Booking Holdings Inc (BKNG) 2002 Q2 法說會逐字稿

Welcome to the priceline second quarter 2002 conference call.

Priceline.com would like to remind everyone that this call may contain forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties and assumptions that are difficult to predict.

Therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements.

Expressions of future goals and similar expressions reflecting something other than historical fact are intended to identify forward looking statements.

The following factors among others could cause Priceline.com's actual results to differ materially from those described in foreword looking statements.

Adverse changes in general market conditions for leisure and other travel products are result.

Among other things, terrorist attacks or hostilities, adverse changes in Priceline.com's relationships with airlines and other product and services providers, including without limitation the withdrawal of providers from the Priceline.com system, the effects of increased competition, systems related failures and or security breaches.

Priceline.com's ability to protect its intellectual property rights, license by Priceline.com and its licensees.

Final adjustments made in closing.

The quarter, legal and regulatory risks and the ability to attract and retain qualified personnel.

For a detailed discussion of these and other factors that could cause Priceline.com's actual results differ materially from those described in the forward-looking statements, please refer to Priceline.com's most recent filings with the Securities and Exchange Commission.

Unless required by law, Priceline.com undertakes no obligation to update publicity and any forward-looking statements whether as a result of new information, future events or otherwise.

And now let me introduce Priceline's Chairman, Rick Braddock.

Go ahead Mr. Braddock.

Thank you.

As usual, I'm joined on the call by Jeff Boyd, our newly appointed co-CEO and Bob Mylod, our CFO.

Not as usual, we're in different geographic places as we handle this call.

The results for the quarter came in pretty much at our revised guidance.

About 205 million in total revenue, 9.9 million of EBITDA, 5.3 million of operating income and net income per share of three cents on both GAP and pro forma basis.

Oddly, our results were influenced by a slow down in our business against expectations in June.

This was entirely driven by softness in the air business, which has continued into the current quarter.

Exacerbated during July by the sharp decrease in airline leisure pricing after several unsuccessful initiatives by the airlines to increase their pricing toward the end of this past quarter.

It's obvious that the airline industry remains in a state of financial disarray, having lost again more than $1.5 billion last quarter and is unstable from a pricing perspective.

Just as obviously, airline pricing has to improve for the airlines to return to profitability, but the path and timing of this evolution is both unclear and unpredictable.

That being said, I'd like to spend a little more time on the component parts of our business.

Because I think that perspective provides a more nuanced view on the state of our business.

During the quarter, our overall customer base grew to 14.5 million.

The addition of new customers, 964,000, was basically on trend and up 10 percent sequentially.

Our repeat business continued it's steady growth, with our repeat rate now 65.4 percent and our absolute level of repeat customers up 12 percent versus prior year at 19 percent sequentially.

Expressed as total demand our total travel offers in the quarter reached an all-time high and were up 15 percent sequentially.

And, in fact, our overall revenue growth sequentially was well in line with our competition.

When viewed by product with a difference versus our customer base being effectively the bind rate on our various offerings our total travel units sold grew substantially, sequentially up 12 percent.

Our hotel offering, who's demand continued to increase at a sequential rate which approximated 30 percent for the quarter, registered sales of 1.1 million room nights, up 20 percent sequentially and 60 percent versus year ago, topping one million room nights on a quarterly basis for the first time.

Other measures of hotel performance including revenue, margin and profitability, increased in similar magnitude.

For air the results were more disappointing, certainly versus our expectation although our unit volume was up six percent sequentially.

However, meaningful increases in average offer price and fare were not sufficient to overcome bind rate which we had forecast to increase but actually decreased over the quarter as a function of both airline pricing and availability.

As a result of these factors, the balance of our business continues to change.

The percent of booked offers contributed by the non-air business has increased from 33 percent a year ago to 51 percent today.

The percent of travel offers generated by non-air has increased from 33 percent a year ago to 43 percent today, and the percent of travel units sold has risen from 53 percent to 67 percent similarly.

Now I'd like to turn it over to Jeff, who will talk some more about the business, and then Bob, who will provide the financial commentary before I return to sum up.

Thank you, Rick.

Priceline's second quarter results reflect the continued strength of our customer franchise and non-air travel businesses as well as the continuing difficult conditions in the airline industry.

Priceline's customer franchise remains strong with an eight percent increase in total offers versus second quarter 2001, and up 15 percent sequentially.

These results are driven by the continuing strength of our brand, effective online and offline marketing, and solid momentum in our hotel business.

We will continue to build support for non-air businesses through advertising and will be returning to television this fall with an expansion of our William Shatner super computer campaign.

The non-air travel businesses remain strong with hotel room nights sold up 60 percent over Q2 2001 and 20 percent sequentially.

The absolute increase in room nights sold from Q1 to Q2 was over 180,000 room nights, 51 percent higher than the absolute increase between the seasonally weak fourth quarter of 2001 and first quarter of 2002.

Results in this business were strong in June and July despite what appears to be a slowdown in the recovery for the airline travel market.

We also expect good results from a planned re-launch of a new and improved hotel product in August including improved star ratings, and amenity information, Web path improvements, and a best price guarantee.

The re-launch will be supported by online and offline advertising and should further push momentum for this business.

Our vacations product is off to a good start since its launch in May.

We have achieved solid bookings growth at attractive margins since launch, and the average vacation transaction size is almost four times our average, with higher passengers per offer and days per trip, indicating a distinct new customer profile for priceline.

And we are very excited about the market.

Package purchasing is migrating to the Internet, which provides a great medium for delivery of the content and information to support a vacation purchase decision, and an avenue for customers to achieve good savings.

We also believe that dynamic, build your own packages on the Internet will appeal to a broad segment of our population that was previously uninterested in buying pre-packaged holidays or tours from a travel agent.

Finally, we are not going to limit our approach to this market.

Rather, we will continue to build package alternatives to meet the needs of the broadest addressable market both on priceline and

.

We will also develop convenient applications to allow

customers to add hotels and rental car purchases to their itinerary to promote combined purchasing.

These initiatives are underway and will be deployed later this year.

The airline business continues to represent a challenge for the online channel space.

Pricing weakness continues, now exacerbated by an industry-wide slowdown in the recovery of traffic in June and July, probably as a consequence of a number of factors, including the effects of the economy and stock market woes on consumer behavior, continued terrorism concerns and the tapping out of demand for leisure air travel after nine solid months of aggressive discounting by the airlines.

Despite the catastrophic effects of low yields on airline financial results, airlines have chosen to address the current slowdown with a widespread fare sale.

As Rick stated, the path and timing of changes in these conditions is unpredictable.

And, therefore, we ware forecasting continued pressure of airline ticket bind rates and margins, reflecting the tightening over time of the spread between average customer offers and our underlying cost.

We have a number of initiatives underway to improve conversion on our airline ticket path, to increase offer volume for our visitors, to improve offer quality, and ultimately the bind rate, and to satisfy customers who are unsuccessful in our name your own price system.

This includes using information about our customers and their travel plans to tailor their experience on our site and our treatment of their offers.

Between priceline.com and

, we have a large base of travel with high purchase intent, with a customer offering on priceline having arguably the highest intent, having made a guaranteed offer.

When market conditions put pressure on air bind rates, we need to provide customers with the best available retail alternatives when their offers cannot be fulfilled.

will provide a vehicle for selling retail products to these customers, and over time, the combination of

and priceline.com will address a wider range of travel needs, than does priceline's current business, ameliorating the disproportionate impact on priceline of severe industry conditions such as exist today.

These initiatives are designed to drive additional revenues from priceline's loyal customer base and take advantage of the growing package market in the near term, and to over time expand the consumer markets served by our travel businesses.

We are pleased with the early returns from our vacation launch and expect these programs to make a positive difference - Bob.

Thanks, Jeff.

Our second quarter revenue of $304.5 million represented a 17 percent decrease from the second quarter of 2001 and a 16 percent quarterly sequential increase from Q1 2002 levels.

Our pro forma net income of three cents a share was in line with our original guidance on our last earnings call, representing our fifth consecutive quarter of pro forma profitability and our second consecutive quarter of GAP profitability.

As in Q1, our GAP profit was the same as our pro forma profit of three cents.

While we were obviously disappointed by our lack of momentum in our top line, we continue to be proud of our company's ability to not only manage our company profitably as we did in the second quarter, but also meet our bottom line expectations despite our revenue shortfall.

We did this by remaining exceptionally disciplined in managing our margins and our operating expenses, all of which essentially performed at or better than the levels that we outlined in our last earnings call.

While I'm not going to go through each of the line items of our income statement, I did want to point out that our total second quarter pro forma operating expenses of $43 million came in just over seven million dollars or 15 percent lower than the $50.2 million of operating expenses incurred in the second quarter of last year.

Again, we are proud of this aspect of our performance because we are now comping against quarters last year in which the lion's share of our turnaround plan had already been implemented.

And this year over year expense improvement is actually understated on an apples to apples basis, due to the fact that today's results reflect the effect of our carrying the additional burden of expenses associated with our acquisition of Priceline Europe, at the very end of last year.

Whereas last year's results do not.

Our second quarter pro forma operating income totaled $5.3 million, which as I mentioned earlier, represents our fifth consecutive quarter of positive pro forma operating earnings and our Q2 pro forma EBITDA was $9.9 million.

Our pro forma net income after giving effect to $788,000 of interest income and $245,000 of income from our ownership interest in Priceline Mortgage, was $6.3 million or three cents per basic and diluted share.

We mentioned on our last earnings call that we expected our GAP results to closely mirror our pro forma results going forward and accordingly our GAP results of $6.3 million or three cents per share, were essentially the same as our pro forma results.

As for cash and cash flow, we invested $1.7 million in capital expenditures during the quarter.

Which was well under our guidance of three to five million dollars.

We began the second quarter with $177.8 million of cash and cash equivalence on hand and we closed the second quarter with $180.2 million of cash and cash equivalence.

This is slightly lower than our previous guidance, due to the shortfall in revenue primarily in June.

Which caused a negative effect on our working capital position towards the end of the quarter.

Finally, we close the quarter with almost 230 million shares outstanding, and 352 employees.

As for our guidance, as I hope you have gleaned from all of our comments on this call, the current environment of the airline industry has made the task of forecasting our top line exceptionally difficult.

As with previous earnings calls, we are not going to provide specific guidance beyond our next quarter.

And as for Q3 expectations, while we are not going to provide you with a specific top line estimate, we would like to share with you a few points of data and some guidelines.

First, our July revenues, representing the first month of the third quarter, came in at roughly 92 to $93 million.

Second, we expect our August revenues to come in at or slightly below July levels consistent with the seasonality of business that we have experience in previous years.

And finally, we are managing our business based upon a wide range of outcomes in September.

Including a potential monthly sequential increase from August levels but also including a potential monthly sequential decrease from August levels.

We believe the upside to our September performance could be driven by the performance of our TV ad campaign that does begin to run in September and about which we are very excited.

However, our enthusiasm has certainly been tempered by our early look at the demand for travel around the September timeframe, driven, we believe, primarily by ongoing fear surrounding the anniversary of the terrorist attack.

As for pro forma EPS we expect to deliver our sixth consecutive quarter of positive results with a range of guidance between roughly breakeven and two cents per share on a pro forma basis.

As for our cash balance, for obvious reasons I'm not going to provide guidance on our expected cash balance at the quarter end because of the share buyback program that, as Rick mentioned, we will be launching in the next week or so.

I would like to turn the call now over to Rick for some closing remarks, after which we will open the call to your questions.

Rick.

As you can tell from our range of guidance, we're continuing to operate in a relatively uncertain and unpredictable air travel environment.

The most recent airline pricing exacerbated this, but we do not believe this pricing is sustainable and that it will rectify itself at some point.

But that point is hard to predict.

All that being said, we remain comfortable that we have a solid and profitable business proposition and will redouble our efforts to pursue and bring to fruition the growth initiatives and continued diversification which Jeff mentioned earlier.

We're very excited about these growth initiatives and believe this game plan provides a path to improved top-line performance despite difficulties that persist in the airline industry at large.

Priceline separately announced today a management realignment including the promotion of Jeff Boyd to Co-CEO and several other senior appointments to more solidly focus the organization around our travel businesses and the execution of these initiatives.

We believe strongly in the underlying value of our franchise and our business and our plans for expansion, and that confidence is underscored by the share repurchase program that we announced today.

We have decided to implement a stock buyback program, as outlined in our release, in conjunction with our purchase, Cheung Kong Holdings and Hutchison Whampoa have indicated an interest in buying a similar dollar amount of shares, approximately $40 million worth, for a total purchase by the three companies of up to $80 million.

While this is our effort to register our support for the business well beyond current valuation levels, we also view it as a smart way to utilize a modest amount of our cash and welcome Cheung Kong and Hutchison Whampoa's commitment to participate.

As usual, they're not only a significant investor but good friends to the company.

With that I'd like to wind up the sort of formal part of the call and turn it over for questions.

Thank you.

If you have a question at this time please press the one key on your touch-tone telephone.

If you question has been answered or you wish to remove yourself from the queue, please press the pound key.

One moment for questions.

Our first question is from Anthony Noto.

Thank you and good afternoon.

Two questions, the first is around Lowestfares.

Strategically how do you plan to use Lowestfares in conjunction with the priceline offering and if you could comment specifically on supply relationships, will you be using published fares on the site or will it be a mix of your opaque fares and published fares?

And will you try to create links between both priceline and Lowestfares and ways to increase overall buying rates?

And the second question relates to your stock buyback program.

If your cap ex for the full year hasn't changed and I calculated how much free cash flow I think you can get to, which is around eight or nine cents a share for the year - that indicates you have about a free cash flow yield of about four percent.

Will you continue to buy back stock until that yield goes to a certain level, say one or two percent?

Or is there some other measure that we should look for in determining when your stock buyback program may stop?

Thanks.

Let me handle the second question,

, and then I'm going to turn it back to Jeff to talk about

.

On the stock buyback plan, our view is that we're making a decision based on where the stock is today, our cash situation and our view of our longer-term prospects.

And, therefore, the value of this is an investment.

And we have a serious intention to implement this program, and at anywhere near current prices, as you know, this would cover a meaningful amount of the thin market float of the company.

I think our view on longer-term targets would be that we'll view the program as we move forward.

I would not say we'd be philosophically committed to or objecting to extensions toward financial criteria.

But I think there's a broader set of criteria that we're launching this program off of.

OK.

Go ahead, Jeff, on

.

Sure.

I think the principal question you asked,

, has to do with how the customer experience on

is going to work.

And I think the principal source of business for

today is traffic that's directed at priceline.com.

And we've had good experience and good conversion with

traffic.

And by itself, it's been an excellent deal for us.

Over time, what we anticipate is that at priceline we have a very large traffic flow, and we have a large number of customers who have made guaranteed offers who do not bind in our name your own price products.

At the appropriate time in the transaction path, those customers will be shown an offer, a retail offer branded

, so that if they can't succeed with a priceline purchase, they'll be able to see retail pricing.

And one of two things can happen.

They can buy and bind on a retail ticket, or that can inform their purchase decision on priceline and they could come back and perhaps have a better chance of being successful with a name your own price ticket.

So I think that's going to be the principal traffic low initially to

.

will also offer priceline's vacations inventory, and I wouldn't expect that inventory to be limited to name your own price inventory.

I would expect over time that that inventory would be fully disclosed, packaged pricing, as well as name your own price inventory with an appropriate

to customers so that they are navigating to the appropriate offers based on what's important to them: saving money versus more information about their trip.

Finally, as to inventory on

, priceline has access to generally available published inventory right now.

That's one potential source of retail inventory on

.

It's also possible that we might enter into a marketing arrangement with another online travel player to get access to additional private inventory from that online travel player in all of those things are under consideration.

Great.

Thank you very much.

Our next question is from

of Morgan Stanley.

Thank you.

A couple of questions.

One, can you provide an update on the status of the EBay travel platform?

Secondly, can you comment a little bit more detail on the competitive landscape, particularly in hotels?

There's a couple of companies, some of your competitors are obviously - you and those competitors are showing pretty strong metrics on hotels.

Could you talk about how you think you're competing directly against Hotels.com, Expedia, and other companies?

How you think that could change over the next quarter and two?

And third, any details on Priceline Europe and how that's doing?

Thank you.

Why don't I talk a little bit about the competitive landscape then we can have Jeff pick up EBay and then I'll come back and talk a little bit about Europe.

I think the - and I mentioned this on the last call.

The hotel space is different space than air on the Internet in certain important regards.

First of all, the own suppliers sites are less well developed both in an executionaly sense and also in terms of the share of aggregate online business they deliver.

And in addition, the various players who are in the value added space, I would call it, are a shorter list than exist in air.

Which means basically there is a lot more space available for them today to occupy and help, you know, hotels sell their rooms.

Second thing is fundamentally because of the nature, at least, of the hotel inventory and perhaps also some elements of differing strategies.

The hotels obviously did not reduce their capacity after September 11, but in certain respects they had some of the same issues as to airlines.

So they have definitely had more available inventory to play with conceptually.

There's plenty of room in the market, in my opinion, for various of the players to do well.

Exedia has a significant position now in this space, as does Hotels.com as you mentioned.

We are as we usually are, more of a niche business.

But we're obviously growing very quickly and we have a potential in my judgment in hotels, to ultimately own a much higher share of the space for two specific reasons.

Number one, the trade offs people have to make to get a hotel room with Priceline, are less onerous in certain respects than they are for air, and in so doing we can appeal to a broader target market.

And I think do appeal to a broader target market.

And secondly, as Jeff mentioned, our vacation product, which we're really just bringing up, is actually as to the hotel inventory a fully disclosed product.

Although the pricing is still opaque, because you bid jointly for hotel and air.

And so in that regard, we have even a more customer friendly alternative than hotel and certainly air.

So I think we have the ability to compete effectively over an extended timeframe.

I don't think the market is yet a share game as it is becoming in the airline side.

And I think there are less sort of - there's less volatility underneath it because even though the hotel chains and the like are not doing phenomenally well they're not in nearly as unstable financial shape as the airlines.

The second question as to an update on eBay, eBay had its official launch of its travel category in New York in June and are in the early stages of rolling out their marketing plans on eBay as well as some marketing off eBay that they have done and I think will do.

It's too early in the program to get into a specific discussion of results but we think the site looks great, we think it's a good product, and we believe it's going to be successful.

As to Europe, the deeper background is, as you know, during the time we did our downsizing/turnaround plan, whatever it should be called, we chose to pursue a less aggressive strategy in Europe both financially and in a business sense.

And so we effectively downsized our operation and made a commitment to the market that we're going to run our European operation at approximately a penny of share loss per quarter, as Bob mentioned earlier on the call.

The truth is we have gotten our numbers below that, in other words, favorable to that target.

And our next objective is to view appropriate ways in the current context to re-inject some growth momentum in that business.

And we have several things underway that are really in stages of negotiation or creation that we think can do that in a cost-effective fashion.

Thanks for the detail, Jeff.

Thanks, Rick.

OK.

Our next question is from Tom Underwood.

Yes.

I was just wondering if you could tell me what advertising was in the second quarter and then with the television ads coming in September what to expect advertising to be in the third quarter?

Bob, why don't you take that?

Sure, Tom.

We - the advertising was 12.8 million in the second quarter.

As has been the case with previous quarters, advertising is one place where we're able, as you know very well, Tom, that's a number that we're able to manage intra-quarter.

So I'm not going to give you specific guidance other than to say that obviously with a fairly wide range of revenue that we've essentially put on the table with our Q3 guidance - you know, we are looking to manage to a breakeven to two cents a share and advertising is one place where we'll be managing expenses to achieve those numbers.

Obviously, we'd love to - we'd love to spend, you know, as much in the third quarter as we - as we did in the second quarter, but time will tell.

And, you know, we're going to be on television so suffice it to say we'll be making a significant investment in Q3, I'm just not going to give you an exact level.

OK.

And then just as a follow-up to that second quarter advertising level, that means that I guess you saw roughly flat sales and marketing versus the first quarter but a significant decrease as a percent of revenue.

What led to the decrease in sales and marketing staying in line?

From year over year or sequentially?

Sequential.

I mean you saw first quarter of about

and I guess you saw about the same in the second quarter?

We went - for sales and marketing, we went from Q1 of about $10.6 million...

Oh, OK.

... to $11.8.

Now in terms of percentage of revenue, that's a slight increase.

But, nevertheless, actually you know I think our guidance was between four and 4.5 percent of revenue for Q2.

We came in at 3.9 percent.

So that's, again, illustrative of the fact that, as I said in my remarks, we're very carefully managing expenses.

These are the expenses that show up in our call centers, our customer service, our credit card charges and, most notably, our charge-backs, where you may recall we've had historical troubles with that.

We really sort of turned that around towards the end of Q4, but most notably in Q1, and we've basically been able to maintain those wins.

And we expect to going forward.

That's great.

What were charge-backs roughly in the second quarter?

We haven't given that number out, it will be in our queue.

But, again, you'll see that it's a very small number.

It was essentially flat in Q1 and something around a half a million dollars in Q2.

So we're in very good shape on that line item.

Thanks.

Our next question is from Justin Baldauf of Merrill Lynch.

Thanks.

I just have two quick questions.

The first, on the hotel business, I think you sold about over a million room nights in the quarter, which is a lot.

And I'm just wondering if you have any sense as to what fraction of the total addressable market that might be.

I'm sure there's anywhere from, I don't know, 50, 100 million plus hotel room nights sold in a year.

But I'm just wondering if you have just a rough sense of what that would be for the quarter, so we have a sense as to what the ultimate opportunity might be.

And then, also, I think you mentioned that you think you can gain market share in the hotel space.

I'm wondering if you have any sense as to any recent trends in market share.

And then the second question goes to the notion of the potential impact of the anniversary of September 11th on September business.

I'm just wondering if that - if you're being, you know, very conservative on just the kind of speculation that there might be an impact, or have you actually seen anything or heard anything from the airlines that would suggest that there's going to be a real impact there?

Thanks.

Justin, on your hotel questions, I think it's an imprecise science to define the size of the market in hotels and what a meaningful share dimension is.

I would certainly feel that - as I said in words earlier - that we don't address the whole market, because we address the segment the size of which is defined by people's desire to obtain savings in return for what

products or really modest tradeoffs.

But I think there's plenty of upside for us and others, because I think the online space is still relatively immature for hotel sales.

And we continue to see good momentum as we move into this quarter.

And those two business there and hotel, from our perspective, has gotten virtually entirely disconnected.

But I think we'd be blowing smoke to try to reduce your question to some real precise sort of numeric input.

I think on the other - and Jeff, maybe you can help me out too - my sense is, you know, without causing a big to do, we certainly have heard of negative travel consequences.

I think they've been in the press actually.

Yes,

.

I think the way I would respond to the question is, I think we are being conservative given the amount of, sort of, scientific evidence that's available this early in the game.

But I do think it's fair at this point in time to say, you know, we can't really predict whether there will be an impact and what the extent of that impact will be.

And under those circumstances it really doesn't seem appropriate to try to give specific guidance.

Yes.

And I would just - it's Bob.

I'd follow up by, you know, when we talk about, sort of, what we're seeing for September.

Obviously, you know, it's the end of July, early August, and, you know, typical to our business, we always have a view or we have a very good look, sort of, when we're 30 to 50 days out what our expected bookings should be.

And suffice it to say, we're disappointed 30 to 50 days away from, you know, the beginning to the middle of September.

We're disappointed with the bookings that we have seen thus far.

And, you know, I guess our view is that - that's really sort of demand driven.

It has nothing to do, obviously, with sort of the binary problems that we discussed on the call.

We really think it's about, sort of the demand for travel around that specific timeframe which we view is obviously operational, but it's no less - no less it is affecting our business.

I have heard some specific things that I wouldn't disclose exactly which airlines it suggested is going to be a challenging time.

OK.

Thanks a lot.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may disconnect at this time.

Have a good day.