Highlights From PCLN's Q3 Conference Call: Gross Bookings Up 56% Year-over-Year

Priceline.com, Inc. (NASDAQ: PCLN) reported Q3 EPS of $9.95, 65 cents better than the analyst estimate of $9.30. Revenue for the quarter came in at $1.45 billion versus the consensus estimate of $1.42 billion. Shares are up over $38 (+7.5%) today.

Highlights From PCLN's Q3 Conference Call:

• Priceline.com, Inc. sees Q4 2011 EPS of $4.90-$5.00, versus the consensus of $5.14.
  
• (Jeffery H. Boyd) Priceline reported consolidated gross bookings for the third quarter of approximately $6.3 billion, up 56% year-over-year. Non-GAAP net income was $513 million or $9.95 per share, up 88% versus prior year.
  
• Third quarter results surpassed First Call consensus estimates of $9.30 per share and our guidance for the quarter.
  
• Worldwide hotel room night reservations were $40.6 million for the quarter, up 47% year-over-year.
  
• Growth rates for our international businesses surpassed our guidance with 61% gross booking growth on a local currency basis.
  
• Growth rates benefited generally from growth in new markets for Booking.com, continued high absolute growth rates for Agoda and TravelJigsaw and increased hotel ADRs.
  
• International hotel gross bookings also benefited generally from growth in hotel supply with Booking.com hotels and other accommodations up 62% year-over-year to 170,000.
  
• Booking.com continues to build inventory and sales in high growth markets, delivering growth in reservations to new destinations and growing demand in those destinations for hotels around the world.
  
• As one indicator of its progress, Booking.com has opened 20 local supply offices during the last 12 months. Priceline's domestic gross bookings growth held steady at 13% in the third quarter, due primarily to growth in retail hotel room night gross bookings aided by improved ADRs, growth in airline ticket sales with higher air fares and growth in rental car reservations.
  
• Merchant gross booking growth of 36% is primarily driven by growth from Agoda and TravelJigsaw, which now represent a significant share of merchant bookings.
  
• Flooding in Thailand is having an impact on travel to that important regional destination.
  
• The Agoda and Booking teams are doing a great job serving customers needing to cancel and booking vacations to unaffected destinations.
  
• (Daniel J. Finnegan) Gross bookings grew by 56% as the business gained market share both internationally and in the U.S. Hotel room nights booked grew year-over-year by 47% in the third quarter, as we saw deceleration compared to the 56% unit growth rate achieved in Q2, 2011.
  
• As we mentioned when we gave Q3 guidance, we expected this higher level of deceleration because we had a softer Q2 comp a year ago, and a tougher Q3 2010 comp, where local currency international gross bookings growth accelerated by almost 1,100 basis points sequentially.
  
• Also, Q3 is the first-quarter where TravelJigsaw is included for the full prior year period. Average daily rates or ADRs were up on a local currency basis by approximately 2% for our international hotel service and by about 6% for our U.S. hotel service for Q3, 2011. In both cases, slightly unfavorable to our assumptions for Q3 guidance.
  
• The average exchange rates for the third quarter of 2011 for the euro and the pound sterling were approximately 9% and 4% higher, respectively, than the average exchange rates for Q3, 2010.
  
• Our Q3 international gross bookings grew by 73% and by 61% on a local currency basis, in both cases exceeding the top end of our guidance range.
  
• Hotel room night growth rates for our international business didn't decelerate to the extent assumed in our forecast. Rental car days booked were up by 36%.
  
• Gross bookings growth for our U.S. business of 13% was at the top end of our guidance range. Strong growth in retail hotel room nights booked and higher ADRs were key drivers, Name Your Own Price hotel room nights declined slightly, likely as a result of competitors' discount hotel initiatives.
  
• Airline tickets booked were up by 8% in the quarter, reflecting good growth in Name Your Own Price and retail airline tickets. A 7% increase in average retail ticket prices also contributed to gross bookings growth.
  
• Gross profit for the quarter was $1.1 billion and grew 65% as compared to the prior year.
  
• Our international operations generated gross profit of $952 million, which constituted an increase of 80% as compared to the prior year and an increase of 68% on a local currency basis.
  
• Gross profit for our U.S. business amounted to $148 million, which represented 8% growth versus prior year.
  
• Total operating expenses came in above our guidance driven primarily by higher than forecasted online advertising expense, which is consistent with our gross bookings over-performance.
  
• Non-GAAP operating income as a percentage of gross profit amounted to 58% for Q3 2011 as compared to 54.9% for the prior year. Non-GAAP other expense recorded below operating income in the quarter amounted to $3 million, which is lower than the $6 million of expense we assumed in our guidance. The variance relates mainly to FX hedging gains that resulted from the euro weakening after we gave guidance.
  
• Adjusted EBITDA for Q3 amounted to $644 million, which exceeded our guidance range of $595 million to $615 million and represents 78% growth versus prior year.
  
• Non-GAAP net income grew by 88% including a lower year-over-year cash tax rate due to the Innovation Box Tax benefit and a lower statutory rate in the U.K.
  
• In terms of cash flow, we generated approximately $560 million of cash from operations during third quarter 2011, which represents an 84% increase versus prior year.
  
• We spent about $12 million on CapEx in the quarter and we've spent about $30 million on a year-to-date basis through September 30th, which represents a sizeable increase compared to prior year.
  
• Our Q4 forecast assumes that exchange rates remain at the same $1.38 per euro and $1.60 per British pound as Friday's closing rates which would result in average exchange rates fairly similar to those that prevailed in Q4 2010.
  
• At or near these exchange rates, our local currency growth rates will be similar to our growth rates expressed in U.S. dollars.
  
• (GUIDANCE) We are forecasting total gross bookings to grow by 39% to 44% with U.S. gross bookings growing by approximately 13%. We expect international gross bookings expressed in U.S. dollars to grow by 50% to 55% as compared to last year and to grow on a local currency basis by approximately 49% to 54%. Our guidance assumes that the rate of year-over-year increase in ADRs for Q4 will be less than what we experienced in Q3 for our international hotel service and about the same as Q3 for our U.S. hotel service. We expect Q4 revenue to grow year-over-year by approximately 27% to 32%, and gross profit dollars to grow by approximately 42% to 47%.
  
• Our forecast reflects the negative impact observed thus far from recent severe flooding in Thailand, which is a key market for our Agoda business and the Asian business of Booking.com. If the impact of the flooding in Bangkok were to worsen, our forecast would be negatively impacted to a greater extent.
  
• (Q&A) On the slight hotel unit acceleration, I was hoping you could parse out maybe a little bit of performance of some of maybe your core European markets for Booking.com, any particular pockets of weakness that maybe you can provide color on. And then also online ad expense as a percentage of gross profit was down a bit on the year-over-year basis. That's following a couple of quarters of increases, any comment there on where exactly you guys are seeing better efficiency in terms of your online ad spend? A) In terms of market performance, Tom, we saw strong performance across all of our markets. So, the newer markets being North America for Booking.com, Asia-Pacific and South America are still growing at faster rates than our overall consolidated growth rate. But the core markets Western Europe, Southern Europe continue to post very strong growth for us and are still a big enough percentage of the total business that if they were impacted dramatically, you would notice that in our reported results. In terms of the online advertising, we did have an improvement as a percentage of gross profit versus the prior year. That's principally due to the investments that we have made last couple of quarters. So, we were telling you that one of the reasons that the online advertising as a percentage of gross booking is higher is that our gross bookings were growing at a faster rate and that those gross bookings would turn into checkouts and revenue particularly in Q3 which is the seasonal peak for travel for Booking.com, and we saw that happen in Q3. So, our gross profit grew at a faster rate than our gross bookings where we had some deceleration, so you see a favorable relationship there. Fundamental advertising efficiency was good and that was partly offset by the mix impact of our international business growing faster than our U.S. business. Internationally, we spend a higher percentage for online advertising than in the U.S. where it's more repeat customers and we also have our offline advertising program.
  
• Just two quick questions. First, Dan, can you - you made some comments that you're not really seeing any impact from macro other than some short-term volatility from cancellations. Can you give us a little bit more color on what you are seeing in Europe right now as it relates to macro, anything different in 3Q versus prior quarters? And then, Jeff, just a question on capital allocation; given the enormous levels of free cash flow generation, we know you've done buybacks in the past to cover converts, but any thought on share repurchase if the stock kind of stays at current levels? A) Okay, Ross, on Europe, what we said was we haven't seen any pronounced impact from macro conditions in our reported results for > Q3 or in our forecast for Q4. We have seen some volatility in transactional growth rates from week-to-week and month-to-month, but overall still blended out to results that we are happy with. We've also seen some volatility in cancellation rates for the Booking.com business. Those are reflected in the gross booking numbers that we report to you, so those are net of cancellations. But we have seen periods where the cancel rate has been proportionately higher than it has been in other periods. And so, we try and discern: is that an impact on the consumer, but there has been nothing there that we've seen that really indicates that there has been a significant impact of the macroeconomic trends. A) And with respect to capital allocation, our approach hasn't changed. We look at buybacks, acquisitions in the same way that we have in the past where we are opportunistic. We have an approval from our board that's roughly $450 million that remains in place. We purchased this year as part of our compensation programs $160 million worth of common stock and we remain open to opportunistic transactions on both fronts going forward.

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