Priceline's Earnings Strong, Outlook Weak - Analyst Blog

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Priceline.com's ( PCLN ) third-quarter earnings beat the Zacks Consensus by 69 cents, or 4.4%. Results were driven by very strong revenue growth, as Priceline appears to be gaining share in an extremely fast-growing market market.

Revenue

Priceline reported revenue of $2.27 billion in the quarter, representing a sequential increase of 35.1% and a year-over-year increase of 33.0%. This was better than management's guidance of $2.16 billion (at the mid-point). Kayak remained a major contributor (5 percentage points of inorganic growth) and is expected to remain so in the following quarters.

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 7.0% sequentially and -44.5% from the year-ago level. The agency business on the other hand grew 48.1% and 169.5% from the previous and year-ago quarters, respectively.  The merchant/agency mix went from 35%/63% in the June 2013 quarter to 27%/69% in the last quarter.

Other revenue was up 105.1% sequentially and up 2158.5% from last year, benefiting from the Kayak acquisition.

Both hotel room nights and rental car days grew double-digits from last year. Room nights were up 7.8% sequentially and 35.5% year over year. Rental car days dropped 4.0% sequentially following a very strong second quarter, staying 27.7% above the year-ago level.  Airline tickets were grew 5.9% from both the previous and year-ago quarters.

Overall ADRs for the consolidated group grew 1.8% on a local currency basis.

Priceline's strong results indicate share gains in both domestic and international markets. Both booking.com and Agoda did very well in the last quarter.

Bookings

Priceline's overall bookings were up 6.4% sequentially and 37.4% year over year, over the guided range. Foreign currency had a positive 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 7.0% sequentially and 41.8% (41% on a local currency basis) year over year (much better than guided). Domestic grew 3.1% sequentially and 16.7% over the prior year (again better than guided).

U.S. bookings were helped by strength across product lines and resurgence in the opaque business (because of Express Deals). Conditions in Europe continue to improve, which along with Priceline's lower-end inventory should help the company going forward.

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.

Agency bookings were again much stronger than merchant, indicating that the current business trend will continue.  

Operating Performance

Priceline reported a pro forma gross margin of 87.6%, up 527 basis points (bps) sequentially and up 578 bps year over year. The gross margin benefited from very strong volume growth and benefited particularly from a 35.5% increase in hotel room nights as well as the 1.8% increase in the ADR. Rental car days grew 27.7% while ticket volume grew 5.9%. 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 43.7% sequentially and 42.4% from last year. Both international and domestic gross profits were up strong double-digits, although domestic was higher than international after a long time. 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 profit. Higher volumes and a resurgent opaque business are helping the domestic profit. 

Priceline's operating income jumped 85.7% sequentially to $1.07 billion and stayed 40.1% higher than the year-ago level. The operating margin of 47.1% expanded 1,284 bps sequentially and 239 bps from the year-ago quarter. All expenses declined sequentially as a percentage of sales, but only S&M and COGS also declined from last year. The year-over-year comparison was hurt by the addition of Kayak costs (mainly personnel).  

Priceline reported adjusted EBITDA of $1.11 billion, up 42.6% from the year-ago quarter, better than management's expectations of adjusted EBITDA in the $990 million to $1.055 billion range.

Net Income

The pro forma net income was $865.1 million, or 38.1% of revenue, compared to $470.4 million, or 28.0% in the previous quarter and $624.3 million, or 36.6% in the year-ago quarter. Our pro forma estimate excludes charges related to amortization of intangibles and other charges and tax adjustments, and includes stock based compensation of 65 cents a share in the last quarter.

Including these items and deducting amounts attributable to non-controlling interests, Priceline's GAAP net income was $833.0 million or $15.72 a share, compared to $437.3 million, or $8.39 a share in the Jun 2013 quarter and $596.6 million, or $11.66 a share in the year-ago quarter.

Balance Sheet

Priceline ended with a cash and short term investments balance of $6.58 billion, up $638.5 million during the quarter. Priceline generated $970.5 million of cash from operations. It spent around $20.5 million on capex and $459.7 million on share repurchases.

At quarter-end, Priceline had $1.77 billion in long-term debt and $538.3 million in short term debt, totaling $2.31 billion. The net cash position at quarter-end was $4.28 billion, up $627.6 million during the quarter. Days sales outstanding (DSOs) were around 28, down from 35 at the beginning of the quarter.

Guidance

For the fourth quarter, Priceline expects total gross bookings to grow 27-34% year over year (26-33% on local currency basis), with international growing 29-36% (up 28-35% on local currency basis) and domestic growing 17-24%. This is expected to yield a year-over-year revenue increase of 19-26% ($1.46 billion at the mid-point, slightly lower than the Zacks Consensus of $1.52 billion).

Priceline expects gross profit dollars to increase 30-37%, with the adjusted EBITDA at $510 million to $540 million.

The pro forma EPS is expected to come in at $7.80-$8.30, based on a 15.5% tax rate and 52.9 million shares. The GAAP EPS is expected to be $6.40 to $6.90. Analysts were expecting pro forma earnings of $7.74 a share when the company reported earnings, well above the guided range.

Conclusion

Priceline reported a very strong quarter, with both revenue and order growth topping management expectations. The numbers seem to indicate that its aggressive TV ad campaigns are paying off, yielding 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.

Despite strong results, the disappointing guidance is likely to bring down estimates, which would keep the Zacks Rank at #3 (Hold). This is similar to peer Orbitz Worldwide ( OWW ), but not nearly as good as Expedia Inc ( EXPE ), which has a Zacks Rank #2 (Buy).



CTRIP.COM INTL (CTRP): Free Stock Analysis Report

EXPEDIA INC (EXPE): Free Stock Analysis Report

ORBITZ WORLDWID (OWW): Free Stock Analysis Report

PRICELINE.COM (PCLN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: CTRP , EXPE , OWW , PCLN

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