The Priceline Group
PRICELINE COM INC (Form: 10-Q, Received: 05/06/2011 16:20:08)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                   

 

Commission File Number 0-25581

 

PRICELINE.COM INCORPORATED

(Exact name of Registrant as specified in its charter)

 

Delaware

 

06-1528493

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

800 Connecticut Avenue

Norwalk, Connecticut 06854

(address of principal executive offices)

 

(203) 299-8000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed, since last report)

 

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 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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” 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

 

Number of shares of Common Stock outstanding at April 29, 2011:

 

Common Stock, par value $0.008 per share

 

49,646,752

(Class)

 

(Number of Shares)

 

 

 



Table of Contents

 

priceline.com Incorporated

Form 10-Q

 

For the Three Months Ended March 31, 2011

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Unaudited Consolidated Financial Statements

3

 

 

Consolidated Balance Sheets (unaudited) at March 31, 2011 and December 31, 2010

3

Consolidated Statements of Operations (unaudited) For the Three Months Ended March 31, 2011 and 2010

4

Consolidated Statement of Changes in Stockholders’ Equity (unaudited) For the Three Months Ended March 31, 2011

5

Consolidated Statements of Cash Flows (unaudited) For the Three Months Ended March 31, 2011 and 2010

6

Notes to Unaudited Consolidated Financial Statements

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

61

 

 

Item 4. Controls and Procedures

62

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 6. Exhibits

64

 

 

SIGNATURES

65

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

Item 1.  Unaudited Consolidated Financial Statements

priceline.com Incorporated

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

March 31,
2011

 

December 31,
2010

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

551,074

 

$

358,967

 

Restricted cash

 

1,064

 

1,050

 

Short-term investments

 

1,194,512

 

1,303,251

 

Accounts receivable, net of allowance for doubtful accounts of $5,893 and $6,353, respectively

 

221,978

 

162,426

 

Prepaid expenses and other current assets

 

56,682

 

61,211

 

Deferred income taxes

 

80,360

 

70,559

 

Total current assets

 

2,105,670

 

1,957,464

 

 

 

 

 

 

 

Property and equipment, net

 

44,386

 

39,739

 

Intangible assets, net

 

234,063

 

232,030

 

Goodwill

 

525,801

 

510,894

 

Deferred income taxes

 

137,969

 

151,408

 

Other assets

 

17,462

 

14,418

 

Total assets

 

$

3,065,351

 

$

2,905,953

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

115,512

 

$

90,311

 

Accrued expenses and other current liabilities

 

322,735

 

243,767

 

Deferred merchant bookings

 

166,805

 

136,915

 

Convertible debt (see Note 8)

 

481,644

 

175

 

Total current liabilities

 

1,086,696

 

471,168

 

 

 

 

 

 

 

Deferred income taxes

 

55,938

 

56,440

 

Other long-term liabilities

 

47,209

 

42,990

 

Convertible debt (see Note 8)

 

 

476,230

 

Total liabilities

 

1,189,843

 

1,046,828

 

 

 

 

 

 

 

Redeemable noncontrolling interests (see Note 11)

 

57,538

 

45,751

 

 

 

 

 

 

 

Convertible debt (see Note 8)

 

93,569

 

38

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.008 par value; authorized 1,000,000,000 shares, 57,414,428 and 56,567,236 shares issued, respectively

 

445

 

438

 

Treasury stock, 7,768,032 and 7,421,128 shares, respectively

 

(797,677

)

(640,415

)

Additional paid-in capital

 

2,347,728

 

2,417,092

 

Accumulated earnings

 

163,545

 

69,110

 

Accumulated other comprehensive income (loss)

 

10,360

 

(32,889

)

Total stockholders’ equity

 

1,724,401

 

1,813,336

 

Total liabilities and stockholders’ equity

 

$

3,065,351

 

$

2,905,953

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

3



Table of Contents

 

priceline.com Incorporated

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Merchant revenues

 

$

454,804

 

$

368,265

 

Agency revenues

 

351,422

 

213,242

 

Other revenues

 

3,094

 

2,887

 

Total revenues

 

809,320

 

584,394

 

Cost of revenues

 

303,512

 

265,278

 

Gross profit

 

505,808

 

319,116

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Advertising — Offline

 

11,614

 

11,788

 

Advertising — Online

 

185,108

 

113,109

 

Sales and marketing

 

34,778

 

24,113

 

Personnel, including stock-based compensation of $13,993 and $11,909, respectively

 

75,221

 

49,777

 

General and administrative

 

25,879

 

18,033

 

Information technology

 

6,670

 

4,608

 

Depreciation and amortization

 

12,479

 

9,779

 

Total operating expenses

 

351,749

 

231,207

 

Operating income

 

154,059

 

87,909

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

1,421

 

855

 

Interest expense

 

(7,715

)

(4,806

)

Foreign currency transactions and other

 

(7,073

)

(3,130

)

Total other income (expense)

 

(13,367

)

(7,081

)

 

 

 

 

 

 

Earnings before income taxes

 

140,692

 

80,828

 

Income tax expense

 

(36,679

)

(26,953

)

Net income

 

104,013

 

53,875

 

Less: net loss attributable to noncontrolling interests

 

777

 

 

Net income applicable to common stockholders of priceline.com Incorporated

 

$

104,790

 

$

53,875

 

Net income applicable to common stockholders per basic common share

 

$

2.12

 

$

1.16

 

Weighted average number of basic common shares outstanding

 

49,319

 

46,309

 

Net income applicable to common stockholders per diluted common share

 

$

2.05

 

$

1.06

 

Weighted average number of diluted common shares outstanding

 

51,159

 

50,862

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

4



Table of Contents

 

priceline.com Incorporated

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2011

(In thousands)

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

Accumulated

 

Accumulated
Other
Comprehensive

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-in Capital

 

Earnings

 

Income (Loss)

 

Income

 

Total

 

Balance, December 31, 2010

 

56,567

 

$

438

 

(7,421

)

$

(640,415

)

$

2,417,092

 

$

69,110

 

$

(32,889

)

 

 

$

1,813,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

 

 

 

 

 

104,790

 

 

$

104,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities, net of tax of $206

 

 

 

 

 

 

 

(584

)

(584

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments, net of tax benefits of $13,084

 

 

 

 

 

 

 

43,833

 

43,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

148,039

 

148,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

(10,355

)

 

 

 

 

(10,355

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for convertible debt in mezzanine

 

 

 

 

 

(93,531

)

 

 

 

 

 

(93,531

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options and vesting of restricted stock units and/or performance shares

 

847

 

7

 

 

 

537

 

 

 

 

 

544

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

 

(347

)

(157,262

)

 

 

 

 

 

(157,262

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation and other stock-based payments

 

 

 

 

 

 

14,110

 

 

 

 

 

14,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excess tax benefit on stock-based compensation

 

 

 

 

 

9,520

 

 

 

 

 

9,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2011

 

57,414

 

$

445

 

(7,768

)

$

(797,677

)

$

2,347,728

 

$

163,545

 

$

10,360

 

 

 

$

1,724,401

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

5


 


Table of Contents

 

priceline.com Incorporated

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

104,013

 

$

53,875

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

4,166

 

3,969

 

Amortization

 

8,313

 

5,810

 

Provision for uncollectible accounts, net

 

2,812

 

1,784

 

Deferred income taxes

 

8,260

 

11,426

 

Stock-based compensation expense and other stock-based payments

 

14,110

 

11,909

 

Amortization of debt issuance costs

 

553

 

907

 

Amortization of debt discount

 

5,239

 

3,274

 

Loss on early extinguishment of debt

 

 

5,251

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(56,487

)

(20,223

)

Prepaid expenses and other current assets

 

3,307

 

1,893

 

Accounts payable, accrued expenses and other current liabilities

 

177,763

 

23,711

 

Other

 

4,170

 

1,111

 

Net cash provided by operating activities

 

276,219

 

104,697

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of investments

 

(472,872

)

(526,493

)

Proceeds from sale of investments

 

618,427

 

212,674

 

Additions to property and equipment

 

(8,279

)

(4,831

)

Acquisitions and other equity investments, net of cash acquired

 

(66,204

)

(2,500

)

Proceeds from settlement of foreign currency contracts

 

 

9,707

 

Payments on foreign currency contracts

 

(16,005

)

 

Change in restricted cash

 

(16

)

(31

)

Net cash provided by (used in) investing activities

 

55,051

 

(311,474

)

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from the issuance of convertible debt

 

 

575,000

 

Payment of debt issuance costs

 

 

(12,938

)

Payments related to conversion of convertible debt

 

 

(98,388

)

Repurchase of common stock

 

(157,262

)

(118,932

)

Proceeds from exercise of stock options

 

544

 

12,597

 

Excess tax benefit from stock-based compensation

 

9,520

 

1,656

 

Net cash (used in) provided by financing activities

 

(147,198

)

358,995

 

Effect of exchange rate changes on cash and cash equivalents

 

8,035

 

(5,584

)

Net increase in cash and cash equivalents

 

192,107

 

146,634

 

Cash and cash equivalents, beginning of period

 

358,967

 

202,141

 

Cash and cash equivalents, end of period

 

$

551,074

 

$

348,775

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for income taxes

 

$

28,956

 

$

15,933

 

Cash paid during the period for interest

 

$

3,601

 

$

751

 

Non-cash fair value adjustment for redeemable noncontrolling interests

 

$

10,355

 

$

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

6



Table of Contents

 

priceline.com Incorporated

Notes to Unaudited Consolidated Financial Statements

 

1.                                       BASIS OF PRESENTATION

 

Priceline.com Incorporated (“priceline.com” or the “Company”) is responsible for the Unaudited Consolidated Financial Statements included in this document.  The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results.  The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting.  As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements.  These statements should be read in combination with the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

The Unaudited Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned interest in TravelJigsaw Holdings Limited since its acquisition in May 2010.  All intercompany accounts and transactions have been eliminated in consolidation.  The functional currency of the Company’s foreign subsidiaries is generally the respective local currency.  Assets and liabilities are translated into U.S. Dollars at the rate of exchange existing at the balance sheet date.  Income statement amounts are translated at the average exchange rates for the period.  Translation gains and losses are included as a component of “Accumulated other comprehensive income (loss)” in the accompanying Unaudited Consolidated Balance Sheets.  Foreign currency transaction gains and losses are included in the Unaudited Consolidated Statements of Operations, principally in “Foreign currency transactions and other.”

 

Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

 

2.                                       STOCK-BASED EMPLOYEE COMPENSATION

 

The Company has adopted stock compensation plans which provide for grants of share based compensation as incentives and rewards to encourage employees, officers, consultants and directors to contribute towards the long-term success of the Company.  Stock-based compensation cost included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately $14.0 million and $11.9 million for the three months ended March 31, 2011 and 2010, respectively.

 

During the three months ended March 31, 2011, 23,204 shares of stock options were exercised with a weighted average exercise price of $23.44.  As of March 31, 2011, the aggregate number of stock options outstanding and exercisable was 332,264 shares, with a weighted average exercise price of $23.60 and a weighted average remaining term of 2.2 years.

 

7



Table of Contents

 

The following table summarizes the activity of unvested restricted stock, restricted stock units and performance share units (“Share-Based Awards”) during the three months ended March 31, 2011:

 

Share-Based Awards

 

Shares

 

Weighted Average
Grant Date Fair Value

 

Unvested at December 31, 2010

 

1,530,647

 

$

130.93

 

Granted

 

116,992

 

$

464.79

 

Vested

 

(830,629

)

$

113.34

 

Performance Share Units Adjustment

 

(11,596

)

$

108.30

 

Forfeited

 

(65,598

)

$

176.18

 

Unvested at March 31, 2011

 

739,816

 

$

199.82

 

 

As of March 31, 2011, there was $100.9 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of 2.3 years.

 

During the three months ended March 31, 2011, the Company made broad-based grants of 39,848 restricted stock units (“RSUs”) that generally vest after three years.  The share based awards granted had a total grant date fair value of $18.5 million based upon the grant date fair value per share of $464.79.

 

In addition, during the three months ended March 31, 2011, the Company granted 77,144 performance share units to certain executives.  The performance share units had a total grant date fair value of $35.9 million based upon the grant date fair value per share of $464.79.  The performance share units are payable in shares of the Company’s common stock upon vesting.  Subject to certain exceptions for terminations related to a change in control and terminations other than for “cause,” for “good reason” or on account of death or disability, the executive officers must continue their service through March 1, 2014 in order to receive any shares.  Stock-based compensation for performance share units is recorded based on the estimated probable outcome at the end of the performance period.  The actual number of shares to be issued at vest date will be determined upon completion of the performance period which ends December 31, 2013.  As of March 31, 2011, the estimated number of probable shares to be issued under this 2011 grant is a total of 77,144 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum number of 164,508 total shares could be issued.  If the minimum performance thresholds are not met, 22,796 shares would be issued at the end of the performance period.

 

2010 Performance Shares Units

 

During the year ended December 31, 2010, the Company granted 110,430 performance shares units with a grant date fair value of $26.0 million, based on a weighted average grant date fair value of $235.34 per share.  The actual number of shares will be determined upon completion of the performance period which ends December 31, 2012.

 

At March 31, 2011, there were 93,745 unvested performance share units outstanding, net of actual forfeitures and vesting.  As of March 31, 2011, the number of shares estimated to be issued at the end of the performance period is a total of 218,608 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum of 226,508 total shares could be issued.

 

3.                                       NET INCOME PER SHARE

 

The Company computes basic net income per share by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted net income per share is based upon the weighted average number of common and common equivalent shares outstanding during the period.

 

Common equivalent shares related to stock options, restricted stock, restricted stock units, and performance share units are calculated using the treasury stock method.  Performance share units are included in the weighted average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period and if the result would be dilutive.

 

8



Table of Contents

 

The Company’s convertible debt issues have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company’s common stock, at the Company’s option.  The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.

 

A reconciliation of the weighted average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands):

 

 

 

For the Three Months
Ended March 31,

 

 

 

2011

 

2010

 

Weighted average number of basic common shares outstanding

 

49,319

 

46,309

 

Weighted average dilutive stock options, restricted stock, restricted stock units and performance share units

 

1,217

 

1,354

 

Assumed conversion of convertible debt

 

623

 

3,199

 

Weighted average number of diluted common and common equivalent shares outstanding

 

51,159

 

50,862

 

Anti-dilutive potential common shares

 

1,300

 

3,393

 

 

Anti-dilutive potential common shares for the three months ended March 31, 2011 and 2010 includes approximately 1.3 million shares and 2.3 million shares, respectively, which could be issued under the Company’s convertible debt if the Company experiences substantial increases in its common stock price.  Under the treasury stock method, the convertible debt will generally have a dilutive impact on net income per share if the Company’s average stock price for the period exceeds the conversion price for the convertible debt.

 

The Company has Conversion Spread Hedges outstanding at March 31, 2011 that increase the effective conversion price of the Company’s 0.75% Convertible Senior Notes due 2013 (the “2013 Notes”) from $40.38 to $50.47 per share from the Company’s perspective and which were designed to reduce potential dilution upon conversion of the debt at maturity (see Note 8).  Since the beneficial impact of the Conversion Spread Hedges is anti-dilutive, it is excluded from the calculation of net income per share.

 

4.                                       INVESTMENTS

 

The following table summarizes, by major security type, the Company’s short-term investments as of March 31, 2011 (in thousands):

 

 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized

Losses

 

Fair
Value

 

Available for sales securities

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

384,411

 

$

110

 

$

(45

)

$

384,476

 

Foreign government securities

 

698,492

 

365

 

(744

)

698,113

 

U.S. agency securities

 

70,914

 

17

 

(1

)

70,930

 

U.S. corporate notes

 

40,821

 

172

 

 

40,993

 

Total

 

$

1,194,638

 

$

664

 

$

(790

)

$

1,194,512

 

 

9



Table of Contents

 

The following table summarizes, by major security type, the Company’s short—term investments as of December 31, 2010 (in thousands):

 

 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government securities

 

$

469,116

 

$

158

 

$

(66

)

$

469,208

 

Foreign government securities

 

682,841

 

558

 

(81

)

683,318

 

U.S. agency securities

 

109,920

 

15

 

(30

)

109,905

 

U.S. corporate notes

 

40,845

 

 

(25

)

40,820

 

Total

 

$

1,302,722

 

$

731

 

$

(202

)

$

1,303,251

 

 

Long-term investments amounting to approximately $0.4 million at December 31, 2010 were comprised of corporate notes with a maturity date greater than one year and are included in “Other assets” on the Company’s Unaudited Consolidated Balance Sheet.  As of March 31, 2011, these investments, amounting to approximately $0.4 million, were reclassified from long-term investments to short-term investments.

 

There were no material gains or losses related to investments for the three months ended March 31, 2011 or 2010.

 

5.                                       FAIR VALUE MEASUREMENTS

 

Financial assets and liabilities carried at fair value as of March 31, 2011 are classified in the table below in the categories described below (dollars in thousands):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

ASSETS:

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

 

$

384,476

 

$

 

$

384,476

 

Foreign government securities

 

 

698,113

 

 

698,113

 

U.S. agency securities

 

 

70,930

 

 

70,930

 

U.S. corporate notes

 

 

40,993

 

 

40,993

 

Foreign exchange derivatives

 

 

381

 

 

381

 

Total assets at fair value

 

$

 

$

1,194,893

 

$

 

$

1,194,893

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

Foreign exchange derivatives

 

$

 

$

19,972

 

$

 

$

19,972

 

Redeemable noncontrolling interests

 

 

 

57,538

 

57,538

 

Total liabilities at fair value

 

$

 

$

19,972

 

$

57,538

 

$

77,510

 

 

10



Table of Contents

 

Financial assets and liabilities carried at fair value as of December 31, 2010 were classified in the table below in the categories described below (dollars in thousands):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

ASSETS:

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

 

$

469,208

 

$

 

$

469,208

 

Foreign government securities

 

 

683,318

 

 

683,318

 

U.S. agency securities

 

 

109,905

 

 

109,905

 

U.S. corporate notes

 

 

40,820

 

 

40,820

 

Long-term investments

 

 

394

 

 

394

 

Foreign exchange derivatives

 

 

4,970

 

 

4,970

 

Total assets at fair value

 

$

 

$

1,308,615

 

$

 

$

1,308,615

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

Foreign exchange derivatives

 

$

 

$

6,995

 

$

 

$

6,995

 

Redeemable noncontrolling interests

 

 

 

45,751

 

45,751

 

Total liabilities at fair value

 

$

 

$

6,995

 

$

45,751

 

$

52,746

 

 

There are three levels of inputs to measure fair value.  The definition of each input is described below:

 

Level 1:

Quoted prices in active markets that are accessible by the Company at the measurement date for identical assets and liabilities.

Level 2:

Inputs are observable, either directly or indirectly. Such prices may be based upon quoted prices for identical or comparable securities in active markets or inputs not quoted on active markets, but corroborated by market data.

Level 3:

Unobservable inputs are used when little or no market data is available.

 

For the Company’s investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace.  Investments in U.S. Treasury and foreign government securities are considered “Level 2” fair value measurements as of March 31, 2011 and December 31, 2010 because the Company has access to quoted prices, but does not have visibility to the volume and frequency of trading for all of these investments.  Fair values for U.S. agency securities and U.S. corporate notes, which are guaranteed by the federal government, are considered “Level 2” fair value measurements because they are obtained from pricing sources for these or comparable instruments.  The Company compares the fair values obtained against data reported by other independent market sources.

 

The Company’s derivative instruments are valued using pricing models.  Pricing models take into account the contract terms as well as multiple inputs where applicable, such as interest rate yield curves, option volatility and currency rates.  Derivatives are considered “Level 2” fair value measurements.

 

11



Table of Contents

 

As of March 31, 2011 and December 31, 2010, the Company considers its redeemable noncontrolling interests to represent a “Level 3” fair value measurement that requires a high degree of judgment to determine fair value.  The Company estimated such fair value based upon standard valuation techniques using discounted cash flow analysis and industry peer comparable analysis.  See Note 11 for further information on redeemable noncontrolling interests.

 

As of March 31, 2011 and December 31, 2010, the carrying value of the Company’s cash and cash equivalents approximated their fair value and consisted primarily of U.S. Treasury money market funds, foreign government securities and bank deposits.  Other financial assets and liabilities, including restricted cash, accounts receivable, accrued expenses and deferred merchant bookings are carried at cost which also approximates their fair value because of the short-term nature of these items.  See Note 4 for information on the carrying value of investments and Note 8 for the estimated fair value of the Company’s convertible debt.

 

In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations.  The Company limits these risks by following established risk management policies and procedures, including the use of derivatives.  The Company’s derivative instruments are typically short-term in nature.  The Company does not use derivatives for trading or speculative purposes.  All derivative instruments are recognized in the Unaudited Consolidated Balance Sheets at fair value.  Gains and losses resulting from changes in the fair value of derivative instruments which are not designated as hedging instruments for accounting purposes are recognized in the Unaudited Consolidated Statements of Operations in the period that the changes occur.  Changes in the fair value of derivatives designated as net investment hedges are recorded as currency translation adjustments to offset a portion of the translation adjustment of the foreign subsidiary’s net assets and are recognized in the Unaudited Consolidated Balance Sheets in “Accumulated other comprehensive income (loss).”

 

Derivatives Not Designated as Hedging Instruments — The Company is exposed to adverse movements in currency exchange rates as the financial results of its international operations are translated from local currency into U.S. Dollars upon consolidation.  Our derivative contracts principally address foreign exchange fluctuations for the Euro.  As of December 31, 2010, derivatives resulting in a liability of $0.2 million were recorded in “Accrued expenses and other current liabilities on the Unaudited Consolidated Balance Sheet.  Foreign exchange losses of $1.7 million and foreign exchanges gains of $2.6 million for the three months ended March 31, 2011 and 2010, respectively, were recorded in “Foreign currency transactions and other” in the Unaudited Consolidated Statements of Operations.  Derivatives associated with foreign currency transaction risks resulted in assets of $0.4 million and $1.0 million as of March 31, 2011 and December 31, 2010, respectively, and are recorded in “Prepaid expenses and other current assets” in the Unaudited Consolidated Balance Sheets.  The settlement of derivative contracts resulted in a net cash outflow of $1.3 million and $0.7 million for the three months ended March 31, 2011 and 2010, respectively, and were reported within “Net cash provided by operating activities” on the Unaudited Consolidated Statements of Cash Flows.

 

Derivatives Designated as Hedging Instruments — As of March 31, 2011 and December 31, 2010, the Company had outstanding foreign currency forward contracts for 398 million Euros and 378 million Euros, respectively, to hedge a portion of its net investment in a foreign subsidiary.  These contracts are all short-term in nature.  Hedge ineffectiveness is assessed and measured based on changes in forward exchange rates.  The fair value of these derivatives at March 31, 2011 was a liability of $20.0 million and is recorded in “Accrued expenses and other current liabilities” in the Unaudited Consolidated Balance Sheet.  At December 31, 2010, the net liability of $2.8 million was recorded as a liability of $6.8 million in “Accrued expenses and other current liabilities” and as an asset of $4.0 million in “Prepaid expenses and other current assets” in the Unaudited Consolidated Balance Sheet.   A cash outflow of $16.0 million for the three months ended March 31, 2011, compared to cash received of $9.7 million for the three months ended March 31, 2010, was reported within “Net cash provided by (used in) investing activities” on the Unaudited Consolidated Statements of Cash Flows.

 

12



Table of Contents

 

6.                                       INTANGIBLE ASSETS AND GOODWILL

 

The Company’s intangible assets consist of the following (in thousands):

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

 

 

 

 

Gross 
Carrying 
Amount

 

Accumulated 
Amortization

 

Net 
Carrying 
Amount

 

Gross 
Carrying 
Amount

 

Accumulated 
Amortization

 

Net 
Carrying 
Amount

 

Amortization 
Period

 

Weighted 
Average 
Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supply and distribution agreements

 

$

274,921

 

$

(85,727

)

$

189,194

 

$

264,491

 

$

(76,823

)

$

187,668

 

10 - 13 years

 

12 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

24,589

 

(23,528

)

1,061

 

23,549

 

(22,119

)

1,430

 

3 years

 

3 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

1,638

 

(1,364

)

274

 

1,638

 

(1,352

)

286

 

15 years

 

15 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer lists

 

21,249

 

(18,873

)

2,376

 

20,338

 

(17,512

)

2,826

 

2 years

 

2 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internet domain names

 

3,543

 

(206

)

3,337

 

1,853

 

(126

)

1,727

 

2 – 20 years

 

10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

54,914

 

(17,141

)

37,773

 

53,099

 

(15,064

)

38,035

 

5 – 20 years

 

11 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

345

 

(297

)

48

 

344

 

(286

)

58

 

3 – 10 years

 

4 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

381,199

 

$

(147,136

)

$

234,063

 

$

365,312

 

$

(133,282

)

$

232,030

 

 

 

 

 

 

Intangible assets with determinable lives are primarily amortized on a straight-line basis.  Intangible asset amortization expense was approximately $8.3 million and $5.8 million for the three months ended March 31, 2011 and 2010, respectively.

 

The estimated amortization expense for intangible assets for the remainder of 2011, the annual expense for the next five years, and the expense thereafter is expected to be as follows (in thousands):

 

2011

 

$

24,748

 

2012

 

30,757

 

2013

 

29,460

 

2014

 

29,387

 

2015

 

26,602

 

2016

 

24,110

 

Thereafter

 

68,999

 

 

 

$

234,063

 

 

13



Table of Contents

 

The change in goodwill for the three months ended March 31, 2011 consists of the following (in thousands):

 

Balance at December 31, 2010

 

$

510,894

 

Currency translation adjustments

 

14,907

 

Balance at March 31, 2011

 

$

525,801

 

 

7.                                       OTHER ASSETS

 

Other assets at March 31, 2011 and December 31, 2010 consist of the following (in thousands):

 

 

 

March 31,
2011

 

December 31,
2010

 

Deferred debt issuance costs

 

$

9,023

 

$

9,576

 

Long-term investments

 

 

394

 

Other

 

8,439

 

4,448

 

Total

 

$

17,462

 

$

14,418

 

 

Deferred debt issuance costs arose from (i) the Company’s issuance, in March 2010, of $575.0 million aggregate principal amount of 1.25% Convertible Senior Notes due 2015 (the “2015 Notes”); (ii) a $175.0 million revolving credit facility entered into in September 2007; and (iii) the Company’s issuance, in September 2006, of $172.5 million aggregate principal amount of 2013 Notes.  Deferred debt issuance costs are being amortized using the effective interest rate method over the term of approximately five years, except for the 2013 Notes which are amortized over their term of seven years.  The period of amortization for the Company’s debt issue costs was determined at inception of the related debt agreements based upon the stated maturity date or the first stated put date, if earlier.  Unamortized debt issuance costs written off to interest expense in the three months ended March 31, 2010 resulting from the early conversion of convertible debt amounted to $0.6 million.

 

8.                                       DEBT

 

Revolving Credit Facility

 

In September 2007, the Company entered into a $175.0 million five-year committed revolving credit facility with a group of lenders, which is secured, subject to certain exceptions, by a first-priority security interest on substantially all of the Company’s assets and related intangible assets located in the United States.  In addition, the Company’s obligations under the revolving credit facility are guaranteed by substantially all of the assets and related intangible assets of the Company’s material direct and indirect domestic and foreign subsidiaries.  Borrowings under the revolving credit facility will bear interest, at the Company’s option, at a rate per annum equal to the greater of (a) JPMorgan Chase Bank, National Association’s prime lending rate and (b) the federal funds rate plus ½ of 1%, plus an applicable margin ranging from 0.25% to 0.75%; or at an adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from 1.25% to 1.75%.  Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.25% to 0.375%.

 

The revolving credit facility provides for the issuance of up to $50.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, which are available in U.S. Dollars, Euros, Pound Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility will be used for working capital and general corporate purposes.  At both March 31, 2011 and December 31, 2010, there were no borrowings outstanding under the facility, and approximately $1.6 million of letters of credit were issued under the revolving credit facility.

 

14



Table of Contents

 

Convertible Debt

 

Convertible debt as of March 31, 2011 consisted of the following (in thousands):

 

March 31, 2011 

 

Outstanding
Principal 
Amount

 

Unamortized
Debt
Discount

 

Carrying
Value

 

1.25% Convertible Senior Notes due March 2015

 

$

575,000

 

$

(93,534

)

$

481,466

 

0.75% Convertible Senior Notes due September 2013

 

213

 

(35

)

178

 

Outstanding convertible debt

 

$

575,213

 

$

(93,569

)

$

481,644

 

 

Convertible debt as of December 31, 2010 consists of the following (in thousands):

 

December 31, 2010 

 

Outstanding
Principal 
Amount

 

Unamortized
Debt
Discount

 

Carrying
Value

 

1.25% Convertible Senior Notes dues March 2015

 

$

575,000

 

$

(98,770

)

$

476,230

 

0.75% Convertible Senior Notes due September 2013

 

213

 

(38

)

175

 

Outstanding convertible debt

 

$

575,213

 

$

(98,808

)

$

476,405

 

 

Based upon the closing price of the Company’s common stock for the prescribed measurement periods during the three months ended March 31, 2011 and December 31, 2010, the contingent conversion thresholds on the 2013 Notes were exceeded.  As a result, the 2013 Notes were convertible at the option of the holders as of March 31, 2011 and December 31, 2010.  Accordingly, the carrying value of the 2013 Notes has been classified as a current liability as of those dates.  The contingent conversion threshold for the prescribed measurement period during the three months ended March 31, 2011 was exceeded for the 2015 Notes.  Therefore, the 2015 Notes are convertible at the option of the holders during the second quarter of 2011.  Accordingly, the Company reported the carrying value of the 2015 Notes as a current liability as of March 31, 2011.

 

For notes that are convertible at the option of the holder, the principal amount is required to be paid in cash so the difference between the principal amount and carrying value is reflected as convertible debt in mezzanine on the Company’s Unaudited Consolidated Balance Sheets.  Therefore, with respect to the 2015 Notes, the Company reclassified $93.5 million from additional paid-in-capital to convertible debt in mezzanine on the Unaudited Consolidated Balance Sheet as of March 31, 2011.  The determination of whether or not the 2015 Notes are convertible must continue to be performed on a quarterly basis.  Consequently, the 2015 Notes may not be convertible in future quarters, and therefore may again be classified as long-term debt, if the contingent conversion threshold is not met in such quarters.  Based on conversion notices received, the remaining outstanding principal amount of the 2013 Notes will be converted during the three months ended June 30, 2011.

 

In the three months ended March 31, 2010, the Company delivered cash of $98.4 million to repay the principal amount and issued 1,995,416 shares of its common stock in satisfaction of the conversion value in excess of the principal amount for convertible debt that was converted prior to maturity.  In the three months ended March 31, 2011, the Company did not receive any early conversions associated with convertible debt.

 

As of March 31, 2011 and December 31, 2010, the estimated market value of the outstanding senior notes was approximately $1.0 billion and $0.9 billion, respectively.  Fair value was estimated based upon actual trades at the end of the reporting period or the most recent trade available as well as the Company’s stock price at the end of the reporting period.  A substantial portion of the market value of the Company’s debt in excess of the outstanding principal amount relates to the conversion premium on the bonds.

 

15



Table of Contents

 

Description of Senior Notes

 

In March 2010, the Company issued in a private placement $575.0 million aggregate principal amount of Convertible Senior Notes due March 15, 2015, with an interest rate of 1.25% (the “2015 Notes”).  The Company paid $12.9 million in debt issuance costs during the three months ended March 31, 2010, related to this offering.   The 2015 Notes are convertible, subject to certain conditions, into the Company’s common stock at a conversion price of approximately $303.06 per share.  The 2015 Notes are convertible, at the option of the holder, prior to March 15, 2015 upon the occurrence of specified events, including, but not limited to a change in control, or if the closing sales price of the Company’s common stock for at least 20 consecutive trading days in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 150% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company’s common stock is acquired on or prior to the maturity of the 2015 Notes in a transaction in which the consideration paid to holders of the Company’s common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2015 Notes in aggregate value ranging from $0 to approximately $132.7 million depending upon the date of the transaction and the then current stock price of the Company.  As of December 15, 2014, holders will have the right to convert all or any portion of the 2015 Notes.  The 2015 Notes may not be redeemed by the Company prior to maturity.  The holders may require the Company to repurchase the 2015 Notes for cash in certain circumstances.  Interest on the 2015 Notes is payable on March 15 and September 15 of each year.

 

In 2006, the Company issued in a private placement $172.5 million aggregate principal amount of Convertible Senior Notes due September 30, 2013, with an interest rate of 0.75% (the “2013 Notes”).  The 2013 Notes are convertible, subject to certain conditions, into the Company’s common stock at a conversion price of approximately $40.38 per share.  The 2013 Notes were not redeemable by the Company prior to maturity.

 

In 2006, the Company entered into hedge transactions relating to the potential dilution of the Company’s common stock upon conversion of the 2013 Notes (the “Conversion Spread Hedges”).  Under the Conversion Spread Hedges, the Company is entitled to purchase from Goldman Sachs and Merrill Lynch approximately 4.3 million shares of the Company’s 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) in 2013, and the counterparties are entitled to purchase from the Company approximately 4.3 million shares of the Company’s common stock at a strike price of $50.47 per share (subject to adjustment in certain circumstances) in 2013.  The Conversion Spread Hedges are separate transactions entered into by the Company with the counterparties and are not part of the terms of the 2013 Notes.  The Conversion Spread Hedges did not immediately hedge against the associated dilution from early conversions of the 2013 Notes prior to their stated maturities.  Therefore, upon early conversion of the 2013 Notes, the Company has delivered any related conversion premium in shares of stock or a combination of cash and shares.  However, the hedging counterparties were not obligated to deliver the Company shares or cash that would offset the dilution associated with the early conversion activity.  Because of this timing difference, the number of shares, if any, that the Company receives from its Conversion Spread Hedges can differ materially from the number of shares that it was required to deliver to the holders of the 2013 Notes upon their early conversion. The actual number of shares to be received will depend upon the Company’s stock price on the date the Conversion Spread Hedges are exercisable, which coincides with the scheduled maturity of the 2013 Notes.

 

Accounting guidance requires that cash-settled convertible debt, such as the Company’s convertible senior notes, be separated into debt and equity components at issuance and a value to be assigned to each.  The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature.  The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount.  Debt discount is amortized using the effective interest method over the period from origination date through the stated maturity date.  The Company estimated the straight debt borrowing rates at debt origination to be 5.89% for the 2015 Notes and 8.0% for the 2013 Notes.  The yield to maturity was estimated at an at-market coupon priced at par.

 

For the three months ended March 31, 2011 and 2010, the Company recognized interest expense of $7.5 million and $4.0 million, respectively, related to convertible notes.  Interest expense was comprised of $1.8 million and $0.5 million, respectively, for the contractual coupon interest, $5.2 million and $3.3 million, respectively,

 

16



Table of Contents

 

related to the amortization of debt discount and $0.5 million and $0.2 million, respectively, related to the amortization of debt issuance costs.  Debt discount and debt issuance costs are amortized through the stated maturity dates of the respective debt.  The effective interest rate for the three months ended March 31, 2011 and 2010 was 6.3% and 7.8%, respectively.

 

In addition, if the Company’s convertible debt is redeemed or converted prior to maturity, a gain or loss on extinguishment will be recognized.  The gain or loss is the difference between the fair value of the debt component immediately prior to extinguishment and its carrying value.  To estimate the fair value at each conversion date, the Company used an applicable LIBOR rate plus an applicable credit default spread based upon the Company’s credit rating at the respective conversion dates.  In the three months ended March 31, 2010, the Company recognized a loss of $5.3 million ($3.2 million after tax) in “Foreign currency transactions and other” in the Unaudited Consolidated Statement of Operations.  In addition, the Company wrote-off unamortized debt issuance costs of $0.6 million for the three months ended March 31, 2010 to interest expense related to the debt conversions.

 

9.                                       TREASURY STOCK

 

In the first quarter of 2010, the Company’s Board of Directors authorized the repurchase of up to $500 million of the Company’s common stock, including the approval to purchase up to $100 million from the proceeds from the issuance of the 2015 Notes.  The Company repurchased 0.4 million shares of its common stock at an aggregate cost of approximately $100 million in the three months that ended March 31, 2010.

 

As of March 31, 2011, the Company has a remaining amount from all authorizations granted by the Board of Directors of $459.2 million to purchase its common stock.  The Company may make additional repurchases of shares under its stock repurchase programs, depending on prevailing market conditions, alternate uses of capital and other factors.  Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in the Company’s complete discretion.

 

The Company’s Board of Directors has also given the Company the general authorization to repurchase shares of its common stock to satisfy employee withholding tax obligations related to stock-based compensation.  The Company repurchased 346,904 shares and 81,249 shares at aggregate costs of $157.3 million and $18.9 million in the three months ended March 31, 2011 and 2010, respectively, to satisfy employee withholding taxes related to stock-based compensation.

 

As of March 31, 2011, there were approximately 7.8 million shares of the Company’s common stock held in treasury.

 

10.                                INCOME TAXES

 

Income tax expense includes U.S. and international income taxes, determined using an estimate of the Company’s annual effective tax rate.  A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards.  A valuation allowance is recognized if it is more likely than not that some portion of the deferred tax asset will not be realized.

 

The Company recognizes income tax expense related to income generated outside of the United States based upon the applicable tax rates and tax laws of the foreign countries in which the income is generated.  During the three months ended March 31, 2011 and 2010, the substantial majority of the Company’s foreign-sourced income has been generated in the Netherlands and the United Kingdom.  Income tax expense for the three months ended March 31, 2011 and 2010 differs from the expected tax expense at the U.S. statutory rate of 35%, primarily due to lower foreign tax rates, partially offset by state income taxes and certain non-deductible expenses.

 

17


 


Table of Contents

 

Effective January 1, 2010, the Netherlands modified its corporate income tax law related to income generated from qualifying “innovative” activities (“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% (25.5% in 2010).  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 the Company’s 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 year 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 Company has significant deferred tax assets, resulting principally from domestic net operating loss carryforwards (“NOLs”).  At December 31, 2010, the Company had approximately $2.7 billion of NOLs for U.S. federal income tax purposes, comprised of $0.6 billion of NOLs generated from operating losses and approximately $2.1 billion of NOLs generated from equity-related transactions, including equity-based compensation and stock warrants, mainly expiring from December 31, 2019 to December 31, 2021.  The utilization of these NOLs is subject to limitation under Section 382 of the Internal Revenue Code and is also dependent on the Company’s ability to generate sufficient future taxable income.

 

Section 382 imposes limitations on the availability of a company’s net operating losses after a more than 50 percentage point ownership change occurs.  The Section 382 limitation is based upon certain conclusions pertaining to the dates of ownership changes and the value of the Company on the dates of the ownership changes.  As a result of a study, it was determined that ownership changes, as defined in Section 382, occurred in 2000 and 2002.  The amount of the Company’s net operating losses incurred prior to each ownership change is limited based on the value of the Company on the respective dates of ownership change.  As of the beginning of the year, it is estimated that the effect of Section 382 will generally limit the total cumulative amount of net operating loss available to offset future taxable income to approximately $1.3 billion, comprised of $0.6 billion of NOLs generated from operating losses which have been fully reflected in the Unaudited Consolidated Financial Statements and $0.7 billion of NOLs generated from equity-related transactions.  At December 31, 2010, the Company had additional federal tax benefits of $87.8 million, generated since January 1, 2006, related to equity transactions that are not recorded in our deferred tax asset accounts.  In accordance with accounting guidance, tax benefits related to equity transactions will be recognized as a credit to additional paid-in capital if and when they are realized by reducing the Company’s current income tax liability.  Pursuant to Section 382, subsequent ownership changes could further limit this amount.

 

The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized.  The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future income, the carryforward periods available for tax reporting purposes, and other relevant factors.  The deferred tax asset at

 

18



Table of Contents

 

March 31, 2011 and December 31, 2010 amounted to $218.3 million and $222.0 million, net of the valuation allowance recorded, respectively.

 

The Company has recorded a non-current deferred tax liability in the amount of $55.9 million and $56.4 million at March 31, 2011 and December 31, 2010, respectively, primarily related to the assignment of estimated fair value to certain purchased identifiable intangible assets associated with various international acquisitions.

 

As an international corporation providing hotel reservation services available in more than 100 countries around the world, the Company is 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 the Company’s worldwide provision for income taxes and other tax liabilities. Although the Company believes that its 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 the Company’s historical income tax provisions and accruals.

 

11.                                REDEEMABLE NONCONTROLLING INTERESTS

 

On May 18, 2010, the Company, through its wholly-owned subsidiary, Priceline.com International Limited (“PIL”), paid $108.5 million, net of cash acquired, to purchase a controlling interest of the outstanding equity of TravelJigsaw Holdings Limited and its operating subsidiary, TravelJigsaw Limited (collectively, “TravelJigsaw”), a Manchester, UK-based international rental car reservation service.

 

Certain key members of TravelJigsaw’s management team retained a noncontrolling ownership interest in TravelJigsaw Holdings Limited.  In addition, certain key members of the management team of Booking.com purchased a 3% ownership interest in TravelJigsaw from PIL in June 2010 (together with TravelJigsaw management’s investment, the “Redeemable Shares”).  The holders of the Redeemable Shares have the right to put their shares to PIL and PIL will have the right to call the shares in each case at a purchase price reflecting the fair value of the Redeemable Shares at the time of exercise.  Subject to certain exceptions, one-third of the Redeemable Shares will be subject to the put and call options in each of 2011, 2012 and 2013, respectively, during specified option exercise periods.  In April 2011, in connection with the exercise of March 2011 call and put options, PIL repurchased a portion of the shares underlying redeemable noncontrolling interests for an aggregate purchase price of approximately $13 million based upon fair value.  As a result of the April 2011 purchase, the redeemable noncontrolling interests in priceline.com International were reduced from 24.4% to 19.0%.

 

Redeemable noncontrolling interests are measured at fair value, both at the date of acquisition and subsequently at each reporting period.  The redeemable noncontrolling interests are reported on the Consolidated Balance Sheet in mezzanine equity in “Redeemable noncontrolling interests.”

 

A reconciliation of redeemable noncontrolling interests for the three months ended March 31, 2011 is as follows (in thousands):

 

 

 

2011

 

Balance, December 31, 2010

 

$

45,751

 

Net loss attributable to noncontrolling interests

 

(777

)

Fair value adjustment(1)

 

10,355

 

Currency translation adjustments

 

2,209

 

Balance, March 31, 2011

 

$

57,538

 

 


(1)           The estimated fair value was based upon standard valuation techniques using discounted cash flow analysis and industry peer comparable analysis.

 

12.                                COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income for the three months ended March 31, 2011 was $148.0 million, comprised of net income applicable to common stockholders of $104.8 million and a favorable currency translation adjustment of $43.8 million, partially offset by an unrealized loss on marketable securities of $0.6 million.  For the comparable period in 2010, comprehensive income was $9.1 million, comprised of $53.9 million of net income applicable to common stockholders and an unrealized gain on marketable securities of $0.2 million, offset by an unfavorable currency translation adjustment of $45.0 million.

 

19



Table of Contents

 

The table below provides the balances for each classification of accumulated other comprehensive income (loss) as of March 31, 2011 and December 31, 2010 (in thousands):

 

 

 

March 31,
2011

 

December 31,
2010

 

Foreign currency translation adjustments (1)

 

$

10,425

 

$

(33,407

)

Net unrealized (loss) gain on investment securities (2)

 

(65

)

518

 

Accumulated other comprehensive income (loss)

 

$

10,360

 

$

(32,889

)

 


(1)           Includes net losses from fair value adjustments at March 31, 2011 of $4,202 after tax ($5,975 before tax) and net gains from fair value adjustments at December 31, 2010 of $15,827 after tax ($27,138 before tax) associated with net investment hedges (see Note 5).  The remaining balance in currency translation adjustments excludes income taxes due to the Company’s practice and intention to reinvest the earnings of its foreign subsidiaries in those operations.

 

(2)           The unrealized loss before tax at March 31, 2011 was $75 and the unrealized gain before tax at December 31, 2010 was $714.

 

13.                                COMMITMENTS AND CONTINGENCIES

 

Litigation Related to Hotel Occupancy and Other Taxes

 

The Company 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 the Company’s “merchant” hotel business.  The Company’s 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.  The Company is 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 the Company is 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, the Company believes 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, the Company believes 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 the Company believes is without basis and have vigorously contested.  The municipalities that are currently involved in litigation and other proceedings with the Company, and that may be involved in future proceedings, have asserted contrary positions and will likely continue to do so.  From time to time, the Company have found it expedient to settle, and may in the future agree to settle, claims pending in these matters without conceding that the claims at issue are meritorious or that the claimed taxes are in fact due to be paid.

 

20



Table of Contents

 

In connection with some of these tax audits and assessments, the Company 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 the Company approximately $3.4 million (an amount that includes interest and penalties) relating to hotel occupancy taxes, which the Company paid in July 2009.  Payment of these amounts, if any, is not an admission that the Company believes it is subject to such taxes and, even if such payments are made, the Company intends to continue to assert its position vigorously.  The Company has 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 the Company 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 the Company’s 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 the Company’s business and results of operations and could be material to the Company’s earnings or cash flow in any given operating period.

 

To the extent that any tax authority succeeds in asserting that the Company has a tax collection responsibility, or the Company determines that it has such a responsibility, with respect to future transactions, the Company 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, the Company could choose to reduce the compensation for its services on “merchant” hotel transactions.  Either step could have a material adverse effect on the Company’s 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.  Therefore, any liability associated with hotel occupancy tax matters is not constrained to the Company’s liability for tax owed on its 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 the Company facilitates hotel reservations has not asserted that taxes are due and payable on the Company’s 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 the Company only on a prospective basis.

 

As a result of this litigation and other attempts by jurisdictions to levy similar taxes, the Company has established a reserve for the potential resolution of issues related to hotel occupancy and other taxes in the amount of approximately $28 million at March 31, 2011 compared to approximately $26 million at December 31, 2010 (which includes, among other things, amounts related to the litigation in San Antonio). The reserve is based on the Company’s 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 quarter ending March 31, 2011, two new cases were commenced.  District of Columbia v. Priceline.com, Inc. (Superior Court for the District of Columbia) was filed on March 22, 2011 and McAllister v. Hotels.com, L.P., et al. (Circuit Court of Saline County, Arkansas), a putative class action, was filed on February 22, 2011.  In addition, County of Volusia, et al. v. Priceline.com, Inc., et al. (Circuit Court of Volusia County, Florida) was filed on April 20, 2011.

 

21



Table of Contents

 

Three cases were dismissed during the quarter.  In State of Oklahoma v. Priceline.com, et al. (District Court of Oklahoma County, Oklahoma; filed in November 2010), defendants’ motion to dismiss was granted on March 11, 2011.  On March 16, 2011, the complaint in City of Santa Monica, California v. Expedia.com, et al. (Superior Court of California, Los Angeles County, West District; filed in June 2010) was dismissed.  Defendants’ motion for summary judgment was granted on March 24, 2011 in City of Birmingham, Alabama, et al. v. Orbitz, Inc. et al. , (Circuit Court of Jefferson County; filed in December 2009).  Additionally, on April 29, 2011, the Kentucky Court of Appeals affirmed dismissal of the action in its entirety in City of Bowling Green, Kentucky v. Hotels.com, L.P. et al. , (Warren County Circuit Court; filed in March 2009).  None of the plaintiffs have yet filed an appeal in these cases.

 

Three cases were dismissed in the quarter after the Company executed a settlement agreement.  County of Monroe, Florida v. Priceline.com, Inc. et al. (U.S. District Court for the Southern District of Florida, filed in January 2009) (agreement signed in August 2010) was dismissed with prejudice February 11, 2011.  In Priceline.com, Inc. v. Miami-Dade County, Florida, et al. , Tourist Development Tax claims asserted by the county were dismissed with prejudice on February 11, 2011 as part of the August 2010 agreement reached in the County of Monroe case.  Brevard County, Florida v. Priceline.com Inc., et al. (U.S. District Court for the Middle District of Florida, filed Oct. 2009)(agreement signed in March 2011) was dismissed with prejudice March 15, 2011.

 

In Horry County, South Carolina, et al. v. Hotels.com, LP, et al. (Court of Common Pleas, Horry County, South Carolina; filed in February 2007), the parties reached an agreement resolving the case in March 2011; judgment dismissing the matter pursuant to the agreement is expected shortly.

 

In addition to these developments, a discussion of  the remaining legal proceedings listed below can be found in the section titled “Legal Proceedings” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  We intend to vigorously defend 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 in December 2004)

·                   City of Rome, Georgia, et al. v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District of Georgia; filed in November 2005)

·                   City of San Antonio, Texas v. Hotels.com, L.P., et al. (U.S. District Court for the Western District of Texas; filed in May 2006)

·                   City of Jacksonville, Florida, et al. v. Hotels.com, L.P., et al. (Circuit Court, Fourth Judicial Circuit, Duval County, Florida; filed in July 2006)

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

·                   City of Gallup, New Mexico v. Hotels.com, L.P., et al. (U.S. District Court for the District of New Mexico; filed in 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 in June 2008)

·                   Township of Lyndhurst, New Jersey v. priceline.com Incorporated, et al. (U.S. District Court for the District of New Jersey; filed in June 2008); (U.S. Court of Appeals for the Third Circuit; appeal filed in April 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 in September 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 in November 2010)

 

22



Table of Contents

 

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 in October 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 in August. 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 in November 2005)

·                   City of San Diego, California v. Hotels.com L.P., et al. (California Superior Court, San Diego County; filed in September 2006) (Superior Court of California, Los Angeles County)

·                   City of Atlanta, Georgia v. Hotels.com L.P., et al. (Superior Court of Fulton County, Georgia; filed in March 2006); (Court of Appeals of the State of Georgia; appeal filed in January 2007); (Georgia Supreme Court; further appeal filed in December 2007)

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

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

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

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

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

·                   City of Oakland, California v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District of California; filed in June 2007); (U.S. Court of Appeals for the Ninth Circuit; appeal filed in December 2007)

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

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

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

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

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

·                   City of Birmingham, Alabama, et al. v. Orbitz, Inc., et al. (Circuit Court of Jefferson County, Alabama; filed in December. 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 in April 2010)

·                   Baltimore County, Maryland v. Priceline.com, Inc., et al. (U.S. District Court for the District of Maryland; filed in May 2010)

 

23



Table of Contents

 

·                   City of Santa Monica, California v. Expedia, Inc., et al. (Superior Court of California, Los Angeles County, West District; filed in 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 in August 2010)

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

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

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

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

 

The Company has 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 the Company, 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, the Company 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 in January 2009)

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

·                   Priceline.com, Inc. v. Indiana Department of State Revenue (Indiana Tax Court; filed in March 2009)

·                   Priceline.com, Inc., et al. v. City of San Francisco, California, et al. (Superior Court of California, County of San Francisco; filed in 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 in December 2009)

·                   Priceline.com Incorporated, et al. v. Osceola County, Florida, et al. (Circuit Court of the Second Judicial Circuit, in and For Leon County, Florida; filed in January 2011)

·                   In the Matter of the Tax Appeal of priceline.com Inc. In the Matter of the Tax Appeal of Lowestfare.com LLC and In the Matter of the Tax Appeal of Travelweb LLC   (Tax Appeal Court of the State of Hawaii; filed in March 2011)

 

The Company intends to prosecute vigorously its claims in these actions.

 

Consumer Class Actions

 

·                   Chiste, et al. v. priceline.com Inc., et al. (United States District Court for the Southern District of New York; filed in December 2008).

 

The Company intends to defend vigorously against the claims in all of the on-going proceedings described above.

 

24



Table of Contents

 

Administrative Proceedings and Other Possible Actions

 

At various times, the Company has also received inquiries or proposed tax assessments from municipalities and other taxing jurisdictions relating to the Company’s 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 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 the Company relating to allegedly unpaid state or local hotel occupancy or related taxes.  Since late 2008, the Company has received audit notices from more than forty cities in the state of California.  The Company is engaged in audit proceedings in each of those cities.  The Company has also been contacted for audit by five counties in the state of Utah and by the City of St. Louis, Missouri.

 

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 the Company and the individual defendants violated the federal securities laws by issuing and selling priceline.com common stock in the Company’s 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 the Company’s Board of Directors, compromised the claims against the Company 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.

 

The Company intends to defend vigorously against the claims in all of the proceedings described in this Note 13.  The Company has 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 the Company’s consolidated balance sheets and provisions recorded have not been material to the Company’s consolidated results of operations.  The Company is unable to estimate the potential maximum range of loss.

 

From time to time, the Company has been, and expects 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 the Company’s business objectives and could adversely affect the Company’s business, results of operations, financial condition and cash flows.

 

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; the Company and Booking.com are cooperating with the OFT’s investigation.  The Company is unable at this time to predict the outcome of the OFT’s investigation and the impact, if any, on the Company’s business, financial condition and results of operations.

 

25



Table of Contents

 

Contingent Purchase Price

 

In connection with the Company’s purchase of Agoda in 2007, contingent consideration was payable in 2011 if Agoda achieved specific “gross bookings” and earnings targets for the three year period of January 1, 2008 through December 31, 2010.  Based upon actual results for the three year period ended December 31, 2010, the Company paid $62.6 million in March 2011 and this amount is reflected as an investing cash outflow.

 

26


 

 


Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our Unaudited Consolidated Financial Statements, including the notes to those statements, included elsewhere in this Form 10-Q, and the Section entitled “Special Note Regarding Forward Looking Statements” in this Form 10-Q.  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 170,000 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 the Booking.com, Agoda and TravelJigsaw companies.  Our principal goal is to continue to 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 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.

 

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

 

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

 

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

 

·                   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.

 

Over the last several years we have experienced strong growth in the number of hotel room night reservations booked through our hotel reservation services.  We believe this growth is the result of, among other things, the broader shift of travel purchases from offline to online, the high growth of travel overall in emerging

 

27



Table of Contents

 

markets such as Asia-Pacific and South America and the continued innovation and execution by our teams around the world to build hotel supply, content and distribution and to improve the customer experience on our websites.  We experienced particularly strong growth in the first quarter of 2011, which reflected strong performance in our core markets and the contribution of Asia-Pacific and South America, which experience peak seasonal travel in the first and fourth quarters of the year, which is a seasonal low point for our other more mature markets.  We expect our year-over-year room night reservation growth rate for the second quarter of 2011 to decelerate as compared to the first quarter 2011 year-over-year growth rate.  Given the sheer size of our hotel reservation business, we believe it is highly likely that our year-over-year growth rates will generally decelerate on a quarterly sequential basis.  Economic conditions in general, and hotel occupancy rates (a common metric that measures hotel customer usage) and average daily rates (“ADR’s”) in particular, generally improved throughout 2010 which will result in progressively more challenging year over year quarterly comparisons as we proceed through 2011.

 

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 countries 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.  Finally, higher oil prices are contributing to higher airline ticket prices and are likely to adversely impact consumer discretionary funds available to be spent on travel.

 

Large, established Internet search engines with substantial resources and expertise in developing online commerce and facilitating Internet traffic are creating — and intend to further create — inroads into online travel, both in the U.S. and internationally.  For example, the U.S. Department of Justice recently approved Google’s acquisition of ITA Software, Inc., a major flight information software company, which will allow Google to pursue the creation of new flight search tools which will enable users to find fares, schedules and availability directly on Google.  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.  Some meta-search sites, such as Kayak.com, which recently began offering its users the ability to purchase tickets directly on its website, may evolve into more traditional online travel sites with ticket-booking capability.  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.

 

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.  Our growth has primarily been generated by our international hotel reservation service brands, Booking.com and Agoda.  Booking.com, our most significant brand, currently includes over 135,000 hotels as compared to about 86,000 hotels last year.  These hotels have been added in Booking.com’s core European market and geographic locations we have entered more recently, including North America, Asia-Pacific and South America.  An increasing amount of our

 

28



Table of Contents

 

business from a destination and point-of-sale perspective is conducted in these newer markets which are growing faster than our overall growth rate.  We believe these trends and factors have enabled us to become the top online hotel reservation service provider in the world as measured by room nights booked.

 

As our international operations have become significant contributors to our results and international hotel bookings have become of increased importance to our earnings, we have seen, and expect to continue to see, changes in certain of our operating expenses and other financial metrics.  For example, because Booking.com and Agoda utilize online search and affiliate marketing as the principal means of generating traffic to their websites, our online advertising expense has increased significantly over recent years, a trend we expect to continue throughout 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 $389.1 million to our revenues for the three months ended March 31, 2011, which compares to $215.8 million for the three months ended March 31, 2010 (year-over-year growth of approximately 80%).  Revenue attributable to our international operations increased on a local currency basis by approximately 79% in the three months ended March 31, 2011, compared to the same period in 2010.

 

Over the past several years, there has been significant volatility in the exchange rate between the Euro and the U.S. dollar.  Over the past year, Greece, Ireland, Portugal 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, including 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 significant, and potentially longer-term, devaluation of the Euro against the U.S. Dollar.  More recently, the European Central Bank raised its key lending rate for the first time in three years, contributing to a strengthening of the Euro relative to the U.S. Dollar.  A strengthening of the Euro benefits our Euro-denominated net assets, gross bookings, revenues, operating expenses, and net income as expressed in U.S. Dollars, while a weakening of the Euro would adversely impact our Euro-denominated net assets, gross bookings, revenues, operating expenses, and net income as expressed in U.S. Dollars.

 

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 Unaudited 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.  In particular, the competition to provide “opaque” hotel services to consumers, an area in which priceline.com has been a leader, has become more intense.  For example, in the fourth quarter of 2010, Expedia began making opaque hotel room reservations available on its principal website under the name “Expedia Unpublished Rates” and has been supporting the initiative with a national television advertising campaign.  In addition, in 2009, Travelocity launched an opaque price-disclosed hotel booking service that allows customers to book rooms at a discount.  As with our Name Your Own Price ®  hotel booking service, for these services, the name of the hotel is not disclosed until after purchase.  We believe these new offerings, in particular Expedia Unpublished Rates, have impacted consumer demand for our opaque hotel service.  If Expedia or Travelocity are successful in growing their opaque hotel service, we may have less consumer demand for our opaque hotel service over time and we are likely to face more competition for access to the limited supply of discounted hotel room rates.  As a result, our share of the discount hotel market in the U.S. could decrease.

 

29



Table of Contents

 

We believe that for a number of reasons, including the recent significant year-over-year increase in retail airfares, consumers are engaging in more shopping behavior before making a travel purchase than they engaged in previously.  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.

 

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, during 2010, we began implementation of direct connection capability with American Airlines.  In December 2010, American terminated its participation in the Orbitz service and withdrew its fares from the Orbitz website, and, in a dispute with American Airlines, Expedia removed American content from its site as its contract with American was set to expire on December 31, 2010.  In April 2011, Expedia and American announced that American would make content available through Expedia and Expedia would establish direct connection capability with American.  This is consistent with an effort on the part of American Airlines, and the airline industry in general, to reduce distribution costs and could be indicative of the airlines in general becoming more aggressive in requiring online travel agents to implement direct connections.  Development and implementation of the technology to enable additional direct connections to travel suppliers could cause us to incur additional operating expenses, increase the frequency/duration of system problems and delay other projects.  In addition, any additional migration toward direct connections would reduce the compensation we receive from GDSs.

 

Many current agreements between major U.S. airlines and major GDSs are due to expire during or at the end of 2011.  It is unclear whether and to what extent any new agreement (or extension or renewal of any existing agreement) between any major U.S. airline and any major GDS will enable GDS subscribers, such as us, equal access to the fares, inventory and content provided by such carrier through the GDS.  Furthermore, it is possible 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.

 

While demand for online travel services in the U.S. continues to experience annualized growth, we believe that the domestic market share of third-party distributors, 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 that suppliers may have as they generally do not charge a processing fee.

 

Domestic airlines have reduced capacity and increased fares since the latter part of 2009.  In addition, the threat of carrier bankruptcies and the emerging prospect of industry consolidation, as evidenced by the mergers of United Air Lines with Continental Airlines; Delta Air Lines with Northwest Airlines; and AirTran with 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 in 2010 and thus far in 2011 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.   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 2009.  Overall, we were able to obtain improved access to discounted airline tickets during the three months ended March 31, 2011, but still encountered challenges in rental car availability.  The crisis in Japan resulting from the recent earthquake and tsunami is expected to result in reduced vehicle production leading to further strain on rental car companies’ fleets and increased retail rental car rates.   Nevertheless, we continue to

 

30



Table of Contents

 

believe that the market for domestic online travel services is an attractive market with continued opportunity for growth.

 

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, higher oil prices, terrorist attacks, unusual weather patterns, natural disasters such as earthquakes, hurricanes, tsunamis, volcanic eruptions (such as the April 2010 eruption of a volcano in Iceland), travel related health concerns including pandemics and epidemics such as Influenza H1N1, avian bird flu and SARS, political instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities, travel related accidents or the withdrawal from our system of a major hotel supplier or airline, could adversely affect our business and results of operations and impair our ability to effectively implement all or some of the initiatives described above.

 

For example, in early 2011, Japan was struck by a major earthquake, tsunami and nuclear emergency.  Japan is an important source of travel demand for Agoda, and these crises have had an adverse impact on travel demand originating in Japan.  In addition, 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.  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.  Thai government elections currently anticipated in June 2011 could lead to additional civil unrest.  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 .  A meaningful amount of retail gross bookings are generated early in the year, as customers plan and reserve their spring and summer vacations in the Northern Hemisphere.  However, we will not recognize associated revenue until future quarters when the travel occurs.  From a cost perspective, we expense the substantial majority of our advertising activities as they are incurred, which is typically in the quarter in which bookings are generated.  As a result, we experience our highest levels of profitability in the second and third quarters of the year, which is when we experience the highest levels of booking and travel consumption for the year for our North American and European businesses.  However, we experience the highest levels of booking and travel consumption for our Asia-Pacific and South American businesses in the first and fourth quarters.  Therefore, if these businesses continue to grow faster than our North American and European businesses, our operating results for the first and fourth quarters of the year may become more significant over time as a percentage of full year operating results.

 

Results of Operations

 

Three Months Ended March 31, 2011 compared to the Three Months Ended March 31, 2010

 

Operating 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, net of

 

31



Table of Contents

 

cancellations, 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 through 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 through our domestic brands and operations, in each case without regard to the location of the travel or the customer purchasing the travel.

 

Gross bookings resulting from hotel room nights, rental car days and airline tickets reserved through our domestic and international operations for the three months ended March 31, 2011 and 2010 were as follows (numbers may not total due to rounding):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

2011

 

2010

 

Change

 

 

 

 

 

 

 

 

 

Domestic

 

$

1,129 million

 

$

989 million

 

14.1

%

International

 

3,536 million

 

1,975 million

 

79.0

%

Total

 

$

4,665 million

 

$

2,965 million

 

57.3

%

 

Gross bookings increased by 57.3% for the three months ended March 31, 2011, compared to the same period in 2010, principally due to 55.8% growth in hotel room night reservations.  The 79.0% increase in international gross bookings was principally attributable to growth in international hotel room night reservations for our Booking.com and Agoda businesses (growth on a local currency basis was approximately 78%).  International gross bookings include $96 million from TravelJigsaw, which was acquired in May 2010.  Domestic gross bookings increased by 14.1% for the three months ended March 31, 2011, compared to the same period in 2010, primarily due to growth in price-disclosed hotel room night reservations, airline tickets booked, which was compounded by an increase in average fares, and Name Your Own Price ®  hotel room night reservations.

 

Gross bookings resulting from hotel room nights, rental car days and airline tickets sold through our agency and merchant models for the three months ended March 31, 2011 and 2010 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

 

 

2011

 

2010

 

Change

 

 

 

 

 

 

 

 

 

Agency

 

$

3,781 million

 

$

2,374 million

 

59.3

%

Merchant

 

884 million

 

591 million

 

49.5

%

Total

 

$

4,665 million

 

$

2,965 million

 

57.3

%

 

Agency gross bookings increased 59.3% for the three months ended March 31, 2011, compared to the same period in 2010, primarily due to growth in hotel room night reservations for Booking.com. Our U.S. business also contributed growth in reservations of price-disclosed hotel room nights, airline tickets and rental car days.  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 49.5% for the three months ended March 31, 2011, compared to the same period in 2010, due to an increase in the sale of Agoda and priceline.com-branded price-disclosed and Name Your Own Price ®  hotel room night reservations, Name Your Own Price ®  airline tickets and the inclusion of TravelJigsaw since its acquisition in May 2010.

 

Three Months
Ended

 

Hotel Room 
Nights

 

Rental
Car Days

 

Airline
Tickets

 

 

 

 

 

 

 

 

 

March 31, 2011

 

31.2 million

 

4.9 million

 

1.6 million

 

 

 

 

 

 

 

 

 

March 31, 2010

 

20.0 million

 

3.0 million

 

1.5 million

 

 

32



Table of Contents

 

Hotel room night reservations increased by 55.8% for the three months ended March 31, 2011, compared to the same period in 2010, due primarily to an increase in Booking.com, Agoda and priceline.com price-disclosed and Name Your Own Price ®  room night reservations.

 

Rental car day reservations increased by 64.7% for the three months ended March 31, 2011, compared to the same period in 2010, due primarily to the inclusion of rental car day reservations for TravelJigsaw, which we acquired in May 2010, as well as an increase in priceline.com price-disclosed rental car days in the U.S.  Rental car day reservations for our Name Your Own Price ®  service in the U.S. slightly decreased due to limited availability of discounted rental car supply resulting from tight fleet levels maintained by our rental car suppliers.

 

Airline ticket reservations increased by 2.1% for the three months ended March 31, 2011, compared to the same period in 2010, due to an increase in the sale of Name Your Own Price ®  airline ticket reservations, partially offset by a slight decline in price-disclosed airline ticket reservations, which benefited from the absence of American Airlines on the Expedia and Orbitz websites during the quarter.

 

Revenues

 

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

 

·                   Agency revenues are derived from travel related transactions where we are not the merchant of record and where the prices of the travel services are determined by third parties. Agency revenues include travel commissions, customer processing fees and GDS reservation booking fees related to certain of the 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.

 

 

 

Three Months Ended
March 31,

 

 

 

 

 

($000)

 

 

 

 

 

2011

 

2010

 

Change

 

 

 

 

 

 

 

 

 

Merchant Revenues

 

$

454,804

 

$

368,265

 

23.5

%

Agency Revenues

 

351,422

 

213,242

 

64.8

%

Other Revenues

 

3,094

 

2,887

 

7.2

%

Total Revenues

 

$

809,320

 

$

584,394

 

38.5

%

 

33



Table of Contents

 

Merchant Revenues

 

Merchant revenues for the three months ended March 31, 2011 increased 23.5% compared to the same period in 2010, primarily due to increases in Agoda price-disclosed hotel room night reservations and Name Your Own Price ®  hotel room night reservations and airline tickets, the inclusion of Travel Jigsaw since its acquisition in May 2010 and an increase in priceline.com price-disclosed hotel room night reservations.

 

Agency Revenues

 

Agency revenues for the three months ended March 31, 2011 increased 64.8% compared to the same period in 2010, primarily as a result of growth in our Booking.com business.  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 three months ended March 31, 2011 consisted primarily of advertising.  Other revenues for the three months ended March 31, 2011 increased 7.2% compared to the same period in 2010 due to increased traffic on our web sites.

 

Cost of Revenues and Gross Profit

 

 

 

Three Months Ended
 March 31,

 

 

 

 

 

($000)

 

 

 

 

 

2011

 

2010

 

Change

 

 

 

 

 

 

 

 

 

Cost of Revenues

 

$

303,512

 

$

265,278

 

14.4

%

% of Merchant Revenues

 

66.7

%

72.0

%

 

 

 

Cost of Revenues

 

For the three months ended March 31, 2011, cost of revenues consisted primarily of charges from the suppliers for: (1) the cost of Name Your Own Price ®  hotel room night 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 three months ended March 31, 2011 increased by 14.4% compared to the same period in 2010, due primarily to the increase in Name Your Own Price ®  revenues discussed above.  Merchant price-disclosed hotel and rental car revenues 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 revenues.  Cost of revenues as a percentage of their associated merchant revenues decreased primarily due to the increase in merchant price-disclosed revenues and the addition of TravelJigsaw merchant revenue, all of which are recorded on a “net” basis.

 

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

 

34


 


Table of Contents

 

Gross Profit

 

 

 

Three Months Ended
March 31,

 

 

 

 

 

($000)

 

 

 

 

 

2011

 

2010

 

Change

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

505,808

 

$

319,116

 

58.5

%

Gross Margin

 

62.5

%

54.6

%

 

 

 

Total gross profit for the three months ended March 31, 2011 increased by 58.5% compared to the same period in 2010, primarily as a result of increased revenue discussed above.  Total gross margin (gross profit expressed as a percentage of total revenue) increased during the three months ended March 31, 2011, compared to the same period in 2010, because Name Your Own Price ®  revenues, which are recorded “gross” with a corresponding cost of revenue, represented a smaller percentage of total revenues compared to retail, price-disclosed revenues which are primarily recorded “net” with no corresponding cost of revenues.  Because Name Your Own Price ®  transactions are reported “gross” and retail transactions are primarily recorded on a “net” basis, we believe that gross profit has become an increasingly important measure of evaluating growth in our business.  Our international operations accounted for approximately $388.2 million of our gross profit for the three months ended March 31, 2011, which compares to approximately $214.9 million for the same period in 2010.  Gross profit attributable to our international operations increased, on a local currency basis, by approximately 79% in the three months ended March 31, 2011, compared to the same period in 2010.

 

Operating Expenses

 

Advertising

 

 

 

Three Months Ended
March 31,

 

 

 

 

 

($000)

 

 

 

 

 

2011

 

2010

 

Change

 

Offline Advertising

 

$

11,614

 

$

11,788

 

(1.5

)%

% of Total Gross Profit

 

2.3

%

3.7

%

 

 

Online Advertising

 

$

185,108

 

$

113,109

 

63.7

%

% of Total Gross Profit

 

36.6

%

35.4

%

 

 

 

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 three months ended March 31, 2011, offline advertising expenses decreased modestly compared to the same period in 2010 due to lower creative talent costs and decreased print advertising, partially offset by higher TV 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 three months ended March 31, 2011, online advertising expenses increased over the same period in 2010, primarily to support increased hotel room night reservations for Booking.com, Agoda and priceline.com, as well as the inclusion of online advertising for TravelJigsaw since its acquisition in May 2010.  Online advertising as a percentage of gross profit increased for the three months ended March 31, 2011 compared to the same period in 2010.  The increase is driven primarily by brand mix rather than a change in the fundamental efficiency of our online advertising by brand.  Our international businesses are growing faster than our priceline.com business in the U.S., and spend a higher percentage of gross profit on online advertising.  In addition, online advertising as a percentage of gross profit is typically at a seasonal high point in the first quarter, as customers make reservations in the first quarter for spring and summer travel. We recognize the advertising expense at the time of booking, but

 

35



Table of Contents

 

recognize the gross profit for price-disclosed reservations when the travel is completed.

 

Sales and Marketing

 

 

 

Three Months Ended
March 31,

 

 

 

 

 

($000)

 

 

 

 

 

2011

 

2010

 

Change

 

Sales and Marketing

 

$

34,778

 

$

24,113

 

44.2

%

% of Total Gross Profit

 

6.9

%

7.6

%

 

 

 

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 three months ended March 31, 2011, sales and marketing expenses, which are substantially variable in nature, increased over the same period in 2010, primarily due to increased gross booking volumes.  Costs associated with merchant bookings for our U.S. business is the largest component of sales and marketing expense, and therefore, growth in sales and marketing expense will more closely correlate with growth in our domestic merchant gross profit than with our total gross profit.  Our domestic merchant gross profit grew more slowly than our total gross profit, which benefited from the high growth in our international agency business, and as a result, sales and marketing expense as a percentage of gross profit declined year-over-year.

 

Personnel

 

 

 

Three Months Ended
March 31,

 

 

 

 

 

($000)

 

 

 

 

 

2011

 

2010

 

Change

 

Personnel

 

$

75,221

 

$

49,777

 

51.1

%

% of Total Gross Profit

 

14.9

%

15.6

%

 

 

 

Personnel expenses consist of compensation to our personnel, including salaries, bonuses, payroll taxes, employee health benefits and stock-based compensation.  For the three months ended March 31, 2011, personnel expenses increased over the same period in 2010, due primarily to increased headcount to support the growth of our business and the inclusion of TravelJigsaw since its acquisition in May 2010.  Stock-based compensation expense was approximately $14.0 million for the three months ended March 31, 2011, and $11.9 million for the three months ended March 31, 2010.

 

General and Administrative

 

 

 

Three Months Ended
March 31,

 

 

 

 

 

($000)

 

 

 

 

 

2011

 

2010

 

Change

 

General and Administrative

 

$

25,879

 

$

18,033

 

43.5

%

% of Total Gross Profit

 

5.1

%

5.7

%

 

 

 

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

 

36



Table of Contents

 

travel expenses. General and administrative expenses increased during the three months ended March 31, 2011, over the same period in 2010, due to higher occupancy and personnel related expenses to support growth in our international operations and the inclusion of TravelJigsaw since its acquisition in May 2010.

 

Information Technology

 

 

 

Three Months Ended
March 31,

 

 

 

 

 

($000)

 

 

 

 

 

2011

 

2010

 

Change

 

Information Technology