It's rare that a company can impress investors by posting flat performance compared to what it did a year ago. Yet for online travel portal Priceline Group (NASDAQ: PCLN), the strong dollar has created brisk headwinds that have held back the earnings power from its fast-growing international business, and coming into Wednesday morning's release of its second-quarter financial report, Priceline investors were expecting an unusual decline in the company's earnings. Yet Priceline largely defied those expectations, with net income coming within half a percentage point of staying stable and with revenue rising despite weak foreign currency performance. Even better, Priceline said it expects its best results ever in the coming quarter. Let's look more closely at Priceline and why investors are celebrating by sending the stock to new all-time record highs.
Priceline flies over the dollar
As we've seen in past quarters, Priceline's second-quarter results were able to outperform the guidance it set for itself. Sales climbed 7.4% to $2.28 billion, inching over the $2.27 billion consensus forecast among investors and ending up above Priceline's own guidance range for revenue growth. Non-GAAP net income fell about 2% to $653 million, but a reduction in the number of shares outstanding limited the decline in Priceline's adjusted earnings per share, which weighed in at $12.45. That was above both what investors had expected and Priceline's own past guidance for $10.95 to $11.75 per share.
Looking more closely at the numbers, the dollar again hit the company hard. Gross travel bookings rose to $15 billion, up 11% from year-ago levels, but on a constant-currency basis, Priceline's total take would have risen by a much more impressive 26%. Still, operationally, Priceline saw impressive volume, with the hotel business rising by more than a quarter to 113 million room-nights and international gross bookings climbing 30% on a dollar-adjusted basis.
Priceline's three main segments continued their long-term trends. The most impressive growth came from the tiny advertising segment, where revenue soared more than 85% and came close to contributing half of Priceline's overall sales gains for the quarter. Agency revenues kept their steady pace, with a rise of almost $108 million to $1.58 billion, while the merchant business saw sales decline by $21 million to $546 million as it continues to decline in relative importance.
CEO Darren Huston lauded the company's strength. "The summer travel season got off to a strong start with a second consecutive quarter of accelerating growth in hotel room nights and rental car days booked," Huston said, and he noted that growth internationally has contributed greatly to Priceline's overall results.
The real reason for Priceline's record surge
Looking ahead, Huston had unusually bullish words that investors took to heart, saying, "We believe we are well set up to deliver the largest quarter in our company's history." With its internal personnel ready to handle high traffic volumes and provide "the best online and offline experience to our customers around the world," Huston is looking forward to an unprecedented third quarter.
Priceline's third-quarter guidance shows just how big the current quarter could be. Once again, the strong dollar will hit gross travel bookings, but the travel giant expects 13% to 20% growth on a constant-currency basis. Revenue growth of 1% to 8% masks about 16 percentage points of headwinds from foreign currency, and adjusted earnings of $22.95 to $24.45 per share would work out to about 3% to 10% higher figures than Priceline managed last year.
Perhaps the biggest surprise about Priceline's guidance is that it wasn't as far off the consensus mark as its past predictions have generally been. The sales guidance is somewhat slower than the 9% rise that investors expect, but the midpoint of Priceline's earnings range is actually above the current projections from those following the stock. That's particularly unusual for Priceline, and it could set up the company to release even better results in three months time.
Priceline shareholders responded favorably to the news, as the stock soared more than 7% in the first hour of pre-market trading to hit new all-time highs. Given how huge a negative impact the U.S. dollar's rise has had on its results, Priceline has done an admirable job of keeping itself moving in the right direction, and a big summer still lies ahead for the online travel giant.
Dan Caplinger owns shares of Priceline Group. The Motley Fool recommends Priceline Group. The Motley Fool owns shares of Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.