Is Priceline Back? Travel Site Beats Street, Predicts Q2 Profit

Priceline (Nasdaq: PCLN) announced Tuesday a pro forma net loss for the first quarter 2001 of US$6.2 million, or 3 cents per share, beating analyst estimates of a loss of 5 to 7 cents per share.

Priceline also said that it expects to report its first operating profit in Q2 2001.

The first-quarter report by Priceline added to the mounting evidence that online travel is one of the few thriving business-to-consumer e-commerce sectors. Priceline's gross profits rose 23 percent compared to the fourth quarter of 2000, to $43.1 million.

"While we are still in a turnaround mode, we are encouraged by the fact that our key customer and financial metrics grew stronger as the first quarter went on," said Priceline.com president and chief executive Daniel H. Schulman.

Turnaround Time

Schulman said that Priceline's turnaround was led by the company's focus on its core travel business, as well as the strengthening of Priceline's brand, product offerings and customer service .

"The sum of these actions have worked -- our top-line momentum has been substantially restored," Schulman said.

Direct Marketing Pays

Priceline chief financial officer Bob Mylod attributed much of the company's first quarter success to a marketing strategy that focused on mining its existing database of customers via direct marketing in order to reduce advertising costs.

As a result, Priceline saw gains to its gross margin, which rose from 15.4 percent to 16 percent, the company said.

"Our dynamic pricing platform enables us to earn margins substantially in excess of our online travel competitors," Mylod said.

Shares Gain

Boosted by growing confidence -- including a pre-announcement upgrade on the stock from Goldman Sachs -- shares of Priceline rose over 35 percent by market close Tuesday, to $6.59. In after-hours trading, the stock had jumped to $7.39 -- representing a 52.4 percent increase over Monday's close.

The last time shares of Priceline sold above $7 was in October.

Goldman Sachs analyst Anthony Noto said in a research report that Priceline is "still in a turnaround phase, but the progress made to date positions the company to better control its destiny, with Q1 potentially being its last unprofitable quarter."

Two of Priceline's rivals, Expedia and Travelocity, also saw significant gains in the market Tuesday, with Expedia posting its first-ever profitable quarter more than a year ahead of schedule. As of the close of trading on Tuesday, Expedia was up $4.11, or 15.8 percent, at $30.12 and Travelocity was up $4.05, or 13.5 percent, at $34.

In April, Travelocity also announced its first-ever profitable quarter.

Hedging Bets

Schulman said there are both pros and cons for Priceline during this period of overall economic downturn.

"It's a con in that if airlines need to go and do fare sales, that can reduce our lower average revenues per ticket sold," Schulman said. "On the pro side, [the downturn] is hurting business travel more than the leisure segment, and we're 100 percent focused on leisure, as opposed to some of our online travel competitors."

"Also, in a downturn, our customers become much more cost conscious, and the tradeoff to get the best deals becomes less onerous to them."

The company said it expects to spend at least 20 million less in cash expenditures in 2001 than in it did in 2000.

Staff Cuts

Priceline's restructuring efforts included the reduction of its staff from 538 employees in the fourth quarter of 2000 to 344 employees at the end of the first quarter 2001.

The company also received an investment of $50 million from Hutchison Whampoa Limited and Cheung Kong (Holdings) and restructured its investment from Delta Airlines to reduce its dividend requirements.

Name-Your-Own-Positives

Priceline's recently completed quarter was marked by restructuring and controversy, but ultimately by successful growth. Boosted by a new graphics interface and reduced customer service contacts, Priceline said that it added 891,490 new customers during the first quarter and generated repeat business of 58 percent.

In March, Priceline began offering last-minute deals on hotel accommodations and airfare to appeal to spur-of-the-moment leisure travelers. Priceline now lets travelers book airline tickets as late as 11 p.m. EST for domestic travel the next day, a hotel room as late as 6 p.m. EST for the same night, and a rental car with as little as four hours notice.

However, Priceline's quarter was not without blemish. A group of investors filed a lawsuit against Priceline in March, alleging that the company conspired to drive up the price of its shares after its initial public offering (IPO).

Also, in January, the Connecticut Attorney General sued Priceline's patent holding company, Walker Digital, for violating state laws requiring fair notice be given to employees before massive layoffs take place.