Priceline's Q2 Indicates Share Gains
Priceline.com’s (PCLN) second-quarter earnings beat the Zacks Consensus by 3 cents. Revenues were also encouraging, especially after Expedia’s (EXPE) poor showing. The strong revenue and earnings growth drove shares up 5.4% in after-hours trading.
Revenue
Priceline reported revenue of $1.68 billion in the quarter, representing a sequential increase of 29.0% and a year-over-year increase of 26.6%. This was better than management’s guidance of $1.57 billion (at the mid-point). Kayak accounted for more than $30 million in revenue.
Revenue by Channel
Priceline’s operating model has been changing over the last two years or so, with the merchant business gradually becoming a smaller part of its business. This is mainly because the agency business has been growing much faster than the merchant business.
While both segments grew in the last quarter, agency was again much stronger than merchant. The merchant business grew 9.8% sequentially and 5.3% from the year-ago level. The agency business on the other hand grew 38.3% and 37.9% from the previous and year-ago quarters, respectively. The merchant/agency mix went from 41%/59% in the Mar 2013 quarter to 35%/63% in the last quarter.
Other revenue was up 904.9% sequentially and up 846.1% from last year, benefiting from the Kayak acquisition.
Both hotel room nights and rental car days were up strongly. Room nights were up 9.8% sequentially and 38.2% year over year Rental car days were even stronger – up 26.3% and 45.3% from the previous and year-ago quarters, respectively. Airline tickets were flat however from both the previous and year-ago quarters.
Overall ADRs grew 1% on a local currency basis.
Priceline’s strong results indicate share gains in both domestic and international markets.
Bookings
Priceline’s overall bookings were up 10.5% sequentially and 38.0% year over year, just over the guided range. Foreign currency had a very limited impact on gross bookings in the last quarter.
Both international and domestic bookings contributed to the growth and continue to indicate better-than-expected growth trends. International was up 10.2% sequentially and 44.1% (hardly any currency impact) year over year (much better than guided). Domestic grew 12.3% sequentially and 11.7% over the prior year (again better than guided).
Despite the macro challenges in Europe, Priceline’s business has remained relatively steady, which we think is partly because of the lower-end inventory that management has built up. The Asia/Pacific business is gaining from both Booking.com, which deals with outsiders travelling to the region and Agoda, which largely deals with travelers within the region. 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.
Both merchant and agency bookings growth followed revenue growth patterns, indicating steady growth at current rates in the next quarter as well.
Operating Performance
Priceline reported a pro forma gross margin of 82.4%, up 324 basis points (bps) sequentially and up 668 bps year over year. Gross margins benefited from the very strong volume growth in the hotel and rental car businesses and steady ADRs in the hotels business. Ticket volume also did not decline, which is a positive. 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 34.3% sequentially and 37.8% from last year. Both international and domestic gross profits were up strong double-digits, although international was again much stronger than domestic. 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 jumped 69.6% sequentially to $576.0 million and stayed 23.5% higher than the year-ago level. The operating margin of 34.3% expanded 820 bps sequentially and shrank 88 bps from the year-ago quarter. While strong revenues helped the sequential comparison, high advertising costs (both online and TV) to promote the Priceline and Kayak businesses impacted the year-over-year comparison. The integration of Kayak costs (mainly personnel) also had an impact.
Priceline reported adjusted EBITDA of $621.3 million, up 25.5% from the year-ago quarter, better than management’s expectations of adjusted EBITDA in the $560-595 million range.
Net Income
The pro forma net income was $470.4 million, or 28.0% of revenue, compared to $290.9 million, or 22.3% in the previous quarter and $355.2 million, or 26.8% in the year-ago quarter. Our pro forma estimate excludes charges related to acquisition-related costs, amortization of intangibles and other charges and tax adjustments and includes stock based compensation of 67 cents a share in the last quarter.
Including these items and deducting amounts attributable to non-controlling interests, Priceline’s GAAP net income was $437.3 million or $8.39 a share, compared to $244.3 million, or $4.76 a share in the Mar 2013 quarter and $352.3 million, or $6.88 a share in the year-ago quarter.
Balance Sheet
Priceline ended with a cash and short term investments balance of $5.95 billion, up $763.5 million during the quarter. Priceline generated $593.4 million of cash from operations. It spent around $21.4 million on capex, $330.7 million on acquisitions and $346.9 million on share repurchases.
At quarter-end, Priceline had $1.76 billion in long-term debt and $532.2 million in short term debt, totaling $2.30 billion. The net cash position at quarter-end was $3.65 billion, down $61.4 million during the quarter. Days sales outstanding (DSOs) were around 35, up from 33 at the beginning of the quarter.
Guidance
For the third quarter, Priceline expects total gross bookings to grow 27-34% year over year (25-32% on local currency basis), with international growing 32-39% (up 30-37% on local currency basis) and domestic growing 5-10%. This is expected to yield a year-over-year revenue increase of 23-30% ($2.16 billion at the mid-point, slightly lower than the Zacks Consensus of $2.18 billion).
Priceline expects gross profit dollars to increase 32-39%, with the adjusted EBITDA at $990 million to $1.055 billion.
The pro forma EPS is expected to come in at $15-30-$16.30, based on a 16% tax rate and 53.3 million shares. The GAAP EPS is expected to be $13.75 to $14.75. Analysts were expecting pro forma earnings of $15.28 a share when the company reported earnings, within the guided range.
Conclusion
Priceline reported a very strong quarter, with both revenue and order growth coming in stronger than competitors’. The numbers seem to indicate that its aggressive TV ad campaigns are paying off, yielding possible share gains. Priceline’s decision to significantly increase inventory, especially in the lower-priced segment in Europe is also likely to have helped.
Priceline has also been steadily building position in 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 margins.
Since overall trends appear to be positive and management guidance is also encouraging, we expect positive revisions to estimates. Priceline shares currently carry a Zacks Rank #3 (Hold), similar to peer Expedia, but not nearly as good as Orbitz Worldwide (OWW), which has a Zacks Rank #2 (Buy).
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