The Priceline Group
PRICELINE COM INC (Form: 10-K, Received: 02/25/2011 16:09:20)

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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, 2010

 

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   x  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   x

 

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  x   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  x   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.  x

 

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  x

 

The aggregate market value of common stock held by non-affiliates of priceline.com Incorporated as of June 30, 2010 was approximately $8.4 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, 2010 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 49,151,597 as of February 17, 2011.

 

 

 



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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 2, 2011, 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, 2010.

 

priceline.com Incorporated Annual Report on Form 10-K for the Year Ended December 31, 2010 Index

 

 

 

Page No.

Special Note Regarding Forward Looking Statements

1

PART I

1

Item 1.

Business

1

Item 1A.

Risk Factors

15

Item 1B.

Unresolved Staff Comments

33

Item 2.

Properties

33

Item 3.

Legal Proceedings

33

 

 

 

PART II

 

40

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

40

Item 6.

Selected Financial Data

43

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

44

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

71

Item 8.

Financial Statements and Supplementary Data

72

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

72

Item 9A.

Controls and Procedures

73

Item 9B.

Other Information

74

 

 

 

PART III

 

75

Item 10.

Directors, Executive Officers and Corporate Governance

75

Item 11.

Executive Compensation

75

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

75

Item 13.

Certain Relationships and Related Transactions, and Director Independence

75

Item 14.

Principal Accountant Fees and Services

75

 

 

 

PART IV

 

76

Item 15.

Exhibits and Financial Statement Schedules

76

Signatures

80

Consolidated Financial Statements

82

 



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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 forecasted 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 150,000 hotels worldwide through the Booking.com, priceline.com and Agoda brands.  In the United States, we also offer our customers car rental reservations, airline tickets, vacation packages, cruises and destination services. We refer to Booking.com, priceline.com, Agoda and TravelJigsaw 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, among others, the Booking.com and Agoda hotel reservation businesses and the TravelJigsaw rental car reservation business.  Our principal goal is to be the leading worldwide online hotel reservation service.  Our business is driven primarily by international results.  During the year ended December 31, 2010, our international business — the significant majority of which is currently generated by Booking.com — represented approximately 69% 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 82% of our consolidated operating income.  Given that the business of our international operations is primarily comprised of Booking.com hotel reservation services, commissions earned in connection with the reservation of hotel room nights represents a substantial majority of our gross profit.

 

Because our domestic services include merchant Name Your Own Price ®  travel services, which are reported on a “gross” basis, while both our domestic and international retail price-disclosed travel services are primarily recorded on a “net” basis, revenue increases and decreases are impacted by changes in the mix of our revenues between Name Your Own Price ®  and retail travel services and, 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:

 

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

 

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

 

·                   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.

 

For the year ended December 31, 2010, we had gross profit of approximately $1.9 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 2010, consisted of: (1) travel commissions; (2) customer processing fees; and (3) GDS reservation booking fees related to certain of the agency services listed above.  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 revenues are derived primarily from 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 a global travel service network that attracts consumers wishing to make travel reservations and connects them in a unique and innovative manner with suppliers of high quality travel services around the world.  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, cruises and destination services through both a traditional, price-disclosed “retail” manner, and through our proprietary demand-collection system known as Name Your Own Price ® .  Through TravelJigsaw, which we acquired in May 2010, we offer retail price-disclosed rental car reservations in 80 countries around the world.  These services are made available over the Internet through websites that we own or control, and are provided by major travel suppliers, including more than 150,000 hotel properties worldwide.

 

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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., one of the world’s leading Internet hotel reservation services, with more than thirty offices worldwide and priceline.com Mauritius Company Limited (formerly known as the Agoda Company, Ltd.), an Internet hotel reservation service with operations primarily in Thailand (“Agoda”).  Booking.com works with over 120,000 chain-owned and independently owned hotels in 99 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 TravelJigsaw Limited (“TravelJigsaw”), a Manchester, U.K.-based rental car reservation service, which we acquired in May 2010.  TravelJigsaw has locations in 80 countries in North America, South & Central America, Europe, Asia, Australia, the Caribbean, Africa and the Middle East.  Certain members of our management own a noncontrolling interest in TravelJigsaw.  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 known as a “demand collection system” that uses the information sharing and communications power of the Internet to create a different way of pricing services.  We believe our services have created a balance between the interests of buyers, who are willing to accept trade-offs in order to save money, and sellers, who are prepared to generate incremental revenue by selling their services at below retail prices, provided that they can do so without disrupting their existing distribution channels or retail pricing structures.  Our demand collection system allows consumers to specify the price they are prepared to pay when submitting an offer for a particular leisure travel service.  We then access databases in which participating suppliers file secure discounted rates not generally available to the public, to determine whether we can fulfill the customer’s offer and decide whether we want to accept the offer at the price designated by the consumer.  This system uses the flexibility of buyers to enable sellers to accept a lower price in order to sell their excess capacity.  We believe that our demand collection system addresses limitations inherent in traditional seller-driven pricing mechanisms in a manner that offers substantial benefits to both buyers and sellers.  We often refer to services offered through our Name Your Own Price ®  service as “opaque” services because not all aspects of the travel service are visible to the consumer before making an offer.

 

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United States: Retail Travel Services .  In the United States, we offer customers the ability to purchase price-disclosed hotel room reservations, rental car days, 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 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.

 

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.  Measured by room nights booked, we are the leader in the online hotel reservation market internationally and in the deep discount segment of this market in the United States.  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 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, 2010, our international business — the significant majority of which is currently generated by Booking.com — represented approximately 69% of our gross bookings, and contributed approximately 82% of our consolidated operating income during that period.  We expect that our international operations will represent a growing percentage of our total gross bookings and operating income over the long term.  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 have begun, and intend to continue, to develop the means to share hotel availability among our brands, which we believe will allow us to better satisfy demand across markets.

 

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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 ®  demand collection system in the United States allows consumers to save money in a simple and compelling way.  Buyers effectively trade off flexibility about brands, service features and/or sellers in return for prices that are lower than those that can be obtained at that time through traditional retail distribution channels.  We have expended significant resources to allow us to introduce price-disclosed retail services in the United States to our consumers to compliment the Name Your Own Price ®  service.  We believe that by offering a “one-stop-shopping” solution to our customers, we can simultaneously fulfill the needs of those customers who are prepared to accept the unique restrictions of our Name Your Own Price ®  service in exchange for receiving significant savings relative to retail prices, as well as those customers who are less price sensitive and require the certainty of knowing the full details of their travel itinerary prior to purchasing.

 

We intend to enhance our service offerings continually, particularly our retail offerings, by adding competitive functionality, adding travel selection at competitive pricing, adding and improving the content and merchandising on our website as well as “cross-sell” opportunities (for example, offering a hotel customer the opportunity to add a rental car reservation to the transaction) to maximize customer conversion.

 

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·                   Become a Leading Worldwide Online Rental Car Reservation Service .  In May 2010, we acquired TravelJigsaw, a United Kingdom-based international rental car reservation service.  TravelJigsaw offers its car hire services in more than 4,000 locations in 80 countries in Europe, the Americas, Asia-Pacific, Africa and the Middle East, with customer support provided in 20 languages.

 

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 120,000 chain-owned and independently owned hotels in 99 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.  Hotels may also participate in Agoda via consolidator relationships.

 

Retail Rental Cars.   In May 2010, we acquired TravelJigsaw, a United Kingdom-based international rental car reservation service.  TravelJigsaw offers its car hire services in more than 4,000 locations in 80 countries in Europe, the Americas, Asia-Pacific, Africa and the Middle East, with customer support provided in 20 languages.  Customers using TravelJigsaw can book a full range of vehicles online through one of TravelJigsaw’s branded websites, or they can reserve their cars by phone.  TravelJigsaw 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 important real estate investment trusts and 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, hotel participants may make similar rates available to consolidators or other discount providers under other arrangements.

 

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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 that enables our customers to select the exact hotel they want to book and the price of the reservation is disclosed prior to booking.

 

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 that 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.

 

Name Your Own Price ® Airline Tickets .  There are a total of 12 domestic airlines and 18 international airlines participating in our Name Your Own Price ® airline ticket service.

 

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.

 

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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.  For example, in some cases we disclose to the customer that agreeing to fly into an alternate airport would increase the chances of his or her offer being accepted.  In other cases, we inform the customer that increasing his or her offer by a certain amount would increase the chances of it being accepted.  We may also offer a customer the opportunity to purchase a price-disclosed retail airline ticket.

 

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.  In June 2007, we eliminated booking fees we had previously charged on the sale of published price retail airline tickets.

 

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 21 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.  During 2010, our total online advertising expenses were approximately $552.1 million, a substantial portion of which was spent internationally through Internet search engines and online affiliate marketing.  We also invested approximately $35.7 million in priceline.com-branded offline advertising in the United States.  We intend to continue a marketing strategy to promote brand awareness and the concept that consumers can save money using our services.  Underlying our marketing strategy is our belief that our target market is all consumers, not just Internet-savvy consumers.  We intend to continue to promote our brands aggressively throughout 2011.

 

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, because our international operations utilize Internet search engines and online affiliate marketing, principally through the purchase of travel-related keywords, as principal means of generating traffic to their websites, our online advertising expense has increased significantly since our acquisition of those companies, a trend we expect to continue throughout 2011.

 

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 Expedia, Orbitz Worldwide or Sabre, 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 and Venere, which are owned by Expedia; Travelocity, lastminute.com and Zuji, which are owned by the Sabre Group; Orbitz.com, Cheaptickets, ebookers, HotelClub and RatesToGo, which are currently owned by Orbitz Worldwide; laterooms and asiarooms owned by Tui Travel; and Gullivers, octopustravel, Superbreak, hotel.de, Hotel Reservation Service, AutoEurope, Holiday Auto, Car Trawler, Ctrip, Rakuten and Wotif;

 

·                   travel suppliers such as airlines, hotel companies and rental car companies, many of which have their own branded websites to which they drive business;

 

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

 

·                   traditional travel agencies, wholesalers and tour operators;

 

·                   online travel search sites such as Kayak.com, Mobissimo.com, FareChase.com, HotelsCombined and SideStep.com (each sometimes referred to as “meta-search” sites) 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.

 

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Traditional online travel companies have created new promotions and consumer value features in an effort to gain competitive advantage.  For example, in 2009, Travelocity launched an opaque price-disclosed hotel booking service that allows customers to book rooms at a discount because, similar to our Name Your Own Price ®  hotel booking service, the name of the hotel is not disclosed until after purchase. In addition, in the fourth quarter of 2010, Expedia began making opaque hotel room reservations available on its principal website under the name “Expedia Unpublished Rates.”  If Expedia or Travelocity are successful in growing their opaque hotel service, our share of the discount hotel market in the U.S. could decrease.  Online travel companies have also offered consumers value features such as, without limitation, the elimination and/or reduction of processing fees, the adoption of “best price” guarantees and the waiver of cancellation and change fees.  The elimination of processing fees on retail airline tickets by us and our major competitors, coupled with the recent significant year over year increases in retail air fares, has led consumers to engage in increased shopping behavior before making a purchase.  Increased shopping behavior reduces our advertising efficiency and effectiveness as traffic obtained through online advertising becomes less likely to result in a purchase on our web site.

 

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, Google recently announced that it has entered into an agreement to acquire ITA Software, Inc., a major flight information software company, which could allow Google to pursue the creation of new flight search tools which will enable users to find flight information on the Internet without using a service like ours.  Google has also invested in HomeAway, a vacation home rental service.  In addition, Google has launched a travel “meta-search” site to show searchers specific hotels and rates in addition to text advertisements, and Microsoft has launched Bing Travel , a “meta-search” site, 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.  These initiatives, among others, illustrate Google’s and Bing’s 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 Google’s or Bing’s 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.

 

Many airline, hotel and rental car suppliers, including suppliers with which we conduct business, are focusing on driving 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.

 

Many of our current and potential competitors, including Internet directories, search engines and large traditional retailers, have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, personnel, technical and other resources than we do. Some of these competitors may be able to secure services on more favorable terms than we can. In addition, many of these competitors may be able to devote significantly greater resources to:

 

·                   marketing and promotional campaigns;

·                   attracting traffic to their websites;

 

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·                   attracting and retaining key employees;

·                   securing vendors and supply; and

·                   website and systems development.

 

Increased competition could result in reduced operating margins, loss of market share and damage to our brand. There can be no assurance that we will be able to compete successfully against current and future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition.  See “ Risk Factors — Intense competition could reduce our market share and harm our financial performance .”

 

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 TravelJigsaw.  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-servicer 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 at Equinix Europe Ltd. in London, England, Global Switch Amsterdam B.V. and TelecityRedbus in the Netherlands and NTT in 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 SAVVIS in Jersey City, New Jersey, which provides communication links, as well as 24-hour monitoring and engineering support.  SAVVIS has its own generator and multiple back-up systems in Jersey City.  We also maintain a second web hosting facility at AT&T in New York City.  Our network operations center monitors both web hosting facilities and is located in our Norwalk, Connecticut headquarters.  All three facilities have a continuous power supply system, generators and redundant servers.  If SAVVIS were unable, for any reason, to support our primary web hosting facility, we would need to activate our secondary site at AT&T.

 

We outsource most of our domestic 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

 

We currently hold twenty-eight issued United States patents, Nos. 5,794,207; 5,897,620; 6,085,169; 6,108,639; 6,134,534; 6,240,396; 6,332,129; 6,345,090; 6,356,878; 6,418,415; 6,466,919; 6,484,153; 6,510,418; 6,553,346; 6,993,503; 7,188,176; 7,203,660; 7,333,941; 7,386,508; 7,472,074; 7,526,089: 7,617,491; 7,620,619; 7,664,672; 7,769,612; 7,801,751; 7,848,940; 7,848,945 and over twenty pending United States and foreign patent applications.  All of our issued United States patents expire between September 4, 2016 and December 4, 2027.  We file additional patent applications on new inventions, as appropriate.

 

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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;

 

·                   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.  See “ Risk Factors — We face risks related to our intellectual property .”

 

We hold the exclusive rights to the trade names and service marks PRICELINE ®  and PRICELINE.COM ®  in the U.S. and in many foreign countries. Our global service mark portfolio currently comprises over 160 service mark registrations.  In the U.S., we own U.S. Service Mark Registration No. 2,272,659 for PRICELINE ®  as well as Nos. 2,481,752 and 2,481,112 for PRICELINE.COM ® .  We also own U.S. Service Mark Registrations Nos. 2,647,673 for NAME YOUR OWN PRICE ® ; 2,481,751 for PRICELINEMORTGAGE ® ; 3,357,458 for PRICELINE EUROPE ® ; and numerous others. Through our subsidiary Travelweb LLC, we own U. S. Registrations Nos. 2,413,798 and 3,899,961 for TRAVELWEB ® . U.S. service mark registrations Nos. 3,435,703 for LOWESTFARE.COM ® ; Nos. 2750062 and 3763002 for BREEZENET ®  and BREEZENET.COM ® ; and No. 2,794,403 for BNM.COM ®  are registered through another subsidiary, Lowestfare.com LLC.

 

In addition, we hold European Community Registrations Nos. 3413846 and 3413952 for BOOKINGS ® ; No. 5752274 for the BOOKING.COM ®  Logo; and No. 3859618 for ACTIVE HOTELS ® .  We also own Benelux Registrations Nos. 762051 and 762054 and French Registration No. 43276223 for the BOOKINGS ®  service mark. We also own French Registration No. 43276225 for BOOKING. Booking.com owns U.S. common law service mark rights in the BOOKING.COM sm  word mark and U.S. Registration No. 3,849,615 for Blue Globe and Suitcase.

 

We aggressively monitor, protect and enforce our copyrights, service marks, trademarks, trade dress, domain names and trade secrets on an ongoing basis through a combination of laws and contractual restrictions, such as confidentiality agreements and affiliate agreements.  For example, we endeavor to register, maintain and enforce our service marks in the United States and internationally, however, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are or may be made available online, regardless of our continuous efforts to police and register our marks. See, “Risk Factors — We face risks related to our intellectual property .”

 

We currently own hundreds of Internet domain names in various top level domains, particularly for purposes of deterring service mark infringement.  Domain names are generally regulated by Internet regulatory bodies such as the World Intellectual Property Organization.  The relationship between trademark and unfair competition laws and domain name registration is still evolving.  The Anticybersquatting Consumer Protection Act in the U.S. and the Uniform Domain Name Dispute Resolution Policy of the Internet Corporation for Assigned Names and Numbers have both significantly enhanced our  ability to deter the infringing registration and use of our service marks in domain names by third parties and to assert our service mark registrations against them.  To maintain our famous marks and prevent the dilution of their distinctiveness, we actively pursue, in the U.S. and abroad, significant infringers, including cybersquatters and typosquatters who for commercial purposes misappropriate our service marks and register misspellings thereof as domain names.  See, “ Risk Factors — We face risks related to our intellectual property .”

 

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Governmental Regulation

 

The services we provide are subject to various federal, state 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 addition, our services may be subject to various state and local taxing regulations.  See “ Risk Factors Uncertainty regarding state and local taxes ”.

 

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, both 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.

 

All of our services are subject to federal and state consumer protection laws and regulations prohibiting unfair and deceptive trade practices.

 

We are also subject to regulations applicable to businesses conducting online commerce.  Presently, there are relatively few laws specifically directed toward online services. However, due to the increasing popularity and use of the Internet and online services, it is possible that laws and regulations will be adopted with respect to the Internet or online services. These laws and regulations could cover issues such as online contracts, user privacy, freedom of expression, pricing, fraud, content and quality of services, taxation, advertising, intellectual property rights and information security. Applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy is developing, but any such new legislation could have significant implications on how we conduct online business. In addition, some states may require us to qualify in that state to do business as a foreign corporation because our service is available in that state over the Internet. Although we are qualified to do business in a number of states, failure to meet the qualifications of certain states, or a determination that we are required to qualify in additional states, could subject us to taxes and penalties.  See “ Risk Factors — Regulatory and legal uncertainties could harm our business,” and “Uncertainty regarding state and local taxes .”

 

Our international operations are subject to various foreign regulations and governing bodies that might limit their services. They may be affected by unexpected changes in regulatory requirements and various tariffs and trade barriers in connection with online commerce. Any failure by our international operations to comply may have an adverse effect on our business.

 

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Seasonality

 

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

 

Employees

 

As of January 31, 2011, we employed approximately 3,400 full-time employees, of which approximately 750 are based in the United States and approximately 2,650 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.

 

The Priceline Group Websites

 

We maintain websites with the addresses www.booking.com, www.priceline.com, www.agoda.com and www.carhire3000.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.

 

Booking.com, Agoda and TravelJigsaw face risks related to their growth rate and expansion, and subject us to risks that can adversely affect our operating results.

 

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 Thailand-based hotel reservation service Agoda and the U.K.-based rental car reservation service 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 reservations.  This growth rate has contributed significantly to our growth in revenue, gross profit and earnings per share.  Over time, Booking.com, Agoda and TravelJigsaw 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, declines in hotel average daily rates (“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.

 

The strategy of Booking.com, Agoda and TravelJigsaw 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 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 TravelJigsaw are unsuccessful in rapidly expanding into other countries, our business, results of operations and financial condition would be adversely affected.

 

We are dependent on the travel industry.

 

Our financial prospects are significantly dependent upon our sale of travel services.  Travel, including hotel room reservations, rental car reservations and airline tickets, 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 cancelled existing travel reservations with us.  In addition, unforeseen events beyond our control, such as terrorist attacks, unusual weather patterns, including natural disasters such as hurricanes, tsunamis or earthquakes and other weather phenomena such as the volcanic ash cloud that grounded European air travel for several days in April 2010, travel related health concerns including pandemics and epidemics such as H1N1 influenza (swine flu), avian bird flu and SARS, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities and travel related accidents, also may adversely affect the travel industry and our business and results of operations.  Further, work stoppages or labor unrest at any of the major airlines could materially adversely affect the airline industry and, as a consequence, have a material adverse effect on our business, results of operations and financial condition.

 

For example, in early 2010, civil unrest in Thailand, a key market for our Agoda business and the Asian business of Booking.com, negatively impacted booking volumes in this market at the time.  In addition, clashes involving Thai security forces, anti-government demonstrators and groups supporting the government resulted in violence in various locations in Bangkok, causing the temporary relocation of Agoda’s Thailand-based operations.  Thailand has experienced disruptive civil unrest in prior years as

 

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well and continued or future civil or political unrest could further disrupt Agoda’s Thailand-based business and operations.

 

We are dependent on certain suppliers.

 

Our arrangements with the hotel, airline and rental car suppliers that participate in our system — either Name Your Own Price ®  or price-disclosed service — 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.

 

With respect to our airline suppliers, the airline industry has experienced a shift in market share from full-service carriers to low-cost carriers that focus primarily on discount fares to leisure destinations and we expect this trend to continue.  Some low-cost carriers, such as Southwest, have not historically distributed their tickets through us or other third-party intermediaries.  In addition, certain airlines have significantly limited or eliminated sales of airline tickets through opaque channels, preferring to consistently show the lowest available price on their own website.  Since the start of the worldwide recession, domestic airline capacity has been significantly reduced, which reduces the number of airline tickets available to our customers and the amount of discounted airline tickets available for our Name Your Own Price ®  business.  During 2010, airlines significantly increased their average fares compared to 2009, which adversely impacts travel demand.  Reduced airline capacity and lower travel demand negatively impact our priceline.com air business, which in turn has negative repercussions on our priceline.com hotel and rental car businesses, and could have a material adverse effect on our business, results of operations and financial condition.  Conversely, decreased airfares can adversely impact our Name Your Own Price ®  airline tickets sales by reducing the amount of absolute dollar savings as compared to retail airline tickets.

 

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.  Recently, there has been significant domestic airline industry consolidation, as evidenced by mergers of United Air Lines with Continental Airlines and Delta Air Lines with Northwest Airlines, as well as the recently announced future acquisition of AirTran by Southwest Airlines.  If one of our major airline suppliers merges or consolidates with, or is acquired by, another company that either does not participate in the priceline.com system or that participates on substantially lower levels, the surviving company may elect not to participate in our

 

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system or to participate at lower levels than the previous supplier.  For example, in September 2010, Southwest Airlines announced that it entered into an agreement to acquire AirTran.  AirTran has participated in our Name Your Own Price ®  system on only a limited basis, but Southwest Airlines has never participated.  In fact, Southwest Airlines does not currently distribute airline tickets through any online travel agent or permit its fares to appear in comparative fare displays.  If AirTran fares are taken out of the online marketplace as a result of this acquisition, those fares would no longer be available to us.  Similarly, United Air Lines has historically participated in our Name Your Own Price ®  system at a high level, while Continental Airlines has historically participated at a much lower level.  We cannot predict the effects that the acquisition of AirTran by Southwest Airlines or the merger of United Air Lines with Continental Airlines will have on our business.

 

In addition, in the event that one of our major suppliers voluntarily or involuntarily declares bankruptcy and is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected.  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.  To the extent major U.S. airlines that participate in our system declare bankruptcy or cease operations, they 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. In addition, because Name Your Own Price ®  customers do not choose their airlines, hotels or rental car companies, the bankruptcy of a major airline, hotel or rental car company, or even the possibility of such a bankruptcy, could discourage customers from using our Name Your Own Price ®  system to book travel.

 

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, i n December 2010, American Airlines terminated its participation in the Orbitz service and withdrew its fares from the Orbitz website.  This is consistent with an effort on the part of American Airlines, and the airline industry in general, to reduce distribution costs.  American Airlines’ termination of its distribution arrangement with Orbitz could be indicative of the airlines in general becoming more aggressive toward requiring online travel agents to implement direct connections.  In addition, in December 2010, Expedia preemptively removed American Airlines flights from its site as its contract with American was set to expire on December 31, 2010.  It is feasible that a dispute between an airline and a GDS could lead to an airline removing its fares from the GDS.  Despite the fact that such a dispute may not involve us, our business could be adversely affected if we are denied access to airfares in a major GDS.   During 2010, we implemented a direct connection with American Airlines.  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.

 

The loss of any major airline participant in our Name Your Own Price ®  system could result in other major airlines electing to terminate their participation in the Name Your Own Price ®  system, which would further negatively impact our business, results of operations and financial condition.  In addition, fewer independent suppliers reduces opacity and competition among suppliers.  In such event, if we are unable to divert sales to other suppliers, our business, results of operations and financial condition may be adversely affected.

 

In addition, given the concentration of the airline industry, particularly in the domestic market, our competitors could exert pressure on other airlines not to supply us with tickets. Moreover, the airlines may attempt to establish their own buyer driven commerce service or participate or invest in other similar services.

 

United Airlines prohibits certain travel agents from using United’s merchant processing system for retail credit card transactions.  When accepting credit cards for payment, such agents must use their own merchant accounts and settle with United with cash.  By requiring such agents to act as merchant of record, United passes the credit card processing costs onto the travel agent.  United has not informed us

 

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that we must cease using United’s merchant processing system for credit card transactions, however, if United or another airline changes its policy with respect to us and requires us to act as merchant of record for retail airline ticket transactions, we will incur additional credit card processing costs and increased chargeback activity and expense, including chargeback expense in connection with the bankruptcy of any such airline.

 

Avis is currently in discussions to acquire the Dollar-Thrifty Automotive Group.  The merger or acquisition of the Dollar-Thrifty Automotive Group by Avis or another rental car company could result in a decrease of rental car reservations available to our rental car service. If another major rental car supplier merges or consolidates with, or is acquired by, another company that either does not participate in the priceline.com system or that participates on substantially lower levels, the surviving company may elect not to participate in our system or to participate at lower levels than the previous supplier.  The loss of any rental car supplier participant in our Name Your Own Price ®  system could result in other rental car suppliers electing to terminate or reduce their participation in the Name Your Own Price ®  system, which would negatively impact our business, results of operations and financial condition.  Similarly, industry consolidation and any resulting reduction in rental car capacity would limit the amount of availability for TravelJigsaw’s rental car service.  Furthermore, many major rental car companies are highly leveraged and the worldwide recession creates the potential for severe financial difficulty, including without limitation, the inability of a rental car company to refinance its debt, restructure its operations or emerge from a bankruptcy, any of which could lead to a reduction in rental car supply made available to us.  In addition, fewer independent suppliers reduces opacity and competition among suppliers.  In such event, if we are unable to divert sales to other suppliers, our business, results of operations and financial condition may be adversely affected.

 

In addition, any disruption in the supply of vehicles or the ability to dispose of vehicles by rental car companies could impact the ability of the rental car companies to match their fleet supply with demand, which could adversely impact our business.  If the rental car industry is faced with excess supply, rental car companies may lower retail rental car rates, which could be beneficial to our retail rental car business, but detrimental to our Name Your Own Price ®  business.  Retail rental car rates decreased during the year ended December 31, 2010 compared to the same period in 2009 (despite Toyota’s January 2010 recall of over 8 million vehicles due to faulty accelerator pedals, which led to a strain on rental car companies’ fleets and temporarily increased retail rental car rates).  Because rental car days are typically less expensive than airline tickets or hotel room night reservations, a reduction in retail rental car rates has a disproportionately adverse effect on sales of Name Your Own Price ®  rental car days since customers may be less likely to accept the trade-offs associated with that service.  If the industry is faced with a shortage of vehicles, rental car companies may further reduce the number of car reservations they distribute through our service or increase the negotiated rates at which they are willing to provide car reservations.  For example, since the recent worldwide recession, the rental car industry has generally reduced its fleet capacity, which has limited the amount of discounted rental car days available for our Name Your Own Price ®  rental car service.

 

We are exposed to fluctuations in currency exchange rates.

 

As a result of the growth of Booking.com and Agoda, and the acquisition of TravelJigsaw, 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.  Our international operations contributed approximately $1.4 billion to our revenues for the year ended December 31, 2010, respectively, which compares to $852.0 million for the year ended December 31, 2009 (year-over-year growth of approximately 70%).  Revenue 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.  Booking.com, Agoda and TravelJigsaw also face foreign exchange risk as their foreign-denominated revenues, expenses, receivables and payables are translated into their respective functional

 

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currencies.  For example, in the fourth quarter of 2010, the U.S. Dollar was stronger against the Euro and the British Pound Sterling, relative to the fourth quarter of 2009, which negatively impacted the growth rates of our Euro and British Pound Sterling denominated gross bookings, gross profit and net income as expressed in U.S. Dollars.

 

In early 2010, Greece and certain other European Union countries with high levels of sovereign debt had difficulty refinancing that debt and central bank intervention was required, causing significant devaluation of the Euro relative to other currencies, such as the U.S. Dollar, and concerns that sovereign defaults could lead to devaluation or abandonment of the common currency.  Sovereign debt issues 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.

 

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 Expedia, Orbitz Worldwide or Sabre, 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 and Venere, which are owned by Expedia; Travelocity, lastminute.com and Zuji, which are owned by the Sabre Group; Orbitz.com, Cheaptickets, ebookers, HotelClub and RatesToGo, which are currently owned by Orbitz Worldwide; laterooms and asiarooms owned by Tui Travel; and Gullivers, octopustravel, Superbreak, hotel.de, Hotel Reservation Service, AutoEurope, Holiday Auto, Car Trawler, Ctrip, Rakuten and Wotif;

 

·                   travel suppliers such as airlines, hotel companies and rental car companies, many of which have their own branded websites to which they drive business;

 

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

 

·                   traditional travel agencies, wholesalers and tour operators;

 

·                   online travel search sites such as Kayak.com, Mobissimo.com, FareChase.com, HotelsCombined and SideStep.com (each sometimes referred to as “meta-search” sites) 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.

 

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.  For example, in 2009, Travelocity launched an opaque price-disclosed hotel booking service that allows customers to book rooms at a discount because, similar to our Name Your Own Price ®  hotel booking service, the name of the hotel is not disclosed until after purchase. In addition, in the fourth quarter of 2010, Expedia began making opaque hotel room reservations available on its principal website under the name “Expedia Unpublished Rates.”  If Expedia or Travelocity are successful in growing their opaque

 

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hotel service, our share of the discount hotel market in the U.S. could decrease.  Online travel companies have also offered consumers value features such as, without limitation, the elimination and/or reduction of processing fees, the adoption of “best price” guarantees and the waiver of cancellation and change fees.  The elimination of processing fees on retail airline tickets by us and our major competitors, coupled with the recent significant year over year increases in retail air fares, has led consumers to engage in increased shopping behavior before making a purchase.  Increased shopping behavior reduces our advertising efficiency and effectiveness as traffic obtained through online advertising becomes less likely to result in a purchase on our web site.

 

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, Google recently announced that it has entered into an agreement to acquire ITA Software, Inc., a major flight information software company, which could allow Google to pursue the creation of new flight search tools which will enable users to find flight information on the Internet without using a service like ours.  Google has also invested in HomeAway, a vacation home rental service.  In addition, Google has launched a travel “meta-search” site to show searchers specific hotels and rates in addition to text advertisements, and Microsoft has launched Bing Travel , a “meta-search” site, 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.  These initiatives, among others, illustrate Google’s and Bing’s 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 Google’s or Bing’s 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.

 

Many airline, hotel and rental car suppliers, including suppliers with which we conduct business, are focusing on driving 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.

 

Many of our current and potential competitors, including Internet directories, search engines and large traditional retailers, have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, personnel, technical and other resources than we do. Some of these competitors may be able to secure services on more favorable terms than we can. In addition, many of these competitors may be able to devote significantly greater resources to:

 

·                   marketing and promotional campaigns;

·                   attracting traffic to their websites;

·                   attracting and retaining key employees;

·                   securing vendors and supply; and

·                   website and systems development.

 

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Increased competition could result in reduced operating margins, loss of market share and damage to our brand. There can be no assurance that we will be able to compete successfully against current and future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition.

 

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

 

A number of jurisdictions 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.  Please see Item 3 — Legal Proceedings and 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 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.  Furthermore, prior to introducing a retail travel option to our customers, substantially all of our business was conducted under the Name Your Own Price ®  system and accordingly, because those services are non-refundable in nature, we recognize travel revenue at the time a booking was generated.  We recognize revenue generated from our retail hotel service, however, including Booking.com and Agoda, at the time that the customer checks out of the hotel.  As a result, we have seen and expect to continue to see, that a meaningful amount of retail hotel bookings generated earlier in the year, as customers plan and reserve their spring and summer vacations, will not be recognized until future quarters.  This could result in a disproportionate amount of our annual earnings being recognized in later quarters.

 

Our results may also be affected by seasonal fluctuations in the supply made available to us by airlines, hotels and rental car suppliers.

 

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.  For example, in the first quarter of 2010, we experienced a mild deceleration in year-over-year hotel room night reservation growth as compared to the year-over-year growth rate in the fourth quarter of 2009.  The unit growth rate decelerated further in the second quarter of 2010 due in part to (1)  travel disruptions caused by the April 2010 eruption of a volcano in Iceland, (2) general uncertainty about the European economy and (3) substantial increases in airfares, which can negatively impact overall travel demand.  As the volcanic activity subsided, macroeconomic concerns in Europe abated and airfare increases moderated, our third quarter year-over-year hotel room night reservation growth rate accelerated, and then reverted to the pattern of deceleration in the fourth quarter 2010.

 

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.

 

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 25.5% (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 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 2011 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 could adversely impact our results of operations.

 

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;

·                   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 an airline or hotel chain;

·                   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 further, 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 often has 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.

 

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 and Agoda, 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 and their affiliates, can be negatively affected.  In a similar way, a significant amount of Booking.com and Agoda’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

 

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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 and Agoda 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 and Agoda reservations, or suffer deterioration in its search engine ranking, due to changes in search engine algorithms or otherwise, the business of Booking.com and Agoda could be negatively 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 in 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.  We may need to expend significant resources to protect against security breaches or to address problems caused 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.

 

Companies that we have acquired, such as Booking.com, Agoda and TravelJigsaw, and that we may acquire in the future, may employ security and networking standards at levels we find unsatisfactory.  The process of enhancing infrastructure to attain improved security and network standards may be time consuming and expensive and may require resources and expertise that are difficult to obtain.  Such acquisitions increase the number of potential vulnerabilities, and can cause delays in detection of an attack, as well as the timelines of recovery from any given attack. Failure to raise any such standards that we find unsatisfactory could expose us to security breaches of, among other things, personal customer data and credit card information that would have an adverse impact on our business, results of operations and financial condition.

 

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, security breaches at third parties such as supplier or distributor systems upon which we rely could result in negative publicity, damage our

 

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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.

 

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.  In addition, because our European senior management’s noncontrolling ownership interest was repurchased in September 2008, it may become more difficult to retain these senior managers.  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 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.

 

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Our expansion places a significant strain on our management, technical, operational and financial resources.

 

We have rapidly and significantly expanded our international operations and anticipate expanding further to pursue growth of our service offerings and customer base. For example, the number of our employees worldwide has grown from less than 700 in the first quarter of 2007, to approximately 3,400 as of December 31, 2010, which growth is mostly comprised of hires by or for our international operations.  Such expansion increases the complexity of our business and places a significant 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.

 

Capacity constraints and system failures could harm our business.

 

We rely on certain third party computer systems and third party service providers, including the 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. In particular, our priceline.com travel business is substantially dependent upon the computerized reservation systems of operators of global distribution systems for the travel industry. 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 Chase Paymentech to process our U.S. credit card transactions; Global Collect and others to process Agoda credit card transactions; and Wright Express to provide credit card numbers which we use as a payment mechanism for merchant hotel transactions. If any of these providers were wholly or partially compromised, our cash flows could be disrupted until such a time as a replacement process could be put in place with a different vendor.  As we add complexity to our systems infrastructure by adding new suppliers and distribution, our total system availability could decline and our results could suffer.

 

A substantial amount of our computer hardware for operating our services is currently located at the facilities of SAVVIS in New Jersey, AT&T in New York City, Equinix Europe Ltd. in London, England, Global Switch Amsterdam B.V. in the Netherlands and certain other data centers. 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 the SAVVIS facility, the AT&T facility, the Equinix Europe Ltd. facility and the Global Switch Amsterdam B.V. facility, or other facilities could result in lengthy interruptions in our services. In addition, the failure by SAVVIS, Verizon, AT&T, Equinix Europe Ltd., Colt Telecom Group Limited, Verizon Business B.V., TrueServer B.V. or other communication providers to provide our required data communications capacity could result in interruptions in our service. Any system failure that causes an interruption in service or decreases the responsiveness of our services could impair our reputation, damage our brand name and have a material adverse effect on our business, results of operations and financial condition.

 

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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 been taking 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 do not know whether we will 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 repair.

 

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; or

·                   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.

 

Companies that we have acquired, such as Booking.com, Agoda and TravelJigsaw, and that we may acquire in the future, may present known or unknown capacity/stability or other types of system challenges.  The process of enhancing infrastructure to attain improved capacity/scalability and other system characteristics may be time consuming and expensive and may require resources and expertise that are difficult to obtain.  Such acquisitions increase potential downtime, customer facing problems and compliance problems.  Failure to successfully make any such improvements to such infrastructures could expose us to potential capacity, stability, and system problems that would have an adverse impact on our business, results of operations and financial condition.

 

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 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 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 operations generate an increasing share of our pretax income.

 

We may have exposure to additional tax liabilities .

 

As an international corporation with offices in over 100 countries 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.

 

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 President Obama’s Administration, if enacted, could have a significant adverse impact on our effective tax rate.

 

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.

 

We are also subject to non-income based taxes, such as payroll, sales, use, value-added, 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.

 

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Acquisitions could result in operating difficulties.

 

As part of our business strategy, we acquired Booking.com Limited in September 2004, Booking.com B.V. in July 2005, Agoda in November 2007 and TravelJigsaw in May 2010.  We may enter into additional business combinations and acquisitions in the future.  Acquisitions may result in dilutive issuances of equity securities, use of our cash resources, incurrence of debt and amortization of expenses related to intangible assets acquired.  In addition, the process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures.  The acquisitions of Booking.com B.V., Booking.com Limited, Agoda and TravelJigsaw were accompanied by a number of risks, including, without limitation:

 

·                   the need to implement or remediate controls, procedures and policies appropriate for a larger public company at companies that prior to the acquisitions may have lacked such controls, procedures and policies;

·                   the difficulty of assimilating the operations and personnel of Booking.com Limited, which are principally located in Cambridge, England, Booking.com B.V., which are principally located in Amsterdam, The Netherlands, Agoda, which are principally located in Singapore and Bangkok, Thailand, and TravelJigsaw, which are principally located in Manchester, England, with and into our operations, which are headquartered in Norwalk, Connecticut;

·                   the potential disruption of our ongoing business and distraction of management;

·                   the difficulty of incorporating acquired technology and rights into our services and unanticipated expenses related to such integration;

·                   the failure to further successfully develop acquired technology resulting in the impairment of amounts currently capitalized as intangible assets;

·                   the impairment of relationships with customers of Booking.com B.V., Booking.com Limited, Agoda and TravelJigsaw or our own customers as a result of any integration of operations;

·                   the impairment of relationships with employees of Booking.com B.V., Booking.com Limited, Agoda and TravelJigsaw or our own business as a result of any integration of new management personnel;

·                   the potential unknown liabilities associated with Booking.com B.V., Booking.com Limited, Agoda and TravelJigsaw.

 

We may experience similar risks in connection with any future acquisitions. We may not be successful in addressing these risks or any other problems encountered in connection with the acquisitions of Booking.com B.V., Booking.com Limited, Agoda or TravelJigsaw, or that we could encounter in future acquisitions, which would harm our business or cause us to fail to realize the anticipated benefits of our acquisitions.  As of December 31, 2010, we had approximately $702 million assigned to the intangible assets and goodwill of Booking.com B.V., Booking.com Limited, Agoda and TravelJigsaw, and therefore, the occurrence of any of the risks identified above could result in a material adverse impact, including an impairment of these assets, which could cause us to have to record a charge for impairment.  Any such charge could adversely impact our operating results, which would likely cause our stock price to decline significantly.

 

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

 

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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.

 

We rely on the value of the Booking.com, priceline.com and Agoda.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 and Agoda brands, and other owned brands, including Lowestfare.com, rentalcars.com, Breezenet.com, MyTravelGuide.com, Travelweb, hotelroom.com, TravelJigsaw and Car Hire 3000, 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 spent considerable money and resources to date on the establishment and maintenance of the Booking.com, priceline.com and Agoda brands, and we will continue to spend money on, and devote 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.

 

We are exposed to various counterparty risks.

 

We are party to derivative instruments to hedge our exposure to potential dilution upon conversion of certain of our convertible senior notes.  The counterparties to our Conversion Spread Hedges are Goldman Sachs and Merrill Lynch.  Under the Conversion Spread Hedges, we are entitled to purchase from the counterparties approximately 4.3 million shares of our common stock (the number of shares underlying the 2013 Notes) at a strike price of $40.38 per share (subject to adjustment in certain circumstances) and the counterparties are entitled to purchase from us approximately 4.3 million shares of our common stock at a strike price of $50.47 per share (subject to adjustment in certain circumstances).  The Conversion Spread Hedges increase the effective conversion price of the 2013 Notes to $50.47 per share from our perspective and are designed to reduce the potential dilution upon conversion of the 2013 Notes. If the market value per share of our common stock at maturity is above $40.38, the Conversion Spread Hedge will entitle us to receive from the counterparties net shares of our common stock based on the excess of the then current market price of our common stock over the strike price of the hedge (up to $50.47).  If any of the counterparties to these derivative instruments were to liquidate, declare bankruptcy or otherwise cease operations, it may not satisfy its obligations under these derivative instruments.  In such event, our fully diluted share count would be increased, which would negatively impact our fully diluted earnings per share.

 

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, 2010, we held approximately $949 million of cash and short-term liquid investments outside of the United States.  To date, we have used our foreign cash to reinvest in our foreign operations.  It is our current expectation to make further investments in our foreign operations with our foreign cash.  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 expenses in the United States with respect to our unremitted foreign earnings.  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.

 

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In addition, on February 1, 2011, U.S. President Barack Obama 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 their being enacted into law.  If the U.S. tax laws change in a manner that increases our tax obligation, our results could suffer.

 

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, 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;

 

·       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.  To date, we have been audited in several taxing jurisdictions with no significant adjustments as a result.  If future audits found that additional taxes were due, we may be subject to tax liabilities, possibly including interest and penalties, which could have a material adverse impact on our financial conditions and results of operations.

 

In addition, the strategy of Booking.com, Agoda and TravelJigsaw 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 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;

 

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·       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;

 

·       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 credit card fraud and chargebacks.

 

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 TravelJigsaw, 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.

 

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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.

 

The unit profitability of certain of our businesses has declined and could continue to decline, as we may be subject to, among other things, competitive pressure and loss or reduction of global distribution system fees.

 

In recent years, the amount of profit we make per airline ticket sold has declined and could continue to decline as we, among other things, experience pressure from suppliers to reduce our profit, strive to remain competitive with other online travel agencies and continue to be subject to reduction of global distribution system, or GDS, fees paid to us.  Historically, we have relied on fees paid to us by GDSs for travel bookings made through GDSs for a portion of our gross profit and a substantial portion of our operating income. We rebate certain GDS costs to certain suppliers (e.g., airlines, hotels, etc.) in exchange for contractual considerations such as those relating to pricing and availability, and expect to continue to do so in the future.  Suppliers put pressure on us to reduce our aggregate compensation and book through lower cost channels to receive full content and avoid penalties.  We have agreements with a number of suppliers to obtain access to content, and are in continuing discussions with others to obtain similar access.  If we were denied access to full content or had to impose service fees on our services, it could have a material adverse effect on our business, results of operations and financial condition.

 

Additionally, 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 December 2010, American Airlines terminated its participation in the Orbitz service and withdrew its fares from the Orbitz website.  This is consistent with an effort on the part of American Airlines, and the airline industry in general, to reduce distribution costs.  American Airlines’ termination of its distribution arrangement with Orbitz could be indicative of the airlines in general becoming more aggressive toward requiring online travel agents to implement direct connections.  In addition, in December 2010, Expedia preemptively removed American Airlines flights from its site as its contract with American was set to expire on December 31, 2010.  It is feasible that a dispute between an airline and a GDS could lead to an airline removing its fares from the GDS.  Despite the fact that such a dispute may not involve us, our business could be adversely affected if we are denied access to airfares in a major GDS.   During 2010, we implemented a direct connection with American Airlines.  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.

 

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 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, 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 16,000 square feet of office space, primarily in Cambridge, England.  Booking.com B.V. leases approximately 198,000 square feet of office space in Amsterdam, Netherlands and in 20 other countries in support of its international operations.  Agoda leases approximately 42,000 square feet of office space in Bangkok, Thailand, and in 14 other countries in support of its international operations.  TravelJigsaw leases approximately 22,000 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 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

 

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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.  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 our 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, 2010, 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 $1.1 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.  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.

 

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As a result of this litigation and other attempts by jurisdictions to levy similar taxes, we have established a reserve for the potential resolution of issues related to hotel occupancy and other taxes in the amount of approximately $26 million as of December 31, 2010 compared to approximately $21 million as of December 31, 2009 (which includes, among other things, amounts related to the litigation in San Antonio).  The reserve is based on our reasonable estimate, and the ultimate resolution of these issues may be less or greater, potentially significantly, than the liabilities recorded.

 

Developments to Date

 

In the year ended December 31, 2010 and to date, nine of the approximately fifty currently pending lawsuits and thirteen of the total number of currently pending administrative proceedings noted above were commenced.  Rulings granting dispositive motions brought by us (or another co-defendant), e.g. motions to dismiss or for summary judgment, were issued in ten cases.  For example, in December, 2010 in Priceline.com, Inc. v. City of Anaheim , the court entered judgment setting aside an earlier hearing officer’s determination that we (and other co-defendants) were liable for the transient occupancy tax at issue; that case is on appeal.  Rulings granting dispositive motions or granting relief sought by a plaintiff municipality (or state) also were issued.  For example, in May 2010, in an administrative proceeding, City of San Diego v. Hotels.com, L.P. , the hearing officer appointed by the City issued a ruling holding us and other online travel companies liable for transient occupancy tax.  We have filed a judicial action challenging that ruling.  In another example, in January 2011, in Travelscape, LLC v. South Carolina Department of Revenue , a case in which we were not a defendant, the South Carolina Supreme Court affirmed a lower court decision holding that Travelscape, an online travel company, was subject to that state’s sales tax because Travelscape was “engaged . . . in the business of furnishing accommodations.”  In light of this ruling, we recorded a $1.7 million charge to general and administrative expenses for the year ended December 31, 2010.  In July 2010, in City of Atlanta v. Hotels.com, L.P. , the court issued a ruling expressly holding that we (and our co-defendants) were not hotel “operators” under the City of Atlanta’s ordinance and were not liable for claimed historic tax amounts.  At the same time, however, the City of Atlanta court found that under the “merchant” model, we (and our co-defendants) have undertaken an obligation to collect taxes and granted plaintiff’s request for an injunction, prospectively enjoining defendants to collect and remit occupancy tax on their compensation for reservation facilitation services to the City of Atlanta.  The City of Atlanta decision is on appeal.

 

Several jurisdictions, including the states of New York and North Carolina, amended their respective laws in an effort to tax online travel companies and “merchant” model gross revenue.  We have complied with applicable amended laws.

 

Lastly, we reached agreements with the respective plaintiffs resolving the claims for purported back taxes in County of Monroe, Florida v. Priceline.com, Inc. et al. , County Commissioners of Worcester, Maryland v. Priceline.com, Inc., et al. , and Mayor & City Council of Baltimore v. Priceline.com, Inc., et al. , as well as three individual cases that had been previously consolidated for pretrial purposes, City of Charleston, South Carolina v. Hotels.com, et al. ; Town of Mount Pleasant, South Carolina v. Hotels.com, et al. ; and City of North Myrtle Beach, South Carolina v. Hotels.com, LP, et al .  These cases have been dismissed.  We also reached an agreement with the plaintiff in County of Brevard, Florida v Priceline.com, Inc., et al.  and that case was dismissed on January 12, 2011.  As part of each of the agreements, plaintiffs have agreed to not assert claims based on the ordinance at issue in the respective action for a period of time, ranging from two to four years.  The settlement amounts in these cases are not material to our results of operations for the year ended December 31, 2010.

 

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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 Dec. 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 Nov. 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 Jacksonville, Florida, et al. v. Hotels.com, L.P., et al. (Circuit Court, Fourth Judicial Circuit, Duval County, Florida; filed July 2006)

·       Lake County Convention and Visitors Bureau, Inc. and Marshall County, Indiana v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District of Indiana; filed June 2006)

·       County of Nassau, New York v. Hotels.com, LP, et al. (U.S. District Court for the Eastern District of New York; filed Oct. 2006); (U.S. Court of Appeals for the Second Circuit; appeal filed Sept. 2007)

·       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)

·       Township of Lyndhurst, New Jersey v. priceline.com Incorporated, et al. (U.S. District Court for the District of New Jersey; filed June 2008); (U.S. Court of Appeals for the Third Circuit; appeal filed Apr. 2009)

·       County of Monroe, Florida v. Priceline.com, Inc. et al. (U.S. District Court for the Southern District of Florida; filed Jan. 2009)

·       Pine Bluff Advertising and Promotion Commission, Jefferson County, Arkansas, et al. v. Hotels.com, LP, et al. (Circuit Court of Jefferson County, Arkansas; filed Sept. 2009)

·       County of Lawrence, Pennsylvania v. Hotels.com, L.P., et al. (Court of Common Pleas of Lawrence County, Pennsylvania; filed Nov. 2009); (Commonwealth Court of Pennsylvania; appeal filed Nov. 2010)

 

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 Oct. 2005); 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 Aug. 2006); (U.S. District Court for the Northern District of Ohio)

·       City of Chicago, Illinois v. Hotels.com, L.P., et al. (Circuit Court of Cook County Illinois; filed Nov. 2005)

·       City of San Diego, California v. Hotels.com L.P., et al. (California Superior Court, San Diego County; filed Sept. 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 Mar. 2006); (Court of Appeals of the State of Georgia; appeal filed Jan. 2007); (Georgia Supreme Court; further appeal filed Dec. 2007)

·       City of Charleston, South Carolina v. Hotels.com, et al. (U.S. District Court for the District of South Carolina; filed Apr. 2006); Town of Mount Pleasant, South Carolina v. Hotels.com, et al. (U.S. District Court for the District of South Carolina; filed May 2006);

 

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and City of North Myrtle Beach, South Carolina v. Hotels.com, LP, et al. (U.S. District Court for the District of South Carolina; filed Aug. 2006)

·       Wake County, North Carolina v. Hotels.com, LP, et al. (General Court of Justice, Superior Court Division, Wake County, North Carolina; filed Nov. 2006); Dare County, North Carolina v. Hotels.com, LP, et al. (General Court of Justice, Superior Court Division, Dare County, North Carolina; filed Jan. 2007); Buncombe County, North Carolina v. Hotels.com, LP, et al. (General Court of Justice, Superior Court Division, Buncombe County, North Carolina; filed Feb. 2007); Mecklenburg County, North Carolina v. Hotels.com LP, et al. (General Court of Justice, Superior Court Division, Mecklenburg County, North Carolina; filed Jan. 2008)

·       City of Branson, Missouri v. Hotels.com, LP., et al. (Circuit Court of Greene County, Missouri; filed Dec. 2006)

·       Horry County, South Carolina, et al. v. Hotels.com, LP, et al. (Court of Common Pleas, Horry County, South Carolina; filed Feb. 2007)

·       City of Myrtle Beach, South Carolina v. Hotels.com, LP, et al. (Court of Common Pleas, Horry County, South Carolina; filed Feb. 2007)

·       City of Houston, Texas v. Hotels.com, LP., et al. (District Court of Harris County, Texas; filed Mar. 2007)

·       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 Dec. 2007)

·       City of Baltimore, Maryland v. Priceline.com, Inc., et al. (U.S. District Court for the District of Maryland; filed Dec. 2008)

·       County Commissioners of Worcester, Maryland v. Priceline.com, Inc., et al. (U.S. District Court for the District of Maryland; filed Jan. 2009)

·       County of Genesee, Michigan, et al. v. Hotels.com LP, et al. (Circuit Court for the County of Ingham, Michigan; filed Feb. 2009)

·       City of Bowling Green, Kentucky v. Hotels.com LP et al. (Warren Cir. Ct., Kentucky, Div. 1; filed Mar. 2009); (Commonwealth of Kentucky Court of Appeals; appeal filed Apr. 2010)

·       St. Louis County, Missouri v. Prestige Travel, Inc. et al. (Circuit Court of St. Louis County, Missouri; filed July 2009)

·       The Village of Rosemont, Illinois v. Priceline.com, Inc., et al. (U.S. District Court for the Northern District of Illinois; filed July 2009)

·       Palm Beach County, Florida v. Priceline.com, Inc., et al. (Circuit Court for Palm Beach County, Florida; filed July 2009)

·       Brevard County, Florida v. Priceline.com Inc., et al. (U.S. District Court for the Middle District of Florida; filed Oct. 2009)

·       Leon County, et al. v. Expedia, Inc., et al. (Second Judicial Circuit Court for Leon County, Florida; filed Nov. 2009); Leon County v. Expedia, Inc. et al. (Second Judicial Circuit Court for Leon County, Florida; filed Dec. 2009)

·       City of Birmingham, Alabama, et al. v. Orbitz, Inc., et al. (Circuit Court of Jefferson County, Alabama; filed Dec. 2009)

·       Town of Hilton Head Island, South Carolina v. Hotels.com, LP, et al. (Court of Common Pleas, Fourteenth Judicial Circuit, Beaufort County, South Carolina; filed Apr. 2010)

·       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 Superior Court, Los Angeles County)

·       Hamilton County, Ohio, et al. v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District Of Ohio; filed Aug. 2010)

 

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·                   State of Florida Attorney General v. Expedia, Inc., et al. (Circuit Court — Second Judicial Circuit, Leon County, Florida; Nov. 2010)

·                   State of Oklahoma v. Priceline.com, Inc., et al. (District Court of Oklahoma County, Oklahoma; filed Nov. 2010)

·                   Montana Department of Revenue v. Priceline.com, Inc., et al. (First Judicial District Court of Lewis and Clark County, Montana; filed Nov. 2010)

·                   Montgomery County, Maryland v. Priceline.com, Inc., et al. (United States District Court for the District of Maryland; filed Dec. 2010)

 

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; filed Jan. 2009)

·                   Priceline.com Inc., et al. v. City of Anaheim, California, et al. (Superior Court of California, County of Orange; filed Feb. 2009); (Superior Court of California, County of Los Angeles)

·                   Priceline.com, Inc. v. Indiana Department of State Revenue (Indiana Tax Court; filed Mar. 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 Dec. 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 Jan. 2011)

 

We intend to prosecute vigorously our claims in these actions.

 

Consumer Class Actions

 

As of December 31, 2010, one purported class action, Chiste, et al. v. priceline.com Inc., et al. (filed December 11, 2008 in the United States District Court for the Southern District of New York) brought by consumers, was pending against us.  Another purported class action, Marshall, et al. v. priceline.com, Inc. , filed February 17, 2005 in the Superior Court of the State of Delaware for New Castle County, was resolved by dispositive motion.  In the Marshall case, in an opinion dated March 8, 2010, the Delaware Superior Court granted our motion for summary judgment in its entirety.  In an opinion dated October 14, 2010, the Delaware Supreme Court affirmed the decision of the Superior Court in its entirety.

 

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

 

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St. Louis, Missouri; the City of Paradise Valley, Arizona; and the City of Denver, Colorado; and state tax officials from Florida, Hawaii, Indiana, Louisiana, New Mexico, 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.  Since late 2008, we have received audit notices from more than forty cities in the state of California.  We are 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 but one of the appeals has been resolved.  The remaining appeal is still pending.

 

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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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:

 

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

 

 

2009

 

High

 

Low

 

 

 

 

 

 

 

First Quarter

 

$

88.89

 

$

64.95

 

Second Quarter

 

119.14

 

78.08

 

Third Quarter

 

170.14

 

102.32

 

Fourth Quarter

 

231.49

 

154.12

 

 

Holders

 

As of February 10, 2011, there were approximately 371 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.

 

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Performance Measurement Comparison

 

The following graph shows the total stockholder return through December 31, 2010 of an investment of $100 in cash on January 1, 2006 for priceline.com Incorporated common stock and an investment of $100 in cash on January 1, 2006 for (i) the NASDAQ Composite Index, (ii) the Standard and Poor’s 500 Index, (iii) the RDG Internet Composite and (iv) the Hemscott Group Index.  The RDG Internet Composite and the Hemscott Group Index are indices of stocks representing the Internet industry, including Internet software and services companies and e-commerce companies.  The Company has elected to use the RDG Internet Composite in lieu of the Hemscott Group Index because it believes the RDG Internet Composite is a better representation of the Company’s line of business, however the Hemscott Group Index is included this year for comparative purposes.  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:

 

 

Measurement
Point

 

Priceline.com
Incorporated

 

NASDAQ
Composite Index

 

S&P 500
Index

 

RDG Internet
Composite

 

Hemscott
Group Index

 

 

 

 

 

 

 

 

 

 

 

 

 

2005

 

100.00

 

100.00

 

100.00

 

100.00

 

100.00

 

2006

 

195.39

 

111.74

 

115.80

 

114.13

 

118.67

 

2007

 

514.61

 

124.67

 

122.16

 

141.53

 

118.37

 

2008

 

329.97

 

73.77

 

76.96

 

76.47

 

73.82

 

2009

 

978.54

 

107.12

 

97.33

 

132.93

 

125.08

 

2010

 

1790.10

 

125.93

 

111.99

 

152.77

 

159.81

 

 

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Sales of Unregistered Securities

 

In 2010, we issued 491,724 shares of our common stock to holders of our 2.25% Convertible Senior Notes upon the conversion of approximately $22.9 million principal amount of notes; we issued 419,818 shares of our common stock to holders of our 2011 Notes upon the conversion of approximately $39.9 million principal amount of notes; and we issued 2,546,286 shares of our common stock to holders of our 2013 Notes upon conversion of approximately $132.8 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.

 

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, 2010:

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, 2010 –

 

8,840

(4)

$

348.34

 

 

$

20,447,000

(2)

October 31, 2010

 

 

 

 

 

 

 

$

393,917,000

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

44,866,000

(1)

November 1, 2010 –

 

1,730

(4)

$

411.91

 

 

$

20,447,000

(2)

November 30, 2010

 

 

 

 

 

 

 

$

393,917,000

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

44,866,000

(1)

December 1, 2010 –

 

 

 

 

$

20,447,000

(2)

December 31, 2010

 

 

 

 

 

 

 

$

393,917,000

(3)

 

 

 

 

 

 

 

 

 

 

Total

 

10,570

(4)

$

358.74

 

 

$

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 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,

 

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

3,084,905

 

$

2,338,212

 

$

1,884,806

 

$

1,409,409

 

$

1,123,103

 

Cost of revenues

 

1,175,934

 

1,077,449

 

928,835

 

769,997

 

722,004

 

Gross profit

 

1,908,971

 

1,260,763

 

955,971

 

639,412

 

401,099

 

Total operating expenses(1)

 

1,122,174

 

789,928

 

666,497

 

501,477

 

339,113

 

Operating income(1)

 

786,797

 

470,835

 

289,474

 

137,935

 

61,986

 

Total other expense

 

40,514

 

28,533

 

13,369

 

16,074

 

1,761

 

Income tax (expense) benefit(2)

 

(218,141

)

47,168

 

(90,171

)

23,537

 

14,594

 

Equity in income (loss) income of investees

 

 

2

 

(310

)

(321

)

(1,393

)

Net income(1)(2)

 

528,142

 

489,472

 

185,624

 

145,077

 

73,426

 

Net income attributable to noncontrolling interests(3)

 

601

 

 

3,378

 

4,679

 

2,161

 

Net income applicable to common stockholders of priceline.com Incorporated (1)(2)

 

527,541

 

489,472

 

182,246

 

138,843

 

69,338

 

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

 

11.00

 

11.54

 

4.64

 

3.69

 

1.86

 

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

 

10.35

 

9.88

 

3.74

 

3.05

 

1.61

 

Total assets

 

2,905,953

 

1,834,224

 

1,312,421

 

1,334,017

 

1,045,509

 

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

 

621,624

 

263,708

 

459,928

 

724,144

 

554,469

 

Total liabilities

 

1,046,828

 

476,610

 

538,520

 

672,492

 

578,931

 

Total stockholders’ equity

 

1,813,336

 

1,321,629

 

698,826

 

453,625

 

390,368

 

 


(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 years ended December 31, 2007, and 2006, amounting to $47.9 million and $28.1 million, respectively, 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.  Noncontrolling interests in 2010 relates to the Company’s purchase of TravelJigsaw in May 2010.

 

(4)                                   Includes convertible debt which is classified as a current liability as of December 31, 2010, 2009, 2008 and 2007.

 

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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 150,000 hotels worldwide through the Booking.com, priceline.com and Agoda brands.  We offer international car rental reservation services through TravelJigsaw, which we acquired in May 2010.  In the United States, we also offer our customers car rental reservations, airline tickets, vacation packages, cruises and destination services.

 

We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include, among others, the international brands Booking.com, Agoda and TravelJigsaw.  Our principal goal is to maintain and grow our position as the leading worldwide online hotel reservation service, measured by room nights booked.  Our business is driven primarily by international results.  During the year ended December 31, 2010, our international business — the significant majority of which is currently generated by Booking.com — represented approximately 69% 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 82% of our consolidated operating income.  Given that the business of our international operations is primarily comprised of hotel reservation services, commissions earned in connection with the reservation of hotel room nights represents a substantial majority of our gross profit.

 

Because our domestic services include merchant Name Your Own Price ®  travel services, which are reported on a “gross” basis, while both our domestic and international retail travel services are primarily recorded on a “net” basis, revenue increases and decreases are impacted by changes in the mix of the sale of Name Your Own Price ®  and retail travel services and, 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 Name Your Own Price ®  hotel room reservation, rental car and airline ticket services, as well as our vacation packages service; and

 

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

 

·      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.

 

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The recent worldwide recession negatively affected the broad travel market and, as a result, our business.  At the onset of the worldwide recession, hotel operators reported significant decreases in occupancy rates (a common metric that measures hotel customer usage) and average daily rates (“ADRs”) in the United States, Europe and Asia.  While these trends have recently shown signs of improvement, there can be no assurance that worldwide economic conditions will not worsen or have a negative impact on the travel industry and, as a result, our business.

 

Over the last several years we have experienced strong growth in the number of hotel room night reservations 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.  For example, in the first quarter of 2010, we experienced a mild deceleration in year-over-year hotel room night reservation growth as compared to the year-over-year growth rate in the fourth quarter of 2009.  The unit growth rate decelerated further in the second quarter of 2010 due in part to (1)  travel disruptions caused by the April 2010 eruption of a volcano in Iceland, (2) general uncertainty about the European economy and (3) substantial increases in airfares, which can negatively impact overall travel demand.  As the volcanic activity subsided, macroeconomic concerns in Europe abated and airfare increases moderated, our third quarter year-over-year hotel room night reservation growth rate accelerated, and then reverted to the pattern of deceleration in the fourth quarter 2010.  Additionally, an increasing amount of our business from a destination and point-of-sale perspective is conducted in markets that we have entered more recently and are growing faster than our overall growth rate, such as Asia-Pacific and South America.  Ongoing efforts to improve the experience for customers on our web site and to add hotel supply also contributed to the strong performance in 2010.  As our business grows in size, it becomes increasingly more difficult to maintain high growth rates and, therefore, we believe that our year-on-year room night reservation growth rates will generally, but not always, decelerate on a quarterly sequential basis in future periods.

 

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, Google recently announced that it has entered into an agreement to acquire ITA Software, Inc., a major flight information software company, which could allow Google to pursue the creation of new flight search tools which will enable users to find flight information on the Internet without using a service like ours.  Google has also invested in HomeAway, a vacation home rental service.  In addition, Google has launched a travel “meta-search” site to show searchers specific hotels and rates in addition to text advertisements, and Microsoft has launched Bing Travel , a “meta-search” site, 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.  These initiatives, among others, illustrate Google’s and Bing’s 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 Google’s or Bing’s 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.

 

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International Trends .  The size of the travel market outside of the United States is substantially greater than that within the United States.  Historically, Internet adoption rates and e-commerce adoption rates of international consumers have trailed those of the United States.  However, international consumers are rapidly moving to online means for purchasing travel.  Accordingly, recent international online travel growth rates have substantially exceeded, and are expected to continue to exceed, the growth rates within the United States.  In addition, the base of hotel suppliers in Europe 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.  We believe these trends and factors have enabled us to become the top online hotel service provider in the world.

 

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 2011.  In addition, and as discussed in more detail below, we have seen the effects of seasonal fluctuations on our operating results change as a result of different revenue recognition policies that apply to our price-disclosed services (including our international hotel service) as compared to our Name Your Own Price ®  services.

 

Another impact of the growing importance of Booking.com, Agoda and TravelJigsaw is our increased exposure to foreign currency exchange risk.  Because we are conducting a significant and growing portion of our business outside the United States and are reporting our results in U.S. Dollars, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency (principally the Euro and the British Pound Sterling) into U.S. Dollars upon consolidation.  Our international operations contributed approximately $1.4 billion to our revenues for the year ended December 31, 2010, which compares to $852.0 million for the year ended December 31, 2009 (year-over-year growth of approximately 70%).  Revenue 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.  In the fourth quarter of 2010, the U.S. Dollar was stronger against the Euro and the British Pound Sterling, relative to the fourth quarter of 2009, which negatively impacted the growth rates of our Euro and British Pound Sterling denominated gross bookings, gross profit and net income as expressed in U.S. Dollars.

 

In early 2010, Greece and certain other European Union countries with high levels of sovereign debt had difficulty refinancing that debt and central bank intervention was required, causing significant devaluation of the Euro relative to other currencies, such as the U.S. Dollar, and concerns that sovereign defaults could lead to devaluation or abandonment of the common currency.  Sovereign debt issues 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.

 

We generally enter into derivative instruments to minimize the impact of short-term currency fluctuations on our consolidated operating results.  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.

 

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.  For example, in 2009, Travelocity launched an opaque price-disclosed hotel booking service that allows customers to book rooms at a discount because, similar to our Name Your Own Price ®  hotel booking service, the name of the hotel is not disclosed until after purchase. In addition, in the fourth quarter of 2010, Expedia began making opaque hotel room reservations available on its principal website under the name “Expedia Unpublished Rates.”  If Expedia or Travelocity are successful in growing their opaque hotel service, our share of the discount hotel market in the U.S. could decrease.  Online travel companies have also offered consumers value features such as, without limitation, the elimination and/or reduction of processing fees, the adoption of “best price” guarantees and the waiver of cancellation and change fees.  The elimination of processing fees on retail airline tickets by us and our major competitors, coupled with the recent significant year over year increases in retail air fares, has led consumers to engage in increased shopping behavior before making a purchase.  Increased shopping behavior reduces our advertising efficiency and effectiveness as traffic obtained through online advertising becomes less likely to result in a purchase on our web site.  Therefore, online advertising expenses for our priceline.com U.S. business grew at a faster rate than gross profit for the year ended December 31, 2010.

 

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 December 2010, American Airlines terminated its participation in the Orbitz service and withdrew its fares from the Orbitz website.  This is consistent with an effort on the part of American Airlines, and the airline industry in general, to reduce distribution costs.  American Airlines’ termination of its distribution arrangement with Orbitz could be indicative of the airlines in general

 

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becoming more aggressive toward requiring online travel agents to implement direct connections.  In addition, in December 2010, Expedia preemptively removed American Airlines flights from its site as its contract with American was set to expire on December 31, 2010.  It is feasible that a dispute between an airline and a GDS could lead to an airline removing its fares from the GDS.  Despite the fact that such a dispute may not involve us, our business could be adversely affected if we are denied access to airfares in a major GDS.   During 2010, we implemented a direct connection with American Airlines.  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.

 

While demand for online travel services continues to experience annualized growth, we believe that the domestic market share of third-party distributors, like priceline.com, has declined over the last several years and that the growth of the domestic online market for travel services has slowed.  We believe the decline in market share is attributable, in part, to (1) 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, and (2) a price advantage in that the suppliers generally do not charge a processing fee.  However, with the aforementioned elimination and reduction of processing and other fees by all of the major online travel companies, we believe that the domestic market share of third party distributors stabilized and potentially increased during 2009 and 2010.

 

Domestic airlines have recently reduced capacity and increased fares.  In addition, the threat of carrier bankruptcies and the emerging prospect of industry consolidation, as evidenced by the recent mergers of United Air Lines with Continental Airlines and Delta Air Lines with Northwest Airlines, as well as the recently announced future acquisition of AirTran by Southwest Airlines, could lead to additional decreases in capacity and further reduce the amount of airline tickets available to us.  Significant increases in average airfares thus far in 2010 may adversely impact 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.  Recent decreases in rental car fleets have led to decreases in rental car availability, which has negatively impacted our Name Your Own Price ®  rental car service.  In addition, Avis is currently in discussions to acquire the Dollar-Thrifty Automotive Group.  The merger or acquisition of the Dollar-Thrifty Automotive Group by Avis or another rental car company could result in a decrease of rental car reservations available to our rental car service.  In January 2010, Toyota recalled over 8 million vehicles due to faulty accelerator pedals, leading to further strain on rental car companies’ fleets and increased retail rental car rates.  As a result of these challenges, we experienced a decline in Name Your Own Price ®  airline tickets and rental car days during the year ended December 31, 2010 compared to the same period in 2009.  Nevertheless, we continue to believe that the market for domestic online travel services is an attractive market with continued opportunity for growth.

 

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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 TravelJigsaw 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, terrorist attacks, unusual weather patterns, including natural disasters such as hurricanes, tsunamis, volcanic eruptions (such as the April 2010 eruption of a volcano in Iceland) or earthquakes and other weather phenomena, travel related health concerns including pandemics and epidemics such as Influenza H1N1, avian bird flu and SARS, political instability, regional hostilities, increases in fuel prices, 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 2010, civil unrest in Thailand, a key market for our Agoda business and the Asian business of Booking.com, negatively impacted booking volumes in this market at the time.  In addition, clashes involving Thai security forces, anti-government demonstrators and groups supporting the government resulted in violence in various locations in Bangkok, causing the temporary relocation of Agoda’s Thailand-based operations.  Thailand has experienced disruptive civil unrest in prior years as well and continued or future civil or political unrest could further disrupt Agoda’s Thailand-based business and operations.

 

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

 

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

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon 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

 

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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, 2010 amounted to $222.0 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 fifty municipalities or counties, and at least nine 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 a reserve 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 of the reserve.   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.

 

·                   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

 

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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 year ended December 31, 2010 includes charges amounting to $13.4 million, 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.

 

·                   Allowance for Doubtful Accounts.  Booking.com earns agency commissions from hotel transactions and because some commissions are not paid, we are therefore subject to potential write-offs.  We provide an allowance for doubtful accounts based upon the age of the commission receivables, taking into consideration past experience and current trends.  In addition, because we are the merchant of record in Name Your Own Price ®  and price-disclosed merchant transactions, we may be held liable for accepting fraudulent credit cards on our website as well as other payment disputes with our customers.  We are also held liable for accepting fraudulent credit cards in certain retail transactions when we do not act as merchant of record.  Accordingly, we calculate and record an allowance for the resulting credit card charge-backs based upon past experience and current trends.  The ultimate resolution of these matters may be greater or less than the reserves recorded.

 

·                   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 the Company’s other reporting units, is substantially in excess of their respective carrying values.  Since the annual impairment test in September 2010, 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.

 

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Recent Accounting Pronouncements

 

In December 2010, the Financial Accounting Standards Board (“FASB”) amended accounting guidance concerning disclosure of supplemental pro forma information for business combinations.  If an entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred in the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The accounting guidance also requires additional disclosures to describe the nature and amount of material, nonrecurring pro forma adjustments.  This guidance is effective for business combinations consummated in periods after December 15, 2010, and should be applied prospectively as of the date of adoption.  Early adoption of this guidance is permitted.

 

In January 2010, the accounting requirements for fair value measurements were modified to provide disclosures about transfers into and out of Levels 1 and 2, separate detail of activity relating to Level 3 measurements, and disclosure by class of asset and liability as opposed to disclosure by the major category of assets and liabilities, which was often interpreted as a line item on the balance sheet.  The accounting guidance also clarifies for Level 2 and Level 3 measurements that a description of the valuation techniques and inputs used to measure fair value and a discussion of changes in valuation techniques or inputs, if any, are required for both recurring and nonrecurring fair value measurements.  If the guidance issued in January 2010 is not adopted early, it is effective for the first reporting period, including interim periods, beginning after December 15, 2009, except for the requirement to provide detail activity of Level 3 measurements, which will be effective beginning after December 15, 2010.  We adopted this 2010 guidance effective with the three months ended March 31, 2010.  See Note 5 to the Consolidated Financial Statements for information on fair value measurements.

 

Results of Operations

 

Year Ended December 31, 2010 compared to Year Ended December 31, 2009

 

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, 2010 and 2009 were as follows (numbers may not total due to rounding):

 

 

 

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 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):

 

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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.

 

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

 

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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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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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Operating Expenses

 

Advertising

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2010

 

2009

 

Change

 

Offline Advertising

 

$

35,714

 

$

36,270

 

(1.5

)%

% of Total Gross Profit

 

1.9

%

2.9

%

 

 

Online Advertising

 

$

552,140

 

$

365,381

 

51.1

%

% of Total Gross Profit

 

28.9

%

29.0

%

 

 

 

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.

 

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Table of Contents

 

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.

 

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.

 

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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.

 

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,

 

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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.  In 2011, we expect the impact of the Innovation Box Tax to reduce our consolidated income tax rate by approximately one to two percentage points.  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.

 

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 2011 and/or future years resulting in a reduction or elimination of the tax benefit. 

 

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Table of Contents

 

Noncontrolling Interests

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2010

 

2009

 

Change

 

Noncontrolling Interests Income

 

$

601

 

n/a

 

n/a

 

 

Noncontrolling interests for the year ended December 31, 2010, represents the proportionate share of the net income of TravelJigsaw Holdings Limited for the period of May 18, 2010 through December 31, 2010, applicable to the noncontrolling interests (refer to Note 13 of the Consolidated Financial Statements).

 

Results of Operations

 

Year Ended December 31, 2009 compared to Year Ended December 31, 2008

 

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, 2009 and 2008 were as follows (numbers may not total due to rounding):

 

 

 

Year Ended December 31,

 

 

 

 

 

2009

 

2008

 

Change

 

 

 

 

 

 

 

 

 

Domestic

 

$

3.645 billion

 

$

3.082 billion

 

18.3

%

International

 

5.665 billion

 

4.318 billion

 

31.2

%

Total

 

$

9.310 billion

 

$

7.400 billion

 

25.8

%

 

Gross bookings increased by 25.8% for the year ended December 31, 2009, compared to the same period in 2008, primarily due to 49.3% growth in hotel room night reservations, partially offset by year-over-year declines in average selling prices for our hotel and airline ticket services in most markets.  The 31.2%increase in international gross bookings was attributable to growth in international hotel room night reservations for our Booking.com and Agoda businesses.  Domestic gross bookings increased by 18.3% for the year ended December 31, 2009, compared to the same period in 2008, primarily due to growth in Name Your Own Price ®  hotel room night reservations, price-disclosed airline tickets, merchant price-disclosed hotel room night reservations and price-disclosed rental car days, partially offset by a decline in Name Your Own Price ®  airline tickets.

 

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Table of Contents

 

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, 2009 and 2008 were as follows (numbers may not total due to rounding):

 

 

 

Year Ended December 31,

 

 

 

 

 

2009

 

2008

 

Change

 

 

 

 

 

 

 

 

 

Agency

 

$

7.191 billion

 

$

5.739 billion

 

25.3

%

Merchant

 

2.119 billion

 

1.662 billion

 

27.5

%

Total

 

$

9.310 billion

 

$

7.400 billion

 

25.8

%

 

Agency gross bookings increased 25.3% for the year ended December 31, 2009, compared to the same period in 2008, due to growth in the sale of Booking.com hotel room night reservations, price-disclosed airline tickets and price-disclosed rental car days.  Merchant gross bookings increased 27.5% for the year ended December 31, 2009, compared to the same period in 2008, due to an increase in the sale of Name Your Own Price ®  hotel room night reservations, Agoda merchant price-disclosed hotel room night reservations and domestic merchant price-disclosed hotel room night reservations, partially offset by a decline in Name Your Own Price ®  airline tickets.

 

Year Ended

 

Hotel Room
Nights

 

Rental
Car Days

 

Airline
Tickets

 

 

 

 

 

 

 

 

 

December 31, 2009

 

60.9 million

 

11.2 million

 

5.9 million

 

 

 

 

 

 

 

 

 

December 31, 2008

 

40.8 million

 

10.0 million

 

4.9 million

 

 

Hotel room night reservations sold increased by 49.3% for the year ended December 31, 2009, over the same period in 2008, primarily due to an increase in the sale of Booking.com agency room night reservations, as well as an increase in the sale of Name Your Own Price ®  room night reservations and Agoda and domestic price-disclosed room night reservations.

 

Rental car days sold increased by 12.4% for the year ended December 31, 2009, over the same period in 2008, primarily due to an increase in the sale of price-disclosed rental car days, as well as an increase in Name Your Own Price ®  rental car days.

 

Airline tickets sold increased by 21.8% for the year ended December 31, 2009, over the same period in 2008, due to an increase in the sale of price-disclosed airline tickets, partially offset by a decline in Name Your Own Price ®  airline tickets.

 

Revenues

 

We continue to experience a shift in the mix of our travel business from a business historically focused exclusively on the sale of domestic point-of-sale travel services to a business that includes significant sales of international point-of-sale hotel services, a significant majority of which are currently generated in Europe.  Because our domestic services include merchant Name Your Own Price ®  travel services, which are reported on a “gross” basis, while both our domestic and international retail travel services are primarily recorded on a “net” basis, revenue increases and decreases are impacted by changes in the mix of the sale of Name Your Own Price ®  and retail travel services and, consequently, gross profit has become an increasingly important measure of evaluating growth in our business.  Our international operations contributed approximately $852.0 million to our revenues for the year ended December 31, 2009, which compares to $619.8 million for the same period in 2008.  Revenue attributable to our international operations increased, on a local currency basis, by approximately 46% in the year ended December 31, 2009, compared to the same period in 2008.

 

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Table of Contents

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2009

 

2008

 

Change

 

 

 

 

 

 

 

 

 

Merchant Revenues

 

$

1,447,576

 

$

1,218,162

 

18.8

%

Agency Revenues

 

868,395

 

648,792

 

33.8

%

Other Revenues

 

22,241

 

17,852

 

24.6

%

Total Revenues

 

$

2,338,212

 

$

1,884,806

 

24.1

%

 

Merchant Revenues

 

Merchant revenues for the year ended December 31, 2009 increased 18.8%, compared to the same period in 2008, primarily due to an increase in the sale of Name Your Own Price ®  hotel room night reservations and rental car days, and Agoda and domestic merchant price-disclosed hotel room night reservations, partially offset by a decline in Name Your Own Price ®  airline tickets.

 

Agency Revenues

 

Agency revenues for the year ended December 31, 2009 increased 33.8% compared to the same period in 2008, primarily as a result of growth in our international operations.

 

Other Revenues

 

Other revenues during the year ended December 31, 2009 consisted primarily of advertising.  Other revenues for the year ended December 31, 2009 increased 24.6% compared to the same period in 2008, primarily as a result of higher online advertising revenues and increased traffic.

 

Cost of Revenues and Gross Profit

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2009

 

2008

 

Change

 

 

 

 

 

 

 

 

 

Cost of Revenues

 

$

1,077,449

 

$

928,835

 

16.0

%

% of Merchant Revenues

 

74.4

%

76.2

%

 

 

 

Cost of Revenues

 

For the year ended December 31, 2009, 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 from our suppliers, 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, 2009 increased by 16.0%, compared to the same period in 2008, primarily due to the increase in merchant revenue discussed above.  Merchant price-disclosed hotel revenues in the U.S. and at Agoda 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, which are recorded on a “net” basis.

 

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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)

 

 

 

 

 

2009

 

2008

 

Change

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

1,260,763

 

$

955,971

 

31.9

%

Gross Margin

 

53.9

%

50.7

%

 

 

 

Total gross profit for the year ended December 31, 2009 increased by 31.9% compared to the same period in 2008, 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, 2009, compared to the same period in 2008, 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 $848.6 million of our gross profit for the year ended December 31, 2009, which compares to approximately $615.8 million for the same period in 2008.  Gross profit attributable to our international operations increased, on a local currency basis, by approximately 46% in the year ended December 31, 2009, compared to the same period in 2008.

 

Operating Expenses

 

Advertising

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2009

 

2008

 

Change

 

Offline Advertising

 

$

36,270

 

$

38,032

 

(4.6

)%

% of Total Gross Profit

 

2.9

%

4.0

%

 

 

Online Advertising

 

$

365,381

 

270,713

 

35.0

%

% of Total Gross Profit

 

29.0

%

28.3

%

 

 

 

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, 2009, offline advertising expenses decreased compared to the same period in 2008 due to lower production and creative talent costs, partially offset by increased television advertising.  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, 2009, online advertising expenses increased over the same period in 2008, primarily due to an increase in online advertising expenses to support increased price-disclosed agency hotel room night reservations booked by

 

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Table of Contents

 

Booking.com as well as increased U.S. travel bookings, partially offset by the impact of foreign currency exchange rates.  Our international operations rely primarily on online advertising, in particular keyword purchases and payments to affiliate advertisers, to support their businesses.

 

Sales and Marketing

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2009

 

2008

 

Change

 

Sales and Marketing

 

$

81,238

 

$

77,948

 

4.2

%

% of Total Gross Profit

 

6.4

%

8.2

%

 

 

 

Sales and marketing expenses consist primarily of (1) credit card processing fees associated with merchant transactions; (2) fees paid to third-party service providers that operate the call centers for our priceline.com business; (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, 2009, sales and marketing expenses, which are substantially variable in nature, increased over the same period in 2008, primarily due to increased credit card processing fees and call center costs associated with increased gross booking volumes, partially offset by decreased bad debt provision and the impact of foreign currency exchange rates.  The decrease in bad debt provision in 2009 was due to improved collection rates for agency commissions from hotels and the stabilization of economic conditions in general, and the hotel sector in particular as compared to 2008.  Credit card processing fees in 2009 reflect a benefit of $1.0 million related to a litigation settlement with certain credit card companies.

 

Personnel

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2009

 

2008

 

Change

 

Personnel

 

$

180,152

 

$

163,785

 

10.0

%

% of Total Gross Profit

 

14.3

%

17.1

%

 

 

 

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, 2009, personnel expenses increased over the same period in 2008, primarily due to increased compensation expenses associated with headcount growth, partially offset by the impact of foreign currency exchange rates.  Stock-based compensation expense was approximately $40.7 million for the year ended December 31, 2009 and $40.5 million for the year ended December 31, 2008.

 

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General and Administrative

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2009

 

2008

 

Change

 

General and Administrative

 

$

68,555

 

$

55,267

 

24.0

%

% of Total Gross Profit

 

5.4

%

5.8

%

 

 

 

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, 2009, over the same period in 2008, due to additional fees for outside professionals, including litigation expenses primarily related to hotel occupancy and other tax proceedings, and increased occupancy expenses associated with new Booking.com offices, partially offset by the impact of foreign currency exchange rates.  Additionally, we recorded a charge in the amount of $3.7 million for the year ended December 31, 2009 related to a judgment in a lawsuit involving hotel occupancy taxes (see Note 16 to the Consolidated Financial Statements for further details).

 

Information Technology

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2009

 

2008

 

Change

 

Information Technology

 

$

19,139

 

$

17,956

 

6.6

%

% of Total Gross Profit

 

1.5

%

1.9

%

 

 

 

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, 2009, the increase in information technology expenses compared to the same period in 2008 was primarily associated with increased information technology expenses related to our international operations, partially offset by a decrease in information technology expenses related to our domestic operations.

 

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Table of Contents

 

Depreciation and Amortization

 

 

 

Year Ended
December 31,

 

 

 

 

 

($000)

 

 

 

 

 

2009

 

2008

 

Change

 

Depreciation and Amortization

 

$

39,193

 

$

42,796

 

(8.4

)%

% of Total Gross Profit

 

3.1

%

4.5

%

 

 

 

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)&n