Inc (PCLN), Expedia Inc (EXPE): Final Thoughts

Page 1 of 2 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

Hedge Fund Billionaires Are Hoarding These 5 Inc (NASDAQ:PCLN) announced a slower growth rate for the coming quarter. The expectation is that revenue will grow by just 15%-22%. There are two main reasons for this slow down in growth. One reason is that international bookings growth will slow to just below 40%. The second reason is the company has increased its advertising rate and advertising budget. It is spending more for more ads in the United States.

A slowdown in earnings growth is sometimes considered bad news for investors, but in the case of 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 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 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 Inc (NASDAQ:PCLN), though. Its market cap is $7.96 billion, versus Priceline’s $38.17 billion.

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