Booking Holdings Inc (BKNG) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Priceline.com fourth quarter conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session and instructions will follow at that time.

As a reminder, this conference call is being recorded.

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, 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.

For a list of factors that could cause Priceline.com's actual results to differ materially from those described in the forward-looking statements, please refer to the Safe Harbor statements at the end of Priceline.com's earnings press release, as well as Priceline.com's most recent filings with the Securities and Exchange Commission.

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

A copy of Priceline.com's earnings press release together in an accompanying financial and statistical supplement that among other things reconciles Priceline.com's pro-forma results to its financial results under generally accepted accounting principals is available in the investor relations sections of Priceline.com's website located at www.priceline.com.

I would now like to introduce Priceline's president and chief executive officer, Mr. Jeffery Boyd.

Mr. Boyd, you may begin.

Thank you very much.

And welcome to Priceline's fourth quarter earnings call.

I'm here with Priceline CFO, Bob Mylod.

Priceline's fourth quarter results came in consistent with our guidance.

We achieved revenues of 197 million dollars, and a pro-forma net loss of one cent per share.

Fourth quarter GAAP results were affected by restructuring and stock-based compensation charges, which Bob will detail shortly.

For the full year, Priceline had revenues of $1 billion, down 14% from 2001.

Pro-forma net income of four cents per share compared to seven cents per share for 2001.

And 24.5 million dollars of pro-forma EBITDA compared to 24.4 million dollars for 2001.

2002 was marked by a deteriorating fundamental outlook for Priceline's major airline partners.

Deep retail discounting of tickets and consequent weakness in our opaque airline ticket business, as well as continued momentum in our hotel offerings.

A 36% drop in tickets sold in 2002 was offset by a 47% year over year increase in hotel room nights sold, and to a lesser extent by our newly launched packages business.

Priceline's hotel business was clearly a bright spot in 2002 with sales of over 4 million room nights.

We have significantly increased our investment in that business including the launch last month of a major TV advertising campaign.

The creative features Priceline's up to 40% pricing advantage over major online sites and the high quality of our hotel inventory with direct consumer delivered messaging.

The ads also do a great job we think of teaching potential new customers how the product works, and reassuring them that they will receive the quality they expect and the precise neighborhood they choose.

Although we are only several weeks into the campaign, we are quite pleased with the initial results.

Specifically, we are running more than 30% ahead of last year's room night sales so far this quarter despite a jittery travel market.

We expect this year over year growth trend in our hotel product to continue, as the ad campaign fuels improved demand and reflects well on our brand generally.

Priceline's customer franchise remained strong during the quarter despite difficulties in our airline ticket product, with the acquisition of 759,000 new customers bringing the total customer base to 16.1 million.

Unique offers coming from repeat customers constituted 66.3% of total unique offers.

While our principal operational focus in the past several months has been on growing and expanding our hotel product, that focus is part of a longer-term strategic goal of diversifying our business away from our opaque airline ticket business.

We have mentioned on previous earnings calls that supplementing our merchant business with retail offerings would be another contributor towards fulfilling our diversification goals.

As is the case with hotels, I am pleased to report meaningful progress on this front too.

In the fourth quarter, we began selling retail tickets to unbound Priceline customers and selling them directly to customers on lowestfare.com.

While retail ticket sales are lower margin transactions, the sale of retail tickets will allow Priceline to satisfy unbound customers that would have bought elsewhere, to cross-sell hotel and rental car to retail purchasers, to limit the loss of market share resulting from shrinking opaque air sales, and to build bookings and awareness for lowestfare.com.

Ultimately, all of this diversification activity is intended to deliver metrics that put us back on course for achieving year over year increases in travel bookings, total revenue and gross profit despite decreases in our opaque airline business.

We are encouraged about what some of the numbers are telling us.

Specifically, in the fourth quarter, Priceline recorded 10.4 million dollars in retail gross bookings not included in revenues. 63% of all fourth quarter booked customer offers came from services other than our opaque airline product.

This is a record for Priceline and is up from 47% a year ago.

Our expectation is for this number to continue to increase and to approach or exceed 70% by the end of the year.

As for how all this relates to our future financial results, we expect to reach an inflection point some time in the second half of this year, at which point the year over year decreases in our opaque airline ticket sales will be overtaken by the sheer size and corresponding growth rates of our collective other businesses.

While Bob is going to limit specific 2003 guidance to the first quarter, our goal is to be in a position to report year over year increases in total travel bookings, revenue and gross profit during the second half of this year as a result of this diversification dynamic.

I will now turn the call over to Bob for a more detailed financial review.

Thanks, Jeff.

As I hope we have made clear by Jeff's opening comments, as well as by comments that we have made on past several earnings calls, the task of forecasting our business has been a very difficult process because of the fact that our largest revenue contributor, our airline business, has seen its revenue base erode fairly significantly over the past several quarters.

Because of this dynamic, we chose on our last earnings call not to give specific top-line guidance for Q4.

Instead, we stated that our actual October revenues representing the first month of the fourth quarter were approximately 72.5 million dollars, and that we expected to experience monthly sequential decreases in revenue for each of the remaining two months of the quarter.

Our Q4 revenues of 197.3 million are reflective of the fact that the quarter played out as expected.

All other financial measures most notably gross margin, variable operating expenses and fixed operating expenses came in at or better than our forecasted levels, and we were able to partially capture some of the cost saving benefits of our fourth quarter restructuring during the quarter as well.

This is why our pro-forma loss per share prior to our previously announced restructuring charge, which I will discuss momentarily, came in comfortably within our original break even to 2 cent loss estimate and one penny better than consensus first call estimates of a loss of 2 cents per share.

We also delivered pro-forma EBITDA of 1.2 million dollars for the quarter, bringing our full year pro-forma EBITDA total to 24.5 million dollars.

We did announce in our last earnings call that we would incur a restructuring charge related to the downsizing in our work force and the restructuring of our non-travel verticals.

The substantial majority of all of these activities were completed in the fourth quarter and resulted in the charge of 4.7 million dollars, which when added to our 250,000 dollar stock base compensation charge brought our GAAP loss to 3 cents per share.

Approximately 1 million dollars of this charge was non-cash in nature.

We successfully reduced our employee and consultant head count by approximately 65 during the quarter, and we are now operating our business with less than 300 employees, and the leanest cost structure that we have had in our company's history.

As for cash and cash flow, we began the quarter with 152.5 million dollars of cash and marketable securities, and we closed the quarter with 149.6 million of cash and marketable securities.

Our balance sheet is free of any debt.

The small decrease in our cash balance is consistent with the 1.7 pro-forma loss that we incurred in the quarter.

We expended 2 million of cash on capital expenditures during the quarter, bringing our full year cap-ex spend to approximately 9.5 million dollars.

And now I'd like to go over our guidance.

I'm going to start by expanding a little bit upon Jeff's remarks.

You just heard Jeff mention that we expect to reach a positive reflection point in our revenues at some point during the latter half of the year and I wanted to provide a little numerical context to his statement to help investors better understand this thought.

Simply put, our just completed fourth quarter represents the sixth consecutive quarter in which the year over year quarterly revenue comparisons for our airline - our opaque airline ticket business have been either flat or negative.

We are forecasting this negative trend to continue throughout 2003 for each of the four quarters of the year.

As a side note to this statement we also expect to experience a small quarterly sequential decrease in airline ticket sales here in the first quarter.

This is certainly -- excuse me -- this is certainly atypical of what seasonal patterns would dictate, i.e., we would normally expect to see a Q1 seasonal bounce up in ticket sales from Q4 levels.

But this outcome is obviously not atypical of the ongoing buying rate difficulties that we continue to face in our airline product.

However, our just completed fourth quarter also represents the seventh consecutive quarter in which we have grown hotel revenues by at least 25% on a year over year basis.

The result of this is that our hotel business is now triple the size it was only eight quarters ago.

We are pleased to say that we expect this 25% plus year over year hotel growth trend to continue for each of the four quarters of 2003.

Not surprisingly, the mathematical product of such compounding and growth over such a sustained period of time, especially when supplemented by the other diversification activity that Jeff just mentioned puts us in a position to feel comfortable about consolidated company growth and revenues as we get towards the second half of this year despite the forecasted decline in opaque airline revenues throughout the year.

As for specific guidance for our first quarter of 2003, I'm going to mirror the format used on our last two earnings calls.

Our January revenues representing the first month of results from our first quarter came in at roughly 62.5 million dollars, and we expect to experience monthly sequential increases off of this base of revenue for the remainder of the quarter, which is typical of our seasonal pattern.

As for earnings, we expect to report pro-forma bottom line results of between a loss of 2 cents per share and break even.

This forecasted loss is consistent with the forecast that we made on our Q4 earnings call and is representative of the increased expenditure in advertising that we are incurring here in Q1.

As for 2003, we are not going to provide specific revenue guidance, but we hope that Jeff's and my remarks regarding the dynamics affecting our 2003 revenues will be helpful to investors in understanding the range of outcomes for our quarterly and full-year revenues here in 2003.

As for our full year EPS forecast, I will reiterate what I said on our last earnings call, which is that despite our projected first quarter operating losses, it is our goal to be profitable on a pro-forma basis, for each of the final three quarters of 2003 and to deliver full year results that exceed the 4 cents of pro-forma EPS that we delivered in 2002.

Finally, I want to point out that all of our aforementioned forecasts are based upon an assumption that we will continue to operate in the consumer travel market similar to the current one, and any outbreak of war or terrorist event would probably have a negative impact on the travel market in general, which in turn would negatively affect our own operating results.

And with that, we would be happy to answer any of your questions.

I'll turn it back to the operator.

Thank you.

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

If your 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 comes from Tom Underwood of Legg Mason.

Yes.

Thanks a lot.

Bob, I was wondering if either you or Jeff could go into just a little bit more detail about what is leading to the significant drop-off in the air buying rate and where you would expect it to begin to stabilize?

Tom, I can take that.

I think the principal cause of the drop in the buying rate that we have seen is the same symptoms that we have discussed in earlier calls.

It is really -- the retail pricing environment has gotten to a point where retail prices are so low that the value provided by our product in many cases isn't enough to justify the tradeoffs.

So our offer quality is tied to retail prices and goes down.

And we still offer customers great deals in certain advance purchase bands for certain Os and Ds in certain circumstances.

But as compared to very low retail prices that are often available, we don't have compelling bargains across the board.

Jeff, do you still have all of the full service or I guess all of the full fare or hub and spoke airlines participating, all the major ones can?

Yes.

The only airline that's not participating in this was disclosed last year is Northwest airlines.

Great.

Thanks.

Thank you.

And our next question comes from Anthony Noto of Goldman Sachs.

Thank you very much.

Hi, Jeff and Bob.

A couple of questions.

As we think about your advertising plan throughout 2003, how should we think about the spend there relative to 2002?

And I know also in that line you record your customer service costs.

What type of change do you anticipate on a year over year basis?

Just so I have a better sense of -- you're pretty clear - you think you can grow gross bookings and revenue as well as gross profit, and so that seems to be the biggest swing factor in the sales and marketing line, getting down to the EPS.

And if you could relate that back to where you were in the fourth quarter, both on a marketing spend and a percent of revenue in customer service.

And then I'd want to follow-up.

Thanks.

Yes.

Well, I'll take that, Anthony.

As far as our advertising spend, you know, we mentioned in our last call that as we get into the first quarter that we expect to spend at levels significantly greater than the ones that we have been spending, you know, in sort of recently.

You know, we spent 11.6 million of -- on advertising in the third quarter of '02.

We spent $10 million in the fourth quarter.

I think you can safely assume that we'll spend greater than either of those numbers here in the first quarter of '02, which obviously if you compare it on a year over year basis where we spent 10 million in the fourth quarter -- I'm sorry of '03 -- and if you compare that to what we spent in the fourth quarter of '02, obviously that would represent sort of a minimum of a 20% increase in advertising spend year over year.

Now, as we get into the second quarter, we spent about 12.8 million in the second quarter, and, you know, while I'm not going to sort of nail down a specific target there, you know, depending upon sort of what our trajectories are and how effective the hotel advertising continues to be, and as Jeff mentioned so far out of the box here we're very happy with it, we'll pivot off a number around there.

And as we get into the second half, you know, we will call it then.

But, you know, again roughly we spent 44, 45 million on advertising in Q --in 2002.

And we're going to pivot somewhere around that number in 2003.

Recognizing of course that in 2002 a very small fraction of that ad spend was spent on a hotel.

And here in 2003, a very large fraction of that number will be spent on hotel.

So obviously that's what's driving the results so far, and that's - you know, as we mentioned in the press release, we're going to continue to hammer home that message throughout 2003.

As for the other sales and marketing, you know, we have been -- we've sort of leveled off here at a very comfortable, you know, percentage of revenue and I would expect that that's where we're going to continue to sort of operate, sort of in the 3.5 to 4% of revenue range.

Okay.

Actually, I had two other questions.

One is on the lodging side, it appears that your gross margin is, you know, not much different than the rest of the business, right around 15, 16%.

Can you talk through any initiatives that can cause that gross margin, not including raising prices, but other sort of initiatives in terms of the processing directly what the properties that could cause that margin to go up and maybe give your a little bit more leverage there?

And then secondly, in talking to our airline analysts we have been hearing different things from the airlines themselves that potentially they're increasing their opaque supply here in the near term, in front of, you know, potential war as well as some liquidation situations.

Could you comment on that supply-side?

Thanks.

Sure.

As to hotel margin, I think it is fair to say that our hotel margin is running at slightly higher than our all in blended margin and I think we have talked about that before.

So it is -- the hotel margin is slightly stronger than our all in blended margin.

Over time there may be an opportunity to increase that margin by basically reducing the cost of reservations, particularly for smaller hotels that have to pay several intermediaries before they even get to a GDS.

That is something that we're looking at and working on.

So there may be an opportunity there, but I would say that I would look at that also as an opportunity to improve the economics for our partners.

So that is just something we have to see how that plays out.

As to the supply-side, with --as regards to the airlines, I think what we're seeing is different behavior from different carriers.

We see some carriers being more aggressive in Priceline than others.

And I would expect that behavior to continue.

I can't predict whether some or most of our partners would get more aggressive in Priceline in the event of an outbreak of war.

It certainly in our opinion would be a smart thing for them to want to do because we have good demand for the business.

We're selling tickets.

We're also selling some retail tickets, and so I think this is a channel that they should want to use if they need the demand, but I can't predict how aggressively they'll do so.

Great.

Thank you very much.

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

I am showing a follow-up question from Tom Underwood of Legg Mason.

Yes.

Actually, sorry to harp on buying rate, but now I'm going to go to the other product - hotels.

And just noticing that you seem to be running in the low 60s right now with the increased advertising and I guess the prospects for a lower repeat percentage as you grow further, how do you expect the buying rate to move throughout the year?

I think if you -- if we look at what we have experienced so far this month, given the advertising has driven an increase in new customers to the hotel product and we have not seen thus far a deterioration in the buying rate.

And so I don't right now see any evidence that that's going to happen going forward.

Great.

Thanks.

You know, and sort of as a follow-up to that, sort of a quasi follow-up to Anthony's question regarding hotel margins -- obviously, Tom, you know that our gross margins in our hotel product are substantially lower than, for instance, the two folks we have been advertising -- mentioning in our advertising -- Hotels.com and Expedia.

So we obviously think our margins are defensible, it's part of the reason why we're able to make the savings claims to the customers that we are.

So, in fact, as we're putting percentage savings in our advertising, in some ways we hope that that's going to actually help the quality of our offers which could actually improve buying rates.

We're not necessarily predicting that, but we certainly think that we're very comfortable in this low 60% range.

Okay.

And then I'm wondering have you all stated just in roughly what your hotel breakdown in terms of revenue was for last year?

Or do you intend on doing so?

No.

I think we'll stick with the breakdown in terms of booked offers that we have in the financial supplement.

Okay.

Great.

Ladies and gentlemen, this concludes the question and answer session for today, and this also concludes today's conference.

Thank you for your participation.

You may disconnect at this time