Priceline.com’s (PCLN) fourth-quarter earnings beat the Zacks Consensus by 42 cents, or 5.5%.
Revenue
Priceline reported revenue of $1.54 billion in the quarter, seasonally down 32.1% on a sequential basis, but up 29.4% from the year-ago quarter. This was better than management’s guidance of $1.46 billion (at the mid-point). Kayak remained a major contributor.
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.
Both segments declined sequentially, with agency down 36.6% and merchant down 22.4%. They were up 39.8% and 2.0%, respectively from the year-ago quarter. The merchant/agency mix went from 27%/69% in the Sep 2013 quarter to 31%/65% in the last quarter.
Other revenue was down 17.8% sequentially and up 1749.5% from last year, benefiting from the Kayak acquisition.
Both hotel room nights and rental car days grew double-digits from last year. Room nights were down 15.6% sequentially and up 36.6% year over year. Rental car days dropped 20.8% sequentially, staying 31.9% above the year-ago level. Airline tickets were flat sequentially and up 28.6% from the year-ago quarters.
Overall ADRs for the consolidated group grew around 2% on a local currency basis.
Bookings
Priceline’s overall bookings were down 15.1% sequentially and up 38.8% year over year, over the guided range. Foreign currency had a slightly positive impact on gross bookings in the last quarter.
Both international and domestic bookings contributed to the growth from the year-ago quarter and continue to indicate better-than-expected growth trends. International was down 15.5% sequentially and up 41.2% (42% on a local currency basis) year over year (much better than guided). Domestic was down 13.1% sequentially and up 26.5% over the prior year (again better than guided).
U.S. bookings were helped by the Priceline.com brand that led to strength across product lines and Express Deals. Better execution on mobile and Kayak advertising revenue also helped. International bookings were driven by growing inventories and successful sales efforts that led to high conversion rates.
Agency bookings were again much stronger than merchant, indicating that the current business trend will continue.
Operating Performance
Priceline reported a pro forma gross margin of 86.1%, down 152 basis points (bps) sequentially and up 582 bps year over year. The sequential comparison was hurt by seasonally lower volumes. Most of the expansion from the year-ago quarter was attributable to the addition of Kayak. 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 up 33.3% sequentially and 38.8% from last year. Both international and domestic gross profits were up strong double-digits, although domestic growth was higher than international. The rapid growth in Asia and Latin America where ADRs are low and margins respond strongly to higher volumes is the main reason for the expansion of the international gross profit. Higher volumes and a resurgent opaque business are helping the domestic profit.
Priceline’s operating income slumped 51.6% sequentially to $517.3 million but the more important thing is, this was 29.8% above year-ago levels. The operating margin of 33.6% shrank 1,356 bps sequentially and expanded 9 bps from the year-ago quarter. All expenses grew sequentially as a percentage of sales, but only S&M and cost of sales declined from last year.
Priceline reported adjusted EBITDA of $578.1 million, down 47.9% from the year-ago quarter, better than management’s expectations of adjusted EBITDA in the $510-540 million range.
Net Income
The pro forma net income was $427.8 million, or 27.8% of revenue, compared to $865.1 million, or 38.1% in the previous quarter and $329.6 million, or 27.7% in the year-ago quarter. Our pro forma estimate excludes charges related to amortization of intangibles, other charges and tax adjustments, and includes stock based compensation of 94 cents a share in the last quarter.
Including these items, Priceline’s GAAP net income was $378.1 million or $7.14 a share, compared to $833.0 million, or $15.72 a share in the Sep 2013 quarter and $288.7 million, or $5.63 a share in the year-ago quarter.
Balance Sheet
Priceline ended with a cash and short term investments balance of $6.75 billion, up $169.1 million during the quarter. Priceline generated $554.5 million of cash from operations. It spent around $27.5 million on capex and a small amount on share repurchases.
At quarter-end, Priceline had $1.75 billion in long-term debt and $151.9 million in short term debt, totaling $1.90 billion. The net cash position at quarter-end was $4.85 billion, up $600 million during the quarter. Days sales outstanding (DSOs) were around 31, up from 28 at the beginning of the quarter.
Guidance
For the fourth quarter, Priceline expects total gross bookings to grow 23-33% year over year (on both U.S. dollar and local currency basis), with international growing 25-35% (same rate on local currency basis) and domestic growing 15-20%. This is expected to yield a year-over-year revenue increase of 15-25% ($1.56 billion at the mid-point, slightly lower than the Zacks Consensus of $1.67 billion).
Priceline expects gross profit dollars to increase 22-32%, with the adjusted EBITDA at $420 million to $450 million.
The pro forma EPS is expected to come in at $6.35-$6.85, based on a 15% tax rate and 53.3 million shares. The GAAP EPS is expected to be $5.02 to $5.52. Analysts were expecting pro forma earnings of $6.61 a share when the company reported earnings, well above the guided range.
Conclusion
Priceline reported a very strong quarter, with both revenue and order growth topping management expectations. The numbers seem to indicate that its aggressive TV ad campaigns are paying off, yielding share gains. Priceline’s decision to significantly increase inventory, especially in the lower-priced segment in Europe is also likely to have helped.
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.
Considering economic conditions all over the world and the fact that Priceline derives a significant chunk of revenue from leisure travel, building a global presence that could balance out macro effects in different geographies seems like a good plan.
Priceline will continue investing in the business (look for continued uptrend in advertising) to push growth and especially to continue its international expansion strategy. This is likely to exert some downward pressure on margins.
The company has started providing conservative guidance, which has been well below expectations, but has come back to beat those expectations very strongly. This may be a good plan to keep shares buoyant. Execution certainly doesn’t seem to be a problem.
Priceline shares currently carry a Zacks Rank #2 (Buy), while peers Expedia (EXPE), Orbitz Worldwide (OWW) and Chinese travel booking company Ctrip International (CTRP) all carry a Zacks Rank #3 (Hold).
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