Priceline Reports Solid Q1

Zacks

Priceline.com Inc (PCLN) had a solid first quarter, beating the Zacks Consensus by 35 cents due to strong revenue growth, especially in international, coming from both volume and rate increases. The lower tax rate was positive, while higher interest expenses were an offsetting factor.

Revenue

Priceline reported revenue of $1.04 billion in the quarter, representing a sequential increase of 4.7% and a year-over-year increase of 28.2%. This was better than management’s guidance of $947 million (at the mid-point) and in line with consensus expectations.

Volumes were up across the business, with hotel room nights, rental car days and airline tickets all growing double-digits on a sequential basis. Room nights and rental car days were also up strong double-digits from last year, although airline tickets were flat.

Ticket volumes were better than in the December quarter, similar to Expedia Inc (EXPE), which also saw softness in the area. Specifically, hotel room nights, rental car days and airline tickets were up 36.6%, 30.2% and 14.3%, respectively from the fourth quarter and up 47.1%, 40.8% and 0.0%, respectively from a year ago.

Revenue by Channel

Historically, Priceline’s merchant business has generated the largest chunk of revenue. However, the trend is reversing, with the agency business growing very rapidly in the recent past, contributing a greater share of revenue in each of the last four quarters.

The merchant/agency revenue share in the last quarter was 48%/52%, with other revenues bringing in less than 1%. Merchant revenue was up 11.3% sequentially and 9.1% year over year. The agency business on the other hand was flat sequentially, while increasing 53.0% from the year-ago quarter. Other revenue was up 12.5% sequentially and 3.8% from last year.

Bookings

Priceline’s overall bookings were up 35.4% sequentially, and 43.9% year over year. Both international and domestic bookings exceeded the guided numbers. International was up 54.2% over the prior year, while growing 39.3% on a sequential basis.

The domestic business jumped 20.7% sequentially and 11.6% year over year. Excluding the impact of foreign currency, international bookings were up 58% from the year-ago quarter.

Booking growth was across all three product lines, with hotel room nights growing through the quarter both internationally and in the U.S. (weak average daily rates -- ADRs -- in Southern Europe had a slightly negative impact). Management stated that Priceline took share in the hotel reservation market.

Booking.com has been increasing hotel inventories across North and South America, as well as Asia, and Priceline’s business in these areas are scaling up. However, some of the recently-added hotels in highly penetrated markets are likely to generate lower commissions given that they are smaller-ADR accommodations.

Priceline continued to push its opaque business model, which did not do as well as in the past because of a growing number of competitors offering heavy discounts.

Rental car bookings were up 41% year over year, driven by strength in both the domestic and international businesses.

Airline tickets benefited from a stronger retail business, although they were impacted by lower supply on account of airlines reducing capacity. However, ticket prices increased. The opaque side of the business was particularly weak.

Operating Performance

Priceline reported a gross margin of 71.7%, down 149 basis points (bps) sequentially due mix and up 916 bps from the year-ago quarter due to higher volumes. 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 grew 2.6% sequentially and 47.0% from last year. While both the domestic and international businesses contributed to the year-over-year growth, international growth was much stronger at 59% (65% on a local currency basis), with domestic growing 8%.

Priceline’s operating income slipped 19.8% sequentially to $249.7 million. The operating margin was 24.1%, down 737 bps sequentially and up 402 bps from the year-ago quarter. While almost all expenses increased as a percentage of sales, the most significant of these was online advertising (up 473 bps sequentially and 385 bps year over year). Offline advertising continued to decline from the year-ago quarter, while increasing sequentially. Personnel costs declined sequentially.

Priceline reported adjusted EBITDA of $271.5 million, up 56.5% from the year-ago quarter, better than management’s expectations of pro forma EBITDA in the $243-253 million range.

Net Income

Pro forma net income was $204.2 million, or 19.7% of revenue, compared to $251.7 million, or 25.4% in the previous quarter and $122.3 million, or 15.1% in the year-ago quarter. Our pro forma estimate excludes amortization of intangibles and other items as well as tax adjustments and includes stock based compensation of 32 cents a share in the last quarter. Our pro forma calculation may differ from Priceline’s presentation due to the inclusion/exclusion of some items that were not considered by management.

Including these items, Priceline’s GAAP net income was $181.8 million or $3.54 a share, compared to $225.7 million, or $4.41 a share in the December 2011 quarter and $104.8 million, or $2.05 a share in the year-ago quarter.

Balance Sheet

Priceline ended with a cash and short term investments balance of $3.62 billion, up $961.0 million during the quarter. Priceline generated $182.4 million of cash from operations, down sequentially because of seasonally lower volumes. It spent around $13.7 million on capex and $254.2 million on share repurchases.

At quarter-end, Priceline had $938.4 million in long-term debt and $503.2 million in short term debt, totaling $1.44 billion (Priceline raised a billion dollars of convertible debt during the quarter). The net cash position at quarter-end was $2.18 billion, up $100 million during the quarter. Days sales outstanding (DSOs) were around 29 up from 24 at the end of the December 2011 quarter.

Guidance

For the second quarter, Priceline expects total gross bookings to grow 26-31% year over year, with international growing 32-37% (up 41-46% on local currency basis) and domestic growing around 5-10%. This is expected to yield a year-over-year revenue increase of 18-23% ($1.33 billion at the mid-point).

Priceline expects gross profit dollars to increase of 31-36% on a non-GAAP basis. The pro forma EBITDA is expected to be $450-470 million.

The pro forma EPS is expected to come in at $7.20-$7.40, based on a 16.5% tax rate and 51.6 million shares. The GAAP EPS is expected to be $6.34 to $6.54. Analysts were expecting pro forma earnings of $7.14 when the company reported earnings, below the guided range.

Conclusion

Priceline reported a very good first quarter, with strength across product lines. Although we detect a certain amount of caution with respect to Europe, the overall trends look extremely strong.

In terms of product lines, we see the hotel business continuing to grow very strongly (management mentioned share gains), helped by Priceline’s decision to increase inventory and offset by lingering tensions in Europe. New business is likely to come at lower margins.

The rental car business should remain strong, as the travel market continues to grow and corporate spending on travel also picks up. Airline tickets are likely to remain the weakest area, since airline companies remain under a lot of pressure. In the near term, we see continued capacity cuts and price hikes. 

In this backdrop, Priceline is expected to continue investing in the business to push growth further and especially to continue its international expansion strategy. This is likely to exert some downward pressure on earnings.

Priceline shares currently have a Zacks Rank of #3, which implies a Hold rating in the short term (1-3 months).

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