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Priceline Up on Solid Q4, Guidance Conservative as Usual - Analyst Blog

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Priceline.com ( PCLN ) reported strong results in the fourth quarter with both revenue and earnings beating the Zacks Consensus Estimate. Its share price soared 8.5% in response.

Unlike rival Expedia ( EXPE ), Priceline generates a much larger chunk of revenue internationally, so currency plays a greater role in its numbers. This also changes the business dynamics somewhat, since the agency model is more prevalent internationally.

Revenue

Priceline reported revenue of $1.84 billion in the quarter, down 35.1% sequentially and up 19.4% from the year-ago quarter. This was better than management's guidance of $1.76 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.

Seasonality impacted both merchant and agency revenue, which were down 22.0% 41.4%, respectively on a sequential basis. More significant was the year on year comparison, which saw merchant revenue down slightly but agency growing 23.1%. The merchant/agency mix went from 22%/74% in the September quarter to 26%/67% in the last quarter.

Other revenue was up 6.4% sequentially and 119.8% from last year.

Room nights, rental car days and airline tickets dropped a respective 17.5%, 22.5% and 15.0% sequentially but grew 23.9%, 15.8% and -5.6% from last year. Priceline also saw an increase in ADRs (up 1.5% on a local currency basis).

Bookings

Priceline's overall bookings were down 22.9% sequentially and up 16.7% year over year, better than guided. Bookings grew 23% on a local currency basis, according to management.

While international bookings continued to grow strong double-digits from the year-ago quarter, domestic bookings growth softened sharply yet again.

The sequential decline of 24.% in agency bookings was greater than the merchant bookings decline of 15.8%. But its 18.5% growth from last year trumped the 7.9% increase recorded for the merchant business.

Operating Performance

Priceline reported a pro forma gross margin of 91.0%, down 136 basis points (bps) sequentially on softer volume and up 491 bps year over year. The benefit from the OpenTable addition didn't repeat in the last quarter, also impacting the sequential comparison. 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 down 36.1% sequentially and up 26.2% from last year. International gross profit grew 24% (32% on a local currency basis).

Priceline's operating income dropped 53.9% sequentially while increasing 21.2% to $626.9 million. The operating margin of 34.1% contracted 1,382 bps sequentially and expanded 51 bps from the year-ago quarter. All expenses increased sequentially as a percentage of sales but the increases in personnel and online advertising of 576 bps and 250 bps, respectively were the most significant. All except COGS increased from last year.

Priceline reported adjusted EBITDA of $711.7 million, up 23.1% from the year-ago quarter, better than management's expectations of adjusted EBITDA in the $625-665 million range.

Net Income

The pro forma net income was $512.5 million, or 27.9% of revenue, compared to $1.10 billion, or 38.8% in the previous quarter and $427.8 million, or 27.8% in the year-ago quarter. Our pro forma estimate excludes charges related to amortization of intangibles, as well as other charges and tax adjustments, and includes stock based compensation in the last quarter.

Including these items, Priceline's GAAP net income was $451.8 million or $8.56 a share, compared to $1.06 billion, or $20.03 a share in the Sep 2014 quarter and $378.1 million, or $7.14 a share in the year-ago quarter.

Balance Sheet

Priceline ended with a cash and short term investments balance of $4.29 billion, down $1.95 billion during the quarter. Priceline generated $755.3 million of cash from operations. It spent around $40.8 million on capex, $2.50 billion on acquisitions and $504.9 million on share repurchases.

At quarter-end, Priceline had $3.85 billion in long-term debt and $37.2 million in short term debt, totaling $3.89 billion. The net cash position at quarter-end was $403.6 million, down from $2.31 billion at the beginning of the quarter. Days sales outstanding (DSOs) were around 32, up from 27 at the beginning of the quarter.

Guidance

For the first quarter, Priceline expects total gross bookings to grow 2-9% year over year (14-21% on a local currency basis), with international growing 3-10% (17-24% on a local currency basis) and domestic growing 0-5%. This is expected to yield a year-over-year revenue increase of 4-11% ($1.76 billion at the mid-point.

Priceline expects gross profit dollars to increase 9-16% (21-28% on a local currency basis), with the adjusted EBITDA at $475 million to $510 million.

The pro forma EPS is expected to come in at $7.20-$7.75, based on a 15% tax rate and 52.7 million shares. The GAAP EPS is expected to be $5.25 to $5.80. Analysts were expecting pro forma earnings of $8.21 a share when the company reported earnings, better than guided.

Conclusion

In typical style, Priceline reported a very strong quarter, with both revenue and earnings topping our expectations.

The results and guidance were impacted by currency, but bookings growth ex-currency was encouraging, reflecting the continued recovery in global travel spending.

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 acquisitions that could help growth in the future.

The company's international business continues to do very well, but there appear to be some issues in the domestic market. The OpenTable acquisition could help on this front. Online travel companies in general have been collaborating to generate additional revenue all over the world and Priceline is no different.

Priceline will continue investing in the business to push growth and especially, to continue its international expansion strategy. But management also expects to return value to shareholders: it has announced a new $3 billion share buyback program.

The company provided conservative guidance, which was again well below expectations.

Priceline shares currently carry a Zacks Rank #4 (Sell) similar to companies like Expedia and Ctrip International ( CTRP ).

Orbitz Worldwide ( OWW ) shares have soared recently because of Expedia's takeover offer, so there isn't much upside on those shares either. Makemytrip ( MMYT ) seems to be the only option for investors looking for exposure to the sector, since the shares carry a Zacks Rank #2 (Buy).

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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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