(PCLN) reported very strong third quarter results, with earnings beating the consensus by 57 cents and revenue beating by 5.3%.


Revenue of $730.7 million was up 21.0% sequentially and 30.1% year over year. The significant increase from the year-ago quarter was helped by easier comps as the third quarter of 2008 was impacted by the recession, while the third quarter of 2009 benefited from strengthening demand.

Revenue growth was driven by significantly higher room night volumes, which offset the decline in average daily rates (ADRs). Room nights increased 14.1% sequentially and 56.3% year over year. Both airline ticket units and rental car days declined sequentially, although they were up 30.2% and11.6%, respectively from the year-ago quarter.

Revenue by Source

The company generates the largest chunk of revenue from the merchant business. This segment contributed 55% of total revenue, a sequential increase of 1.9% and a year-over-year increase of 23.6%.

The agency business brought in another 44%, an increase of 58.0% from the previous quarter and 38.9% from a year ago. Other revenue accounted for the remaining 1%, growing 11.3% sequentially and 42.8% year over year.


Although gross bookings increased in both domestic and international markets, international bookings saw stronger growth. Domestic bookings increased 3.6% sequentially and 24.9% year over year compared to international bookings growth of 21.9% and 37.8% in the previous and year-ago quarters, respectively.

The strength in international bookings was due to geographic expansion, increase in hotel supply and growth in new markets. Both and Agoda contributed. The domestic business reflected the impact of lower ADRs and airfares, although volume increases more than offset these.

Operating Results

The gross margin was 59.4%, up 884 basis points (bps) from the previous quarter’s 50.6%. The gross margin was up 312 bps from the year-ago quarter. Gross profit dollars increased in both the domestic and international businesses, although international saw much stronger growth.

Operating expenses of $212.3 million were higher than the previous quarter’s $178.4 million. The operating margin was 30.3%, up 934 bps from 21.0% recorded in the previous quarter. Management lowered expenditure in all except the online advertising area, which increased 83 bps as a percentage of sales. Lower COGS was the main reason for the operating margin expansion, although other expenses also declined.

Pro forma net income was $173.3 million, or 23.7% of revenue, compared to $99.0 million, or 16.4% in the previous quarter and $118.7 million, or 21.1% in the year-ago quarter.

Including share-based compensation, amortization of intangibles, hotel occupancy tax litigation charges, gain on extinguishment of debt, other charges, the tax impact of these and the reversal of a portion of the company’s valuation reserve on its deferred tax assets, the GAAP net income was $319.0  million or $6.42 a share, compared to $67.0 million, or $1.38 a share in the Jun 2009 quarter and $84.5 million, or $1.74 a share in the year-ago quarter.

Balance Sheet

The company ended with a cash and short-term investments balance of $720.6 million, up $129.7 million during the quarter. The company generated $195.2 million in cash from operations. Capex and share repurchases were minimal in the quarter. It also liquidated its equity investment in, which helped improve the cash position.

At quarter-end, Priceline had $50.2 million in long term debt, or a net cash position of $670.4 million. Days sales outstanding (DSOs) were around 21, down from 23 in the Jun 2009 quarter.


For the fourth quarter, management expects total gross bookings to grow 30-40% year over year, with international growing 50-60% and domestic growing roughly 15%. ADRs are expected to remain weak, although year-over-year comps will become easier.

This is expected to yield year-over-year revenue increase of 24-28% and gross profit dollar increase of 40-45%.

Total advertising spend is expected to be $94-97 million, roughly 94% of which will be online. Sales and marketing expense is expected to be $20-21 million, personnel expenses $40-41 million, general and administrative expenses $23-24 million, information technology expenses $5.5 million and depreciation and amortization charges $4.5 million. EBITDA is expected to be $98-108 million.

Other income/expense is expected to be an expense of $1.9 million. Cash taxes are expected to be $19-22 million.

The pro forma EPS of $1.52-1.62 a share is based on a pro forma diluted share count of 50.7 million shares. The GAAP EPS is expected to be $1.06 to $1.16.
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