At least for the time being, Norwegian Cruise Line Holdings (NYSE:NCLH) appears to have found an often-elusive balance in the cruise-ship industry between bookings and ship capacity. The cruise-line operator hasn't had much trouble filling new fleet capacity, as illustrated by its extremely popular vessel Norwegian Bliss, which launched sailings in April 2018.
Below, we'll review the company's impressive second-quarter 2019 earnings report, released on Thursday before markets opened for trading, and uncover the success factors behind its fast-rising top line and profits.
(Note that all comparative numbers in the discussion that follows are presented against the prior-year quarter.)
Norwegian Cruise Line: The raw numbers
|Metric||Q2 2019||Q2 2018||Change|
|Revenue||$1.66 billion||$1.52 billion||9.2%|
|Net income||$240.2 million||$226.7 million||6%|
|Diluted earnings per share||$1.11||$1.01||10%|
What happened this quarter?
- Net yield (net revenue divided by total available passenger cruise days), rose by 5%, or 5.8% in constant-currency terms -- precisely in line with management's projections last quarter. The robust yields were powered by a repositioning of the Norwegian Joy from Asia to the North American west coast in late April (following a $50 million renovation), as well as higher onboard spending and "strong growth in organic pricing across all core markets."
- Management attributed the high-single-digit revenue increase to the net yield growth and the addition of capacity days due to the deployment of the Norwegian Bliss.
- Passenger ticketing revenue increased by 9.5%, to $1.18 billion, while onboard and other revenue improved by 9%, to $484.9 million.
- Cruise operating expense climbed by 11%, to $958.4 million, as capacity days increased. "Other operating expense," which includes marketing, general, and administrative (MG&A) expense, as well as depreciation and amortization, increased at a slightly slower pace versus cruise operating expense, rising 8%.
- Faster growth in expenses versus revenue caused operating margin to drop roughly 60 basis points, to 19.2%.
- A technical issue on the Norwegian Pearl encountered after quarter-end in July is projected to negatively impact earnings per share (EPS) by $0.07 in 2019.
- Like competitor Carnival Cruise Lines, Norwegian will absorb an unexpected drag on earnings due to the United States' impromptu revision of its Cuba travel policy in early June. The abrupt policy reversal, which immediately halted cruise traffic to Cuba, will shave an estimated $0.45 off Norwegian's full-year 2019 earnings.
What management had to say
The one internal and one external headwind mentioned above notwithstanding, Norwegian remains on pace for an extremely profitable year. In the cruise-specialist's earnings press release, CEO Frank Del Rio enumerated current pillars of its buoyant revenue:
Continued robust demand for our global brands along with our strong consumer focused value proposition, honed revenue management practices and best guest marketing strategy, enabled us to continue to drive ticket pricing higher which, when coupled with strong onboard revenue performance, resulted in record second quarter results. The underlying fundamentals of our business remain strong across all core markets, and we continue to expect record financial results in 2019, despite the impact from the change in federal regulations which resulted in the cessation of premium-priced Cuba sailings.
Norwegian adjusted full-year earnings projections to account for impacts related to the Pearl and Cuba restrictions on Thursday. The company anticipates full-year adjusted EPS of $5.00-$5.10, versus its earlier range of $5.40-$5.50. Net yield growth is chalked in at 2.1% and 2.6% in constant currency, against a previous outlook for 3%-4% (and 3.5%-4.5% in constant currency).
For the third quarter, the cruise operator expects net yield to land at 1.5% (1.75% in constant currency) and is targeting adjusted EPS of $2.15. Given the company's current momentum, it has a decent chance to exceed both full-year and third-quarter guidance -- absent any new unanticipated headwinds.