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Priceline Beats On Top And Bottom, Guidance Disappoints

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Priceline.comPCLN honestly did nothing wrong or unexpected yesterday, as the company managed to beat the Zacks Consensus Estimate on both the top and bottom lines. But the market somehow turned inexplicably negative, sending the shares crashing.

Okay, Q4 guidance could have been stronger: management expects revenues of $1.92 billion at the mid-point while the analysts polled by Zacks are expecting $2.06 billion. But the bottom line is also important, and here management guidance of $11.50 at the mid-point far exceeds the Zacks Consensus of $11.17 a share.

So the company is exposed to FX, which travel company is not? And it also has exposure to China, giving people something to worry about because of the deceleration in Chinese GDP. The company's hotel inventories in the country are also on the rise and it has investments in Ctrip CTRP , which is one of the leading travel players in the country. China travel is on the rise despite the GDP concern, and Priceline is gradually building position.

Plus management usually offers conservative guidance, so investors probably have nothing to worry about.

Investors also appear to have forgotten that Priceline has signed on to TripAdvisor's TRIP Instant Booking platform, even as Expedia EXPE maintained distance. The benefits of that alliance will kick in next year, with test runs starting as we speak. Priceline also uses meta search from Kayak, which it owns, further expanding distribution. Hopefully this will help it build position in the domestic business, which is a bit of a concern given Expedia's strength and the ongoing consolidation in the market.

So with that, let's dive into the numbers-

Revenue

Priceline reported revenue of $3.10 billion in the quarter, up 36.1% sequentially and 9.4% from the year-ago quarter. This was in line with management's guidance of $2.96 billion (at the mid-point).

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. This is mainly because the agency business has been growing much faster.

The merchant business did better than agency on a sequential basis, as may be expected given its predominance in certain international markets. Since these markets were also impacted by currency, the segment's 8.7% growth from the year-ago quarter was encouraging. The merchant/agency mix went from 24%/69% in the June quarter to 19%/76% in the last quarter.

Advertising & Other revenue was up 5.6% sequentially and 30.3% from last year, accounting for the balance.

Room nights, rental car days and airline ticket volumes grew a respective 2.2%, -7.0% and -4.8% sequentially and 21.9%, 12.7% and 0.0% from last year. Priceline also saw a slight increase in ADRs (up less than 2% on a constant currency basis).

Bookings

Priceline's overall bookings were down 1.2% sequentially and up 6.9% year over year, better than guided. Bookings grew 22% year over year ex-FX, according to management.

Both international and U.S. bookings suffered in the last quarter. International bookings growth decelerated sharply while domestic bookings declined 2.5% compared to a 9.9% increase in the year-ago quarter. International bookings grew 8.3% from last year (25% on a currency neutral basis). This seems to indicate that all its advertising and brand building efforts in the domestic market have not yet yielded results.

Merchant bookings were very weak in the last quarter, declining 7.9% sequentially and 3.7% from last year. Agency fared better (flat sequentially and up 8.7% year over year).

Operating Performance

Priceline reported a pro forma gross margin of 94.5%, up 277 basis points (bps) sequentially and 218 bps year over year.

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 grew 40.2% sequentially and 12.0% (29% in constant currency) from last year. International gross profit grew 11% (29% on a constant currency basis).

Priceline's operating income grew 110.4% sequentially and 22.0% from the $1.36 billion reported last year. The operating margin of 48.9% expanded 1,728 bps sequentially and 101 bps from the year-ago quarter. All expenses declined sequentially as a percentage of sales in the seasonally strong quarter, with online advertising and personnel expenses seeing the greatest increase from last year.

Priceline reported adjusted EBITDA of $1.597 billion, up 11.7% from the year-ago quarter, better than management's expectations of adjusted EBITDA in the $1.425-1.525 billion range.

Net Income

Priceline.com Inc. - Earnings Surprise | FindTheBest

The pro forma net income was $1.25 billion, or 40.2% of revenue, compared to $592.8 million, or 26.0% in the previous quarter and $1.14 billion, or 40.1% in the year-ago quarter. Our pro forma estimate excludes amortization of intangibles and other charges as well as tax adjustments, and includes stock based compensation in the last quarter.

Including these items, Priceline's GAAP net income was $1.20 billion or $23.41 a share, compared to $517.0 million, or $9.94 a share in the June quarter and $1.06 billion, or $20.03 a share in the year-ago quarter.

Balance Sheet

Priceline ended with a cash and short term investments balance of $3.05 billion, down $135.2 million during the quarter. Priceline generated $1.31 billion of cash from operations. It spent around $42.3 million on capex, $89.7 million on acquisitions and $1.28 billion on share repurchases.

At quarter-end, Priceline had $5.42 billion in long-term debt with the net debt position at being $2.37 billion, up from a net debt position of $2.21 billion at the beginning of the quarter. Days sales outstanding (DSOs) were around 26, down from over 35 at the beginning of the quarter.

Guidance

For the third quarter, Priceline expects total gross bookings to grow 1-8% year over year (113-20% on a local currency basis), with international growing 3-10% (17-24% on a local currency basis) and U.S. growing 5-10%. This is expected to yield a year-over-year revenue increase of 1-8% ($1.92 billion at the mid-point), or below the $2.06 billion analysts polled by Zacks were expecting.

Priceline expects gross profit dollars to increase 3-10% (14-21% on a constant currency basis), with the adjusted EBITDA at $710 million to $760 million.

The pro forma EPS is expected to come in at $11.10-$11.90, based on a 17% tax rate and 50.9 million shares. The GAAP EPS is expected to be $9.10 to $9.90. Analysts were expecting pro forma earnings of $11.17 a share when the company reported earnings, so the mid-point of the guidance is higher.

Recommendation

Priceline shares currently carry a Zacks Rank #3 (Hold), so better to grab smaller players like Ctrip or Travelport (TVPT), which carry Zacks Ranks of #1 and #2 instead.

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EXPEDIA INC (EXPE): Free Stock Analysis Report

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CTRIP.COM INTL (CTRP): 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 Nasdaq, Inc.


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

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