Booking Holdings Inc (BKNG) 2004 Q2 法說會逐字稿

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.

The forward-looking statements are not guarantees for 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 forecast 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 under takes 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 website located at www.Priceline.com.

At this time, I would like to remind everybody that this conference is being recorded.

And now, I would like to introduce Priceline's speakers for this afternoon, Jeff Boyd and Bob Mylod.

Go ahead, gentlemen.

Thank you very much.

And thanks, everybody, for joining our second quarter conference call.

I'm here with Bob Mylod, Priceline CFO.

The second quarter was an excellent quarter for Priceline.com as results were boosted by sales of new retail products and generally positive market conditions.

Gross bookings of $470 million were up 58% versus last year, revenue was $259 million, up 8%, and pro forma gross profit grew 35% over last year, to $55 million.

We believe our growth rates this year continue to place us among the fastest-growing online travel businesses in our peer universe.

Priceline is thriving on the successful repositioning our business to feature a wider choice of attractive travel products, including our new retail choice air product, enhanced packages offering, and merchant and agency sales from Travelweb.com.

Strong top line performance against translated into strong bottom line results.

Priceline's pro forma net income was $12.8 million or 32 cent per share, compared to pro forma net income of 20 cents in the second quarter of 2003.

This bottom line performance was achieved, despite a year-over-year increase in advertising costs of over $5.5 million as we continued our increased investment in marketing during the quarter, to support our new air business and hotel product.

Priceline's retail choice product for airline tickets, where customers can now choose from a list of flights, times, and low fares, or name their own price for greater savings, continues to perform well.

Airline tickets sold increased 60% over last year, making a positive contribution to growing bookings and earnings, and driving customers for other Priceline products.

While we have made great progress in rebuilding this business, we expect the market environment for airlines to remain challenging.

Priceline's hotel business had another strong quarter with almost 2 million room nights sold, a 32% increase over second quarter 2003.

Sales were lifted by strong room night sales in our packages product, and include a partial quarter of merchant and agency room nights sold through Travelweb.com.

Packaging of travel products remains an important growth area for Priceline.com, as suppliers continue to view packaging as an attractive discount channel, and consumer acceptance of dynamic packaging grows.

Second quarter growth in packages continued at the high levels obtained in the first quarter, aided by the addition of retail choice for vacations, where customers can now select an opaque or disclosed flight itinerary, depending on their needs.

We are very encouraged by consumer acceptance of this new feature.

Retail choice has made a significant contribution to both our air and package businesses.

And we are confident it will be additive to our hotel and rental car businesses in the coming months.

Rental cars delivered a strong second quarter with 1.4 million rental car days sold, representing 63% growth versus second quarter last year.

Retail rental car sales are now sourced from own URLs such as RentalCars.com, BreezeNet.com and lowestfare.com, as well as from placements on Priceline, which provide customers with a retail option when their opaque offer fails.

We have developed a new retail search and booking tool for rental cars, which is being rolled out to our own URL's and will be core of the retail choice product on Priceline.

With the expansion of our product offerings, we not only have more choice for customers, but we have more choice for suppliers who can now meet their distribution needs with a number of products.

We can also attack more affiliate and white label distribution opportunities with greater product selection.

And intend to pursue opportunities for Travelweb, packages, and our other products going forward.

During the second quarter, Priceline raised $100 million through the issuance of 2.25% convertible notes, convertible into Priceline common shares of $37.95 per share.

The proceeds of this offering are available for general corporate purposes, and give us added flexibility to participate in opportunistic acquisition activity, as the online traffic market continues to consolidate.

Past acquisitions have been evaluated based on product fit, customer acquisition, and financial accretion, and we expect to continue application of those criteria going forward.

Our second quarter results demonstrate the consumer appeal of our products and a strong online travel market and the vitality of our financial model, as we are generating higher levels of profitability at lower scale than most of our public peers.

We intend to continue to build retail choice into our hotel and rental car products, and to offer customers attractive additional products at the point of reservation, through packages and through sale of destination product in path, which we will start to roll out later this year.

With our product line, we can provide travelers with a blend of choices, convenience and value that is unique in the market.

We will also continue to support the Priceline brand with significant TV advertising.

We have extended the Shatner-Nimoy campaign with 2 new spots, one for airline tickets and one for hotels.

This effective campaign will continue to be our primary acquisition vehicle for the second half, and we believe there is a significant opportunity to increase overall awareness and understanding of our new product choices.

To summarize, we expect to see continued strong growth in gross bookings, gross profit and earnings in the second half of this year.

We also intend to continue investing in Travelweb, our retail choice hotel and rental car products, packaging and destination commerce, distribution initiatives, and advertising, to better position Priceline for 2005 and beyond.

I will now turn the call over to Bob.

Thanks, Jeff.

I will give a brief review of our second quarter results, and then which will finish with some forward guidance.

Let me start with our Q2 operating metrics which all came in within or higher than the preliminary ranges that we provided when we updated our Q2 guidance in June.

Our gross bookings, which grew at an annualized rate of 58.3% in the quarter, were fueled mainly by the continued success of our retail products.

Specifically, our agency bookings which captured the significant majority of our retail offerings grew by 482% year-over-year, and 51% on a quarterly sequential basis.

Revenue of $259.4 million also came in 8.3% higher than last year's levels, and we achieved this year-over-year growth despite a continued accelerated change in our airline ticket business mix, from primarily opaque merchant business, where revenues are reported on a gross basis, to our retail agency business where we report revenues on a net basis.

Our pro forma gross profit dollars, which exclude $828,000 of non-cash amortization expenses associated with our acquisition of Travelweb, grew by 35% year-over-year.

As for operating expenses, I will start with advertising expense which came in at $16.4 million for the quarter.

You may recall that in our June preannouncement, we upwardly revised our advertising expense estimate for the quarter, to between 15.5 and $16 million.

We came in higher than this range because we elected to begin running our latest TV commercial, featuring William Shatner and Leonard Nimoy, during the final week of the quarter.

The increased ad spend is also consistent with a message we have been delivering to our [inaudible] for several quarters, now.

Namely, that it is our plan to invest some of the overperformance on our bottom line back in the business in the form of increased ad spend, in order to position the company for future growth.

As Q2 unfolded, we did just that, just as we did in the first quarter, and investors should continue to expect that we will do the same in future quarters if and when, we are meeting and exceeding our financial targets, and are creative as is compelling as it has been thus far in 2004.

As for the remaining expense line items in our P&L, generally our expenses came in at levels consistent with the guidance that we gave on our first quarter earnings call.

We did have a favorable variance in our personnel expense, which came in at $7.8 million, or approximately $800,000 lower than our previous guidance.

The positive variance occurred as a result of a favorable resolution of a legal matter involving a former employee during the quarter, as well as from a slower-than-expected ramp in employee costs associated with the upgrade to the Travelweb hotel merchant website and booking engine.

This lower-than-expected ramp in Travelweb development activities also resulted in positive variance in our IT expenses, which also came in lower than previous guidance.

We reported pro forma net income of 32 cents per share, which came in at the high end of our revised guidance of between 29 and 32 cents, when we preannounced in June.

GAAP net income of 29 cents per share was affected by a total of approximately $1.4 million, or 3 cents per share of expenses primarily related to non-cash acquisition related amortization expense.

As for cash and cash flow, we began the quarter with $278.1 million of cash and marketable securities, and we closed the quarter with $386.2 million of cash and marketable securities, representing a net increase in cash of approximately $108 million.

The largest contribution from this increase in cash came from the convertible debt offering which we completed in June.

We received $97.25 million of cash proceeds from the offering.

We also extended approximately $4.5 million of net cash during the quarter on acquisitions.

Most notably, our acquisition of Travelweb.

The $4 million net cash number represents the price paid for acquisitions, net of the cash balances acquired.

And if you exclude capital raising, and acquisition-related activity during the quarter, our cash balance grew by approximately $14.5 million in the quarter.

Total capital expenditures in the quarter were $2.3 million.

With cash balances now approaching $400 million, we believe we are in good position to take advantage of corporate opportunities as they arise.

As Jeff just mentioned, we have thus far been successful, we believe, in completing acquisitions that have expanded our addressable audience, consumers, and strengthened our supplier relationships.

That will continue to be a part of our strategy going forward, and our cash balances provide us with the maximum financial flexibility to pursue this strategy.

We have also in the past elected to invest in Priceline itself, through stock buyback initiatives.

Again, our cash balances allow us to look to this option in the future, as market conditions dictate.

In short, we believe that our cash balance, which has more than doubled in the past year, is a very critical asset, and we will seek to invest it patiently, and with a view towards the creation of value for our shareholders.

Now, I would like to go over our guidance.

Let me start with guidance that is applicable to the third and fourth quarters of this year, and then I will finish with specific EPS guidance for each of the last 2 quarters of 2004.

We expect to see total gross bookings grow on average, by approximately 44 to 48% versus previous year's quarterly levels, during the second half of 2004.

As has been the case all year, this growth in bookings will continue to be driven by strong year-over-year growth in our agency books, which should grow by an estimated 350 to 400% year-over-year in the third quarter.

Keep in mind, that by the time we reach the fourth quarter, we will be comping, for the first, time against a quarter in which our retail products have been fully integrated into the Priceline core website path.

And while this will result in a slowing of our year-over-year growth in agency bookings, we nevertheless, expect agency bookings to grow by approximately 150% in the fourth quarter.

We expect to see airline ticket unit sales grow on average by approximately 60% versus previous year's quarterly levels during the second half of 2004.

Hotel room nights sold are expected to grow by approximately 25%, and rental car days are expected to grow by approximately 20% during the second half.

The sequential decrease in the annualized growth in rental car days sold is primarily due to a challenging comparable.

Specifically, the third quarter of 2003 grew 40% sequentially and also included, for the first time, a full quarter of results from RentalCars.com, which was acquired at the end of the second quarter of 2003.

As for the income statement, we expect revenues to grow by approximately 5% versus last year's levels.

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 primarily on a gross basis, and agent activities where revenues are reported on net basis.

We expect total pro forma gross profit dollars to grow by approximately 35% versus last year's second half levels.

With Q4 growth rates slightly exceeding Q3 growth rates.

As for operating expenses, I will address ad spend in a moment when I get to specific quarterly EPS guidance for the second half.

We expect that sales and marketing expenses will continue to move in relationship to gross profit dollars, at levels roughly consistent with prior periods for the remainder of the year.

We expect personnel costs to average approximately 9.5 to $10 million per quarter during the second half.

You will notice that this is higher than Q2 levels for 2 primary reasons.

First, as I mentioned earlier, Q2 benefited from a favorable settlement of an employee matter which will not reoccur in subsequent quarters.

Second, because the Travelweb acquisition closed at the end of April, Q2 contains only 2 months of operating expenses from Travelweb, where as Qs 3 and 4 bear the entire Travelweb expense burden.

We expect general and administrative expenses of approximately 3.8 to $4 million.

We expect information technology expenses of 3.1 to $3.3 million.

And depreciation and amortization expenses of approximately $2.7 million on a pro forma basis.

Which excludes amortization expenses associated with acquisitions.

Total net interest income is estimated to come in at approximately $400,000 per quarter.

As for specific guidance for Q3, we are targeting pro forma EPS of approximately 25 to 30 cent per share.

This includes an estimated advertising expense of approximately 14.5 to $15.5 million.

For the fourth quarter, we are targeting pro forma EPS of approximately 13 to 17 cents, including an estimated 12.5 to $13.5 million advertising expense.

It bears noting, that the midpoint of our guidance for the second half represents over 40% year-over-year growth in our pro forma EPS.

Pro forma adjustments are expected to total approximately 1.5 to $1.8 million in the third quarter.

The 2 biggest line items in this amount will be our non-cash dividend associated with our preferred stock, and non-cash amortization expense primarily associated with our acquisition of Travelweb.

Fourth quarter pro forma adjustments are expected to total approximately 500 to $700,000.

Finally, I want to point out, as I have done on previous calls, that all of our guidance is 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.

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

Our first question comes from Anthony Noto from Goldman Sachs.

Mr. Noto, your line is open.

Our next question comes from Brian Egger from Harris Nesbitt.

Hi, good afternoon.

I just had 2 questions.

The first is, I see you may have answered this in your expense guidance, but it looked to me like your EPS guidance was considerably more conservative than your bookings and gross profit guidance.

I assume that is because you're effectively raising some of those operating expense items that you talked about earlier.

And my second question is, actually did you see any disruption of your Travelweb distribution through the Orbitz system as a result of some of the system and software problems that the Orbitz merchant hotel program apparently had in the quarter?

It's Jeff, and I'll answer the second question first.

We have not seen a disruption in the business Travelweb is getting from Orbitz, and I think we represent a relief valve for them in the event that their own presentation algorithms aren't able to deliver their direct merchant hotel inventory they have access to Travelweb to show to a customer.

So we have not seen a disruption in that business.

And as for the first question, Brian.

Indeed, we do expect expenses associated with Travelweb to increase in the third quarter, relative to second quarter levels.

That's consistent with our plan, rolling out a new, basically, website, booking platform, and a transition towards offering retail products on the Priceline platform, there is a lot of fairly intensive development work associated with that, and that is well under way here in the third quarter.

Okay.

Thank you.

Our next question comes from Scott Barry from CSFB.

Hey, guys.

This is Ed Lowe for Scott.

Couple questions.

First, can you talk about the competitive landscape in both the retail and opaque segments?

Secondly, just on the advertising environment, can you guys talk about what you're seeing as the highest yielding channels, where are you guys putting your advertising dollars?

Third, can you just break out what Travelweb contributed during the quarter in terms of room nights sold?

And then fourth, I notice that the net merchant revenue rate was a bit low in the quarter.

Can you talk about the drivers for that?

Thank you.

Okay.

Why don't I try to do the first 2, and Bob will do the second 2.

In terms of the competitive environment, I think that the online travel market continues to be intensely competitive.

I think our competition are all spending aggressively in their own marketing, and I think in this year, you have something that you haven't had, perhaps last year, which is very aggressive off-line spending by both Travelocity and CheapTickets.com.

Having said that, we feel very good about our own off-line advertising campaign, which to your second question, really is one of the principal channel for spending and customer acquisition for Priceline.com.

We think we've got an effective campaign out there.

And when you look at our gross bookings growth, we think we are holding share, and in fact, gaining share on the basis of a very reasonable level of marketing spend.

Especially when you compare to the big guys, like Expedia.

As for the last 2 questions, we are not breaking out the separate performance of Travelweb as it relates to metrics or operating performance.

I will sort of reiterate what I just said earlier which is that we did -- we had some favorable expense variances as it related to what we expected our Travelweb expenses to be in Q2, primarily though as a result of a slight delay in the kickoff of the redevelopment of Travelweb.

And we also had a bit of a positive variance as a result of -- Orbitz in fact, did perform at slightly better levels than we had expected.

We had expected a quicker transition by Orbitz towards their OMH platform for non-Travelweb founder hotels.

That transition is primarily complete now, although it took place at a slightly slower pace than we had anticipated when we gave guidance.

As for your question on net merchant revenue rate, I assume you are talking about the relationship between merchant revenues and merchant bookings, and the reason for the decline in that rate would be simply, a difference in the way that we report Travelweb revenues as opposed to -- merchant revenues, as opposed to Priceline core merchant revenues.

We report the Travelweb merchant revenues on a net basis.

So as a result, when you look at the net merchant revenue rate, it should have declined in the quarter, and that will continue to be the case going forward.

Thank you.

Our next question comes from Anthony Noto from Goldman Sachs.

Thank you.

Bob and Jeff, I was wondering if you could comment at all on what you expect for the linearity of the quarter, and what type of sort of seasonality you're seeing thus far in the quarter as you go into the September time period?

What are you contemplating for the impact of consumer travel and maybe any hesitancy, because of terror concerns around the elections.

And then I have one follow-up.

Sure, Anthony, I think, you know, as we look at our business in the third and fourth quarter, we are looking at very, very healthy overall growth rates in the 40% range, and so it is hard for us to really quantify a softening or an impact because of concerns around terrorism, recent Orange Alert in New York and Washington, and generally a heightening of the dialogue in the public arena and in the media around terrorism, tied primarily to the Presidential election.

It is possible that that is having an impact on overall leisure travel.

In terms of sequential performance of our business, we think it is good sequential performance.

Our business mix is changing, so you can't necessarily compare it directly with prior years, but it is possible there is an impact there.

Yeah, I would certainly say that to the extent that there is one, there certainly -- and I would guess that our competitors would say the same thing, and presumably our suppliers as well, that there presumably is more of one in the third quarter than in the second quarter but as Jeff said, it is really impossible to quantify.

Great.

And then how much do you think September accounts for the quarter this year versus a year ago?

Just so we can understand the changing nature of your business because of the mix shift?

You know, I don't think we would target any disproportionate -- any disproportionate change in September this year versus last year, based on the mix shift.

Great.

Thank you.

Our next question comes from Tom Underwood from Legg Mason.

Yes, actually kind of following up on Anthony's question, just was wondering if you could comment perhaps, on how higher hotel occupancy and rates in major markets heading into the third quarter may be affecting your business?

My very limited studies have shown me that perhaps, your buying has been slightly affected, in the same way that others conversions are being affected by a little bit of sticker shock.

Tom, I think that we have a couple of our major booking cities, Boston and New York, that have political conventions in the third quarter, and we definitely have seen a decrease in our bind rate in those cities for those weeks.

I wouldn't overstate the significance of that to our overall business, and I also wouldn't overstate the significance of what -- what the hotels have seen in a return of business travelers, because we principally are still booking on the weekends.

And our experience is that the hotels prefer to continue to use our channel, even as their occupancy rate goes up, as compared, for example, to discounting through disclosed channels.

All right.

That all makes sense to me.

I'm wondering outside of the convention cities, but the other major primary cities, the San Francisco, the Chicago, et cetera, for the fall season, for that minor part of your business that's weekdays, does it look like it is more challenging this year than last?

Again, I wouldn't overstate the impact of increased occupancy.

We are still seeing very strong inventory support from our suppliers, and very good conversion on the website.

Okay.

And then just as a follow-up, I mean, you mentioned the rental car year-over-year 20% growth because your lapping RentalCars.com.

To what degree are you benefiting from the growth in retail air, in terms of perhaps cross-sell on the primary site?

How do we see such strong growth elsewhere, and rental cars not following quite the same way?

I think that we have seen really good attachment of rental cars, in our packages path, where we offer the opportunity in path, prior to checkout.

And that's something that we are going to be rolling out for both the opaque and the retail businesses in the coming months.

And we would expect to get much more of a benefit in rental cars from our increased air business when we've made those improvements.

Great.

Thanks.

I'm show nothing further questions.

Thank you very much, everybody.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect, and have a wonderful day.