Priceline.com Inc (NASDAQ:PCLN) recently posted strong earnings growth on May 9. It also lowered its guidance for the second quarter in the few weeks before it acquires a small competitor. With these changes coming in the next few months, this is what investors need to know.
Earnings report
Total earnings per share was $5.97 for the first quarter of this year. This beat Wall Street estimates by over 9% and beat last year’s earnings by 33%. Total revenue grew by 25%, as well.
International bookings caused a large portion of this growth. 88% of total gross profit in the first quarter came from international operations. This $894 million grew by 45% from the same time last year.
The company has focused on growing its international expansion in the last year. It has succeeded with this goal. The company also announced news for the next quarter.
Q2 guidance
A slowdown in earnings growth is sometimes considered bad news for investors, but in the case of Priceline.com Inc (NASDAQ:PCLN) it is not. Its top line will grow, just not by the same amount it had in this previous quarter. This quarter had a growth rate much higher than it should have. There was an increase in bookings that the company did not expect.
An increase in marketing expenses is also a positive sign for future growth. The management is telling investors that there will be an increase in expenses now for an increase in revenue later. Total earnings have an expected growth of 23% this year and an additional 19% the following year. The growth may not be as high as it has been in the past, but it is still very strong.
The pending acquisition merger
The company also announced it has set a final date for the acquisition of Kayak Software Corp (NASDAQ:KYAK). The total acquisition price is $1.8 billion in cash and stock on May 21 of this year. The price has been set at $40 per share, which brought the share price of Kayak down in trading on May 10 to $40.10. There are stipulations on this acquisition price based on the value of Priceline’s stock. If Priceline.com Inc (NASDAQ:PCLN)’s stock is above $698.27 per share, the purchase price will be adjusted. Priceline is trading above $720, so there will likely be a slightly higher distribution to current shareholders.
Kayak Software Corp (NASDAQ:KYAK) brings a solid business and income stream to Priceline. The company’s most recent quarter had a high amount of selling, general, and administrative expenses, which lead to a net income loss of $577,000. 2012 was its first fully profitable year. It had increased its exposure and marketing expenses to grow its top line by more than 250% since 2008.
Under the leadership of Priceline.com Inc (NASDAQ:PCLN), Kayak will benefit from a reduction in SGA expenses due to synergies of operations. Kayak Software Corp (NASDAQ:KYAK) was a small fish compared to Priceline, but it was still increasing its market share. Had it not been acquired, it was expected to grow its bottom line by 25% or more in the next two years due to an increase in advertising and promotions.
This acquisition has the potential to add an additional $370 million in revenue to Priceline’s expected $6.5 billion in the next year. This is a great move for Priceline.
Other competition
With an up-and-coming competitor out of the way, there is room for one of the smaller travel websites to step up its game. Expedia Inc (NASDAQ:EXPE) is already the leader in total gross bookings for online travel companies. It is considerably smaller than Priceline.com Inc (NASDAQ:PCLN), though. Its market cap is $7.96 billion, versus Priceline’s $38.17 billion.
For the first quarter of this year, the company had just $1.01 billion in total revenue. On this revenue it had a negative net income due to selling, general, and administrative expenses. It is important to note that while Expedia has more bookings overall, it does not have the most profitable bookings. Expedia Inc (NASDAQ:EXPE) has taken the strategy of providing everything to everyone, while Priceline.com Inc (NASDAQ:PCLN) has focused on the most profitable bookings.
It’s 2011 spinoff Tripadvisor Inc (NASDAQ:TRIP) has been growing substantially in the last year. The majority of TripAdvisor’s revenue comes from click-through and affiliate bookings to Expedia and Priceline. As Tripadvisor Inc (NASDAQ:TRIP) continues to expand and grow, bookings passed on to Expedia and Priceline will grow as well. This is a win for all three companies.
Most analysts expect a strong growth in revenue for Expedia Inc (NASDAQ:EXPE) this year due to marketing and exposure to more markets. The consensus is a 20% growth in revenue and an 8% growth in net income. This is a great sign for the company, but because the earnings won’t keep up with the revenue growth, investors should watch this stock closely.
Final thoughts
Even with lower guidance for the second quarter of this year, Priceline.com Inc (NASDAQ:PCLN) is a great company to consider for an investment. It has a strong history of growth and great potential for the next year. Its acquisition of Kayak Software Corp (NASDAQ:KYAK) will bring more earnings growth in the coming years and eliminate competition. Expedia will have to step up its marketing and operations to continue to compete. It doesn’t look like it will be the winner for a while.
The article Lower Guidance Doesn’t Mean Sell originally appeared on Fool.com and is written by Austin Higgins.
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