Priceline.com Inc (PCLN) beat the Zacks Consensus in the last quarter, coming in 32 cents, or 3.5% higher. Shares jumped $13.48 (2.65%) in after-hours trading, more than making up for the 85-cent decline during the day.
The results are a reflection of a recovery in demand, especially for hotel and rental car bookings.
Revenue
Priceline reported revenue of $1.45 billion in the quarter, representing sequential and year-over-year increases of 31.7% and 45.0%. This was better than management’s guidance of $1.40 billion (at the mid-point) and consensus expectations of $1.42 billion.
Hotel room night and rental car units were strong, although ticket volumes slipped, similar to Expedia Inc (EXPE), which also saw softness in air ticket sales. Specifically, hotel room nights, rental car days and airline tickets grew 12.5%, 6.1% and -5.9%, respectively from the second quarter.
Compared to the year-ago quarter, volumes were up 47.6%, 37.3% and 6.7% in the hotel room, rental car and airline ticket product lines, respectively.
Revenue by Channel
Historically, Priceline’s merchant business has generated the largest chunk of revenue. However, the trend appears to be reversing, with the agency business growing very rapidly in the recent past, contributing an equal share in some quarters and a greater share in the last two. The merchant/agency revenue share in the last quarter was 39%/60%, with other revenues bringing in less than 1%. Merchant revenue was up 8.0% sequentially and 15.9% year over year. The agency business on the other hand grew 54.0% and 73.9%, respectively, from the previous and year-ago quarters. Other revenue was down 1.1% sequentially and 9.2% from last year.
Bookings
Priceline’s overall bookings increased 8.3% sequentially and 56.2% year over year. International was again stronger than domestic in both the previous and year-ago comparisons. Specifically, domestic bookings grew -3.1% and 13.1% from the previous and year-ago quarters, while international grew 11.6% and 72.9%. Excluding the impact of foreign currency, international bookings were up 61% from the year-ago quarter. Management stated that Priceline picked up market share in both the U.S. and internationally, with booking.com, Agoda and TravelJigsaw all contributing.
While the growth in domestic bookings was at the high end of the guided range, international bookings continued to exceed by a significant margin. Management also stated that international hotel room night volumes declined in the last quarter, but less than expected, although rental car (TravelJigsaw) volumes increased.
Booking.com has been increasing hotel inventories across North and South America, as well as Asia, and Priceline’s business in these areas are scaling up. However, the Thailand floods will impact Agoda revenue in the next quarter. Priceline’s average daily rates (ADRs) were up worldwide and compared favorably with the year-ago quarter. ADRs increased around 2% for the international business (on a local currency basis) and 6% for the domestic business.
Airline ticket bookings grew 8% from a year ago, as airlines continued to utilize the Name Your Own Price model to push through the higher prices. Gross bookings gained from the higher prices.
Operating Performance
Priceline reported a gross margin of 75.7%, up 778 basis points (bps) sequentially and 902 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. Priceline’s gross profit dollars increased 46.8% sequentially and 64.6% from last year. While both the domestic and international businesses contributed to the year-over-year growth, international growth was much stronger at 80% (68% on a local currency basis), with domestic growing 8%.
Priceline’s operating income was up 87.5% sequentially to $624.6 million. The operating margin was 43.0%, up 1,278 bps sequentially and 859 bps from the year-ago quarter. All expenses were down sequentially as a percentage of sales due to higher volumes. However, online advertising expenses as a percentage of sales increased 203 bps compared to the year-ago quarter, G&A increased 34 bps, while all other expenses declined. The stronger gross margin was the main reason for both the sequential and year-over-year expansion in the operating margin.
Priceline reported adjusted EBITDA of $644.5 million, up 77.8% from the year-ago quarter, better than management’s expectations of pro forma EBITDA in the $595-615 million range.
Net Income
Pro forma net income was $478.2 million, or 32.9% of revenue, compared to $276.4 million, or 25.1% in the previous quarter and $235.1 million, or 23.5% in the year-ago quarter. Our pro forma estimate excludes amortization of intangibles and other items on a tax adjusted basis and includes stock based compensation of 26 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 $469.5 million or $9.17 a share, compared to $256.4 million, or $5.02 a share in the June 2011 quarter and $223.0 million, or $4.41 a share in the year-ago quarter.
Balance Sheet
Priceline ended with a cash and short term investments balance of $2.40 billion, up $455.2 million during the quarter. Priceline generated $560.5 million of cash from operations, nearly double the amount generated in the last quarter. It spent around $11.7 million on capex and $3.7 million on share repurchases. At quarter-end, Priceline had $82.8 million in long term debt and $492.2 million in short term debt, totaling $575.0 million (down slightly during the quarter). The net cash position at quarter-end was $1.83 billion, up $46 million during the quarter. Days sales outstanding (DSOs) were around 22, up from 27 at the end of the June 2011 quarter.
Guidance
For the fourth quarter, Priceline expects total gross bookings to grow 39-44% year over year, with international growing 50-55% (up 49-54% on local currency basis) and domestic growing around 13%. This is expected to yield a year-over-year revenue increase of 27-32% ($947 million at the mid-point).
Priceline expects both gross and operating profit dollars to increase of 42-47% on a non GAAP basis. The pro forma EBITDA is expected to be $310-330 million.
The pro forma EPS is expected to come in at $4.90-$5.00, based on a 19% tax rate and 51.5 million shares. The GAAP EPS is expected to be $4.23 to $4.33. Analysts were expecting pro forma earnings of $4.86 when the company reported earnings, well below the guided range.
Conclusion
Priceline reported a solid quarter and guidance was also much better than expected. The company clearly benefited from the ongoing recovery in online travel bookings.
Priceline’s current growth is the result of strategic additions to its hotel inventory, which has helped drive volumes in that segment. As ADRs also picked up due to stronger demand, the company was able to generate very strong results in the hotel business. Additionally, the TravelJigsaw acquisition has proved extremely beneficial, with Priceline seeing solid growth in rental cars. The only negative at this time in fact is with respect to the air ticket business, where escalating air ticket prices are having a slightly negative impact on volumes (in line with trends across the industry). Of course, we are also a shade cautious about the floods in Thailand, which could negatively impact its business in the region.
Priceline shares currently have a Zacks Rank of #3, which implies a Hold rating in the short term (1-3 months).
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