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Priceline Group Inc (NASDAQ:PCLN)

Q1 2014 Earnings Conference Call

May 8, 2014 7:30 a.m. ET

Executives

Darren Huston – President and CEO

Daniel Finnegan – CFO and CAO

Analysts

Heath Terry – Goldman Sachs

Justin Post – BofA Merrill Lynch

Douglas Anmuth – JPMorgan

Ross Sandler – Deutsche Bank

Mark Mahaney – RBC Capital Markets

Michael Millman – Millman Research

Dean Prissman – Credit Suisse

Ken Sena – Evercore Partners

Tom White – Macquarie

Mike Olson – Piper Jaffray

Brian Fitzgerald – Jefferies

Kevin Kopelman – Cowen and Company

Operator

Welcome to the Priceline Group's First Quarter 2014 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. Please go ahead, gentlemen.

Darren Huston

Okay, thank you very much. Welcome to the Priceline Group’s first quarter conference call. Thank you for joining us before the market opens this morning in New York. I am here in Amsterdam with Priceline Group CFO Dan Finnegan.

The Group reported consolidated gross bookings for the first quarter of approximately $12.3 billion, up 34% year-over-year, or about 35% on a local currency basis.

Non-GAAP net income was $416 million, up 40% year over year, and earnings per share was $7.81, up 36% versus prior year surpassing Factset consensus estimate of $6.93 per share and our guidance for the quarter. Our customers booked accommodation reservations for 83.4 million room nights in the quarter, up 32% year over year.

Booking.com continues to extend its lead as the world’s largest brand for booking accommodations and continues to increase its year-over-year share of rooms booked in every region it operates in. Booking.com’s platform now has over 455,000 hotels and other accommodations in 200 countries, up 54% over last year. This reflects not only our continued aggressive push into directly bookable non-hotel accommodations but still the attractive worldwide opportunity to acquire traditional hotel properties.

Agoda.com delivered strong transactional growth in the quarter and we are confident that both Agoda.com and Booking.com are gaining share across the Asia Pacific region. High growth rates in these new markets continue to contribute the higher overall group growth as they become an increasing share of our worldwide business.

Priceline.com posted solid 20% growth in gross bookings with strong results in both in air and rental cars. Priceline.com hotel results when combined with Booking.com success in North America reflects hotel market share gain. The Priceline.com team also made good progress reworking much of the plumbing that will allow to improve all aspects of the sites with real time experimentation and to test taking a strong brand and hotel offering aboard with multi-currency capabilities.

Rentalcars.com year is off to a good start with its transition from a completely semiopaque offering to a mixed retail offering behind it. Rentalcars.com customers will now see reviews and have more transparency on the quality of the services they are booking. Results were strong as the team continues to build share in international markets and successfully execute its mobile strategy.

KAYAK delivered impressive profitability in the quarter and early indications from its targeted expansion in Europe are encouraging. I am really pleased with these teams onboarding for the group and a methodical work they do every day to build a wonderful customer experience and sustainable business model for the future.

Mobile continues to be a key focus for all the group companies as we continue to see mobile bookings growth or exceed our desktop growth for all of our brands. Mobile transactions are of course important but the emerging mobile and multi-screen lifestyle is also transforming our customer experience with our companies offering us opportunities to engage with them throughout their travel. This is of course driving more bookings and new booking patterns, but more importantly people engagement with our company’s brands.

The group performed well in the first quarter on both the top and bottom line. Operating leverage stemmed from the beneficial impact of the Kayak acquisition. Our outlook calls for pressure on operating margins in Q2 as we will anniversary that acquisition later this month. We will continue Booking.com successful foray into offline advertising in certain international markets and invest aggressively in online variable channels to profitably build our book of business for the third quarter.

We remain committed to making the smart investments in people, infrastructure, marketing, supply and innovation to allow us to pursue profitable long term growth from a position of strengths and extend our lead as the world’s leading online travel business.

I want to thank our employees around the world for their hard work and dedication and delivering a strong start to the year for their brands and for the group.

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

Daniel Finnegan

Thanks, Darren. 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 2014. 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 and bottom line perspective. Room nights booked grew by 32% in the first quarter, decelerating compared with the unit growth rate of 37% achieved in Q4.

Growth rates were solid across all our key regions and we believe that we again grew our market share in Q1. Average daily rates or ADRs for Q1 2014 were up on a local currency basis by about 3% for the consolidated group.

Rental car days booked were up by 25% for Q1, decelerating compared to 32% growth in Q4. The growth is a blend of strong performance for retail reservations for rentalcars.com and Priceline.com partly offset by a decrease in Name Your Own Price rental car days for Priceline.com.

For the first quarter compared to the prior year, the FX rate for the euro to the US dollar was favourable by about 4%. However the dollar strengthened significantly against many other currencies including those of Australia, Brazil, Turkey, Thailand, Argentina and Indonesia. As a result, currency exchange rate had an overall slightly negative impact on our growth rates expressed in US dollars.

Our Q1 gross bookings grew by 34% compared to prior year. Our Q1 international gross bookings grew by 37% in US dollars and by about 38% on a local currency basis. Gross bookings for our Priceline.com brand business in the US grew by 20%. Performance was strong across retail air, rental car and hotel verticals, including the benefit from increased advertising placements within KAYAK.

Hotel Express Deals also performed well but our Name Your Own Price hotel, air and car services were all down year over year due to limited availability of discounted grades and share shifts to express deals. I will remind you that name your own price impacts merchant gross bookings and disproportionately impacts merchant revenues since we record name your own price revenues on a gross basis while our other revenues are recorded on a net basis.

Gross profit for the quarter was $1.4 billion and grew 37% as compared to prior year. The inclusion of KAYAK in our results contributed about 7 percentage points of inorganic gross profit growth for the quarter. KAYAK revenue amounted to $69 million in Q1 net of intercompany activity.

Our international operations generated gross profit of $1.21 billion, which constituted an increase of 35% as compared to the prior year and 37% on a local currency basis. Gross profit for our US business including KAYAK amounted to $201 million which represented 50% growth versus prior year, excluding the impact of travel transaction tax charges recorded in Q1 2013 that we discussed last year.

Non-GAAP operating income amounted to 35.6% of gross profit for Q1 which is 50 bps better than last year. Operating margins were impacted by 111 bps of deleverage in off-line advertising mainly related to our booking.com TV campaigns and the inclusion of KAYAK offline advertisers.

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 was 200 bps better than prior year. 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 we anniversary the acquisition on May 21.

Operating margins came in 340 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. The favorable ad efficiency results from better than forecasted online ad ROIs, favorable mix of direct business and shift in some off-line advertising spend to Q2 and beyond.

Adjusted EBITDA for Q1 amounted $513 million which exceeded the top end of our guidance range of $450 million and represents 39% growth versus prior year. KAYAK had a nicely profitable quarter and contributed to our bottom line.

Since KAYAK earns much of its revenues click through generated rather than travel consumed, Q1 is a relatively more profitable quarter from a seasonal perspective for KAYAK than it is for our overall business. Kayak contribution to our gross profit and EBITDA growth rate will be less impactful after we lap the acquisition in May.

Non-GAAP net income grew by 40%, and non-GAAP EPS grew by 36% reflecting the impact of a higher fully diluted share count.

In terms of cash flow, we generated approximately $177 million of cash from operations during first quarter 2014 which is about 3% lower than last year. We prepaid income taxes of $346 million in the quarter for booking.com in return for an early payment cash discount. We made a similar prepayment last year in the amount of $224 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 $30 million on CapEx and we repaid about $58 million over 2015 convertible notes upon early conversion by their holders. We also returned $97 million to shareholders through purchases of our common stock. Our cash and investments totaling about $6.7 billion at quarter end are available for general corporate purposes, including additional share repurchases, acquisition and debt repayment.

Now for second quarter 2014 guidance. We’re forecasting total gross bookings to grow by 22% to 32% in US dollars and by 20% to 30% on a local currency basis. With US gross bookings growing by 15% to 20% we expect international gross bookings to grow by 24% to 34% in US dollars and by 21% to 31% on a local currency basis.

Our Q2 forecast assumes that local currency ADRs for the consolidated group will be up by about 1% compared to the prior year period. Our Q2 forecast assumes that foreign exchange rates remain at the same $1.39 per euro and $1.70 per British pound at yesterday’s closing rates. Improved result in average exchange rate that will be stronger by about 6% for the euro and about 10% for the British pound as compared to the prior year. We expect the overall impact of currency fluctuations to be favorable to our growth rates expressed in US dollars.

We have hedge contract in place to substantially shield our second quarter EBITDA and net earnings from any fluctuation to 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 19% to 29% and gross profit dollars to grow by 24% to 34%. We expect the declines in our Name Your Own Price services will impact revenue growth rates in Q2. We expect about 300 bps of deleverage in non-GAAP operating income as a percentage of gross profit compared to prior year, driven by lower online ad ROIs and increased investment in offline advertising expense.

Our approach to online and off-line advertising is consistent with past practice. With the disciplined approach to invest in advertising to build our brands, while delivering demand at an acceptable ROI. Our ROI targets are fluid based upon competitive and marketplace conditions and are set to achieve the right balance between topline growth and bottom-line profitability.

We are investing more heavily in online advertising thus far in Q2 and assume the strategy will be maintained for the remainder of the quarter. Q2 year-over-year online advertising efficiency benefits from the inclusion of KAYAK in our consolidated result but to a lesser extent than Q1, because we lap the acquisition on May 21.

Q2 also reflects some off-line spend that is shifted from Q1 into Q2 as I mentioned a moment ago. For full year 2014 we continue to estimate that we would spend between $220 million and $240 million for offline advertising. Adjusted EBITDA is expected to range between $725 million and $775 million which at the midpoint represents 21% 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 for alternative minimum tax and state income taxes in the US. We are targeting on-GAAP EPS of approximately $11.22 to $12.02 per share which at the midpoint represents 20% growth over prior year.

Our non-GAAP EPS guidance assumes a fully diluted share count of 53.3 million shares based upon yesterday’s closing price $1131.74. We forecast GAAP EPS between $9.67 and $10.47 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.

We’re pleased that the hard-work and talent of our brand teams delivered great results in Q1 and a strong forecast for Q2. Our guidance reflects our actual results to date and our expectation that such a large business comparing against high transaction growth rates. We experienced a pattern of sequential deceleration.

Our forecast does not assume any material change in macroeconomic conditions in general and conditions in the consumer travel market in particular. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Heath Terry of Goldman Sachs.

Heath Terry – Goldman Sachs

Great. Thanks. Darren, when you look out sort of across the landscape of travel, what are you seeing in terms of the willingness of hotels to begin to work with additional platforms, particularly some of the smaller hotels that have long been almost sort of de facto exclusive to Priceline including your own other platforms like KAYAK? And then maybe even more broadly, just the level of sophistication that you're seeing in hotels, and particularly with the larger chains, the franchisees of those hotels in engaging more directly with online?

Darren Huston

I would say generally speaking of course everyone advancing in a way that they think about the role of technology and how they run our operations, a few years ago we would be going out and you’d have to be teaching people how to use the PC. That obviously isn’t the case anymore. I mean I was just in Bucharest in Romania this week and they’ve got fiber optics in Romania, I mean you would have thought and obviously you will need to adjust the model. But the internet is also changing very fast and it’s not only a world of just PCs, it’s now world of tablets and phones and there’s so many options open to hotels that the degree to which we’re catching up technologically there is becoming more confused, and all the different ways that they could be spending their money. And they of course are always looking for the best and lowest cost option to generate demand and I strongly believe we still offer that, I mean given the fact that everything is changed, you can advertise on Google or TripAdvisor, you have to pay money for that just to play.

And a lot of them rely on us to be that provider of demand not just from local demand but demand from all parts of the world, and for any single hotel or even for some of the change it’s difficult for them to get the scale they need to be able to attract customers from the corners of the world, even as much of the technology is advanced. So generally speaking it’s a very dynamic environment, many hotels have channel managers which allow them to plug in the bookings as well as Agoda, they can try things on KAYAK, they can work with other vendors, they can put them on these demand systems, but net, net, most of the hotels I see have a hard time finding the kind of ROI, by doing it on their own, and they would much rather prefer to focus on just running a great hotel. I mean the real secret to success for hotels in this new world is just run a product, have a very differentiated thing and we can help bring the entire world to find them and I think many of them are recognizing that’s the case.

Heath Terry – Goldman Sachs

You mentioned ROI. Obviously you picked up some headlines earlier this month with some comments that you made about the limitations that you found in the social media platforms, the ROI there. Is that just maybe to go beyond the headline, is that something that you feel is sort of an innate limitation of those platforms or is that something that Priceline sees as an opportunity to exploit down the road as either those platforms or customers get more sophisticated around using them for travel purposes?

Darren Huston

So to be clear, we do spend money on Facebook and Twitter and any other platform and we really care deeply understand our offerings and may also work closely with us to try to make this work. That has built a small fraction of our spend and I think that is important to differentiate between kind of primarily brand advertisers, the Coca-Colas and GMs of the world, advertisers like us which are directly response advertisers and for direct response advertisers, these are these large service of audience in the world that just haven't been figured out how to translate that audience into a transaction where Google of course is extremely good at this as our many of them others and my comments there are more wanting to move bigger and faster and I'm sure, and to be honest I think Facebook for instance is making a lot of progress but we would love to have some of these big audience pools to be able to find business at an ROI like we find in other channels, and that's really my comment.

And if anything I would call a general encouragement to continue to – they will be able to figure this out. I think man of these large audience platforms, company like Priceline are the key I think for them breaking the back of the issue, how do they deal a powerful advertising business.

Operator

Our next question comes from Justin Post of Bank of America.

Justin Post – BofA Merrill Lynch

Can you comment a little bit about the positive ROI you're seeing in 1Q and then why you guided a little bit for deleverage in 2Q? I think that also is related to shifting out spend to 2Q. Maybe talk a little bit why you did that. And are you spending more now because you anticipate healthy activity in 3Q?

Darren Huston

Hey Justin, so to be clear we didn't have positive ROIs in Q1, we still had ROI pressure – we had positive ROI but we didn’t have year-over-year. Year-over-year slightly negative not to the extent that have seen thus far in Q2 and we’re forecasting. We had a significant beneficial impact from the inclusion of KAYAK in Q1 and that was built into our forecast, we knew that, that was going to be there. KAYAK also had a better quarter than with the forecast, so that contributed, we get less of a benefit as we move into Q2 from the inclusion of KAYAK because we lap the acquisition and we made a conscious decision that we’re going to invest to an aggressive degree in variable channels and that’s in our actual results to date and in our forecast for the rest of the quarter for online advertising.

For offline advertising if you look at the markets you’re investing in booking.com and KAYAK and Priceline for that matter in the US, UK for booking.com, and Canada there was pretty bad weather in those markets, polar vortex in Canada and US and a lot of snow, flight disruption and we had flooding in the UK. And so we decided to step up guest and not spend as much for offline advertising there and instead deferred it to Q2 where there is still huge amount of travel booking going on for spring breaks and for summer vacation. So that’s why we pushed back on that.

Daniel Finnegan

I would also note that Q2 is really a key period in the online travel space, and certainly in the northern hemisphere. And we’re going to make sure that we – in the channels that we really understand, the variable channels that we’re getting at least if not more than our fair share of your channels, other may be using a lot of couponing and discounting, that’s not traditionally been a way that we build business, we’re going to make sure that the channels are warmed up and the snow leaves and prices get less, we want to be in the market executing because that’s when you really build demand for the summer and we want to make sure that our forecast reflects that.

Justin Post – BofA Merrill Lynch

And maybe one follow-up. As we think about 3Q, the KAYAK acquisition will be lapped, what would you give advice as we start to model 3Q without KAYAK in there?

Darren Huston

We don’t give any guidance beyond Q2 as our normal practice, it will definitely get less benefit in the online ad efficiency from the KAYAK acquisition as we lap it. So I would just assume that there is no built in efficiency from that and then you’ve got to come up with your own estimation as to what you think will happen with just the online ROIs and in the marketplace in general. That’s such a big number in our P&L that it can be very volatile and can have its positive or negative impact on operating leverage.

Operator

Our next question comes from Douglas Anmuth of JPMorgan.

Douglas Anmuth – JPMorgan

I just want to just stick with the KAYAK theme here. Just coming up on the anniversary in a couple weeks, can you just talk how you're thinking about the benefits so far of KAYAK versus the standalone business, and then also how it's driving broader group, how that's grown over last year relative to what you're thinking when you acquired it.

Darren Huston

I would say generally speaking, we’ve seen the meta [ph] is becoming a more important channel for all of the OTA brands in the group and I think bidding and owning meta has taught us a lot about what that means, what does it mean to the other side for somebody selling advertising for those volume advertising and we certainly do a lot of impressive group to share best practice I would say in particular in the area of mobile, KAYAK has been a tremendous addition into the conversation of the group as we try to build our way through how we can drive success in the mobile space.

They also have had a pretty nice impacts on Priceline’s air business, it’s been another area I would flag as a positive. Now the way we run the group is the brands run very independently. We do share across the group, we have sessions around social and mobile and other topics but really it’s up to Steve and his team to drive the results and knowing Steve and his folks, I think they get energized being around other -- group of other really high performing companies and thinking about how they’re going to take their product and lead to their business being the world’s leading meta. And now I'm excited to take settlement with the group, driving some really good results and now the next page for them is to go from being what I would call primarily the US business to becoming very global and they become a number of experiments to that degree that we’re feeling really good about and quite promising.

Operator

Our next question comes from Ross Sandler of Deutsche Bank.

Ross Sandler – Deutsche Bank

Just had two questions. Back to the ROI discussion. So if you strip out the impact from KAYAK we're probably seven quarters into the period where you started to call out ROI pressure. So is the year-on-year decline in ROI ex-KAYAK a function of the geographic mix shift which is natural in the business, or if we look at it on a same geo basis, is the ROI declining there as well? And do you envision a time where booking will have a base of organic traffic that could potentially offset these ROI pressures or not?

And then the second question is one that you've gotten in the past, but TripAdvisor announced this week that they're going to launch assisted book for all channels, smartphone, mobile, and tablet -- sorry, smartphone, desktop, and tablet. How do you view these assisted channels? If we were to see Google implement assisted book do you have any sense of how that could impact your unit economics in hotel?

Daniel Finnegan

Hey Ross, first of all on ROI, you are right, we’ve got pressure now for seven quarters to varying degrees. We saw the back half of 2013 less pressure as we were comping against the periods where the pressure first started until the comps got a little bit easier. I would argue that as you go into the back half this year, maybe therefore the comps are little bit tougher but it’s – we’re not going to give a forecast and it’s very difficult to predict even if we wanted to give long exactly how the market is going to lay out that far into the future.

In terms of geographic shift, won’t give you any details of our marketing ROIs by market but this is too significant of an impact in the consolidated results to – not being more across the board.

Darren Huston

I would probably start off by just saying that TripAdvisor is really partner of ours and we have a very healthy relationship and I would say it’s got even stronger over time and it feels quite data driven and quite symbiotic and we are finding ways together to drive a lot more business in their sort of core products. And when it comes generally to the introduction of new products, the way we think about it is we are always changing on both the ROI as well as the strategic value and I talked about strategic value, it’s just a good experience of a customer. It’s creative of a customer who they book with, as it helped us build customers for the future, or it’s just about a single transaction. And if the strategic value of a particular product is high, for instance Google PPC over the years but then we lean in, then we invest, then we spend more on it, we focus our people on innovating the campaign, we actually even co-create products in those scenarios. If the strategic value is low, obviously we don’t spend heavily, we lean back, we go for really high ROIs, we don’t invest, we might even just partially put product in, or even not participate at all. That’s always the trade off we’re going and I think in the case of [indiscernible], we understand the product really well, [indiscernible] lot of change to try to address some of our strategic concerns but at least on the launch, we decided not to participate, at this time that’s not that we won’t in the future and that is very constructive and I think in the case of TripAdvisor or Google, who introduced the new product, we’re very involved in the discussion and then ultimately they’re going to make their decision, and we will make our decision and that’s how all these things work. So I do feel very comfortable that we are building a bigger and stronger directed to over time and [indiscernible] any partner that we are not afraid to make really difficult decisions because we do every day. And over time it’s smarter to build up a better business.

Operator

Thank you. Our next question comes from Mark Mahaney of RBC.

Mark Mahaney – RBC Capital Markets

I wanted to ask a broad question about alternative accommodations, you given the disclosure that’s become a larger part of your pace, could you talk about the impact of that to the business in terms of -- maybe just in terms of consumers, do you find that this is bringing a broad range of consumers, are you able to increase match rates, what this does to your overall economics, does it help geographic expansion, just does this give you greater depth in each existing market? What’s the impact of the buildout of alternative accommodations on your business?

Darren Huston

Thanks, Mark. I think generally speaking it’s been very positive, because if you think about it when people come to a city, they’re just looking for a place to stay but the scenario under which you arrive [indiscernible] might be with your family and kids, and other ones might be a business trip, maybe you are backpacking or you’re on a Gulf trip with friends, and in a way hotels can satisfy many of those needs but there is other types of accommodations that might never satisfy. For instance, I was talking to some folks about hostel booking and they were telling us, you guys know you’re the number one way that people book a hostel, I mean it’s hard to imagine three years ago that we were like huge in the hospital world – then with the younger consumer, it’s a low ticker, what brings us apparently just on a very low budget.

When you look at Paris, it allows you to find a place you can book for €30 but we also have the George at the bank and you could save for €1000 if you want, so it’s trend for the assortment that really allows us to treat different consumer scenarios and with products that match the needs of the consumer. Specifically vacation rentals, which is kind of the latest in the long tail, or self catered product, it’s becoming a really good deal because vacation rentals are very difficult to book, you go through an email phone with the user, people don’t feel secure about it, also many familiars, the vacation rentals is an upgrade, if they are on vacation, they are also saying on a visa or in Tashkent, so our role of going down the path of accommodation, getting them wired up, making them directly bookable, making them instantly convertible, it’s good work to do and by increasing that assortment, it’s further strengths in booking.com and our other brands as products that consumers want to go to first to really find the accommodation that matches them. But I would say it’s been – it’s really hard work by the way because you should go down the long tail, you’re getting really small places, you’re getting the cities without name, you’re getting to families and holidays but it’s great work in the sense of really reinventing the product that we bring to consumers and it’s really going extremely well.

And one other thing I would say is more people are looking for products like apartments or self-catered product around the world and even hotels are adjusting, you find many hotels in Europe that in the front they are hotels but in the back they’ve got an apartment block, if they are using for families etc. So also seeing that the product within a single hotel can have many variants depending on the user needs that they are trying to address.

Operator

Our next question comes from Michael Millman of Millman Research.

Michael Millman – Millman Research

Could you talk about what impact you're seeing from Trivago on KAYAK in the US? And also on the rental cars, can you talk about what you're seeing in pricing in Europe and the US and what you're seeing in fleet availability in Europe and the US?

Darren Huston

I will let Dan take the second one, rental cars. With regard to Trivago and KAYAK, both of them are – this is not from the FTA site, both are great sources of demand, Trivago in the United States has grown significantly but off to a very low base and we’re participating in that with Trivago, and we use the thing with KAYAK, we try to treat our first demand very independently regardless the act Expedia is the majority owner of Trivago and we won KAYAK, we try to keep Chinese wall between those, that I know Expedia has the same and we’re getting a lot of growth out of both of those sources of bookings today.

Daniel Finnegan

And in terms of rental cars business, Michael, pricing is up low single-digits in the US and down low single digit for our European business. Availability for summer is always a challenge as the team in rentalcars.com does a great job of working closely with the suppliers to make sure we get our fair share of the availability, that’s an ongoing path to make sure we are in the right position. In the US as well as it relates to our Name Your Own Price business, it’s been more challenged each of the big players, the big 3 have partnered with their smaller price alternatives where they can move some excess inventory on weekends and what have you, in the past more typically got to our Name Your Own Price channel, so this is really nothing there, it’s always the challenge for the Priceline team to get at that excess inventory, we will have quarters where we get better results because we’re more successful in quarters like Q1 and what we are projecting for Q2 where it looks like it’s going to be more challenging, the market is healthy and there is not just that many excess cars to move through Name Your Own Price.

Operator

Our next question comes from Dean Prissman of Credit Suisse.

Dean Prissman – Credit Suisse

So as you look at the continued growth of your business, room night growth of 32%, I'm guessing it's combination of both new users and greater wallet share with existing customers. Can you qualitatively discuss the relative importance of each lever? And then I have a follow-up.

Darren Huston

Yeah I would say we have a healthy balance of both new usage as well as repeat. We’re always looking to get both levers in a way I don't feel that healthy to have too much of your business direct because we’ve got to keep casting the net and the fishing net to bring more customer base, clean good franchise. So we have a healthy balance of both, more of our business as Dan mentioned is coming direct which I think is healthy and that includes new customers. But I don’t really want to talk too much about wallet share and other topics which should be confidential.

Dean Prissman – Credit Suisse

And then given the size of the outbound China travel market and even greater potential, beyond the Ctrip relationship, can you update us on your strategy with Booking.com, particularly as one considers the tour group oriented nature of international travel originating from the country?

Darren Huston

We feel very positive about our outbound business from China, it’s one of our fastest growing businesses in the world. We did find just for color that The Malaysian air tragedy where everyone had a bit of a short term impact but we are seeing Chinese in drove right now traveling to North Asia, Southeast Asia, even Europe, US and I think part of this is all nationalities are becoming more comfortable with mid travel or traveling in a do-it-yourself way into the packaged travel, that’s a general trend. We certainly see that with Chinese as well and you can come to Amsterdam I would figure [indiscernible] Shanghai, all the people who have come back, channel bags, and they were definitely traveling on their own, wasn’t group travel and I think you’re going to continue to see that trend, the Internet in some ways makes it more comfortable for even cautious travelers to go out whether couple or as a family versus having to travel as groups. By the way I had spent three years as they have a Microsoft in Japan, even back then Japanese only travelled in groups. So you definitely see a massive change in that Japanese are traveling in alone or with very groups of friends, doing their do-it-yourself travel versus the kind of packages. By the way it doesn’t mean packages are going away any time soon and it’s just that the general trend is for more and more independent travel including among North Asian folks.

Operator

Our next question comes from Ken Sena of Evercore Partners.

Ken Sena – Evercore Partners

Does growth in Facebook and some of the newer channels pose any sort of change to how you think about rate parity over the next few years given that it's a log-in experience? Maybe as you look out over the next few years, how should we think about rate parity and what effect that could have on the competitive landscape?

Darren Huston

I think it’s a good chance to touch on this topic and I would say first, you need to start with the consumer and if anything things are getting more confusing for consumers if you go on to most meta channel despite all the great work that’s been done, most rates are not real deal, there is tax issue, exchange rate issue, lot of wholesale inventory being landed as retail inventory, sometimes you will click on a rate and it goes to a blank website and you try to – use something else. So the whole area of rate in hotels and accommodations I would say unfortunately it’s like backsliding, there’s just a lot of noise in the market and that’s a very important thing that needs to get addressed, by a combination of both gate, and metas, the world just needs more transparency to really rate.

I guess the second point I would make is that new customers get charged more, I mean it's a basic principle of the company, we will not let them charge more, it’s why we have the best price guarantee, it is why we push for transparency in pricing and clarity and we will go to the ends of the earth to make sure they don’t.

So to some degree we need more data on it, we need to more better understand that property is like building a product less on some surgical social channel but we understand the opportunity whether it’s also Google etc. and all of the new ways to market as well as anyone does and we’re monitoring this and creating investment in big data etc to really understand in depth to basically deliver on that basic principle, we will never let our customers get charged more. And that also by the way includes collecting deals that are better than anywhere they will find on the internet and I mean we have thousands and thousands of rates on our sites that if you log in or you are loyal user, those hotels are providing to you to get your business, so we’re in our own a massive marketing channel for hotels to pick a customer that might have shown up somebody else to come to their hotels. And I think that is going to continue going forward. But I actually relish the opportunity to continue to address this and I think we are in a pretty unique position to help bring some sanity to the world of pricing, both because of KAYAK, also because of our position in the marketplace as the world’s leading player in the space.

Operator

Our next question comes from Tom White of Macquarie.

Tom White – Macquarie

Thanks for taking my question. I guess I just wanted to reconcile some of your comments around meta search becoming a more important channel for the OTAs. But I'm also hearing some comments about sort of better direct navigation business in the quarter. If we look at sort of your markets on a geographic, unique basis, is the percentage of traffic you're getting from meta search increasing or decreasing? And then also just on mobile, maybe provide a bit more color around some of the non-transaction engagement you referenced in your prepared remarks.

Darren Huston

Let me take the first comment. We – meta search is an important channel for us but it's not as big as you might think it is, it’s been growing as a percentage of our source demand, we have many other source of demand versus Google, and many other search engines that we buy demand from globally but we also have a very long tail affiliate of EasyJet, providing there and all the way down the line many, many airlines and railroads etc. So if you look at all sorts of paid demand, direct demand is growing search paid demand, within paid demand, meta continues to grow quite well and take some x proportion but it’s not so dramatic, it’s completely shifting that overall landscape – for Q1 it is a positive factor in terms of our advertising efficiency, it’s the trend we’re seeing for some time now, a nice growth in our direct booking business, nice growth in repeat – we talked about our advertising philosophy, the client focused dollars in areas that we think are strategically valuable, we will build the customers that recognize our brand and it’s loyal to it, from the service we can provide them over the long run.

Tom White – Macquarie

And then just on mobile, talked about non-transaction engagement. I was just wondering if there's any more color there, and if you ever thought that that might be a monetizeable opportunity for you somewhere down the line, maybe advertising revenues or something like that.

Darren Huston

I think on that, the way we think about it is – sometimes it’s hard to connect all the pieces but the users will take one of the screen to ultimately book on, we want to give credit to the experience to all the screens that they ultimately use and multiscreen attribution is not simple, so we think we have a fairly strong bit on it in terms of way – whether you use it for entering the system on what devices they are using, to ultimately complete their journey, and then we think all learning is they are using more and more screens to help on their journey, it’s amazing how many screens people touch on the same booking. I think what that’s helping us do is it’s changing – just the booking and into something that improves the entire trip from easy check in to easy Wi-Fi to even comparing thins like guides to the city and other elements of innovation, in some ways it’s almost like the move to increase the number of screens and move to mobile, has the wallet that we are painting on before it was just the desktop and it was a single experience and people would print out their paper based confirmation and that would be it in terms of their digital connection with us. So now everything is digital, many never print the confirmations, they won’t actually go on the confirmation, when they are standing at the bus, or train station and say, taking to my hotel, that you can now do on booking.com and literally give you walking direction, the driving direction to your hotel, as you find things around your hotel, that it’s interesting I would say all of the growth of screens, it’s still early days, but I think we are getting a lot of smarter about thinking of the consumer as holding many screens and then deciding how we interact with that.

I wouldn’t say it’s a big advertising thing necessarily, that’s not our thinking about, it’s much more about how do we become more meaningful in the booking experience rather than just being aggressively do the transaction.

Operator

Our next question comes from Mike Olson of Piper Jaffray.

Mike Olson – Piper Jaffray

For Booking.com in the US, where would you say we are on the spectrum of growth trajectory? Was there some low-hanging fruit in terms of market share gains in the first few quarters of entering the market with the new brand and the big ad campaign, and now it becomes more challenging to gain incremental share? Or is it the opposite, that now with the brand further permeated in the market, it should be easier to leverage the work you've done in building Booking.com in that market?

Darren Huston

I would say that generally speaking it’s still early days, we recently passed 40,000 properties in the United States and to build a property kind of like it takes many years, we’ve gotten now pretty much all the change on board, now we are building independent hotels and really gotten into long tail accommodations, I was talking about a team in Boston the other day, all of P&Ds and things that they have yet to put on the platform. So we are seeing continued growth, there are some markets that are very retail oriented, places like Miami, where we are really bigger, San Diego and other markets that are more wholesale oriented but Orlando is the world place like that we need to continue to chip away but in the way that we grew the rest of our business, it doesn’t all come in one pop, it’s like a continued methodical breaking down walls, moving forward and I feel really good about what our teams are doing in the United States. We are going to continue to expand the number of offices, the amount of engagement we do, the hotels and we’re still at booking.com highly under-indexed in the United States relative to Europe and the degree to which we can continue this hard work there's a lot of growth still ahead of us in that market.

Mike Olson – Piper Jaffray

And then following an earlier question, could you talk about where you are on number of vacation rental properties now on Booking.com? And will you kind of focus on primarily adding portfolios of properties from managers or also individual property owners?

Darren Huston

I think the count today is right at the bottom – vacation rentals at the bottom, we tend to think it’s a 145,000 approximately vacation rentals, we define those as self catered product that includes holiday homes and 144,702, by the way all of our data on the website is real, we’re constantly updating, that’s why I look, but what we are trying to do is build those properties that you can truly confirm, that you know you’re going to be able to stay there, that have electric calendars that are secure, and we started by working with property managers because it’s easy to understand, because it’s like working with the hotel owners, it’s got thousands of rooms, the room impacts the vacation rentals themselves. And we’re building out other some extra net [ph] other products will ultimately allow us to work with individuals vacation homeowners as well. That’s our goal, there is a lot of work to do to get there but you will continue to see this number go up over time because we’re just going to methodically break down the walls and bringing the product on board.

We’re really happy with our production, if you talk to any of players who work with us I think they will highlight to you that booking.com produces extremely well for them and we hope to bring that production to a broader number of accommodations over time. I would say we’re more European planted today because it was a natural place to start we do have vacation rentals in other parts the world but slowly that account outside of our [indiscernible] building as well.

Operator

Our next question comes from Brian Fitzgerald of Jefferies.

Brian Fitzgerald – Jefferies

A couple quick ones. Maybe a quick follow-up on mobile. Anything to call out in terms of engagement as differentiated across your brands or geographies? And then on booking, user reviews up 44% by our estimates year over year, 10% in the quarter. How do you think about -- how you drive review growth there and the efficacy of the reviews, make them more valuable to the traveler?

Darren Huston

I will start with the review question and then – so on reviews, the thing I would like the people is our reviews are all some verified guests and we still have rule that once your review is 14 months old, becomes off the site, so it makes the comps a little bit weird at times because of seasonality. So importantly when you look at that number you always take that into account and the second thing is obviously our ability to attract people, their review changes over time. Right now I am feeling very good if anything engagement is increasing despite the fact that often when you check out of a hotel you get a message from us, from the hotel, maybe somebody else and people are engaging a very deeply in our reviews and our review response rates are very high and keeping our reviews a very high quality and we are proud of that and we feel like we have the largest number of verified reviews for accommodations in the world, of course others have many more reviews but they are not necessarily verified, they are much more open ended in terms of anyone being able to do the review.

I think your other question was on mobile.

Daniel Finnegan

And so we said in the past, the brands are at different stages of maturity in terms of mobile apps and mobile websites, booking.com, KAYAK and Priceline.com are pretty far advanced, all of our brands are getting significant and growing levels of traffic coming to us through mobile devices and we are doing a nice job in growing our mobile bookings are very high rate as well. So from us mobile engagement -- typical level when a customer comes in and look at the [inaudible]

Operator

Our next question comes from [inaudible]

Darren Huston

…Because everyone is trying to figure out this exact question. I think for the group versus others would be very heavily weighted on mobile web, we think that's where you're going to a pickup brand-new transactional customers, somebody standing in airports, staying in either hotel tonight and they open to a web-based record, downloads our app, to necessarily make that, we think our app customers as more of our loyal bookers, we don’t necessarily try to take them down to do their first booking ever, on a mobile app, we are happy with that. But that’s not – that’s been our general way of generating demand with mobile and we also believe that mobile downloads for sure don't lead to engaged booking does and there is a lot of Charlotte [indiscernible] lots of download but it doesn't necessarily ultimately make it a good ROI investments and we’ve got similar views in the past on things like Facebook likes, it’s nice to have but it’s not ultimately leading to a good result and we definitely shied away from.

We also don’t believe strongly and overly interrupting the experience that when you get on mobile app we immediately tell you we will download the app, without letting you get through to the experience, that’s something that differentiates our approach, I think we’re much more about what the consumer experience and quickly getting them into the booking path and learning about what they are going to do next. That’s -- again it's an evolving – there is lots of companies that are trying to implement in the space, we’re building our own tooling, we have a lot of smart people looking at it, I feel very good about our result but it’d be wrong for me to say that we’ve got everything figure that it will work, we’re just trying to get as smart as we can and be ROI focused as much as we can on this space.

Operator

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

Kevin Kopelman – Cowen and Company

Thanks a lot. On KAYAK, you said it delivered impressive profitability. Can you give us any sense of how it compares to overall group margins? And also can you discuss any Easter timing impact for Q1 and to what extent that will offset the Priceline anniversary of KAYAK in Q2.

Darren Huston

So the KAYAK profitability, the KAYAK business is nicely profitable. Some of the competitors talk about the growth rate of their businesses but the profit is more in question. Steve and team have chosen to strike the right balance I think between what they spend to drive topline growth while delivering very healthy margins. So our earnings based upon check out, they are delivering higher relative percentage of their annual profit in Q1, it’s really positive to our margins for Q1.

In terms of Easter timing that is a benefit to Q2 and a detriment to Q1 [inaudible] that’s reflected in our forecast, so Q2 looks better – Q2 looks worse as a result of that shift in terms of our profitability and gross profit growth.

Kevin Kopelman – Cowen and Company

And then a follow-up on vacation rentals. We know it's a large percentage of the properties. Can you give us any sense of how big a factor it is on bookings or room nights growth? Is that a meaningful addition to growth yet?

Darren Huston

Yeah, I think as we have disclosed vacation rentals are not – on average not as big as [inaudible] rentals. So [technical difficulty] educate you on this call but this call is a self-catered hotel with lots of apartments. And there is actually quite a few of those and it’s a growing category particularly in Europe and also in other parts of the world. So we feel like the production in the vacation rentals space is very strong, but always if you look at the growth of our property count it always going to over emphasize the amount of rooms supplied because the supply is still many times, you are getting less rooms for property. It’s not that there is no hotels to acquire requiring many, many hotels to just over time the long tail, per property brings on investments.

Operator

Thank you. And at this time I would like to turn the call back to management for any further remarks.

Darren Huston

No, I want to thank everyone again – this is our first conference call in Amsterdam – it’s our first conference call for Europe hopefully, it’s a signal that we are a global company but I apologize everyone having to get up before the market but I do really appreciate the interest and the engagement and we are looking forward to a great Q2.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.

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