Booking Holdings Inc (BKNG) 2003 Q3 法說會逐字稿

Good day, Ladies and Gentlemen and welcome to Priceline.com Third Quarter Conference Call.

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

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

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 for 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 relief 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 statement whether result of new information, future events or otherwise.

A copy of Priceline.com's earnings press release together with an accompanying financial and statistical supplement is available in the investigator relation section of Priceline.com's Web site, located at www.priceline.com.

Now I'd like to introduce priceline's speaker for this afternoon, Mr. Jeff Boyd.

Please go ahead.

Thank you very much and welcome to the third quarter conference call.

I'm here with Priceline's the Chief Financial Officer, Bob Mylod.

Priceline's third quarter net income per share exceeded our range of guidance and first call consensus estimates as continued strong and hotel rental car results and expense controls offset a week buying rate and softening demand for OPEC airline tickets.

For the quarter, we had revenues of $243 million up approximately 1% both sequentially and year over year.

Gross travel bookings were $301 million, gross profit was $40.6 million up 9% and 8% respectively compared to the third quarter of 2002.

Priceline recorded GAAP net income of $9.7 million or 24 cents per share and GAAP net income applicable to common stockholders of $8.5 million or 21 cents per share for the quarter, which includes the effect of a non-cash preferred stock dividend of $1.2 million or 3 cents per share.

Priceline experienced accelerating growth in hotel and rental car sales in the quarter.

Priceline sold over $1.6 million room nights in Q3, up 41% over last year's Q 83 and 8% over the second quarter of this year.

Demonstrating the quality of our product and continued success of our marketing.

Priceline added over $100,000 room nights in the third quarter and we are particularly pleased that our year-over-year unit sales growth rate accelerated from 38% in the second quarter to 41% in the third quarter.

In Rental car, continued strong buying rates and improved demand drove a sequential quarterly increase of 234,000 days sold as we eclipsed 1 million rental days sold in a quarter for the first time in the company's history.

Whereas second quarter days sold were up 4% year-over-year, third quarter days were up 43% year-over-year. our re-launched rental car site comprised of faster response, improved user guidance, better content and merchandising and retail option for times of constrained OPEC inventory has contributed to strong bind rates for OPEC rentals and increased retail rental car gross bookings at attractive margins.

Package sales also increased significantly in the third quarter.

Over 2,000 hotels now participate in Priceline packages with over 100 destinations.

Significant product enhancements are scheduled for the coming weeks, which we believe should drive increased package sales.

I want to now turn to the airline ticket product.

Priceline recorded consolidated top line growth on a year-over-year basis, in the third quarter for the first time in six quarters.

Gross bookings and gross profit registered solid year-over-year growth, but revenue growth at 1% underperformed our expectations due to a 17% sequential decrease in unit sales of OPEC airline tickets.

The primary driver of this under performance was a 7% decrease in the bind rate and weakness in demand for tickets in September.

That demand in bind weakness continued in October.

We believe that the demand shortfall is addressable with the resumption of advertising for our airline ticket product and as many of you know, our plan is to do just that, as part of the re-launch of our air path with retail integration.

Priceline has completed initial development of retail integration and is testing a number of consumer interfaces on its production system.

To give a very preliminary view of the results, we have a new functionality, OPEC tickets written decreased 15% while retail tickets written increased approximately 125% in the latter part of October, compared to pre-launch levels.

The net effect shows that the new site satisfies more customers, as buying friendly OPEC functionality and increased retail bookings offset negative pressure on OPEC bind from tight availability around the holidays and the impact of displaying retail prices on the number of OPEC offers and average OPEC offer price and OPEC margins.

We anticipated a reduction of offer prices and a changing mix as the as a result of these product changes.

We believe providing more information and more choice represents a significant improvement for consumers, and is therefore in the long-term best interests of the business.

As I stated in our last call, we intend to devote marketing resources to the re-launch of our airline ticket product.

We will add approximately $3 million to our advertising budget to be spent across the fourth quarter and in the first quarter of 2004.

In a program designed to support TV and radio advertising of our re-launch as well as hotel advertisement sufficient to sustain growing room night sales.

We believe the new air campaign will be effective in rebuilding demand for airline tickets and provide positive spillover for the other products.

Fourth quarter results will be impacts by current weakness in air demand and shifting mix with more retail and fewer OPEC tickets being sold.

That said, the increase in retail tickets sold associated with our re-launch should, together with strong hotel, car, and package growth, drive a positive trend in gross bookings for the quarter.

As we go into the first half of 2004, we expect a sequential increase in air demand given seasonal demand trends and the resumption of airline ticket advertising.

This should drive increasing air gross bookings and higher customer satisfaction rates.

It should drive more packaging and gross sale opportunities and improving repeat customer dynamics.

With continued growth in hotel and rental car sales and new package opportunities, we believe Priceline will be well positioned to sustain growth in bookings, gross profit and EPS into 2004.

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 Q3 results and finish with forward guidance.

Our Q3 revenues of $243.4 million came in slightly below our revenue guidance as Jeff said due to unexpectedly soft results in September driven entirely by the airline product.

This did result in a small shortfall in revenue relative to our guidance, we were very pleased to over-deliver on just about every operational and financial metric in the quarter.

In particular we set individual quarterly records for the most hotel, rental car, vacation package and retail product sales in the quarter.

More importantly, we grew our gross bookings by 9% on a year over year basis, our gross profit dollars by 8%, and delivered net income per share of 24 cents, which comfortably exceeded both our own guidance as well as first call estimates.

In short the fast growing parts of our business have now become large enough to drive overall bookings growth despite a 42% year over year decline in opaque airline ticket sales.

At the beginning of 2003, perhaps the most important goal that we set for ourselves was to diversify our revenue streams away from the opaque airline product.

We believe we have been resurroundingly successful in achieving this goal.

In Q3, 80% of the bound offers came from products other than opaque air, and by the time we get to the end of 2003, we expect this number to grow to approximately 85%.

We look forward to managing a business in 2004 when 85% of the unit sales come from products that are growing at significant double-digit rates.

And it is exactly this diversification dynamic that makes us feel very good about delivering significant growth in gross bookings, gross profit dollars and net income next year.

Our Q3 gross margin of 16.7% was 100 basis points higher than a year ago, but 20 basis points lower than Q2.

As I will explain in the guidance portion of my remarks, we believe this sequential decline is temporary.

As for the calls of the decline, it was driven almost entirely by margin declines in our opaque airline service as a result of continued compression on the spread between our cost of supply and the offer prices of our customers who continue to benchmark their offer prices off some of the lowest published retail rates in the history of the airline business.

Opaque airline margins were also negatively affected by a promotional sales that we ran for several weeks during September.

To put the sequential margin decline into some perspective, the total company grows margin would have been approximately 17% in Q3, had our opaque airline product delivered the same gross margin percentage as was achieved in Q2.

Said differently, the remaining merchant businesses, IE, hotel, rental car and vacation packages continued to deliver very strong margins for us in the quarter.

And the continuing quarterly sequential growth of our agency businesses, contributed to strong sequential growth in fee income and gross margin.

It is worth noting that in only three quarters, the agency business has grown from 131,000 of fee income in the fourth quarter of 2002 to $1.9 million of fee income here in the third quarter of 2003.

Hopefully, this demonstrates to investors that our retail strategy is working.

And as Jeff mentioned, we are very optimistic about how our retail strategy will contribute more and more significantly in future quarters, including the fourth quarter of this year.

As for operating expenses, I want to point out that we chose to expand the number of operating expense line items that we report to investors this quarter.

For most of the company's history, we have limited the reporting of operating expenses to three line items.

Sales and marketing, systems and business development, and general and administrative expense.

As of Q3, we have expanded our disclosure to include six line items.

Personnel expense, advertising expense, sales and marketing expense, depreciation and amortization expense, information technology expense, and finally G & A expense.

We have made these changes to provide greater transparency and to allow investors and analysts who are building their own forward projections of our business to better identify those expenses, which are variable in nature and those that are fixed.

I won't go through our Q3 operating expense performance by line item, but suffice it to say that the strong Q3 EPS was due in no small part to the continued expense discipline that has been an important part of the Priceline story for several years.

In Q3, we also had another strong performance from Priceline mortgage, which for the second consecutive quarter contributed well in expense of $1 million of income.

We reported GAAP net income of 24 cents per share, which as we mentioned handily bested our previous guidance as well as first call estimates.

We did declare and pay the non-cash dividend on the preferred stock in Q3, which had the effect of reducing our net income applicable to common stock it holders by 3 cents to 21 cents per share.

Our third quarter GAAP earnings also include the effect of $106,000 stock based compensation charges and 154,000 of option payroll taxes as well as 137,000 of expense reversal related to the favorable settlement of previously accrued restructuring charges.

None of the three line items which have the net effect of reducing our net income by $123,0000 are included in the earnings estimates that the analysts who cover Priceline.

As for cash and cash flow we began the quarter with 149.2 million of cash in marketable securities and cash and we closed with 284.1 million in cash and marketable securities.

The large increase in cash was due primarily to the 121.6 million of cash proceeds that we received from the convertible debt offering which we completed during the quarter.

Absent the convertible debt proceeds, our cash balances grew by 13.3 million in the quarter.

We expended nearly $3 million op capital expend tour during the quarter, which represents a small up-tick from previous quarters and relates primarily to the development of our retail integration project.

This activity resulted in approximately $1.4 million of capitalized software development which was approximately $400,000 higher than we had run in the second quarter of 2002.

I'm sorry, 2003.

The increase in cash during the quarter was by $5.6 million of proceeds from the exercise of stock options, although this amount was partially offset by $1.6 million negative working capital swing, consistent with our seasonal working capital cycle.

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

And I am going to use the same format we have used on several of our last earnings calls.

In October, representing the first month of the fourth quarter, we generated approximately $68 million of revenue.

This is down approximately 6% from October of 2002.

And we expect to experience monthly sequential decreases off of this base of revenue for the remainder of the quarter, consistent not only with the expected seasonal pattern of the business but all with also with the accelerating range in the airline ticket mix from a primarily gross basis to one in which the agency business where we report revenues on a net basis contributes increasingly to the bookings and our gross profit.

This revenue guidance obviously implies we will run below revenue levels of a year ago, but for several quarters we have stressed that the gross bookings net Rick and the reported gross profit would take on increasing performance importance as compared to revenue as a result of the retail integration business mix.

To put that statement into some perspective, both our October gross bookings and gross profit dollars grew at high single digit percentages on a year over year basis despite the decrease in reportable revenue.

We expect total fourth quarter gross bookings be up by more than 10% on a year over year basis and we expect gross margins to come in between 17% and 17.5%.

As for each of our individual travel services, we are not going to provide specific guidance on unit sales of opaque airline tickets.

Because as Jeff mentioned, we expect to test different user interfaces of the retail integrate throughout the quarter, which could cause the mix from retail and opaque to change from the current levels.

As for the hotel business, we expect to grow opaque room Net sales by approximately 25% to 30% on a year over year basis.

Keep in mind that fourth quarter growth rates reflect the reduced advertising spending in fourth quarter and keeping with seasonal demand and converging patterns.

Q4 is the fourth quarter in which the hotel business is costing against this quarter in which our off-line advertising measures was focused almost exclusively on our hotel product.

We expect the rental car business to grow by approximately 35% to 45% on a year over year basis.

Continuing the very strong momentum that our rental car business has exhibited in the fast several quarters.

We expect to spend approximately 9 million to 11 million on advertising in this quarter.

This represents a fairly wide range due to the potential timing of the $3 million ad spend we expect to make on the official launch of the retail advertising campaign.

We have not yet decided whether the bulk of these dollar also be spent towards the end of fourth quarter, or the beginning of first quarter of 2004.

As for the remaining expenses, we expect sales and marketing expenses to run at similar levels as a percentage of sales, as those seen in previous quarters in 2003.

We expect our information technology expenses to return to second quarter levels, as our third quarter IT expense was favorably impacted by the capitalized costs associated with the launch of retail integration and the settlement of certain vendor disputes related primarily to telecom expenses.

We expect all remaining costs representing primarily our fixed operating expenses to come in at levels roughly consistent with third quarter levels.

In recent quarters our earnings have been strongly bolstered by the share of net income of Price line mortgage.

We expect Price line mortgage to be profitable in the quarter, the re-phi market has cooled off significantly in the past several months and we expect our share of the Price line mortgage net income will be modest.

Which when combined with the share of operating losses of travel web will cause other income to contribute a loss of approximately $300 to $400,000 to the bottom line results.

As for fourth quarter earnings, we expect to report GAAP net income of 2 and 8 cents per share.

Again the wide range relates primarily to the level of advertising that is ultimately expended in the quarter.

We expect our cash balance to decrease by approximately $4 million to $5 million during the fourth quarter, due to revenue and timing related working capital swings, which will be, recouped during the first half of 2004, consistent with our working capital cycle.

Our ending cash balance could come in below projected result Depending upon the extent, if any, to which we employ some of our cash to buy back stock in the quarter in connection with the stock buy back program that was authorized by the board of directors last year.

As for guidance beyond the fourth quarter, we are not providing specific numbers, but as Jeff mentioned, we do expect to generate meaningful year over year gross bookings, net profit and net income.

Finally I want to point outs as I have done at previous calls that the aforementioned the forecasts are based on an assumption that we will continue operating in a consumer travel market that is roughly similar to the current one and any further deals for the political instability or terrorist event particularly within the United States would in all likelihood have a negative impact on the travel market in general and our operating results in particular.

With that, we would be happy to open it up for questions.

Thank you.

If you have a question at this time, please press the number '1' key on your touch-tone telephone one moment for questions.

Our first question is from Anthony Noto of Goldman Sachs.

Thank you very much.

Bob and Jeff, I was wondering if you could comment on a couple of things in the quarter and I wanted to ask a question about the retail product.

In the quarter as I look at the bind rate for the hotel product, it looks like it's continued to have somewhat of a little bit of a deterioration.

On a year over year basis, it's actually flat but down sequentially.

Is the bind rate down sequentially due to seasonality that we have seen in the past and what's the trend there that you see in the bind rate and also, what did you see in terms of ADR's in the quarter and then I have two follow-ups, thanks.

All hit the bind rate.

I think looking at the numbers, where the bind rate is actually is slightly ahead of last year's bind rate for the third quarter, and the shifts you are seeing really are primarily seasonal.

And you can expect the bind rate to strengthen in the fourth quarter, as seasonally we tend to see some more availability in some better binding in the fourth quarter Bob, as to the ADR?

As you know, Anthony, we generally don't comment on ADR, but I would say directionally, we have seen a very modest, although, you know, not really meaningful increase in ADR's No, nothing that would be worth sort of stressing in our remarks.

Jeff, then you made a comment about the retail offering, and the increase in the retail offered bookings versus the opaque decline.

I was wondering if you could comment how has the bind rates improved for the overall air product since you have launched the beta test or tested the retail product.

I know that is down to 22% in the quarter.

But if you did sort of an A and B test or before and after test, how much did the bind rate improve when you provided the retail offering before someone actually named your own price.

It's difficult to pinpoint the exact impact on the bind rate because even with an A and B test, the bind swing seasonally and we are getting into a period where more and more of our demand is for holiday periods.

And for those periods, you tend to sell relatively more retail tickets than opaque tickets because the inventory starts to get constrained.

So, we have seen -- we definitely have some improvement in the opaque bind from the re launch itself, but I think the more important trend is that we look at the number of tickets that we're selling and the number of customers we're satisfying and because we have been able to move the retail numbers up significantly, as I stated in the prepared remarks, you will see that the total ticket sales are going to go up, and that gives you an opportunity to cross sell your hotel and rental car product.

It gives you an opportunity to offer a package and creates a satisfied customer who is based on our experience far more likely to repeat.

Right.

And Bob, then one quick question on guidance.

I'm trying to reconcile your guidance for the fourth quarter to the new guidance for the fourth quarter and I realized there's a mix shift in gross bookings and the revenue that skews that comparison.

I wondered if you would comment specifically on the EPS guidance.

Previously, you guided to the fourth quarter of 8 to 12 cents on a pro forma basis.

Now your guidance is in GAAP.

There's no difference there.

We have really -- we are really trying to stick to guiding to, you know, to GAAP numbers, so actually, the 8 to 12 of guidance for the previous guidance of 8 to 12 was GAAP, and the two 2 to 8 is GAAP.

There's no sort of apples to orange issue here.

OK.

Thanks.

Other than the difference in the numbers, obviously.

Right.

Thank you.

Thank you

Thank you.

Our next question is from Tom Underwood of Legg Mason.

Yes.

I had a couple of questions.

First for agency bookings, I was just wondering how you expected them to trend for the fourth quarter, if you can comment.

I know it's a little fuzzy with the air tests.

And then just more importantly, for the agency revenue as a percent of gross books.

I noticed that tick the up to 5.5% in the third quarter.

Was that seasonal in nature.

Is there something that's causing strength there?

I think what you can expect, Tom, for the fourth quarter is for agency revenues to tick up, and to also increase as a percentage of total gross bookings, and that's a function of writing significantly more retail tickets on the air path.

Posts relaunch.

OK.

What I'm also trying to ask about, Jeff is kind of the agency gross profit margin.

Since the revenue accounting is based on I believe stay instead of time of booking, it's not an easy comparison, but just -- I noticed that your agency revenue as a percent of agency gross bookings increased from where it's been running slightly below 5% for the last few quarters to 5.5%.

I think probably the principle reason for that is that in the quarter we started selling retail hotel rooms via our deal with Travel web and the margins that we get on a retail hotel room sale is higher than the margins we get on airline tickets.

Though so, as you throw hotel business into the mix, that's relatively friendly to your margin on your agency business.

Do you expect any change to the agency margins as you integrate air more into the --well, integrate retail air more into the existing air path?

I think we're -- the margins on the agency business will continue to be principally driven by mix.

Now, that doesn't mean that there won't be opportunities to improve your margins on some.

Sales with some carriers and so forth, but I think that the margin itself will be driven more by mix than an increase in the margin on per ticket sales at least through the first half of next year.

OK.

Then just on a different subject, have you seen any change in terms of I guess supplier relations or the competitive landscape in yourselves versus Hot-wire, since the announcement of Hot-wire --Hot-wire going to be acquired by Interactive?

The comment I would make there, Tom, is that the suppliers generally view us as a supplier friendly channel, and I think that they're very concerned, and want to make sure that there are alternatives, online distribution alternatives to companies controlled by interactive.

So, relatively speaking, I think that the suppliers are more.

Interested in working with us, in working more closely with us, because we represent a very supplier friendly alternative to you know, Interactive, who is obviously the biggest player in the space.

Thanks.

Thank you.

This concludes the question and answer session.

Gentlemen, I would now like to turn the conference back to you.

Thank you very much, everybody for attending our call and you have our numbers if you have additional questions.

Thanks.

Ladies and Gentleman, this concludes the conference.

You may now disconnect.