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Despite solid revenue growth, Priceline.com Inc (PCLN - Analyst Report) missed the Zacks Consensus by 20 cents, as higher stock based compensation and a higher tax rate impacted results. However, the solid guidance drove share prices up 6.57% in after-hours trading.
Priceline reported revenue of $990.7 million in the quarter, representing a sequential decline of 31.8% and a year-over-year increase of 35.5%. This was better than management’s guidance of $947 million (at the mid-point) and consensus expectations of $967.9 million.
Volumes were impacted across the business, with hotel room nights, rental car days and airline tickets all declining double-digits on a sequential basis, although they were up from last year. Ticket volumes were again softer than the other two, similar to Expedia Inc (EXPE - Analyst Report), which also saw softness in the area.
Specifically, hotel room nights, rental car days and airline tickets were down 17.2%, 24.3% and 12.5%, respectively from the third quarter and up 52.7%, 35.9% and 7.7%, respectively from a year ago.
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 some.
The merchant/agency revenue share in the last quarter was 45%/55%, with other revenues bringing in less than 1%. Merchant revenue down 22.2% sequentially and up 16.6% year over year. The agency business on the other hand dropped 38.2% sequentially, while increasing 56.7%, from the year-ago quarter. Other revenue was down 4.0% sequentially and 12.1% from last year.
Priceline’s overall bookings declined 20.8% sequentially, but jumped 51.8% year over year. Both international and domestic bookings exceeded the guided numbers. International was up 65.6% over the prior year, despite the 21.6% sequential decline.
The domestic business too showed sequential softness (down 17.7%) and increased 15.7% year over year. Excluding the impact of foreign currency, international bookings were up 67% from the year-ago quarter.
Management stated that booking.com, Agoda and Rentalcars.com (formerly TravelJigsaw) all contributed to the increase from the December 2010 quarter. 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.
Management did say, however, that some of the recently-added hotels in highly penetrated markets would generate lower commissions given that they were smaller-ADR accommodations. The Agoda business meanwhile, continued to do well, despite the flooding in Thailand.
Priceline continued to push its opaque business model, which did not do as well as in the past because of a growing number of competitors offering heavy discounts.
Priceline reported a gross margin of 73.1%, down 258 basis points (bps) sequentially due to lower volumes and up 749 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 slipped 34.1% sequentially, although they were up 50.9% from last year. While both the domestic and international businesses contributed to the year-over-year growth, international growth was much stronger at 63% (66% on a local currency basis), with domestic growing 10%.
Priceline’s operating income was down 50.1% sequentially to $311.5 million. The operating margin was 31.4%, down 1,155 bps sequentially and up 399 bps from the year-ago quarter. All expenses were up sequentially as a percentage of sales due to lower volumes.
However, personnel expenses increased the most (327 bps) as a percentage of sales, followed by online advertising, which increased 272 bps, cost of sales, which increased 258 bps and G&A, which increased 148 bps. Online advertising increased the most significantly from the year-ago quarter (up 370 bps).
Priceline reported adjusted EBITDA of $344.0 million, up 54.3% from the year-ago quarter, better than management’s expectations of pro forma EBITDA in the $310-330 million range.
Pro forma net income was $234.7 million, or 23.7% of revenue, compared to $478.2 million, or 32.9% in the previous quarter and $150.9 million, or 20.6% 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 49 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 $225.7 million or $4.41 a share, compared to $469.5 million, or $9.17 a share in the September 2011 quarter and $135.7 million, or $2.66 a share in the year-ago quarter.
Priceline ended with a cash and short term investments balance of $2.66 billion, up $253.0 million during the quarter. Priceline generated $281.8 million of cash from operations, down sequentially because of seasonally lower volumes. It spent around $17.1 million on capex and a small amount on share repurchases. At quarter-end, Priceline had $77.4 million in long term debt and $497.6 million in short term debt, totaling $575.0 million (no change during the quarter). The net cash position at quarter-end was $2.08 billion, up $25 million during the quarter. Days sales outstanding (DSOs) were around 24 up from 22 at the end of the September 2011 quarter.
For the first quarter, Priceline expects total gross bookings to grow 33-38% year over year, with international growing 41-46% (up 43-48% on local currency basis) and domestic growing around 10%. This is expected to yield a year-over-year revenue increase of 22-27% ($947 million at the mid-point).
Priceline expects gross profit dollars to increase of 40-45% on a non GAAP basis. The pro forma EBITDA is expected to be $243-253 million.
The pro forma EPS is expected to come in at $3.80-$3.90, based on a 16% tax rate and 51.7 million shares. The GAAP EPS is expected to be $3.10 to $3.20. Analysts were expecting pro forma earnings of $3.54 when the company reported earnings, well below the guided range.
Priceline missed our expectations on the bottom line, while exceeding on the top line. However, investors were impressed by the solid guidance, which was much better than our expectations.
Priceline’s current growth is the result of strategic additions to its hotel inventory, which has helped drive solid year-over-year growth. As ADRs also picked up due to stronger demand, the company was able to generate very strong results in the hotel business. Additionally, the Rentalcars.com business 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).
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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