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The Priceline Group Inc.’s (PCLN - Free Report) first-quarter 2017 earnings beat the Zacks Consensus Estimate by 11.9% and were better than management’s guidance of $8.45 at the mid-point.

On a year-over-year basis, the agency business showed strong momentum but merchant business was lumpy. Room nights and Rental cars performed impressively. The only point of weakness was airline tickets.

At the call, management was upbeat about the company’s ongoing investments in technology and people and the new best brand campaign, and expects these efforts to drive growth going forward.

Overall, we remain positive about the secular growth trend in the online travel booking market, Priceline’s strong position in international markets, growth opportunities in the domestic market, good execution, prudent marketing strategy and strong financial position. Priceline has had an impressive run on the bourse over the last one year. The company gained 45.3%, better than the Zacks Internet - Commerce industry’s addition of 40.7%.

However, weaker ADRs, macro headwinds, increasing advertising spend and occupancy tax-related litigation remain overhangs.

Let’s check out the numbers.

Revenues

Priceline reported revenues of $2.42 billion, up 3% sequentially and 12.6% from the year-ago quarter. Revenues however missed the Zacks Consensus Estimate by a slight margin.

Revenues by Channel

Priceline generates the bulk of its revenues from international markets where the agency model is more popular. This is reflected in the merchant/agency split of revenues, which was 18/74% in the first quarter (previous quarter split was (19/74%).

Merchant revenues were up 0.5% sequentially but down 6.3% year over year. Agency revenues increased 2.8% sequentially and 19% year over year.

Advertising & Other revenue was up 11.7% sequentially and 7.9% from last year. This is basically non inter-company revenues from Kayak and OpenTable.

Room nights, rental car days and airline ticket volumes were up a respective 34.1%, 32.9% and 12.5% sequentially.  On a year-over-year basis, room nights were up 27.4%, rental car days increased 15.4% while airline ticket volumes were down 2.1%.

Priceline’s room night growth is attributable to its geographically diverse inventory and brand recognition that tends to balance out macro uncertainties related to any one market, as well as growing competition from local and international players. The company saw average daily rates for accommodations or ADRs growing 1% year over year. Rentalcars.com also did quite well but there was some softness in ticket volumes.

The Priceline Group Inc. Price, Consensus and EPS Surprise

Bookings

Priceline’s overall bookings were up 36.9% sequentially and 24.2% (27% in constant currency) year over year, better than guided.

Merchant bookings were up 19.3% sequentially and 20.2% year over year. Agency bookings increased 39.8% sequentially and 24.8% from the year-ago levels.

Margins and Net Income

Priceline reported pro forma gross margin of 96.5%, down 45 basis points (bps) sequentially but up 247 bps year over year.

Owing to the nature of its business and the mix of agency versus merchant revenues, management usually uses gross profit dollars rather than margin to gauge performance during any quarter. Priceline’s gross profit dollars were flat sequentially but up 16% (17% in constant currency) from last year and higher than the guidance. International gross profit grew 17% (19% on a constant currency basis). U.S. gross profit grew 6% from last year.

Priceline’s adjusted operating income was down 38.8% sequentially and 7.3% from $643.1 million reported last year. Operating margin of 24.8% declined 1065 bps sequentially and 516 bps from the year-ago quarter.

Priceline’s GAAP net income was $455.6 million or $9.11 a share, compared with $673.9 million, or $13.47 a share in the December quarter and $374.4 million, or $7.47 a share in the year-ago quarter.

Balance Sheet

Priceline ended the quarter with cash and short term investments balance of $5.4 billion, up $1.1 million during the quarter. Priceline generated $380.6 million of cash from operations. It spent around $70.5 million on capex and $209.8 million on share repurchases.

At quarter-end, Priceline had $7.3 billion in long-term debt with the net debt position being $4.9 billion compared with a net debt position of $4.09 billion in the previous quarter.

Guidance

For the second quarter of 2017, Priceline expects room nights booked to grow 16-21% and total gross bookings to grow 12-17% year over year (15-20% on a constant currency basis).

Notably, this guidance indicates a slowdown in growth rates of room nights booked and total gross bookings as it is the lowest compared to the last three quarters. Investors seem to be worried about this overly conservative guidance as reflected in the 3.46% depreciation in the stock price in afterhours trading.

Priceline expects gross profit dollars to increase 14-19% (17-22% on a constant currency basis), with adjusted EBITDA in the range of $860-905 million.

Pro forma earnings per share (EPS) are expected to come in the range of $13.30-$14.00. The Zacks Consensus Estimate is pegged at $15.49. GAAP EPS is expected in the range of $12.55-$13.25.

Zacks Rank and Stocks to Consider

Priceline currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader technology sector include Alphabet Inc. (GOOGL - Free Report) , Monolithic Power Systems, Inc. (MPWR - Free Report) and Marchex, Inc. (MCHX - Free Report) . While Alphabet sports a Zacks Rank #1 (Strong Buy), Monolithic Power and Marchex carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected earnings per share growth rates for Alphabet, Marchex and Monolithic Power are 16.7%, 15% and 17%, respectively.

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