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Priceline.com’s (PCLN - Analyst Report) third quarter earnings beat the Zacks Consensus by 40 cents (3.5%). Revenue too was encouraging, topping estimates by 3.4%. Shares responded accordingly, jumping 9.5% in extended trading, following the 2.2% increase during the day.
Priceline reported revenue of $1.71 billion in the quarter, representing a sequential increase of 28.6% and a year-over-year increase of 17.4%. This was better than management’s guidance of $1.63 billion (at the mid-point) and better than consensus expectations.
Volumes were up sequentially across the business, with hotel room nights, rental car days and airline tickets growing 10.0%, 9.3% and 0.0%, respectively. Room nights and rental car days were up strong double-digits (36.0% and 34.3%, respectively) from last year, with airline ticket volumes increasing 6.3%.
Revenue by Channel
Priceline’s business model has been changing over the last two years or so, with the merchant business gradually becoming a smaller percentage of revenue. This is mainly because the agency business has been growing at more than three times the rate of growth of the merchant business.
The last quarter was a strong one for the merchant businesshowever, as the business grew 102.9% sequentially and 95.1% year over year. The agency business on the other hand dropped 24.2% sequentially and 33.3% from last year. This sent the merchant/agency revenue share in the last quarter to 66%/34% from 42%/58% in the previous one.
Other revenue was down 14.1% sequentially and up 8.1% from year over year, remaining below 1% of the total revenue for the year.
Priceline’s overall bookings were up 6.9% sequentially and 25.2% year over year, far exceeding the high end of the guided range. Excluding the impact of foreign currency, total bookings were up 34% from the year-ago quarter.
Both international and domestic bookings contributed to the increase and both came in higher than guided, indicating better-than-expected growth trends. International grew 8.8% sequentially and 29.7% (41% excluding currency impact) year over year. Domestic slid 1.3% sequentially but increased 7.2% over the prior year.
The better-than-expected international bookings were largely on account of a stronger-than-expected travel market in Europe, which was reflected in the increase in room nights and rental car days. Additionally, Priceline saw continued growth in Asia. Agoda continues to gather momentum with increased scale and improved distribution.
The Asia business has gained from recent initiatives, such as the tie-up with Ctrip.com International (CTRP - Snapshot Report), China’s leading online travel booking service. Overall, increase in hotel supply helped international bookings in the last quarter (particularly in the case of Bookings.com, which is largely based in Europe.
Domestic ADRs increased again in the last quarter, which along with higher ticket prices and stronger retail (both ticket sales and rental car reservations) drove results.
Priceline reported a gross margin of 81.8%, up 616 basis points (bps) sequentially and 612 bps year over year due to higher volumes in the international business, helped by better pricing in the U.S. 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 grew 39.1% sequentially and 26.9% from last year. While both the domestic and international businesses contributed to the year-over-year growth, international growth was much stronger at 31% (42% on a local currency basis), with domestic growing 3%.
Priceline’s operating income jumped 63.6% sequentially to $763.4 million helped by higher volumes. The operating margin of 44.7%, grew 958 bps sequentially and 175 bps from the year-ago quarter.
While all expenses declined sequentially as a percentage of sales, the most significant were cost of sales (down 616 bps), online advertising (down 171 bps) and G&A (down 52 bps). Cost of sales also declined significantly from last year, with online advertising and personnel expenses increasing significantly. Increases/decreases in other segments were less significant.
Priceline reported adjusted EBITDA of $780.9 million, up 21.2% from the year-ago quarter, better than management’s expectations of pro forma EBITDA in the $690-765 million range.
The pro forma net income was $607.8 million, or 35.6% of revenue, compared to $360.9 million, or 27.2% in the previous quarter and $502.6 million, or 34.6% in the year-ago quarter. Our pro forma estimate excludes amortization of intangibles and includes stock based compensation of 34 cents a share in the last quarter.
Including this item and deducting amounts attributable to non-controlling interests, Priceline’s GAAP net income was $596.6 million or $11.66 a share, compared to $352.3 million, or $6.88 a share in the June 2012 quarter and $469.5 million, or $9.17 a share in the year-ago quarter.
Priceline ended with a cash and short term investments balance of $4.67 billion, up $725.7 million during the quarter. Priceline generated $674.9 million of cash from operations, significantly higher than the June quarter. It spent around $10.5 million on capex and a very small amount on share repurchases.
At quarter-end, Priceline had $937.3 million in long-term debt and $514.5 million in short term debt, totaling $1.45 billion. The net cash position at quarter-end was $3.22 billion, up $720 million during the quarter. Days sales outstanding (DSOs) were around 26, down from 29 at the beginning of the quarter.
For the fourth quarter, Priceline expects total gross bookings to grow 21-28% year over year, with international growing 27-35% (up 28-36% on local currency basis) and domestic staying flat. This is expected to yield a year-over-year revenue increase of 15-22% ($1.17 billion at the mid-point).
Priceline expects gross profit dollars to increase 26-33%, with the adjusted EBITDA at $381-425 million.
The pro forma EPS is expected to come in at $6.12-$6.57, based on a 15.6% tax rate and 51.4 million shares. The GAAP EPS is expected to be $5.39 to $5.84. Analysts were expecting pro forma earnings of $5.96 when the company reported earnings, well below the guided range.
Priceline’s third quarter results tell an encouraging story. It is apparent that management caution regarding Europe was overblown. Revenue and order trends in the region seem to indicate that the travel market is picking up. This is a big positive for a company like Priceline, which has significant exposure to the region.
Also, considering the condition of the global economy and the fact that Priceline derives a significant chunk of revenue from leisure travel, which is discretionary spending, its possible that the company is taking some market share. The guidance was well above consensus, so shares are likely to maintain growth trajectory.
The hotel business will continue to benefit from recent additions to inventory, but we need to bear in mind that this will be at lower margins (significant ADR pressure internationally, offset by improving ADR in the domestic business which we think is because of a higher mix of corporate versus personal bookings).
Nevertheless, Priceline will continue investing in the business to push growth and especially to continue its international expansion strategy. This is likely to exert some downward pressure on earnings.
Since overall trends appear to be turning positive and management guidance has surprised positively, we expect positive revisions to estimates, which should raise the current Zacks Rank of #4 (Sell) on Priceline shares. We remain Neutral on a long-term basis.