Booking Holdings Inc (BKNG) 2008 Q3 法說會逐字稿

Welcome to the Priceline's third quarter 2008 conference call.

Priceline 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 from those expressed or implied or forecasted in the statements.

Expressions of future goals and similar expressions reflecting something other than historical fact are identified as forward-looking statements or a list of factors that could cause the actual results to differ from those described in the forward-looking statements, please refer to the Safe Harbor statements at the end of the Priceline's earnings press release as well as Priceline most recent filing with the Securities and Exchange Commission.

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

A copy of Priceline's earnings press release together with an accompanying financial and statistical supplement is available in the investor relations section of Priceline's website located at www.Priceline.com.

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

Go ahead, gentlemen.

Thank you very much.

This is Jeff Boyd.

Welcome to Priceline's third quarter conference call.

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

Priceline reported consolidated gross bookings for the third quarter of $2 billion up 47% year over year.

Proforma gross profit of $316 million was up 57%.

Profomra EBIDTA was $153 million up 69%, and proforma net income was $117 million or $2.39 per share up 52%.

Third quarter results surpassed first call consensus estimates of $2.10 per share due to better than forecast results in Europe and the United States.

Our international business had a good quarter with 59% gross bookings growth despite a substantial decline from the beginning to the end of the quarter in the value of the Euro and in hotel ADRs.

International gross bookings benefited from growth in new markets and results from Agoda, the Asian hotel reservation business we acquired last year.

It had gross bookings of $32 million in the quarter.

Agoda was able to achieve good growth rates despite civil unrest in Thailand which has materially dampened leisure travel in Agoda's largest destination market.

Priceline's domestic business grew 33% in the third quarter due to growth in sales of opaque and retail airline tickets, hotel room nights and vacation packages.

Domestic merchant gross bookings which include opaque services and retail merchant hotels grew 19%.

We believe that Priceline continued to gain market share on our major competitors during the quarter and delivered superior earnings growth.

While it is difficult to make precise forecasts in today's market, our third quarter results demonstrate our strong competitive position in challenging economic times.

While the international business showed good third quarter growth rates, in late September the global financial crisis struck Europe in earnest with widespread instability in major banking centers,deep concern over the safety of bank deposits and ultimately widespread governmental intervention, all occuring within a two week time span.

A rapid decline in the value of the Euro coincided with these developments.

Not surprisingly, consumer demand in our business perceptibly weakened during this period as consumers processed these events.

We have seen deterioration in the key drivers of the business, namely, the Euro dollar exchange rate, transaction growth rates, ADRs and cancellation.

Given the outlook for the general economy, we are forecasting a significant reduction in U.S.

dollar denominated international gross booking growth rates.

Of course, further negative economic developments such as a fresh wave of instability in financial markets or high profile financial or industrial company bankruptcies or bailouts which depress consumer sentiment would likely lead to below forecast results.

Despite these macro challenges we are continuing to expand our international hotel platform and build new markets and enhancing the connections among our businesses in North America, Europe and Asia.

Booking.com now has approximately 57,000 hotels in over 70 countries and continues to add inventory and build new destinations.

We continue to benefit from growing repeat business to booking.com and other booking.com branded sites.

Agoda has made good progress in building its direct hotel inventory and its infrastructure for long-term growth in the promising Asian market.

Priceline's domestic business showed 33% year-over-year growth in the third quarter.

We continue to see attractive domestic growth rates which we believe are supported by consumer demand for travel deals in a weak economic setting, attractive inventory from airlines and hotels using our services to round out demand and protect yields, and effective marketing of our low-price positioning in both opaque and retail markets.

The negotiator ad campaign continues to provide a versatile platform for effectively communicating our value proposition and strengthening our brand.

There are wide ranging estimates for future economic conditions.

With most assuming further deterioration in consumer spending and economic growth in all of our markets.

Our goal is to pursue unit and local currency bookings growth in all of our key markets, and maintain operating margins while continuing to build our brands and expand the international hotel platform.

We will be more measured in activities which grow our cross structure given the volatility of market conditions.

We do not believe this current economic outlook will put an end to the global secular movement of travel planning and purchase to the Internet.

We do believe our brands, superior content and pricing, lean cost structure and strong balance sheet and cash flows position us well to compete in economic down cycles.

I will now turn the call over to Bob for the details.

Thank you, Jeff.

On August 5th earlier this year we announced the second quarter earnings and gave financial guidance for the third quarter and second half of 2008.

As has always been typical of the guidance that we give, our guidance then was based on the assumption we would be operating in an economic condition throughout the back half of 2008 that were similar to the economic conditions that existed on the day we gave guidance.

As Jeff discussed, the economic events that have happened since August 5th have put the overall travel industry, the online travel industry and, therefore, Priceline in an environment that looks nothing like the environment that existed 90 days ago.

As you can see these third quarter results, fortunately these conditions didn't crop up in time to significantly affect our third quarter.

In fact,, our gross bookings, gross profit, EBIDTA and earnings per share all came within, or in the case of our profit matrix, well above the range of guidance we gave on August 5.

We are particularly proud of this performance because we were able to deliver these results despite significant headwinds that developed and strengthened toward the end of the quarter.

One of these headwinds was foreign currency exchange rates.

I intend to discuss Fx more in a moment.

I want to point out the Q3 EBIDTA and net income did benefit from approximately $5 million of Fx hedging gains that we recognized during the quarter.

Even without the gains our profits came in well above expectations and well above first call earnings estimate.

Most importantly it appears we took significant market share from our competitors during the quarter and continue to position the world-wide businesses for long-term growth.

We were also very pleased with our third quarter cash flows which were strong and put us in a relatively advantageous capital position at a time when capital is very hard to come by.

Specifically, during Q3 we generated approximately $102 million in operating cash flow up 65% year-over-year.

During the quarter we repaid approximately $53 million of principal amount of our convertible notes and invested $123 million to purchase the remaining minority interest in our Priceline Europe subsidiary and spent $5.9 million on capital expenditure.

Despite this $182 million use of cash associated with these discrete financing and investing activities we ended up the third quarter with a cash and marketable securities balance that is in excess of our debt balance.

Beyond that we have a $175 million revolving credit facility that is undrawn and that doesn't expire for four years.

As I mentioned we feel very good about the balance sheet and liquidity position.

That covers the financial highlights from Q3 that Jeff didn't already cover.

I would like to revert back to the discussion of the current economic environment that Jeff began.

It has significant implications for the immediate earnings outlook.

Jeff has covered the obvious potential effect that a weak economy is having on the unit demand for travel.

I want to discuss a couple of other key metrics in some detail.

As we have discussed on previous earnings calls our gross bookings and earnings are affected by two variables driven by macro economic factors.

First, foreign currency exchange rates and second, the retail prices at which the hotel partners choose to market their rooms on our websites.

These two variables are critical because of a majority of our gross bookings and profits are generated by the hotel room reservation services most of which are conducted outside of the United States in Euros or British pounds.

To put this into numerical perspective on the August 5th call the Euro translated into $1.55 and the British pound translated into $1.95.

Those August 5th Fx translation rates formed the basis of the second half guidance.

As we speak today the Euro has devalued against the dollar by 17% since August 5th and is now translating at $1.29 per Euro as of the close of business last night.

The British pound devalued faster down 19% to a translation rate of $1.59 per pound.

Both of these rates are also down significantly from the year ago levels.

As for average selling prices of our hotel rooms or ADRs, those too have declined relative to where they were over the summer as the hotel suppliers have cut selling prices in order to stimulate lagging demand.

Guidance on August 5 was for ADRs to be roughly flat on a year-over-year basis domestically and down roughly 1% to 2% on a year-over-year internationally,all consistent with summer levels.

Actual third quarter ADRs were down 1% domestically and down 3.5% internationally with worsening trends towards the end of September carried into the fourth quarter.

As Jeff mentioned we believe these ADR declines also contributed and continue to contribute to an increase in reservation cancellation rates which have created yet another headwind for us.

Because the fourth quarter is seasonally our weakest for gross bookings, the impact of the cancellation rates on our gross bookings will be more impactful to the fourth quarter as compared to other quarters.

One last point on fX and ADRs rate declines as they relate to the dollar denominated international gross bookings metric.

And that is that fX they have an impact on each others.

With our blended exchange rate for the two main foreign currency down 15% year-over-year and international ADRs on a local currency basis down by more than 5% year-over-year.

This means the international hotel room night sales net of cancellations will have to grow by nearly 25% in the fourth quarter in order for international gross bookings on a dollars denominated basis just to be flat with last year's levels.

That is a very significant headwind.

As you will see when we get to the specific numerical guidance for the fourth quarter it is our goal and expectation to grow our international gross bookings on a dollar denominated basis in the fourth quarter despite these historically unprecedented headwinds.

The last point I want to make before I give the specific numerical guidance has to do with our outstanding convertible debt and the impact it is having and expected to have on future diluted share count.

As most of you know, in recent quarters our stock traded at levels well in excess of conversion prices and as a result our diluted share count rose to levels exceeding 50 million shares.

With our stock trading down significantly as of late, we are now witnessing the opposite effect,namely our diluted share stock has fallen with the stock price and providing a favor share price in Q 4.

And there is one other point I would like to make about our convertible notes.

And that has to do with early conversion activity.

As most of you know the owners of the convertible notes are primarily convertible bond hedge funds, almost all of whom have suffered significant losses and investor redemptions as a result of the recent market turmoil.

These investor redemptions also forced the hedge funds to liquidate their bond portfolios.

Prices across the board for convertible bonds have plummeted.

And the prices of our convertible notes have plummeted along with the market.

In fact, our convertible notes are trading at prices that essentially assign no value to the significant option value that is inherent in them.

Therefore.many convertible note holders have elected to convert their notes prior to maturity and receive the intrinsic value of the bonds from us instead of trying to sell them in the open market.

In the past several weeks we have received approximately $50 million face amount of such early conversion notices.

As long as the convertible bonds market is in turmoil we expect to see more.

As I mentioned earlier, we are in a relatively advantageous liquidity position.

We think we have plenty of excess liquidity to repay the principal amount of convertible bonds with cash, with any remaining in the money value to be repaid through the issuance of common shares.

While this activity has created a little bit of unpredictability with respect to our quarter ending debt balances and cash balances it does not impact the predictability of the cash net of debt position.

It was slightly positive in Q3 and expected to grow nicely in Q4.

I would also like to point out we generally look at all of this activity as good news because by redeeming our notes early we will eliminate any potential future dilution we would have otherwise experienced if our bonds remained outstanding through maturity and the stock price goes back up to levels we saw earlier this year.

I would like to point out this early conversion activity creates a mismatch in timing between when we deliver shares to our convertible note holders for the in-the-money conversion value of the notes and when we receive shares from the hedging counterparties for the conversion spread hedges.

Because of this timing anomaly and calculating the proforma diluted share count that we use for proforma EPS we have decided not to give effect to the hedging benefit associated with any convertible notes converted early until the actual maturity date of the hedge.

Now for fourth quarter guidance.

We are looking for total fourth quarter gross bookings to grow by approximately 7.5% to 17.5% on a year-over-year bases.

With international gross bookings coming at anywhere from flat to up 10% versus last year's fourth quarter level.

And domestic gross bookings growing by 22%.

As I mentioned this will be the first quarter in years in which dollar denominated gross bookings will grow at a slower rate than the local currency growth rate.

We expect international gross bookings to grow on a local currency basis by approximately 10% to 20%.

This growth rate is consistent with a continuation of the year-over-year growth rate declines we saw in Q1, Q2 and Q3.

Due to all the negative headwinds that I just reviewed, we do expect the slope of the decline will steepen significantly as compared to the slope we witnessed in the first nine months of 2008.

We expect proforma revenue to grow by approximately 12% to 14% year-over-year.

We expect proforma gross profit dollars to grow 12.5% to 17% on a year-over-year basis.

As for Q4 operating expenses, we are targeting consolidated advertising expenses of $58 million to $62 million with approximately 90% of that amount being spent on online advertising.

We expect sales and marketing expense between $16.5 million and $17.5 million .

We expect personnel costs excluding stock based compensation between $28 million and $29 million.

We expect G&A expenses of approximately $13 million to $13.5 million.

Information technology costs of $5 million to $5.5 million and depreciation and amortization expense excluding acquisition amortization of approximately $4.3 million.

We expect total below the line positive impact of approximately $2.5 million which is comprised primarily of foreign exchange hedging income.

We are targeting proforma EBIDTA of between $60 million to $66 million.

We are targeting proforma EPS of approximately $1.00 to $1.10 per share.

Our proforma EPS forecast includes an estimated cash income tax of approximately $11.5 to $12 million comprised of international income taxes and alternative minimum tax in the United States.

Our proforma EPS guidance is based upon a proforma diluted share count of 44.6 million shares based on the last night closing stock price of $52.60 per share.

This is a substantially lower share count than last quarter due to the convertible note dynamics that I discussed.

As for expected GAAP results, we expect to report GAAP EPS between $0.55 and $0.65 per share.

The difference between our GAAP and proforma results will be driven primarily by the inclusion of acquisition-related amortization, stock based compensation and certain income tax expenses all of which are noncash in nature.

Our forecast assumes that the Euro versus dollar exchange rate remains at same $1.29 per Euro as last night's closing rate.

It also assumes that there was no material change in the fX relationship between the pound and Euro.

Our forecasts assume that the ADRs of domestic hotel service will be down 3% to 4% compared to 2007 levels and the ADRs of international hotel service will be down by about 5% to 6% year-over-year which is basically where we are currently running at right now.

We think our Q4 forecast is representative of another quarter in which we expect to take market share both in the United States and internationally.

From a balance sheet perspective as I mentioned earlier due to convertible note conversions that have already been processed or will be processed during the quarter we expect the debt balances to be reduced by an additional $75 million as compared to the levels at which we ended the third quarter.

It is possible we will pay down more debt if we see further conversions.

As I mentioned we will welcome this activity.

We have plenty of excess liquidity to repay our debt and that excess liquidity continues to grow each quarter to put us in a position to take advantage of the market dislocations through the early retirement of our convertible notes.

Before I turn the call over to questions I want to make a few more qualitative points about the financial guidance.

The first point relates to the Q4 guidance that I just gave.

It is always our practice to give very detailed financial guidance for any current quarter and we are doing so today.

By definition forecasting involves predicting an uncertain future.

What we wanted to say is that the very real economic uncertainty affecting the worldwide consumer and worldwide marketplaces has added a great deal to our own level of uncertainty around our forecast.

Our Q4 forecast does its best to quantify how the current market environment which is clearly very weak will play out for the rest of the quarter.

Our bias is that it will get weaker, given the trends that we have seen since September.

With the volatility associated with that trend means there is a significantly greater standard deviation error in our forecast with respect to possible upside and downside as compared to previous quarters.

As you might surmise, all of this economic uncertainty impacts how we think about 2009.

Typically around this time of the year we are engaged in a budgeting process for the following year.

This year is no different and we are deeply into that process as we speak.

However the format of the budgeting process is different this year in that we are trying to forecast multiple financial performance outcomes based on multiple potential economic conditions.

Until we see stability in the world-wide economy we will be reluctant to communicate any financial forecasts for 2009.

Therefore, when we announce our Q4 results in February it is unlikely we will provide a full year 2009 forecast.

What I can say about our 2009 budget process is that regardless of whatever economic scenario ultimately manifests itself we will be striving to achieve several principal goals.

First, to grow the unit sales and local currency gross bookings in each or our businesses on a worldwide basis.

Second, to continue taking market share in the world-wide online travel market.

And third, to maintain the significant operating leverage gains we achieved in 2008.

As I hope we have made clear on this call, our numbers are going to be impacted by several variables to create difficulties comps for us in the next several quarters.

But these variables are not necessarily permanent.

Once we see stability or even a turnaround in some of these variables such as fX and ADRs, our comps toward the end of next year should get easier and should not ultimately impact our overall long-term growth rates.

With that we would be happy to take your

(OPERATOR INSTRUCTIONS).

Our first question comes from Imran Kahn of JPMorgan.

Yes, hi.

This is [Bridget Weishaar] in for Imran.

I am wondering if you could discuss the differences you are seeing across western international countries and has it spread or is it offset by penetration increases?

I think the economic weakness is essentially widespread by this point in time.

I wouldn't point out a geography that appears to somehow be immune to it.

That is not to say we don't have higher growth rates in some newer markets which is still the case.

You can absolutely see the impact of the economy in most markets.

Our next question comes from Michael Millman of Soleil.

Thank you.

Can you talk about if you are seeing a change in particularly in Europe in how vacationers or travelers are acting?

Are you seeing change in weekend vacations?

Or one way or the other or full week which presumably would be vacations.

Then relatedly, I guess Ryanair has talked about a huge promotion.

Do you see that having a major effect on business or already having some effect on business?

I will take the first question and Jeff can take the second question.

As for trends in Europe, I would make a couple of comments.

I would say first of all, the economic headlines have been much more prevalent in the United States.

I think the United States market has been digesting where the economy is potentially going over a longer period of time.

I think that is why specifically our U.S.

business performed very well because there wasn't as much shock in the headline news in the United States relative to Europe.

I think as we got into September and we saw several of the major European banks fail we could absolutely sort of see a little change in the booking patterns of consumers in Europe as they started to catch up on digesting the state of the current world markets.

The only other thing to say is that we did in Q3 see a little contraction in the timeframe when consumers were booking and consuming the hotel room but nothing very material.

As for Ryanair, Jeff.

One thing that has happened which is good which is oil prices have come down dramatically.

That put the airlines in a position where they can look forward to potentially being profitable next year and both in the United States and with Ryanair in Europe we have seen some fare sale activity which is absolutely intended to spur demand.

I would expect that it would spur demand and ultimately we and the other online travel agents should benefit from that.

Thank you.

[OPERATOR INSTRUCTIONS] We ask that you limit yourself to one question.

Our next question comes from Scott Barry at Credit Suisse First Boston.

Question on the fX impact?

Is that consistent with your revenue mix across your expense line items .And assuming we have a slower growth environment in 2009 on the top line, could you give us a sense for where we might get some back on the expense line items such as in maybe personal costs or G&A?

Sure, Scott.

One of the nice features of our international businesses is that our expenses tend to line up very well, with our revenue and gross profit in terms of fX.

We tend to have not very material differences or hedging translation risk with respect to expenses on one hand and in revenue on the other hand.

And one of our goals in 2009 is to maintain the operating leverage in local currency.

I think because we don't have much of a mismatch in the expenses versus revenues that makes that more achievable goal than it otherwise would be.

As for how we are going to manage expenses in 2009?

I think I tried to allude to that a little bit.

As we think about building the forecast for 2009 we are coming up with various scenarios of growth and because we do want to try to maintain that operating leverage, regardless of which scenario ends up unfolding.

There is an element of expense management to it.

We certainly have plenty of fixed expenses in the P& L.

Personnel is one and offline advertising is one of them and G&A is one of them and IT is one of them.

And I think you can assume that we're going to be careful about managing the fixed expenses in 2009 and the variable ones as well.

Online advertising is obviously our single biggest expense line item.

We hope as we move into 2009 we hope that we will be operating in that environment from a position of strength relative to some of our competitors who have been competing in much better markets over the last couple of years.

Our next question comes from Brian Fitzgerald of Banc of America.

I wanted to know if you could give us an update on keyword pricing.

Is there any change to kind of the underlying balance or elasticity between your ad mix and profitability and bookings?

On keyword pricing, we are certainly hearing what many of you are probably hearing in the marketplace.

There is an expectation that that may soften and that in general demand for advertising should soften and pricing should soften.

I don't think that is really visible or reflected in the third quarter results.

I think that's another way of saying we haven't seen that that much yet.

In terms of the ad mix the only comment is that we will continue to push our ROI targets and try to use offline dollars here in the United States to build the brim.

We have compelling low price messaging here and it is working as you can see with what we think are attractive growth rates that clearly are related to the fact that we have a strong brand and good pricing positioning and we will continue to push that next year.

Our next question comes from Jennifer Watson with Goldman Sachs.

Can you talk about the potential for launching a name your own price product internationally?

We have name your own price hotel inventory in Europe and some other international destinations which we sell to U.S.

resident customers and we also use it in our vacation package product.

We are in that business right now.

We have not -- we also at Priceline have points of sale and opaque hotel.

We have not invested a lot of time and money in it.

Given the marketplace there may be some more demand on the supplier side and consumers are looking for bargains.

I wouldn't rule that out as something that we might get back into and maybe invest more time into next year.

It is not something that we are doing right this minute.

(OPERATOR INSTRUCTIONS).

Our next question comes from Justin Post at Merrill Lynch.

Bob, when you think about next year on the October call last year you were able to call out some interesting things and dynamics for the following year is there anything beyond the macro that you think will be interesting affecting the year-over-year growth rates for bookings or revenues as you look to next year?

One of the reasons why I sort of painstakeningly went through the various variables was to deliver the punchline about what we need to do on a unit growth basis just to break even.

We view that as actually fairly impressive.

In that we do have very big head winds.

Ultimately our unit growth is still very strong in Europe and we think represents market leading growth in which we are taking market share.

We don't have an ability at this point to predict 2009 but in many ways the story for booking.com remains exactly intact.

We continue to grow not only in Europe and into Eastern Europe but throughout international and into the United States.

The fact that we have a little slowdown doesn't change our strategy at all.

It may make us more careful about how we manage forward looking expenses but we still think there is a big opportunity.

As Jeff mentioned there are plenty of people moving from offline means of purchasing their travel to online means.

We're going to have some headwinds, no doubt about it, but the fundamental thesis that we are pursuing internationally is, as I said, is intact.

One thing I would add, Justin, is that as we continue to build out the hotel network because we have soft occupancy and demand at the hotels, I think we are in a very good position to bring more hotels into the system, to get some of the larger chains that have not been focused on getting new online distribution channels, to get them to recognize the value of the distribution that we can bring to them from around the world and we certainly expect to use this opportunity to try to improve our inventory and relationships with the hotel suppliers.

We believe that next year is the year that we can really help them and work together to sort of mitigate the impact of the economic downturn on their business.

On the fourth quarter you said you are up 10% to 20% in Europe on the hotel nights so far this quarter.

How do you think that compares to the industry?

Do you think it is down 5% to 10% , so you're out-performing by maybe 1500 basis points?

How would you characterize

Just to clarify our guidance is for local currency gross bookings growth rate to be up 10% to 20%.

Given the ADR declines and higher cancellation rates it means that our new unit gross bookings coming in the front end are up more than 10 -- we expect them to be up more than 10% to 20%.

I am not in a position to say what we think that means relative to the rest of the market.

We will leave that up to you but I mean based upon some of the rhetoric we have heard from industry sources and our competitors, we think that will probably continue to represent market leading growth.

Next question comes from Mark Mahaney of Citigroup.

The significant expansion in the hotels under management or under contracted inventory, any color on where you see that growth and to what extent is that for hotels in the U.S.

Secondly, Bob, could you clarify the comments on the potential margin outlook for next year?

You said with units and bookings growth and local currencies, I think you said you should be able to maintain '08 margins.

Under which scenario do you think margins would actually theoretically have to come down?

Is it flat revenue, flat bookings and local currency brings margins down in '09, or could even under that scenario they stay flat?

Thank you.

I guess I will handle the first question in terms of hotel expansion for booking.

com.

It is happening in all of the principal markets in Europe, in North America and in Asia.

Our expectation is that we will continue developing the hotel inventory world wide.

As for the operating leverage point, Mark, our goal for 2009 is to grow units and gross bookings on a local currency basis.

And because our expenses are also expressed on a local currency basis, our goal and intention is to manage those expenses so we can maintain the operating leverage.

If we were to enter a scenario where the top line were to shrink, that could limit our ability to maintain the operating leverage.

For now, here in the middle of November, given our unit growth rate that we are seeing in the fourth quarter, we still think it is reasonable to hope we can grow the units and the gross bookings on a local currency basis.

If we manage those expenses properly and manage our ROIs on online spend well, we can hopefully maintain that operating leverage on a consolidated basis.

There appear to be no further questions.

Did you have any closing remarks?

Thank you all very much for participating in the call.

Thank you ladies and gentlemen.

That does conclude our Priceline third quarter 2008 conference call.

You may disconnect.

Have a great day.