Priceline.com Inc PCLN) reported strong numbers in the seasonally down fourth quarter. The company’s earnings including stock based compensation and excluding other items beat the Zacks Consensus by 16 cents, or 5.7%.

Shares dropped 1.8% during the day since expectations were low given the fact that competitor Expedia Inc (EXPE) missed expectations. However, after Priceline’s positive surprise and solid guidance, shares jumped 4.67% in after-hours trading.

Revenue

Priceline reported revenue of $731.3 million in the quarter, representing a sequential decline of 27.0% and a year-over-year increase of 35.0%. This was in-line with the Zacks Consensus estimate, although at the high end of management’s expectations of a 31-36% increase from last year.

On a sequential basis, Priceline saw double-digit seasonal volume declines across all product lines. Specifically, hotel room nights dropped 20.0%, rental car days growing 23.5% and airline tickets 13.3%.

The year-over-year revenue increase was attributable to both hotel room nights and rental car days, which were up 50.8% and 64.6%, respectively. Priceline’s average daily rates (ADRs) compared favorably with the year-ago quarter, increasing around 3% for the international business and over 5% for the domestic business. Airline tickets (down 2.8%) was the only product line that disappointed.

Revenue by Channel

Historically, Priceline’s merchant business has generated the largest chunk of revenue. However, the agency business has been growing very rapidly in the recent past, even contributing an equal share in some quarters.

The merchant/agency revenue share in the last quarter was 52%/47%, with other revenues bringing in the remaining 1%. Merchant revenue dropped 22.7% sequentially, while increasing 20.4% year over year.

The agency business was down 31.4% sequentially, but up 56.8% from the year-ago quarter. Other revenue was down -0.9% and -15.7% from the previous and year-ago quarters, respectively.

Bookings

Overall bookings were down 18.5% sequentially and up 44.2% year over year. International and domestic bookings were equally soft compared to the third quarter, declining 18.1% and 19.5%, respectively. However, Priceline’s international bookings growth of 64.8% was much higher than the domestic bookings growth of 8.5%.

Excluding the impact of foreign currency, international bookings were up 70.7% from the year-ago quarter. The strength in international was due to geographic expansion, increase in hotel supply, increased penetration in new markets, inclusion of Agoda and TravelJigsaw results, as well as the higher average daily rates.

Priceline’s domestic bookings were fueled by stronger results in Priceline’s hotel and opaque rental car categories. Room night reservations were spurred by higher ADRs and promotional pricing by hotel partners.

Operating Performance

Priceline reported a gross margin of 65.7%, down 105 basis points (bps) sequentially and up 785 bps from the year-ago quarter. 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 were down 28.1% sequentially (typical seasonality), and increased 53.3% from last year. While both the domestic and international businesses contributed to the year-over-year growth, international growth was much stronger at 68.4% (75% excluding the impact of currency).

Priceline’s operating expenses were down 13.6% sequentially to $279.5 million. The operating margin was 27.4%, down 696 bps sequentially and up 475 bps from the year-ago quarter. All expenses were up sequentially as a percentage of sales (due to the lower volumes), although personnel increased the most.

The cost of sales declined substantially from the year-ago quarter, helping the comparison. Offline advertising, G&A and IT costs also declined from last year, although not so significantly.

Priceline reported adjusted pro forma EBITDA of $222.9 million, up 67.4% from the year-ago quarter and much better than management’s expectations of pro forma EBITDA in the $$200-210 million range.

Net Income

Pro forma net income was $150.9 million, or 20.6% of revenue, compared to $235.1 million, or 23.5% in the previous quarter and $89.5 million, or 16.5% in the year-ago quarter. Our pro forma estimate excludes amortization of intangibles, loss on extinguishment of debt and other gains and charges on a tax adjusted basis and includes stock based compensation of 39 cents a share.

Our pro forma calculation may differ from Priceline’s presentation due to the inclusion/exclusion of some items that were not considered by management.

Including these items, Priceline’s GAAP net income was $135.7 million or $2.66 a share, compared to $223.0 million, or $4.41 a share in the September 2010 quarter and $78.5 million, or $1.55 a share in the year-ago quarter.

Balance Sheet

Priceline ended with a cash and short term investments balance of $1.66 billion, up $187.1 million during the quarter. Priceline generated $179.9 million of cash from operations. It spent around $8.1 million on capex and around $3.8 million on share repurchases.

At quarter-end, Priceline had $476.4 million in long and short term debt, down $5.2 million during the quarter. The net cash position at quarter-end was $1.19 billion. Days sales outstanding (“DSOs”) were around 20, down from 23 at the end of the September 2010 quarter.

Guidance

For the first quarter, Priceline expects total gross bookings to grow 45-50% year over year, with international growing 64-69% (up 66-71% on local currency basis) and domestic growing 7-12%. This is expected to yield a year-over-year revenue increase of 29-34% ($768.5 million at the mid-point), much better than our expectations of $746 million. Priceline also expects a gross profit dollar increase of 47-52%.

Total advertising spend is expected to be $185-190 million, of which roughly $12 million will be spent on offline advertising. Sales and marketing expense is expected to be $32-36 million, personnel expenses (excluding stock based compensation) of $65-69 million, general and administrative expenses $23-26 million, information technology expenses $7 million and depreciation and amortization charges $5 million. The pro forma EBITDA is expected to be $147-157 million.

Priceline expects the pro forma EPS to come in at $2.34-$2.44, with the GAAP EPS at $1.66 to $1.76. Analysts were expecting pro forma earnings of $2.03, well below the guided range.

Conclusion

Analysts have been lowering estimates over the past 7 days, which has had a negative impact on the Zacks rank (currently #4, signifying a short-term Sell recommendation). However, we think that estimates will go up in the next few days. We would caution investors about rising costs however, which are likely to lower margins in 2011.

 
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