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Operator
Welcome to Priceline's fourth quarter 2003 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, 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 statement.
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 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 with an accompanying financial and statistical supplement is available in the Investor Relations section of Priceline.com's web site located at www.priceline.com.
Now, I would like to introduce Priceline's speaker for this afternoon, Jeff Boyd.
Sir, please go ahead.
Jeffery Boyd - President, Chief Executive Officer and Director
Good afternoon, everybody and thank you very much for joining our fourth quarter conference call.
I'm here with Bob Mylod, Priceline's CFO.
For Priceline.com, 2003 was marked by record bottom line financial performance and a return to growth in travel bookings, accomplished by offering more diverse and broadly attractive travel products.
Priceline reported GAAP earnings per share of 27 cents for 2003 compared to a loss of 57 cents for 2002.
Gross travel bookings for 2003 were $1.101 billion compared to 1.165 billion for 2002.
Importantly, gross travel bookings in the third and fourth quarter of 2003 were up 9% and 12% respectively versus 2002.
Revenue in Q3 was roughly flat year-over-year and down 9% in the fourth quarter as the mix of retail business, which is booked on a net basis, increased due to our efforts to reposition our airline ticket offering.
Gross profit for the fourth quarter was $31.8 million, up 4% from last year's fourth quarter, as growing contribution from hotel, rental car, retail airline ticket and packaged sales more than offset the year-over-year decrease in opaque airline tickets.
Fourth quarter EPS were 6 cents, compared to a loss of 20 cents for the fourth quarter of 2002, comfortably within the range of our guidance and exceeding First Call consensus estimates.
I am pleased to report that Priceline is making material progress towards stabilizing airline ticket sales and that progress is reflected in the results we are releasing today.
In the second quarter of 2003, total airline ticket unit sales, merchant plus retail, were down 44% versus 2002.
In the third quarter, improving retail conversion, reduced the year-over-year deficit to 32% and in the fourth quarter, with the launch of our new air product, the deficit was reduced to 18%.
While we are in the very early days of our new advertising campaign, first quarter to date ticket sales are encouraging with quarter to date ticket sales ahead of last year's results.
As we foreshadowed in last quarter's call, the new product has resulted in significantly increased retail ticket sales and a decrease in opaque ticket sales.
Despite the loss of some higher-margin opaque ticket sales, the new product is selling more tickets as a whole and the gross profit contribution from increased retail ticket sales more than offsets the opaque loss.
In short, we believe the new product was financially accretive in the fourth quarter without the benefit of our relaunched TV campaign.
Equally important, when retail and opaque prices are close, we want to give our customers the choice to buy retail and increased sales are more than offsetting any cannibalization.
Finally, with the significant increase in ticket sales, we have a better opportunity to sell the customer our other products, for example, through packaging.
As many of you know, we also launched a new package product in the fourth quarter with fixed pricing, more flight options and a last-minute weekender product offering flight time windows.
This launch was very successful from the outset with an immediate sharp increase in package unit sales.
Year-over-year package growth rates have more than doubled since the relaunch, which bodes well for packaged growth going forward.
Since airline ticket demand is a key source of packaged leads, we believe increased demand for airline tickets will add momentum to our package sales.
While it is too early to predict the longer term impact of our new advertising, early results are encouraging.
We believe the William Shatner/Leonard Nimoy ad is an entertaining and effective way to deliver the message that Priceline has a new airline ticket product.
The new spot has created significant PR buzz and site traffic and total ticket sales are both showing year over year growth, quarter to date.
Hotel results continue to be very strong, with a differentiated supplier-friendly product and great savings and inventory for our customers.
Fourth quarter hotel total merchant and retail unit sales increased 37% versus the fourth quarter of 2002.
This strong performance was aided by room night sales from our growing package business and that favorable trend continues in the current quarter.
We are also continuing to support our hotel product with significant TV advertising continuing last year's successful campaign.
As you can see from our reported results, rental car total merchant and retail unit sales were very strong in the fourth quarter, as well, up 62% from the year-ago quarter.
This accelerated growth rate reflects strong opaque growth and retail sales from owned or acquired URLs, principally rental cars.com and lowestfare.com.
Total retail or agency sales for all products for the fourth quarter were $59 million, an increase of 73% sequentially and over 400% year-over-year with air retail and rental car retail sales showing the strongest growth.
We believe that to maximize our ability to create value for our shareholders and customers in the fast-changing Internet travel space, we needed to provide customers with a broader range of choices.
With the strong momentum in our hotel and rental car products and the successful introduction of retail choice in air and an improved package product, we believe Priceline is now positioned to reap the benefits in share of the growing online travel market, business momentum and profitability.
All in all, we are very pleased with Priceline's financial results and product metrics, especially for our new air and package offerings.
With these great products, the benefit of the Priceline brand and an exciting new ad campaign, we are optimistic about 2004.
We are also working on enhancements to our retail air and packages product which should further promote conversion of existing traffic flows and help drive new customers to Priceline.
We are beginning 2004 better positioned than ever to participate in the growing online travel space.
With that, I will now turn the call over to Bob for the financial review.
Robert Mylod - Chief Financial Officer
Thanks, Jeff.
I'll be starting with a review of our Q4 results and then I'll finish with some forward-guidance.
Let me begin by saying that from a financial perspective, we've been quite eager to share today's results with our investors because in the past several months, there has certainly been a fair degree of investor concern that our fourth quarter transition to an airline ticket service that offers both "name your own price," as well as retail products could result in excessive volatility in our financial results relative to our guidance.
Today's earnings announcements show that we met or exceeded each line item of guidance that we provided on last quarter’s earnings call.
Hopefully this demonstrates to investors that we have successfully navigated through the transition period, all while remaining solidly profitable and positioning the company for very strong earnings in 2004.
As for the specifics of the quarter, I want to start by alerting you to the fact that we have moved to a new format for reporting our metrics.
Starting with this quarter, our statistical supplement will include combined merchant and agency unit bookings for air, hotel and rental car services.
The format change reflects the increased importance of agency unit sales to our operating results and, for the first time, gives investors a view into the full scale of our operating activities.
We will no longer provide customer offer or bind rate metrics underlying these new metrics since such data provides an incomplete and potentially misleading or confusing picture of what is happening in our business today.
With that said, from a metrics perspective, our Q4 gross bookings, which grew by 12.2% year-over-year were buoyed by a 473% increase in agency bookings driven primarily by the successful launch of our airline retail product in the middle of the quarter.
Jeff mentioned the positive trend in total airline ticket sales which clearly portend a return to growth in 2004.
In addition, our hotel product continued to deliver outstanding results as demonstrated by a year-over-year growth in hotel rooms sold of 36.9%.
In the guidance portion of our Q3 earnings call, we said that the opaque portion of our hotel business would grow on an annualized basis by 25 to 30%.
Actual results came in comfortably in excess of that guidance.
Our rental car service also followed up on a breakout third quarter by delivering a growth rate in rental car days of 61.8% over fourth quarter of 2002.
This number may come as a surprise to some of you because it shows that we have quietly built ourselves a very strong retail business on top of our opaque business, primarily as a result of the success of both lowestfare.com and rentalcars.com in delivering retail customers and our opaque rental car business, also continued to deliver strong results.
In the guidance portion of our Q3 call, we said that the opaque portion of our rental car business would grow on an annualized basis by 35 to 45%.
Actual results came in comfortably within that guidance.
Now, onto the financial results.
As we said would be the case in our last earnings call, we did experience year-over-year declines in revenue due to the accelerated change in our airline ticket business mix from a primarily opaque merchant business, where revenues are reported on a gross basis, to one in which our retail agency business, where we report revenues on a net basis, contribute increasingly strong numbers as the quarter unfolded.
For several quarters now, we have stressed to investors that our gross bookings metric and our reported gross profit would ultimately become the most appropriate measures for evaluating the growth in our business.
With our retail airline ticket service now up and running, this fact is evident in our gross profit results.
For despite the year-over-year decline in reported revenue, the increase in gross bookings, accompanied by the dramatic increase in our agency business drove a record gross margin of 17.7%, which translated to gross profit dollars of $31.8 million.
This was the second consecutive quarter in which we delivered year-over-year growth in gross profit dollars and as you will see when we get to the guidance section of my remarks, we expect this trend to continue throughout 2004.
As for operating expenses, other than our sales and marketing expense, which are variable in nature and move down on a quarterly sequential basis, consistent with the seasonal quarterly sequential decline in our bookings, all of our other operating expenses came in at roughly the same levels as were delivered in the third quarter.
We reported GAAP net income of 6 cents per share, which, as we mentioned, came comfortably within our guidance of 2 to 8 cents and bested the consensus First Call estimate of 4 cents per share.
As for cash and cash flow, we began the quarter with $284.1 million of cash and marketable securities and we closed the quarter with $268. million of cash and marketable securities.
The cash declines were driven primarily by stock buyback activity that we engaged in during the quarter.
Specifically, we invested $12.2 million of our cash to buy back 690,000 shares of our common stock, which represents approximately 2% of our outstanding shares and approximately 3 to 4% of our estimated public float.
We also invested an additional $2.2 million on capital expenditures and $3 million on several small acquisitions, primarily related to certain URLs that we purchased during the quarter and which are contributory to our retail initiatives in our airline and rental car services.
The sum of all of this stock buyback and investing activity totaled $17.4 million during the quarter.
And now, I'd like to go over our guidance and I will begin with fairly specific guidance on Q1.
We expect to see total gross bookings grow by approximately 25 to 30% versus last year's first quarter levels.
This includes an estimated 3 to 400% year-over-year increase in agency bookings.
Total airline tickets are expected to grow 10 to 15% year-over-year, hotel room nights sold are expected to grow by 25 to 30% year-over-year and rental car days are expected to grow by 50 to 60% year-over-year.
As for the income statement, we expect revenues to be roughly flat versus last year's levels in Q1, although it should hopefully come as no surprise that actual reported revenues could come in higher or lower than this estimate, depending upon the ultimate mix of our business between merchant activities, where revenues are reported on a gross basis, and agent activities, where revenues are reported on a net basis.
We expect gross margins to come in between 18 and 20% and we expect total gross profit dollars to grow by 15 to 20% versus last year's first quarter levels.
As for operating expenses, we expect advertising expenses of approximately 13 to $15 million.
We expect sales and marketing expenses of approximately 6.5 to $7 million.
We expect personnel costs of approximately 7 to $7.5 million.
We expect general and administrative expenses of approximately $3.5 million.
We expect information technology expenses of approximately 2.5 to $3 million and depreciation and amortization expenses of approximately $2.3 million.
Total interest income is estimated to come in at approximately the same $400,000-plus level as in Q4.
All of these inputs result in a first quarter net income per share of approximately 6 to 10 cents per share.
I should note that our GAAP net income applicable to common shareholders will be affected by a $772,000 non-cash dividend that was declared on our preferred stock during the quarter.
As for our second quarter guidance, while I'm not going to provide the type of granule detail that I provided for Q1, we are comfortable that Q2 gross bookings should continue to grow by the same 25 to 30% annualized rate that we expect to experience in Q1.
This should drive a healthy increase in gross profit dollars, which when combined with an advertising expense forecast that is less than or equal to Q1 levels should result in an earnings per share of between 22 and 30 cents in Q2.
As for guidance beyond the second quarter, we're not providing specific numbers, but we do expect to generate meaningful year-over-year growth in gross bookings, gross profit dollars and net income during the second half of the year and we expect total advertising expense to be lower in the second half of the year as compared to the first half.
Finally, I want to point out as I have done on previous calls that all the aforementioned 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 geopolitical 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.
And with that, we would be happy to answer your questions.
Operator
Thank you, sir.
Ladies and gentlemen, if you have a question at this time, please press the 1 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, please, for our first question.
Our first question comes from Anthony Noto of Goldman Sachs.
Please go ahead.
Anthony Noto - Analyst
Thank you very much.
Hi, Jeff and Bob.
First question, I noticed the hotel business grew 37%, I think you originally thought that would grow in the 25% range.
I was wondering if you could comment on the specific trend there, given it's a seasonally slower quarter, a little bit of a year-over-year growth rate that was above expectations?
And in the context of that commentary, if you could comment on the current trends within the industry or that the suppliers are talking about reducing supply to third parties and pushing down net rate margins, could you talk specifically about your relationship with suppliers and what you're seeing in the trends there?
And then, their objective is to maintain sort of price consistency across channels, Priceline is unique because it's opaque, can allow them to actually price discriminate to capture the incremental leisure traveler, is that an advantage for you?
And secondly, as you go into 2004, what are some of the underlying assumptions in the first half of the year for the return that you will have on your marketing spend in the first quarter and how does that compare to what you have in the second quarter and is that the biggest difference in the earnings line?
Thanks.
Jeffery Boyd - President, Chief Executive Officer and Director
Okay.
I'll start with the hotel questions, Anthony and let Bob address the marketing efficiency question.
In terms of the fourth quarter growth, I think that we benefited from continued strong fundamental trends for the product in terms of both demand and conversion and I think we also benefited from increased contribution from package sales, as we said on the call.
We've had a significant lift in our packages business based on the new product that we launched in the fourth quarter and that helps hotel room night sales.
In terms of the supplier trends, I think Priceline is well-positioned in the current environment.
The margins that we take on our hotel business are not as high as the margins that are taken in disclosed channels and so we haven't seen the kind of pressure and concern about our margins and we feel they're reasonable and sustainable.
And in terms of hotels' attitudes towards discounting in general, I think that it's tending to favor opaque channels, channels that are not featuring their brand and channels that are not directly in competition with their brand dot-com web sites.
And so Priceline is not included in the best price guarantees that the hotels have out there, we're actually excluded and we continue to get excellent pricing and availability from the hotels and we think the outlook for that looks good given current occupancy rates and their current view of the market.
Robert Mylod - Chief Financial Officer
And as for the second part of your question, Anthony, as I just said, we do expect to spend approximately 13 to $15 million in the first quarter on advertising and our second quarter guidance is that we will spend that much or less, which doesn't necessarily mean that we will spend less, but we certainly don't expect to spend more.
So, when you look at the mid point of our guidance, 6 to 10 cents, you know, the mid point is 8 in Q1 and the mid point of our guidance in Q2 of 22 to 30%, the mid point being 26, it obviously, the main reason for the increase sequentially has very little to do with the decrease in advertising, it's mainly about a growth in gross profit dollars.
We began heavy advertising in Q1 as it relates to our TV advertising toward the end of January.
So we certainly expect, as the quarter unfolds in Q1, that we'll get better efficient -- better efficiency and as we move through Q2, which is obviously our seasonally high point, we certainly expect to see a lot of leverage against that dollar spent.
Anthony Noto - Analyst
And one other quick question.
On your guidance for gross bookings growth of 25 to 30% following your two quarters of growth in the back half of this year, what type of assumptions are you making for changes in supply in the air business?
Talking to our airline analyst, who has a fair amount of positive speculation that capacity within the air industry would increase, which could actually improve just your regular opaque business on top of what you're seeing in your retail business.
I was wondering if you could comment on that and if that would be an additional positive?
Jeffery Boyd - President, Chief Executive Officer and Director
Anthony, I think that increased capacity by the airlines participating in our "Name Your Own Price" product is potentially a positive for us.
What we like best about the new product is that we can now benefit through a very wide range of industry conditions.
When the airlines go on sale now we see a significant improvement in our retail sales rather than a downturn in opaque sales and we're also seeing positive demand trends in general to the airline ticket product site and positive demand trends in general for airline tickets will bode well for both retail and for opaque sales.
Anthony Noto - Analyst
Great, thank you.
Operator
Our next question comes from Brian Egger of Harris Nesbitt.
Your question, please?
Brian Egger - Analyst
Good afternoon.
Just following up on your advertising budget and plans and your guidance is quite clear, maybe you can fill us in a little bit on your strategy with respect to the degree to which you feel it will be advantageous to maintain your legacy of the hotel advertising campaign, even concurrent with the new air product campaign, just strategically, how you think about that and what you judge so far as to the likelihood of keeping both of those active at the same time?
Jeffery Boyd - President, Chief Executive Officer and Director
Well, if many of you are watching a lot of cable television in the first quarter you would have seen both the Shatner/Nimoy ad and our continuation of our hotel campaign.
We had great success with that campaign last year and our intention is to continue running hotel advertising along the lines of that campaign at significant weights throughout the quarter, so it is our intention to continue to support the hotel business with television advertising as well as some radio advertising, too.
Brian Egger - Analyst
Okay, thanks very much.
Operator
Our next question comes from Jake Fuller of Thomas Weisel.
Your question, please?
Jake Fuller - Analyst
Yeah, good afternoon, guys.
Can you talk at all about the composition of your agency bookings, what percentage of that is air?
Jeffery Boyd - President, Chief Executive Officer and Director
Jake, we're not going to give the exact breakdown, but I think the way I would look at it, just in order of priority, would be air, rental car, hotel.
Jake Fuller - Analyst
Okay, and what I'm trying to get back to you is to get some sense of what’s going on with your opaque ticket business, obviously you're not breaking that out now.
I wanted to get a sense of whether or not that was in line with your expectations, did you see greater cannibalization or less cannibalization with the new retail?
Jeffery Boyd - President, Chief Executive Officer and Director
I think the cannibalization that we saw to the extent that you can really quantify that, and it's difficult to do, was not in excess of our expectations.
What was in excess of our expectations is the traction that the retail offering got directly with customers and, as you can see by the numbers that we're reporting and projecting for the first quarter, it's a very significant turn-around in total ticket sales.
Robert Mylod - Chief Financial Officer
Yeah, I would add that, you know, it's clear that there are two different customer segments.
There's the opaque segment, which obviously, as I've mentioned to you many times, Jake, we're always looking to maximize our opportunity in that market and then there's the retail segment, which is benefiting from the ongoing shift from people who once bought airline tickets offline and who are increasingly buying them online.
So, no question about it, this was not, obviously there's been a lot of investor concern in Q4 and perhaps maybe even in Q1 that there could be a dilution problem.
That clearly has not been the case.
I think it's a clear success.
We have two separate markets that we're both seeking to optimize and it's clearly working.
Jake Fuller - Analyst
Thank you.
Operator
There are no further questions at this time.
Ladies and gentlemen, thank you for your participation in today's conference.
This does conclude the program and you may now disconnect.