- Priceline reported its earnings on May 4, before markets opened.
- The company reported Non-GAAP EPS of $10.54 and revenue of $2.15 billion.
- However, Q2 guidance overshadowed the strong performance, sending the Priceline stock crashing.
Priceline Group Inc. (NSDQ:PCLN) reported its Q1 2016 earnings on May 4 before markets opened. The company delivered a very strong earnings report, beating wall street estimates on both the top line as well as bottom line. However, the Priceline stock went into a tailspin, in spite of the strong Q1 report. Priceline stock closed the last trading session at $1253.03, a huge 7.5% drop from its last closing price (May 3). The post-earnings fall raises a couple of questions. Why exactly did the stock crash? Should long-term investors buy into the latest dip? A deeper look at the earnings report is helpful.
Priceline's Stellar Growth Continues
Priceline's Q1 performance was summed up in one statement from Jeffrey Boyd, interim CEO:
The Group performed well in the quarter and we made good progress executing against our key initiatives.
Priceline delivered a stellar Q1 performance, blowing past analyst expectations. The company delivered a 9% earnings surprise and 1.3% top line beat, its biggest earnings beat in a couple of years.
Priceline reported Q1 revenue of $2.148 billion, $30 million higher than analyst estimates and good for 17% YoY growth. On the earnings front, the company delivered $10.54 in Non-GAAP earnings, a huge 84 cent beat and good for 30% YoY growth. Free cash flow swelled to $3.04 billion, an 8% improvement over the year-ago quarter. All in all, Priceline outperformed on all growth metrics, irrespective of the way you break up the numbers.
Strong Margins And A Healthy Balance Sheet
Another major positive coming out of the earnings report was the 320bps improvement in the gross margin, which was a result of the revenue mix shifting further in favour of Agency revenues, which made up 69.8% of revenues, up from 65.2% in the year-ago quarter.
However, the gross profit margin expansion did not trickle down to the operating level as operating expenses grew at 18.6% YoY, outpacing the top line growth. The net income margin was further hit by a $50 million impairment charge on account of the investment in Hotel Urbano, which continues to bear the brunt of Brazil's macro weakness. In spite of the contractions, Priceline's bottom line story remains intact with operating margins in excess of 25% and a net income margin of 17.4%. The free cash flow margin, though healthy at 31.9%, was a 70 bps contraction over the year-ago number.
Priceline closed Q1 with a cash and equivalents balance of $3.38 billion, an improvement of $700+ million over the previous quarter. Cash and Investment stood at $11 billion. Long-term debt stood at $6.3 billion against shareholders equity of $9 billion, implying a D/E ratio of 0.69. While the debt level could raise a few eyebrows at first glance, an interest coverage ratio of 11x should comfort investors.
So What Exactly Sent The Stock Spiralling?
If Priceline did tick all the right boxes in its earnings report, then why exactly did the stock go into a tailspin? The answer to this lies in the guidance. In a forward-looking market, the past does not matter as much as what the future presents. Yes, Priceline's strong earnings report was overshadowed by a guidance which fell short of expectations.
The Priceline management issued the following guidance for Q2:
- Room nights growth of 15% to 22%.
- Gross bookings growth of 11% to 18%.
- Revenue growth of 7% to 14%.
- Gross profit growth of 9% to 16%.
- Adjusted EBITDA of $740 million to $795 million.
- Non-GAAP EPS of $11.6 to $12.5
While revenue guidance fell short of expectations for 16% growth, this could be overlooked given the fact that Priceline has a history of under-promising and over-delivering. In other words, the management has historically been conservative when issuing guidance. However, the adjusted EBITDA and Non-GAAP EPS guidance was low even by Priceline's conservative standards. The EPS guidance, at its midpoint, implies a 3% YoY decline, which is a first in the company's history. An earnings decline is unforgivable, especially for a stock which trades at a PE ratio of close to 25.
While the guidance, in general, could have been the reason for the post-earnings fall in Priceline's stock price, the single biggest reason to worry investors was probably the EPS guidance. The EPS guidance, at its midpoint of $12.05, was 20% lower than what analysts had been anticipating.
Fundamentally, Priceline continued to fire on all cylinders which was evident from its Q1 earnings report. However, in a forward-looking market, Priceline's guidance once again proved to be its undoing. The weak Q2 guidance overshadowed the strong Q1 performance, sending the stock crashing on the bourses. Long investors, who believe in the fundamental story at Priceline could be attracted to pile into the stock, given the significant post-earnings fall in Priceline stock price.