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Priceline.com Inc. (NASDAQ:PCLN)

Q4 2013 Earnings Conference Call

February 20, 2014 04:30 AM ET

Executives

Jeffery H. Boyd - Chairman of the Board

Darren Huston - President and CEO

Daniel J. Finnegan - CFO and CAO

Analysts

Justin Post -Bank of America Merrill Lynch

Dean Prissman - Credit Suisse

Naved Kahn - Cantor Fitzgerald

Heath Terry - Goldman Sachs Group Inc.

Michael Olson - Piper Jaffray

Mark Mahaney - RBC Capital Markets

Ronald Josey - JMP Securities

Ross Sandler - Deutsche Bank AG

Douglas Anmuth - JP Morgan Chase & Co.

Thomas White - Macquarie Research

Aaron Kessler - Raymond James & Associates, Inc.

Brian Fitzgerald - Jefferies & Co.

Kevin Kopelman - Cowen and Company

Brian Nowak - Susquehanna Financial Group

Operator

Welcome to the Priceline Group's Fourth Quarter and Full-Year 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's speakers for this afternoon, Darren Huston and Daniel Finnegan. Go ahead, gentlemen.

Darren Huston

Well, thank you very much. Welcome to the Priceline Group’s fourth quarter conference call. I’m here with Priceline Group CFO, Dan Finnegan.

The Group reported consolidated gross bookings for the fourth quarter of approximately $9.1 billion, up 39% year-over-year. Gross bookings growth accelerated sequentially due to a slight acceleration in the room night growth. For the full-year, the Priceline Group reported gross bookings of $39 billion, up 38% and 271 million room night, up 37%. Our top line growth rates were remarkably steady through 2013, reflecting a relatively more stable economic backdrop and continued forward execution and innovation from our teams around the world.

Booking.com continues to solidify its position of the world leading brand for booking accommodation. In 2013, we continue to build on our differentiated worldwide supply with now over 425,000 hotels and other accommodations in 195 countries, up 54% over last year. Much of the recent growth is also being driven by continued push into non-hotel accommodation, including our 112,000 vacation rental properties that are directly bookable with instant confirmation.

In addition to aggressively growing our number of accommodation partners, the Group invested nearly $2 billion in marketing during the year, including our successful Booking.com offline advertising experiment in the United States. Following that success we intend to continue our offline investment in the Booking.com brand in the U.S in 2014 as well as expand this experiment to other markets.

In September, we launched in Australia and then the past few weeks we also launched off-line campaigns in Canada, and our first European experiment in the United Kingdom. Ads with our online advertising investments, we take a measured, disciplined approach, testing and constantly optimizing, always seeking the best returns for our spend. So far we’re pleased with our results, but there are still more to be done and we continue to invest to build our competencies in this area.

Booking.com’s growth in Europe held out well this year, but its newer markets continue to grow faster, largely comprising an ever larger percentage of the business. Although these markets are sometimes less possible than Booking.com’s core markets, we believe that these investments, position Booking.com to capitalize on what we believe to be an attractive, long-term opportunity.

Over the course of the year, Agoda strengthened its position in the fast-growing Asia-Pacific market making great strides in mobile functionality, accommodation supply and localization efforts. The Group’s Q4 results benefited from the increasing mix of APAC business from both Agoda and Booking.com which seasonally peaks in this quarter.

Momentum in our U.S priceline.com brand continued in Q4, the 27% gross bookings growth and 28% airline ticket growth. Room night growth and rental car day growth also accelerated in the quarter. Strong performance from Express Deals, excellent mobile execution, increased advertising on KAYAK and effective offline advertising contributed to these results.

When you combine priceline.com strong results with Booking.com’s increasing success American bookers, we feel proud of the solid market share gains we’re making in the worlds most competitive online travel market. Also notable for the first time in 2013, the United States became Booking.com’s largest destination.

Rentalcars.com recently transitioned from a semi-opaque offering to more globally appealing retail offering. Early indications are encouraging and we remain excited with rentalcar.com opportunity to expand its business globally and be the world's leading online rental car reservation service.

The Group made good progress in the months following the KAYAK acquisition, expand our presence on KAYAK, but we were previously underrepresented. KAYAK and our other brands have being showing best practices, while KAYAK works to build its brand into international markets and maintain its high pace of product innovation.

Mobile execution and innovation continued to be key areas of focus in investments for all our businesses. Mobile is a prime example of how the Group’s can successfully share knowledge, tools and lessons learned across our brand. To give you a sense of just how fast mobile is changing our business, we previously announced that Booking.com completed just over $1 billion in gross mobile transactions in 2011 increasing this three-fold to 3 billion in 2012.

In 2013 that same number exceeded $8 billion. But mobile is not just about booking; it is also an increasingly important part of our customers' multi-screen lifestyles. We want to support our customers with the best pricing, best assortment and best connective online experience regardless of the screen they use to book with, travel with or stay with.

The Group performed well in 2013 exceeding expectations throughout the year. In my new role as Group CEO, I'm excited by the tremendous potential of each of our brands and by the opportunity to work with our talented and dedicated people around the world. Going forward we intend to continue building our brands by making investments in marketing, people, supply and product innovation to drive long-term profitable and sustainable growth.

I want to thank our employees around the world for their hard work and dedication and delivering a terrific year for their bands and for the Group. We look forward to a successful 2014 as well.

I'll now turn the call over to Dan for the detailed financial review.

Daniel J. Finnegan

Thanks, Darren. I'll discuss some of the highlights and operating results and cash flows for the quarter and then provide guidance for the first quarter of 2014. Growth rates mentioned in my remarks are in relation to the prior-year comparable period, unless otherwise indicated.

Q4 was a strong quarter from a top and bottom line perspective. Strong unit growth, paired with better than forecasted operating margins, drove results that exceeded the top end of our guidance range in all key metrics.

Room nights booked grew by 37% in the fourth quarter, modestly accelerating compared to the unit growth rate of 36% achieved in Q3. Our key European market posted a solid quarter and our unit growth rate also benefited from our fast-growing Asia Pacific and South American regions which represent a larger percentage of our business for the quarter due to seasonality.

Performance was also strong in North America and I believe that we again grew our market share across all our regions in Q4. Average daily rates, or ADRs, for Q4 2013 were up on a local currency basis by about 2% for the consolidated group. Rental car days booked were up by 32% for Q4 compared to prior year, accelerating compared to 28% growth in Q3 driven by strong performance for rentalcars.com and priceline.com.

For the fourth quarter compared to the prior year, the FX rate for the euro to the U.S. dollar was favorable by about 5%. However, the dollar strengthened significantly against many Asian and Southern Hemisphere currencies, including those of Australia, Brazil, Japan, Argentina and Indonesia. As a result, currency exchange rates had an overall slightly negative impact on our growth rate expressed in U.S. dollars.

Q4 gross bookings grew by 39% compared to prior year. Our Q4 international gross bookings grew by 41% in U.S. dollars and by about 42% on a local currency basis. Our international business continued to deliver remarkably high growth rates, made possible by our teams around the world, diligently adding accommodations, efficiently driving demand to our desktop and mobile sites and then continuously innovating so we successfully convert traffic into customers that book.

Our priceline.com brand business in the U.S. grew gross bookings by 27%, accelerating compared to Q3 with strong performance across air, rental car and hotel verticals. Priceline.com also benefited from increased advertising placements within KAYAK.

Non-GAAP gross profit for the quarter was $1.3 billion and grew 39% as compared to prior year. GAAP gross profit for the quarter was $1.3 billion and grew 42% as compared to prior year. GAAP gross profit includes a credit in the amount of $6.3 million in Q4 2013 and a charge in the amount of $16.1 million in Q4 2012 related to travel transaction tax litigation.

These exclude the impact of the credit in Q4 2013 and the charge in Q4 2012 for non-GAAP gross profit, non-GAAP operating income, adjusted EBITDA and non-GAAP net income. Consistent with past practice, we exclude significant charges and credits for judgments, rulings and settlements related to travel transaction taxes because the amounts and timing of these items are unpredictable, not driven by core operating results and rendered comparisons with prior periods less meaningful.

The inclusion of KAYAK in our results contributed about 5 percentage points of inorganic gross profit growth for the quarter. KAYAK revenue amounts to $55 million in Q4 net of intercompany activity. Our international operations generated gross profit of $1.15 billion which constituted an increase of 38% as compared to the prior year on both the U.S. dollar and local currency basis.

Non-GAAP gross profit for our U.S. business, including KAYAK but excluding the impact of the aforementioned travel transaction tax items, amounted to $172 million which represented 44% growth versus the prior year. Non-GAAP operating income amounted to 42.7% of gross profit for Q4 and is 106 bps lower than last year.

Operating margins were impacted by 146 bps of deleverage and offline advertising mainly related to our Booking.com TV campaigns in the U.S. and Australia and the inclusion of KAYAK offline advertising.

Q4 personnel expense includes a $12 million charge related to a payroll tax levy in the Netherlands. While there was a similar payroll tax levy in 2012, it was an accident in Q3 that year and we therefore had an unfavorable comp in Q4. Other OpEx also reflects some deleverage as we continue to invest in people, offices and IT-related expenses to support our business growth.

Online advertising expense as a percentage of gross profit is 200 bps lower than prior year. We continue to see pressure on ROIs but to a lesser degree in Q4 than previous quarters. Much of the year-over-year improvement in this metric is due to the inclusion of KAYAK because KAYAK spends relatively less on online advertising as a percentage of gross profit and spending by our other brands for ad placements on KAYAK is eliminated from our consolidated results.

We expect KAYAK to benefit our consolidated online ad efficiency until the anniversary of the acquisition in May. Operating margins came in 234 bps better than assumed in our guidance forecast due to gross profit over-performance, better than assumed ad efficiency and lower than forecasted other operating expenses.

Adjusted EBITDA for Q4 amounted to $578 million which exceeded the top end of our guidance range of $540 million and represents 36% growth versus prior year. Non-GAAP net income grew by 35% and non-GAAP EPS grew by 31% reflecting the impact of a higher fully diluted share count.

In terms of cash flow, we generated approximately $554 million of cash from operations during fourth quarter 2013 which is about 12% higher than last year. During Q4 we spent about $27 million on CapEx and we repaid about $415 million of our 2015 convertible notes.

For full year 2013 we generated approximately $2.3 billion of cash from operations which represents a 29% increase versus prior year. During full year 2013 in addition to the $415 million spent to repay debt, we used about $500 million to buy KAYAK and the remaining minority interest in rentalcars.com, and we returned $884 million to shareholders through purchases of our common stock.

Our cash and investments totaling about $6.8 billion at year end are available for general corporate purposes including additional share repurchases, acquisitions and debt repayment.

Now for first quarter 2014 guidance. We are forecasting total gross bookings to grow by 23% to 33% on both the U.S. dollar and local currency basis with U.S. gross bookings growing by 15% to 20%. We expect international gross bookings expressed in U.S. dollars to grow by 25% to 35% and to grow by 25% to 35% on a local currency basis as well.

Our Q1 forecast assumes that local currency ADRs for the consolidated Group will be up by about 2% compared to the prior year period. Our Q1 forecast assumes that foreign exchange rates remain at the same $1.37 per euro and $1.67 per British pound as yesterday's closing rates, which would result in average exchange rates that would be stronger by about 4% for the euro and about 7% for the British pound as compared to the prior year.

We expect the overall impact of currency fluctuations to be about neutral to growth after factoring in fairly significant devaluation and various other currencies versus the U.S. dollar as compared to the prior year. We have hedged contracts in place to substantially shield our first quarter EBITDA and net earnings from any fluctuation in the euro or pound versus the dollar between now and the end of the quarter but these hedges do not offset the impact of translation on our gross bookings, revenue, gross profit and operating income. Do not hedge our earnings beyond the first quarter, and they do not hedge against further deterioration in currencies other than the euro or the pound.

We expect Q1 revenue to grow year-over-year by approximately 15% to 25% and gross profit dollars to grow by 22% to 32%. I’ll remind you that gross profit is a better indicator of our top line momentum than revenue since we record Name Your Own Price revenues on a gross basis, while our other revenues are reported on a net basis.

For example, the success of our Express Deals service has driven opaque hotel growth in gross bookings and gross profit, but the shift of share away from Name Your Own Price hotel has caused the decline in opaque hotel revenue. We expect about 290 bps of deleverage in non-GAAP operating income as a percentage of gross profit compared to prior year. More than half of the operating deleverage was attributable to growth in offline advertising related to our Booking.com brand and the inclusion of KAYAK off-line advertising. We have been pleased with the results of the offline investment we’ve made in our Booking.com brand thus far in the U.S. and Australia. We recently launched Booking.com offline advertising campaigns in Canada and the U.K. and we will likely continue to invest in additional markets going forward as long as the result continue to be positive.

For full-year 2014 we estimate that the group will spend between $220 million and $240 million for offline advertising. Q1 margin pressure is also caused by a later Easter this year which means all gross profit related to Easter checkouts will be recognized in Q2 this year whereas some benefited Q1 last year. Other OpEx also reflects some deleverage as we ramp our headcount, office and IT expenses to be ready for peak travel season.

Adjusted EBITDA is expected to range between $420 million and $450 million, which at the midpoint represents 18% growth versus prior year. Our non-GAAP EPS forecast includes an estimated cash income tax rate of approximately 15%, comprised of international income taxes and alternative minimum tax and state income taxes in the U.S. We are targeting a non-GAAP fully diluted EPS of approximately $6.35 to $6.85 per share, which at the midpoint represents 15% growth over prior year, including the impact of a higher year-over-year share count.

Our non-GAAP EPS guidance assumes a fully diluted share count of 53.3 million shares based upon yesterday's closing stock price of $1,273.76 and reflects the impact of shares issued and options assumed as part of the KAYAK acquisition, net of shares repurchased over 2013. We forecast GAAP EPS between $5.02 and $5.52 per share for Q1. The difference between our GAAP and non-GAAP results is driven by non-GAAP adjustments that are detailed in our earnings release.

We're pleased by the remarkably strong and steady unit growth the group has delivered over 2013 and that is inherent in our forecast for Q1. Our guidance reflects deceleration in growth experienced to-date in the quarter and our expectation that such a large business comparing against high transaction growth rates will experience a pattern of sequentially decelerating. Our forecast does not assume any material change in macroeconomic conditions in general and conditions in the consumer travel market in particular.

We will now take your questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) Our first question comes from Justin Post of Bank of America. Your line is open.

Justin Post -Bank of America Merrill Lynch

Great, thank you. Hope you can hear me okay. My question is regarding the gross profit guidance for Q1; it looks like a quite of bit of deceleration, maybe you could parse that out. Is it just natural deceleration in the business or are there other factors like Easter that are affecting your outlook? And then when you look out further in the year, are there anything else besides the KAYAK acquisition that you would point out, maybe investors should think about as we work through the year on tougher comps? Thank you.

Jeffery H. Boyd

Hey, Justin. So as far as the gross profit growth the later Easter is definitely a significantly factor, so that will be a shift of gross profit out of Q1 into Q2. Since Q1 is a relatively smaller quarter from a gross profit perspective it has a more significant impact in Q1. We also are forecasting some deceleration as I said in my prepared comments and that would flow through in the gross profit line. For the remainder of the year we gave you some guidance on offline advertising because that’s a difficult one for you guys to model and we have been rolling out for some additional markets. In terms of online advertising we’re not going to give guidance for the expectation for the future other than I did make a comment in my prepared remarks that we will last the KAYAK acquisition is May and that kind of beneficial impact on our online ad efficiency in the year since we’ve owned it.

Justin Post -Bank of America Merrill Lynch

Okay, great. Thank you.

Jeffery H. Boyd

You’re welcome.

Operator

Thank you. Our next question comes from Dean Prissman of Credit Suisse. Your line is open.

Dean Prissman - Credit Suisse

My question, so for your vacation rental properties, is there any color you can share in terms of the profile of your suppliers, specifically is the majority of inventory coming from a number of large property managers or is the base of potential suppliers is far more fragmented. And then just KAYAK, is there any perspective you can share in terms of how you’ve either begun to or intend to apply KAYAK’s technologies across your other brands? Thank you.

Darren Huston

Okay, Dean, this is Darren I’ll take both those questions. First of all on vacation rentals, vacation rentals are real natural extension of our Booking.com’s move into non-hotel accommodation. And as you probably know the vacation rental market is a supply heavy demand starved market place. But our place is different from others because we’re working to make the vacation rentals directly bookable and instantly conformable at scale. And we want ultimately for vacation rentals to be easy to book a hotel room on Booking.com. So there’s a lot of issues to work through and in terms of the early suppliers on Booking.com there are a number of large property management companies in that mix, these are companies that have built the infrastructure to do current bookings, they have like the digital calendars of the home owners, they have exclusive access to the homes. But there’s also a lot of smaller properties as well, apartment blocks, products like this that we’ve been able to bring online and we’re pretty optimistic that we can continue to do that. We’re going to hold a pretty high bar on that ability again to be instantly bookable and confirmable going forward. And then as it relates to KAYAK specifically, I think there’s been outstanding learning particularly in the mobile space and KAYAK to the group got a lot of great thinking in that area and I think it's really benefited all the group companies to be in with conversations with KAYAK. I also think that KAYAK’s approach generally speaking to product development or it's quite consistent with the other brands but together we’ve learned a number of things from that nimbleness in how we can experiment real time things like that. By going forward Steve and team are now taking a really disciplined and methodological approach international expansion and that is very consistent with the way the group works as well and I wholly support that kind of process versus of throwing things out there, they’re really thinking through things and I am quite optimistic about the future.

Dean Prissman - Credit Suisse

Great. Thank you.

Darren Huston

Thank you.

Operator

Thank you. Our next question comes from Naved Kahn of Cantor Fitzgerald. Your question please.

Naved Kahn - Cantor Fitzgerald

Couple of questions, so can you talk about if you’re contemplating any kind of impact from the political investment Thailand in your guidance and then, with regards to the pace of hotel additions, the 225,000 that you have currently does it, it seems to be a nice pickup from the number you reported last time. Does it include – is it fair to assume it's largely because you're also signing up vacation rental properties at higher pace that’s causing the expiration?

Darren Huston

Okay, I’ll again take both those questions. The Thai market there’s a number of things that are happening in January, seems always be a sporadic month. The Thai market has been challenging obviously with the unrest, although we are finding that bookers are finding their way around Thailand. We’re seeing strong bookings in places like Malaysia, Indonesia other sort of South East destinations. But we don’t think obviously we’re a global business so these things aren’t as material to our global result. I’d also highlight of course the winter storms that many of you're experiencing in the United States as well as the floods in the U.K. and the winter Olympics, they all have a tendency to dampen pockets of demand depending on where users are with overall. We don’t think those had a material effect on the global business. And as it relates to our property count, yes, we've been adding a lot of vacation rental properties. These are generally self-catered products. Some of them have one room, some of them may have multiple rooms, but I also want to make sure people understand we are still adding hotels in many, many countries, even countries we've been in for many years like Italy, Spain, France, so the mix of what we're adding has fewer rooms than an average property that we have in the base, but there's still a lot of multi-room properties of various sorts and types that still need to be acquired in the system.

Naved Kahn - Cantor Fitzgerald

Okay. Thanks.

Operator

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

Heath Terry - Goldman Sachs Group Inc.

Thanks. Darren, I was wondering if you could sort of give us a sense of what you're seeing within advertising, customer acquisition costs particularly around mobile, whether it's on the app download side or even just sort of the more straightforward customer acquisition through search or some of the other alternative channels that you have. As you think about sort of lifetime value of your app customers, how are you thinking about allocating budget between those channels that you have available to you?

Darren Huston

Yes. Thanks, Steve. We don't give out conversion ROI data things like this probably are very proprietary, but I would say at the highest level. Mobile is obviously an interesting area and mobile comes in various forms. People say mobile, it's such a broad concept. But you actually have to get into either web based mobile or app based mobile and then you got to talk separately about tablets and phones. And as mobile has increased the mix of our business, mobile is tending towards becoming more PC like. It's interesting how we talked about in mobile how it's all last minute booking or app based, but in fact over time, people are starting to view even more regular types of bookings on mobile phones and tablets. Tablets used to be a product of the rich and the wealthy, but more and more they're becoming very mainstream and begin to behave very much like a laptop or another device. So we think mobile is generally a net positive for an online travel agent because it increases the number of screens that we can market against. It improves the experience of our customers, but figuring out exactly where to send money and how to attract customers is still an ongoing art. We meet regularly as a group to discuss these things to really, really be smart about it because sometimes you can get – fads can happen and people can go out chasing downloads, but if people download apps and they never use them, those aren't very valuable. So we think we've got a pretty good handle now on what the ROI is of a mobile download versus a mobile app they'll actually convert. But we continue to try to learn in that space. I would say we certainly have a lot of caution about going and chasing downloads (indiscernible) and we think a lot through that. The other really important thing is many people will book on one device but then experience on another device or they'll start the booking on one device and then pick up the same search on another device. So we're working a lot to connect their screens so that single account users can really reflect their experience regardless of the screen that they're using and I think that is obviously a new phenomenon that people are starting to figure out and I think in general we've got a pretty good handle on it.

Heath Terry - Goldman Sachs Group Inc.

Great. Thanks very much.

Operator

Thank you. Our next question comes from Mike Olson of Piper Jaffray. Question please.

Michael Olson - Piper Jaffray

Hi. Good afternoon. You talked a lot about continuing the offline marketing aggressively and is the ongoing aggressive spend in offline investments that would otherwise be made in online marketing channels or is it an investment in marketing that kind of would otherwise follow the bottom line? In other words, would you just be spending those dollars anywhere or what's the tradeoff you're making with spending more on offline tradeoff versus more online marketing or tradeoff versus higher profitability, or is it some combination?

Darren Huston

Okay. Well, I would say it's not a tradeoff. In all of our online channels we're optimizing ROI and we're not moving money from the online spend into the offline spend. The offline spend is – we also treat methodically and we're creating tools and figure out how to use offline spend as a new way to acquire customers and we compare that spend both from an immediate booking perspective as well as a lifetime value perspective against all of our online channels. So you can think about it as adding a leg to our marketing stool and trying to make that as data driven as all the success we've had on the online side. We got into this really from an experiment standpoint because the Booking.com brand in particular is broadly used, but it doesn't have very high AETAS [ph] awareness. These are in our more mature markets. And the bet is basically by increasing AETAS awareness through effective offline marketing. Can we get more earnings, more cash flow in the business from that betting? Could it make economic sense relative to other investments? So it's not a tradeoff but it's certainly all of our marketing investments are compared against one and other regardless of channel or regardless of their offline or online and that's the standard that we hold the entire group to and this is just giving us a few more options. And ultimately it does also allow us to go more directive for the future.

Michael Olson - Piper Jaffray

Thank you.

Operator

Thank you. Our next question comes from Mark Mahaney of RBC Capital Markets. Question please.

Mark Mahaney - RBC Capital Markets

I think you had said an interesting factoid about the U.S. is now the largest destination for Booking.com and it sounds like that's after years of building up a presence in North America. I would think long-term, however, that that would change again given that the size of the European and Asia travel markets are of the same or they could be the same or bigger than the U.S. market. How do you think about that? It sounds like a great accomplishment but would you want that to be the case say 5 to 10 years from now? Any general thoughts on that. Thanks, Darren.

Darren Huston

Yes. Thanks, Mark. When we say largest market, we're meaning country market, so that's comparing the U.S. to France or China or Italy independently. I would say at a regional level, Asia shows tremendous promise obviously with the population as does Europe more broadly defined if you include Eastern Europe. So, I think each one of those regions has tremendous potential. In terms of country markets and in the U.S. there's a quarter likely of the world's GDP still and likely a quarter of all travel expenditures. So we would have expected to be truly global. At least today that the U.S. is our largest market, maybe 20 years from now it will China. But at least today that would be a reasonable expectation. But the fact that it's just now becoming our largest destination market still means that there's a lot of growth ahead of us in the United States because it deserves to be significantly larger than it is today.

Mark Mahaney - RBC Capital Markets

Thanks, Darren.

Darren Huston

Thanks.

Operator

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

Ronald Josey - JMP Securities

Thank you for taking the question. I wanted to ask maybe, Darren, a little bit more about the seasonality. I know you said that while the bookings in the quarter came from Asia Pac and South America, particularly good to having the best quarter. I guess 4Q is always the seasonally highest quarter. So can you talk a little bit more about just the contribution from Asia Pac and South America? And for South America particularly, is it doing so well because of North American travelers using Booking.com? Thanks.

Darren Huston

Yes. Maybe I'll get Dan first to just talk a little bit about the seasonality of the business and I'll make some comments geographically.

Daniel J. Finnegan

So seasonality, Ron, Q4 and Q1 to a lesser degree are typically the peak season for South America and Asia Pacific, and so we see it particularly in Q4 we feel the impact of those faster growing regions representing a larger percentage of our total gross bookings driving up our consolidated growth rate. Then you start to move into Q1, also was an important quarter for those regions, but you also now see North America and Europe those bookings start to kick-in for Easter and summer checkouts. So it's a little less pronounced in Q1.

Darren Huston

Just regarding South America specifically, it's interesting. South America itself is very dependent on inner regional travel. South America is generally long ways from other places. But if you get up to the northern part of South America or into the Caribbean, Central America, it becomes more and more dependent on American bookers, particularly if you get into Mexico or Caribbean and that has really benefited as the destination as we've grown in America with American bookers. I would also add though that we were quite early into Brazil and Argentina, so our business there is both strong from an inbound basis but also among Brazilians and Argentineans and many of those end up coming to places like Miami, East Coast of America and that's helped that business as well. So, I feel like we've got a great presence in South America but also still again so much more to do than where we are today.

Ronald Josey - JMP Securities

Great. Thank you.

Operator

Thank you. Our next question comes from Ross Sandler of Deutsche Bank. Your line is open.

Ross Sandler - Deutsche Bank AG

Thanks, guys. Just a high-level question on mobile, is the mix of mobile transactions similar in terms of percentage coming from pay channels versus organic channels relative to your base business in desktop? And within those pay channels are they similar or the ones that are working similar as to desktop i.e. search versus kind of affiliate and other in mobile? Thanks.

Darren Huston

Well, Dan, do you want to take the first cut of that?

Daniel J. Finnegan

Yes. Well maybe I'll just quickly comment. The -- within mobile, again you have got tablet and phone and then you have got app versus web. And app is just a very different thing because you’re getting the app and then the businesses generally exclude to redirect bunch of a clarity app, but the place you got to get the app downloads can vary. But as it relates to web based mobile, it is relatively the same as desktop, although still a lot to work out with regards to the non Google sources, because you can think of all the things that you can think of TripAdvisor, Trivago or an affiliate like easyJet or Ryanair. They don’t necessarily have all the tools to pass us the same amount of mobile businesses as they do with desktop business. But Google specifically is probably -- it's obviously a different business on Google, on the phone because we got less real estate to play with, but they’ve been doing probably the most work here to make it an effective way to buy mobile business over time. Okay?

Operator

Thank you. Our next question comes from Doug Anmuth of JP Morgan. Your question please.

Douglas Anmuth - JP Morgan Chase & Co.

Great. Thanks for taking the question. Darren, I know it’s only been six weeks or so and especially since you’ve been in the new seat. But I was just hoping you could perhaps give us some color on where your -- where you think your thought process might differ most from Jeff’s if it does it all. Obviously, the business has been run extremely well of course in the past, but is there any strategy, geography, marketing initiatives or anything like that you think is perhaps a little bit different going forward? Thanks.

Darren Huston

Thanks, Doug. Well, I think its always important to remember people that I was -- I’ve been running Booking.com before I took on this role for a couple of years and its -- and a lot of the things that philosophies that were developed for the Group, I was very much part of developing and as they say you don't want to fix what ain’t broke. So I really much feel like our strategy of focusing on organic growth potentially looking for opportunistic acquisitions, but not relying heavily on acquisitions for growth. Running independent brand entrepreneurially, all of these facets and probably most importantly in the Group is our focus on the customer and making sure everything we design is around satisfying our end users is really -- I think will continue and I don’t see any major deviations from that path. There are lots of things going on in the Group, and also in the innovation side and those will only be different because the market continues to evolve and it’s very competitive. But I hope that you will see coming out of all the brands, if anything an increased pace of innovation around our product as the landscape continues to evolve and we continue to adjust to that. We’re not afraid to invest, but we definitely have a philosophy that those investments should be in profitable investments and things that can be sustainable for the long-term versus buying business in a non-profitable. I certainly subscribe to those principles and we’re going to continue to execute in that manner.

Douglas Anmuth - JP Morgan Chase & Co.

Okay. Thank you.

Operator

Thank you. Our next question comes from Tom White of Macquarie. Your question please.

Thomas White - Macquarie Research

Hi. Thanks for taking my question. Maybe just a follow-up on the comments in the prepared remarks about U.S becoming the biggest destination for booking. Can you maybe just parse that a little bit whether -- how much of that is the result of U.S point of sale, maybe impact from the offline ad campaign you guys are doing here or versus maybe increased hotel supply making it more compelling for European travelers to or international travelers to travel here? Thanks.

Darren Huston

Yes, thanks Tom. We don’t -- I can’t parse it where the traffic is coming from just because it’s quite proprietary. But I will say it is a combination of all the factors. We’ve been significantly expanding our property base in the United States. We have signed now pretty much all of the chains in the United States. It’s a very chain dominant market. So our products on the shelf is extremely competitive. We have also expanded our teams in the United States. Over a 1,000 people now work for Booking.com in the United States. We have offices across the country and we are going to continue to expand those. So I feel like the products on the shelf is very strong and then that is driven then a lot of engagement in the product by both international travelers as well as domestic travelers. We have always been, for years, strong in cities like New York, which is a big international destination, Miami, San Francisco, but you're seeing increasing strength in cities that are really primarily American destinations and a lot of that is because we are attracting a significantly more American to use our product.

Operator

Thank you. Our next question comes from the line of Aaron Kessler with Raymond James. The line is open.

Aaron Kessler - Raymond James & Associates, Inc.

First on, if you can talk little bit about the KAYAK, how are you looking to integrate with that going forward. I know when you acquired them its kind of more about operating independently, although it does seem like Priceline as well as booking as it integrated a little more. But is there any overview on where you think penetration rates are today for Europe online travel as well as the European mix of Booking.com? Thank you.

Darren Huston

First of all, let me just talk about KAYAK first. We were really -- we felt very much as brands we were underrepresented in KAYAK before the acquisition. And I would say we have taken pretty big steps to get our fair representation within KAYAK. But we are also very careful that KAYAK has to be a marketplace that clears at market rates and we’re going to continue with that principle, because Expedia and other players are also buying into KAYAK and we have no intention to make KAYAK a Priceline Group only marketplace. But I feel good that we’ve gotten the right things there. We are sharing a lot of learnings with them, but the level and depth of integration work has pretty much been done. And Dan, you do want to talk about …

Daniel J. Finnegan

In terms of Internet penetration in Europe, Aaron, I don’t have any specific data to share with you. We look at the same types of reports that you do from the PhoCusWright and others. I’d say that given the growth rates that we continue to post in Europe, it’s clear that the penetration is still ongoing and that there is still a shift to the internet, that’s one of the drivers that’s helping us grow at the rate that we are.

Aaron Kessler - Raymond James & Associates, Inc.

Great, thank you. And just any quick thoughts on the air acceleration in the quarter, what was behind that?

Jeffery H. Boyd

Good execution by the priceline.com air team for one, getting access to discounted rates for opaque, and then it's also been largely helped by integration with KAYAK as we mentioned earlier. So, Priceline is powering book at KAYAK for airline tickets and that’s driven some nice additional business for Priceline.

Aaron Kessler - Raymond James & Associates, Inc.

Great. Thank you.

Operator

Thank you. Our next question comes from Brian Fitzgerald of Jefferies. Your line is open.

Brian Fitzgerald - Jefferies & Co.

Actually we’ve been watching the number of reviews on Booking.com for a while and maybe the proxy fund engagement. And we know it’s a kind of plateaud out towards the end of the quarter and then as inflected up since kind of nicely. Maybe just wondering is that reflective of seasonality, are you going through like a periodic calling process where you’re cleaning up the reviews, making sure they’re fresh; any color there would be great.

Jeffery H. Boyd

Yes, it's a great question Brian. I think one is two things that people don’t, they don’t find obvious that we probably market more on our reviews. One is that, all of our reviews are from verified guests, so by definition you can’t write a review unless you’ve paid. But secondly all the reviews on our site are only 14 months old. So we don’t call any reviews out of the recent reviews, they’re all real guests, bad reviews, good reviews or whatever. But we’ll take the odd review out that uses strong language or mentioned somebody personally [ph]. We’ve never removed the review score itself. But what you’re seeing basically is the seasonality because of its 14 months role and we’re very confident that the rate at which people return reviews is not changing and we’ll see that those counts will continue to increase as the business continues to grow.

Brian Fitzgerald - Jefferies & Co.

Awesome. Thanks guys.

Operator

Thank you. Our next question comes from Kevin Kopelman of Cowen and Company. Your question please.

Kevin Kopelman - Cowen and Company

Hi, thanks a lot. Could you give us anymore color on your TV advertising test in the U.K. and as you approach there any difference given your brand is probably more well know there versus other countries where you reduced TV advertising for Booking.com? Thanks.

Darren Huston

Yes, I would say on the United Kingdom, in Europe despite our strength we're constantly surprised that half the European still know our brand even though many have used us. And the UK is a big important market for us, so this is kind of the obvious next place for us to test. And for us we're just being cognizant and methodical about the cost and the returns, including how brand awareness ultimately drives booking and I think we're getting smarter and smarter about this. So I think the net of it is we're very strong in Europe but we believe that and hope that offline marketing can have a great impact there. But again this is a test and an experiment and if we find that it doesn't have the needed impact, then we'll bring that down. But the UK was also – our ads were trying to use the same content in many markets. We changed the voice over. So if you watched the UK booking ads, you'll notice that they're just down in a different tone. We test those tones with customers. But the voice over in English works very well and that's why to-date all four markets are English speaking markets.

Kevin Kopelman - Cowen and Company

Great. Thank you very much.

Darren Huston

Thank you.

Operator

Thank you. Our next question comes from Brian Nowak of Susquehanna. Your line is open.

Brian Nowak - Susquehanna Financial Group

I have two. The first one you made really strong progress in the U.S. with the Booking.com and branded ad campaign. I guess I'd be curious about your thoughts about strategically couponing or a discounting initiative on mobile or desktop in the U.S. to really drive further growth and market share? And then the second one, in your 10-K geographic breakdown of revenue, other revenues that are non-U.S., non-Europe, non-UK accelerated really nicely to 113% growth in 2013. I assume that's APAC in Agoda. Can you just talk to which countries you're seeing that accelerating growth in and help us understand sustainability from here? Thanks.

Darren Huston

Yes, I'll let Dan take and he'll answer that second question that you're referring to. On the first question, Booking.com is an agency model. That means that the hotels are basically going into the marketplace and setting their own rates. And therefore we don't naturally tend to do a lot of couponing. This is different that Priceline and Agoda with the merchant models would more likely use that as a tactic. There are more things we can do but we like to be sort of an everyday little price option for customers that they know that the prices we have are the lowest they can get in the market. We sometimes do closed user group deals that we collect from hotels and do them just to our logged in and subscribed customers and that seemed to be a pretty effective tactic for us in terms of driving our growth. But couponing specifically is not something that we use on any basis with the agency model and Booking.com.

Daniel J. Finnegan

In terms of that geographic footnote, Brian, it's not going to be very helpful for you in trying to decide for a growth rate for that other column. There's just some shifts there between certain regions and into the Netherlands. And so if you look at the footnote there, that's just a combination of various other subsidiaries that operate outside of U.S. or Netherlands.

Brian Nowak - Susquehanna Financial Group

Okay. Thanks.

Operator

Thank you. At this time, I show no further questions in queue.

Darren Huston

Okay. Well, thank you very much and look forward to talking to you guys again next quarter.

Operator

Thank you, gentlemen, and thank you everyone for your participation. That does conclude the Priceline Group's fourth quarter and full year 2013 conference call. You may disconnect your lines at this time. Have a great day.

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