The Priceline Group
PRICELINE COM INC (Form: 10-K, Received: 02/27/2012 17:03:19)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________________________________________________
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 _____________________________________________________________________________________________
 
For the fiscal year ended: December 31, 2011
 
Commission File No.: 0-25581
priceline.com Incorporated
(Exact name of Registrant as specified in its charter)
 
Delaware
(State or other Jurisdiction of Incorporation or
Organization)
 
06-1528493
(I.R.S. Employer Identification No.)
 
 
 
800 Connecticut Avenue
Norwalk, Connecticut
(Address of Principal Executive Offices)
 
06854
(Zip Code)
 
Registrant’s telephone number, including area code: (203) 299-8000
 _____________________________________________________________________________________________
 
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class:
 
Name of Each Exchange on which Registered:
Common Stock, par value $0.008 per share
 
The NASDAQ Global Select Market
 
Securities Registered Pursuant to Section 12(g) of the Act: None .
 _____________________________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   ý  No   o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   o   No   ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý   No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer   x
 
Accelerated filer   o
 
 
 
Non-accelerated filer   o
 
Smaller reporting company   o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o   No  ý
The aggregate market value of common stock held by non-affiliates of priceline.com Incorporated as of June 30, 2011 was approximately $25.2 billion based upon the closing price reported for such date on the Nasdaq Global Select Market.  For purposes of this disclosure, shares of common stock held by executive officers and directors of priceline.com Incorporated on June 30, 2011 have been excluded because such persons may be deemed to be affiliates of priceline.com Incorporated.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of priceline.com Incorporated’s common stock was 49,798,861 as of February 17, 2012.
 


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DOCUMENTS INCORPORATED BY REFERENCE
 
The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth in this Form 10-K, is incorporated herein by reference from priceline.com Incorporated’s definitive proxy statement relating to the annual meeting of stockholders to be held on June 7, 2012, to be filed with the Securities and Exchange Commission within 120 days after the end of priceline.com Incorporated’s fiscal year ended December 31, 2011.
 
priceline.com Incorporated Annual Report on Form 10-K for the Year Ended December 31, 2011 Index
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Special Note Regarding Forward-Looking Statements
 
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements.  These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict, including the Risk Factors identified in Item 1A of this Annual Report; therefore, actual results may differ materially from those expressed, implied or forecast in any such forward-looking statements.
 
Expressions of future goals, expectations and similar expressions including, without limitation, "may," "will," "should," "could," "expects," "does not currently expect," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "targets," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. Our actual results could differ materially from those described in the forward-looking statements for various reasons including the risks we face which are more fully described in Item 1A, "Risk Factors."  Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents we file or furnish from time to time with the Securities and Exchange Commission (the "SEC" or the "Commission"), particularly our quarterly reports on Form 10-Q and current reports on Form 8-K.
 
PART I
 
Item 1.  Business
 
General
 
Priceline.com Incorporated is a leading online travel company that offers our customers hotel room reservations at over 210,000 hotels worldwide through the Booking.com, priceline.com and Agoda brands.  In the United States, we also offer our customers reservations for car rentals, airline tickets, vacation packages, destination services and cruises through the priceline.com brand. We offer car rental reservations worldwide through rentalcars.com (formerly known as TravelJigsaw), which we acquired in May 2010. We refer to Booking.com, priceline.com, Agoda and rentalcars.com collectively as the "Priceline Group," the "Company," "we," "our" or "us."
 
We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include the Booking.com, Agoda and rentalcars.com companies.  Our principal goal is to serve our customers with worldwide leadership in online hotel and rental car reservations.  Our business is driven primarily by international results. During the year ended December 31, 2011, our international business (the significant majority of which is generated by Booking.com) represented approximately 78% of our gross bookings (an operating and statistical metric referring to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by our customers), and approximately 88% of our consolidated operating income. Given that the business of our international operations is primarily comprised of hotel reservation services, gross profit earned in connection with the reservation of hotel room nights represents a substantial majority of our gross profit.
 
Our priceline.com brand in the U.S. offers merchant Name Your Own Price ® travel services (sometimes referred to as "opaque" travel services), which are recorded in revenue on a "gross" basis and have associated cost of revenue. Retail, or price-disclosed, travel services offered by both our U.S. and international brands are recorded in revenue on a "net" basis and have no associated cost of revenue. Therefore, revenue increases and decreases are impacted by changes in the mix of our revenues between Name Your Own Price ® and retail travel services. Gross profit reflects the net margin earned for both our Name Your Own Price ® and retail travel services. Consequently, gross profit has become an increasingly important measure of evaluating growth in our business. At present, we derive substantially all of our gross profit from the following sources:

Commissions earned from price-disclosed hotel room reservations, rental cars, cruises and other travel services;
Transaction gross profit and customer processing fees from our price-disclosed merchant hotel room and rental car reservation services;
Transaction gross profit and customer processing fees from our Name Your Own Price ®  hotel room reservations, rental car and airline ticket services, as well as our vacation packages service;
Global distribution system ("GDS") reservation booking fees related to both our Name Your Own Price ®  airline ticket, hotel room reservation and rental car services, and price-disclosed airline tickets and rental car services; and

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Other gross profit derived primarily from selling advertising on our websites.
 
For the year ended December 31, 2011, we had gross profit of approximately $3.1 billion comprised of "agency" gross profit, "merchant" gross profit, and "other" gross profit.  Agency gross profit is derived from travel related transactions where we are not the merchant of record and where the prices of our services are determined by third parties. Agency gross profit, which represented the substantial majority of our total gross profit in 2011, consisted of: (1) travel commissions; (2) GDS reservation booking fees related to certain of the agency services listed above; and (3) customer processing fees.   Merchant gross profit is derived from transactions where we are the merchant of record and therefore charge the customer’s credit card for the travel services provided, and consisted of: (1) transaction gross profit representing revenue charged to a customer, less the cost of revenue amount charged by suppliers in connection with the reservations provided through our Name Your Own Price ®  hotel room reservation, rental car and airline ticket services, as well as through our price-disclosed vacation packages services; (2) transaction gross profit representing the amount charged to a customer, less the amount charged by suppliers in connection with our merchant price-disclosed services; (3) customer processing fees charged in connection with the sale of our Name Your Own Price ®  airline tickets, hotel room reservations and rental cars and our merchant price-disclosed services; and (4) ancillary fees, including GDS reservation booking fees related to certain of the services listed above.  Other gross profit is derived primarily from selling advertising on our websites.
 
Priceline.com Incorporated was formed as a Delaware limited liability company in 1997 and was converted into a Delaware corporation in July 1998.  Our common stock is listed on the NASDAQ Global Select Market under the symbol "PCLN."  Our principal executive offices are located at 800 Connecticut Avenue, Norwalk, Connecticut 06854.
 
The Priceline Group Business Model
 
We own and operate an online global travel service network that attracts consumers wishing to make travel reservations and connects them in an efficient and innovative manner with suppliers of high quality travel services around the world, including over 210,000 hotel properties.  We offer customers the ability to make hotel reservations on a worldwide basis primarily under the Booking.com, priceline.com and Agoda brands.  In the United States, we also offer customers the ability to purchase other travel services, including airline tickets, rental car days, vacations packages, destination services and cruises through both a traditional, price-disclosed "retail" manner, and through our proprietary demand-collection system known as Name Your Own Price ® .  In May 2010, we acquired TravelJigsaw and in late 2011, we re-branded TravelJigsaw as "rentalcars.com." Through rentalcars.com, we offer retail price-disclosed rental car reservations around the world. 

International: Price-Disclosed Hotel Reservation Services .  We offer a retail price-disclosed hotel reservation service through our international operations, which consist primarily of Booking.com B.V., the world’s leading Internet hotel reservation service, with offices worldwide and priceline.com Mauritius Company Limited (formerly known as the Agoda Company, Ltd.), an Internet hotel reservation service with operations primarily in Asia ("Agoda").  Booking.com works with over 185,000 hotels and accommodations in over 160 countries offering hotel reservations on various websites and in 41 languages.  For geographic related information, see Note 18 to the Consolidated Financial Statements.
 
International: Price-Disclosed Rental Car Reservation Services .  We offer a retail price-disclosed rental car reservation service through rentalcars.com, a Manchester, U.K.-based rental car reservation service, which we acquired in May 2010 ("rentalcars.com").  Rentalcars.com offers rental car reservations throughout the world.  Certain members of our management own a noncontrolling interest in rentalcars.com.  See Note 13 to the Consolidated Financial Statements for further details.  For geographic related information, see Note 18 to the Consolidated Financial Statements.
 
United States: Name Your Own Price ®   Travel Services .  We have developed a unique pricing system that allows consumers to specify the price they are prepared to pay when submitting an offer for a particular leisure travel service.  We then access databases in which participating suppliers file secure discounted rates not generally available to the public, to determine whether we can fulfill the customer’s offer and decide whether we want to accept the offer at the price designated by the consumer.  This Name Your Own Price ®  service uses the flexibility of buyers to enable sellers to accept a lower price in order to sell their excess capacity without disrupting their existing distribution channels or retail pricing structures.  We believe that our Name Your Own Price ®  service offers substantial benefits to both buyers and sellers.  We often refer to our Name Your Own Price ®  services as "opaque" services because not all aspects of the travel service are visible to the consumer before making an offer.

United States: Price-Disclosed Travel Services .  In the United States, we offer customers the ability to purchase reservations for price-disclosed hotel rooms, rental cars, airline tickets, vacation packages, destination services and cruises at retail prices.  In these transactions, the customer typically selects hotel reservation, rental car, airline flight or other travel itineraries from an array of results produced in response to the customer’s request.  These results usually include the identity of

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the travel supplier, the exact price of the itinerary, and other details relating to the itineraries.  In some circumstances, the customer pays us at the time of reservation, and in other circumstances, the customer pays the travel supplier directly at the time of travel.
 
We believe that the combination of our retail price-disclosed model and our Name Your Own Price ®  model allows us to provide a broad array of options to value-conscious travelers, while providing us with diverse streams of revenue and gross profit.
 
The Priceline Group Strategy
 
The online travel category has continued to experience significant worldwide growth as consumer purchasing shifts from traditional off-line channels to interactive online channels.  We are the leader in the worldwide online hotel reservation market based on room nights booked.  Our strategy is to continue to participate broadly in online travel growth by expanding our service offerings and markets.
 
Maintain and Grow Our Position as the Leading Worldwide Online Hotel Reservation Service .  The size of the travel market outside of the United States is substantially greater than that within the United States.  Historically, Internet penetration rates and e-commerce adoption rates of international consumers have trailed those of the United States.  However, international consumers are rapidly moving to online means for purchasing travel.  Accordingly, recent international online travel growth rates have substantially exceeded, and are expected to continue to exceed, the growth rates within the United States.  Prior to 2004, substantially all of our revenues were generated within the United States.  For the year ended December 31, 2011, approximately 78% of our gross bookings and approximately 88% of our consolidated operating income were generated through our international brands - primarily Booking.com.  We expect that our international operations will represent a growing percentage of our total gross bookings and operating income over the long term.  We believe that the opportunity to continue to grow our business exists for the markets in which we operate. Because of what we believe to be superior growth rate opportunities associated with international online travel, we intend to continue to invest resources to increase the share of our revenues represented by international consumers and capitalize on international travel demand.
 
The positioning of our Booking.com and Agoda hotel reservation services has given us access to a broader international market.  We intend to use Booking.com and Agoda to further develop our worldwide operations, especially in geographic areas where Internet penetration and e-commerce adoption are growing.  We continue to develop the means to share hotel availability among our brands, which we believe will allow us to better satisfy demand across markets.

We believe that by promoting our brands worldwide, sharing hotel supply and customer flow and applying our industry experiences in the United States and Europe to other international regions, we can further expand our service internationally and maintain and grow our position as the leading worldwide online hotel reservation service.
 
Continue to be One of the Top Online Travel Businesses in North America for Value-Conscious Leisure Travelers .  Our Name Your Own Price ®  service in the United States allows consumers to save money in a simple and compelling way.  Buyers effectively trade off flexibility about brands and service features in return for prices that are lower than those that can be obtained at that time through traditional retail distribution channels.  We also offer price-disclosed retail services in the United States to our consumers to compliment the Name Your Own Price ®  service.  We believe that by offering a "one-stop-shopping" solution to our customers, we can simultaneously fulfill the needs of those customers who are prepared to accept the unique restrictions of our Name Your Own Price ®  service in exchange for receiving significant savings relative to retail prices, as well as those customers who are less price sensitive and require the certainty of knowing the full details of their travel itinerary prior to purchasing.
 
Become a Leading Worldwide Online Rental Car Reservation Service .  In May 2010, we acquired the rentalcars.com business, a United Kingdom-based international rental car reservation service formerly known as TravelJigsaw.  Rentalcars.com offers its car hire services throughout the world, with customer support provided in 38 languages.
 

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Service Offerings — International
 
Retail Hotels.   We offer a retail, price-disclosed hotel service worldwide, primarily through our Booking.com and Agoda brands.  Booking.com works with over 185,000 hotels and accommodations in over 160 countries offering hotel reservations on various websites and in 41 languages.  Hotels participate in Booking.com, which operates under an agency model, and Agoda, which operates primarily under a merchant model, by filing rates in our proprietary extranet. 
 
Retail Rental Cars.   In May 2010, we acquired the rentalcars.com business, a United Kingdom-based international rental car reservation service formerly known as TravelJigsaw. Rentalcars.com offers its car hire services in more than 4,000 locations throughout the world, with customer support provided in 38 languages.  Customers using rentalcars.com can book a full range of vehicles online through one of rentalcars.com’s branded websites, or they can reserve their cars by phone.  Rentalcars.com primarily offers its services under a semi-opaque merchant model that allows customers to see the price, vehicle type and rental location, but not the identity of the supplier until the reservation is made.
 
Service Offerings — United States
 
Name Your Own Price ® Hotels .  Through our Name Your Own Price ® hotel room reservation service, customers can make reservations at hotel properties in substantially all major cities and metropolitan areas in the United States and Europe.  Most significant national hotel chains as well as several independent property owners participate in our Name Your Own Price ®  service.  Hotels participate by filing secure private discounted rates with related rules accessible through a global distribution system database.  These specific rates generally are not available to the general public or to consolidators and other discount distributors who sell to the public. However, hotels may make similar rates available to consolidators or other discount providers under other arrangements.

To make an offer, a customer specifies: (1) the city and neighborhood in which the customer wants to stay, (2) the dates on which the customer wishes to check in and check out, (3) the "class" of service (1, 2, 2½, 3, 3½, 4, 5-star or "resort"), (4) the price the customer is willing to pay, and (5) the customer’s valid credit card to guarantee the offer.  When making an offer, consumers must agree to stay at any one of our participating hotel partners and accept a reservation that cannot be refunded or changed.  The target market for our Name Your Own Price ®  hotel room reservation service is the leisure travel market.
 
Retail Hotels.   We also operate a price-disclosed hotel service in the United States which enables our customers to select the exact hotel they want to book and the price of the reservation is disclosed prior to booking. We offer such reservations through a merchant model, as well as through an agency model for hotel room night reservations sourced through the Booking.com extranet.
 
Name Your Own Price ® Rental Cars .  Our Name Your Own Price ®  rental car service is currently available in substantially all major United States airport markets.  The top five brand name airport rental car companies in the United States are seller participants in our rental car program.  Consumers can access our website and select where and when they want to rent a car, what kind of car they want to rent (e.g., economy, compact, mid-size, SUV, etc.) and the price they want to pay per-day, excluding taxes, fees and surcharges.  When we receive an offer, we determine whether to fulfill the offer based upon the available rates and rules.  If a customer’s offer is accepted, it cannot be refunded or changed, and we will immediately reserve the rental car, charge the customer’s credit card and notify the customer of the rental car company and location providing the rental car.
 
Retail Rental Cars.   We also offer a price-disclosed rental car service on www.priceline.com and other websites which enables our customers in the United States to choose between price-disclosed or Name Your Own Price ®  rental cars.  Our price-disclosed rental car service operates under the "agency" model, under which we earn a commission upon rental car return, and accommodates one-way and off-airport reservations.  As with our retail airline ticket and hotel reservation services, rental car reservations booked in a retail manner do not have the restrictions associated with our Name Your Own Price ®  service.  Customers can select the exact rental car brand they want to book and the price of the reservation is disclosed prior to purchase.
 

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Name Your Own Price ® Airline Tickets . Our Name Your Own Price ®  airline ticket service operates in a manner similar to our Name Your Own Price ®  hotel room reservation service.  To make an offer, a customer specifies: (1) the origin and destination of the trip, (2) the dates on which the customer wishes to depart and return, (3) the price the customer is willing to pay, and (4) the customer’s valid credit card to guarantee the offer.  When making an offer, consumers must agree to:
fly on any one of our participating airline partners;
leave at any time of day between 6 a.m. and 10 p.m. on their desired dates of departure and return;
purchase only round trip coach class tickets between the same two points of departure and return;
accept at least one stop or connection;
receive no frequent flier miles or upgrades; and
accept tickets that cannot be refunded or changed.
If a customer’s offer is not accepted, but we believe the offer is reasonably close to a price that we would be willing to accept, we will attempt to satisfy the customer by providing guidance to the customer indicating that changing certain parameters of the offer would increase the chances of the offer being accepted. 
 
Retail Airline Tickets.   We also offer our customers in the United States the ability to purchase retail airline tickets at disclosed prices and with disclosed itineraries.  The airline sets the retail price paid by the consumer and is the merchant of record for the transaction.  These airline tickets do not have the restrictions associated with our Name Your Own Price ®  service.  For example, in addition to having fully disclosed itineraries, retail airline tickets are generally changeable and cancellable for a fee.
 
With respect to each of our airline, hotel and rental car services, we believe the combination of our Name Your Own Price ®  model and the retail model allows us to provide a broad array of options to value-conscious travelers, while providing us with diverse streams of revenue.
 
Vacation Packages .  Our vacation package service allows consumers in the United States to purchase packages consisting of airfare, hotel and rental car components.  Consumers can select the exact hotel or resort that they want to reserve, and then select either a retail airline ticket or an opaque airline ticket for the air component of their package.  In addition, customers can elect to add a rental car to their package.  Vacation packages are sold at disclosed prices, although consumers cannot determine the exact price of the individual components on our website.
 
Destination Services .  We currently offer customers in the United States the opportunity to purchase destination services such as parking, event tickets, ground transfers, tours and other services available at their travel destinations.  This service is offered to consumers as part of the process of booking an air, hotel, rental car and vacation reservation, and also as a standalone service.
 
Cruises .  We also offer price-disclosed cruise trips through World Travel Holdings, Inc. ("WTH"), an agent representing major cruise lines.  Our cruise service allows consumers in the United States to search for and compare cruise pricing and availability information from cruise lines, and to purchase cruises online or through a call center by selecting from our published offerings and prices.  We receive commissions from WTH on successful cruise bookings.
 
Travel Insurance .  We offer our air, hotel and vacation package customers in the United States an optional travel insurance package that provides coverage for, among other things, trip cancellation, trip interruption, medical expenses, emergency evacuation, and loss of baggage, property and travel documents.  We also offer our rental car customers in the United States the opportunity to purchase collision damage waiver insurance.  The travel insurance is arranged for by BerkelyCare, a division of Affinity Insurance Services, Inc. and underwritten by Stonebridge Casualty Insurance Company, an AEGON Company.  We retain a fee for every optional insurance package purchased by our customers.
 
While we are currently focused on the travel services described above, over time, we may evaluate the introduction of other services that we believe could enhance the travel experience of our customers.


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Marketing and Brand Awareness
 
Booking.com, priceline.com and Agoda have established widely used and recognized e-commerce brands through aggressive marketing and promotion campaigns. In late 2011, we re-branded our international rental car business as rentalcars.com, and intend to market that brand worldwide through online advertising. During 2011, our total online advertising expenses were approximately $919.2 million , a substantial portion of which was spent internationally through Internet search engines and online affiliate marketing.  We also invested approximately $35.5 million in priceline.com-branded offline advertising in the United States.  We intend to continue a marketing strategy to aggressively promote brand awareness, primarily through online means. 
 
As our international operations have become more meaningful contributors to our results, we have seen, and expect to continue to see, changes in our advertising expense.  Specifically, online advertising as a percentage of gross profit increased for the year ended December 31, 2011, compared to the same period in 2010. The increase is driven primarily by brand mix rather than a change in the fundamental efficiency of our advertising by brand. Our international operations are growing faster than our priceline.com business in the U.S., and spend a higher percentage of gross profit on online advertising, a trend which we expect to continue. Furthermore, the priceline.com brand in the U.S. is obtaining an increasing share of its traffic through online advertising, a trend which we also expect to continue. We recognize advertising expense as incurred at the time of booking, but recognize the gross profit for price-disclosed hotel room and rental car reservations when the travel is completed.
 
Competition
 
We compete with both online and traditional sellers of the services we offer. The market for the services we offer is intensely competitive, and current and new competitors can launch new sites at a relatively low cost. We may not be able to effectively compete with industry conglomerates such as Google, Microsoft or Expedia, each of which may have access to significantly greater and more diversified resources than we do.
 
We currently or potentially compete with a variety of companies with respect to each service we offer. With respect to our travel services, these competitors include, but are not limited to:
Internet travel services such as Expedia, Hotels.com, Hotwire, Elong, CarRentals.com and Venere, which are owned by Expedia; Travelocity, lastminute.com, Holiday Auto and Zuji, which are owned by the Sabre Group; Orbitz.com, Cheaptickets, ebookers, HotelClub and RatesToGo, which are owned by Orbitz Worldwide; laterooms and asiarooms, which are owned by Tui Travel; and Gullivers, octopustravel, Superbreak, hotel.de, Hotel Reservation Service, AutoEurope, Car Trawler, Ctrip, MakeMyTrip, Rakuten, Jalan and Wotif;

travel suppliers such as hotel companies, airlines and rental car companies, many of which have their own branded websites to which they drive business, including without limitation Room Key, a recently launched hotel search engine owned by several major hotel companies;

large online portal, social networking, group buying and search companies, such as Google, Yahoo! (including Yahoo! Travel), Bing (including Bing Travel), Facebook, Groupon and Living Social;

traditional travel agencies, wholesalers and tour operators;

online travel search sites such as Kayak.com, Trivago.com, Mobissimo.com, FareChase.com and HotelsCombined (each sometimes referred to as a "meta-search" site) and travel research sites that have search functionality, such as TripAdvisor, Travelzoo and Cheapflights.com; and

operators of travel industry reservation databases such as Galileo, Travelport, Amadeus and Sabre.

Large, established Internet search engines with substantial resources and expertise in developing online commerce and facilitating Internet traffic are creating - and intend to further create - inroads into online travel, both in the U.S. and internationally. For example, following its acquisition of ITA Software, Inc., a major flight information software company, Google recently launched a new flight search tool that enables users to find fares, schedules and availability directly on Google and excludes online travel agent ("OTA") participation within the search results. Google has also invested in HomeAway, a publicly traded vacation home rental service, and launched "Hotel Finder," a utility that allows users to search and compare hotel accommodations based on parameters set by the user. In addition, Microsoft has launched Bing Travel , which searches for airfare and hotel reservations online and predicts the best time to purchase them. "Meta-search" sites leverage their search technology to aggregate travel search results for the searcher's specific itinerary across supplier, travel agent and other websites

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and, in many instances, compete directly with us for customers. Furthermore, certain suppliers limit OTA participation within the meta-search results. Some meta-search sites, such as Kayak.com, which offers its users the ability to make hotel reservations directly on its website, may evolve into more traditional online travel sites. These initiatives, among others, illustrate a clear intention to more directly appeal to travel consumers by showing consumers more detailed travel search results, including specific information for travelers' own itineraries, which could lead to suppliers or others gaining a larger share of search traffic or may ultimately lead to search engines maintaining transactions within their own websites. If Google, as the single largest search engine in the world, or Bing, or other leading search engines refer significant traffic to these or other travel services that they develop in the future, it could result in, among other things, more competition from supplier websites and higher customer acquisition costs for third-party sites such as ours and could have a material adverse effect on our business, results of operations and financial condition.

Several major hotel companies, including Choice Hotels International, Hilton Worldwide, Hyatt, InterContinental Hotels Group, Wyndham Hotel Group and Marriott, have launched Room Key, a hotel search engine that competes directly with our hotel room night reservation services. The hotel companies that own Room Key have a stated goal of driving demand directly to their brand websites, thus reducing the share received by online travel agencies. They may also attempt to improve their competitive position by offering lower room rates, better room availability or additional features or amenities through Room Key than are available through services like ours. If Room Key is successful, our share of the online hotel room night reservation market could be negatively affected and our business could suffer.

Hotels are also increasingly offering hotel room reservations through "daily deal" websites such as Groupon and Living Social, which sell coupons to customers at a substantial discount. Expedia recently entered into a partnership with Groupon to sell hotel room reservations to Groupon customers under the "Groupon Getaways" brand name. If these new services are successful, we may experience less demand for our services and are likely to face more competition for access to the limited supply of discounted hotel room rates.

Competition in domestic online travel remains intense and traditional online travel companies are creating new promotions and consumer value features in an effort to gain competitive advantage. In particular, the competition to provide "opaque" hotel services to consumers, an area in which priceline.com has been a leader, has become more intense over the recent past. For example, in the fourth quarter of 2010, Expedia began making opaque hotel room reservations available on its principal website under the name "Expedia Unpublished Rates" and has been supporting the initiative with a national television advertising campaign. In addition, in 2009, Travelocity launched an opaque price-disclosed hotel booking service that allows customers to book rooms at a discount. As with our Name Your Own Price ® hotel booking service, for these services, the name of the hotel is not disclosed until after purchase. We believe these new offerings, in particular Expedia Unpublished Rates, have adversely impacted the market share and year-over-year growth rate for our opaque hotel service, which experienced a modest decline in room night reservations in 2011 compared to 2010. In addition, hotels are increasingly offering discounted hotel room reservations through "daily deal" websites such as Groupon and Living Social. If Expedia or Travelocity are successful in growing their opaque hotel service and/or "daily deal" websites are successful in garnering a sizable share of discounted hotel bookings, we may have less consumer demand for our opaque hotel service over time and we are likely to face more competition for access to the limited supply of discounted hotel room rates. As a result, we believe our share of the discount hotel market in the U.S. could further decrease.

We believe that for a number of reasons, including the recent significant year-over-year increase in retail airfares, consumers are engaging in increased shopping behavior before making a travel purchase than they engaged in previously. Increased shopping behavior reduces our advertising efficiency and effectiveness because traffic becomes less likely to result in a purchase on our website, and such traffic is more likely to be obtained through paid online advertising channels than through free direct channels.

The launch of Room Key discussed above is demonstrative of the effort of many hotel, airline and rental car suppliers, including suppliers with which we conduct business, to drive online demand to their own websites in lieu of third-party distributors such as us. Certain suppliers have attempted to charge additional fees to customers who book airline reservations through an online channel other than their own website. Furthermore, some airlines may distribute their tickets exclusively through their own websites. Suppliers who sell on their own websites typically do not charge a processing fee, and, in some instances, offer advantages such as web-only fares, bonus miles or loyalty points, which could make their offerings more attractive to consumers than models like ours. See " Risk Factors - Intense competition could reduce our market share and harm our financial performance ."
 

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Operations and Technology
 
Our business is supported by multiple systems platforms, which were designed with an emphasis on scalability, performance and reliability.  The platforms are largely independent among Booking.com, priceline.com, Agoda and rentalcars.com.  The software platforms and architecture use a variety of tools within each corporate implementation, including server-side Java, C++, ASP, .Net and Perl, and SQL scripts integrated with Oracle, MySQL and Microsoft SQL-server relational database systems.  These internal platforms were designed to include open application protocol interfaces that can provide connectivity to vendors in the industries in which we operate.  These include large global systems, such as airline and hotel room reservation systems and financial service providers, as well as individual suppliers, such as individual hotels.  Our Internet servers utilize digital certificates to help us conduct secure communications and transactions, as appropriate.
 
The systems infrastructure and web and database servers of our international operations are primarily hosted in England, the Netherlands and Hong Kong. Each location has backup generators and infrastructure typical of hosted data centers.
 
Our systems infrastructure and web and database servers in the U.S. are hosted at two U.S. data center locations, each of which provides network connectivity, networking infrastructure and 24-hour monitoring and engineering support. Our network operations center is located in our Norwalk, Connecticut headquarters and monitors all web hosting facilities.  All data center facilities have a continuous power supply system, generators, redundant servers and multiple back-up systems.  If one hosting facility were inaccessible, for any reason, we would need to shift all traffic to another hosting facility.
 
Customer service for our international business is provided primarily through in-house customer call centers. We outsource most of our U.S.-based priceline.com call center and customer service functions, and use a real-time interactive voice response system with transfer capabilities to our call centers and customer service centers.
 
Intellectual Property
 
Over time and through acquisitions, we have assembled a portfolio of patents, trademarks, service marks, copyrights, domain names, and trade secrets covering the Priceline Group's services. We regard the protection of our intellectual property as critical to our success. We protect our intellectual property rights by relying on federal, state and common law rights in the U.S. and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights in our services. We have entered into confidentiality and invention assignment agreements with our employees and contractors and nondisclosure agreements with parties with whom we conduct business in order to limit access to and disclosure of our proprietary information.

We pursue the registration of our domain names, trademarks, and service marks in the U.S. and internationally. We currently hold numerous issued United States patents and pending United States and international patent applications.  We file additional patent applications on new inventions, as appropriate. Effective trademark, copyright, patent, domain name, trade dress, and trade secret protection is expensive to maintain and may require litigation. As the Priceline Group expands internationally, we must protect our intellectual property rights and other proprietary rights in an increasing number of jurisdictions, a process that is expensive and time consuming and may not be successful in every location. See, "Risk Factors - We face risks related to our intellectual property ."
 
Governmental Regulation
 
The services we provide are subject to various federal, state, international and local regulations. For example, our travel service is subject to laws governing the offer and/or sale of travel services as well as laws requiring us to register as a "seller of travel" in certain jurisdictions.  In addition, our services may be subject to various federal, state, international and local taxing regulations.  See " Risk Factors - Adverse application of state and local tax laws could have an adverse effect on our business and results of operations " and " We may have exposure to additional tax liabilities. "
 
We are subject to federal, state and international laws that require protection of user privacy and user data.  In our processing of travel transactions, we receive and store a large volume of personally identifiable data in the United States, Europe and Asia.  This data is increasingly subject to legislation and regulations in numerous jurisdictions around the world, including the Commission of the European Union through its Data Protection Directive and variations of that directive in the member states of the European Union.  Such government action is typically intended to protect the privacy of personal data that is collected, processed and transmitted in or from the governing jurisdiction.
 

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In addition, our strategy involves rapid expansion into regions around the world, including Asia, South America and elsewhere, many of which have different legislation, regulatory environments and tax laws. Compliance with foreign legal, regulatory or tax requirements will place demands on our time and resources, and we may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences, which may have an adverse effect on our business.

Seasonality

A meaningful amount of retail gross bookings are generated early in the year, as customers plan and reserve their spring and summer vacations in Europe and North America. However, we do not recognize associated revenue until future quarters when the travel occurs. From a cost perspective, we expense the substantial majority of our advertising activities as they are incurred, which is typically in the quarter in which bookings are generated. As a result, we typically experience our highest levels of profitability in the second and third quarters of the year, which is when we experience the highest levels of booking and travel consumption for the year for our North American and European businesses. However, we experience the highest levels of booking and travel consumption for our Asia-Pacific and South American businesses in the first and fourth quarters. Therefore, if these businesses continue to grow faster than our North American and European businesses, our operating results for the first and fourth quarters of the year may become more significant over time as a percentage of full year operating results. In addition, Our Name Your Own Price ® services are generally non-refundable in nature, and accordingly, we recognize travel revenue at the time a booking is generated. However, we recognize revenue generated from our retail hotel services, including Booking.com and Agoda, at the time that the customer checks out of the hotel. Therefore, if our retail hotel business continues to grow, we expect our quarterly results to become increasingly impacted by these seasonal factors.
 
Employees
 
As of January 31, 2012, we employed approximately 5,000 full-time employees, of which approximately 1,000 are based in the United States and approximately 4,000 are based in our international offices. We also retain independent contractors to support our customer service, website content translation and system support functions.
 
We have never had a work stoppage and our employees are not represented by any collective bargaining unit. We consider our relations with our employees to be good. Our future success will depend, in part, on our ability to continue to attract, integrate, retain and motivate highly qualified technical and managerial personnel, for whom competition is intense. See " Risk Factors - We rely on the performance of highly skilled personnel and, if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed. "
 
The Priceline Group Websites
 
We maintain websites with the addresses www.booking.com, www.priceline.com, www.agoda.com and www.rentalcars.com, among others.  We are not including the information contained on our websites as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.  We make available free of charge through the www.priceline.com website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC.  These reports and other information are also available, free of charge, at www.sec.gov.  Alternatively, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  In addition, the priceline.com Incorporated Code of Business Conduct and Ethics is available through the www.priceline.com website and any amendments to or waivers from the Code of Ethics will be disclosed on that website.

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Item 1A.  Risk Factors
 
The following risk factors and other information included in this Annual Report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us may also impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
We are dependent on the travel industry .

Our financial prospects are significantly dependent upon our sale of travel services, particularly leisure travel. Travel, including hotel, rental car and airline ticket reservations, is dependent on discretionary spending levels. As a result, sales of travel services tend to decline during general economic downturns and recessions. Accordingly, the recent worldwide recession led to a weakening in the fundamental demand for our services and an increase in the number of customers who canceled existing travel reservations with us. Recently, we have experienced volatility in growth rates for transactions booked and in cancellations for our international business. We have also observed a decline in transaction growth rates and weaker trends in hotel average daily rates ("ADRs") for certain southern European countries, likely due to the impact of weak economic conditions and sovereign debt concerns. This volatility makes it more difficult to predict longer-term trends and the future impact of macro-economic weakness on our business.
Concern over sovereign debt of certain European Union countries has caused significant devaluation of the Euro relative to other currencies, such as the U.S. Dollar. Sovereign debt issues in the European Union could lead to further significant, and potentially longer-term, devaluation of the Euro against the U.S. Dollar, which would adversely impact our Euro-denominated net assets, gross bookings, revenues, operating expenses, and net income as expressed in U.S. Dollars. In addition, many governments around the world, including the U.S. government, are operating at very large financial deficits. Disruptions in the economies of such governments could cause, contribute to or be indicative of, deteriorating macro-economic conditions. Furthermore, governmental austerity measures aimed at reducing deficits could impair the economic recovery and adversely affect travel demand.
In addition, unforeseen events beyond our control, such as worldwide recession, higher oil prices, terrorist attacks, unusual weather patterns, natural disasters such as earthquakes, hurricanes, tsunamis, floods, volcanic eruptions (such as the April 2010 eruption of a volcano in Iceland), travel related health concerns including pandemics and epidemics such as Influenza H1N1, avian bird flu and SARS, political instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities, travel related accidents or the withdrawal from our system of a major hotel supplier or airline, could adversely affect our business and results of operations. For example, in early 2011, Japan was struck by a major earthquake, tsunami and nuclear emergency. Japan is an important source of travel demand for Agoda, and these crises have had an adverse impact on travel demand originating in Japan and demand for Japanese destinations. In October 2011, severe flooding in Thailand, a key market for our Agoda business and the Asian business of Booking.com, negatively impacted booking volumes and cancellation rates in this market. In addition, in early 2010, Thailand experienced disruptive civil unrest, which caused the temporary relocation of Agoda's Thailand-based operations. Future natural disasters or civil or political unrest could further disrupt our business and operations.
We face risk related to the growth rate and expansion of Booking.com, Agoda and rentalcars.com.

We derive a substantial portion of our revenues from, and have significant operations, outside of the United States. Our international operations include the Netherlands-based hotel reservation service Booking.com, the Asia-based hotel reservation service Agoda and the U.K.-based rental car reservation service rentalcars.com (formerly known as TravelJigsaw). Each year since 2007, our international operations achieved significant year-over-year growth in their gross bookings (an operating and statistical metric referring to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by our customers) and hotel room night and rental car reservations. This growth rate has contributed significantly to our growth in consolidated revenue, gross profit and earnings per share. Over time, Booking.com, Agoda and rentalcars.com will experience a decline in their growth rate as the absolute level of their gross bookings and unit sales grow larger. Other factors may also slow the growth rates of our international operations, including, for example, worldwide economic conditions, any strengthening of the U.S. Dollar versus the Euro and other currencies, declines in ADRs, increases in cancellations, travel market conditions and the competitiveness of the market. A decline in the growth rates of our international operations could have a negative impact on our future revenue and earnings per share growth rates and, as a consequence, our stock price.

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The strategy of Booking.com, Agoda and rentalcars.com involves rapid expansion into regions around the world, including Europe, Asia-Pacific, North America, South America and elsewhere, many of which have different customs, different currencies, different levels of customer acceptance of the Internet and different legislation, regulatory environments, tax laws and levels of political stability. In addition, compliance with foreign legal, regulatory or tax requirements will place demands on our time and resources, and we may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences. If Booking.com, Agoda and rentalcars.com are unsuccessful in rapidly expanding into new markets, our business, results of operations and financial condition would be adversely affected.

The number of our employees worldwide has grown from less than 700 in the first quarter of 2007, to approximately 5,000 as of December 31, 2011, which growth is mostly comprised of hires by or for our international operations. As a result of such rapid expansion, the average tenure of our employees has become shorter. In addition, expansion increases the complexity of our business and places additional strain on our management, operations, technical performance, financial resources and internal financial control and reporting functions.

There can be no assurance that we will be able to manage our expansion effectively. Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our future operations, especially as we employ personnel in multiple geographic locations. We may not be able to hire, train, retain, motivate and manage required personnel, which may limit our growth, damage our reputation, negatively affect our financial performance, and harm our business.

We are exposed to fluctuations in currency exchange rates.

As a result of the growth of Booking.com and Agoda, and the acquisition of the rentalcars.com business, we are conducting a significant portion of our business outside the United States and are reporting our results in U.S. Dollars. As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency (principally the Euro and the British Pound Sterling) into U.S. Dollars upon consolidation. For example, a strengthening of the Euro increases our Euro-denominated net assets, gross bookings, gross profit, operating expenses, and net income as expressed in U.S. Dollars, while a weakening of the Euro decreases our Euro-denominated net assets, gross bookings, gross profit, operating expenses, and net income as expressed in U.S. Dollars. Additionally, foreign exchange rate fluctuations on transactions denominated in currencies other than the functional currency result in gains and losses that are reflected in the Consolidated Statements of Operations. Booking.com, Agoda and rentalcars.com are subject to risks typical of international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Greece, Ireland, Portugal and certain other European Union countries with high levels of sovereign debt have had difficulty refinancing their debt. Concern around devaluation or abandonment of the Euro common currency, or that sovereign default risk may be more widespread and could include the U.S., has led to significant volatility in the exchange rate between the Euro, the U.S. dollar and other currencies over the past several years.

Intense competition could reduce our market share and harm our financial performance.

We compete with both online and traditional sellers of the services we offer. The market for the services we offer is intensely competitive, and current and new competitors can launch new sites at a relatively low cost. We may not be able to effectively compete with industry conglomerates such as Google, Microsoft or Expedia, each of which may have access to significantly greater and more diversified resources than we do.
 
We currently or potentially compete with a variety of companies with respect to each service we offer. With respect to our travel services, these competitors include, but are not limited to:
Internet travel services such as Expedia, Hotels.com, Hotwire, Elong, CarRentals.com and Venere, which are owned by Expedia; Travelocity, lastminute.com, Holiday Auto and Zuji, which are owned by the Sabre Group; Orbitz.com, Cheaptickets, ebookers, HotelClub and RatesToGo, which are owned by Orbitz Worldwide; laterooms and asiarooms, which are owned by Tui Travel; and Gullivers, octopustravel, Superbreak, hotel.de, Hotel Reservation Service, AutoEurope, Car Trawler, Ctrip, MakeMyTrip, Rakuten, Jalan and Wotif;

travel suppliers such as hotel companies, airlines and rental car companies, many of which have their own branded websites to which they drive business, including without limitation Room Key, a recently launched hotel search engine owned by several major hotel companies;


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large online portal, social networking, group buying and search companies, such as Google, Yahoo! (including Yahoo! Travel), Bing (including Bing Travel), Facebook, Groupon and Living Social;

traditional travel agencies, wholesalers and tour operators;

online travel search sites such as Kayak.com, Trivago.com, Mobissimo.com, FareChase.com and HotelsCombined (each sometimes referred to as a "meta-search" site) and travel research sites that have search functionality, such as TripAdvisor, Travelzoo and Cheapflights.com; and

operators of travel industry reservation databases such as Galileo, Travelport, Amadeus and Sabre.

Large, established Internet search engines with substantial resources and expertise in developing online commerce and facilitating Internet traffic are creating - and intend to further create - inroads into online travel, both in the U.S. and internationally. For example, following its acquisition of ITA Software, Inc., a major flight information software company, Google recently launched a new flight search tool that enables users to find fares, schedules and availability directly on Google and excludes online travel agent ("OTA") participation within the search results. Google has also invested in HomeAway, a publicly traded vacation home rental service, and launched "Hotel Finder," a utility that allows users to search and compare hotel accommodations based on parameters set by the user. In addition, Microsoft has launched Bing Travel , which searches for airfare and hotel reservations online and predicts the best time to purchase them. "Meta-search" sites leverage their search technology to aggregate travel search results for the searcher's specific itinerary across supplier, travel agent and other websites and, in many instances, compete directly with us for customers. Furthermore, certain suppliers limit OTA participation within the meta-search results. Some meta-search sites, such as Kayak.com, which offers its users the ability to make hotel reservations directly on its website, may evolve into more traditional online travel sites. These initiatives, among others, illustrate a clear intention to more directly appeal to travel consumers by showing consumers more detailed travel search results, including specific information for travelers' own itineraries, which could lead to suppliers or others gaining a larger share of search traffic or may ultimately lead to search engines maintaining transactions within their own websites. If Google, as the single largest search engine in the world, or Bing, or other leading search engines refer significant traffic to these or other travel services that they develop in the future, it could result in, among other things, more competition from supplier websites and higher customer acquisition costs for third-party sites such as ours and could have a material adverse effect on our business, results of operations and financial condition.

Several major hotel companies, including Choice Hotels International, Hilton Worldwide, Hyatt, InterContinental Hotels Group, Wyndham Hotel Group and Marriott, have launched Room Key, a hotel search engine that competes directly with our hotel room night reservation services. The hotel companies that own Room Key have a stated goal of driving demand directly to their brand web sites, thus reducing the share received by online travel agencies. They may also attempt to improve their competitive position by offering lower room rates, better room availability or additional features or amenities through Room Key than are available through services like ours. If Room Key is successful, our share of the online hotel room night reservation market could be negatively affected and our business could suffer.

Hotels are also increasingly offering hotel room reservations through "daily deal" websites such as Groupon and Living Social, which sell coupons to customers at a substantial discount. Expedia recently entered into a partnership with Groupon to sell hotel room reservations to Groupon customers under the "Groupon Getaways" brand name. If these new services are successful, we may experience less demand for our services and are likely to face more competition for access to the limited supply of discounted hotel room rates.

Competition in domestic online travel remains intense and traditional online travel companies are creating new promotions and consumer value features in an effort to gain competitive advantage. In particular, the competition to provide "opaque" hotel services to consumers, an area in which priceline.com has been a leader, has become more intense over the recent past. For example, in the fourth quarter of 2010, Expedia began making opaque hotel room reservations available on its principal website under the name "Expedia Unpublished Rates" and has been supporting the initiative with a national television advertising campaign. In addition, in 2009, Travelocity launched an opaque price-disclosed hotel booking service that allows customers to book rooms at a discount. As with our Name Your Own Price ® hotel booking service, for these services, the name of the hotel is not disclosed until after purchase. We believe these new offerings, in particular Expedia Unpublished Rates, have adversely impacted the market share and year-over-year growth rate for our opaque hotel service, which experienced a modest decline in room night reservations in 2011 compared to 2010. In addition, hotels are increasingly offering discounted hotel room reservations through "daily deal" websites such as Groupon and Living Social. If Expedia or Travelocity are successful in growing their opaque hotel service and/or "daily deal" websites are successful in garnering a sizable share of discounted hotel bookings, we may have less consumer demand for our opaque hotel service over time and we are likely to face more competition for access to the limited supply of discounted hotel room rates. As a result, we believe our share of the

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discount hotel market in the U.S. could further decrease.

We believe that for a number of reasons, including the recent significant year-over-year increase in retail airfares, consumers are engaging in increased shopping behavior before making a travel purchase than they engaged in previously. Increased shopping behavior reduces our advertising efficiency and effectiveness because traffic becomes less likely to result in a purchase on our website, and such traffic is more likely to be obtained through paid online advertising channels than through free direct channels.

The launch of Room Key discussed above is demonstrative of the effort of many hotel, airline and rental car suppliers, including suppliers with which we conduct business, to drive online demand to their own websites in lieu of third-party distributors such as us. Certain suppliers have attempted to charge additional fees to customers who book airline reservations through an online channel other than their own website. Furthermore, some airlines may distribute their tickets exclusively through their own websites. Suppliers who sell on their own websites typically do not charge a processing fee, and, in some instances, offer advantages such as web-only fares, bonus miles or loyalty points, which could make their offerings more attractive to consumers than models like ours.

We rely on the performance of highly skilled personnel and, if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed.
Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. In particular, the contributions of certain key senior management in the U.S., Europe and Asia are critical to the overall management of the Company. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees, the loss of whom could harm our business.
In addition, competition for well-qualified employees in all aspects of our business, including software engineers, mobile communication talent and other technology professionals, is intense both in the U.S. and abroad. With the recent success of our international business and the increased profile of the Booking.com business and brand, competitors have increased their efforts to hire our international employees. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected. We do not maintain any key person life insurance policies.
We are dependent on certain suppliers.
Our arrangements with the hotel, airline and rental car suppliers generally do not require them to provide any specific quantity of hotel room reservations, airline tickets or rental cars, or to make room reservations, tickets or cars available for any particular route, in any geographic area or at any particular price. During the course of our business, we are in continuous dialogue with our major suppliers about the nature and extent of their participation in our system. The significant reduction on the part of any of our major suppliers of their participation in our system for a sustained period of time or their complete withdrawal could have a material adverse effect on our business, results of operations and financial condition.
During the recent worldwide recession, the hotel industry experienced a significant decrease in occupancy rates and ADRs, and an increase in reservation cancellation rates. While lower occupancy rates have historically resulted in hotel suppliers increasing their distribution of hotel room reservations through third-party intermediaries such as us, our remuneration for hotel transactions changes proportionately with room price, and therefore, lower ADRs generally have a negative effect on our hotel business and a negative effect on our gross profit.

In addition, certain hotels have begun initiatives to reduce margins received by third party intermediaries on retail merchant transactions, which is the primary method we employ to distribute retail hotel room reservations in the United States. Many hotels distribute room reservations through their own websites and therefore might increase negotiated rates for merchant rate hotel room reservations sold through our merchant price-disclosed hotel service, decreasing the margin available to us. While our merchant price-disclosed hotel agreements with our leading hotel suppliers provide for specified discounts, if one or more participating hotels were to require us to limit our merchant margins, upon contract renewal or otherwise, it could have an adverse effect on our business, results of operations and financial condition.
We could be adversely affected by changes in the airline industry, and, in many cases, we will have no control over such changes or their timing. Examples of such changes could include, without limitation, carrier bankruptcy, industry consolidation, capacity reductions, airfare increases and loss of GDS incentives, any or all of which could adversely affect our

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business. Additionally, some rental car suppliers have begun offering discounted prepaid reservations on their own sites and through certain online travel agents. If such rates are sufficiently discounted or are associated with more flexible cancellation policies than those applicable to our Name Your Own Price ® rental car service (which are generally non-cancellable), the value proposition of our Name Your Own Price ® rental car service would be negatively impacted which could reduce demand for that service and could adversely affect our business.
Online advertising is our largest expense and is subject to variability .

As our international operations have become more meaningful contributors to our results, we have seen, and expect to continue to see online advertising, which is our largest expense, increase as a percentage of gross profit. Our international operations are growing faster than our priceline.com business in the U.S., and spend a higher percentage of gross profit on online advertising, a trend which we expect to continue. Furthermore, the priceline.com brand is obtaining an increasing share of its traffic through online advertising, a trend which we also expect to continue. In addition, advertising efficiency is impacted by a number of factors, including without limitation, ADRs, costs per click, cancellation rates, foreign exchange rates and the extent to which we are successful in converting paid traffic to booking customers and then causing customers to return directly to our websites for future bookings.

Adverse application of state and local tax laws could have an adverse effect on our business and results of operation.

A number of jurisdictions in the United States have initiated lawsuits against on-line travel companies, including us, related to, among other things, the payment of hotel occupancy and other taxes (i.e., state and local sales tax). In addition, a number of municipalities have initiated audit proceedings, issued proposed tax assessments or started inquiries relating to the payment of hotel occupancy and other taxes. See Note 16 to the Consolidated Financial Statements for a description of these pending cases and proceedings. Additional state and local jurisdictions are likely to assert that we are subject to, among other things, hotel occupancy and other taxes (i.e., state and local sales tax) and could seek to collect such taxes, either retroactively or prospectively, or both.
In connection with some hotel occupancy tax audits and assessments, we may be required to pay any assessed taxes, which amounts may be substantial, prior to being allowed to contest the assessments and the applicability of the ordinances in judicial proceedings. This requirement is commonly referred to as "pay to play" or "pay first." Payment of these amounts, if any, is not an admission that we believe that we are subject to such taxes and, even if such payments are made, we intend to continue to assert our position vigorously.
Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings. For example, in October 2009, a jury in a San Antonio class action found that we and the other online travel companies that are defendants in the lawsuit "control" hotels for purposes of the local hotel occupancy tax ordinances at issue and are, therefore, subject to the requirements of those ordinances. An unfavorable outcome or settlement of pending litigation may encourage the commencement of additional litigation, audit proceedings or other regulatory inquiries. In addition, an unfavorable outcome or settlement of these actions or proceedings could result in substantial liabilities for past and/or future bookings, including, among other things, interest, penalties, punitive damages and/or attorney fees and costs. There have been, and will continue to be, substantial ongoing costs, which may include "pay to play" payments, associated with defending our position in pending and any future cases or proceedings. An adverse outcome in one or more of these unresolved proceedings could have a material adverse effect on our business and results of operations and could be material to our earnings or cash flows in any given operating period.
To the extent that any tax authority succeeds in asserting that we have a tax collection responsibility, or we determine that we have one, with respect to future transactions, we may collect any such additional tax obligation from our customers, which would have the effect of increasing the cost of hotel room reservations to our customers and, consequently, could make our hotel service less competitive (i.e., versus the websites of other online travel companies or hotel company websites) and reduce hotel reservation transactions; alternatively, we could choose to reduce the compensation for our services on "merchant" hotel transactions. Either step could have a material adverse effect on our business and results of operations.

In many of the judicial and other proceedings initiated to date, municipalities seek not only historical taxes that are claimed to be owed on our gross profit, but also, among other things, interest, penalties, punitive damages and/or attorney fees and costs.  The October 2009 jury verdict in the San Antonio litigation and the related proceedings to determine, among other things, the amount of penalties, interest and attorney's fees that could be owed by us illustrate that any liability associated with hotel occupancy tax matters is not constrained by our liability for tax owed on our historical gross profit.


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We will continue to assess the risks of the potential financial impact of additional tax exposure, and to the extent appropriate, we will reserve for those estimates of liabilities.

Fluctuations in our financial results make quarterly comparisons and financial forecasting difficult.

Our revenues and operating results have varied significantly from quarter to quarter because our business experiences seasonal fluctuations, which reflect seasonal trends for the travel services offered by our websites. Traditional leisure travel bookings in Europe and the United States are higher in the second and third calendar quarters of the year as consumers take spring and summer vacations. In the first and fourth quarters of the calendar year, demand for travel services in Europe and the United States generally declines from a seasonal perspective. A meaningful amount of retail gross bookings are generated early in the year, as customers plan and reserve their spring and summer vacations in the Northern Hemisphere. However, we will not recognize associated revenue until future quarters when the travel occurs. From a cost perspective, we expense the substantial majority of our advertising activities as they are incurred, which is typically in the quarter in which bookings are generated. As a result, we typically experience our highest levels of profitability in the second and third quarters of the year, which is when we experience the highest levels of booking and travel consumption for the year for our North American and European businesses. However, we experience the highest levels of booking and travel consumption for our Asia-Pacific and South American businesses in the first and fourth quarters. Therefore, if these businesses continue to grow faster than our North American and European businesses, our operating results for the first and fourth quarters of the year may become more significant over time as a percentage of full year operating results.
Our revenues and operating results may continue to vary significantly from quarter to quarter because of these factors. As a result, quarter-to-quarter comparisons of our revenues and operating results may not be meaningful. For example, over the last several years we have experienced strong growth in the number of hotel room nights booked through our hotel reservation services. However, given the sheer size of our hotel reservation business, we believe it is highly likely that our year-over-year room night reservation growth rates will generally decelerate on a quarterly sequential basis in future periods.

Because of these fluctuations and uncertainties, our operating results may fail to meet the expectations of securities analysts and investors. If this happens, the trading price of our common stock would be adversely affected.
Our processing, storage, use and disclosure of personal data exposes us to risks of internal or external security breaches and could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.

The security of data when engaging in electronic commerce is essential to maintaining consumer and supplier confidence in our services. Substantial or ongoing security breaches whether instigated internally or externally on our system or other Internet based systems could significantly harm our business. We currently require customers who use certain of our services to guarantee their offers with their credit card, either online or, in some instances, through our toll-free telephone service. It is possible that advances in computer circumvention capabilities, new discoveries or other developments, including our own acts or omissions, could result in a compromise or breach of customer transaction data.
We cannot guarantee that our existing security measures will prevent security breaches or attacks. A party (whether internal, external, an affiliate or unrelated third party) that is able to circumvent our security systems could steal customer information or transaction data, proprietary information or cause significant interruptions in our operations. For instance, from time to time, we have experienced "denial-of-service" type attacks on our system that have made portions of our websites slow or unavailable for periods of time. In addition, several major corporations experienced well-publicized online security breaches during the first half of 2011, including among others, Sony, the data security firm RSA, Lockheed Martin, the email wholesaler Epsilon, the Fox broadcast network and Citigroup. We may need to expend significant resources to protect against security breaches or to address problems caused and liabilities incurred by breaches, and reductions in website availability and response time could cause loss of substantial business volumes during the occurrence of any such incident. These issues are likely to become more difficult as we expand the number of places where we operate and as the tools and techniques used in such attacks become more advanced. Security breaches could result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability and subject us to regulatory penalties and sanctions. Security breaches could also cause customers and potential customers to lose confidence in our security, which would have a negative effect on the value of our brand. Our insurance policies carry low coverage limits, and would likely not be adequate to reimburse us for losses caused by security breaches.
We also face risks associated with security breaches affecting third parties conducting business over the Internet. Consumers generally are concerned with security and privacy on the Internet, and any publicized security problems could inhibit the growth of the Internet and, therefore, our services as a means of conducting commercial transactions. Additionally,

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security breaches at third parties such as supplier or distributor systems upon which we rely could result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability and subject us to regulatory penalties and sanctions. Some of our business is conducted with third party marketing affiliates, which may generate travel reservations through our infrastructure or through other systems. A security breach at such a third party could be perceived by consumers as a security breach of our systems and could result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability and subject us to regulatory penalties and sanctions. In addition, such third parties may not comply with applicable disclosure requirements, which could expose us to liability.

In our processing of travel transactions, we receive and store a large volume of personally identifiable data. This data is increasingly subject to legislation and regulations in numerous jurisdictions around the world, including the Commission of the European Union through its Data Protection Directive and variations of that directive in the member states of the European Union. This government action is typically intended to protect the privacy of personal data that is collected, processed and transmitted in or from the governing jurisdiction. We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, results of operations and financial condition.
In addition, in the aftermath of the terrorist attacks of September 11, 2001 in the United States, government agencies have been contemplating or developing initiatives to enhance national and aviation security, such as the Transportation Security Administration's Computer-Assisted Passenger Prescreening System, known as CAPPS II. These initiatives may result in conflicting legal requirements with respect to data handling. As privacy and data protection has become a more sensitive issue, we may also become exposed to potential liabilities as a result of differing views on the privacy of travel data. Travel businesses have also been subjected to investigations, lawsuits and adverse publicity due to allegedly improper disclosure of passenger information. These and other privacy developments that are difficult to anticipate could adversely impact our business, results of operations and financial condition.
Proposed "cookie" laws could negatively impact the way we do business.
In June 2011, the Dutch Parliament adopted a bill to amend the Dutch Telecommunications Act.  One of the provisions of the bill is a new regulation on the use of "cookies."  A "cookie" is a text file that is stored on a user's web browser by a website.  Cookies are common tools used by thousands of websites, such as Booking.com, which is based in the Netherlands, and priceline.com, to, among other things, store or gather information (i.e., remember log-on details so a user does not have to re-enter them when revisiting a site) and enhance the user experience on a Website.  Cookies are valuable tools for websites like Booking.com and priceline.com to improve customer experience and increase conversion on their websites. 
This bill would require websites, such as Booking.com, to provide Dutch users with clear and comprehensive information about the storage and use of certain cookies and obtain prior consent from the user before placing certain cookies on a user's web browser.  Consent could be accomplished by asking a user to check a box to consent to the use of the cookies before proceeding on the website ("opt-in" consent).   
The bill must be adopted by the Dutch Senate before it will become law; the Dutch Senate is currently debating the bill.  The bill is intended to implement certain provisions of the European Union's ePrivacy Directive, which requires member countries to adopt regulations governing the use of "cookies" by websites servicing customers from the European Union.  If the Dutch bill is adopted by the Senate in its current form or if European Union countries adopt similarly restrictive "cookie" regulations that require "opt-in" consent before certain cookies can be placed on a user's web browser, it might adversely affect our ability, in particular, Booking.com's ability, to service certain customers in the manner we currently do and impair our ability to continue to improve and optimize performance on our websites.  As a result, these regulations, if adopted, could have a material adverse effect on our business, results of operations and financial condition.
Our stock price is highly volatile .
The market price of our common stock is highly volatile and is likely to continue to be subject to wide fluctuations in response to factors such as the following, some of which are beyond our control:
operating results that vary from the expectations of securities analysts and investors;
quarterly variations in our operating results;
changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
fluctuations in currency exchange rates, particularly between the U.S. Dollar and the Euro;
announcements of technological innovations or new services by us or our competitors;

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changes in our capital structure;
changes in market valuations of other Internet or online service companies;
announcements by us or our competitors of price reductions, promotions, significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
loss of a major supplier participant, such as a hotel chain or airline;
changes in the status of our intellectual property rights;
lack of success in the expansion of our business model geographically;
announcements by third parties of significant claims or proceedings against us or adverse developments in pending proceedings;
occurrences of a significant security breach;
additions or departures of key personnel; and
stock market price and volume fluctuations.

Sales of a substantial number of shares of our common stock could adversely affect the market price of our common stock by introducing a large number of sellers to the market. Given the volatility that exists for our shares, such sales could cause the market price of our common stock to decline significantly. In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis.
The trading prices of Internet company stocks in general, including ours, have experienced extreme price and volume fluctuations. To the extent that the public's perception of the prospects of Internet or e-commerce companies is negative, our stock price could decline, regardless of our results. Other broad market and industry factors may decrease the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, also may decrease the market price of our common stock. Negative market conditions could adversely affect our ability to raise additional capital.
We are defendants in securities class action litigations. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. To the extent our stock price declines or is volatile, we may in the future be the target of additional litigation. This additional litigation could result in substantial costs and divert management's attention and resources.
There can be no assurance that we can maintain our "Innovation Box Tax" benefit.

Effective January 1, 2010, the Netherlands modified its corporate income tax law related to income generated from qualifying "innovative" activities (the "Innovation Box Tax"). Earnings that qualify for the Innovation Box Tax will effectively be taxed at the rate of 5% rather than the Dutch statutory rate of 25%. Booking.com obtained a ruling from the Dutch tax authorities in February 2011 confirming that a portion of its earnings ("qualifying earnings") is eligible for Innovation Box Tax treatment. The ruling from the Dutch tax authorities is valid from January 1, 2010 through December 31, 2013 (the "Initial Period").

In order to be eligible for Innovation Box Tax treatment, Booking.com must, among other things, apply for and obtain a research and development ("R&D") certificate from a Dutch governmental agency every six months confirming that the activities that Booking.com intends to be engaged in over the subsequent six month period are "innovative."  Should Booking.com fail to secure such a certificate in any such period - for example, because the governmental agency does not view Booking.com's new or anticipated activities as "innovative" - or should this agency determine that the activities contemplated to be performed in a prior period were not performed as contemplated or did not comply with the agency's requirements, Booking.com may lose its certificate and, as a result, the Innovation Box Tax benefit may be reduced or eliminated. 

After the Initial Period, Booking.com intends to reapply for continued Innovation Box Tax treatment for future periods. There can be no assurance that Booking.com's application will be accepted, or that the amount of qualifying earnings or applicable tax rates will not be reduced at that time. In addition, there can be no assurance that the tax law will not change in 2012 and/or future years resulting in a reduction or elimination of the tax benefit.

The loss of the Innovation Box Tax benefit in future periods would adversely impact our results of operations.

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Our business could be negatively affected by changes in search engine algorithms and dynamics or termination of traffic-generating arrangements.

We utilize Internet search engines and other travel demand aggregation websites, principally through the purchase of travel-related keywords, to generate traffic to our websites. Booking.com, Agoda and rentalcars.com, in particular, rely to a significant extent upon Google to generate business and, to a much lesser extent, other search engines and other travel demand aggregation websites. Search engines such as Google frequently update and change the logic which determines the placement and display of results of a user's search, such that the placement of links to our sites, and particularly those of Booking.com, Agoda, rentalcars.com and their affiliates, can be negatively affected. In a similar way, a significant amount of Booking.com, Agoda and rentalcars.com's business is directed to our own websites through participation in pay-per-click advertising campaigns on Internet search engines whose pricing and operating dynamics can experience rapid change commercially, technically and competitively. In addition, we purchase web traffic from a number of sources, including some operated by our competitors, in the form of pay-per-click arrangements that can be terminated with little or no notice. If one or more of such arrangements is terminated, or if a major search engine, such as Google, changes its algorithms in a manner that negatively affects the search engine ranking of our brands or our third-party distribution partners or changes its pricing, operating or competitive dynamics in a negative manner, our business, results of operations and financial condition would be adversely affected.
In addition, Booking.com, Agoda and rentalcars.com rely on various third party distribution channels (i.e., affiliates) to distribute hotel room reservations. Should one or more of such third parties cease distribution of Booking.com, Agoda and rentalcars.com reservations, or suffer deterioration in its search engine ranking, due to changes in search engine algorithms or otherwise, our business could be negatively affected.
Capacity constraints and system failures could harm our business .

We have experienced rapid growth in customer traffic, the number of hotels on our extranets and the geographic breadth of our operations. If our systems cannot be expanded to cope with increased demand or fails to perform, we could experience unanticipated disruptions in service, slower response times, decreased customer service and customer satisfaction and delays in the introduction of new services, any of which could impair our reputation, damage our brands and materially and adversely affect our revenues. While we do maintain redundant systems and hosting services for some of our business, it is possible that we could experience an interruption in our business, and we do not carry business interruption insurance sufficient to compensate us for losses that may occur.

A substantial amount of our computer hardware for operating our services is currently located at hosting facilities around the world. These systems and operations are vulnerable to damage or interruption from human error, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite any precautions we may take, the occurrence of any disruption of service due to any such misconduct, natural disaster or other unanticipated problems at such facilities, or the failure by such facility to provide our required data communications capacity could result in lengthy interruptions or delays in our services. Any system failure that causes an interruption or delay in service could impair our reputation, damage our brand name and have a material adverse effect on our business, results of operations and financial condition.  
 
We rely on certain third party computer systems and third party service providers, including global distribution systems and computerized central reservation systems of the airline, hotel and rental car industries to satisfy demand for airline tickets and priceline.com hotel room and rental car reservations. Any interruption in these third party services systems or deterioration in their performance could prevent us from booking airline, hotel and rental car reservations and have a material adverse effect on our business. Our agreements with some third party service providers are terminable upon short notice and often do not provide recourse for service interruptions. In the event our arrangement with any of such third parties is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms and, as a result, it could have a material adverse effect on our business, results of operations and financial condition.  

We depend upon various third parties to process credit card transactions around the world. In addition, we rely on a third party to provide credit card numbers which we use as a payment mechanism for merchant hotel transactions. If any such third party were wholly or partially compromised, our cash flows could be disrupted or we may not be able to generate merchant hotel transactions until such a time as a replacement processes could be put in place with a different vendor.
 

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We do not have a completely formalized disaster recovery plan in every geographic region in which we conduct business.  In the event of certain system failures, we may not be able to switch to back-up systems immediately and the time to full recovery could be prolonged. Like many online businesses, we have experienced system failures from time to time. In addition to placing increased burdens on our engineering staff, these outages create a significant amount of user questions and complaints that need to be addressed by our customer support personnel. Any unscheduled interruption in our service could result in an immediate loss of revenues that can be substantial, increase customer service cost and cause some users to switch to our competitors. If we experience frequent or persistent system failures, our reputation and brand could be permanently harmed. We have taken and continue to take steps to increase the reliability and redundancy of our systems. These steps are expensive, may reduce our margins and may not be successful in reducing the frequency or duration of unscheduled downtime.  
 
We use both internally developed systems and third-party systems to operate our services, including transaction processing, order management and financial systems. If the number of users of our services increases substantially, or if critical third-party systems stop operating as designed, we will need to significantly expand and upgrade our technology, transaction processing systems, financial and accounting systems and other infrastructure. We may not be able to upgrade our systems and infrastructure to accommodate such conditions in a timely manner, and, depending on the third-party systems affected, our transactional, financial and accounting systems could be impacted for a meaningful amount of time before upgrade, expansion or repair.  
 
Our financial results will likely be materially impacted by payment of cash income taxes in the future.

Until our domestic net operating loss carryforwards are utilized or expire, we do not expect to make tax payments on our U.S. income, except for U.S. federal alternative minimum tax and state income taxes. However, we expect to pay foreign taxes on our foreign income. We expect that our international operations will grow their pretax income at higher rates than our U.S. operations over the long term and, therefore, we expect that our cash tax payments will increase as our international operations generate an increasing share of our pretax income.

We may have exposure to additional tax liabilities .    

As an international corporation providing travel reservation services around the world, we are subject to income taxes as well as non-income based taxes, in both the United States and various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, there is no assurance that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals. The Internal Revenue Service initiated an audit of our income taxes for the first time in the third quarter of 2011. To date, we have been audited in several taxing jurisdictions with no significant adjustments as a result. If future audits find that additional taxes are due, we may be subject to incremental tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our financial condition and results of operations.

Changes in tax laws or tax rulings may have a significantly adverse impact on our effective tax rate. For example, proposals for fundamental U.S. international tax reform, such as certain proposals by U.S. President Barack Obama's Administration, if enacted, could have a significant adverse impact on our effective tax rate.

We are also subject to non-income based taxes, such as value-added, payroll, sales, use, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions. From time to time, we are under audit by tax authorities with respect to these non-income based taxes and may have exposure to additional non-income based tax liabilities.

We may not be able to keep up with rapid technological and other changes.

The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, consolidation, frequent new service announcements, introductions and enhancements and changing consumer demands. We may not be able to keep up with these rapid changes. In addition, these market characteristics are heightened by the emerging nature of the Internet and the apparent need of companies from many industries to offer Internet based services. As a result, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our service in response to competitive service offerings and the evolving demands of the marketplace. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure.

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Improved web browsing functionality and the development of thousands of useful applications is driving substantial traffic and commerce activity to mobile platforms, including mobile devices such as the iPhone and Android-enabled phones, and tablet devices such as the iPad.  In addition, social networking sites and social commerce and flash-sale sites are experiencing high levels of usage and rapid growth.  We believe travel transactions will grow rapidly on mobile platforms and may gain acceptance on social and flash-sale platforms.  If we are unable to develop product offerings and effective distribution on these platforms, we could lose market share to existing competitors or new entrants.

We rely on the value of the Booking.com, priceline.com, Agoda and rentalcars.com brands, along with others, and the costs of maintaining and enhancing our brand awareness are increasing.

We believe that maintaining and expanding the Booking.com, priceline.com, Agoda and rentalcars.com brands, along with our other owned brands, are important aspects of our efforts to attract and expand our user and advertiser base. As our larger competitors spend increasingly more on advertising, we are required to spend more in order to maintain our brand recognition. In addition, we have invested considerable money and resources to date on the establishment and maintenance of the Booking.com, priceline.com, Agoda and rentalcars.com brands, and we will continue to invest resources to advertising, marketing and other brand building efforts to preserve and enhance consumer awareness of our brands. We may not be able to successfully maintain or enhance consumer awareness of these brands, and, even if we are successful in our branding efforts, such efforts may not be cost-effective. If we are unable to maintain or enhance customer awareness of our brands in a cost-effective manner, our business, results of operations and financial condition would be adversely affected.
Regulatory and legal uncertainties could harm our business.

The services we offer are regulated by regulations (including without limitation laws, ordinances, rules and other regulations) of national and local governments and regulatory authorities around the world. Our ability to provide our services is and will continue to be affected by such regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by judicial or regulatory bodies could require us to incur significant compliance costs, cause the development of the affected markets to become impractical and otherwise have a material adverse effect on our business, results of operations and financial condition.

Compliance with international and U.S. laws and regulations that apply to our international operations increases our cost of doing business in foreign jurisdictions. These laws and regulations include U.S. laws such as the Foreign Corrupt Practices Act, the UK Bribery Act and local laws which also prohibit corrupt payments to governmental officials, data privacy requirements, labor relations laws, tax laws, anti-competition regulations and consumer protection laws. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could result in prohibitions on our ability to offer our services in one or more countries, could delay or prevent potential acquisitions, and could also materially damage our reputation, our brands, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these difficulties. We are also subject to a variety of other risks and challenges in managing an organization operating in various countries, including those related to:

general economic conditions in each country or region;
fluctuations in currency exchange rates and related impacts to our operating results;
regulatory changes or other government actions;
political unrest, terrorism and the potential for other hostilities;
public health risks, particularly in areas in which we have significant operations;
longer payment cycles and difficulties in collecting accounts receivable;
additional complexity to comply with regulations in multiple tax jurisdictions, as well as overlapping tax regimes;
our ability to repatriate funds held by our foreign subsidiaries to the United States at favorable tax rates;
difficulties in transferring funds from or converting currencies in certain countries; and
reduced protection for intellectual property rights in some countries.

Our business has grown substantially over the last several years and continues to expand into new geographical locations. In addition, we have made efforts and expect to make further efforts to integrate supply across our various demand platforms. These changes add to complexity in tax compliance, and our increased size and operating history may increase the likelihood that we will be subject to audits by taxing authorities in various jurisdictions.


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In addition, the strategy of Booking.com, Agoda and rentalcars.com involves rapid expansion into regions around the world, including Europe, Asia, North America, South America and elsewhere, many of which have different legislation, regulatory environments, tax laws and levels of political stability. In September 2010, the United Kingdom's Office of Fair Trading ("OFT"), the competition authority in the U.K., announced it was conducting a formal early stage investigation into suspected breaches of competition law in the hotel online booking sector and had written to a number of parties in the industry to request information. Specifically, the investigation focuses upon whether there are agreements or concerted practices between hotels and online travel companies and/or hotel room reservation "wholesalers" relating to the fixed or minimum resale prices of hotel room reservations.  In September 2010, Booking.com B.V. and priceline.com Incorporated, on behalf of Booking.com, received a Notice of Inquiry from the OFT; we and Booking.com are cooperating with the OFT's investigation. We are unable at this time to predict the outcome of the OFT's investigation and the impact, if any, on our business and results of operations. Compliance with foreign legal, regulatory or tax requirements will place demands on our time and resources, and we may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences.

We will be subject to increased income taxes in the event that our foreign cash balances are remitted to the United States .

As of December 31, 2011, we held approximately $1.6 billion of cash and short-term investments outside of the United States. To date, we have used our foreign cash to reinvest in our foreign operations. It is our current intention to reinvest our foreign cash in our foreign operations. If our foreign cash balances continue to grow and our ability to reinvest those balances diminishes, it will become increasingly likely that we will repatriate some of our foreign cash balances to the United States. In such event, we would likely be subject to additional income tax expense in the United States with respect to our unremitted foreign earnings. Other than federal alternative minimum tax and certain state income taxes, we would not incur an increase in tax payments unless we repatriate the cash and no longer have net operating loss carryforwards available to offset the taxable income. Additionally, if we were to repatriate foreign cash to the U.S., it would use a portion of our domestic net operating loss carryforward which could result in us being subject to cash income taxes on the earnings of our domestic business sooner than would otherwise have been the case.

In addition, U.S. President Barack Obama has proposed significant changes to the U.S. international tax laws that would limit U.S. deductions for interest expense related to un-repatriated foreign-source income and modify the U.S. foreign tax credit rules. We cannot determine whether all of these proposals will be enacted into law or what, if any, changes may be made to such proposals prior to being enacted into law. If the U.S. tax laws change in a manner that increases our tax obligation, our results could be adversely impacted.

We face risks related to our intellectual property .

We regard our intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. If we are not successful in protecting our intellectual property, it could have a material adverse effect on our business, results of operations and financial condition.
While we believe that our issued patents and pending patent applications help to protect our business, there can be no assurance that:
a third party will not have or obtain one or more patents that can prevent us from practicing features of our business or that will require us to pay for a license to use those features;

our operations do not or will not infringe valid, enforceable patents of third parties;

any patent can be successfully defended against challenges by third parties;

the pending patent applications will result in the issuance of patents;

competitors or potential competitors will not devise new methods of competing with us that are not covered by our patents or patent applications;

because of variations in the application of our business model to each of our services, our patents will be effective in preventing one or more third parties from utilizing a copycat business model to offer the same service in one or more categories;


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new prior art will not be discovered that may diminish the value of or invalidate an issued patent; or

legislative or judicial action will not directly or indirectly affect the scope and validity of any of our patent rights.

There has been recent discussion in the press regarding the examination and issuance of so called "business method" patents. As a result, the United States Patent and Trademark Office has indicated that it intends to intensify the review process applicable to such patent applications. The new procedures are not expected to have a direct effect on patents already granted. We cannot anticipate what effect, if any, the new review process will have on our pending patent applications. In addition, there has been recent discussion in various federal court proceedings regarding the patentability and validity of so called "business method" patents. The U.S. Supreme Court, in a recent decision in Bilski v. Kappos , partially addressed the patentability of so-called business method patents.   We cannot anticipate what effect, if any, any new federal court decision or new legislation will have on our issued patents or pending patent applications.
We pursue the registration of our trademarks and service marks in the U.S. and internationally. However, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available online. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that might diminish the value of our proprietary rights or harm our reputation.
From time to time, in the ordinary course of our business, we have been subject to, and are currently subject to, legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties will continue to assert intellectual property claims, in particular patent claims, against us, particularly as we expand the complexity and scope of our business. We endeavor to defend our intellectual property rights diligently, but intellectual property litigation is extremely expensive and time consuming, and has and is likely to continue to divert managerial attention and resources from our business objectives. Successful infringement claims against us could result in significant monetary liability or prevent us from operating our business, or portions of our business. In addition, resolution of claims may require us to obtain licenses to use intellectual property rights belonging to third parties, which may be expensive to procure, or possibly to cease using those rights altogether. Any of these events could have a material adverse effect on our business, results of operations or financial condition.
Our business is exposed to risks associated with processing credit card transactions.
Our results have been negatively impacted by purchases made using fraudulent credit cards. Because we act as the merchant of record in a majority of our priceline.com transactions as well as those of Agoda and rentalcars.com, we may be held liable for accepting fraudulent credit cards on our websites as well as other payment disputes with our customers. Additionally, we are held liable for accepting fraudulent credit cards in certain retail transactions when we do not act as merchant of record. Accordingly, we calculate and record an allowance for the resulting credit card chargebacks. If we are unable to combat the use of fraudulent credit cards on our websites, our business, results of operations and financial condition could be materially adversely affected.
In addition, in the event that one of our major suppliers voluntarily or involuntarily declares bankruptcy, we could experience an increase in credit card chargebacks from customers with travel reservations with such supplier. For example, airlines that participate in our system and declare bankruptcy or cease operations may be unable or unwilling to honor tickets sold for their flights. Our policy in such event is to direct customers seeking a refund or exchange to the airline, and not to provide a remedy ourselves. Because we are the merchant-of-record on sales of Name Your Own Price ® airline tickets to our customers, however, we could experience a significant increase in demands for refunds or credit card chargebacks from customers, which could materially adversely affect our operations and financial results. For example, in April 2008, Aloha Airlines and ATA Airlines each ceased operations and we experienced an increase in credit card chargebacks from customers with tickets on those airlines.
Agoda and rentalcars.com process credit card transactions and operate in numerous currencies. Credit card costs are typically higher for foreign currency transactions and in instances where cancellations occur.
We are party to legal proceedings which, if adversely decided, could materially adversely affect us.

We are a party to the legal proceedings described in Item 3 below, and Note 16 to the Consolidated Financial Statements. The defense of the actions described in Item 3 and Note 16 may increase our expenses and an adverse outcome in any of such actions could have a material adverse effect on our business and results of operations.



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Item 1B.  Unresolved Staff Comments
 
None.
 
Item 2.  Properties
 
Our executive, administrative, and U.S. operating offices and network operations center are located in approximately 70,000 square feet of leased office space located in Norwalk, Connecticut.  We also lease approximately 49,000 square feet of office space in Grand Rapids, Michigan.  Booking.com Limited leases approximately 48,000 square feet of office space in Cambridge, England.  Booking.com B.V. leases approximately 458,000 square feet of office space in Amsterdam, Netherlands and in 39 other countries in support of its international operations.  Agoda leases approximately 74,000 square feet of office space in Bangkok, Thailand, and in 18 other countries in support of its international operations.  Rentalcars.com leases approximately 29,000 square feet of office space in Manchester, England.  We do not own any real estate as of February 1, 2011.
 
We believe that our existing facilities are adequate to meet our current requirements, and that suitable additional or substitute space will be available as needed to accommodate any further expansion of corporate operations.
 
Item 3.  Legal Proceedings
 
Litigation Related to Hotel Occupancy and Other Taxes

We and certain third-party defendant online travel companies are currently involved in approximately fifty lawsuits, including certified and putative class actions, brought by or against U.S. states, cities and counties over issues involving the payment of hotel occupancy and other taxes (i.e., state and local sales tax) and our "merchant" hotel business. Our subsidiaries Lowestfare.com LLC and Travelweb LLC are named in some but not all of these cases. Generally, each complaint alleges, among other things, that the defendants violated each jurisdiction's respective hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under each law. Each complaint typically seeks compensatory damages, disgorgement, penalties available by law, attorneys' fees and other relief. We are also involved in one consumer lawsuit relating to, among other things, the payment of hotel occupancy taxes and service fees. In addition, approximately sixty municipalities or counties, and at least six states, have initiated audit proceedings (including proceedings initiated by more than forty municipalities in California), issued proposed tax assessments or started inquiries relating to the payment of hotel occupancy and other taxes (i.e., state and local sales tax). Additional state and local jurisdictions are likely to assert that we are subject to, among other things, hotel occupancy and other taxes (i.e., state and local sales tax) and could seek to collect such taxes, retroactively and/or prospectively.

With respect to the principal claims in these matters, we believe that the ordinances at issue do not apply to the service we provide, namely the facilitation of reservations, and, therefore, that we do not owe the taxes that are claimed to be owed. Rather, we believe that the ordinances at issue generally impose hotel occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations.  In addition, in many of these matters, municipalities have asserted claims for "conversion" - essentially, that we have collected a tax and wrongfully "pocketed" those tax dollars - a claim that we believe is without basis and have vigorously contested.  The municipalities that are currently involved in litigation and other proceedings with us, and that may be involved in future proceedings, have asserted contrary positions and will likely continue to do so. From time to time, we have found it expedient to settle, and may in the future agree to settle, claims pending in these matters without conceding that the claims at issue are meritorious or that the claimed taxes are in fact due to be paid.

In connection with some of these tax audits and assessments, we may be required to pay any assessed taxes, which amounts may be substantial, prior to being allowed to contest the assessments and the applicability of the ordinances in judicial proceedings. This requirement is commonly referred to as "pay to play" or "pay first." For example, the City of San Francisco assessed us approximately $3.4 million (an amount that includes interest and penalties) relating to hotel occupancy taxes, which we paid in July 2009. Payment of these amounts, if any, is not an admission that we believe we are subject to such taxes and, even if such payments are made, we intend to continue to assert our position vigorously. We have successfully argued against a "pay first" requirement asserted in another California proceeding.

Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings. For example, in October 2009, a jury in a San Antonio class action found that we and the other online travel companies that are defendants in the lawsuit "control" hotels for purposes of the local hotel occupancy tax ordinances at issue and are, therefore, subject to the requirements of those ordinances. On July 1, 2011, the court issued findings of fact and

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conclusions of law in connection with this case. In addition to ruling that hotel tax was due from defendants on the markup and service fee, the court held defendants liable for penalties and interest per the terms of each city's applicable ordinance, but capped penalties at fifteen percent (15%) of the total amount of unpaid taxes at the time of entry of judgment; ordinances without a penalty provision are assessed a fifteen percent (15%) penalty under the Texas Tax Code. We expect supplemental findings of fact and conclusions of law to be issued by the court, followed by a judgment. We intend to vigorously pursue an appeal of the judgment on legal and factual grounds.

An unfavorable outcome or settlement of pending litigation may encourage the commencement of additional litigation, audit proceedings or other regulatory inquiries. In addition, an unfavorable outcome or settlement of these actions or proceedings could result in substantial liabilities for past and/or future bookings, including, among other things, interest, penalties, punitive damages and/or attorney fees and costs. There have been, and will continue to be, substantial ongoing costs, which may include "pay first" payments, associated with defending our position in pending and any future cases or proceedings. An adverse outcome in one or more of these unresolved proceedings could have a material adverse effect on our business and results of operations and could be material to our earnings or cash flow in any given operating period.

To the extent that any tax authority succeeds in asserting that we have a tax collection responsibility, or we determine that we have such a responsibility, with respect to future transactions, we may collect any such additional tax obligation from our customers, which would have the effect of increasing the cost of hotel room reservations to our customers and, consequently, could make our hotel service less competitive (i.e., versus the websites of other online travel companies or hotel company websites) and reduce hotel reservation transactions; alternatively, we could choose to reduce the compensation for its services on "merchant" hotel transactions. Either step could have a material adverse effect on our business and results of operations.

We estimate that, since our inception through December 31, 2011 , we have earned aggregate gross profit, including fees, from our entire U.S. "merchant" hotel business (which includes, among other things, the differential between the price paid by a customer for our service and the cost of the underlying room) of approximately $1.4 billion . This gross profit was earned in over a thousand taxing jurisdictions that we believe have aggregate tax rates (which may include hotel occupancy taxes, state and local taxes, among other taxes) associated with a typical transaction between a consumer and a hotel that generally range from approximately 6% to approximately 18% , depending on the jurisdiction. In many of the judicial and other proceedings initiated to date, municipalities seek not only historical taxes that are claimed to be owed on our gross profit, but also, among other things, interest, penalties, punitive damages and/or attorney fees and costs. Therefore, any liability associated with hotel occupancy tax matters is not constrained to our liability for tax owed on our historical gross profit, but may also include, among other things, penalties, interest and attorneys' fees.

To date, the majority of the taxing jurisdictions in which we facilitate hotel reservations have not asserted that taxes are due and payable on our U.S. "merchant" hotel business.  With respect to municipalities that have not initiated proceedings to date, it is possible that they will do so in the future or that they will seek to amend their tax statutes and seek to collect taxes from us only on a prospective basis.

Reserve For Hotel Occupancy and Other Taxes

As a result of this litigation and other attempts by jurisdictions to levy similar taxes, we have established an accrual for the potential resolution of issues related to hotel occupancy and other taxes in the amount of approximately $33 million as of December 31, 2011 compared to approximately $26 million as of December 31, 2010 (which includes, among other things, amounts related to the litigation in San Antonio).  The accrual is based on our estimate of the ultimate cost of resolving these issues. The actual cost may be less or greater, potentially significantly, than the liabilities recorded. An estimate for a possible loss or range of loss in excess of the amount accrued cannot be reasonably made.

Developments in the Year Ended December 31, 2011

In the year ended December 31, 2011 and to date, six of the approximately fifty currently pending lawsuits and seven of the total number of currently pending administrative proceedings noted above were commenced. District of Columbia v. Priceline.com, Inc. (Superior Court for the District of Columbia) was filed on March 22, 2011; McAllister v. Hotels.com, L.P., et al. (Circuit Court of Saline County, Arkansas), a putative class action, was filed on February 22, 2011; County of Volusia, et al. v. Priceline.com, Inc., et al. (Circuit Court of Volusia County, Florida) was filed on April 20, 2011; Town of Breckenridge, Colorado v. Colorado Travel Company, LLC, et al. , (Summit County District Court), a putative class action, was filed on July 25, 2011; County of Nassau v. Expedia, Inc. et al. (Supreme Court of the State of New York, County of Nassau) was filed on September 26, 2011. This case previously had been dismissed from federal court and was refiled as a state court action. State

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of Mississippi ex rel. Attorney General Jim Hood v. Priceline.com, Inc., et al. (Chancery Court for Hinds County, Mississippi) was filed in December 2011. In addition, County of Kent, Michigan v. Hotels.com, L.P., et al. (Circuit Court for Kent County) was filed in November 2011; the Priceline defendants were voluntarily dismissed in December 2011.

In addition, during the year ended December 31, 2011 and to date, appellate rulings and rulings granting dispositive motions brought by us (or another co-defendant), e.g. motions to dismiss or for summary judgment, were issued. For example, on June 28, 2011, in St. Louis County, et al. v. Prestige Travel, Inc., et al. (Circuit Court of St. Louis County, Missouri; filed July 2009), the Supreme Court of Missouri affirmed the lower court's dismissal of all claims against the online travel companies. On October 25, 2011, in City of Houston v. Hotels.com, L.P. (Harris County, Tex. Dist. Ct., filed on March 5, 2007) (Tex. App., appeal filed April 14, 2010), the Texas 14th Court of Appeals affirmed the lower court's grant of summary judgment in favor of the defendants on all claims, holding that the statutes at issue in that case did not apply to defendants' hotel reservation facilitation services. In January 2012, Plaintiffs filed a petition for review before the Texas Supreme Court. In State of Oklahoma v. Priceline.com, et al. (District Court of Oklahoma County, Oklahoma, filed November 2010), defendants' motion to dismiss was granted on March 11, 2011 and plaintiffs did not appeal. Defendants' motion for summary judgment was granted on March 24, 2011 in City of Birmingham, Alabama, et al. v. Orbitz, Inc. et al. , (Circuit Court of Jefferson County, filed December 2009); Plaintiffs have appealed that ruling to the Alabama Supreme Court. On April 29, 2011, the Kentucky Court of Appeals affirmed the lower court's dismissal of all claims against the online travel companies in City of Bowling Green, Kentucky v. Hotels.com, L.P., et al. (filed in Warren Circuit Court in March 2009; appeal filed April 2010; motion for discretionary review filed with Kentucky Supreme Court in May 2011).  In February 2012, the Kentucky Supreme Court denied the plaintiff's motion for discretionary review of the Court of Appeals' decision.   In City of San Diego, California v. Hotels.com, L.P., et al. , JCCP 4472 (Los Angeles Superior Court, filed February 9, 2006), on September 6, 2011, the court granted the online travel companies' petition to (i) vacate the hearing officer's prior ruling that the online travel company defendants are liable for transient occupancy tax pursuant to San Diego's ordinance, (ii) issue a new ruling that the online travel company defendants are not liable for such tax, and (iii) to set aside the City of San Diego's assessments. With respect to its remaining claims, the City of San Diego has indicated it will stipulate to a consent judgment in favor of the online travel companies. The City has indicated it plans to appeal. In City of Santa Monica v. Expedia, Inc. et al., JCCP 4472 (Los Angeles Superior Court, filed June 25, 2010), the court granted the online travel companies' motion to dismiss all claims without leave to amend; judgment was entered on July 26, 2011 in favor of the defendants. The case is currently on appeal. In Township of Lyndhurst, New Jersey v. priceline.com Inc., et al. (filed in the U.S. District Court for the District of New Jersey in June 2008) (U.S. Court of Appeals for the Third Circuit, appeal filed April 2009), the Third Circuit affirmed the District Court's dismissal of the case. On August 24, 2011, the Third Circuit also denied the Township's motion for rehearing. On January 28, 2012, in the City of Branson, Missouri v. Hotels.com, LP., et al. (Circuit Court of Greene County, Missouri, filed December 2006), the Court granted defendants' motion to dismiss all causes of action. In City of Goodlettsville, Tennessee, et al. v. priceline.com Incorporated, et al. (U.S. District Court for the Middle District of Tennessee; filed June 2008), the court granted the defendants' motion for summary judgment on February 21, 2012.

Rulings granting dispositive motions or granting relief sought by a plaintiff municipality (or state) also were issued. For example, on August 3, 2011, in County of Lawrence, Pennsylvania v. Hotels.com, L.P., et al. (Court of Common Pleas of Lawrence County, Pennsylvania, filed November 2009) (Commonwealth Court of Pennsylvania, appeal filed in November 2010), the Court for the Commonwealth of Pennsylvania reversed the dismissal by the Court of Common Pleas of Lawrence of the County's declaratory relief claim, but affirmed the dismissal of the remaining counts. In The Village of Rosemont, Illinois v. priceline.com, Inc., et al. (U.S. District Court for the Northern District of Illinois, filed in July 2009), on October 14, 2011, the court granted plaintiff's motion for summary judgment. In City of Atlanta, Georgia v. Hotels.com L.P., et al. (Superior Court of Fulton County, Georgia, filed March 2006), following the decision by the Georgia Supreme Court affirming summary judgment in favor of defendants in May 2011, the Superior Court of Fulton County found that there are unresolved claims in the case for conversion, punitive damages, and attorneys' fees. That decision is the subject of a motion for reconsideration filed by defendants on December 29, 2011.

Lastly, in the year ended December 31, 2011 we reached agreements with the respective plaintiffs resolving the claims for purported back taxes in the following cases: Brevard County, Florida v. Priceline.com Inc., et al. (U.S. District Court for the Middle District of Florida, filed October 2009); County of Genesee, Michigan, et al. v. Hotels.com L.P., et al. (Circuit Court for the County of Ingham, Michigan, filed in February 2009); City of Jacksonville v. Hotels.com, L.P., et al., 2006-CA-005393 (Circuit Court for Duval County, filed August 4, 2006); Anne Gannon v. Hotels.com, L.P. , 50 2009 CA 025919 (Circuit Court for Palm Beach County, filed July 30, 2009); City of Myrtle Beach, South Carolina v. Hotels.com, L.P., et al. (Court of Common Pleas for Horry County, South Carolina, filed in February 2007); Town of Hilton Head Island, South Carolina v. Hotels.com, L.P., et al. (Court of Common Pleas for Beaufort County, South Carolina, filed in April 2010) and Horry County, South Carolina, et al. v. Hotels.com, LP, et al. (Court of Common Pleas, Horry County, South Carolina; filed in February 2007). These cases have been dismissed. In addition, County of Monroe, Florida v. Priceline.com, Inc. et al. (U.S. District Court for

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the Southern District of Florida, filed January 2009)(agreement signed August 2010) and the Tourist Development Tax claims asserted by the County in Priceline.com, Inc. v. Miami-Dade County, Florida, et al. , were dismissed in 2011 pursuant to the August 2010 agreement reached in the County of Monroe case. As part of each of these agreements, plaintiffs have agreed to not assert claims based on the ordinance at issue in the respective action for periods that range from two to four years.  The settlement amounts in these cases are not material to our results of operations or cash flow for the year ended December 31, 2011.

The currently pending occupancy tax matters are listed below. We intend to defend vigorously against the claims in all of the proceedings described below.

Statewide Class Actions and Putative Class Actions

Such actions include:

City of Los Angeles, California v. Hotels.com, Inc., et al. (California Superior Court, Los Angeles County; filed December 2004)
City of Rome, Georgia, et al. v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District of Georgia; filed November 2005)
City of San Antonio, Texas v. Hotels.com, L.P., et al. (U.S. District Court for the Western District of Texas; filed May 2006)
City of Gallup, New Mexico v. Hotels.com, L.P., et al. (U.S. District Court for the District of New Mexico; filed July 2007)
City of Goodlettsville, Tennessee, et al. v. priceline.com Incorporated, et al. (U.S. District Court for the Middle District of Tennessee; filed June 2008)
Pine Bluff Advertising and Promotion Commission, Jefferson County, Arkansas, et al. v. Hotels.com, LP, et al. (Circuit Court of Jefferson County, Arkansas; filed September 2009)
County of Lawrence, Pennsylvania v. Hotels.com, L.P., et al. (Court of Common Pleas of Lawrence County, Pennsylvania; filed November 2009
McAllister, et al. v. Hotels.com LP, et al. (Circuit Court of Saline County, Arkansas; filed February 2011)
Town of Breckenridge, Colorado v. Colorado Travel Company, LLC, et al. (District Court of Summit County, Colorado; filed July 2011)
County of Nassau v. Expedia, Inc., et al. (Supreme Court of Nassau County, New York; filed September 2011)

Actions Filed on Behalf of Individual Cities, Counties and States

Such actions include:

City of Findlay, Ohio v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District of Ohio; filed October 2005); (U.S. Court of Appeals for the Sixth Circuit; appeal filed December 2010); and City of Columbus, Ohio, et al. v. Hotels.com, L.P., et al. (U.S. District Court for the Southern District of Ohio; filed August 2006); (U.S. District Court for the Northern District of Ohio); (U.S. Court of Appeals for the Sixth Circuit; appeal filed December 2010)
City of Chicago, Illinois v. Hotels.com, L.P., et al. (Circuit Court of Cook County Illinois; filed November 2005)
City of San Diego, California v. Hotels.com L.P., et al. (California Superior Court, San Diego County; filed September 2006) (Superior Court of California, Los Angeles County)
City of Atlanta, Georgia v. Hotels.com L.P., et al. (Superior Court of Fulton County, Georgia; filed March 2006)
Wake County, North Carolina v. Hotels.com, LP, et al. (General Court of Justice, Superior Court Division, Wake County, North Carolina; filed November 2006); Dare County, North Carolina v. Hotels.com, LP, et al. (General Court of Justice, Superior Court Division, Dare County, North Carolina; filed January 2007); Buncombe County, North Carolina v. Hotels.com, LP, et al. (General Court of Justice, Superior Court Division, Buncombe County, North Carolina; filed February 2007); Mecklenburg County, North Carolina v. Hotels.com LP, et al. (General Court of Justice, Superior Court Division, Mecklenburg County, North Carolina; filed January 2008)
City of Houston, Texas v. Hotels.com, LP., et al. (District Court of Harris County, Texas; filed March 2007); (Affirmed on appeal, Texas Fourteenth Court of Appeals October 2011); (Texas Supreme Court; petition for review filed January 2012)

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City of Oakland, California v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District of California; filed June 2007); (U.S. Court of Appeals for the Ninth Circuit; appeal filed December 2007)
City of Bowling Green, Kentucky v. Hotels.com, L.P., et al., (Warren Circuit Court; filed March 2009); (Commonwealth of Kentucky Court of Appeals; appeal filed April 2010); (Kentucky Supreme Court; motion for discretionary review filed May 2011)
The Village of Rosemont, Illinois v. Priceline.com, Inc., et al. (U.S. District Court for the Northern District of Illinois; filed July 2009)
Leon County, et al. v. Expedia, Inc., et al. (Second Judicial Circuit Court for Leon County, Florida; filed November 2009); Leon County v. Expedia, Inc. et al. (Second Judicial Circuit Court for Leon County, Florida; filed December 2009)
City of Birmingham, Alabama, et al. v. Orbitz, Inc., et al. (Circuit Court of Jefferson County, Alabama; filed December 2009); (Alabama Supreme Court; appeal filed May 2011)
Baltimore County, Maryland v. Priceline.com, Inc., et al. (U.S. District Court for the District of Maryland; filed May 2010)
City of Santa Monica, California v. Expedia, Inc., et al. (Superior Court of California, Los Angeles County, West District; filed June 2010); (California Court of Appeal, Second District; appeal filed September 2011)
Hamilton County, Ohio, et al. v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District Of Ohio; filed August 2010)
State of Florida Attorney General v. Expedia, Inc., et al. (Circuit Court - Second Judicial Circuit, Leon County, Florida; November 2010)
Montana Department of Revenue v. Priceline.com, Inc., et al. (First Judicial District Court of Lewis and Clark County, Montana; filed November 2010)
Montgomery County, Maryland v. Priceline.com, Inc., et al. (United States District Court for the District of Maryland; filed December 2010)
District of Columbia v. Expedia, Inc., et al. (Superior Court for the District of Columbia; filed March 2011)
County of Volusia, et al. v. Expedia, Inc., et al. (Circuit Court of Volusia County; filed April 2011)
State of Mississippi ex rel. Attorney General Jim Hood v. Priceline.com, Inc., et al. (Chancery Court for Hinds County, Mississippi; filed December 2011)

We have also been informed by counsel to the plaintiffs in certain of the aforementioned actions that various, undisclosed municipalities or taxing jurisdictions may file additional cases against us, Lowestfare.com LLC and Travelweb LLC in the future.

Judicial Actions Relating to Assessments Issued by Individual Cities, Counties and States

After administrative remedies have been exhausted, we may seek judicial review of assessments issued by an individual city or county. Currently pending actions seeking such a review include:

Priceline.com, Inc., et al. v. Broward County, Florida (Circuit Court - Second Judicial Circuit, Leon County, Florida; complaints filed January 2009, August 2009, and May 2011)
Priceline.com Inc., et al. v. City of Anaheim, California, et al. (Superior Court of California, County of Orange; filed February 2009); (Superior Court of California, County of Los Angeles); (California Court of Appeal, Second District; appeal filed January 2011)
Priceline.com, Inc. v. Indiana Department of State Revenue (Indiana Tax Court; filed March 2009)
Priceline.com, Inc., et al. v. City of San Francisco, California, et al. (Superior Court of California, County of San Francisco; filed June 2009); (Superior Court of California, County of Los Angeles)
Priceline.com, Inc. v. Miami-Dade County, Florida, et al. (Eleventh Judicial Circuit Court for Miami Dade, County, Florida; filed December 2009)
Priceline.com Incorporated, et al. v. Osceola County, Florida, et al. (Circuit Court of the Second Judicial Circuit, in and for Leon County, Florida; filed January 2011)
In the Matter of the Appeal of Travelocity.com LLC, et al. (Hawaii Tax Appeal Court; filed March 2011)

We intend to prosecute vigorously our claims in these actions.

Consumer Class Actions

On June 21, 2011 in Chiste, et al. v. priceline.com Inc., et al. (United States District Court for the Southern District of New York; filed in December 2008), the court granted our motion to dismiss all claims against it except the breach of fiduciary claim. On June 21, 2011, the case was transferred to the United States District Court for the Northern District of Illinois for

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resolution of the remaining claim, which was consolidated under Peluso v. Orbitz.com, et al. , 11 Civ. 4407 on July 14, 2011. On July 13, 2011, the plaintiffs filed a Notice of Appeal of the June 21, 2011 decision in the United States Court of Appeals for the Second Circuit. On July 25, 2011, the Peluso court granted plaintiff's motion to voluntarily dismiss the claim against us in the Northern District of Illinois. On December 6, 2011, the Second Circuit dismissed the appeal for lack of jurisdiction.

We intend to defend vigorously against the claims in all of the on-going proceedings described above.

Administrative Proceedings and Other Possible Actions

At various times, we have also received inquiries or proposed tax assessments from municipalities and other taxing jurisdictions relating to our charges and remittance of amounts to cover state and local hotel occupancy and other related taxes. Among others, the City of Philadelphia, Pennsylvania; the City of Phoenix, Arizona (on behalf of itself and 12 other Arizona cities); the City of St. Louis, Missouri; the City of Paradise Valley, Arizona; the City of Denver, Colorado; City of Greenwood Village, Colorado; City of Littleton, Colorado; City of Golden, Colorado; and the City of Portland, Oregon and County of Multnomah, Oregon; and state tax officials from Arkansas, Florida, Indiana, Louisiana, Maryland, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, Wisconsin, and Wyoming have begun formal or informal administrative procedures or stated that they may assert claims against us relating to allegedly unpaid state or local hotel occupancy or related taxes. Between 2008 and 2010, we received audit notices from more than forty cities in the state of California. We have been engaged in audit proceedings in each of those cities. We have also been contacted for audit by five counties in the state of Utah.

Litigation Related to Securities Matters

On March 16, March 26, April 27, and June 5, 2001, respectively, four putative class action complaints were filed in the U.S. District Court for the Southern District of New York naming priceline.com, Inc., Richard S. Braddock, Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. as defendants (01 Civ. 2261, 01 Civ. 2576, 01 Civ. 3590 and 01 Civ. 4956).  Shives et al. v. Bank of America Securities LLC et al. , 01 Civ. 4956, also names other defendants and states claims unrelated to us.  The complaints allege, among other things, that we and the individual defendants violated the federal securities laws by issuing and selling priceline.com common stock in our March 1999 initial public offering without disclosing to investors that some of the underwriters in the offering, including the lead underwriters, had allegedly solicited and received excessive and undisclosed commissions from certain investors.  After extensive negotiations, the parties reached a comprehensive settlement on or about March 30, 2009.  On April 2, 2009, plaintiffs filed a Notice of Motion for Preliminary Approval of Settlement.  On June 9, 2009, the court granted the motion and scheduled the hearing for final approval for September 10, 2009.  The settlement, previously approved by a special committee of our Board of Directors, compromised the claims against us for approximately $ 0.3 million. The court issued an order granting final approval of the settlement on October 5, 2009.  Notices of appeal of the Court's order have been filed with the Second Circuit.  All of the appeals have now been resolved.

OFT Inquiry

In September 2010, the United Kingdom's Office of Fair Trading (the "OFT"), the competition authority in the U.K., announced it was conducting a formal early stage investigation into suspected breaches of competition law in the hotel online booking sector and had written to a number of parties in the industry to request information.  Specifically, the investigation focuses upon whether there are agreements or concerted practices between hotels and online travel companies and/or hotel room reservation "wholesalers" relating to the fixed or minimum resale prices of hotel room reservations.  In September 2010, Booking.com B.V. and priceline.com Incorporated, on behalf of Booking.com, received a Notice of Inquiry from the OFT; we and Booking.com are cooperating with the OFT's investigation.  We are unable at this time to predict the outcome of the OFT's investigation and the impact, if any, on our business, financial condition and results of operations.

We intend to defend vigorously against the claims in all of the proceedings described in this Item 3. We have accrued for certain legal contingencies where it is probable that a loss has been incurred and the amount can be reasonably estimated. Except as disclosed, such amounts accrued are not material to our Consolidated Balance Sheets and provisions recorded have not been material to our consolidated results of operations. We are unable to estimate the potential maximum range of loss.

From time to time, we have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third party intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources, divert management's attention from our business objectives and could adversely affect our business, results of operations, financial condition and cash flows.


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Item 4.  Mine Safety Disclosures
 
Not applicable.

PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Price Range of Common Stock
 
Our common stock is quoted on the NASDAQ Global Select Market under the symbol "PCLN."  The following table sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported on the NASDAQ Global Select Market:
 
2011
 
High
 
Low
 
 
 
 
 
First Quarter
 
$
509.00

 
$
402.25

Second Quarter
 
561.88

 
451.75

Third Quarter
 
554.00

 
441.55

Fourth Quarter
 
553.33

 
411.26

 
2010
 
High
 
Low
 
 
 
 
 
First Quarter
 
$
262.67

 
$
192.72

Second Quarter
 
273.93

 
173.32

Third Quarter
 
358.24

 
173.75

Fourth Quarter
 
428.10

 
325.00

 
Holders
 
As of February 14, 2012, there were approximately 330 stockholders of record of priceline.com Incorporated’s common stock, although we believe that there are a significantly larger number of beneficial owners.
 
Dividend Policy
 
We have not declared or paid any cash dividends on our capital stock since our inception and do not expect to pay any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business.

Performance Measurement Comparison

The following graph shows the total stockholder return through December 31, 2011 of an investment of $100 in cash on January 1, 2007 for priceline.com Incorporated common stock and an investment of $100 in cash on January 1, 2007 for (i) the NASDAQ Composite Index, (ii) the Standard and Poor’s 500 Index and (iii) the Research Data Group ("RDG") Internet Composite Index. The RDG Internet Composite Index is an index of stocks representing the Internet industry, including Internet software and service companies and e-commerce companies. Historic stock performance is not necessarily indicative of future stock price performance.  All values assume reinvestment of the full amount of all dividends and are calculated as of the last day of each month:

 

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Measurement
Point
 
Priceline.com
Incorporated
 
NASDAQ
Composite Index
 
S&P 500
Index
 
RDG Internet
Composite
 
 
 
 
 
 
 
 
 
 
 
2006
 
100.00

 
100.00

 
100.00

 
100.00

 
2007
 
263.38

 
110.26

 
105.49

 
126.21

 
2008
 
168.88

 
65.65

 
66.46

 
67.19

 
2009
 
500.83

 
95.19

 
84.05

 
120.51

 
2010
 
916.19

 
112.10

 
96.71

 
145.40

 
2011
 
1,072.48

 
110.81

 
98.75

 
149.87

 

Sales of Unregistered Securities
 
In 2011, we issued 4,869 shares of our common stock to holders of our 0.75% Convertible Senior Notes upon the conversion of approximately $0.2 million principal amount of notes. Such issuances of shares of our common stock were made under Section 4(2) of the Securities Act of 1933, as amended.  See Note 11 to the Consolidated Financial Statements.
 

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Issuer Purchases of Equity Securities
 
The following table sets forth information relating to repurchases of our equity securities during the three months ended December 31, 2011:

ISSUER PURCHASES OF EQUITY SECURITIES
 
Period
 
(a) Total Number
of Shares (or
Units) Purchased
 
(b) Average
Price Paid per
Share (or Unit)
 
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
 
(d) Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that May
Yet Be Purchased Under the
Plans or Programs
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
$
44,866,000

 
(1)  
October 1, 2011 —
 

 
$

 

 
$
20,447,000

 
(2)  
October 31, 2011
 
 

 
 

 
 

 
$
393,917,000

 
(3)  
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
$
44,866,000

 
(1)  
November 1, 2011—
 
1,244

(4)  
$
533.31

 

 
$
20,447,000

 
(2)  
November 30, 2011
 
 

 
 

 
 

 
$
393,917,000

 
(3)  
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
$
44,866,000

 
(1)  
December 1, 2011 —
 
294

(4)  
$
470.71

 

 
$
20,447,000

 
(2)  
December 31, 2011
 
 

 
 

 
 

 
$
393,917,000

 
(3)  
 
 
 
 
 
 
 
 
 
 
 
Total
 
1,538

(4)  
$
521.34

 

 
$
459,230,000

 
 
_____________________________
(1)
Pursuant to a stock repurchase program announced on November 2, 2005, whereby the Company was authorized to repurchase up to $50,000,000 of its common stock.
(2)                                   Pursuant to a stock repurchase program announced on September 21, 2006, whereby the Company was authorized to repurchase up to $150,000,000 of its common stock.
(3)                                   Pursuant to a stock repurchase program announced on March 4, 2010, whereby the Company was authorized to repurchase up to $500,000,000 of its common stock.
(4)                                   Pursuant to a general authorization, not publicly announced, whereby the Company is authorized to repurchase shares of its common stock to satisfy employee withholding tax obligations related to stock-based compensation.

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Item 6.  Selected Financial Data
 
SELECTED FINANCIAL DATA
 
The following selected consolidated financial data presented below are derived from the Consolidated Financial Statements and related Notes of the Company, and should be read in connection with those statements, some of which are included herein.  Selected financial data reflects data related to rentalcars.com (formerly known as TravelJigsaw) and Agoda from their respective acquisition dates of May 2010 and November 2007.  The information set forth below is not necessarily indicative of future results and should be read in conjunction with Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
 
 
Year Ended December 31,
 
2011
 
2010
 
2009
 
2008
 
2007
 
(In thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
Total revenues
$
4,355,610

 
$
3,084,905

 
$
2,338,212

 
$
1,884,806

 
$
1,409,409

Cost of revenues
1,275,730

 
1,175,934

 
1,077,449

 
928,835

 
769,997

Gross profit
3,079,880

 
1,908,971

 
1,260,763

 
955,971

 
639,412

Total operating expenses (1)
1,680,958

 
1,122,174

 
789,928

 
666,497

 
501,477

Operating income (1)
1,398,922

 
786,797

 
470,835

 
289,474

 
137,935

Total other expense
31,128

 
40,514

 
28,533

 
13,369

 
16,074

Income tax (expense) benefit (2)
(308,663
)
 
(218,141
)
 
47,168

 
(90,171
)
 
23,537

Equity in income (loss) income of investees

 

 
2

 
(310
)
 
(321
)
Net income (1)(2)
1,059,131

 
528,142

 
489,472

 
185,624

 
145,077

Net income attributable to noncontrolling interests (3)
2,760

 
601

 

 
3,378

 
4,679

Net income applicable to common stockholders (1)(2)
1,056,371

 
527,541

 
489,472

 
182,246

 
138,843

Net income applicable to common stockholders per basic common share (1)(2)
21.27

 
11.00

 
11.54

 
4.64

 
3.69

Net income applicable to common stockholders per diluted share (1)(2)
20.63

 
10.35

 
9.88

 
3.74

 
3.05

Total assets
3,970,671

 
2,905,953

 
1,834,224

 
1,312,421

 
1,334,017

Long-term obligations, redeemable noncontrolling interests and redeemable preferred stock (4)
788,218

 
621,624

 
263,708

 
459,928

 
724,144

Total liabilities
1,191,971

 
1,046,828

 
476,610

 
538,520

 
672,492

Total stockholders’ equity
2,574,295

 
1,813,336

 
1,321,629

 
698,826

 
453,625

_____________________________
(1)               The Company recorded a $55.4 million expense related to a litigation settlement in 2007.
(2)             The Company recorded non-cash income tax benefits for the year ended December 31, 2009, resulting from the reversal of a portion of its valuation allowance on its deferred tax assets related to net operating loss carryforwards of $183.3 million.  The Company also recorded income tax benefits in the year ended December 31, 2007 amounting to $47.9 million resulting from a reversal of a portion of the valuation allowance on its deferred tax assets related to domestic net operating loss carryfowards generated from operating losses.
(3)             In September 2008, the Company repurchased all of the remaining outstanding shares underlying noncontrolling interests in Priceline.com International Limited.  Redeemable noncontrolling interests beginning in 2010 relates to the Company's purchase of rentalcars.com in May 2010. In April 2011, in connection with the exercise of certain call and put options in March 2011, the redeemable noncontrolling interests in rentalcars.com were reduced from 24.4% to 19.0%.  
(4)             Includes convertible debt which is classified as a current liability.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our financial statements, including the notes to those statements, included elsewhere in this Form 10-K, and the Section entitled "Special Note Regarding Forward-Looking Statements" in this Form 10-K.  As discussed in more detail in the Section entitled "Special Note Regarding Forward-Looking Statements," this discussion contains forward-looking statements which involve risks and uncertainties.  Our actual results may differ materially from the results discussed in the forward-looking statements.  Factors that might cause those differences include, but are not limited to, those discussed in "Risk Factors."
 
Overview

We are a leading online travel company that offers our customers hotel room reservations at over 210,000 hotels worldwide through the Booking.com, priceline.com and Agoda brands. In the United States, we also offer our customers reservations for car rentals, airline tickets, vacation packages, destination services and cruises through the priceline.com brand. We offer car rental reservations worldwide through rentalcars.com (formerly known as TravelJigsaw), which we acquired in May 2010.
 
We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include the Booking.com, Agoda and rentalcars.com companies.  Our principal goal is to serve our customers with worldwide leadership in online hotel and rental car reservations.  Our business is driven primarily by international results. During the year ended December 31, 2011, our international business (the significant majority of which is generated by Booking.com) represented approximately 78% of our gross bookings (an operating and statistical metric referring to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by our customers), and approximately 88% of our consolidated operating income. Given that the business of our international operations is primarily comprised of hotel reservation services, gross profit earned in connection with the reservation of hotel room nights represents a substantial majority of our gross profit.

Our priceline.com brand in the U.S. offers merchant Name Your Own Price ® travel services (sometimes referred to as "opaque" travel services), which are recorded in revenue on a "gross" basis and have associated cost of revenue. Retail, or price-disclosed, travel services offered by both our U.S. and international brands are recorded in revenue on a "net" basis and have no associated cost of revenue. Therefore, revenue increases and decreases are impacted by changes in the mix of our revenues between Name Your Own Price ® and retail travel services. Gross profit reflects the net margin earned for both our Name Your Own Price ® and retail travel services. Consequently, gross profit has become an increasingly important measure of evaluating growth in our business. At present, we derive substantially all of our gross profit from the following sources:

Commissions earned from price-disclosed hotel room reservations, rental cars, cruises and other travel services;

Transaction gross profit and customer processing fees from our price-disclosed merchant hotel room and rental car reservation services;

Transaction gross profit and customer processing fees from our Name Your Own Price ®  hotel room reservation, rental car and airline ticket services, as well as our vacation packages service;

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

Other gross profit derived primarily from selling advertising on our websites.

Over the last several years we have experienced strong growth in the number of hotel room night reservations booked through our hotel reservation services. We believe this growth is the result of, among other things, the broader shift of travel purchases from offline to online, the high growth of travel overall in emerging markets such as Asia-Pacific and South America, and the continued innovation and execution by our teams around the world to build hotel supply, content and distribution and to improve the customer experience on our websites. We experienced exceptionally strong year-over-year growth during 2011. However, given the sheer size of our hotel reservation business, we believe it is highly likely that our year-over-year growth rates will generally decelerate on a quarterly sequential basis in the future. Thus far during the first quarter of 2012, we experienced deceleration in year-over-year hotel room night reservation growth as compared to the year-over-year growth rate

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in the fourth quarter of 2011. We expect to experience further deceleration in growth rates throughout 2012 and beyond.

In addition, many governments around the world, including the U.S. and certain European governments, are operating at very large financial deficits. Governmental austerity measures aimed at reducing deficits could impair the economic recovery and adversely affect travel demand. Weak economic growth and elevated unemployment rates in the economies of such countries could cause, contribute to, or be indicative of, deteriorating macro-economic conditions. Recently, we have experienced volatility in the growth rates for transactions booked and cancellations for our international business. We have also observed a decline in transaction growth rates and weaker trends in hotel average daily rates ("ADRs") for certain southern European countries, likely due to the impact of weak economic conditions and sovereign debt concerns. This volatility makes it more difficult to predict longer-term trends and the future impact of macro-economic weakness on our business. Finally, higher oil prices are contributing to higher airline ticket prices and are likely to adversely impact consumer discretionary funds available to be spent on travel.

Large, established Internet search engines with substantial resources and expertise in developing online commerce and facilitating Internet traffic are creating - and intend to further create - inroads into online travel, both in the U.S. and internationally. For example, following its acquisition of ITA Software, Inc., a major flight information software company, Google recently launched a new flight search tool that enables users to find fares, schedules and availability directly on Google and excludes online travel agent ("OTA") participation within the search results. Google has also invested in HomeAway, a publicly traded vacation home rental service, and launched "Hotel Finder," a utility that allows users to search and compare hotel accommodations based on parameters set by the user. In addition, Microsoft has launched Bing Travel , which searches for airfare and hotel reservations online and predicts the best time to purchase them. "Meta-search" sites leverage their search technology to aggregate travel search results for the searcher's specific itinerary across supplier, travel agent and other websites and, in many instances, compete directly with us for customers. Furthermore, certain suppliers limit OTA participation within the meta-search results. Some meta-search sites, such as Kayak.com, which offers its users the ability to make hotel reservations directly on its website, may evolve into more traditional online travel sites. These initiatives, among others, illustrate a clear intention to more directly appeal to travel consumers by showing consumers more detailed travel search results, including specific information for travelers' own itineraries, which could lead to suppliers or others gaining a larger share of search traffic or may ultimately lead to search engines maintaining transactions within their own websites. If Google, as the single largest search engine in the world, or Bing, or other leading search engines refer significant traffic to these or other travel services that they develop in the future, it could result in, among other things, more competition from supplier websites and higher customer acquisition costs for third-party sites such as ours and could have a material adverse effect on our business, results of operations and financial condition.

Several major hotel companies, including Choice Hotels International, Hilton Worldwide, Hyatt, InterContinental Hotels Group, Wyndham Hotel Group and Marriott, have launched Room Key, a hotel search engine that competes directly with our hotel room night reservations services around the world. The hotel companies that own Room Key have a stated goal of driving demand directly to their brand web sites, thus reducing the share received by online travel agencies. They may also attempt to improve their competitive position by offering lower room rates, better room availability or additional features or amenities through Room Key than are available through services like ours. If Room Key is successful, our share of the online hotel room night reservation market could be negatively affected in the United States and around the world and our business could suffer.

Hotels also are increasingly offering hotel room reservations through "daily deal" websites such as Groupon and Living Social, which sell coupons to customers at a substantial discount. Expedia recently entered into a partnership with Groupon to sell hotel room reservations to Groupon customers under the "Groupon Getaways" brand name. If these new services are successful, we may experience less demand for our services and are likely to face more competition for access to the limited supply of discounted hotel room rates.

International Trends . The size of the travel market outside of the United States is substantially greater than that within the United States. Historically, Internet adoption rates and e-commerce adoption rates of international consumers have trailed those of the United States. However, international consumers are rapidly moving to online means for purchasing travel. Accordingly, recent international online travel growth rates have substantially exceeded, and are expected to continue to exceed, the growth rates within the United States. We expect that over the long-term, international online travel growth rates will follow a similar trend to that experienced in the United States. In addition, the base of hotel suppliers in Europe and Asia is particularly fragmented compared to that in the United States, where the hotel market is dominated by large hotel chains. We believe online reservation systems like ours may be more appealing to small chains and independent hotels more commonly found outside of the United States. Our growth has primarily been generated by our international hotel reservation service brands, Booking.com and Agoda. Booking.com, our most significant brand, currently includes over 185,000 hotels and accommodations on its website as compared to about 120,000 hotels and accommodations last year (updated hotel counts are

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available on the Booking.com website). Booking.com has added hotels over the past year in its core European market as well as higher-growth markets such as North America (which is a newer market for Booking.com), Asia-Pacific and South America. An increasing amount of our business from both a destination and point-of-sale perspective is conducted in these newer markets which are growing faster than our overall growth rate. We believe that the opportunity to continue to grow our business exists for the markets in which we operate. We believe these trends and factors have enabled us to become the top online hotel reservation service provider in the world as measured by room nights booked.

As our international operations have become significant contributors to our results and international hotel bookings have become of increased importance to our earnings, we have seen, and expect to continue to see, changes in certain of our operating expenses and other financial metrics. For example, because Booking.com and Agoda utilize online search and affiliate marketing as the principal means of generating traffic to their websites, our online advertising expense has increased significantly over recent years, a trend we expect to continue throughout 2012 and beyond. In addition, certain newer markets in which we operate that are i n earlier stages of development have lower operating margins compared to more mature markets, which could have a negative impact on our overall margins as these markets increase in size over time. Also, we intend to continue to invest in hotel additions. Many of these newer properties we add, especially in highly penetrated markets, may have fewer rooms or lower ADRs, and may appeal to a smaller subset of customers (for example, hostels and bed and breakfasts) and therefore may also negatively impact our margins over time.

Another impact of the growing importance of Booking.com, Agoda and rentalcars.com is our increased exposure to foreign currency exchange risk. Because we are conducting a significant and growing portion of our business outside the United States and are reporting our results in U.S. Dollars, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency (principally the Euro and the British Pound Sterling) into U.S. Dollars upon consolidation. A strengthening of the Euro increases our Euro-denominated net assets, gross bookings, gross profit, operating expenses, and net income as expressed in U.S. Dollars, while a weakening of the Euro decreases our Euro-denominated net assets, gross bookings, gross profit, operating expenses, and net income as expressed in U.S. Dollars. Greece, Ireland, Portugal and certain other European Union countries with high levels of sovereign debt have had difficulty refinancing their debt. Concern around devaluation or abandonment of the Euro common currency, or that sovereign default risk may be more widespread and could include the U.S., has led to significant volatility in the exchange rate between the Euro, the U.S. dollar and other currencies. We generally enter into derivative instruments to minimize the impact of short-term currency fluctuations on our consolidated operating results. However, such derivative instruments are short term in nature and not designed to hedge against currency fluctuation that could impact our foreign currency denominated gross bookings, revenue or gross profit (see Note 5 to the Consolidated Financial Statements for additional information on our derivative contracts). For example, while revenue from our international operations grew on a local currency basis by approximately 70% for the year ended December 31, 2011 compared to the same period in 2010, as a result of the positive impact of currency exchange rates, revenue from our international operations as reported in U.S. Dollars grew 79% year-over-year.

Domestic Trends . Competition in domestic online travel remains intense and traditional online travel companies are creating new promotions and consumer value features in an effort to gain competitive advantage. In particular, the competition to provide "opaque" hotel services to consumers, an area in which priceline.com has been a leader, has become more intense over the recent past. For example, in the fourth quarter of 2010, Expedia began making opaque hotel room reservations available on its principal website under the name "Expedia Unpublished Rates" and has been supporting the initiative with a national television advertising campaign. In addition, in 2009, Travelocity launched an opaque price-disclosed hotel booking service that allows customers to book rooms at a discount. As with our Name Your Own Price ® hotel booking service, for these services, the name of the hotel is not disclosed until after purchase. We believe these new offerings, in particular Expedia Unpublished Rates, have adversely impacted the market share and year-over-year growth rate for our opaque hotel service, which experienced a modest decline in room night reservations in 2011 compared to 2010. In addition, hotels are increasingly offering discounted hotel room reservations through "daily deal" websites such as Groupon and Living Social. If Expedia or Travelocity are successful in growing their opaque hotel service, and/or "daily deal" websites are successful in garnering a sizable share of discounted hotel bookings, we may have less consumer demand for our opaque hotel service over time and we are likely to face more competition for access to the limited supply of discounted hotel room rates. As a result, we believe our share of the discount hotel market in the U.S. could further decrease.

We believe that for a number of reasons, including the recent significant year-over-year increase in retail airfares, consumers are engaging in increased shopping behavior before making a travel purchase than they engaged in previously. Increased shopping behavior reduces our advertising efficiency and effectiveness because traffic becomes less likely to result in a purchase on our website, and such traffic is more likely to be obtained through paid online advertising channels than through free direct channels.


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While demand for online travel services in the U.S. continues to experience annualized growth, we believe that the domestic market share of third-party distributors is impacted in part by a concerted initiative by travel suppliers to direct customers to their own websites in an effort to reduce distribution expenses and establish more direct control over their pricing. The launch of Room Key discussed above is demonstrative of such efforts. In addition, certain suppliers have attempted to charge additional fees to customers who book airline reservations through an online channel other than their own website. Suppliers who sell on their own websites typically do not charge a processing fee, and, in some instances, offer advantages such as web-only fares, bonus miles or loyalty points, which could make their offerings more attractive to consumers than models like ours.

Some travel suppliers are encouraging third-party travel intermediaries, such as us, to develop technology to bypass the traditional GDSs, such as enabling direct connections to the travel suppliers or using alternative global distribution methods. For example, in 2011, we enabled a direct connection with American Airlines. During 2011, American Airlines content was temporarily unavailable on Expedia and Orbitz due to disputes related to enabling a direct connection. We believe that this is consistent with an effort on the part of American Airlines, and the airline industry in general, to reduce distribution costs and could be indicative of the airlines in general becoming more aggressive in requiring online travel agents to implement direct connections. Development and implementation of the technology to enable additional direct connections to travel suppliers could cause us to incur additional operating expenses, increase the frequency/duration of system problems and delay other projects. In addition, any additional migration toward direct connections would reduce the compensation we receive from GDSs.

Domestic airlines have reduced capacity and increased fares since the latter part of 2009, a trend which may continue. Decreases in capacity reduce the amount of airline tickets available, while significant increases in average airfares over the last two years have adversely impacted leisure travel demand. Reduced airline capacity and demand negatively impact our priceline.com air business, which in turn has negative repercussions on our priceline.com hotel and rental car businesses. Our rental car business is further impacted by decreases in rental car fleets, which has negatively impacted our Name Your Own Price ® rental car service. We expect continued variability in the breadth and depth of discounted airline tickets and rental car rates made available to us in the future, depending on market conditions from time to time.

Seasonality . A meaningful amount of retail gross bookings are generated early in the year, as customers plan and reserve their spring and summer vacations in Europe and North America. However, we do not recognize associated revenue until future quarters when the travel occurs. From a cost perspective, we expense the substantial majority of our advertising activities as they are incurred, which is typically in the quarter in which bookings are generated. As a result, we typically experience our highest levels of profitability in the second and third quarters of the year, which is when we experience the highest levels of booking and travel consumption for the year for our North American and European businesses. However, we experience the highest levels of booking and travel consumption for our Asia-Pacific and South American businesses in the first and fourth quarters. Therefore, if these businesses continue to grow faster than our North American and European businesses, our operating results for the first and fourth quarters of the year may become more significant over time as a percentage of full year operating results. In addition, Our Name Your Own Price ® services are generally non-refundable in nature, and accordingly, we recognize travel revenue at the time a booking is generated. However, we recognize revenue generated from our retail hotel services, including Booking.com and Agoda, at the time that the customer checks out of the hotel. Therefore, if our retail hotel business continues to grow, we expect our quarterly results to become increasingly impacted by these seasonal factors.

Other Factors . We believe that our success will depend in large part on our ability to maintain profitability, primarily from our hotel business, to continue to promote the Booking.com, Agoda and rentalcars.com brands internationally and the priceline.com brand in the United States, and, over time, to offer other travel services and further expand into other international markets. Factors beyond our control, such as worldwide recession, higher oil prices, terrorist attacks, unusual weather patterns, natural disasters such as earthquakes, hurricanes, tsunamis, floods, volcanic eruptions (such as the April 2010 eruption of a volcano in Iceland), travel related health concerns including pandemics and epidemics such as Influenza H1N1, avian bird flu and SARS, political instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities, travel related accidents or the withdrawal from our system of a major hotel supplier or airline, could adversely affect our business and results of operations and impair our ability to effectively implement all or some of the initiatives described above.

For example, in early 2011, Japan was struck by a major earthquake, tsunami and nuclear emergency. Japan is an important source of travel demand for Agoda, and these crises have had an adverse impact on travel demand originating in Japan and demand for Japanese destinations. In October 2011, severe flooding in Thailand, a key market for our Agoda business and the Asian business of Booking.com, negatively impacted booking volumes and cancellation rates in this market. In addition, in early 2010, Thailand experienced disruptive civil unrest, which caused the temporary relocation of Agoda's Thailand-based operations. Future natural disasters or civil or political unrest could further disrupt our business and operations

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in Thailand.

We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve long-term operating results. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, mergers and acquisitions. Our goal is to improve volume and sustain margins in an effort to maintain profitability. The uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we cannot provide assurance that we will sustain gross profit growth and profitability.

Critical Accounting Policies and Estimates

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

Deferred Tax Valuation Allowance . We periodically evaluate the likelihood of the realization of deferred tax assets, and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future income, the carryforward periods available to us for tax reporting purposes, and other relevant factors. Based on management's assessment of positive and negative evidence, we recorded non-cash tax benefits in 2009 of $183.3 million, resulting from the reversal of a portion of our valuation allowance on deferred tax assets. The net deferred tax asset at December 31, 2011 amounted to $147.8 million. The valuation allowance may need to be adjusted in the future if facts and circumstances change, causing a reassessment of the amount of deferred tax assets more likely than not to be realized.

Accounting for State and Local "Hotel Occupancy" Taxes . As discussed in Note 16 to the Consolidated Financial Statements, we are currently involved in over fifty lawsuits brought by or against states, cities and counties over issues involving the payment of hotel occupancy and other taxes (i.e., state and local sales tax) and our "merchant" hotel business. We are also involved in one consumer lawsuit relating to, among other things, the payment of hotel occupancy taxes and service fees. In addition, over sixty municipalities or counties, and at least six states, have initiated audit proceedings (including proceedings initiated by more than forty municipalities in California), issued proposed tax assessments or started inquiries relating to the payment of hotel occupancy and other taxes (i.e., state and local sales tax). Additional state and local jurisdictions are likely to assert that we are subject to, among other things, hotel occupancy and other taxes (i.e., state and local sales tax) and could seek to collect such taxes, retroactively and/or prospectively. Historically, we have not collected hotel occupancy or other taxes on the gross profit earned from "merchant" hotel transactions; however, in a handful of jurisdictions, we have been recently required by passage of a new statute or court order, to start collecting and remitting certain taxes (local occupancy and/or sales tax) imposed upon our margin and/or service fee. The ultimate resolution of these matters in all jurisdictions cannot be determined at this time. We have established an accrual for potential resolution of issues related to hotel occupancy and other taxes for prior and current periods, consistent with applicable accounting principles and in light of all current facts and circumstances. We accrue for legal contingencies where it is probable that a loss has occurred and the amount can be reasonably estimated; our legal expenses for these matters are expensed as incurred and are not reflected in the amount accrued. A variety of factors could affect the amount of the liability (both past and future), which factors include, but are not limited to, the number of, and amount of gross profit represented by, jurisdictions that ultimately assert a claim and prevail in assessing such additional tax or negotiate a settlement and changes in relevant statutes. The ultimate resolution of these matters may be greater or less than the liabilities recorded.


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Stock-Based Compensation. We record stock-based compensation expense for equity-based awards over the recipient's service period based upon the grant date fair value of the award. A number of our equity awards have performance targets (a performance "contingency") which, if satisfied, can increase the number of shares issued to the recipients at the end of the performance period or, in certain instances, if not satisfied, reduce the number of shares issued to the recipients, sometimes to zero, at the end of the performance period. The performance periods for our performance based equity awards are typically three years. We record stock-based compensation expense for these performance-based awards based upon our estimate of the probable outcome at the end of the performance period (i.e., the estimated performance against the performance targets). We periodically adjust the cumulative stock-based compensation recorded when the probable outcome for these performance-based awards is updated based upon changes in actual and forecasted operating results. Stock-based compensation for the years ended December 31, 2011 and 2010 includes charges amounting to $10.3 million and $13.4 million , respectively, representing the cumulative impact of adjusting the estimated probable outcome of unvested performance share units. Our actual performance against the performance targets could differ materially from our estimates.

We record stock-based compensation expense net of estimated forfeitures. In determining the estimated forfeiture rates, we periodically review actual and projected forfeitures. To the extent that actual or projected forfeiture rates differ from current estimates, such amounts are recorded as a cumulative adjustment in the period in which the estimate is revised.

Valuation of Goodwill . We have recorded goodwill related to businesses we have acquired. Goodwill is reviewed at least annually for impairment using appropriate valuation techniques. In the event that future circumstances indicate that any portion of our goodwill is impaired, an impairment charge would be recorded.

A substantial amount of our goodwill relates to our acquisition of Booking.com. The estimated fair value for Booking.com, as well as our other reporting units, is substantially in excess of their respective carrying values. Since the annual impairment test in September 2011, there have been no events or changes in circumstances to indicate a potential impairment.

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

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued guidance for new disclosure requirements regarding a company's rights of offset and related arrangements associated with financial instruments and derivative instruments. The new disclosures are designed to make financial statements that were prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards ("IFRS"). The new disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein. Retrospective application is required.

In September 2011, the FASB issued an accounting update, which amends the guidance on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If, based on the qualitative factors, it is more-likely-than not that the fair value of the reporting unit is less than its carrying value, then the unchanged two-step approach previously used would be required. The new accounting guidance does not change how goodwill is calculated, how goodwill is assigned to the reporting unit, or the requirements for testing goodwill annually or when events and circumstances warrant testing. The accounting update is effective for annual and interim periods beginning after December 15, 2011. Early adoption of the update is permitted. During the three months ended September 30, 2011, we performed our annual quantitative goodwill impairment testing, and concluded that the estimated fair value for each reporting unit substantially exceeds its respective carrying value. This new accounting guidance will not have a significant impact on us.
    

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In June 2010, the FASB issued amended accounting guidance on the presentation of other comprehensive income in financial statements by requiring comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income. This accounting update also required reclassification adjustments out of other comprehensive income to be presented in both the income statement and the statement in which other comprehensive income is presented, both in interim and annual periods. In December 2011, the FASB issued another accounting update which indefinitely defers the requirement to separately present reclassification adjustments on the face of the financial statements. During the deferral period, a company that does not display reclassification adjustments on the face of the financial statements must disclose such adjustments in the notes to the financial statements. The accounting guidance did not change the items that constitute net income or other comprehensive income, the timing of when other comprehensive income is reclassified to net income, or the earnings per share computation. The accounting update requires retrospective application. Public entities will be required to adopt the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We intend to comply with the change in presentation of other comprehensive income in the financial statements beginning in the first quarter of 2012.
    
In May 2010, the FASB issued amended guidance on fair value to largely achieve common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. The new accounting guidance does not extend the use of fair value but rather provides guidance about how fair value should be determined. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. Amendments that clarify the Board's intent under existing requirements include: (a) use of the highest and best use and valuation premise concept should be limited to nonfinancial assets; (b) disclosure should include quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy; and (c) the fair value of an instrument classified in an entity's equity should be valued from the perspective of a market participant that holds that instrument as an asset. The amended guidance changes requirements as follows: (a) disclosures are expanded, particularly those relating to fair value measurements based on unobservable inputs, (b) fair value measurements for financial assets and liabilities based on a net position are permitted if market or credit risks are managed on a net basis and other criteria are met, and (c) premiums and discounts are allowed only if a market participant would also include them in the fair value measurement. This accounting update is effective for public companies for interim or annual periods beginning after December 15, 2011, with early adoption permitted. We expect to make the additional disclosures required in 2012.

Results of Operations
 
Year Ended December 31, 2011 compared to Year Ended December 31, 2010
 
Operating and Statistical Metrics
 
Our financial results are driven by certain operating metrics that encompass the booking activity generated by our travel services.  Specifically, reservations of hotel room nights, rental car days and airline tickets capture the volume of units purchased by our customers.  Gross bookings is an operating and statistical metric that captures the total dollar value, generally inclusive of taxes and fees, of all travel services booked by our customers, and is widely used in the travel business.  International gross bookings reflect gross bookings generated principally by websites owned by, operated by, or dedicated to providing gross bookings for our international brands and operations, and domestic gross bookings reflect gross bookings generated principally by websites owned by, operated by, or dedicated to providing gross bookings by our domestic operations, in each case without regard to the travel destination or the location of the customer purchasing the travel.

Gross bookings resulting from hotel room night reservations, rental car days and airline tickets sold through our domestic and international operations for the years ended December 31, 2011 and 2010 were as follows (numbers may not total due to rounding):
 
 
Year Ended December 31,
 
 
 
2011
 
2010
 
Change
Domestic

$4.748
 billion
 

$4.166
 billion
 
14.0
%
International
16.909
 billion
 
9.480
 billion
 
78.4
%
Total

$21.658
 billion
 

$13.646
 billion
 
58.7
%
 
Gross bookings increased by 58.7% for the year ended December 31, 2011, compared to the same period in 2010, principally due to 52.6% growth in hotel room night reservation. The 78.4% increase in international gross bookings (growth on a local currency basis was approximately 70%) was attributable to growth in international hotel room night reservations for

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our Booking.com and Agoda businesses, as well as higher average daily rates ("ADRs") charged for hotel stays and growth in international car reservations for our rentalcars.com business, which was acquired in May 2010. Domestic gross bookings increased by 14.0% for the year ended December 31, 2011, compared to the same period in 2010, primarily due to growth in gross bookings from our price-disclosed airline ticket and hotel room night reservation services and our Name Your Own Price ® hotel room night and airline ticket reservation services. Higher ADRs drove growth in gross bookings related to our Name Your Own Price ® hotel business despite a modest year-over-year decline in Name Your Own Price ® hotel room night reservations for the year ended December 31, 2011.
 
Gross bookings resulting from hotel room night reservations, rental car days and airline tickets sold through our agency and merchant models for the years ended December 31, 2011 and 2010 were as follows (numbers may not total due to rounding):
 
 
Year Ended December 31,
 
 
 
2011
 
2010
 
Change
Agency

$17.610
 billion
 

$10.781
 billion
 
63.3
%
Merchant
4.048
 billion
 
2.864
 billion
 
41.3
%
Total
$21.658 billion
 

$13.646
 billion
 
58.7
%
 
Agency gross bookings increased 63.3% for the year ended December 31, 2011, compared to the same period in 2010, due to growth in the sale of Booking.com hotel room night reservations. Our U.S. priceline.com business experienced growth in reservations of agency price-disclosed hotel room nights, airline tickets and rental car days. Merchant gross bookings increased 41.3% for the year ended December 31, 2011, compared to the same period in 2010, due to an increase in gross bookings from our Agoda hotel room night reservation service, our rentalcars.com rental car reservation service, our priceline.com merchant price-disclosed hotel room night reservation service and our Name Your Own Price ® hotel room night, airline ticket and rental car reservation services. Higher ADRs drove growth in gross bookings related to our Name Your Own Price ® hotel business despite a modest year-over-year decline in Name Your Own Price ® hotel room night reservations for the year ended December 31, 2011.
 
Year Ended
 
Hotel Room
Nights
 
Rental
 Car Days
 
Airline
 Tickets
 
 
 
 
 
 
 
December 31, 2011
 
141.6 million
 
23.8 million
 
6.2 million
 
 
 
 
 
 
 
December 31, 2010
 
92.8 million
 
16.3 million
 
5.9 million
 
Hotel room night reservations sold increased by 52.6% for the year ended December 31, 2011, over the same period in 2010, principally due to an increase in the sale of Booking.com, Agoda and priceline.com price-disclosed hotel room night reservations, partially offset by a modest decline in Name Your Own Price ® hotel room night reservations. Booking.com, our most significant brand, currently includes over 185,000 hotels and accommodations on its website as compared to about 120,000 hotels and accommodations last year (updated hotel counts are available on the Booking.com website). Booking.com has added hotels over the past year in its core European market as well as higher-growth markets such as North America (which is a newer market for Booking.com), Asia-Pacific and South America. An increasing amount of our business from a destination and point-of-sale perspective is conducted in these newer markets which are growing faster than our overall growth rate. Our U.S. priceline.com price-disclosed hotel room night reservations benefited from the integration of U.S. hotels from the Booking.com extranet on the priceline.com website.

Rental car days sold increased by 45.6% for the year ended December 31, 2011, over the same period in 2010, primarily due to the inclusion of rental car day reservations from rentalcars.com, which we acquired in May 2010, as well as an increase in Name Your Own Price ® rental car reservations.

Airline tickets sold increased by 5.7% for the year ended December 31, 2011, over the same period in 2010, due to an increase in both price-disclosed and Name Your Own Price ® airline ticket reservations.
 

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Revenues
 
Merchant revenues are derived from transactions where we are the merchant of record and therefore charge the customer's credit card for the travel services provided. Merchant revenues include (1) transaction revenues representing the selling price of Name Your Own Price ® hotel room reservations, rental cars and airline tickets and price-disclosed vacation packages; (2) transaction revenues representing the amount charged to a customer, less the amount charged by suppliers in connection with (a) the hotel room reservations provided through our merchant price-disclosed hotel service in the U.S. and at Agoda, and (b) the rental car reservations provided through our merchant semi-opaque rental car service at rentalcars.com, which allows customers to see the price of the reservation prior to purchase but not the identity of the supplier; (3) customer processing fees charged in connection with the sale of Name Your Own Price ® airline tickets, hotel room reservations and rental cars and merchant price-disclosed hotel reservations; and (4) ancillary fees, including GDS reservation booking fees related to certain of the services listed above.

Agency revenues are derived from travel related transactions where we are not the merchant of record and where the prices of the travel services are determined by third parties. Agency revenues include travel commissions, GDS reservation booking fees related to certain of the services listed above and customer processing fees and are reported at the net amounts received, without any associated cost of revenue. Principally all of the revenue for Booking.com is comprised of travel commissions.

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

 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Merchant Revenues
$
2,004,432

 
$
1,691,640

 
18.5
 %
Agency Revenues
2,339,253

 
1,380,603

 
69.4
 %
Other Revenues
11,925

 
12,662

 
(5.8
)%
Total Revenues
$
4,355,610

 
$
3,084,905

 
41.2
 %
 
Merchant Revenues

Merchant revenues for the year ended December 31, 2011 increased 18.5% , compared to the same period in 2010, primarily due to an increase in merchant revenues from our Agoda price-disclosed hotel room night reservation service, our rentalcars.com rental car reservation service, our Name Your Own Price ® airline ticket and hotel room night reservation services and our priceline.com price-disclosed hotel room night reservation service.
  
Agency Revenues

Agency revenues for the year ended December 31, 2011 increased 69.4% compared to the same period in 2010, primarily as a result of growth in the business of Booking.com. Our U.S. agency hotel room night reservations benefited from the integration of U.S. hotels from the Booking.com extranet on the priceline.com website.

Other Revenues

Other revenues during the year ended December 31, 2011 consisted primarily of advertising. Other revenues for the year ended December 31, 2011 decreased 5.8% compared to the same period in 2010.
 
  Cost of Revenues and Gross Profit
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Cost of Revenues
$
1,275,730

 
$
1,175,934

 
8.5
%
% of Merchant Revenues
63.6
%
 
69.5
%
 
 


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Cost of Revenues
 
For the year ended December 31, 2011, cost of revenues consisted primarily of: (1) the cost of Name Your Own Price ® hotel room reservations from our suppliers, net of applicable taxes, (2) the cost of Name Your Own Price ® rental cars from our suppliers, net of applicable taxes; and (3) the cost of Name Your Own Price ® airline tickets, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets. Cost of revenues for the year ended December 31, 2011 increased by 8.5% , compared to the same period in 2010, primarily due to the increase in Name Your Own Price ® revenues discussed above. Merchant price-disclosed hotel room and car rental reservations are recorded in merchant revenues net of the amounts paid to suppliers and therefore, there is no associated cost of revenues for merchant price-disclosed hotel revenues. Cost of revenues as a percentage of their associated merchant revenues decreased primarily due to the increase in merchant price-disclosed hotel revenues and the addition of rentalcars.com merchant revenue, all of which are recorded on a "net" basis.

Agency revenues are recorded at their net amount, which are amounts received less amounts paid to suppliers, if any, and therefore, there are no costs of agency revenues.

Gross Profit
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Gross Profit
$
3,079,880

 
$
1,908,971

 
61.3
%
Gross Margin
70.7
%
 
61.9
%
 
 

 
Total gross profit for the year ended December 31, 2011 increased by 61.3% compared to the same period in 2010, primarily as a result of increased revenue discussed above. Total gross margin (gross profit expressed as a percentage of total revenue) increased during the year ended December 31, 2011, compared to the same period in 2010 because Name Your Own Price ® revenues, which are recorded "gross" with a corresponding cost of revenue, represented a smaller percentage of total revenues compared to retail, price-disclosed revenues which are primarily recorded "net" with no corresponding cost of revenues. Because Name Your Own Price ® transactions are reported "gross" and retail transactions are primarily recorded on a "net" basis, we believe that gross profit has become an increasingly important measure of evaluating growth in our business. Our international operations accounted for approximately $2.6 billion of our gross profit for the year ended December 31, 2011, which compares to approximately $1.4 billion for the same period in 2010. Gross profit attributable to our international operations increased, on a local currency basis, by approximately 70% in the year ended December 31, 2011, compared to the same period in 2010.
 
Operating Expenses
 
Advertising
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Online Advertising
$
919,214

 
$
552,140

 
66.5
 %
% of Total Gross Profit
29.8
%
 
28.9
%
 
 

Offline Advertising
$
35,470

 
$
35,714

 
(0.7
)%
% of Total Gross Profit
1.2
%
 
1.9
%
 
 

 
Online advertising expenses primarily consist of the costs of (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; (4) banner and pop-up advertisements; and (5) e-mail campaigns. For the year ended December 31, 2011, online advertising expenses increased over the same period in 2010, primarily to support increased hotel room night reservations for Booking.com and Agoda, increased rental car day reservations for rentalcars.com and increased hotel room night reservations for priceline.com. Online advertising as a percentage of gross profit increased for the year ended December 31, 2011, compared to the same period in 2010. The increase is driven primarily

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by brand mix rather than a change in the fundamental efficiency of our advertising by brand. Our international operations are growing faster than our priceline.com business in the U.S., and spend a higher percentage of gross profit on online advertising, a trend which we expect to continue. Furthermore, the priceline.com brand is obtaining an increasing share of its traffic through online advertising, a trend which we also expect to continue. We recognize advertising expense as incurred at the time of booking, but recognize the gross profit for price-disclosed hotel room and rental car reservations when the travel is completed.

Offline advertising expenses are related to our domestic television, print and radio advertising for priceline.com. For the year ended December 31, 2011, offline advertising was flat compared to the same period in 2010. We recognize expense for production costs of advertising the first time the advertising takes place.

Sales and Marketing
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Sales and Marketing
$
162,690

 
$
116,303

 
39.9
%
% of Total Gross Profit
5.3
%
 
6.1
%
 
 

 
Sales and marketing expenses consist primarily of (1) credit card processing fees associated with merchant transactions; (2) fees paid to third-parties that provide call center, website content translations and other services; (3) provisions for credit card chargebacks; and (4) provisions for bad debt, primarily related to agency hotel commission receivables. For the year ended December 31, 2011, sales and marketing expenses, which are substantially variable in nature, increased over the same period in 2010, primarily due to increased gross booking volumes as well as expenses related to increased content translations. Our U.S. merchant business benefited from the impact of reduced credit card processing fees resulting from Durbin Amendment to the Dodd-Frank Financial Reform and Consumer Protection Act (which amendment caps the interchange fee for debit card transactions and went into effect on October 1, 2011), partially offset by the impact of higher costs resulting from increases in foreign currency transactions and increased cancellation rates from our Agoda business. Costs associated with our U.S. priceline.com business comprise a large component of sales and marketing expenses. Our U.S. priceline.com business grew more slowly than our total gross profit, which benefited from the high growth in our international agency business, and as a result, sales and marketing expenses as a percentage of total gross profit for the year ended December 31, 2011 declined compared to the same period in 2010.
 
Personnel
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Personnel
$
352,295

 
$
270,071

 
30.4
%
% of Total Gross Profit
11.4
%
 
14.1
%
 
 

 
Personnel expenses consist of compensation to our personnel, including salaries, bonuses, payroll taxes, employee health benefits and stock-based compensation. For the year ended December 31, 2011, personnel expenses increased over the same period in 2010, due primarily to increased headcount to support the growth of our international businesses. Stock-based compensation expense was approximately $65.7 million for the year ended December 31, 2011 compared to $68.2 million for the year ended December 31, 2010. Stock-based compensation for the years ended December 31, 2011 and 2010 included charges amounting to $10.3 million and $13.4 million , respectively, representing the cumulative impact of adjusting the estimated probable outcome at the end of the performance period for certain outstanding unvested performance share units.


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General and Administrative
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
General and Administrative
$
123,652

 
$
81,185

 
52.3
%
% of Total Gross Profit
4.0
%
 
4.3
%
 
 

 
General and administrative expenses consist primarily of: (1) fees for outside professionals, including litigation expenses; (2) occupancy expenses; and (3) personnel related expenses such as recruiting, training and travel expenses. General and administrative expenses increased during the year ended December 31, 2011, over the same period in 2010, due to higher recruiting, training and travel expenses related to increased headcount at Booking.com, Agoda and rentalcars.com. Additionally, we have significantly increased our office capacity worldwide to support continued growth in our international operations. The year ended December 31, 2010 included a favorable expense adjustment of approximately $2.7 million in connection with the resolution of certain franchise and sales and use tax issues related to our corporate headquarters location, and a charge of $1.7 million related to a court ruling in South Carolina (see Note 16 to the Consolidated Financial Statements for further details).
 
Information Technology
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Information Technology
$
33,813

 
$
20,998

 
61.0
%
% of Total Gross Profit
1.1
%
 
1.1
%
 
 

 
Information technology expenses consist primarily of: (1) outsourced data center costs relating to our domestic and international data centers; (2) system maintenance and software license fees; (3) data communications and other expenses associated with operating our Internet sites; and (4) payments to outside consultants. For the year ended December 31, 2011, the increase in information technology expenses compared to the same period in 2010 was due primarily to growth in our worldwide operations.

Depreciation and Amortization
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Depreciation and Amortization
$
53,824

 
$
45,763

 
17.6
%
% of Total Gross Profit
1.7
%
 
2.4
%
 
 

 
Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) depreciation on computer equipment; (3) amortization of internally developed and purchased software; and (4) depreciation of leasehold improvements, office equipment and furniture and fixtures. For the year ended December 31, 2011, depreciation expense increased from the same period in 2010 due principally to capital expenditures for additional data center capacity and office build outs to support growth and geographic expansion, principally related to our Booking.com brand. We expect future capital expenditures to also be higher than historical prior year levels as we continue to invest to support business growth. In addition, for the year ended December 31, 2011, amortization expense increased from the same period in 2010 due to acquisition-related amortization in connection with our acquisition of rentalcars.com in May 2010.
 

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Other Income (Expense)
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Interest Income
$
8,119

 
$
3,857

 
110.5
 %
Interest Expense
(31,721
)
 
(29,944
)
 
5.9
 %
Foreign Currency Transactions and Other
(7,526
)
 
(14,427
)
 
(47.8
)%
Total
$
(31,128
)
 
$
(40,514
)
 
(23.2
)%
 
For the year ended December 31, 2011, interest income on cash and marketable securities increased over the same period in 2010, primarily due to an increase in the average balance invested. Interest expense increased for the year ended December 31, 2011, as compared to the same period in 2010, primarily due to an increase in the average outstanding debt resulting from the March 2010 issuance of $575.0 million aggregate principal amount of convertible senior notes, and fees on the undrawn $1 billion revolving credit facility entered into in October 2011.

Derivative contracts that hedge our exposure to the impact of currency fluctuations on the translation of our international operations into U.S. dollars upon consolidation resulted in foreign exchange gains of $4.0 million for the year ended December 31, 2011 compared to foreign exchange gains of $2.9 million for the year ended December 31, 2010, and are recorded in "Foreign currency transactions and other."

Foreign exchange transaction losses, including costs related to foreign exchange transactions, resulted in losses of $11.3 million for the year ended December 31, 2011, compared to losses of $6.0 million for the year ended December 31, 2010, and are recorded in "Foreign currency transactions and other."

In addition, losses of $11.3 million for the year ended December 31, 2010 resulted from convertible debt conversions during 2010, and are recorded in "Foreign currency transactions and other."

During the fourth quarter of 2011, we began classifying certain foreign currency processing fees, amounting to $2.2 million, as an offset to revenue earned from the third party that processes the payments for merchant hotel transactions.

Income Taxes
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Income Tax Expense
$
308,663

 
$
218,141

 
41.5
%
 
Our effective tax rate for the years ended December 31, 2011 and 2010 were 22.6% and 29.2%, respectively. Our effective tax rate differs from the expected tax provision at the U.S. statutory tax rate of 35% principally due to lower foreign tax rates, the Innovation Box Tax benefit discussed below, and the resolution of an uncertain tax position during the second quarter of 2011. Following the conclusion of an audit, we reversed a reserve of approximately $12.5 million in the three months ended June 30, 2011 for unrecognized tax benefits attributable to tax positions taken in 2010. We do not expect further significant changes in the amount of unrecognized tax benefits during 2012.

The effective tax rate for the year ended December 31, 2011 is lower compared to 2010 primarily due to a higher percentage of foreign income, which is taxed at lower rates, the Innovation Box Tax benefit discussed below, and the reversal of the reserve for unrecognized tax benefits referred to above.

Effective January 1, 2010, the Netherlands modified its corporate income tax law related to income generated from qualifying "innovative" activities (the "Innovation Box Tax"). Earnings that qualify for the Innovation Box Tax will effectively be taxed at the rate of 5% rather than the Dutch statutory rate of 25.0%. Booking.com obtained a ruling from the Dutch tax authorities in February 2011 confirming that a portion of its earnings ("qualifying earnings") is eligible for Innovation Box Tax treatment. The ruling from the Dutch tax authorities is valid from January 1, 2010 through December 31, 2013 (the "Initial Period"). In this ruling, the Dutch tax authorities require that the Innovation Box Tax benefit be phased in

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over a multi-year period. The amount of qualifying earnings expressed as a percentage of the total pretax earnings in the Netherlands will vary depending upon the level of total pretax earnings that is achieved in any given year.

In order to be eligible for Innovation Box Tax treatment, Booking.com must, among other things, apply for and obtain a research and development ("R&D") certificate from a Dutch governmental agency every six months confirming that the activities that Booking.com intends to be engaged in over the subsequent six month period are "innovative."  Should Booking.com fail to secure such a certificate in any such period - for example, because the governmental agency does not view Booking.com's new or anticipated activities as "innovative" - or should this agency determine that the activities contemplated to be performed in a prior period were not performed as contemplated or did not comply with the agency's requirements, Booking.com may lose its certificate and, as a result, the Innovation Box Tax benefit may be reduced or eliminated. 

Booking.com intends to reapply for continued Innovation Box Tax treatment for future periods. There can be no assurance that Booking.com's application will be accepted, or that the amount of qualifying earnings or applicable tax rates will not be reduced at that time. In addition, there can be no assurance that the tax law will not change in 2012 and/or future years resulting in a reduction or elimination of the tax benefit.

The Innovation Box Tax did not have a material impact on the our 2010 results. The impact of the Innovation Box Tax for 2011 reduced our consolidated effective income tax rate by approximately four percentage points. We currently estimate that our consolidated effective tax rate for 2012 will be lower by approximately four to six percentage points compared to what it would be if we did not have the benefit of the Innovation Box Tax.

Until our domestic net operating loss carryforwards are utilized or expire, we do not expect to make tax payments on our U.S. income, except for U.S. federal alternative minimum tax and state income taxes. However, we expect to pay foreign taxes on our foreign income. We expect that our international operations will grow their pretax income at higher rates than the U.S. over the long term and, therefore, it is our expectation that our cash tax payments will increase as our international businesses generate an increasing share of our pre-tax income.

The Internal Revenue Service initiated an audit of our income taxes for the first time in the third quarter of 2011. To date, we have been audited in several taxing jurisdictions with no significant adjustments as a result. If future audits find that additional taxes are due, we may be subject to incremental tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our financial condition and results of operations.

Redeemable Noncontrolling Interests
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2011
 
2010
 
Change
Net income attributable to noncontrolling interests
$
2,760

 
$
601

 
359.2
%
 
The net income attributable to redeemable noncontrolling interest for the year ended December 31, 2011 compared to the same period in 2010 increased primarily due to the improved year-over-year operating performance for rentalcars.com.

Results of Operations
 
Year Ended December 31, 2010 compared to Year Ended December 31, 2009
 
Operating and Statistical Metrics
 
Gross bookings resulting from hotel room night reservations, rental car days and airline tickets sold through our domestic and international operations for the years ended December 31, 2010 and 2009 were as follows (numbers may not total due to rounding):
 

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Year Ended December 31,
 
 
 
2010
 
2009
 
Change
Domestic
$ 4.166 billion
 
 $ 3.645 billion
 
14.3
%
International
 9.480 billion
 
 5.665 billion
 
67.3
%
Total
$ 13.646 billion
 
 $ 9.310 billion
 
46.6
%
 
Gross bookings increased by 46.6% for the year ended December 31, 2010, compared to the same period in 2009, principally due to 52.3% growth in hotel room night reservations.  The 67.3% increase in international gross bookings was attributable to growth in international hotel room night reservations for Booking.com and Agoda (growth on a local currency basis was approximately 73%).  International gross bookings for the year ended December 31, 2010 include $185 million of gross bookings of TravelJigsaw gross bookings since its acquisition in May 2010.  Domestic gross bookings increased by 14.3% for the year ended December 31, 2010, compared to the same period in 2009, primarily due to increases in price-disclosed and Name Your Own Price ® hotel room night reservations, and increases in average airline fares, and increases in price-disclosed and Name Your Own Price ®  rental car days.
 
Gross bookings resulting from hotel room night reservations, rental car days and airline tickets sold through our agency and merchant models for the years ended December 31, 2010 and 2009 were as follows (numbers may not total due to rounding):

 
Year Ended December 31,
 
 
 
2010
 
2009
 
Change
Agency
$ 10.781 billion
 
$ 7.191 billion
 
49.9
%
Merchant
2.864 billion
 
 2.119 billion
 
35.2
%
Total
$ 13.646 billion
 
$ 9.310 billion
 
46.6
%
 
Agency gross bookings increased 49.9% for the year ended December 31, 2010, compared to the same period in 2009, due to growth in the sale of Booking.com and priceline.com hotel room night reservations and an increase in average airline fares.  Our U.S. agency hotel room reservations benefited from the integration of U.S. hotels from the Booking.com extranet into the priceline.com website.  Merchant gross bookings increased 35.2% for the year ended December 31, 2010, compared to the same period in 2009, due to increases in the sale of Agoda merchant price-disclosed hotel room night reservations and priceline.com merchant price-disclosed and Name Your Own Price ®  hotel room night reservations and the inclusion of gross bookings from TravelJigsaw, which was acquired in May 2010.
 
Year Ended
 
Hotel Room
Nights
 
Rental
  Car Days
 
Airline
  Tickets
 
 
 
 
 
 
 
December 31, 2010
 
92.8 million
 
16.3 million
 
5.9 million
 
 
 
 
 
 
 
December 31, 2009
 
60.9 million
 
11.2 million
 
5.9 million
 
Hotel room night reservations sold increased by 52.3% for the year ended December 31, 2010, over the same period in 2009, primarily due to an increase in the sale of Booking.com agency room night reservations, as well as an increase in the sale of Agoda price-disclosed room night reservations, priceline.com price-disclosed room night reservations and Name Your Own Price ®  room night reservations.
 
Rental car days sold increased by 45.3% for the year ended December 31, 2010, over the same period in 2009, primarily due to the inclusion of rental car day reservations sold by TravelJigsaw, which we acquired in May 2010, and increases in the sale of priceline.com price-disclosed rental car day reservations.
 
Airline tickets sold were flat for the year ended December 31, 2010, over the same period in 2009, as a decline in Name Your Own Price ® airline tickets was partially offset by a slight increase in price-disclosed airline tickets.
 

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Revenues
 
We classify our revenue into three categories:
 
Merchant revenues are derived from transactions where we are the merchant of record and therefore charge the customer’s credit card for the travel services provided.  Merchant revenues include (1) transaction revenues representing the selling price of Name Your Own Price ®  hotel room reservations, rental cars and airline tickets and price-disclosed vacation packages; (2) transaction revenues representing the amount charged to a customer, less the amount charged by suppliers in connection with (a) the hotel room reservations provided through our merchant price-disclosed hotel service in the U.S. and at Agoda, and (b) the rental car reservations provided through our merchant semi-opaque rental car service at TravelJigsaw (which allows customers to see the price, car type and location of the reservation prior to purchase, but not the identity of the supplier); (3) customer processing fees charged in connection with the sale of Name Your Own Price ®  hotel room reservations. airline tickets and rental cars and merchant price-disclosed hotel reservations; and (4) ancillary fees, including GDS reservation booking fees related to certain of the services listed above.
 
Agency revenues are derived from travel related transactions where we are not the merchant of record and where the prices of our services are determined by third parties. Agency revenues include travel commissions, customer processing fees and GDS reservation booking fees related to certain of the agency services listed above and are reported at the net amounts received, without any associated cost of revenue.
 
Other revenues are derived primarily from advertising on our websites.
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
 
 
 
 
 
 
Merchant Revenues
$
1,691,640

 
$
1,447,576

 
16.9
 %
Agency Revenues
1,380,603

 
868,395

 
59.0
 %
Other Revenues
12,662

 
22,241

 
(43.1
)%
Total Revenues
$
3,084,905

 
$
2,338,212

 
31.9
 %
 
Merchant Revenues
 
Merchant revenues for the year ended December 31, 2010 increased 16.9% compared to the same period in 2009, primarily due to an increase in the sale of Agoda and priceline.com merchant price-disclosed hotel room night reservations, Name Your Own Price ®  hotel room night reservations and the inclusion of TravelJigsaw since its acquisition in May 2010.
 
Agency Revenues
 
Agency revenues for the year ended December 31, 2010 increased 59.0% compared to the same period in 2009, primarily as a result of growth in the business of Booking.com.  Our U.S. agency hotel room reservations benefited from the integration of U.S. hotels from the Booking.com extranet into the priceline.com website.
 
Other Revenues
 
Other revenues during the year ended December 31, 2010 consisted primarily of advertising.  Other revenues for the year ended December 31, 2010 decreased 43.1% compared to the same period in 2009, primarily as a result of the termination of a relationship with a post-transaction online advertising partner in September 2009.


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Table of Contents

Cost of Revenues and Gross Profit
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Cost of Revenues
$
1,175,934

 
$
1,077,449

 
9.1
%
% of Merchant Revenues
69.5
%
 
74.4
%
 
 

 
Cost of Revenues
 
For the year ended December 31, 2010, cost of revenues consisted primarily of charges from suppliers for: (1) the cost of Name Your Own Price ®  hotel room reservations, net of applicable taxes, (2) the cost of Name Your Own Price ®  rental cars, net of applicable taxes; and (3) the cost of Name Your Own Price ®  airline tickets, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets.  Cost of revenues for the year ended December 31, 2010 increased by 9.1%, compared to the same period in 2009, primarily due to the increase in merchant revenue discussed above.  Merchant price-disclosed hotel revenues in the U.S. and for Agoda and merchant semi-opaque rental car reservations for TravelJigsaw are recorded in merchant revenues net of the amounts paid to suppliers and therefore, there is no associated cost of revenues for merchant price-disclosed hotel revenues.  Cost of revenues as a percentage of their associated merchant revenues decreased primarily due to the increase in merchant price-disclosed hotel revenues and the addition of TravelJigsaw merchant revenues, all of which are recorded on a "net" basis.
 
Agency revenues are recorded at their net amount, which are amounts received less amounts paid to suppliers, if any, and therefore, there are no costs of agency revenues.
 
Gross Profit
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Gross Profit
$
1,908,971

 
$
1,260,763

 
51.4
%
Gross Margin
61.9
%
 
53.9
%
 
 

 
Total gross profit for the year ended December 31, 2010 increased by 51.4% compared to the same period in 2009, primarily as a result of increased revenue discussed above.  Total gross margin (gross profit expressed as a percentage of total revenue) increased during the year ended December 31, 2010, compared to the same period in 2009, because Name Your Own Price ®  revenues, which are recorded "gross" with a corresponding cost of revenue, represented a smaller percentage of total revenues compared to retail, price-disclosed agency and merchant revenues which are primarily recorded "net" with no corresponding cost of revenues.  Because Name Your Own Price ®  transactions are reported "gross" and retail transactions are primarily recorded on a "net" basis, we believe that gross profit has become an increasingly important measure of evaluating growth in our business.  Our international operations accounted for approximately $1.4 billion of our gross profit for the year ended December 31, 2010, which compares to approximately $848.6 million for the same period in 2009.  Gross profit attributable to our international operations increased, on a local currency basis, by approximately 77% in the year ended December 31, 2010, compared to the same period in 2009.


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Table of Contents

Operating Expenses
 
Advertising
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Online Advertising
$
552,140

 
$
365,381

 
51.1
 %
% of Total Gross Profit
28.9
%
 
29.0
%
 
 

Offline Advertising
$
35,714

 
$
36,270

 
(1.5
)%
% of Total Gross Profit
1.9
%
 
2.9
%
 
 

 
Offline advertising expenses consist primarily of: (1) the expenses associated with domestic television, print and radio advertising; and (2) the cost for creative talent, production costs and agency fees for television, print and radio advertising.  For the year ended December 31, 2010, offline advertising expenses were generally flat compared to the same period in 2009.  Online advertising expenses primarily consist of the costs of (1) search engine keyword purchases; (2) affiliate programs; (3) banner and pop-up advertisements; and (4) e-mail campaigns.  For the year ended December 31, 2010, online advertising expenses increased over the same period in 2009, primarily to support increased gross bookings for Booking.com, Agoda and priceline.com, as well as the inclusion of online advertising expense for TravelJigsaw since its acquisition in May 2010.
 
Sales and Marketing
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Sales and Marketing
$
116,303

 
$
81,238

 
43.2
%
% of Total Gross Profit
6.1
%
 
6.4
%
 
 

 
Sales and marketing expenses consist primarily of (1) credit card processing fees associated with merchant transactions; (2) fees paid to third-parties that provide call center, website content translations and other services; (3) provisions for credit card chargebacks; and (4) provisions for bad debt primarily related to agency hotel commission receivables.  For the year ended December 31, 2010, sales and marketing expenses, which are substantially variable in nature, increased over the same period in 2009, primarily due to increased credit card processing fees, third-party service costs and bad debt provision associated with increased gross booking volumes.

Personnel
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Personnel
$
270,071

 
$
180,152

 
49.9
%
% of Total Gross Profit
14.1
%
 
14.3
%
 
 

 
Personnel expenses consist of compensation to our personnel, including salaries, bonuses, taxes, employee health benefits and stock-based compensation. For the year ended December 31, 2010, personnel expenses increased over the same period in 2009, primarily due to increased headcount to support the growth of our business, higher bonus accruals reflecting our strong operating performance, and the inclusion of TravelJigsaw since its acquisition in May 2010.  Stock-based compensation expense was approximately $68.2 million for the year ended December 31, 2010 and $40.7 million for the year ended December 31, 2009.  Stock-based compensation for the year ended December 31, 2010 includes charges amounting to $13.4 million, representing the cumulative impact of adjusting the estimated probable outcome at the end of the performance period for certain outstanding unvested performance share units.
 

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Table of Contents

General and Administrative
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
General and Administrative
$
81,185

 
$
68,555

 
18.4
%
% of Total Gross Profit
4.3
%
 
5.4
%
 
 

 
General and administrative expenses consist primarily of: (1) fees for outside professionals, including litigation expenses; (2) occupancy expenses; and (3) personnel-related expenses such as recruiting, training and travel expenses.  General and administrative expenses for the year ended December 31, 2010 included a favorable adjustment of approximately $2.7 million in connection with the resolution of certain franchise tax and sales and use tax issues related to our corporate headquarters location and a charge of $1.7 million related to a court ruling in South Carolina (see Note 16 to the Consolidated Financial Statements for further details).  General and administrative expenses for the same period in 2009 included a charge of $3.7 million related to a judgment in a lawsuit involving hotel occupancy taxes.  Excluding these items, general and administrative expenses increased during the year ended December 31, 2010, over the same period in 2009, due to professional fees incurred in the second quarter 2010 related to the acquisition of TravelJigsaw, increased personnel-related expenses and occupancy expenses to support the growth in our Booking.com and Agoda operations, and the inclusion of TravelJigsaw since its acquisition in May 2010, partially offset by a decrease in litigation expenses primarily related to hotel occupancy tax and other tax proceedings.

Information Technology
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Information Technology
$
20,998

 
$
19,139

 
9.7
%
% of Total Gross Profit
1.1
%
 
1.5
%
 
 

 
Information technology expenses consist primarily of: (1) system maintenance and software license fees; (2) outsourced data center costs relating to our domestic and international data centers; (3) data communications and other expenses associated with operating our Internet sites; and (4) payments to outside consultants. For the year ended December 31, 2010, information technology expenses increased compared to the same period in 2009, primarily due to growth in our worldwide operations.
 
Depreciation and Amortization
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Depreciation and Amortization
$
45,763

 
$
39,193

 
16.8
%
% of Total Gross Profit
2.4
%
 
3.1
%
 
 

 
Depreciation and amortization expenses consist of:  (1) amortization of intangible assets with determinable lives; (2) amortization of internally developed and purchased software, (3) depreciation of computer equipment; and (4) depreciation of leasehold improvements, office equipment and furniture and fixtures.  For the year ended December 31, 2010, depreciation and amortization expense increased from the same period in 2009, primarily due to acquisition-related amortization in connection with our acquisition of TravelJigsaw.
 

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Table of Contents

Other Income (Expense)
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Interest Income
$
3,857

 
$
2,223

 
73.5
%
Interest Expense
(29,944
)
 
(24,084
)
 
24.3
%
Foreign Currency Transactions and Other
(14,427
)
 
(6,672
)
 
116.2
%
Total
$
(40,514
)
 
$
(28,533
)
 
42.0
%
 
For the year ended December 31, 2010, interest income increased over the same period in 2009, primarily due to an increase in the average balance of cash and marketable securities invested.  Interest expense increased for the year ended December 31, 2010, as compared to the same period in 2009, primarily due to an increase in the average outstanding debt.  "Foreign currency transactions and other" includes foreign exchange gains of $3.0 million and losses of $2.7 million for the years ended December 31, 2010 and 2009, respectively, related to foreign exchange derivative contracts.  Foreign exchange transaction losses including fees on foreign exchange transactions were approximately $6.1 million and $2.9 million for the years ended December 31, 2010 and 2009, respectively.  The early conversion of convertible debt resulted in losses of $11.3 million and $1.0 million for the years ended December 31, 2010 and 2009, respectively.
 
Income Taxes
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Income Tax (Expense) Benefit
$
(218,141
)
 
$
47,168

 
(562.5
)%
 
Our effective tax rate for the years ended December 31, 2010 and 2009 was 29.2% and (10.7)%, respectively, and differs from the expected tax provision at the U.S. statutory tax rate of 35%, principally due to lower foreign tax rates, partially offset by state income taxes and certain non-deductible expenses.  The income tax benefit for the year ended December 31, 2009 included a benefit of $183.3 million, resulting from the reversal of a portion of the valuation allowance on our deferred tax assets relating to net operating loss carryforwards.  Excluding the aforementioned $183.3 million benefit in 2009, the effective income tax rates for the year ended December 31, 2010 decreased over the same period in 2009, primarily due to a higher percentage of foreign income which is taxed at lower rates.
 
Due to our domestic net operating loss carryforwards, we do not expect to make tax payments on our U.S. income for the foreseeable future, except for U.S. federal alternative minimum tax and state income taxes.  However, we expect to pay foreign taxes on our foreign income.  We expect that Booking.com, Agoda and TravelJigsaw will grow their pretax income at higher rates than the U.S. over the long term and, therefore, it is our expectation that our cash tax payments will continue to increase as our international operations generate an increasing share of our pretax income.
 
Effective January 1, 2010, the Netherlands modified its corporate income tax law related to income generated from qualifying "innovative" activities (the "Innovation Box Tax").   Earnings that qualify for the Innovation Box Tax will effectively be taxed at the rate of 5% rather than the Dutch statutory rate of 25.5% (25% as of 2011).  Booking.com obtained a ruling from the Dutch tax authorities in February 2011 confirming that a portion of its earnings ("qualifying earnings") is eligible for Innovation Box Tax treatment.  The ruling from the Dutch tax authorities is valid from January 1, 2010 through December 31, 2013 (the "Initial Period"). In this ruling, the Dutch tax authorities require that the Innovation Box Tax benefit be phased in over a multi-year period.  The Innovation Box Tax did not have a material impact on our 2010 results.  The amount of qualifying earnings expressed as a percentage of the total pretax earnings in the Netherlands will vary depending upon the level of total pretax earnings that is achieved in any given year.
 
In order to be eligible for Innovation Box Tax treatment, Booking.com must, among other things, apply for and obtain a research and development ("R&D”) certificate from a Dutch governmental agency every six months confirming that the activities that Booking.com intends to be engaged in over the subsequent six month period are "innovative."  Should Booking.com fail to secure such a certificate in any such period - for example, because the governmental agency does not view Booking.com’s new or anticipated activities as "innovative" - or should this agency determine that the activities contemplated

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Table of Contents

to be performed in a prior period were not performed as contemplated or did not comply with the agency’s requirements, Booking.com may lose its certificate and, as a result, the Innovation Box Tax benefit may be reduced or eliminated.
 
After the Initial Period, Booking.com intends to reapply for continued Innovation Box Tax treatment for future periods.  There can be no assurance that Booking.com’s application will be accepted, or that the amount of qualifying earnings or applicable tax rates will not be reduced at that time.   In addition, there can be no assurance that the tax law will not change in future years resulting in a reduction or elimination of the tax benefit. 

Redeemable Noncontrolling Interests
 
 
Year Ended
December 31,
 
 
 
($000)
 
 
 
2010
 
2009
 
Change
Net income attributable to noncontrolling interests
$
601

 
n/a
 
n/a