3Q Results Boost Priceline Shares - Analyst Blog

Priceline.com Inc's (PCLN) third quarter earnings -- including stock based compensation and excluding other items -- missed the Zacks Consensus by 11 cents. However, excluding stock based compensation, earnings easily beat our expectations and management guidance.

Priceline's estimates for the quarter edged up a couple of cents in the 30 days leading up to the earnings announcement, reflecting the higher expectations attached to the online travel industry.

Priceline's results in the quarter were driven by better-than expected revenue, which was the result of very strong growth across the Asia/Pacific, Europe and North America regions. All product lines except air tickets contributed to the growth. Priceline's booking.com and Agoda did particularly well in the last quarter.

As a result, Priceline shares were up 6.03% in after-market trading.

Revenue

Priceline reported revenue of $1.00 billion in the quarter, representing sequential and year-over-year increases of 30.5% and 37.1%, respectively. This exceeded the Zacks Consensus estimate by 3.4% and was better than management's expectations of a 29-34% increase from last year.

On a sequential basis, Priceline saw good volume growth, with hotel room nights growing 18.5%, rental car days growing 19.4% and airline tickets declining 7.1%. The decline in ticket revenue was on account of higher airfares and capacity reductions.

The year-over-year revenue increase was attributable to both hotel room nights and rental car days, which were up 53.9% and 95.9%, respectively from the September 2009 quarter. TravelJigsaw was partly responsible for the increase in rental car days.

Average daily rates (ADRs) compared favorably with the year-ago quarter, increasing over 4% for the international business and over 5% for the domestic businesses. Airline tickets (down 2.8%) was the only product line that disappointed.

Revenue by Channel

Historically, the merchant business has generated the largest chunk of revenue. However, the agency business has been growing very rapidly over the last few quarters to an almost equal share of total revenue.

The merchant/agency revenue share in the last quarter was 49%/50%, with other revenues bringing in the remaining 1%. Merchant revenue grew 10.7% sequentially and 23.5% year over year. The agency business grew 58.7% sequentially and 55.9% from the year-ago quarter. Other revenue was flattish sequentially, but down 54.3% from last year.

Bookings

Overall bookings were up 17.5% sequentially and 47.1% year over year. The sequential growth was entirely on account of Priceline's international business, partially offset by the small decline in domestic. However, growth from the year-ago quarter was attributable to both domestic and international demand, although international looks to be the stronger of the two by far.

Specifically, Priceline's international bookings increased 27.9% sequentially and 67.3% year over year. Excluding the impact of foreign currency, international bookings were up 78% from the year-ago quarter.

The strength in international was due to geographic expansion, increase in hotel supply, increased penetration in new markets, inclusion of Agoda (fifth straight quarter of triple-digit year-over-year increase in gross bookings) and a full quarter of TravelJigsaw's results, as well as the higher average daily rates.

Priceline's Domestic bookings declined 2.8% sequentially, but were up 12.2% year over year. The increase in the domestic business was fueled by stronger results in Priceline's hotel and opaque rental car categories. Higher hotel inventories (including promotional inventories) contributed to the strength in the hotel business.

Operating Performance

Priceline reported a gross margin of 66.5%, up 836 basis points (bps) sequentially and 710 bps from the year-ago quarter. 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. Gross profit dollars increased strong double-digits both sequentially and when compared with the year-ago quarter.

While both the domestic and international businesses contributed to this growth, international growth was much stronger at 67.6% (80% excluding the impact of currency) over the year-ago quarter. Domestic gross profit dollars grew 15.7%.

Priceline's operating expenses were up 21.2% sequentially to $321.6 million. The operating margin was 34.4%, up 1,083 bps sequentially and 554 bps from the year-ago quarter. All expenses declined sequentially as a percentage of sales, although cost of sales and G&A were down more significantly than the others. All expenses except online advertising and G&A also declined as a percentage of sales from the year-ago quarter.

Priceline reported adjusted pro forma EBITDA of $362.5 million, up 61.4% from the year-ago quarter and much better than management's expectations of pro forma EBITDA in the $$327-337 million range.

Net Income

Pro forma net income was $235.1 million, or 23.5% of revenue, compared to $125.5 million, or 16.4% in the previous quarter and $146.1 million, or 20.0% in the year-ago quarter.

Our pro forma estimate excludes amortization of intangibles, loss on extinguishment of debt and other gains and charges on a tax adjusted basis. Our pro forma net income calculation includes stock based compensation of 42 cents a share. Our pro forma calculation may differ from Priceline's presentation due to the inclusion/exclusion of some items that were not considered by management.

Including these items, Priceline's GAAP net income was $223.0 million or $4.41 a share, compared to $115.0 million, or $2.26 a share in the June 2010 quarter and $319.0 million, or $6.42 a share in the year-ago quarter. The year-ago quarter included a one-time tax gain that led to strong GAAP profits.

Balance Sheet

Priceline ended with a cash and short-term investments balance of $1.48 billion, up $254.9 million during the quarter. Priceline generated $305.4 million of cash from operations. It spent around $4.2 million on capex and around $23K on share repurchases.

At quarter-end, Priceline had $471.2 million in long and short term debt, down $44.8 million during the quarter. The net cash position at quarter-end was $1.00 billion. Days sales outstanding (DSOs) were around 23, down from 25 at the end of the June 2010 quarter.

Guidance

For the fourth quarter, Priceline expects total gross bookings to grow 36-41% year over year, with international growing 54-59% (up 58-63% on local currency basis) and domestic growing 5-10%. This is expected to yield year-over-year revenue increase of 31-36% and a gross profit dollar increase of 49-54%.

Total advertising spend is expected to be $141-146 million, of which roughly $6 million will be spent on offline advertising. Sales and marketing expense is expected to be $29-32 million, personnel expenses (excluding stock based compensation) of $60.5-63.5 million, general and administrative expenses of $21-24 million, information technology expenses $7 million and depreciation and amortization charges excluding acquisition amortization $5 million. Pro forma EBITDA is expected to be $200-210 million, pro forma EPS to be $2.91-$3.06 (based on 51.4 million shares) and GAAP EPS $2.29 to $2.44.

Priceline has a Zacks #2 Rank, implying a short term Buy recommendation.

 
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