CTRP Ctrip Com International Ltd

Priceline.com’s (PCLN) fourth-quarter earnings beat the Zacks Consensus by 26 cents (4.2%). Revenue growth was more or less in line with expectations. Shares responded very positively, gaining 3.7% in extended trading, following the 1.0% increase during the day.

Revenue

Priceline reported revenue of $1.19 billion in the quarter, representing a sequential decline of 30.2% and a year-over-year increase of 20.2%. This was better than management’s guidance of $1.17 billion (at the mid-point).

Volumes were down sequentially across the business (in line with normal seasonality), with hotel room nights, rental car days and airline tickets declining 16.3%, 23.4% and 17.6%, respectively. Room nights and rental car days were up strong double-digits 37.5% and 35.8%, respectively) from last year, with airline ticket volumes remaining flat.

Revenue by Channel

Priceline’s business model has been changing over the last two years or so, with the merchant business gradually becoming a smaller percentage of revenue. This is mainly because the agency business has been growing at more than three times the rate of growth of the merchant business.

The merchant business picked up very strongly in the third quarter, so there was a sequential decline in the fourth. Overall, the merchant business declined 57.8% sequentially, while remaining 5.9% higher than the year-ago level.

The agency business remained strong however, growing 22.2% and 31.9% from the previous and year-ago quarters, respectively.  The merchant/agency mix went from 66%/34% in the Sep 2012 quarter to 40%/60% in the last quarter.

Other revenue was flat sequentially and up 13.1% from last year, remaining below 1% of the total revenue for the quarter.

Domestic ADRs grew 1% in the last quarter, impacted by the mix of hotels and also hurricane Sandy, which hurt high-margin sales in the New York City market. Global ADRs were however down 1%, impacted by lower-cost inventories (a trend that may be expected to continue).

Bookings

Priceline’s overall bookings were down 15.9% sequentially and up 32.8% year over year, far exceeding the high end of the guided range. Excluding the impact of foreign currency, total bookings were up 35% from the year-ago quarter.

Both international and domestic bookings contributed to the sequential decline and year-over-year increase and both came in higher than guided, indicating better-than-expected growth trends. International declined 15.1% sequentially and increased 40.4% (43% excluding currency impact) year over year. Domestic slid 19.8% sequentially but increased 4.4% over the prior year.

The better-than-expected international bookings were on account of strong room night growth in Europe, as well as seasonal strength in the emerging Asian and Latin American markets. Significantly higher hotel supply (41% year-over-year increase at Booking.com) and strategic tie-ups with companies like Ctrip.com International (CTRP), China’s leading online travel booking service are helping the international business.

Operating Performance

Priceline reported a gross margin of 80.3%, down 156 basis points (bps) sequentially and up 714 bps year over year due to higher volumes in the international business, helped by better pricing in the U.S. 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 down 31.6% sequentially and up 31.9% from last year. While both the domestic and international businesses contributed to the year-over-year growth, international growth was much stronger at 37% (39% on a local currency basis), with domestic growing 4%.

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 margin. 

Priceline’s operating income dropped 47.8% sequentially to $398.6 million due to lower volumes, but stayed 28.0% higher than the year-ago level. The operating margin of 33.5%, shrunk 1,127 bps sequentially and expanded 204 bps from the year-ago quarter.

While all expenses increased sequentially as a percentage of sales (due to the lower volumes), the most significant were online advertising (up 378 bps), personnel (up 240 bps) and G&A (up 175 bps). Cost of sales declined significantly from last year, while most other expenses increased.

Priceline reported adjusted EBITDA of $425.7 million, up 23.7% from the year-ago quarter, better than management’s expectations of pro forma EBITDA in the $381-425 million range.

Net Income

The pro forma net income was $329.6 million, or 27.7% of revenue, compared to $624.3 million, or 36.6% in the previous quarter and $251.7 million, or 25.4% in the year-ago quarter. Our pro forma estimate excludes amortization of intangibles, other charges and tax adjustments and includes stock based compensation of 39 cents a share in the last quarter.

Including these items and deducting amounts attributable to non-controlling interests, Priceline’s GAAP net income was $288.7 million or $5.63 a share, compared to $596.6 million, or $11.66 a share in the Sep 2012 quarter and $225.7 million, or $4.41 a share in the year-ago quarter.

Balance Sheet

Priceline ended with a cash and short term investments balance of $5.18 billion, up $515.2 million during the quarter. Priceline generated $496.8 million of cash from operations. It spent around $16.2 million on capex and a very small amount on share repurchases.

At quarter-end, Priceline had $936.7 million in long-term debt and $520.3 million in short term debt, totalling $1.46 billion. The net cash position at quarter-end was $3.73 billion, up $510 million during the quarter. Days sales outstanding (DSOs) were around 28, up from 26 at the beginning of the quarter.

Guidance

For the first quarter, Priceline expects total gross bookings to grow 30-37% year over year, with international growing 36-43% (up 35-42% on local currency basis) and domestic growing 5-10%. This is expected to yield a year-over-year revenue increase of 17-24% ($1.25 billion at the mid-point).

Priceline expects gross profit dollars to increase 30-37%, with the adjusted EBITDA at $316-346 million.

The pro forma EPS is expected to come in at $4.90-$5.30, based on a 15.5% tax rate and 51.6 million shares. The GAAP EPS is expected to be $4.12 to $4.52. Analysts were expecting pro forma earnings of $4.87 a share when the company reported earnings, well below the guided range.

Conclusion

Priceline’s fourth quarter results tell an encouraging story. Europe continues to do better than expected and other international markets, such as APAC and South America continue to grow strongly.

Priceline has significant exposure to Europe and has been building its position in other emerging international markets. It is not only increasing its hotel inventories, but also entering into strategic alliances and making strategic acquisitions that could help growth in the future.

Also, considering the condition of the global economy and the fact that Priceline derives a significant chunk of revenue from leisure travel, which is discretionary spending, its possible that the company is taking some market share. The guidance was well above consensus, so shares are likely to maintain their growth trajectory.

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

Since overall trends appear to be positive and management guidance has also surprised positively, we expect positive revisions to estimates. Priceline shares currently carry a Zacks Rank #2 (Buy), better than peers Expedia (EXPE) and Orbitz Worldwide (OWW), both of which carry a Zacks Rank #3 (Hold).

 
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