Priceline Beats, Investors React to Guidance
Priceline.com’s (PCLN) first-quarter earnings beat the Zacks Consensus by 66 cents (13.2%). Revenues came in slightly higher than expected.
Priceline excludes charges and credits related to the taxation of online travel bookings, which depend on rulings in different states. In the last quarter, the exclusion of such unfavorable rulings added 40 cents to the adjusted EPS.
Revenue
Priceline reported revenue of $1.30 billion in the quarter, representing a sequential increase of 9.4% and a year-over-year increase of 25.5%. This was better than management’s guidance of $1.25 billion (at the mid-point).
Revenue by Channel
Priceline’s business model has been changing over the last two years or so, with the merchant business gradually becoming a smaller percentage of revenue. This is mainly because the agency business has been growing much faster than the merchant business.
Both businesses grew strongly from the previous and year-ago quarters. The merchant business grew 11.9% sequentially and 6.5% from the year-ago level. The agency business was even stronger, growing 7.7% and 43.2% from the previous and year-ago quarters, respectively. The merchant/agency mix went from 60%/40% in the Dec 2012 quarter to 41%/59% in the last quarter.
Other revenue was up 9.1% sequentially and up 9.6% from last year, remaining below 1% of the total revenue for the quarter.
Overall ADRs grew 1% on a local currency basis.
Bookings
Priceline’s overall bookings were up 39.0% sequentially and up 36.4% year over year, at the high end of the guided range. Foreign currency had a very limited impact on gross bookings in the last quarter.
Booking volumes were up both sequentially and year-over-year across product lines with hotel room nights, rental car days and airline tickets increasing 36.8%, 37.5% and 21.4%, respectively. Room nights and rental car days were up strong double-digits (37.7 and 43.5%, respectively) from last year, with airline ticket volumes growing 6.3%.
Both international and domestic bookings contributed to the growth and continue to indicate better-than-expected growth trends. International was up 41.7% sequentially and increased 42.8% (43% excluding currency impact) year over year (at the high end of the guided range). Domestic grew 25.7% sequentially and 8.7% over the prior year (within the guided range).
Other than the macro challenges in Europe, Priceline is also facing regulatory hurdles in Argentina and stiff competition in China and other Asia/Pacific countries. Despite these pressures, the company has done relatively well (especially in the Asia/Pacific through Agoda and booking.com). Increasing hotel inventories and strategic tie-ups with companies like Ctrip.com International (CTRP), China’s leading online travel booking service are helping the international business.
Operating Performance
Priceline reported a pro forma gross margin of 79.1%, down 116 basis points (bps) sequentially and up 747 bps year over year. Gross margins may remain under pressure as Priceline continues to strengthen its position in geographies that typically yield lower ADRs. The increase from the year-ago quarter is related to some Easter-related sales being pulled into the quarter. Because of the nature of the business and the mix of agency versus merchant revenue, management usually uses gross profit dollars rather than margin to gauge performance during any quarter.
Priceline’s gross profit dollars were up 7.8% sequentially and 38.6% from last year. International drove the year-over-year increase in gross profit, while domestic declined slightly. The rapid growth in Asia and Latin America where ADRs are low and margins respond strongly to higher volumes is the main reason for the expansion of the international gross margin.
Priceline’s operating income dropped 14.8% sequentially to $399.7 million, but stayed 60.1% higher than the year-ago level. The operating margin of 26.1%, shrank 739 bps sequentially and expanded 202 bps from the year-ago quarter. Higher advertising expenses as a percentage of sales drove the sequential decline and moderated the expansion from the year-ago quarter. Online advertising was the bigger driver (due to the mix shift to international brands). The booking.com TV advertising campaign kicked off in the last quarter, which also led to increase in offline advertising.
All other expenses declined sequentially as a percentage of sales (due to the higher volumes), with S&M, personnel and G&A declining 18 bps, 1 bp and 38 bps, respectively. S&M and G&A also declined from last year.
Priceline reported adjusted EBITDA of $368.2 million, up 35.6% from the year-ago quarter, better than management’s expectations of adjusted EBITDA in the $316-346 million range.
Net Income
The pro forma net income was $290.9 million, or 22.3% of revenue, compared to $329.6 million, or 27.7% in the previous quarter and $204.2 million, or 19.7% in the year-ago quarter. Our pro forma estimate excludes charges related to unfavorable rulings, amortization of intangibles and other charges and tax adjustments and includes stock based compensation of 42 cents a share in the last quarter.
Including these items and deducting amounts attributable to non-controlling interests, Priceline’s GAAP net income was $244.3 million or $4.76 a share, compared to $288.7 million, or $5.63 a share in the Dec 2012 quarter and $181.7 million, or $3.54 a share in the year-ago quarter.
Balance Sheet
Priceline ended with a cash and short term investments balance of $5.18 billion, down $1.58 million during the quarter. Priceline generated $183.1 million of cash from operations. It spent around $15.0 million on capex and $76.4 million on share repurchases.
At quarter-end, Priceline had $936.0 million in long-term debt and $526.2 million in short term debt, totaling $1.46 billion. The net cash position at quarter-end was $3.72 billion, down $6.8 million during the quarter. Days sales outstanding (DSOs) were around 33, up from 28 at the beginning of the quarter.
Guidance
For the second quarter, Priceline expects total gross bookings to grow 30-37% year over year (27-34% on local currency basis), with international growing 36-43% (up 33-40% on local currency basis) and domestic growing 5-10%. This is expected to yield a year-over-year revenue increase of 15-22% ($1.57 billion at the mid-point, slightly lower than the Zacks Consensus of $1.63 billion).
Priceline expects gross profit dollars to increase 26-33%, with the adjusted EBITDA at $560-595 million.
The pro forma EPS is expected to come in at $8.87-$9.45, based on a 16% tax rate and 51.6 million shares. The GAAP EPS is expected to be $7.87 to $8.45. Analysts were expecting pro forma earnings of $9.21 a share when the company reported earnings, within the guided range.
Conclusion
Priceline reported another strong quarter, although the topline guidance was a little lighter than expected. International bookings trends could also have been better. Management highlighted some issues in Argentina and also pointed out that the Asia/Pacific market was very competitive. All things considered, we still don’t think the results and guidance were too disappointing.
While Priceline has significant exposure to Europe, it has been steadily building position in other emerging international markets. It is not only increasing its hotel inventories, but also entering into strategic alliances and making strategic acquisitions that could help growth in the future.
Considering economic conditions all over the world and the fact that Priceline derives a significant chunk of revenue from leisure travel, building a global presence that could balance out macro effects in different geographies seems like a good plan.
Priceline will continue investing in the business (look for continued uptrend in advertising) to push growth and especially to continue its international expansion strategy. This is likely to exert some downward pressure on earnings.
Since overall trends appear to be positive and management guidance is also not disappointing, we expect positive revisions to estimates. Priceline shares currently carry a Zacks Rank #3 (Hold), better than peer Expedia (EXPE), which has a Zacks Rank #5, but not nearly as good as Orbitz Worldwide (OWW), which has a Zacks Rank #2 (Buy).
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