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Earnings Preview: Inc.

Read MoreHide Full Article Inc. is scheduled to announce its second-quarter 2012 results on August 7, 2012. We witness limited movement in analyst estimates in the build-up to the release.

Prior-Quarter Synopsis

Priceline’s first-quarter non-GAAP earnings were better than the Zacks Consensus by 35 cents, attributable to strong revenue growth, especially in international, coming from both volume and rate increases.

Revenue for the quarter was up both sequentially as well as from the year-ago quarter, driven by strong volumes across the business, with hotel room nights, rental car days and airline tickets all growing double-digits on a sequential basis. Room nights and rental car days were also up by strong double-digits from last year, although airline tickets were flat.

However, gross margin was down 149 basis points (bps) sequentially due to unfavorable mix but was up 916 bps from the year-ago quarter due to higher volumes. The operating margin also shrunk in the quarter due to significantly higher online advertising expenses.

(Detailed earnings results can be viewed in the blog titled: Priceline Reports Solid Q1)

Second Quarter Guidance

Priceline expects total gross bookings to grow in a range of 26–31% year over year, with international bookings growing 32–37% (up 41–46% on local currency basis) and domestic bookings growing in a range of 5–10%. This is expected to yield a year-over-year revenue increase of 18–23% ($1.33 billion at the mid-point).

The pro forma EPS is expected to be in a range of $7.20–$7.40 while the GAAP EPS is estimated in a range of $6.34 – $6.54.

Agreement of Analysts

Out of the 10 analysts providing estimates, 1 analyst made a downward revision for the second quarter as well as for fiscal 2012 in the last 30 days.

Over the same time period, 1 analyst moved in the opposite direction for the second quarter.

Priceline’s revenue has increased double-digits over the past four quarters and the analysts expect the trend to continue in the upcoming quarter. They expect a healthy second quarter, with earnings coming above the consensus estimate of $7.06, on strong room night growth, industry data, and strong results from Expedia Inc. (EXPE - Free Report) .

The analysts see potential for accelerated share gains, helped by the extension of and Agoda brands into new markets. They believe that has been increasing hotel inventories across North and South America, as well as Asia, and Priceline’s business in these areas is scaling up.

However, the analysts remain cautious about the higher domestic airfares, weakening hotel metrics and overall headwinds in Europe. They expect third quarter guidance to be impacted by unfavorable foreign currency movements and macro headwinds.

Magnitude of Estimate Revisions

In the past 30 days, there was no change in the Zacks Consensus Estimate for the second quarter whereas the fiscal 2012 estimate was down by 4 cents to $29.90 cents.

Over the 90-day period, the Zacks Consensus Estimate was down by 9 cents for the second quarter and by 28 cents for fiscal 2012.

Our Recommendation

We expect Priceline to report a decent second quarter, with strong execution and strength across the hotel business, driven by share gains and new businesses.

Though the overall trends look extremely strong, we remain a little concerned about the headwinds in Europe. We also believe that Airline tickets will likely remain a weak spot due to continued capacity cuts and price hikes.

Longer term, we believe that Priceline remains well positioned to sustain its growth as consumers now prefer the Internet for making travel plans and seek the benefit of discounted prices offered by ecommerce companies like Priceline, rather than the time consuming offline ways.

Additionally, Priceline is expected to continue investing in the business to push growth further and especially to continue its international expansion strategy. This is likely to exert some downward pressure on earnings.

Priceline retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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