) second quarter was quite good, with earnings beating the Zacks
Consensus by 51 cents (7.2%). However, investors were disappointed
with revenue growth, which was impacted by both currency and
continued slowdown in Europe.
Priceline reported revenue of $1.33 billion in the quarter,
representing a sequential increase of 27.9% and a year-over-year
increase of 20.3%. This was in line with management's guidance of
$1.33 billion (at the mid-point) and just short of consensus
Volumes were up sequentially across the business, with hotel
room nights, rental car days and airline tickets growing 9.4%,
24.6% and 6.3%, respectively. Room nights and rental car days were
up strong double-digits (39.1% and 30.3%, respectively) from last
year, although airline tickets were flat.
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 at more than three times the rate of
growth of the merchant business.
The merchant/agency revenue share in the last quarter was
42%/58%, with other revenues bringing in less than 1%. Merchant
revenue was up 11.0% sequentially and 3.9% year over year.
The agency business, on the other hand, was up 43.6%
sequentially and 35.6% from the year-ago quarter. Other revenue was
up 16.4% sequentially and 24.4% from last year.
Priceline's overall bookings were up 9.2% sequentially and 26.8%
year over year, at the low end of the guided range. Excluding the
impact of foreign currency, total bookings were up 36% from the
Both international and domestic bookings contributed to the
increase, but both were at the low end of guidance, indicating
softer-than-expected growth trends. International grew 9.2%
sequentially and 33.1% (44% excluding currency impact) year over
year. Domestic was up 9.3% sequentially and 5.3% over the prior
Booking.com did reasonably well in the last quarter given recent
inventory additions across North and South America. The significant
exposure to Europe affected results in the last quarter as
conditions in Europe, particularly the U.K. and Southern Europe,
continued to weaken (hurt by currency, macro). International ADRs
also suffered due to the growing business in the Asia/Pacific, as
well as weakness in Europe.
The Asia business is likely to grow further given recent
initiatives, such as the tie-up with
), China's leading online travel booking service. Domestic ADRs
increased in the last quarter. 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
Rental car bookings were very strong in the last quarter, driven
by strength in both the domestic and international businesses.
Capacity cuts and price hikes continued to impact the airline
ticket business. The opaque side of the business was hit by supply
Priceline reported a gross margin of 75.7%, up 402 basis points
(bps) sequentially and 774 bps year over year due to higher volumes
in the international business, helped by better pricing in the U.S.
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 35.1% sequentially and
34.0% from last year. While both the domestic and international
businesses contributed to the year-over-year growth, international
growth was much stronger at 40% (53% on a local currency basis),
with domestic growing 6%.
Priceline's operating income jumped 86.9% sequentially to $249.7
million helped by higher volumes. The operating margin of 35.2%,
grew 1,109 bps sequentially and 495 bps from the year-ago
While all expenses declined sequentially as a percentage of
sales, the most significant were cost of sales (down 402 bps),
online advertising (down 302 bps) and personnel (down 156 bps).
Cost of sales also declined significantly from last year, with
online advertising increasing significantly. Increases/decreases in
other segments were less significant.
Priceline reported adjusted EBITDA of $494.8 million, up 41.8%
from the year-ago quarter, better than management's expectations of
pro forma EBITDA in the $450-470 million range.
The pro forma net income was $387.3 million, or 29.2% of
revenue, compared to $204.2 million, or 19.7% in the previous
quarter and $269.4 million, or 24.4% 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 34 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
Including these items and after deducting amounts attributable
to non-controlling interests, Priceline's GAAP net income was
$352.3 million or $6.88 a share, compared to $181.7 million, or
$3.54 a share in the March 2012 quarter and $256.4 million, or
$5.02 a share in the year-ago quarter.
Priceline ended with a cash and short term investments balance
of $3.94 billion, up $323.6 million during the quarter. Priceline
generated $431.6 million of cash from operations, significantly
higher than the March quarter. It spent around $14.7 million on
capex and a very small amount on share repurchases.
At quarter-end, Priceline had $937.8 million in long-term debt
and $508.8 million in short term debt, totaling $1.45 billion. The
net cash position at quarter-end was $2.50 billion, up slightly
during the quarter. Days sales outstanding (DSOs) were around 29,
consistent with the prior quarter.
For the third quarter, Priceline expects total gross bookings to
grow 10-18% year over year, with international growing 12-20% (up
23-31% on local currency basis) and domestic growing around 5%.
This is expected to yield a year-over-year revenue increase of
9-15% ($1.63 billion at the mid-point).
Priceline expects gross profit dollars to increase 15-25% on a
non-GAAP basis. The adjusted EBITDA is expected to be $690-765
The pro forma EPS is expected to come in at $11.10-$12.10, based
on a 16.4% tax rate and 51.5 million shares. The GAAP EPS is
expected to be $10.21 to $11.21. Analysts were expecting pro forma
earnings of $12.28 when the company reported earnings, well above
the guided range.
Priceline's second quarter results were not bad considering the
condition of the global economy, particularly Europe and the fact
that it derives a significant chunk of revenue from leisure travel,
which is discretionary spending. The guidance was below the
consensus, but this was only to be expected, since markets have
been deteriorating for some time and competitors, such as
) have also reported weakening trends.
Priceline is likely to be worse affected because of its
significant exposure to Europe. Therefore, its focus on Asia and
recent success in the region are encouraging. We think this could
help the company get through these trying times.
Yes, the hotel business will benefit from recent additions to
inventory, but we need to bear in mind that this will be at lower
margins (significant ADR pressure internationally, offset by
improving ADR in the domestic business which we think is because of
a higher mix of corporate versus personal bookings). Add to this
the possibility of increasing cancellations, which naturally occur
in times of uncertain demand.
Nevertheless, Priceline will continue investing in the business
to push growth and especially to continue its international
expansion strategy. This is likely to exert some downward pressure
We therefore think that some caution regarding the shares is
warranted at this point. The Zacks Rank on Priceline shares is
currently #3 (Hold in the next 1-3 months). We are also Neutral on
a long-term basis.
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