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<DAILY TROUBLE>
Tuesday, March 2, 1999

Preview Travel Inc.
(Nasdaq: PTVL)
Website: www.previewtravel.com
Phone: 415-439-1200
Price (3/1/99): $23

HOW DID IT FIND TROUBLE?

Turbulence spelled an early descent for this Internet jetsetter. It wasn't all that long ago that Preview Travel reigned supreme over the friendly skies. As the leading online travel agency, having booked just over $200 million in leisure and business trips last year, this was destined to be the next airborne 'Net stock.

But after reaching dizzying heights last summer, the pressure began to build. While airlines began to scale back commission rates paid to online booking agencies to appease traditional operators with more overhead, it eventually had to ruffle the feathers of the industry as a whole.

With the airline industry mired in pricing wars, the carriers soon found themselves capping royalty payouts to all travel agents. Cutting out the middleman, be it brick and mortar or Internet-based, seemed like the logical way to win back some of the profits the airlines had to give up in serving up rock-bottom airfare rates to the end user.

Was this the end of the travel agent? Of course not, but with the industry at the mercy of cost-cutting suppliers it was hard for investors to get excited over the growth prospects of travel agencies -- even online ones like Preview Travel.

BUSINESS DESCRIPTION

San Francisco-based Preview Travel closed out the year with 6.4 million registered subscribers. At the company's website users can check air, hotel, and car rental rates and proceed to book them online.

Last year the company carried out 640,000 transactions. The convenience, along with prepackaged travel information, has made the site one of the 50 most popular stops on the Internet, according to Media Metrix.

FINANCIAL FACTS

Income Statement
12-month sales: $14.0 million
12-month income: ($27 million)*
12-month EPS: ($2.11)*
Profit Margin: N/A
Market Cap: $312.8 million
(*Includes loss from disposal of television business and from television operations.)

Balance Sheet
Cash: $61.5 million
Current Assets: $68.2 million
Current Liabilities: $8.0 million
Long-term Debt: N/A

Ratios
Price-to-earnings: N/A
Price-to-sales: 22.3

HOW COULD YOU HAVE SEEN IT COMING?

On the Internet, being the leader doesn't come cheaply. The cost of exposure on places like America Online (NYSE: AOL), Excite (Nasdaq: XCIT), and Lycos (Nasdaq: LCOS) is growing at a faster rate than the increased revenues and the improving gross margins.

So while an eclectic operator like online auctioneer eBay (Nasdaq: EBAY) can wow Wall Street with a combination of community growth and profitability, Preview Travel has been showing a surge in popularity with widening losses. While a similar fate has befallen the online world's prized e-tailer, Amazon.com (Nasdaq: AMZN), the bookseller is serving in a segment where the hope remains that eventually the ink will be as black as the text of the books it sells.

Preview Travel is dealing in a tough niche where it is spending the necessary tens of millions of dollars a year in promotional costs at a time when most vacation purveyors are looking to scale back the significance of an intermediary. The trend has been evident to those who follow the industry, and getting out last year as online commissions were getting capped would have spared the recent bumpy ride.

WHERE TO FROM HERE?

Last month I finally booked my first airline flight through Preview Travel. I guess it was guilt that drew me in. Over the past two years, whenever I needed to travel I would log on with Preview to find out the most convenient and economical itinerary, then log off and call the airline directly.

I'm not alone, since less than 10% of Preview Travel's registered users actually made a booking last year. But Preview Travel has recently upgraded its site, and after using its vacation planning resources to find a cheap flight or a hotel bargain, and now Fodor's travel guides, I was finally won over.

Preview Travel stands a fighting chance now. No, not because it finally swayed my fickle ways. Sensing the airline royalty slashings, the company has gone from deriving 68% of its revenues from plane ticket sales a year ago to just 48% today. With the airlines unlikely to loosen that tightening grip anytime soon, the diversification is a welcome thing. That percentage should continue to shrink since the company has recently upgraded its cruise offerings to go along with the popular car and hotel bookings.

The company has also begun to exploit itself the same way it has ponied up for advertising on the popular portal sites in the past. Last quarter, while travel-related transactions doubled, the company had a six-fold increase in revenues from selling banner ads on its own site. So even if most users will continue to pass on booking travel plans directly through Preview Travel, the company will still benefit from the popularity of its site. On Monday of this week (Mar. 1), the company announced that it had signed deals with five major advertisers, including AT&T, Hewlett-Packard, Discover Brokerage, AutoConnect, and Ticketmaster Online-CitySearch

While the losses should continue in the near term, the company has a healthy cash arsenal to see it through. With a clean slate on debt, the company closed out 1998 with $61.5 million in cash and marketable securities. That will help the company pay for its presence throughout the Internet (as is the case with Snap, the new offering from NBC and CNET) as the company's revenues should continue to grow with company acceptance.

Trading recently in the low $20s, the company has an enterprise value that is equal to its last year of gross bookings. While few would value a traditional travel agency as richly on a relative basis, Preview Travel has probably set itself up as a juicy takeover target for the larger portal players. While the upside seems more likely than the downside here, it will no doubt be a bumpy ascension. Fly at your own risk.

-Rick Aristotle Munarriz
(tmfedible@aol.com)

The Fool is hiring. Answer the call.

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