Priceline.com 's PCLN third-quarter 2016 earnings and revenues not only came ahead of its guidance but also increased year over year.
Investors cheered the performance and for once rewarded management for the tradition of guiding conservatively. This was reflected in the 5.12% appreciation in the stock price in afterhours trading.
Both agency and merchant businesses showed strong momentum. Room nights grew much faster than in the recent past. Rental cars also performed impressively. The only point of weakness was airline tickets.
PRICELINE.COM Price, Consensus and EPS Surprise
Priceline reported revenues of $3.69 billion, up 44.4% sequentially and 18.9% from the year-ago quarter. Revenues beat the Zacks Consensus Estimate by 1.9% and were better than management's guidance of $3.55 billion at the mid-point.
Revenues by Channel
Priceline generates the bulk of its revenues from international markets where the agency model is more popular. This is reflected in the merchant/agency split of revenues, which was 17/78% in the third quarter (previous quarter split was (22/70%).
Merchant revenues were up 19.8% sequentially and 4% year over year. Agency revenues grew 56.1% sequentially and 23.3% year over year.
Advertising & Other revenue was down 4.1% sequentially but up 10.6% from last year. This is basically non inter-company revenues from Kayak and OpenTable. The restaurant reservation service that Priceline acquired some time back is rapidly building on the number of restaurants in North America and also expanding internationally.
Room nights, rental car days and airline ticket volumes grew a respective 6.3%, -2.8% and -5.3% sequentially and 29.4%, 12.5% and -2.5% from last year. Priceline's room night growth is attributable to its geographically diverse inventory and brand recognition that tends to balance out macro uncertainties related to any one market, as well as growing competition from local and international players. The company did however see average daily rates for accommodations or ADRs declining. Rentalcars.com also did quite well but there was some softness in ticket volumes.
Priceline's overall bookings were up 3.3% sequentially and 24.9% (26% in constant currency) year over year, better than guided.
Management stopped breaking up U.S. and international bookings this year but still provided some color on the respective gross profit contributions.
Merchant bookings were up 8.4% sequentially and 40.2% year over year. Agency bookings grew 2.5% sequentially and were up 22.6% from the year-ago levels.
Margins and Net Income
Priceline reported pro forma gross margin of 97.3%, up 218 basis points (bps) sequentially and 271 bps year over year.
Owing to the nature of its business and the mix of agency versus merchant revenues, management usually uses gross profit dollars rather than margin to gauge performance during any quarter. Priceline's gross profit dollars were up 47.7% sequentially and 22% (23% in constant currency) from last year, higher than the guidance. International gross profit grew 25% (26% on a constant currency basis). U.S. gross profit was flat year over year.
Priceline's adjusted operating income grew more than 100% sequentially and 19.7% from $775.44 million reported last year. Operating margin of 49.2% expanded 1886 bps sequentially and 30 bps from the year-ago quarter.
Priceline's GAAP net income was $506 million or $10.13 a share, compared with $508.6 million, or $11.60 a share in the June quarter and $1196.7 million, or $23.41 a share in the year-ago quarter.
Priceline ended the quarter with cash and short term investments balance of $4.38 billion, up $735.6 million during the quarter. Priceline generated $1.5 billion of cash from operations. It spent around $54 million on capex and $199 million on share repurchases.
At quarter-end, Priceline had $6.34 billion in long-term debt with the net debt position being $2.93 billion, down from a net debt position of $2.88 billion in the previous quarter.
Beginning with the fourth quarter of 2016, Priceline is changing its reporting for non-GAAP financial metrics. Adjusted EBITDA and non-GAAP net income will include cost of stock-based compensation. Also, the company will no longer reduce income tax expense for the impact of non-operating loss carry-forwards.
For the fourth quarter, Priceline expects room nights booked to grow 20-25% and total gross bookings to grow 16-21% year over year (17-22% on a constant currency basis).
Priceline expects gross profit dollars to increase 13-18% (14-19% on a constant currency basis), with adjusted EBITDA in a range of $755-795 billion.
Pro forma EPS is expected to come in at $12.20-$12.80, much lower than the Zacks Consensus Estimate of $12.98 at the midpoint. GAAP EPS is expected in a range of $11.40-$12.00 a share.
Zacks Rank & Key Picks
Priceline has a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader technology space are Acacia Communications, Inc. ACIA , Advanced Energy Industries, Inc. AEIS and Amkor Technology, Inc. AMKR , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Notably, the consensus estimate for Acacia's current year has been revised upward to $2.28 over the last seven days.
Similarly, the consensus estimate for Advanced Energy has been revised upward to $2.67 over the last seven days.
Lastly, the consensus estimate for Amkor has been revised upward to 53 cents over the last seven days.
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