Booking Holdings Inc (BKNG) 2009 Q4 法說會逐字稿

Welcome to Priceline's fourth quarter 2009 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 materially from those expressed, implied or 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 last of factors that could cause Priceline's actual results to differ materially from those described in the forward-looking statements, please refer to the Safe Harbor statement at the end of Priceline's earnings press release, as well as Priceline's most recent filings with the Securities & Exchange Commission.

Unless required by law, Priceline 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'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.

And now, I would like to introduce Priceline's speakers for this afternoon, Jeff Boyd, Dan Finnegan and Matt Tynan.

Go ahead, gentlemen.

Thank you very much and welcome to Priceline's fourth quarter conference call.

I'm here with Priceline's CFO, Dan Finnegan, and Matt Tynan, Senior Vice President of Finance.

I'll make opening remarks, Dan will give a detailed financial review, and then I will sum up.

After the prepared portion, we will take questions.

Priceline reported consolidated gross bookings for the fourth quarter of approximately $2.3 billion, up 53% year-over-year.

Pro forma net income was $102 million or $1.99 per share, up $0.54 versus the prior year.

Fourth quarter results surpassed First Call consensus estimates of $1.68 per share and our guidance for the quarter.

Top line growth for the international businesses accelerated as we compare to weak results in last year's fourth quarter due to the global recession.

For the full year, Priceline reported gross bookings of $9.3 billion, up 26% from 2008, and pro forma net income per share of $8.52, a 43% increase over 2008.

Growth rates for our international business increased during the quarter with 70% gross bookings growth on a local currency base.

Growth rates benefited from weak comps and stabilizing ADR trends and cancellation trends.

International gross bookings benefited from growth in new markets, growth in hotel supply and results from Agoda.

Bookings.com's worldwide hotel supply platform is now approximately 78,000 hotels in 76 countries.

During 2009, we made substantial investments in distribution in our online channels, while maintaining reasonable efficiencies.

Agoda also reported improving growth rates resulting in improved merchant growth rates on a consolidated basis.

We have also continued to work on sharing supply, customers, and best practices among our brands around the world.

For example, booking.com supply has been the primary source of European hotels for Priceline.com customers for sometime, and we recently began to test showing booking.com North American hotels to Priceline.com customers as well.

Priceline's domestic gross bookings grew 21% in the fourth quarter due primarily to grow in sales of opaque and retail hotel room rate reservations, retail airline tickets and vacations packages.

Domestic merchant gross bookings, which include opaque services and retail merchant hotels continued to grow at attractive rates despite year-over-year declines in opaque airline tickets and retail car days tied primarily to declining capacity.

Opaque and retail hotel room night reservation growth continued at impressive rates as our hotel partners continued to use promotional pricing to drive demand in retail channels and used our opaque service to bolster occupancy.

In summary, the business performed well in the fourth quarter and I commend my colleagues around the world for their focus and execution.

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

Thanks, Jeff.

I'll discuss some of the highlights and operating results and cash flows for the quarter and then provide guidance for the first quarter of 2010.

As we highlighted when we announced our third quarter results, the latter half of 2008 was significantly impacted by weakening global economic conditions and as a result our comps were easier for the latter half of 2009.

These easier comps helped us deliver sequential increases in our quarterly growth rates in gross booking dollars and hotel room nights for each of the second, third, and fourth quarters of 2009 as compared to the prior year.

The easier comp for fourth quarter 2009 resulted in strong unit growth rates, favorable FX impact and more moderate ADR decreases versus earlier periods of 2009.

During our Q3 earnings call, we highlighted our assumption that though latter half would be more challenging since we had seen a marked improvement in our business fundamentals during the latter half of Q4 2008, which would therefore result in a tougher comp.

Our performance in the latter half of 2009 exceeded our assumptions propelled particularly by outstanding performance for our international business.

Hotel room nights booked grew by 60% in the fourth quarter versus last year.

Gross booking dollars grew by 53% for the fourth quarter after applying the negative impact of lower average prices and the favorable impact of currency exchange rates.

ADRs for our international hotel service were down by about 1% versus Q4 2008, and were down about 7% for our domestic hotel service.

Although still a headwind, the ADR trends with improved from the decreases that were posted earlier in 2009.

FX rates were basically in line with the assumption used for guidance.

However, when comparing our results to the prior year, FX rates provided a favorable impact for the first time since Q3, 2008.

The average exchange rates for the euro and the pound versus the dollar were up by 12% and 4% respectively in fourth quarter of 2009 versus fourth quarter 2008.

In summary, room night growth and ADRs were favorable to the assumptions used for guidance resulting in performance that exceeded the top end of our range of guidance in all key operating metrics from gross bookings to EPS.

Gross profit was $313 million and grew 53% as compared to prior year.

Our domestic business generated gross profit of $91 million, which represented 16% growth versus prior year.

Gross profit for our international operations amounted to $222 million, and grew by 75% as compared to the prior year.

Total operating expenses were favorable to guidance as expenses for personnel, G&A, and sales and marketing came in below our estimates.

The variances for personnel and G&A relate mainly to the timing of hiring for our international business.

The variance in sales and marketing is the result of lower than assumed bad debt expense driven by continued improvement in collection results for booking.com.

On a year-over-year basis, we increased pro forma operating expenses by 32%, as we continue to invest in marketing, people, and new offices to support the growth of our business.

We recorded below the line expenses in the quarter of about $2.5 million, which is in line with our guidance.

In summary, pro forma EBITDA for Q4 amounted to $133 million, which exceeded our forecast of $98 million to $108 million, and represents 75% growth versus prior year.

In terms of cash flow, we generated approximately $146 million of cash from operations during fourth quarter 2009, which represents an 82% increase versus prior year.

We spent about $5 million on CapEx in the quarter, and repaid $75 million of convertible debt principal, bringing us to an outstanding debt balance of $196 million at year end.

This leaves us at year end with cash and marketable securities of about $604 million in excess of our outstanding debt balance.

We also have our $175 million revolving credit facility that is undrawn and doesn't expire until September 2012.

We received conversion notices during first quarter 2010 for an additional $98 million of principal amount of convertible debt.

After processing these conversions in the first quarter of 2010, we will be left with outstanding convertible debt of about $98 million.

As we have highlighted in the past, our fully diluted share count, particularly as it relates to equivalent shares outstanding for our convertible debt tends to vary based upon our average stock price.

We include equivalent shares in our fully diluted share count, for the theoretical number of theirs would be issued if our outstanding convertible notes were actively converted.

Since our average stock price was substantially higher in the fourth quarter of 2009 than the same period in 2008, our diluted share count is also higher in Q4 2009 versus prior year.

For first quarter 2010 guidance, we are forecasting total gross bookings to grow by 42% to 48% with domestic gross bookings growing by approximately 10% to 15%.

We expect international gross bookings expressed in US dollars to grow by 65% to 73%, as compared to last year, and to grow on a local currency basis by approximately 56% to 64%.

We expect our books growth rate versus prior year to continue to be hampered by decreases in ADRs.

Our first quarter guidance is based on an assumption that the race of decline in our ADRs will be flat to slightly improved versus the rates of decline that we saw in Q4.

Our forecast assumes that exchange rates remain at the same $1.38 per euro, and $1.58 per British pound as yesterday's closing rates.

This would yield euro and pound average FX rates for the first quarter that are up by approximately 7%, and 11% respectively as compared to the prior year.

We have hedge contracts in place to substantially shield our first quarter net earnings from any deterioration from the euro or pound between now and the end of the quarter, but these hedges do not offset the impact of translation of our gross bookings, revenue, and gross profit.

We expect Q4 revenue to growth year-over-year by approximately 23% to 27%, and gross profit dollars to grow by approximately 50%.

For Q1 operating expenses, we are targeting consolidated advertising expenses of approximately $118 million to $121 million, with approximately 90% of that amount being spent for online advertising.

We expect sales and marketing expense of between $22 million and $25 million.

We expect personnel costs, excluding stock-based compensation to come in between $38 million and $40 million.

We expect G&A expenses of approximately $16 million to $18 million.

We expect information technology costs of approximately $6 million, and depreciation and amortization expense excluding acquisition amortization of approximately $4.5 million.

We expect total below the line negative impacts of approximately $0.5 million, which is comprised primarily of foreign exchange hedging expense and net interest expense.

Pro forma EBITDA is expected to range between $97 million and $107 million, and we are targeting pro forma fully diluted EPS of approximately $1.54 to $1.64 per share, which represents 46% growth year-over-year at the midpoint.

Our pro forma EPS forecast includes an estimated cash income tax of approximately $17 million to $20 million, comprised of international income taxes, and alternative minimum tax in the US.

Our pro forma EPS guidance is based upon a pro forma diluted share count of approximately 51 million shares, which is based on yesterday's closing stock price of $211.21 per share.

This is significantly higher than our share count of 47.2 million shares in Q1 2009 due to year-over-year increase in our primary outstanding share count, resulting mainly from shares issued due to debt conversions over the past year and also due to the impact of higher share prices on fully diluted shares related to our convertible notes.

As a result of those early conversions, the difference between primary and fully diluted share count as been narrowing.

Given the reduction in our outstanding convertible debt balance I just discussed, our fully diluted share count will be less impacted in changes in our stock price going forward.

As for expected GAAP results, we expect to report a GAAP EPS of $1.04 to $1.14 per share.

The difference between our GAAP and pro forma results is driven by pro forma adjustments to exclude stock-based compensation, acquisition-related amortization, non-cash interest expense for amortization of debt discount, non-cash gains or losses related to debt conversions, and certain income tax expenses, all of which are non-cash in nature to arrive at pro forma earnings.

We also intend to address pro forma results to exclude charges or benefits if any, related to rulings, or settlements.

Although we are no providing guidance between Q1 2010, I would like to highlight that the strong results and sequential unit growth we have achieved for the past several quarters is to some extent driven by the relatively easy comps caused by the impact of the global recession on the prior-year periods.

We believe our comps become progressively more challenging throughout each quarter of 2010.

We have seen deceleration in unit growth rates this far in Q1 2010 as compared to Q4, both domestically and internationally.

And this deceleration is factored into the guidance we just gave.

More difficult comps in tandem with the sheer size of the business make it highly likely that will return to a pattern of decelerating unit growth rates.

Our guidance assumes that macroeconomic conditions in general and conditions in the consumer travel market in particular remain relatively unchanged.

I'll now turn the call back over to Jeff for some closing comments.

Thanks, Dan.

We are pleased with the performance of our global business in 2009.

Despite a very difficult economic and competitive environment, we were able to make significant investments in building our business while delivering earnings growth to our shareholders.

Moreover, growth rates improved during the year as we began to comp against weak, year-ago results.

We ended 2010 with more stability in unit pricing, but with continued volatility in foreign currency exchange rates.

Economic growth has returned in many regions, but unemployment remains high, and ballooning government deficits threaten to destabilize currencies and rekindle inflation.

We believe our growth rates in those of our industry will decelerate as the year proceeds and we begin to compare against improved 2009 results, particularly in the second half.

Our competition will also anniversary the conversion benefit of last year's fee cuts, and the earnings benefit associated with cuts to their marketing spends as the year proceeds.

We believe our businesses are well positioned to continue building our brands and offerings and to compete effectively in our global markets.

We will now take your questions.

Thank you, gentlemen.

(Operator instructions) .

Due to the number of participates on the call, we ask that you please limit yourself to one question at a time.

After which, you may queue back up for a follow-up question.

Our first question comes from Aaron Kessler of Kaufman

Thanks, guys.

Good quarter.

Couple of questions on your advertising cost, continue to see good leverage with the online advertising segment.

Are you still seeing more direct traffic on your booking.com property, similar to Q3?

And also, do you continue to see a trend of maybe European hotels, selecting maybe just one travel agency?

Thank you.

Yes, on the first question, we continue to see good levels of direct traffic to all of our websites around the world, and it's a very important part of our task to try to build our brands and promote that direct traffic.

With respect to hotels, working with just one online agency, that's not something that we necessarily have promoted or seen as a trend and, again, I think especially when economic conditions still remain relatively weak and occupancy rates are very much below their historical highs, that hotels will tend to work with multiple distribution channels.

Thank you.

Our next question comes from Ross Sandler of RBC Capital Markets.

Thanks, guys.

Just two quick questions.

The domestic bookings guidance assumed a little bit of deceleration, more so than you have been experiencing of late.

Is that just conservative?

Or is there anything that's kind of one time-ish going on that is driving that deceleration?

And then on the marketing guidance for 1Q, it assumes a pretty large step-up from the 4Q run rate.

Can you help us better understand where that incremental spend going, and is that a sustainable uptick or just some front-end loading of the marketing in the first half?

Thanks.

From the perspective of the domestic bookings guidance, I think that range is straight down the middle.

It represents, I think, the kind of deceleration that you would expect to see given the size of the business, and given the industry growth rates, and at least what the one competitor who has reported has been saying.

So I think it's -- there's no one timer there, and I mention that growth rates are expected to decelerate going in to the year, and so to me that's all fairly consistent.

With respect to the marketing spend, the step-up is essentially seasonal in nature.

The businesses tend to spend particularly in online channels in advance of the major booking upticks that you see in the spring and in the summer, so that's really more seasonal than anything else.

On the year-over-year basis, Ross, the total advertising spending is pretty much in line with the entire year as a percentage of gross profit.

Thank you.

Our next question comes from Justin Post of Banc of America.

Thank you.

Jeff, it looks like you have a growing and accelerating lead in Europe right now based on your bookings numbers.

Are you thinking about any investments as mar as marketing or loyalty points to help lock that in longer term?

And are you seeing any volatility in Southern Europe related to the financial crisis issues down there?

Thank you.

With respect to loyalty programs, as I mentioned earlier, our first task is to improve our product and our offerings and our functionality on the website to encourage people to come back and hopefully come back to us directly.

We don't have any intention of starting a loyalty or a points program or anything of that nature in Europe, although Agoda.com does have a loyalty program in Asia.

And I'm sorry, the second question?

(Inaudible) Oh, so -- with respect to the recent volatility in currency in Europe, I think that's really more reflective of a concern as to what would happen in the future if there was a default -- a sovereign default by Greece or something of that nature.

It is not something we have seen reflected in the numbers we have seen to date in terms of the business.

Thank you.

Our next question comes from Ingrid Chun of Goldman Sachs.

Thank you, good afternoon.

So we believe that you are the low-cost operator in Europe.

How do you think about booking.com's fee structure currently?

And have you seen any competitors pricing as aggressively to try to win share?

I think the -- what has happened in the last year is that hotels have gotten less focused on margin, and more focused on getting people into the hotel.

Going back three or four years ago, margin was -- and distribution cost was a much more salient concern for hotels because they had high levels of occupancies and yields were going up, but in the current environment that really hasn't been a front-burner issue.

On the other hand, we have seen Expedia buying [Veneray] and going out with a agency model that presumably could have some distribution cost efficiencies for some hotels, so that may be an example of trying to compete on the distribution cost side.

Thank you.

Our next question comes from Mark Mahaney of Citigroup.

Thank you.

Jeff, I think you referred to Agoda as having improving growth rates and just to be specific, were you referring to Q4 year-over-year gross bookings for Agoda faster than what you had in the prior quarter?

And could you also comment on how you think about the risk related to your access to hotel inventory with the eventual resurgence of corporate travel both in the US and Europe?

Thank you.

Mark, you are right.

That's what I said, and I was referring to sequential improvement in their growth rates.

With respect to inventory concerns, and -- we have all said this a number of times, I think our businesses have performed pretty well in times of high occupancy and increasing yields, and in fact increasing yields is a tail wind for gross bookings.

Having said that there's no question that promotional pricing helped to spur leisure travel last year, not just for us, but for others in the space, and that the absence of promotional pricing could have an impact on fundamental demand.

Thank you.

Our next question comes from Mike Olson of Piper Jaffray.

Thanks.

Within Agoda, can you talk about what countries you are seeing the most strength in?

And second would you will being to share your thinking our how travel metasearch sites like Kayak impact OTA's and does this trend change your strategy at all as far as how you'll drive direct traffic?

Thanks.

I guess with respect to Agoda , we have consistently seen their business do well in Asian countries outside of China and India?

Particular, that has been their focus.

Thailand is a big market for Agoda.

With respect to metasearch, I think all we can say at this point in time is for the hotel business, which is our principal business, metasearch is a growing, but still a very, very small player in the space.

You have seen some portals like Bing on MSN start to look at metasearch as a way to address specific traffic searching for hotel and airline tickets.

We participate in those channels and we are participating in other metasearch channels, and we're advertisers on them, and our expectations is that those channels grow in their significance, that we will continue to participate.

And I can't think of a reason why we should lose share to other competitors in that kind of an environment versus the environment we're operating in

Thank you.

Our next question comes from Imran Khan of JPMorgan.

Yes, hi, thank you for taking my questions.

Two questions one on the airline ticket side, it seemed like unit growth rate decelerated from 30% to 16%, and seemed like the sequential drop was bigger than what we had last two years, trying to better understand that, and secondly, in terms of -- as the hotel's occupancy increases or the corporate travel picks up, how aggressively do you think the international small hotels will complete for the keyword pricing, and how should we think of the advertising cost as a percentage of your gross profit dollar?

Thank you.

Thank you.

Okay.

We're not doing a good job of one question a person.

But it's no problem Imran.

Dan, why don't you take the first one and I'll do the second.

Imran, airline ticket sales have decelerated from Q3 to Q4.

I think that's reflection of a pretty weak overall travel environment out there for airline tickets, and we're seeing impact of the fee cuts by our competitors, which are maybe causing our growth rate to decelerate.

But it's still strong performance in an overall environment where airline ticket sales are pretty soft.

I would add in there, I also mentioned in my prepare remarks, that opaque tickets were actually down year-over-year, so that obviously is a headwind in terms of overall ticket growth.

With respect to international hotels getting more aggressive in competing for key words, I would expect over time that hotels will get more involved in trying to directly market their properties over the internet, and that is something, certainly that has happened in the United States, and I would expect that to happen elsewhere, but for a small independent hotels that make up the majority of the international markets in which we do business they just don't have the resources and expertise to aggressively market on n a lot of different channels.

It's very hard for them to get distribution through affiliates, its very hard for them to do search marketing in multiple languages, so I think there's a very significant limit to how aggressive they can be in trying to market directly in online channels.

Thank you.

Our next question comes from Sandeep Aggarwal of Collins Stewart.

Thanks for taking my question.

Jeff, I have two questions.

One is how do you compare and contrast booking.com's results in Priceline.com, maybe in terms of click through rate conversion or percent annual gross bookings in US.

And secondly, I will be curious to know about your views on private-sale business, this is a new trend we are seeing, and many of these private sale businesses are offering travel-reduced services.

Okay.

With respect to the first question, we really don't get into disclosing details about things like click-through rates for any of our business, or how one compares to the other, just it's just too competitively sensitive.

With respect to private sale businesses, we're certainly aware that a number of businesses are out there now with limited time private sales.

I think that those businesses are -- they are good companies, and they are good businesses, but they are really in a different space than we are in, and it's very hard to scale.

It's very hard to scale a business when you have got a limited time sale on four or five hotels, even if you sold every single hotel -- every hotel room in each of those hotels, it wouldn't represent a sizable business compared to the size of online travel agents or the size of the advertising businesses you see on Trip Advisor and some of the other sites.

So I think it is going to -- they will be good businesses, but they will probably be relatively small in size compared to the kinds of businesses we are operating here.

You could also say, Sandeep, that we somewhat participate in that market through our name your own price business.

So we have private sales going on, maybe not private, but we've got sales going on every day.

Thank you.

Our next question comes from Michael Millman of Millman Associates.

Thank you.

Can you tell us in Europe what your ADRs are on a same-store basis, or what the change is on an a same-store basis and also what the ADRs -- how the ADRs of your new hotel connections compare with the existing model that you have?

Well, we said for ADRs, Michael, was that for Q4 we saw a decrease year on year of about 1%, and for our Q1, we're projecting that that rate of decline will stay flat or maybe improve slightly.

We don't give an actual ADR rate, but given the size and breadth of the booking.com business it's pretty representative of what you'd see out there in the hotel market for Europe.

Thank you.

Our next question comes from Doug Hammond of Barclays Capital.

This is actually Ron Ghose calling in for Doug.

And thanks for taking my question.

Another question similar on ADR, but on 1Q guidance, I believe the underlying assumption is some stability in ADRs for some continued improvement, but still you have year-over-year decreases with 1Q being flat to slightly improved sequentially.

So I guess my question is what do you believe will be needed for ADRs to turn positive in 2010, given these improving trends and that internationally DR's you just mentioned decrease just 1% domestic.

Improved sequentially, but still down 7%.

Thank you.

Well, I think to get back in to the black, we're pretty close on the international business at down 1%, and projecting flat to slight improvement.

On the domestic side we're probably going to need to see a rebound in corporate travel and just demand in general to help drive those ADRs positive.

Thank you.

Our next question comes from James Cakmak of Sidoti & Company.

Hi, thanks for taking my questions.

You mentioned you were seeing some deceleration in unit growth rates in the first quarter.

Is that something that has been steady rate of decline in the quarter, or has it been slightly accelerating throughout the first quarter?

Thank you.

I don't think we want to get in to a nuanced description of how the rate of deceleration inter quarter is occurring.

Thank you.

Our next question comes from Scott Kessler of Standard and Poors.

Thanks a lot.

I will just ask one question.

I'm wondering in light of what I would characterize as somewhat limited stock repurchase activity over the last couple of years.

$17 million in 2009, and $4.5 million the prior year.

I'm wondering how you are thinking about your excess cash position at this point?

If buybacks are something you are going to be more involved in, or if maybe you could give us just a general sense of how you are thinking about cash in general?

Thanks a lot.

Our outlook and approach on that has been fairly consistent in the sense that we remain potential purchasers of our stock.

We have been opportunistic about it in the past, and we have repurchased stock in size when we did our last couple of converts, and you are right, that that was a while ago, but that remains an alternative for using our cash balances.

We also have been active over the years in the M&A market and continue to evaluate those opportunities, and that's another potential use of cash.

And then lastly, we've used cash over the last year, and we're using some in this year to repay our debt.

Thank you.

Our final question comes from Justin Post of Banc of America.

Thank you.

Just wondering about your taxes.

It looks like your deficit is now down in the $450 million range.

What could happen if you used up your deficit?

What could that change your tax rate?

Any long-term changes there?

Thank you.

I guess by deficit you mean our NOL?

Yes, it looks like your accumulated deficit on the balance sheet or your NOL either way.

The accumulated deficit on the balance sheet is retained earnings, but our asset that we've classified on the balance sheet or our NOL represents the amount that we have given recognition to.

There's another amount that we have not yet booked.

We wouldn't book it until if and when we use it.

But the amount that we have out there is still pretty sizable, it's $1.4 billion of total NOL that we have available to us.

So that's going to continue to shield our taxes -- our income here in the US from having tax liability for the foreseeable future.

Thank you .

And gentlemen, are there any closing

No.

Thank you all for participating in the call.

This does conclude Priceline.com's fourth quarter 2009 conference call.

At this time, you may disconnect.

Thank you for your participation.