Booking Holdings Inc (BKNG) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Priceline.com Second Quarter 2003 Earnings Conference Call.

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

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

If anyone should require assistance, during the conference, please press "*" than "0" on your touchtone telephone.

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 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 or future goals and similar expressions reflecting something other than historical facts are intended to identify forward-looking statements.

For a list of factors that could 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 filing 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 within the company's financial and statistical supplement is available in the "Investor Relations" section of Priceline.com's website, located at "www.priciline.com."

And, now, I'd like to introduce the Priceline speakers for this afternoon.

Mr. Jeff Boyd, President and CEO; and Bob Mylod, CFO.

Please go ahead, sir.

Thank you very much, and welcome to our second quarter conference call.

I'm here with Priceline's CFO, Bob Mylod.

Good afternoon, everyone.

Priceline's second quarter results succeeded our range of guidance and the First Call consensus estimates based on strong hotel and rental car results and stabilized airline ticket sales, as improved visa travel demand offset continued weak bind rates.

For the quarter, we had revenues of $240 million, up sequentially 19% from the first quarter, and gross travel bookings of $297 million.

Priceline recorded GAAP net income of $7.7 million or 20 cents per share for the quarter on a post-split basis, as this was our first quarter reporting results after our 1-for-6 reverse stock split implemented in June.

Accelerating growth in hotel sales continued during the quarter.

Gross margins improved, as retail business grew and rental car results continue to improve.

As most of you know, Priceline's primary focus, over the last few quarters, has been building our merchant hotel business; and we achieved record results in the second quarter.

Priceline sold over 1.5 million room nights in the second quarter; and hotel unit sales were up 38% over last year's second quarter and 22% over the first quarter of this year, demonstrating the quality of our product and the continued success of our marketing.

Priceline added 270,000 room nights in the second quarter, and we are particularly pleased that our year-over-year unit sales growth rate continued to accelerate from 35% in the first quarter to 38% in the second quarter.

Strong hotel results continued with unit sales growth increasing to-date in July compared to last year.

Priceline's gross margins continued to improve in the second quarter as well, 16.9% versus 15.8% in the second quarter of '02 and 16.5% in the first quarter of '03.

Growth in agency retail sales and improvement in merchant margins drove this margin improvement.

Priceline had agency gross bookings of $30 million in the second quarter, up 44%, sequentially, and an increase of $26 million over last year.

The continued growth in Priceline's retail ticket sales in the second quarter contributed to our higher reported gross margins and growing consumer acceptance of this significant product extension gives us confidence that scheduled enhancements to our airline ticket offering will be well received and additive.

Our progress in diversifying our business and broadening Priceline's customer appeal is underscored by the fact that over 75% of our booked reservations in the second quarter came from businesses other than opaque air, up from 71% in the first quarter.

Packaged sales also increased significantly in the second quarter up over 100% year-over-year.

We added 700 new hotel properties and 40 new destinations since the first quarter.

Over 1,500 hotels now participate in Priceline packages with almost 100 destinations, and we have significant product enhancements scheduled for the fourth quarter.

Product improvements continued to pay off for Priceline in the second quarter.

Enhancements in the first quarter made to our rental car path aided conversion and continued strong bind rates; and the second quarter bind of 50% was up 13% from the year-ago quarter.

Improving demand and strong conversion drove a sequential quarterly increase of over 192,000 days sold or 30%.

Whereas, first quarter days sold were down 14% year-over-year, second quarter rental car unit sales were up 4% year-over-year.

This growth trend accelerated in each month of the second quarter and continues in July with month-to-date year-over-year growth now exceeding our hotel growth rate.

This trend will be supported by re-launched rental car site, launching in two phases, this quarter.

Phase 1, launched earlier this month, comprises faster response, improved user guidance, and better content and merchandising.

Phase 2 includes retail options for times of constrained opaque inventory and will be launched in the coming weeks.

We anticipate this new functionality will drive increased retail rental car gross bookings at attractive margins.

Airline ticket results were mixed.

Demand for opaque tickets increased 15%, sequentially; but the bind rate declined to 23.8%, resulting in a slight sequential increase in units sold.

However, higher average opaque book fares, combined with significant growth in the retail ticket sales, resulted in a 16% sequential increase in combined opaque and retail airline ticket gross bookings.

We are comfortable with our solid demand trend, particularly, in light of the fact that we have not run air-specific offline advertising for almost a year; instead, we have benefited from our brand equity, online efforts in association from our hotel campaign, and improving leisure demand.

We believe that Priceline is well positioned to capture significant airline ticket demand, when it resumes airline ticket and general travel advertising after air product improvements are launched, later this year.

Priceline continues to make progress on its stated goal of developing retail product offerings to diversify its revenue streams and broaden its customer appeal.

Recent milestones include the launch of Travelweb hotel inventory on "lowestfare.com," the purchase of "rentalcars.com," and the re-launch of the rental car product previously mentioned.

During the second half, we intend to launch improved retail integration across all of our travel products -- rental car, hotel, air and packages -- giving our customers a wider array of choices and the best-travel deals on the Internet.

Priceline's brand and customer franchise remains one of our most highly valued assets.

We added 900,000 new customers in the second quarter, up 20% sequentially; and total travel offers increased 23% sequentially reflecting strong demand for all of our travel products.

Because of our brand and distinctive product offerings, we have been successful in generating demand growth, particularly, for our hotel product while spending, we believe, less in the quarter on advertising than any other leading travel site.

Our hotel TV campaign continued its success, and we are supplementing with radio this quarter to extend our reach.

We're also advertising rental car on the radio to support the peak summer booking period and plan to market product improvements as appropriate.

In summary, we are pleased with our second quarter earnings and progress on our business initiatives.

We look forward to continued growth in our non-air businesses and further progress on repositioning our air business with slight improvements later this year.

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

Thanks, Jeff.

I'm going to begin with a brief review of our second quarter results and then finish with some forward guidance.

We stated on our last earnings call that our April revenues representing the first month of Q2 came in at roughly $58 million, and that was expected to experience monthly sequential increases off of this base of revenue for the remainder of the quarter consistent with the overall seasonal pattern of our business.

Our Q2 revenues of $239.6 million reflect that the quarter played itself out according to that guidance with, particularly, strong results in the month of June.

As you will see, when I get to the guidance portion of my remarks, the strong June results have thus far been carried into July.

As Jeff mentioned, the main story for the second quarter was the absolute performance of our hotel business, which experience accelerating year-over-year growth for each month of the quarter culminating to year-over-year growth in the room nights sold for the quarter of 38%.

And while our hotel service was indeed the main driver of our sequential topline growth, our airline product -- which for several quarters had been in decline and had obscured some of the strong results that we've been delivering for sometime now in our non-air products -- turned in results that contributed to our sequential growth in revenues.

We said on our last earning call that we expected unit sales of opaque airline tickets to be roughly flat on a quarterly sequential basis.

In fact, we grew the unit sales by a couple of percentage points which, when combined with higher ticket prices and a significant sequential increase in sales of retail airline tickets, caused total gross bookings on our airline business to increase 16% sequentially.

Our gross margin of 16.9% represented the highest quarterly margin in our company's history.

All segments of our business contributed to this performance.

Our merchant businesses, which represent our core opaque products, grew their combined margins by 30 basis points on a quarterly sequential basis.

And the continuing quarterly sequential growth of our agency businesses, run principally by our retail airline business, contributed to a strong sequential growth in fee income.

It is worth noting that, alone in two quarters, our agency business has grown from $131,000 of fee income in the fourth quarter of 2002 to $1.5 million of fee income here in the second quarter of 2003.

Hopefully, this demonstrates to investors that our retail strategy has begun to pay real dividends; and, as Jeff mentioned, our agency/retail initiatives have been fairly modest in nature thus far.

And we have a multitude of product developments to deploy in the second half, which will hopefully continue this business, diversify our overall revenue streams, and expand our reported gross margins over the long term.

Our revenue and gross profit performance, when combined with our continued focus on expense discipline and a very strong performance from Priceline mortgage, was contributed in excess of $1 million of income allowed us to deliver earnings per share of 20 cents, which comfortably exceeded our previously announced estimates of 12 to 18 cents per share; and, as Jeff mentioned, our results also exceeded the 14 cents per share First Call estimate.

Our second quarter earnings include the effect of 172,000 of stock-based compensation and option payroll taxes, which the analysts who cover Priceline back out of their First Call estimates.

As for cash and cash flow, we began the quarter with 139.8 million of cash and marketable securities; and we closed the quarter with 149.2 million of cash and marketable securities.

We extended $1.1 million on capital expenditures during the quarter, and the 9.4 million increase in cash during the quarter was bullied by $4.5 million of proceeds from the exercise of stock options.

Although this amount was more than offset by cash that was used for the acquisition of "rentalcars.com" and for several sizeable prepaid expenses related to significant insurance in software renewals in the quarter.

And, now, I'd like to go over our guidance; and I'm going to use the same format that we've used on our last two earnings calls.

Our July revenues representing the first month of results for the quarter are expected to come in at roughly $93 million to $95 million, and we expect to experience month sequential decreases off of this base of revenues for the remainder of the quarter, consistent with the expected seasonal pattern of our business.

You may recall that when we outlined our financial goals for 2003, at the beginning of this year, we said it was our goal to experience year-over-year growth in revenues at some point during the second half of the year.

We are comfortable now that we will achieve this goal in the third quarter with an estimated year-over-year revenue growth of approximately 5%.

We expect that our opaque airline ticket business will be roughly flat on a quarterly sequential basis, and we expect that our year-over-year growth in hotel room nights sold will be at least as high as the 38% year-over-year achieved in the second quarter.

Rental cars continues to deliver very strong results, which make us comfortable in saying the rental cars will grow this year-over-year unit sales at an even faster rate than hotel's overall its unit sales.

We expect Q3 gross margins to come in at or slightly higher than the record 16.9% gross margin that we experienced in Q2; and we expect our fixed operating expenses, including our advertising expense, to come in at levels roughly consistent with Q2 levels.

And we expect fortified mortgage to once again be contributory to our bottom-line in an amount of approximately $1 million, although that income stream is subject to greater variation to the interest rate swings.

As for Q3 earnings, we expect to report GAAP net income of between 20 and 22 cents per share; and this compares to the First Call estimates -- consensus First Call estimate of 15 cents per share.

I want to note that we will be declaring and paying the non-cash dividend on our preferred stock in Q3, which will have the added effect of reducing our net income applicable to common stockholders by an estimated 3 cents to a level of between 17 and 19 cents per share.

We expect our cash balance to increase by approximately $10 million during the quarter.

This number could change, depending upon the extent, if any, to which we employ some of our cash to buy back stock during the quarter in connection with the stock buyback program that was authorized by our board of directors last year.

As for our fourth quarter forecast, we expect to accelerate our year-over-year growth in revenue from Q3 levels to a range of approximately 5 to 10%.

Q4 is typically our seasonally weakest quarter, particularly, for our opaque airline product.

Having said that, we expect to see a different and less seasonal pattern for our retail business in any given fourth quarter in the future including the fourth quarter of this year.

We therefore expect to see a fairly significant increase in our retail agency bookings expressed as a percentage of our total bookings in the quarter.

Because of this mixture phenomenon between merchant -- whose revenues we report on a gross basis -- and agency, which we report on a net basis, our gross bookings metrics and our reported gross profit are expected to take on increasing importance, as we move through the next several quarters and beyond.

As for our Q4 EPS, we are targeting a range of approximately 8 to 12 cents per share, which compares to current First Call estimates of 7 cents per share.

Finally, I want to point out, as I have done on previous calls, that all of our above-mentioned forecasts are based upon an assumption that we will continue operating in a consumer travel market that is roughly similar to the current one and any further geopolitical instability or terrorist event, particularly, within the United States within our likelihood have a negative impact on the travel market, in general, and our operating results, in particular.

With that, we would be happy to answer your questions, now.

Thank you, sir.

If you have a question, at this time, please press the "1" key on touchtone telephone.

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

Again, if you'd like to ask a question, please press the "1" key.

And our first question is from Anthony Noto of Goldman Sachs.

Hi.

This is Eric Webber for Anthony Noto.

Can you give us any trends in average selling price by product categories?

Bob.

Yes.

Eric, as you know, we do not break out our average selling price per unit; but, as we did mention it really for our airline product, we did see average selling price increase in our airline ticket business in the second quarter.

Part -- that's partly reflect -- a reflection of our reduced bind rates, as our bind rates went down.

We were binding only the most robust offers, which had partly the effect of increasing our average selling price.

Average selling price for our other products -- probably, they have -- well, they did increase very, very slightly; but our unit growth and our revenue for our other products were fairly similar.

Thank you.

Thank you, and our next question is from Tom Underwood of Legg Mason.

Yes.

Congratulations on a very good, guys.

I was wondering, if you could give us just a little bit more detail on what the enhancements have been that have led to the surprising strength in rental cars?

Tom, I think, there are a couple of things that have helped our rental car business.

Earlier in the year, we made some changes to the website that improved the processing time; in other words, the time it takes for a consumer to get an answer with respect to their offer.

We've also done some things to improve the merchandising; and, for example, we've included an opportunity to up-sell customers to a better car-type, and we've also employed some fixed-price cross-sell type offers.

I think all of those things have helped.

I also think, and it may even be more significant, that the rental car business has benefited from the hotel advertising, which really shines a light on, a very consumer-friendly product of Priceline, and for customers who used to think of us as a place where you had to let us pick the time for you to fly in your airline flight.

It really pushed the company in a different light, and I think the rental car business has benefited from that advertising.

I also think it's benefited from good market conditions, strong consumer demand, and really a much healthier rental car market per se.

Rental car companies are getting some higher prices these days for retail products.

Therefore, we're delivering some good savings; and I think if anybody who's been to our website recently would see, we're now guaranteeing the best prices on rental cars and advertising savings of 25% versus other leading online travel sites.

Okay.

Have you seen any material changes to the pricing that you're achieving, I guess, on a baseline basis?

I think you mentioned that, maybe relative to retail, it has declined a bit.

And then have you seen any change to inventory levels from suppliers?

Suppliers have been using Priceline appropriately.

They've allowed us to, basically, fill in the times when they've got more fleet than they need.

And they recognize now that we're a significant part of their distribution, and I think they're using the system appropriately, aggressively.

As to the pricing that we're receiving, I don't want to get too much into that other than to say what I said before, which is retail prices in rental cars are certainly firm versus where they were last summer; and I think that's benefited us.

Great.

Thanks.

Thank you sir.

And, ladies and gentlemen, this does conclude today's conference.

Thank you for your participation.

You may disconnect at this time, and have a great day.

Thanks.

Everybody.

END