Priceline.com’s (PCLN) first quarter earnings missed the Zacks Consensus by 23 cents. Revenue was also slightly short, missing by 1.0%. Shares slid 12.11% after hours, as the big miss took investors by surprise. We believe that the uncertainty regarding near-term performance was also responsible for the negative sentiment, since second-quarter guidance was quite good.
The earnings miss was the result of the volcano in Iceland, which led to a large number of cancellations and postponements. Civil unrest in Thailand was also a concern in the last quarter.
Revenue
Revenue of $584.4 million was up 7.9% sequentially, up 26.5% from the year-ago quarter and at the high end of management’s guided range of a 23-27% year-over-year increase.
Although revenue continues to grow at double-digit rates from the year-ago quarter, the rate of increase is declining. Management expects this trend to continue, as the company enjoyed relatively better comps over the past few quarters, due to the recession impacting the year-ago quarters. So as the year progresses, comps are expected to become more difficult.
On a sequential basis, Priceline saw good volume growth across all product lines, with hotel room nights growing 37.3%, rental car days growing 26.0% and airline tickets growing 16.7%.
The year-over-year growth was almost totally attributable to hotel room nights, which were up 56.8% from the Mar 2009 quarter. Average daily rates (ADRs) were up around 2% for the international business and down 2% for the domestic business. As expected, currency had a positive impact on revenue in the last quarter. Airline tickets were up 2.8%, while rental car days declined 0.9%.
Revenue by Source
The company generates the largest chunk of revenue from the merchant business. This segment contributed 63% of total revenue, a sequential increase of 16.0% and a year-over-year increase of 9.3%. The agency business brought in another 36%, a decrease of 3.3% from the previous quarter and increase of 77.4% from a year ago. Other revenue accounted for the less than 0.5%, falling 25.0% sequentially and 39.8% year over year.
Priceline generates revenue both directly and as an agent. The direct business, referred to as the merchant business, overcame the softness in the Dec quarter to report an 18.7% sequential growth in Mar. Revenue was up 24.8% year over year. The merchant business was driven by strong hotel revenues that offset year-over-year declines in airline ticket and rental car sales.
Bookings
Overall bookings were up 30.9% sequentially and 52.5% year over year. The strong growth was largely due to the international business, which continued to perform very well, despite the volcanic eruption and civil unrest. The domestic business did not fare too badly either, growing double-digits, both sequentially and year over year.
Specifically, international bookings increased 37.8% sequentially and 80.8% year over year. Excluding the impact of foreign currency, international bookings were up 73% from the year-ago quarter. The strength in international was due to geographic expansion, an increase in hotel supply, increased penetration in new markets and slightly higher ADRs. Both booking.com and Agoda contributed to the strength.
Domestic bookings grew 19.1% sequentially and 16.2% year over year. The increase in the domestic business was the result of stronger hotel results, as well as a significant increase in airline ticket prices when compared to the year-ago quarter. It should be noted that stronger airline ticket prices are not necessarily a positive, since they inflate the bookings number, but do not translate to additional revenue.
Operating Performance
The gross margin was 54.6%, down 320 basis points (bps) sequentially and up 952 bps from the year-ago quarter. However, gross profit dollars were up both sequentially and year over year. 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. Gross profit dollars increased again in both the domestic and international businesses, although international continued to see much stronger growth.
Operating expenses of $225.4 million were higher than the previous quarter’s $190.3 million. The operating margin was 16.0%, down 666 bps sequentially and up 548 bps from the year-ago quarter.
COGS and online advertising as a percentage of sales increased the most, while the only decline came from G&A.
However, COGS was down significantly in comparison to the year-ago quarter, although this was partially offset by a very significant increase in online advertising expenses. The increase in online advertising is in line with management’s longer-term strategy.
As a result, the adjusted pro forma EBITDA came in at $111.7 million, up 75.3% from the year-ago quarter and better than management’s expectations of pro forma EBITDA in the $97-107 million range.
Pro forma net income was $64.3 million, or 11.0% of revenue, compared to $89.0 million, or 16.4% in the previous quarter and $30.0 million, or 6.5% in the year-ago quarter. Our pro forma estimate excludes amortization of intangibles, gain on extinguishment of debt and other charges on a tax adjusted basis. Pro forma income includes stock based compensation of 23 cents a share.
Including these items, the GAAP net income was $53.9 million or $1.06 a share, compared to $78.5 million, or $1.55 a share in the Dec 2009 quarter and $25.0 million, or $0.53 a share in the year-ago quarter.
Balance Sheet
Priceline ended with a cash and short-term investments balance of $1.23 billion, up $435.5 million during the quarter. The company generated $104.7 million of cash from operations. It spent around $4.8 million on capex and $118.9 million on share repurchases. The company also raised $575 million through senior convertible notes. Consequently, at quarter-end, Priceline had $558.5 million in long and short term debt, or a net cash position of $677.2 million. Days sales outstanding (DSOs) were around 21, up from 20 in the Dec. 2009 quarter.
Guidance
For the second quarter, management expects total gross bookings to grow 32.5-37.5% year over year, with international growing 45-50% (55-60% on local currency basis) and domestic growing 15-20%. This is expected to yield a year-over-year revenue increase of 18-23% and a gross profit dollar increase of 34-39%.
Total advertising spending is expected to be $141-146 million, of which roughly $10 million will be spent on offline advertising. Sales and marketing expense is expected to be $28-31 million, personnel expenses (excluding stock based compensation) of $43-46 million, general and administrative expenses $19-21 million, information technology expenses $6 million and depreciation and amortization charges $4 million. EBITDA is expected to be $170-180 million.
Cash taxes are expected to be $35 million.
Management also expects a pro forma EPS of $2.50-$2.57 based on around 51.2 million average diluted shares. The GAAP EPS is expected to be $1.87 to $2.07.
Our Recommendation
The results have come in at the high end of management’s own expectations, although the Zacks Consensus was more optimistic. The Zacks Consensus Estimate for the June quarter is $2.60, which is again better than management’s guidance for the quarter.
We continue with our Outperform recommendation on Priceline shares, since we view the earnings miss as a near-term issue and believe the long-term drivers remain intact.
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