Priceline 2011 Annual Report Download - page 34

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements, including the notes to those
statements, included elsewhere in this Form 10-K, and the Section entitled "Special Note Regarding Forward-Looking
Statements" in this Form 10-K. As discussed in more detail in the Section entitled "Special Note Regarding Forward-
Looking Statements," this discussion contains forward-looking statements which involve risks and uncertainties. Our
actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause
those differences include, but are not limited to, those discussed in "Risk Factors."
Overview
We are a leading online travel company that offers our customers hotel room reservations at over 210,000 hotels
worldwide through the Booking.com, priceline.com and Agoda brands. In the United States, we also offer our customers
reservations for car rentals, airline tickets, vacation packages, destination services and cruises through the priceline.com brand.
We offer car rental reservations worldwide through rentalcars.com (formerly known as TravelJigsaw), which we acquired in
May 2010.
We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our
operations to include the Booking.com, Agoda and rentalcars.com companies. Our principal goal is to serve our customers
with worldwide leadership in online hotel and rental car reservations. Our business is driven primarily by international results.
During the year ended December 31, 2011, our international business (the significant majority of which is generated by
Booking.com) represented approximately 78% of our gross bookings (an operating and statistical metric referring to the total
dollar value, generally inclusive of all taxes and fees, of all travel services purchased by our customers), and approximately
88% of our consolidated operating income. Given that the business of our international operations is primarily comprised of
hotel reservation services, gross profit earned in connection with the reservation of hotel room nights represents a substantial
majority of our gross profit.
Our priceline.com brand in the U.S. offers merchant Name Your Own Price® travel services (sometimes referred to as
"opaque" travel services), which are recorded in revenue on a "gross" basis and have associated cost of revenue. Retail, or
price-disclosed, travel services offered by both our U.S. and international brands are recorded in revenue on a "net" basis and
have no associated cost of revenue. Therefore, revenue increases and decreases are impacted by changes in the mix of our
revenues between Name Your Own Price® and retail travel services. Gross profit reflects the net margin earned for both our
Name Your Own Price® and retail travel services. Consequently, gross profit has become an increasingly important measure of
evaluating growth in our business. At present, we derive substantially all of our gross profit from the following sources:
• Commissions earned from price-disclosed hotel room reservations, rental cars, cruises and other travel services;
• Transaction gross profit and customer processing fees from our price-disclosed merchant hotel room and rental
car reservation services;
• Transaction gross profit and customer processing fees from our Name Your Own Price® hotel room reservation,
rental car and airline ticket services, as well as our vacation packages service;
• Global distribution system ("GDS") reservation booking fees related to both our Name Your Own Price® airline
ticket, hotel room reservation and rental car services, and price-disclosed airline tickets and rental car services;
and
• Other gross profit derived primarily from selling advertising on our websites.
Over the last several years we have experienced strong growth in the number of hotel room night reservations booked
through our hotel reservation services. We believe this growth is the result of, among other things, the broader shift of travel
purchases from offline to online, the high growth of travel overall in emerging markets such as Asia-Pacific and South America,
and the continued innovation and execution by our teams around the world to build hotel supply, content and distribution and to
improve the customer experience on our websites. We experienced exceptionally strong year-over-year growth during 2011.
However, given the sheer size of our hotel reservation business, we believe it is highly likely that our year-over-year growth
rates will generally decelerate on a quarterly sequential basis in the future. Thus far during the first quarter of 2012, we
experienced deceleration in year-over-year hotel room night reservation growth as compared to the year-over-year growth rate