Priceline.com Inc (PCLN) reported strong revenues in the first quarter. However, the company’s earnings including stock based compensation and excluding other items missed the Zacks Consensus by 12 cents, or 5.0%, due to rising costs. Shares dipped slightly after the earnings announcement, but are already stabilizing.
Revenue
Priceline reported revenue of $809.3 million in the quarter, representing sequential and year-over-year increases of 10.7% and 38.5%. This was much better than management’s guidance of $768 million (at the mid-point).
Volumes across all product lines were up both sequentially and year over year. Specifically, hotel room nights, rental car days and airline tickets jumped 41.8%, 25.6% and 23.1%, respectively from the seasonally softer fourth quarter.
Compared to the year-ago quarter, revenues were up 55.7%, 64.1% and 4.0% 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 agency business has been growing very rapidly in the recent past, even contributing an equal share in some quarters.
The merchant/agency revenue share in the last quarter was 56%/43%, with other revenues bringing in less than 1%. Merchant revenue was up 19.0% sequentially and 23.5% year over year.
The agency business grew 1.6% and 64.8%, respectively, from the previous and year-ago quarters. Other revenue was down 4.6% sequentially, although it was up 7.2% from last year.
Bookings
Priceline’s overall bookings increased 42.9% sequentially and 57.4% year over year. The sequential strength in international bookings was stronger than in domestic bookings. Specifically, domestic bookings grew 25.2% and 14.1% from the previous and year-ago quarters, while international grew 49.6% and 79.0%.
Excluding the impact of foreign currency, international bookings were up 78% from the year-ago quarter. Growth rates in both domestic and international bookings exceeded the guidance provided by Priceline. Management stated that this strength was due to strong performance across product lines and markets.
Hotel room nights were very strong in the last quarter, as Booking.com gained traction. Booking.com has been increasing hotel inventories across North and South America, as well as Asia, and Priceline stated that all these areas were scaling up, resulting in the last quarter.
Priceline’s average daily rates (ADRs) also compared favorably with the year-ago quarter, increasing around 4% for the international business and 7% for the domestic business.
Management stated that TravelJigsaw was very strong in the last quarter, contributing to the solid unit growth in rental cars. The strength may be expected to continue, as Priceline enters the strong summer season. TravelJigsaw is currently building inventory to meet this demand.
Airline tickets, which has been the weakest product line in the recent past, had a very strong quarter, helped by the non availability of tickets from American Airlines – a subsidiary of AMR Corp (AMR) on both Expedia Inc (EXPE) and Orbitz Worldwide (OWW).
The last quarter’s performance was fueled by strength across retail and opaque channels, as well as stronger ADRs.
Operating Performance
Priceline reported a gross margin of 62.5%, down 316 basis points (bps) sequentially and up 789 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 5.3% sequentially and increased 58.5% from last year. While both the domestic and international businesses contributed to the year-over-year growth, international growth was much stronger at 81%, with domestic growing 13%.
Priceline’s operating expenses were up 22.9% sequentially to $162.3 million. The operating margin was 20.1%, down 739 bps sequentially and up 402 bps from the year-ago quarter. All except personnel expenses were up sequentially as a percentage of sales due to higher volumes. Personnel expenses declined. Most expenses increased from the year-ago quarter, although the most significant increase was in online advertising.
Priceline reported adjusted EBITDA of $173.5 million, up 55.3% from the year-ago quarter, much better than management’s expectations of pro forma EBITDA in the $147-157 million range.
Net Income
Pro forma net income was $116.7 million, or 14.4% of revenue, compared to $150.9 million, or 20.6% in the previous quarter and $64.3 million, or 11.0% 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 27 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 $104.8 million or $2.05 a share, compared to $135.7 million, or $2.66 a share in the December 2010 quarter and $53.9 million, or $1.06 a share in the year-ago quarter.
Balance Sheet
Priceline ended with a cash and short term investments balance of $1.75 billion, up $83.4 million during the quarter. Priceline generated $276.2 million of cash from operations. It spent around $8.3 million on capex, $66.2 million on acquisitions and around $157.3 million on share repurchases.
At quarter-end, Priceline had $93.6 million in long term debt and $481.6 million in short term debt, totaling $571.2 million (up $98.8 million during the quarter). The net cash position at quarter-end was $1.17 billion, down $15.4 billion during the quarter. Days sales outstanding (DSOs) were around 25, up from 20 at the end of the December 2010 quarter.
Guidance
For the second quarter, Priceline expects total gross bookings to grow 53-58% year over year, with international growing 76-81% (up 53-58% on local currency basis) and domestic growing 8-13%. This is expected to yield a year-over-year revenue increase of 36-41% ($1.06 billion at the mid-point). Priceline also expects a gross profit dollar increase of 57-62%.
Total advertising spend is expected to be $233-243 million, of which roughly $10 million will be spent on offline advertising. Sales and marketing expense is expected to be $36-41 million, personnel expenses (excluding stock based compensation) of $75-80 million, general and administrative expenses $26-30 million, information technology expenses $8 million and depreciation and amortization charges $5 million. The pro forma EBITDA is expected to be $310-320 million.
Priceline expects the pro forma EPS to come in at $4.70-$4.90, with the GAAP EPS at $4.03 to $4.23. Analysts were expecting pro forma earnings of $3.92, well below the guided range.
Conclusio
Analysts have been raising estimates over the past 7 days, which has had a positive impact on the Zacks Rank (currently #1, signifying a short-term Strong Buy recommendation). We would caution investors about rising costs however, which are likely to lower margins in 2011.
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