Priceline Q1 Strong, Outlook Disappoints - Analyst Blog

Priceline.com PCLN reported very strong results with both revenue and earnings beating our estimates and growing strongly from the year-ago quarter. Shares opened higher today and continue to trend up.

Revenue

Priceline reported revenue of $1.64 billion in the quarter, seasonally up 6.5% sequentially and 26.1% from the year-ago quarter. This was better than management's guidance of $1.56 billion (at the mid-point). Kayak remained a major contributor while the name-your-own-price model weakened.

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 grew sequentially, with agency up 4.1% and merchant 9.4%. Merchant revenues declined -0.3% due to the opaque business, which was impacted by the non-availability of discounts and a shift to Express Deals. Agency revenues jumped 3.2%, more than making up for the decline. The merchant/agency mix was relatively steady at 32%/63% in the last quarter.

Other revenue was up 23.4% sequentially and up 1992.6% from last year, benefiting from the Kayak acquisition.

Hotel room nights and rental car days were particularly strong although airline ticket volumes also grew double-digits. Room nights, rental car days and airline tickets grew a respective 32.2%, 29.5% and 11.1% sequentially and 32.0%, 24.2% and 17.6% from last year. Overall ADRs for the consolidated group grew around 3% on a local currency basis. Compare this with Expedia EXPE, which has not been able to grow its ADR for roughly a year now.

Bookings

Priceline's overall bookings were up 34.4% sequentially and 34.2% year over year, over the guided range. Foreign currency had a slightly negative impact on gross bookings in the last quarter.

Both international and domestic bookings grew strong double-digits from both the previous and year-ago quarters with international growing stronger than domestic.

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 85.7%, down 44 basis points (bps) sequentially and up 654 bps year over year. Mix was slightly negative in the sequential comparison, while the improvement from last year was related 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 6.0% sequentially and 36.5% from last year. Both international and domestic gross profits were up strong double-digits, although domestic growth was higher than international. The expansion in domestic profit is largely due to Kayak. 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.

Priceline's operating income fell 10.8% sequentially to $461.6 million but the more important thing is, this was 35.9% above year-ago levels. The operating margin of 28.1% shrank 545 bps sequentially and expanded 202 bps from the year-ago quarter. All except personnel expenses grew sequentially as a percentage of sales, with only S&M and cost of sales declining from last year.  

Priceline reported adjusted EBITDA of $513.3 million, p 39.4% from the year-ago quarter -- better than management's expectations of adjusted EBITDA in the $420-450 million range.

Net Income

The pro forma net income was $360.7 million, or 22.0% of revenue, compared to $427.8 million, or 27.8% in the previous quarter, and $294.2 million, or 22.6% 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 73 cents a share in the last quarter.

Including these items, Priceline's GAAP net income was $331.2 million or $6.25 a share, compared to $378.1 million, or $7.14 a share in the Dec 2013 quarter and $244.3 million, or $4.76 a share in the year-ago quarter.

Balance Sheet

Priceline ended with a cash and short-term investments balance of $6.71 billion, down $42.2 million during the quarter. Priceline generated $177.0 million of cash from operations. It spent around $29.7 million on capex and $96.7 million on share repurchases.

At quarter-end, Priceline had $1.76 billion in long-term debt and $97.7 million in short term debt, totaling $1.86 billion. The net cash position at quarter-end was $4.86 billion, up $97.4 million during the quarter. Days sales outstanding (DSOs) were around 35, up from 31 at the beginning of the quarter.

Guidance

For the second quarter, Priceline expects total gross bookings to grow 22-32% year over year (20-30% on a local currency basis), with international growing 24-34% (21-31% on a local currency basis) and domestic growing 15-20%. This is expected to yield a year-over-year revenue increase of 19-29% ($1.56 billion at the mid-point, slightly lower than the Zacks Consensus of $2.13 billion).

Priceline expects gross profit dollars to increase 24-34%, with the adjusted EBITDA at $725 million to $775 million.

The pro forma EPS is expected to come in at $11.22-$12.02, based on a 15% tax rate and 53.3 million shares. The GAAP EPS is expected to be $9.67 to $10.47. Analysts were expecting pro forma earnings of $11.53 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, Orbitz Worldwide OWW and Chinese travel booking company Ctrip International CTRP all carry a Zacks Rank #3 (Hold).

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