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priceline.com Incorporated (NASDAQ:PCLN)

Q1 2013 Results Earnings Call

May 9, 2013 4:30 PM ET

Executives

Jeffery Boyd - Chief Executive Officer

Daniel Finnegan - Chief Financial Officer

Analysts

Eric Sheridan - UBS

Brian Fitzgerald - Jefferies

Naved Khan - Cantor Fitzgerald

Heath Terry - Goldman Sachs

Mike Olson - Piper Jaffray

Tom White - Macquarie

Ross Sandler - Deutsche Bank

Mark Mahaney - RBC Capital Markets

Justin Post - Bank of America Merrill Lynch

Ron Josey - JMP Securities

Scott Devitt - Morgan Stanley

Douglas Anmuth - JPMorgan

Aaron Kessler - Raymond James

Stephen Ju - Credit Suisse

Bill Lennan - Monness Crespi

Kevin Kopelman - Cowen and Company

Operator

Welcome to the Priceline Group’s First Quarter 2013 Conference Call. Priceline would like to remind everyone that this call may contain forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals and similar expressions reflecting something other than historical fact are intended to identify forward-looking statements.

For a list of factors that could cause Priceline’s actual results to differ materially from those described in the forward-looking statements, please refer to the Safe Harbor statements at the end of Priceline’s earnings press release, as well as Priceline’s most recent filings with the Securities and Exchange Commission. Unless required by law, Priceline undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise.

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

And now I'd like to introduce the Priceline Group speakers for this afternoon, Jeffrey Boyd and Daniel Finnegan. Go ahead, gentlemen.

Jeffery Boyd

Thank you. Welcome to Priceline's First Quarter Conference Call. I'm here with Priceline's CFO, Dan Finnegan. I will make some opening remarks and Dan will give a detailed financial review. After the prepared portion, we will take questions.

The Priceline Group reported consolidated gross bookings for the first quarter of approximately $9.2 billion, up 36% year-over-year. Non-GAAP net income was $297 million or $5.76 per share, up 35% versus prior year. First quarter results surpassed FactSet consensus estimates of $5.27 per share and our guidance for the quarter.

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

Our international business recorded 43% gross bookings growth on a local currency basis consistent with Q4’s growth rate. Hotel room night growth rates in the latter part of the quarter were better than expected as our forecast for deceleration proved conservative.

Growth rates benefited from good results in Europe and continued high growth rates in Asia Pacific and the Americas. International gross bookings also benefited generally from growth in hotel supply and strong results at Rentalcars.com.

Booking.com's platform now has over 295,000 hotels and other accommodations, up 40% over last year. Booking.com’s growth in Europe has held up well despite the weak economic conditions, particularly in Southern countries and negative news cycles relating to the politics of the debt crisis.

Absolute transaction on local currency growth rates in Europe and non-Europe were steady on average in Q1, leading to no deceleration in room night growth for the consolidated group and we believe market share gains. Booking.com continued its aggressive development of markets outside Europe. These markets continue to grow faster than the core European markets, contributing more to overall growth as they become a larger percentage of the whole business.

Investment in this effort includes people to build their hotel supply and marketing spend, including Booking.com’s offline marketing experiment in the United States. We are pleased with the results of these efforts today and with the resulting levels of room night growth we have sustained over the last year.

Agoda delivered good room night growth in the quarter and is building a leadership position in many of its Asia Pacific markets, particularly for Asia Pacific bookers. With Agoda and Booking.com whose APAC business does particularly well within international bookers, we believe the group has build a valuable franchise in this part of the world with attractive prospects as the region grows.

Priceline’s domestic gross bookings grew 9% in the first quarter due to growth in domestic rental car reservations as well as improved hotel room night gross bookings aided by growth in the Express Deals service. We are pleased with priceline.com’s progress building Express Deals and the response to its new ad campaign featuring William Shatner and Kaley Cuoco.

Merchant gross bookings growth of 27% continues to reflect growth at Agoda and Rentalcars.com. Growth in rental car days increased sequentially from 37% to 43% driven by strong growth at Rentalcars.com and improved results at priceline.com.

While the first quarter is seasonally the smallest earnings quarter for Rentalcars.com, the business continued to perform well as it builds out its international footprint. We have now received the necessary approvals for the KAYAK transaction and currently expect to close the transaction on May 21st.

As we’ve said before, consistent with our history with Booking.com, Agoda and Rentalcars.com, KAYAK will be operated independently by current management and we’re excited to welcome them to the group.

The Group’s business performance exceeded expectations in the quarter and pressure on operating margins in the first quarter did not materialize to the degree of forecast. As you know, it is difficult to forecast future marketing efficiencies, given changing business mix and competitive and seasonal factors.

However, it is important to keep in mind this quarter, the quarter variability and operating margins is not reflective of any change in our philosophy of building our business and brands by investing in geographic expansions supply, product and service innovation and customer acquisition, or how we carry out that philosophy. I want to thank our employees around the world for their hard work and dedication. I will now turn the call over to Dan for the detailed financial review.

Daniel Finnegan

Thanks Jeff. I will discuss some of the highlights and operating results and cash flows for the quarter and then provide guidance for the second quarter of 2013. Growth rates mentioned in my remarks are in relation to the prior year comparable period unless otherwise indicated. Q1 was a strong quarter from a top line perspective. Hotel room nights books grew by 38% in the first quarter consistent with the unit growth rate achieved in Q4.

Our international business saw a solid growth rates in all our key markets. Our priceline.com business achieved accelerating retail and opaque room night growth in the quarter. Average daily rates or ADRs for Q1 2013 were up on a local currency basis by about 1% for the consolidated group.

Rental car days also were up by 43% accelerating compared to the Q4 growth rate of 37%. Rentalcars.com and priceline.com’s rental car services both posted strong quarters. For the first quarter compared to prior year, the FX rate for the euro to the U.S. was favorable by less than 1% and the FX rate for the British pound to the U.S. dollar was unfavorable by about 2%. As a result, the currency exchange rate did not have much impact on our year-over-year growth rate expressed in U.S. dollars for gross bookings, revenue, gross profit, adjusted EBITDA and net income. In summary, strong unit growth rates drove Q4 gross bookings growth of 36%.

Our Q1 international gross bookings grew by 43% in US dollars and on a local currency basis. Gross bookings grew by 9% for our priceline.com brand business in the U.S. Good performance in both retail and opaque reservations services contributed to year-over-year growth. The acceleration of growth compared to the 4% growth rate for Q4 was driven primarily hotel and rental car reservations.

Non-GAAP gross profit for the quarter was $1.03 billion and grew 39% as compared to prior year. GAAP gross profit for the quarter was $1.01 billion and grew 46% as compared to prior year. GAAP gross profit includes an accrual in Q1 in the amount of $20.5 million for travel transaction taxes. Primarily related to unfavorable ruling in the State of Hawaii and the District of Columbia, non-GAAP gross profit, non-GAAP operating income, adjusted EBITDA and non-GAAP net income are adjusted to exclude the impact of the charge. Consistent with past practice, we exclude significant charges and credits for judgments, rulings, and settlements related to travel transaction taxes, because the amount and timing of these items are unpredictable, not driven by core operating results and render comparisons with prior periods less meaningful.

Year over year gross profit growth was helped to an extent by Easter falling on March 31st this year which resulted in some revenue related to the holiday shifting into Q1. Non-GAAP operating income as a percentage of non-GAAP gross profit amounted to 35.1% for Q1 compared to 35.8% for the prior year Q1. The operating margin declined by 70 bps compared to prior year, but was better than our guidance forecast. Margins were impacted mainly by de-leverage in advertising expense. Online advertising grew faster than gross profit due to lower year over year advertising ROIs and the continued mix shift in our business to our international brands which drive their business to a greater degree through online advertising. In addition, we continued to experience faster growth in paid channels for certain of our brands.

We launched our first Booking.com TV advertising campaign in the US in Q1 which also contributed to the pressure on operating margins versus prior year. On the positive side, operating margins were better than our forecast due to less online advertising de-leverage than forecasted and some favourability in other operating expenses. In addition, the aforementioned shift to some Easter gross profit into Q1 benefitted operating margins in Q1 and we exert pressure on operating margins in Q2 in each case compared to the prior year.

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

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

In terms of cash flow, we generated approximately $183 million of cash from operations during the first quarter of 2013, which is about flat with last year. We prepaid income taxes of $220 million in the quarter for Booking.com and return for an early payment cash discount.

We made a similar prepayment last year in the amount of $166 million. These taxes would otherwise have been paid monthly over the year and so subsequent quarters of the year will have a lower payment burden as a result.

We spent about $15 million on CapEx in the quarter. Our cash and investments of $5.2 billion as of March 31, 2013, is available for general corporate purposes, including share repurchases, acquisitions and debt repayments.

Now for second quarter 2013 guidance. We are forecasting total gross bookings to grow by 30% to 37%, and to grow on a local currency basis by approximately 27% to 34% with U.S. gross bookings growing by 5% to 10%. We expect international gross bookings expressed in U.S. dollars to grow by 36% to 43% and to grow on a local currency basis by approximately 33% to 40%.

Our Q2 forecast assumes that local currency ADRs with consolidated group will be up -- less than 1% compared to prior year. Our Q2 forecast assumes that foreign exchange rates remain at the same $1.32 per euro and $1.56 per British pound, as yesterday’s closing rates, which would result an average exchange rates that would be stronger by about 3% for the euro and weaker by about 3% for the British pound as compared to the prior year.

We have hedged contracts in place to substantially shield our second quarter EBITDA and net earnings from any fluctuation in the euro or the pound versus the dollar between now and the end of the quarter. But these hedges do not offset the impact of translation on our gross bookings, revenue, gross profit and operating income, and do not hedge our earnings beyond the second quarter.

We expect Q2 revenue to grow year-over-year by approximately 15% to 22%, and gross profit dollars to grow by approximately 26% to 33%. We expect 400 to 500 bps of deleverage non-GAAP operating income as a percentage of gross profit compared to prior year.

We assume that margins in Q2 will again be impacted by deleverage in online advertising expense due to lower year-over-year ROIs, business mix continuing to shift to our international brands and to pay channels for certain of our brands. We’ll also continue our investment in TV advertising in U.S. market for our Booking.com brand.

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

Our forecast reflects growth in personnel and other expenses as we continue to making investments necessary to keep our current and future growth. As I mentioned a moment ago, Q2 margins compared to prior year are expected to be slightly impacted by the shift of some Easter gross profit into Q1 in 2013.

Adjusted EBITDA is expected to range between $560 million and $595 million, which at the midpoint represent 17% growth versus prior year. We are targeting non-GAAP fully diluted EPS of approximately $8.87 to $9.45 per share, which at the midpoint represents 17% growth over prior year.

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

Our non-GAAP EPS guidance assumes a fully diluted share count of 51.6 million shares based upon yesterday’s closing stock price of $735.27 per share -- for the stock. We forecast GAAP EPS of $7.87 to $8.45 per share for Q2. The difference between our GAAP and non-GAAP results is driven by non-GAAP adjustments that are detailed in our earnings release.

As Jeff mentioned, we received final regulatory approval of the KAYAK acquisition earlier today. Our guidance for Q2 does not include Kayak or any related deal costs. We will include Kayak in our consolidated results from the expected May 21 closing date forward. We believe that the impact of the Kayak acquisition on our non-GAAP EPS for 2013 will be de minimis.

We are pleased by the strong set of unit growth the group has delivered over the last several quarters and that is inherent in our forecast. Our guidance reflects our expectation for sequentially decelerating growth rates for a very large business comparing against high transaction growth rates. We are still concerned about economic conditions on a worldwide basis and in Europe in particular. Our forecast does not assume any material change in macroeconomic conditions in general and conditions in the consumer travel market in particular. Given the uncertainties surrounding worldwide economic conditions, particularly in Europe, where much of our business is concentrated, we believe the variability around our guidance is elevated.

We’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Eric Sheridan of UBS.

Eric Sheridan - UBS

Wanted to talk a little bit about Booking.com in the United States, and sort of early days what you are seeing there from your experience and how you are measuring return on the advertising spending in that market, and how you think about that type of brand advertising offline on a global basis going forward?

Jeffery Boyd

Eric, we are looking at this as an experiment where our approach will be to very carefully measure what the impact of the spend is not only on direct business to Booking.com but in the performance of the brand and the all other channels in which it advertisers aggressively. The results of that, that process of evaluating the data will take place over the course of the year and how we will proceed afterwards is will be driven by the data. Obviously the group has very substantial experience of advertising in the United States on the priceline.com brand and I think the team here has done a good job of very efficiently using a mix of offline and online to drive brand awareness and really effective online advertising and that’s ultimately -- the goal is to try to demonstrate that the Booking.com spend offline will have a positive ROI.

But we haven’t taken any decision to that, given the sort of stage and the process we are in. But as Dan and I both mentioned, we were happy with the results that we’ve seen in the booking.com business outside of the core European market, including North America. And we are excited to continue (inaudible).

Operator

Our next question comes from Brian Fitzgerald of Jefferies.

Brian Fitzgerald - Jefferies

Consistency into the deleverage, yourself and other people in the industry are seeing across the advertising, if you had -- heading your head on, is it impacted more by perhaps Google or other industry competitive pressures, is there more the secular shift into emerging market and you want to get in front of a brand out there and so that’s a more costly advertising dollar?

Jeffery Boyd

I think it would be a mistake to try to attribute it to more or less anyone. We do -- we have a competitive marketplace and that’s certainly reflected in competition for clicks and keywords in some of the biggest and most popular travel markets. So we operate in, we have other markets where there is pressure on hotel average daily rates where there is lot of competition by local players where your brand may not be as strong and so convert as long as strong it is and up in markets where you have been operating for a longer time. So all those things have an impact as well as the unique competitive behaviour of each player in the space has got their own approach and their own specific goals they are trying to accomplish with their marketing spend.

Brian Fitzgerald - Jefferies

Great. Thanks Jeff.

Operator

Thank you. Our next question comes from Naved Khan of Cantor Fitzgerald. Your line is open.

Naved Khan - Cantor Fitzgerald

Thanks. Just a couple of questions. First, in the U.K. very tough comp because of the Olympics last year and then I have a follow up?

Jeffery Boyd

The -- I think the -- it’s always very difficult to assess the impact positive or negative of an event like the Olympics or World Cup Soccer. So I think its fair to say that we have in preparing our guidance made any real account for the fact that the Olympics were last year.

Naved Khan - Cantor Fitzgerald

Okay. Thanks. And then just on mobile, can you talk about how, I know your different brands are performing relative to each other in terms the full penetration in the mobile channel and basically what you see out there?

Jeffery Boyd

I think that our brands are doing a good job in mobile. I think that the level of progress is different at different brands depending on the markets they are primarily operating in, the United States and Western Europe in particular I think we have outstanding apps in mobile functionality and the share of the business is being transacted and mobile channel is being growing very steadily, and I think compares well to some of the numbers that have been published out there by others in our space and similar spaces.

We feel like we are pushing out distinctive functionality that’s attractive to users and its still relatively new markets, so we are very hard to try to figure out what the most sufficient distribution methods are and so forth.

The hotel space is typically is first in line here and I think relatively more advanced than the rental car space and I don’t think that’s vastly difference between us and our competition, and obviously we’re primarily focus on hotel space because that’s our most important market.

Naved Khan - Cantor Fitzgerald

Thank you.

Operator

Thank you. Our next question comes from Heath Terry of Goldman Sachs. Your line is open.

Heath Terry - Goldman Sachs

I was wondering if you could give us a sense of where as booking grows outside of Europe and particularly grows in the U.S. sort of how you are macroeconomic exposure is changing, because obviously with booking growing in U.S. that still sort of falls under at least as we see it international revenue as that shifted enough that maybe there is a difference in where your real macro exposure lies versus the way things are presented in the financials?

Jeffery Boyd

Thank you, Heath. Our ultimate goal is to have the broadest possible diversification of macro risk which you can have with truly global business. Our more specific issue over the last couple of years has been the relatively high concentration of the Booking.com business in Europe as Europe is going through it issues concerning sovereign debt. And we have consistently said and shown that percentage of the business of Booking.com that is in Europe is shrinking every quarter just because it’s business outside of that region is growing faster than Europe business, and that condition and circumstance remains true for the first quarter.

I think it’s a harder question to say, we therefore expose to different macroeconomic risk as our exposure in United States grows and as pure statement of fact, the answer to that is, yes, we have greater risk in United States as our business United States grows. But I’m much, much happier and I think it’s much better for the business as a whole to have a business that has ultimately probably diversified as a travel market that we serve and I think growing our business in the United States is necessary to accomplish that goal.

Heath Terry - Goldman Sachs

With the increase in marketing spending that we are seeing, we’re also seeing an increase in the rate of growth in bookings. And wonder to the extent that all of this focus around delverage on the advertising line has been there, should we continue to expect over time that we do see more of a top line benefit from these investments being made even if it’s on a delayed basis particularly around some of the offline advertising spend, like the television campaigns?

Jeffery Boyd

The way I would answer that is I think that we have gotten a very good performance from our colleagues who are managing the advertising both online and offline for our brands around the world. If you look at the absolute size of our business and to date I think what we could fairly describe is pretty modest deceleration of a very big business. I think the business as a whole is performing very, very well and balancing the desire to build the franchise and drive high level of growth on the one hand and deliver operating margin and profit to shareholders on the other hand.

If we could be criticized for how we are balancing that, I think the only fair criticism would be that we’re not spending in a hot and we are pushing too much towards the margin side. I am very comfortable with the balance we are striking and I tried to make it clear in my prepared remarks that neither the results that we are reporting nor what we are guiding to is representing any change of philosophy on our part. We are with our current course of speed, continue making the investments that we think will pay off, not just in terms of growth today but in terms of earnings down the road. And I think we are doing a decent job striking that balance.

Operator

Our next question comes from Mike Olson of Piper Jaffray.

Mike Olson - Piper Jaffray

Indicated in your comments that you continue to see economic uncertainties in certain regions and that could result in very, very varying results, and that makes sense. But would you say that your level of concern related to economic uncertainty is higher than what it was when you reported Q4 three months ago or is it a level of uncertainty consistent with what you felt over the last three months? And I guess to add on to that, similarly you have a Q2 comp for international bookings growth that significantly easier than Q1, based on that other than kind of the large numbers, what are the regions that you anticipate a deceleration in international bookings growth for Q2?

Jeffery Boyd

So on the first question, the best way I can answer that is to say that we have been pleasantly surprised with the resilience of the travel and consumer that we serve, really in all our markets were times of economic uncertainty, travel is -- we’re leisure travel guys and it’s compelling activity and people are -- they are traveling and booking hotel rooms, and of course airline tickets, some really shaky economic circumstances. I don’t think it would be fair to say that I feel differently about that than or Dan feels differently about that than we did three months ago, I think it’s about the same and the language that we read in the script is exactly the same as what we read three months ago. So I think we feel the same but we are gratified by the resilience of the traveler worldwide.

With respect to the second quarter comp, we looked at the performance of the business in the second quarter last year and the absolute growth rates that we achieved were in our opinion pretty impressive and we also delivered strong operating margins which represented an improvement year over year. And so we feel like that’s a very solid comp against which we have to perform this year.

Operator

Our next question comes from Tom White of Macquarie.

Tom White - Macquarie

So you guys have talked about lower advertising ROIs year-over-year for the past few quarters. Independent of kind of geographic mixes, has there been any change in kind of its trajectory of those ROI declines? Are they worsening, are they stable and has there been any significant recent changes to what kind of what goes into that, say between cancelation rates, the bidding environment or your conversion rates? And then just quickly, offline advertising that looks like there is a little over $20 million in incremental spend versus 4Q is that kind of the new run rate that we should think about going forward? Thanks.

Daniel Finnegan

For the online advertising, ROIs, Tom, we didn’t pullout any significant change in trend there. Jeff pointed out last year. We had a very strong operating margin. We had decelerating growth rates last year. So that typically drives favorability in the margin because you’ve got checkouts that were booked in prior strong growth quarters and then deceleration generally ties together with lower spend in that quarter.

So, I think that’s more of a driver, together we talked about a little bit of shift to ease the gross profit out of Q2 and into Q1 this year. Those would be the bigger factors in terms of margin deleverage from Q1 to Q2. In terms of offline advertising, we said that the runway would be similar to what you’ve seen in the past for Priceline and so that would be a good guide to look at there.

Tom White - Macquarie

Okay. Thank you.

Operator

Thank you. Our next question comes from Ross Sandler of Deutsche Bank. Your question, please?

Ross Sandler - Deutsche Bank

Thanks, guys. As you said two questions, one on the follow-up from the TV campaign and then one on search marketing. So on the TV campaign, do you guys have an idea of how Booking.com brand stacks up again, so we have a brand in Europe from an unaided awareness perspective given that you choose not to do brand building in those markets.

And then on the search question, are you testing the new Google enhanced campaigns in any of your markets you attend? Couple of changes from Google, has there any impact on ROIs and what percent of your transactions are coming from tablet? Thank you.

Jeffery Boyd

With respect to the Booking.com brand awareness in Europe and other markets outside the United States, I don’t have that data with me. It’s something that we track and I would say Booking.com has done a great job of building awareness through its online campaigns in Europe and by virtue of the quality of its user experience and repeat customers.

And I think it’s safe to say that the awareness that Booking.com enjoys in Europe, especially in the markets where it’s been operating for a long time is certainly ahead of what it is here in the United States. And the question is whether it’s an opportunity to take just to try to further improve that brand awareness is something that we continually think about.

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

With respect to Google enhanced campaigns, we typically are very active in advertising and testing and experimenting with all of the new opportunities and tools that Google provides to advertisers. I don’t have anything quantitative to say to you about how much that is and whether it’s good or bad. But we certainly are working with it and that’s just part of our everyday work with Google.

Ross Sandler - Deutsche Bank

Thank you.

Operator

Thank you. Our next question comes from Mark Mahaney of RBC Capital Markets. Your line is open.

Mark Mahaney - RBC Capital Markets

Thanks. Two questions, please. First, on the rental cars business. I know you probably won’t quantify the contribution, but could you provide any more color around that business, the economics of that business, how it compares to some of the other products that you sell or any particular geographic regions where that rentalcars.com property is doing better?

And then secondly, you recently put out a press release that indicated that mobile as a channel was something like mid-teens of our total bookings. It’s a pretty large number. Does that have any material impact one way or another on your advertising ROI, does an increase -- does the mix shift towards the mobile channels negatively or positively impacted investment in any material way?

Daniel Finnegan

So on the rental cars business, Mark, we don’t disclose a lot of data on that but we have said in the past that merchant businesses are typically kind of high teens margins and rentalcars.com also a healthy margin and a profitable business for us. It’s so particularly concentrated in Europe but the team has done a great job in expanding the business outside of Europe, they are expanding into US, Australia. So they continue to just expand into additional markets and perform very well and grow well within their core European market as well.

And the business growth that we have seen with our other businesses, typically there is room for margin expansion together with that and we are pleased with the margins that the business has delivered to date.

Jeffery Boyd

And Mark, with respect to mobile I am not sure about the press release that you quoted but I think we are -- we certainly are driving substantial share of the hotel business in particular through mobile. And we are very excited and pleased by how that’s going. With respect to the impact on advertising and maybe I can address a question that was also asked and I didn’t really cover in my answer, the search advertising in particular on mobile devices is in its very early days. And I think you’ve heard from others that when you look at -- tablet is a mobile device, it tends to look an awful like a desktop in terms of who is using it and where and what the experience is. And so now what we are seeing much more integration of search marketing programs that we are already involved in, on tablets today.

With respect to the handsets on the other hand, I think the search marketing is still very much in its early days. Like everybody else we are investing in it but I don’t believe that what’s going on in the mobile market right now is in any way a prime driver of our broad experience in terms of advertising efficiency.

Operator

Our next question comes from Justin Post of Merrill Lynch.

Justin Post - Bank of America Merrill Lynch

First, I don’t know if you’d comment on this but does your outlook assume any deceleration in bookings growth or conversion rates on ad spend in the last two months of the quarter? We know it’s a very back end loaded quarter. And then secondly, on cash flow, use of the cash, post Kayak you’re going to have several billion dollars of cash, if you could tell us the amount you have and other strategic opportunities that you see, Jeff, looking forward in the international markets to kind of deploy that cash over time obviously can’t tell what you are thinking about. But do you see opportunities to use that cash or do you think about returning to shareholders?

Daniel Finnegan

We’re not going to parse it month by month for you Justin. We did say that our guidance does assume sequential deceleration and that’s generally been our mindset, as this is big business, it posted strong growth rates in the prior year. And so we assume sequential deceleration. We don’t talk about what we are seeing in for conversion, so we didn’t give any guidance there. Can’t really help you further with that, other than we gave you the broad advertising efficiency guidance.

Jeffery Boyd

And with respect to cash use, we do believe that there will be opportunities in the future to deploy our cash in our international cash in particular either through investing in the business and growing the business or in acquisitions and as you mentioned, I can’t get specific with that. But we do believe there are attractive businesses out there, we have been reasonably acquisitive as a company. We haven’t done but we are always very active in the market.

And with respect to other uses of cash as we said before, we have been buyers of our common stock and repurchase from time to time. We have an authorization outstanding that is matter of public record, and that will continue to be the case but that’s something we evaluate from time to time.

Justin Post - Bank of America Merrill Lynch

Okay. Appreciate it.

Operator

Thank you. Our next question comes from Ron Josey of JMP Securities. Your line is open.

Ron Josey - JMP Securities

Thank you for taking my question. I want to switch topics a little bit and talk a little about Asia and South America, particularly as we exited summer travel months in those geographies. And I’m wondering if you can talk a little bit about maybe what you saw this past summer season down there versus the other prior year, maybe in terms of like share gains and growth? Thank you.

Jeffery Boyd

I think those markets continued to be very, very attractive markets, as internet penetration grows and as they benefit from fundamental economic growth and gaining affluence. Couple of comments. I think we did well in both markets based on the data available to us in terms of market share. We are comfortable with how we are proceeding. There are couple of specific challenges in those markets that we and I think everybody else has to deal with in Asia Pacific.

It’s a very, very competitive market. And as we’ve said in previous calls, the absolute economics in terms of the pricing of hotels and the competition down there makes it potentially more expensive to those with brand. We are happy and prepared to bear that expanse. But that’s definitely a condition in the market place because, as I’ve said in my prepared remarks I think between Agoda and Booking.com, we are building an outstanding franchise in that region.

And with respect to South America, there are unique operational issues that are brought there. They are particularly in Argentina where the government policy is very, very disruptive to international businesses. It makes it very, very difficult to bring people into the country to help build the business, obviously makes it very difficult to repatriate earnings.

It’s just a very challenging environment for businesses in Argentina and that’s something that we all have to deal with. Having said that, we are working very hard to build our business there. We have a very natural position from which to build because we have so many customers both in Europe and North America who have logical links in travel to South America, and that’s a great footprint from which we can build to go and there with really great market share of international travelers who were in the region. And I think that’s been an advantage for us that those operational challenges are there.

Ron Josey - JMP Securities

Thank you.

Operator

Thank you. Our next question comes from Scott Devitt of Morgan Stanley. Your line is open.

Scott Devitt - Morgan Stanley

I was wondering, Jeff, if you could talk about the -- any greater competition from Expedia that you are seeing, as it relates to the agency program they’ve launched in Europe and any affect that that could be having on CP season in Europe? And then secondly, I think you referenced multiple times on the call to strength the rental cars business and Expedia had noted some weakness due to supply constraints and wonder if you have any view on the differences there in your business versus what the experienced in the quarter? Thank you.

Jeffery Boyd

For, Scott, on the competition question, Expedia is a very strong company and they’ve been competing very aggressively against us for quite some time. Their agency program dates back to the acquisition of Venere, which is many years ago now. So, we think we’ve been doing a decent job in the phase of very robust competition from Expedia.

With respect to Expedia Traveler Preference, that program even thought they have been out for a while in terms of hotels that are fully involved. And it’s still a pretty small number. So they’ve got lot of hotels that are providing agency, but the number there providing both and offered on a combined basis is relatively small compared to 295,000 hotels and book.com is operating with. We’ve had experience with product here in the United States because we offered it on priceline.com. We think we understand how it works and we are comfortable that we’ve got the product and service to compete very effectively with that going forward. I can’t answer the question as to whether that particular programs have any impact -- having any impact on how they are behaving in online marketplaces, we don’t know that and just can’t ascertain that based on the data that we have in the marketplace.

With respect to rental cars, we are operating a different business from Expedia, Rentalcars.com is a little bit of a different animal than Expedia or Hotwire, although I do know that Expedia owns carentals.com but I think that the market footprint of Rentalcars.com is quite different and has been on a very nice consistent growth path since we acquired and we are happy with what we are seeing there.

With respect to the domestic rental car market, we’ve had good results in the quarter, as Dan mentioned for domestic rental car and we can really only speak for ourselves and what we're seeing. But we did -- we had a good quarter, the performance of the domestic rental car business actually improved sequentially and we were pleased with what we saw.

Operator

Our next question comes from Douglas Anmuth of JPMorgan.

Douglas Anmuth - JPMorgan

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

Daniel Finnegan

Doug, Jeff said I think in our last call and I will say it again. Just mathematically as we start the comp against Q3 and Q4 where our ROIs were under pressure and we saw that our margins coming down year over year. That will provide an easier comp. So we’re not going to give guidance beyond this one quarter but just from a mathematical perspective that’s clearly an easier comp for us.

Operator

Our next question comes from [Kim Shah] of Evercore Partners.

Unidentified Analyst

Just in your prepared remarks you talked about room night growth and your belief that you were gaining share. And I was just wondering if you could provide a little bit more about your confidence in that and also any specific territories where that might be happening more than others?

Jeffery Boyd

Our share gain comment is based on best information we have at the highest level, we see the absolute growth rates that our competition is reporting and we see our growth rates being higher and at the very highest level we say okay, we probably got some share there. Our folks out in the field have their own data but we don’t have anything that is more specific than that, than we would try to if you are on a conference call.

Operator

Our next question comes from Aaron Kessler of Raymond James.

Aaron Kessler - Raymond James

A couple of questions, first, can you comment a little more just on the express deals, looks like you may be pushing that little more on your site, just how you view that versus kind of name your own price going forward, and just curious your thoughts about the vacation rental market, how you view that market and it looks like you may be going down (inaudible) add more inventories that way?

Daniel Finnegan

So we have definitely worked hard to find the optimal way to promote express deals on a website, and that is a function of continuous experimentation to see what gives us the best conversion. We have fabulous group of really loyal name your own price customers who want to use that product who are comfortable with it, who feel they can find the best savings and we want to make it as easy as possible for them to find what they find do so. We’ve got a very strong desire to serve our name your own price loyalists but we also want to make sure that a new customer coming into the website understands where to find Express Deals and that’s especially in the case for somebody who may not be comfortable bidding.

So it’s really, it’s a process of experimentation and what you see today is going be different a month from now. And hopefully, we’ll be engaged in a process where we’re just constantly making that presentation better and more engaging for the consumer.

Daniel Finnegan

And in terms of our vacation rentals, Booking.com has done a great job over the last few years. It changed our language a little bit. We used to talk about hotel count and now we talk about hotel and other accommodations. So they have been fanning out and padding bed and breakfast in hostels and guest apartments to the website.

And our hope overtime is that we would continue to add all types of properties that our customers are interested in staying in and can be booked over the Internet. So I think we’ll continue down that path and they’ve done a great job till now.

Aaron Kessler - Raymond James

Great. Thank you.

Operator

Thank you. Our next question comes from Stephen Ju of Credit Suisse. Your line is open.

Stephen Ju - Credit Suisse

Jeff, interested in what you said earlier about not spending enough. Do you feel like the market is globally are ripe enough that you might be walking away from some of your long-term growth potential but not grabbing land fast enough?

And Dan, I think you said in your prepared remarks that you paid $224 million in taxes for Booking.com versus 166 last year. So if I’m doing my math correctly, it’s implying an FX intact at 35% growth rate, an operating profit dollars assuming no material change to tax rate. So it implies about north of 40% on an FX-neutral basis for Booking.com. It’s just somewhere in the ballpark. Thanks.

Jeffery Boyd

So I’ll let Dan answer the cash flow question. I want you to do that first?

Daniel Finnegan

I wouldn’t necessarily assume that Stephen. So the amount that we pay is subject to what the tax authorities ask us to pay. The growth in the amount certainly is because the business is growing and the tax liability for the year will grow but you can’t -- it's not that clear-cut that you can draw that relationship.

Jeffery Boyd

And with respect to the comment, I’m not spending enough as I tried to say. I think we’re just trying to strike the right balance here. And certainly, the opportunity that we have in front of us is especially in a lot of the new markets where we are standing is just so attractive that I think it would be his mistake for us not to go at that aggressively or to be timid about it because we’re worried about few basis points of margin to leverage in.

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

Stephen Ju - Credit Suisse

Thank you.

Operator

Thank you. Our next question comes from Bill Lennan of Monness Crespi. Your line is open.

Bill Lennan - Monness Crespi

Thank you. On the margin compression topic which seems to be top of the mind but we talk a lot about the cost side and efficiencies. So you had discussed about pricing. So if you talk to hotels, you talk to 100 of small sample size for what you’ve signed but there is a perception that there is a gap between what you charge, what your biggest competitors charge.

So I had just a couple of questions on that. One, what is your price -- how is your pricing behavior over the last year so on an apples-to-apples basis. So are you taking it up at all? And two, if you did chose to raise price, how would you asses your pricing power specifically if you told the typical hotel, we’re taking you from x to x plus 2%. What would their alternatives be? Where would they go?

Jeffery Boyd

I think the short answer to that is that we are not looking to try to drive higher margin through increasing cost to hoteliers. That is not part of our strategy at this time. I think it is true that some other players in the space charge hotels more. When that’s the case, we’d like to take advantage of that disparity so we can compete more aggressively for availability and rooms at times of high occupancy. If we have significant market share and I think with that comes a responsibility to be good partners with our hotels and I don’t think it would be consistent with that to think that it would be a good idea for us to do some sort of across the board price increase just because we were worried about our margins coming down a 100 basis points.

Bill Lennan - Monness Crespi

Then one more on cost if I might. Also we focused a lot on online advertising which of course is a huge piece. But I wonder in aggregate some of the smaller costs, I am just wondering how they are behaving, I am thinking, is it what you pay people occupancy -- what’s the upward pressure on those costs, or your opportunity to realize some margins from say, not the top five costs, but cost number five through 20 in the bucket?

Jeffery Boyd

I think we have done a pretty good job over the last number of years and scaling versus our non-advertising costs. We have had quarters of where the non-advertising operating costs go up a little bit because we need to staff up and enhance high seasoned growth, customer service requirements, aggressive hotel supply goals that we set for the teams and we are prepared to do that. But over the long term those costs have scaled nicely for us and should scale nicely in the future. The very substantial part of that it’s pushing now and we think that to the extent that we are going to be looking for scale there, it’s not going to be -- by trying to put pressure on compensation to our colleagues, I think we have the best people, we want to have the best people, we want to pay them well. So it’s really more about efficiency and how you do your business.

Operator

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

Kevin Kopelman - Cowen and Company

I had a question on currency impact, looks like you are expecting 3 percentage point currency benefit on bookings growth in Q2, are you expecting a similar currency impact on gross profit growth in the quarter?

Daniel Finnegan

Yes, Kevin, the currency benefit would impact all of the lines for our booking.com business.

Operator

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

Jeffery Boyd

Thank you all very much for participating in the call.

Operator

Thank you gentlemen and thank you everyone for your participation. This does conclude your program. You may disconnect your lines at this time. Have a great day.

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