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.
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
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
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.
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
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
), China's leading online travel booking service are helping the
Agency bookings were again much stronger than merchant,
indicating that the current business trend will continue.
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
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
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.
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
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.
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
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.
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
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
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
), but not nearly as good as
), which has a Zacks Rank #2 (Buy).
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