Scott Devitt: Priceline Continues To Outperform (PCLN)

From Stifel Nicolaus analyst Scott Devitt's note to clients on Priceline's (NASDAQ: PCLN) Q1 results (see also full conference call transcript):

Overview
• We reiterate our Buy recommendation on shares of Priceline and are
increasing our target price to $31 based on continued outperformance. At
$31 per share, Priceline shares would trade for 16x 2007 EV/unlevered
free cash flow (adjusted for NOL and tax-effecting FCF) and 11x EBITDA.
At current levels, Priceline trades for 13.2x EV/FCF and 8.8x EBITDA.
We would be aggressive buyers of Priceline shares following 1Q06
results, all else being equal.
• Priceline reported 1Q06 diluted cash EPS of $0.19, $0.01 above our
$0.18 pro forma estimate. On a GAAP basis, the company reported a
loss per share of $0.02, relating to the inclusion of stock comp expense.
The reported revenue of $241.9 million was mostly in line with our $243.9
million expectation.
• Priceline had $746.8 million in gross bookings, showing 47% of growth,
or 33% organic growth. Priceline's domestic organic growth rate was 10%
in the first quarter.
• Priceline Europe bookings increased by 102% organically to $272.8
million in the quarter. We estimate that Priceline's hotel bookings from
Europe could amount to as much as 40% of gross bookings in 2006.
• We are raising our 2006 revenue estimate from $1.01 billion to $1.03
billion and increasing our EPS estimate from $1.56 to $1.65. Our 2007
EPS estimate is going to $2.00.

Our Thoughts

Priceline delivered solid results driven by continued stellar performance from its international operations. In the quarter, bookings growth in Europe exceeded 100% and accelerated from the 88% growth reported in 4Q05. International bookings accounted for 37% of total bookings and could exceed 40% for full-year 2006. The company expects that more than 50% of pro forma operating income will come from international operations in 2006. Also, the domestic business did quite well and experienced 10% bookings growth up from 5% in 4Q05.

In the quarter, Priceline sold 728,000 airline tickets, 4.2 million hotel room nights, and 1.6 million rental car days. We estimate that more than 75% of Priceline's bookings in dollars terms are generated outside of the air business. In terms of gross profit, we believe less than 20% comes from the air business. Given the environment of potentially changing GDS economics and incentives in air ticket distribution business, we find Priceline uniquely diversified away from this challenging air landscape. We also believe that Priceline already receives lower incentives than its counterparts in the industry.

Going forward, we believe (and management suggested on its conference call) that 2006 guidance is conservative. In fact, in the month of April Priceline's hotel revenue and gross profit grew by 50% from March levels. We are uncertain how long triple digit annualized growth in Europe can last but believe Priceline is well-positioned to maintain its competitive position given its low take rate relative to competitors.

We expect Priceline to generate free cash flow growth in excess of 20% in 2006 and at 20% in 2007, yet the business trades for 13x free cash flow. We find the shares to be mis-priced for its growth and business prospects. We believe the shares have been hampered by difficult industry conditions but think investors need to focus on the continued outperformance versus expectations, longest-tenured management team and best strategic buyer of assets, 20+% cash flow growth, shift to hotel transactions, and 2x industry growth in Europe as sustainable reasons to own the shares at current levels.

Results

Priceline reported revenue of $241.9 million for the 1Q06, up 3.7 % from the quarter a year-ago. Reported revenues were slightly below our expectations of $243.3 million. Gross profit grew 25% to $72.6 million. The company reported net income of a loss of $1.0 million, or ($0.02) per share on a GAAP basis or $7.6 million and $0.19 on an adjusted basis, above our estimate of $0.18. Advertising expenses during the quarter consisting of both online and offline advertising activities totaled $31.3 million, of which $21.9 million consisted of online advertising. Approximately 70% of Priceline's total ad spend was for online spending. Priceline's earnings were negatively impacted by $6 million of amortization expense, primarily associated with the acquisitions of Travelweb, Active Hotels, and Bookings B.V. and $3 million of stock based compensation expense which reflected the adoption of FAS 123R during the quarter. All of these expenses were non-cash in nature.

Gross bookings for the quarter were $746.8 million, an increase of roughly 47% from 1Q05, while gross margins decreased to 25.2% from 33.0% in the year-ago period, and from 30.1% sequentially. Domestic results were helped by strong retail hotel sales and growth in rental cars and packages Priceline Europe recorded gross bookings of $272.8 million in the first quarter, which represents an organic growth rate of 102% compared to the same quarter in the prior year. Management noted that the company grew faster than competitors in Europe during the quarter.

Airline ticket unit bookings fell 2.6% compared to the same period a year ago. Hotel room night unit bookings of 4.2 million grew 62.5% compared to the same period last year and rental car day unit bookings increased 26.8% year over year to 1.6 million rental days sold. Priceline's domestic organic growth rate was 10% in the quarter up from 5% last quarter.. Merchant gross bookings growth was flat year/year due to continued shrinking of the opaque product. The company ended the quarter with $188.4 million in cash and $223.2 million in debt on the balance sheet. During the quarter, the company used cash to acquire approximately $5.6 million worth of common stock, pursuant to the share buyback program. Total capital expenditures in the first quarter were approximately $2.1 million.

Outlook and Conclusion

Management expects second quarter 2006 gross bookings to grow 45% - 50% with revenues expected to be up about 8% - 12%, and gross profit growth of about 45% to 50%. Management gave guidance of pro forma net income of priceline.com, Inc. (PCLN) May 4, 2006 between $0.48 and $0.53 per diluted share. For the full year 2006, management expects gross bookings between $2.9 billion and $3.1 billion, with European bookings of about $1.1 billion. Priceline expects proforma net income in the range of $1.60 to $1.70 billion. In addition, management expects that Priceline Europe will account for more than half of total company pro forma operating income in 2006, up by well in excess of 50% in an organic year-over-year basis. We are raising our 2006 revenue estimate from $1.016 billion to $1.031 billion and increasing our EPS estimate from $1.56 to $1.65. Our 2007 EPS estimate is going to $2.00.

We reiterate our Buy recommendation on shares of Priceline and are increasing our target price to $31 based on continued outperformance. At $31 per share, Priceline shares would trade for 16x 2007 EV/unlevered free cash flow (adjusted for NOL and tax-effecting FCF) and 11x EBITDA. At current levels, Priceline trades for 13.2x EV/FCF and 8.8x EBITDA.