as the principal means of generating traffic to their websites, our online advertising expense has increased significantly since our acquisition of those companies, a trend we expect to continue throughout 2008 and beyond. In addition, and as discussed in more detail below, since the acquisitions of Booking.com Limited and Booking.com B.V., we have seen the effects of seasonal fluctuations on our operating results change as a result of different revenue recognition policies that apply to our price-disclosed services (including our international hotel service) as compared to our Name Your Own Price ® services.

Another impact of the growing importance that our international operations represent to our business is our increased exposure to foreign currency exchange risk. Because we are conducting a significant and growing portion of our business outside the United States and are reporting our results in U.S. dollars, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency into U.S. dollars upon consolidation. Our international operations contributed approximately $372.6 million to our revenues for the year ended December 31, 2007, which compares to $182.7 million for the same period in 2006. Approximately $30.3 million of this increase is due to fluctuations in currency exchange rates. If the U.S. dollar weakens against the local currency, the translation of these foreign-currency-denomina ted balances will result in increased net assets, net revenues, operating expenses, and net income or loss. Similarly, our net assets, net revenues, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against local currency.

Domestic Trends . While the online market for travel services continues to experience significant annualized growth, we believe that the domestic market share of third-party distributors, like priceline.com, has declined over the recent past and that the growth of the domestic online market for travel services has slowed. We believe the decline in market share is attributable, in part, to a concerted initiative by travel suppliers to direct customers to their own websites in an effort to reduce distribution expenses and establish more direct control over their pricing. In addition, airlines and hotel chains have generally experienced year-over-year increases in load factors (a common metric that measures airplane customer usage) and occupancy rates (a common metric that measures hotel customer usage), respectively, which leaves them with less excess supply to provide third party intermediaries like priceline.com. Recent decreases in domestic airline capacity could further reduce the amount of airline tickets available to us. Notwithstanding these trends, we continue to believe that the market for domestic online travel services is an attractive market with continued opportunity for growth.

The financial prospects of our domestic business have historically been significantly dependent upon the sale of leisure airline tickets and, as a result, the health of our domestic business has been impacted by the health of the airline industry. While the sale of leisure airline tickets remains an important part of our business, revenue earned in connection with the domestic reservation of hotel room nights has come to represent a substantial majority of our domestic gross profit. The domestic hotel market has been characterized in recent years by robust demand and limited supply, leading to increased occupancy rates, and in turn, increased average daily rates (“ADRs”). Because our remuneration for agency hotel transactions increases proportionately with room price, increased ADRs generally have a positive effect on our agency hotel business. Higher ADRs, however, can also negatively affect consumer demand, and higher occupancy rates can lead hotels to restrict our access to merchant hotel availability, particularly in high occupancy destinations popular with our travel base. Higher occupancy rates also have historically tended to drive lower margins as hotel suppliers have less need to distribute through third-party intermediaries such as us.

Recently, significant attention has been given to the state of the United States economy and concern has been expressed regarding certain recessionary trends. We do not believe that our 2007 financial results were impacted by a slowdown in the United States economy, and we believe that our brands and services are attractive to consumers and suppliers in times of economic stress. There can be no assurance, however, that our business would not be adversely affected if current economic conditions continue or worsen.

We also rely on fees paid to us by global distribution systems, or GDSs, for travel bookings made through GDSs for a portion of our gross profit and a substantial portion of our operating income. Connectivity to a GDS does not guarantee us access to the content of a travel supplier such as an airline or hotel company. We have agreements with a number of suppliers to obtain access to content, and are in continuing discussions with others to obtain similar access. If we were denied access to a suppliers’ full content or had to incur service fees in order to access or book such content, our results could suffer.

We believe that our success will depend in large part on our ability to maintain profitability, primarily from our hotel business, to continue to promote the priceline.com brand in the United States, the Booking.com brand internationally, the Agoda brand in Asia and, over time, to offer other travel services and further expand into other international markets. Factors beyond our control, such as the outbreak of an epidemic or pandemic disease; natural disasters such as hurricanes, tsunamis or earthquakes; terrorist attacks, hostilities in the Middle East or elsewhere; or the withdrawal from our system of a major hotel supplier, could adversely affect our business and results of operations and impair our ability to effectively implement all or some of the initiatives described above. We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve operating results. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, mergers and acquisitions. In addition, we currently do not have operations in geographic areas such as South America, and therefore may consider strategic alternatives in those areas. Our goal is to improve volume and sustain gross margins in an effort to maintain profitability. The uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we cannot provide assurance that we will sustain revenue growth and profitability.

Seasonality . Our Name Your Own Price ® services are non-refundable in nature, and accordingly, we recognize travel revenue at the time a booking is generated. However, we recognize revenue generated from our retail hotel services, including our international operations, at the time that the customer checks out of the hotel. As a result, a meaningful amount of retail hotel bookings generated earlier in the year, as customers plan and reserve their spring and summer vacations, will not be recognized as revenue until future quarters. From a cost perspective, however, we expense the substantial majority of our advertising activities as they are incurred, which is typically in the quarter in which bookings are generated. Therefore, as our retail hotel business continues to grow, we expect our quarterly results to become increasingly impacted by these seasonal factors.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 2 to our Consolidated Financial Statements. Certain of our accounting policies are particularly important to our financial position and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. On an on-going basis, we evaluate our estimates, including those related to the items described below. Those estimates are based on, among other things, historical experience, terms of existing contracts, our observance of trends in the travel industry and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies that involve significant estimates and judgments of management, including the following:

Deferred Tax Valuation Allowance . As required by SFAS No. 109, “Accounting for Income Taxes,” we periodically evaluate the likelihood of the realization of deferred tax assets, and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future income, the carryforward periods available to us for tax reporting purposes, and other relevant factors. Based upon management’s assessment of positive and negative evidence, we recorded non-cash tax benefits in 2007, 2006 and 2005 of $47.9 million, $28.1 million and $170.5 million, respectively, resulting from a reversal of a portion of our valuation allowance on our deferred tax assets. We believe that it is more likely than not that our remaining deferred tax assets will not be realized and, accordingly, a valuation allowance against those assets remains. The valuation allowance may need to be adjusted in the future if facts and circumstances change.

• Stock-Based Compensation. We record stock-based compensation expense over the service period based upon the grant date fair value of equity-based grants. We estimate forfeiture rates in determining the amount of compensation to record. In addition, we record stock-based compensation expense for grants that include a performance contingency based upon the estimated probable outcome at the end of the performance period. We periodically adjust the cumulative stock-based compensation recorded when estimated forfeiture rates are adjusted, or when the probable outcome for performance-based shares is updated based upon changes in facts and circumstances.

• Accounting for State and Local “Hotel Occupancy” Taxes . As discussed in Note 17 to our Consolidated Financial Statements, several jurisdictions have initiated lawsuits against several on-line travel companies, including us, alleging among other things, that sales or hotel occupancy tax is applicable to the differential between the price paid by a customer for our service and the cost of the underlying room. Historically, we have not collected taxes on this differential. Additional state and local jurisdictions could assert that we are subject to sales or hotel occupancy taxes on this differential and could seek to collect such taxes, either retroactively or prospectively, or both. To the extent that any tax authority succeeds in asserting that a tax collection responsibility applies to transactions conducted through the priceline.com service, we might have additional tax exposures. We will continue to assess the risks of the potential financial impact of additional tax exposures, and to the extent appropriate, we reserve for those estimated liabilities.

Allowance for Doubtful Accounts. Because we act as merchant of record in the majority of our transactions, we may be held liable for accepting fraudulent credit cards on our website as well as other payment disputes with our customers. Additionally, we are also held liable for accepting fraudulent credit cards in certain retail transactions when we do not act as merchant of record. Accordingly, we calculate and record an allowance for the resulting credit card charge-backs. In addition, in connection with hotel agency transactions, we provide an allowance for doubtful accounts based on past experience and the age of commissions receivable.

Valuation of Goodwill . We have recorded goodwill related to businesses we have acquired including Booking.com B.V., Booking.com Limited, Travelweb, the Agoda Companies and priceline.com europe Ltd. Goodwill is reviewed at least annually for impairment using appropriate valuation techniques. In the event that future circumstances indicate that any portion of our goodwill is impaired, an impairment charge would be recorded.

Valuation of Long-Lived Assets and Intangibles. We evaluate whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets and intangibles may be impaired or not recoverable. The significant factors that are considered that could trigger an impairment review include changes in business strategies, market conditions, or the manner of use of an asset; under performance relative to historical or expected future operating results; and negative industry or economic trends. In evaluating an asset for possible impairment, management estimates that asset’s future undiscounted cash flows to measure whether the asset is recoverable. If it is determined that the asset is not recoverable, we measure the impairment based on the projected discounted cash flows of the asset over its remaining life.

• Airline Debit Memos. Our airline suppliers periodically send us debit memos that make claims for additional amounts due to them related to the cost of airline tickets we sold on their behalf. We process the debit memos received and, when appropriate, make payments to the airlines. Based on our historical experience and our contractual arrangements with the airlines, we establish reserves for estimated losses when appropriate resulting from these claims.

Results of Operations

Year Ended December 31, 2007 compared to Year Ended December 31, 2006

Operating Metrics

Our financial results are driven by certain operating metrics that encompass the selling activity generated by our travel services. Specifically, sales of airline tickets, hotel room nights and rental car days capture the volume of units purchased by our customers. Gross Bookings capture the total dollar value inclusive of taxes and fees of all travel services purchased by our customers. International gross bookings reflect gross bookings generated principally by websites owned by, operated by, or dedicated to providing gross bookings for our international brands and operations, and domestic gross bookings reflect gross bookings generated principally by websites owned by, operated by, or dedicated to providing gross bookings by our domestic operations, in each case without regard to the location of the travel or the customer purchasing the travel.


MANAGEMENT DISCUSSION FOR LATEST QUARTER


Overview

General . We are a leading online travel company that offers our customers a broad range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services. In the United States, we offer our customers a unique choice: the ability to purchase travel services in a traditional, price-disclosed manner or the opportunity to use our unique Name Your Own Price ® service, which allows our customers to make offers for travel services at discounted prices. Internationally, we offer our customers hotel room reservations in 60 countries and 22 languages.

We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include, among others, the brands Booking.com and Active Hotels in Europe and Agoda in Asia. Our principal goal is to be the leading worldwide online hotel reservation service. At present, we derive substantially all of our revenues from the following sources:

• Transaction revenues from our Name Your Own Price ® hotel room, rental car services and airline ticket, as well as our vacation packages service;

• Commissions earned from the sale of price-disclosed hotel rooms, rental cars, cruises and other travel services;

• Customer processing fees charged in connection with the sale of both Name Your Own Price ® and price-disclosed hotel rooms and Name Your Own Price ® airline tickets and rental cars services. We eliminated processing fees for our price-disclosed airline ticket service in June 2007;

• Transaction revenue from our price-disclosed merchant hotel room service;

• Global distribution system (“GDS”) reservation booking fees related to both our Name Your Own Price ® airline ticket, hotel room and rental car services, and price-disclosed airline tickets and rental car services; and

• Other revenues derived primarily from selling advertising on our websites.

Over the last several years, our business has transitioned from one driven primarily by domestic results to one driven primarily by international results. Prior to 2004, substantially all of our revenues were generated within the United States. In September 2004, we acquired Booking.com Limited, a U.K.-based online hotel service, in July 2005, we acquired Booking.com B.V., a Netherlands-based online hotel service, and in November 2007, we acquired Agoda Company, Ltd. (“Agoda”) and AGIP LLC (“AGIP,” and together with Agoda, the “Agoda Companies”), an online hotel service with operations in Singapore and Thailand. During each of the three and nine month periods ended September 30, 2008, our international business – the significant majority of which is currently generated by our European operations – represented approximately 60% of our gross bookings (an operating and statistical metric referring to the total dollar value, inclusive of all taxes and fees, of all travel services purchased by our customers), and contributed more than two-thirds of our consolidated operating income. Given that our international business is primarily comprised of hotel reservation services, revenue earned in connection with the reservation of hotel room nights has come to represent a substantial majority of our gross profit.

Economic turmoil in the United States and Europe is negatively affecting the broad travel market and, as a result, our business. Most recently, global economic and financial market conditions have worsened markedly, creating uncertainty for consumers and pressuring consumer spending on travel. For example, we have recently observed decreases in occupancy rates (a common metric that measures hotel customer usage) and average daily rates (“ADRs”) in both the United States and Europe. We believe that the positive trends impacting our domestic and international business overshadowed these negative influences in the first nine months of 2008. However, market conditions have worsened significantly recently, with particular deterioration in September that continued into early November. We believe macro economic turmoil and these weakening travel market trends, including, without limitation, decreased consumer demand, further deterioration in ADRs and increases in cancellations, have had a negative impact on our business, particularly in Europe and will continue to have a negative impact in the near term. We cannot predict the magnitude or duration of this downturn, but our current limited visibility does not suggest any near-term improvement.

The hotel market has, until recently, been characterized by robust demand and limited supply, leading to increased occupancy rates, and in turn, increased ADRs. However, the hotel industry has recently experienced a general decrease in occupancy rates, and we have experienced slowing demand growth, an increase in reservation cancellation rates and declining ADRs – trends in which we do not anticipate any near-term improvement. While lower occupancy rates have historically resulted in hotel suppliers increasing their distribution of hotel rooms through third-party intermediaries such as us, our remuneration for hotel transactions changes proportionately with room price, and therefore, lower ADRs generally have a negative effect on our hotel business and a negative effect on our gross profit.

We believe the current worldwide economic downturn and lower ADRs are also responsible for the increase in the number of hotel cancellations, particularly at our international operations. Our international operations distribute hotel rooms primarily through an agency model where reservations are generally cancellable, as opposed to merchant models operated by us (principally in the U.S.) and our competition and through which reservations are generally not cancellable without penalty. As ADRs decline, customers who have existing reservations may cancel those reservations and rebook at a lower rate, and in times of economic stress, travelers are more likely to cancel their vacation plans outright. While decreasing ADRs and an uncertain economic environment make it relatively more attractive for consumers to make a cancellable agency reservation than a pre-paid reservation, our agency business will likely have higher cancellation rates compared to companies who offer predominantly merchant model hotel rooms.

International Trends . The size of the travel market outside of the United States is substantially greater than that within the United States. Historically, Internet adoption rates and e-commerce adoption rates of international consumers have trailed those of the United States. However, international consumers are rapidly moving to online means for purchasing travel. Accordingly, recent international online travel growth rates have substantially exceeded and are expected to continue to exceed the growth rates within the United States. In addition, the base of hotel suppliers in Europe is particularly fragmented compared to that in the United States, where the hotel market is dominated by large hotel chains. We believe online reservation systems like ours may be more appealing to small chains and independent hotels more commonly found outside of the United States. We believe these trends have enabled us to become the top online hotel service provider in Europe, and will allow us to successfully expand our service offerings internationally beyond Europe.

As our international operations have become significant contributors to our results and international hotel bookings have become of increased importance to our earnings, we have seen, and expect to continue to see, changes in certain of our operating expenses and other financial metrics. For example, because our international operations utilize online affiliate and search marketing as the principal means of generating traffic to their websites, our online advertising expense has increased significantly since our acquisition of those companies, a trend we expect to continue through the remainder of 2008 and beyond. In addition, and as discussed in more detail below, since the acquisitions of Booking.com Limited and Booking.com B.V., we have seen the effects of seasonal fluctuations on our operating results change as a result of different revenue recognition policies that apply to our price-disclosed services (including our international hotel service) as compared to our Name Your Own Price ® services.

Another impact of the growing importance that our international operations represent to our business is our increased exposure to foreign currency exchange risk. Because we are conducting a significant and growing portion of our business outside the United States and are reporting our results in U.S. dollars, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency (principally the Euro and the British Pound Sterling) into U.S. dollars upon consolidation. Our international operations contributed approximately $223.7 million and $492.3 million to our revenues for the three and nine months ended September 30, 2008, respectively, which compares to $131.8 million and $270.1 million for the same periods in 2007, respectively. Approximately $8.6 million and $31.8 million, respectively, of this increase is due to fluctuations in currency exchange rates. As a result, our year-over-year revenue growth in the three and nine months ended September 30, 2008, was approximately 63.2% and 70.5%, respectively, on a local currency basis compared to approximately 69.7% and 82.3%, respectively, after giving effect to currency fluctuations. The U.S. dollar has generally weakened since we acquired Booking.com B.V. in July 2005, and as a result, the year over year growth rates in our international results, when reported in U.S. dollars, have been positively impacted by changes in foreign exchange rates. However, the U.S. dollar has recently strengthened significantly against the Euro and the British Pound Sterling, which results in decreased net assets, revenues, operating expenses, and net income, and in October 2008, for the first time since our acquisition of Booking.com B.V., the foreign exchange impact was negative rather than positive. Accordingly, it will become increasingly difficult for us to grow our gross bookings, revenues and earnings on a dollar-denominated basis during the fourth quarter of 2008 and beyond. If the U.S. dollar weakens against the local currency, the translation of our foreign-currency-denomina ted balances will result in increased net assets, gross bookings, revenues, operating expenses, and net income. The impact of short-term currency fluctuations on our income for the three months ended September 30, 2008, was minimized by certain derivatives we held. These derivatives expire on December 31, 2008, and we have no foreign exchange hedges currently in place past that date. Furthermore, our derivative instruments do not hedge against fluctuation in our gross bookings.

Domestic Trends . While demand for online travel services continues to experience annualized growth, we believe that the domestic market share of third-party distributors, like priceline.com, has declined over the recent past and that the growth of the domestic online market for travel services has slowed. We believe the decline in market share is attributable, in part, to a concerted initiative by travel suppliers to direct customers to their own websites in an effort to reduce distribution expenses and establish more direct control over their pricing.

In addition, airlines have generally experienced year-over-year increases in load factors (a common metric that measures airplane customer usage), which leaves them with less excess supply to provide third party intermediaries like priceline.com. Recent decreases in domestic airline capacity and the emerging prospect of industry consolidation, as evidenced by the recent merger agreement between Delta Air Lines and Northwest Airlines, could further reduce the amount of airline tickets available to us. In addition, major airline carriers began significant reductions in U.S. capacity in September 2008. These reductions are expected to result in increased fares and lower traveler demand. Higher fares and lower traveler demand could negatively impact our domestic air business, which could in turn negatively impact our domestic hotel and rental car businesses. In addition, current domestic economic conditions are partially responsible for a change in the arrangements between rental car companies and automobile manufacturers. Where manufacturers have historically supplied cars to rental car companies under a lease or another arrangement whereby the manufacturer would buy the car back when it is taken out of the fleet, manufacturers have begun to require the rental car companies purchase the cars for their fleets, which shifts the burden of risk of selling the car to the rental car company. Because of the recent economic turmoil, rental car companies have struggled to sell such cars, and as a result, they are faced with excess supply. This, along with an intensely competitive environment, leads to lower retail rental car rates, which in turn, are beneficial to our retail rental car business, but detrimental to our Name Your Own Price ® business. Notwithstanding these trends, we continue to believe that the market for domestic online travel services is an attractive market with continued opportunity for growth.

We also rely on fees paid to us by global distribution systems, or GDSs, for travel bookings made through GDSs for a portion of our gross profit and operating income. Connectivity to a GDS does not guarantee us access to the content of a travel supplier such as an airline or hotel company. We have agreements with a number of suppliers to obtain access to content, and are in continuing discussions with others to obtain similar access. If we were denied access to a suppliers’ full content or had to incur service fees in order to access or book such content, our results could suffer.

We believe that our success will depend in large part on our ability to maintain profitability, primarily from our hotel business, to continue to promote the priceline.com brand in the United States, the Booking.com brand internationally, the Agoda brand in Asia and, over time, to offer other travel services and further expand into other international markets. Factors beyond our control, such as terrorist attacks, political instability, regional hostilities, increases in fuel prices, global economic slowdown, imposition of taxes or surcharges by regulatory authorities, travel related accidents, travel related health concerns, unusual weather patterns, including natural disasters such as hurricanes, tsunamis or earthquakes; or the withdrawal from our system of a major hotel supplier or airline, could adversely affect our business and results of operations and impair our ability to effectively implement all or some of the initiatives described above. For example, recent civil unrest during the peak booking season in Thailand, a key market for our Agoda business, is negatively impacting booking volumes. We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve operating results. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, mergers and acquisitions. In addition, we currently do not have operations in geographic areas such as South America, and therefore may consider strategic alternatives in those areas. Our goal is to improve volume and sustain gross margins in an effort to maintain profitability. The uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we cannot provide assurance that we will sustain revenue growth and profitability.

Seasonality . Our Name Your Own Price ® services are generally non-refundable in nature, and accordingly, we recognize travel revenue at the time a booking is generated. However, we recognize revenue generated from our retail hotel services, including our international operations, at the time that the customer checks out of the hotel. As a result, a meaningful amount of retail hotel bookings generated earlier in the year, as customers plan and reserve their spring and summer vacations, will not be recognized as revenue until future quarters. From a cost perspective, however, we expense the substantial majority of our advertising activities as they are incurred, which is typically in the quarter in which bookings are generated. Therefore, as our retail hotel business continues to grow, we expect our quarterly results to become increasingly impacted by these seasonal factors.

Results of Operations

Three and Nine Months Ended September 30, 2008 compared to the Three and Nine Months Ended September 30, 2007

Operating and Statistical Metrics

Our financial results are driven by certain operating metrics that encompass the booking activity generated by our travel services. Specifically, reservations of hotel room nights, rental car days and airline tickets capture the volume of units purchased by our customers. Gross bookings is an operating and statistical metric that captures the total dollar value inclusive of taxes and fees of all travel services booked by our customers. International gross bookings reflect gross bookings generated principally by websites owned by, operated by, or dedicated to providing gross bookings for our international brands and operations, and domestic gross bookings reflect gross bookings generated principally by websites owned by, operated by, or dedicated to providing gross bookings by our domestic operations, in each case without regard to the location of the travel or the customer purchasing the travel.

ross bookings increased by 47.4% and 63.3% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. The increase in the three and nine month periods was primarily attributable to growth of 58.6% and 76.7%, respectively, in our international gross bookings, virtually all of which relates to retail hotel room night sales (including the $110 million and $401 million favorable impact of foreign currency exchange rates in the three and nine month periods ended September 30, 2008, respectively). Domestic gross bookings increased in the three and nine months ended September 30, 2008, by 32.8% and 46.9%, respectively, primarily due to growth in the sale of retail airline tickets, Name Your Own Price ® hotel room nights, price-disclosed hotel room nights and Name Your Own Price ® airline tickets.

Agency gross bookings increased 53.8% and 73.3% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, due to growth in our international hotel operations and in the sale of retail airline tickets. Merchant gross bookings increased 28.3% and 35.4% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, due to an increase in the sale of Name Your Own Price ® hotel room nights, the inclusion of room nights sold by Agoda, which was acquired in November 2007, domestic merchant price-disclosed hotel room nights and Name Your Own Price ® airline tickets. Agoda gross bookings amounted to $32.4 million and $81.2 million for the three and nine months ended September 30, 2008, respectively.

CONF CALL

Jeffery Boyd

Welcome to Priceline’s third quarter conference call. I’m here with Priceline’s CFO, Bob Mylod.

Priceline reported consolidated gross bookings for the third quarter of $2 billion, up 44% year-over-year. Pro forma gross profit of $316 million was up 57%. Pro forma EBITDA was $153 million, up 69% and pro forma net income was $117 million or $2.39 per share, up 52%.

Third quarter results surpassed third quarter consensus estimates of $2.10 due to better than forecast results in Europe and the United States. Our international business had a good quarter with 59% bookings growth despite a substantial decline from the beginning to the end of the quarter in the value of the Euro and in hotel ADR’s.

International gross bookings benefited from growth in new markets and results from Agoda, the Asian hotel reservation business we acquired last year which added gross bookings of $32 million in the quarter. Agoda was able to achieve good growth rates despite civil unrest in Thailand, which has materially dampened leisure travel in Agoda’s largest destination market.

Priceline’s domestic business grew 33% in the third quarter due to growth in sales of opaque and retail airline tickets, hotel room nights and vacation packages. Domestic merchant gross bookings which include opaque services and retail merchant hotels grew 19%. We believe that Priceline continued to gain market share on our major competitors during the quarter and delivered superior earnings growth. While it is difficult to make precise forecasts in today’s market, our third quarter results demonstrate our strong competitive position in challenging economic times.

While our international business showed good third quarter growth rates in late September the global financial crisis struck Europe in earnest with widespread instability in major banking centers, deep concern over the safety of bank deposits and ultimately widespread governmental intervention all occurring within a two week time span. A rapid decline in the value of the Euro coincided with these developments.

Not surprisingly, consumer demand in our business perceptibly weakened during this period as consumers processed these events. We have therefore seen deterioration in the key drivers of the business, namely the Euro/Dollar exchange rate, transaction growth rates, ADR’s and cancellations. Given the outlook for the general economy we are forecasting a significant reduction in U.S. dollar denominated international gross booking growth rates.

Of course further negative economic developments such as a fresh wave of instability in the financial markets or high profile financial or industrial company bankruptcies or bailouts which depress consumer sentiment would likely lead to below forecast results. Despite these macro challenges we continue to expand our international hotel platform, building new markets and enhancing the connections among our businesses in North America, Europe and Asia.

Booking.com now has approximately 57,000 hotels in over 70 countries and continues to add inventory and build new destinations. We continue to benefit from growing repeat business to Booking.com and other Booking.com branded sites. Agoda has made good progress in building its direct hotel inventory and its infrastructure for long-term growth in the promising Asian market.

Priceline’s domestic business showed 33% year-over-year growth in the third quarter. We continue to see attractive domestic growth rates which we believe are supported by consumer demand for travel deals in a weak economic setting, attractive inventory from airlines and hotels using our services to round out demand and protect yields and effective marketing of our low price positioning in both opaque and retail markets. The negotiator ad campaign continues to provide a versatile platform for effectively communicating our value proposition and strengthening our brand.

There are wide ranging estimates for future economic conditions with most assuming further deterioration in consumer spending and economic growth in all of our core markets. Our goal is to pursue unit and local currency bookings growth in all of our key markets and maintain operating margins while continuing to build our brands and expand the international hotel platform. We will be more measured in activities which grow our cost structure given the volatility in market conditions.

We do not believe the current economic outlook will put an end to the global secular movement of travel planning and purchase to the Internet. We do believe our brands, superior content and pricing, lean cost structure and strong balance sheet and cash flows position us well to compete in economic down cycles.

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

Robert Mylod

On August 5 earlier this year we announced our second quarter earnings and gave financial guidance for the third quarter and second half of 2008. As has always been typical of the guidance we give our guidance then was based upon an assumption that we would be operating in an economic condition throughout the back half of 2008 that was similar to the economic conditions that existed on that day we gave guidance.

Of course as Jeff discussed, the economic events that happened since August 5 have put the overall travel industry, the online travel industry and therefore Priceline in an environment that looks nothing like the environment that existed 90 days ago. As you can see from the third quarter results fortunately these conditions didn’t crop up in time to significantly affect our third quarter. In fact, our gross bookings, gross profit, EBITDA and earnings per share all came within, or in the case of our profit metrics, well above the range of guidance we gave on August 5.

We are particularly proud of this performance because we were able to deliver these results despite significant headwinds that developed and strengthened towards the end of the quarter. One of these headwinds was foreign currency exchange rates and I intend to discuss FX more in a moment but I did want to point out that our Q3 EBITDA and net income results did benefit from approximately $5 million of FX hedging gains that we recognized in the quarter.

Even without these gains, however, our profits came in well above our expectations and well above first call earnings estimates. Most importantly, it appears we took significant market share from our competitors during the quarter and continued to position our worldwide businesses for continued long-term growth. We were also very pleased with our third quarter cash flows which were very strong and which put us in what we think is a relatively advantageous capital position at a time when capital is very hard to come by.

Specifically, during Q3 we generated approximately $102 million in operating cash flow, up 65% year-over-year. During the quarter we repaid approximately $53 million on the principle amount of our convertible notes. We also invested $123 million to purchase all the remaining minority interest in our Priceline Europe subsidiary and we spent $5.9 million on capital expenditure. Despite this $182 million use of cash associated with these discreet financing and investing activities, we still ended up the third quarter with cash and marketable securities balance that is in excess of our debt balance.

Beyond that we have a $175 million revolving credit facility that is undrawn and doesn’t expire for four years. So as I mentioned, we feel very good about our balance sheet and our liquidity position.

That pretty much covers the major financial highlights from Q3 and Jeff didn’t already cover, so what I’d like to do is revert back to the discussion of the current economic environment that Jeff began because it certainly has significant implications for our immediate earnings outlook.

Jeff has already covered the obvious potential effect that a weak economy is having on our fundamental unit demand for travel. I wanted to discuss a couple other key metrics in some detail.

As we have discussed on previous earnings calls, our gross bookings and earnings are significantly affected by two variables that are heavily driven by macroeconomic factors. First, foreign currency exchange rates. Second, the retail prices at which our hotel partners choose to market their rooms on our web sites. These two variables are critical because a very significant majority of our gross bookings and profits are generated by our hotel room reservation services, most of which are conducted outside the United States in Euros or British Pounds.

To put these words into a little numerical perspective, on the day of our August 5 earnings call the Euro translated into $1.55 and the British Pound translated into $1.95. Those August 5 FX translation rates formed the basis of our second half guidance. As we speak today, the Euro has devalued against the dollar by 17% since August 5 and is now translating at $1.29 per Euro as of the close of business last night. The British Pound devalued at an even faster rate, down 19% to a translation rate of $1.59 per Pound. Both of these rates are also down significantly from their year-ago levels.

As for average selling prices of our hotel rooms (ADR’s), those too have declined very significantly relative to where they were over the summer as our hotel suppliers have cut their selling prices in order to stimulate lagging demand. Our guidance on August 5 was for ADR’s to be roughly flat on a year-over-year basis domestically and down roughly 1-2% on a year-over-year basis internationally, all roughly consistent with summer levels.

Actual third quarter ADR’s were down 1% domestically and down 3.5% internationally with significantly worsening trends towards the end of September that have carried into the fourth quarter. As Jeff mentioned we believe these ADR declines also contributed and continue to contribute to an increase in our reservation cancellation rates which have created yet another headwind for us. Because the fourth quarter is seasonally our weakest for gross bookings, the impact of an increase in cancellation rates on our gross bookings will be more impactful to the fourth quarter as compared to the other quarters.

One last point on FX and ADR rate declines as they relate to our dollar denominated international gross bookings metric. That is that FX rates and ADR’s have a multiplicative impact on each other when calculating gross bookings dollars. So when our blended FX exchange rates for our two main foreign currency is down by nearly 15% year-over-year and international ADR’s on a local currency basis are down by more than 5% year-over-year this means that our international hotel room night sales net of cancellations will have to grow by nearly 25% in the fourth quarter in order for international gross bookings on a dollar denominated basis to just be flat with last year’s levels. That is obviously a very significant headwind. As you will see when we get to our specific numerical guidance for the fourth quarter it is nevertheless our goal and expectation to grow our international gross bookings on a dollar denominated basis in the fourth quarter despite these historically unprecedented headwinds.

The last point I want to make before I give the specific numerical guidance has to do with our outstanding convertible debt and the impact it is having and is expected to have on our future diluted share count. As most of you know in recent quarters our stock traded at levels that were well in excess of their conversion prices and as a result our diluted share count rose to levels exceeding 50 million shares. With our stock trading down significantly as of late, we are now witnessing the opposite effect, namely that our diluted share count has fallen along with our stock price thereby providing a favorable share count comparable in Q4.

There is one other point I would like to make about our convertible notes and that has to do with early conversion activity. As most of you know, the owners of our convertible notes are primarily convertible bond hedge funds almost all of whom have suffered very significant losses and investor redemptions as a result of the recent market turmoil. These investor redemptions have forced hedge funds to liquidate their bond portfolios. As a result, prices across the board for convertible bonds have plummeted and the prices of our convertible notes have plummeted along with the market.

In fact, our convertible notes are now trading at prices that essentially assign no value to the significant option value that is inherent in them and therefore many convertible note holders have opted to convert their notes prior to maturity and receive the intrinsic value of their bonds from us instead of trying to sell them in the open market.

In the past several weeks we have received approximately $50 million face amount of such early conversion notices and as long as the convertible bond market remains in turmoil we expect to potentially see more. As I mentioned earlier we are in a relatively advantageous liquidity position and so we think we believe we have plenty of excess liquidity to repay the principle amount of our convertible bonds with cash with any remaining in the money value repaid through the issuance of common shares.

While this activity has created a little bit of unpredictability with respect to our quarter ending debt balances and cash balances. It does not impact the predictability of our cash net of debt position which was slightly positive in Q3 and is expected to grow nicely in Q4.

I’d also like to point out we generally look at all this activity as good news because by redeeming our notes early we will eliminate any potential future dilution that we would have otherwise experienced if our bonds remained outstanding through maturity and our stock price goes back up to levels we saw earlier this year.

I’d also like to point out this early conversion activity creates a mismatch of timing between when we deliver shares to our convertible note holders for the in the money conversion value of their notes and when we receive shares from our hedging counter parties for our conversion spread hedges. Because of this timing anomaly in calculating the pro forma diluted per share count we use for pro forma EPS we have decided not to give effect the hedging benefit associated with any convertible notes that are converted early until the actual maturity date of the hedge.

Now for fourth quarter guidance. We are looking for total fourth quarter gross bookings to grow by approximately 7.5-17.5% on a year-over-year basis with international gross bookings coming anywhere from flat to up 10% versus last year’s fourth quarter level and domestic gross bookings growing by approximately 22%.

As I mentioned earlier this will be the first quarter in years in which dollar denominated gross bookings will grow at a slower rate than the local currency growth rate. Specifically we expect international gross bookings to grow on a local currency basis by approximately 10-20%. This growth rate is consistent with a continuation of the year-over-year growth rate declines we saw in Q1, Q2 and Q3. However, due to all the negative headwinds I just reviewed we do expect the slope of the decline to steepen significantly as compared to the slop we witnessed during the first nine months of 2008.

We expect pro forma revenue to grow by approximately 12-14% on a year-over-year basis. We expect pro forma gross profit dollars to grow by approximately 12.5-17.5% on a year-over-year basis. As for Q4 operating expenses, we are targeting consolidated advertising expenses of approximately $58-62 million with approximately 90% of that amount being spent on online advertising. We expect sales and marketing expense between $16.5 to $17.5 million. We expect personnel costs excluding stock based compensation to come in between $28-29 million. We expect G&A expenses of approximately $13-13.5 million, information technology costs of approximately $5-5.5 million and depreciation and amortization expense excluding acquisition amortization of approximately $4.3 million.

We expect total below the line positive impact of approximately $2.5 million which is comprised primarily of foreign exchange hedging income. We are targeting pro forma EBITDA of between $60-66 million. We are targeting pro forma EPS of approximately $1.00 to $1.10 per share. Our pro forma EPS forecast includes an estimated cash income tax of approximately $11.5-12 million comprised of international income taxes and alternative minimum tax in the United States. Our pro forma EPS guidance is based on pro forma diluted per share count of approximately 44.6 million shares which is based on last night’s closing stock price of $52.60 per share. As you can see, this is a substantially lower share count than last quarter’s share count due to the convertible note dynamics I just discussed.

As for expected GAAP results we expect to report GAAP EPS of between $0.55 to $0.65 per share. The difference between our GAAP and pro forma results will be driven primarily by the inclusion of acquisition related amortization, stock based compensation and certain income tax expense all of which are non-cash in nature.

Our forecast assumes the Euro versus dollar exchange rate remains at the same $1.29 per Euro as last night’s closing rate. It also assumes there is no material change in the FX relationship between the Pound and the Euro. Our forecasts also assume the ADR’s of domestic hotel service will be down 3-4% as compared to 2007 levels and the ADR’s of our international hotel service will be down about 5-6% year-over-year which is basically about what we are currently running at now.

We think our Q4 forecast is representative of another quarter in which we expect to take market share both in the United States and internationally. From a balance sheet perspective, as I mentioned to you earlier, due to convertible note conversions that are to be processed or will be processed during the quarter we expect our debt balances to be reduced by an additional $75 million as compared to the levels at which we ended the third quarter. Of course it is possible we will pay down even more debt if we see further conversions and as I mentioned we will welcome this activity. We already have plenty of excess liquidity to repay our debt and that excess liquidity continues to grow each quarter which puts us in the position to take advantage of the market dislocations through the early retirement of our convertible notes.

Before I turn the call over to your questions I did want to make a few more qualitative points about our financial guidance. The first point relates to the Q4 guidance I just gave. It has always been our practice to give very detailed financial guidance for any current quarter and we are doing so again today. By definition, forecasting involves predicting an uncertain future. We wanted to say the very real economic uncertainty that is affecting the worldwide consumer and worldwide market places has added a great deal to our own level of uncertainty around our forecast. Our Q4 forecast does its best to quantify how the current market environment, which is clearly very weak, will play out for the rest of the quarter. Our bias is that it will get weaker given the trends we have seen since September but the volatility associated with that trend means there is a significantly greater standard deviation in our forecast with respect to possible upside and possible down side as compared to previous quarters.

As you might surmise, all of this economic uncertainty impacts how we think about 2009. Typically around this time of year we are engaged in our budgeting process for the following year. This year is no different and we are deeply into that process as we speak. However, the format of our budgeting process is different this year in that we are trying to forecast multiple financial performance outcomes based upon multiple potential economic conditions. Until we actually see some stability in the worldwide economy, we will be reluctant to communicate any financial forecasts for 2009.

Therefore, when we announce our Q4 results in February it is unlikely that we will provide a full-year 2009 forecast. What I can say about our 2009 budget process is that regardless of whatever economic scenario ultimately manifests itself we will be striving to achieve several principle goals. First, to grow the unit sales and local currency gross bookings in each of our businesses on a worldwide basis. Second, to continue taking market share in the worldwide online travel market. Third, to maintain the significant operating leverage gained we achieved in 2008.

Lastly, as I hope we have made pretty clear on this call, our numbers are going to be impacted by several variables that will create difficult comps for us in the next several quarters. These variables are not necessarily permanent. Once we see stability, or even a turn around in some of these variables such as FX and ADR’s, our comps towards the end of next year should get easier and should not ultimately impact our overall long-term growth rates.

With that we’d be happy to take your questions.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

13483 Views