NEW YORK (CNNfn) - Priceline.com, the Internet retailer that allows users to name their own price on everything from gasoline to groceries, warned Wednesday that third-quarter revenue will fall short of Wall Street forecasts because of slowing airline ticket sales.|
The news sent Priceline shares tumbling $7.87, or 42 percent, to close at $10.75 in Wednesday trading.
Priceline (PCLN: Research, Estimates) said it expects to report third-quarter revenue of about $340 million to $345 million, well below Wall Street forecasts of about $370 million. The Norwalk, Conn.-based company reported sales of $152.2 million in the third quarter of 1999.
Priceline attributed the revenue shortfall to slow airline ticket sales, which it said would be as much as $25 million below those of the second quarter. It also said it expects an operating loss of about 1 cent a share in the third quarter, in line with analysts' estimates.
"We believe that our revenue disappointment this quarter is attributable to specific events affecting our airline ticket sales, including a second $20 fuel surcharge imposed in early September by the airlines, the high level of flight cancellations ... and the introduction by the airlines of their own special sales fares in September," Priceline President and CEO Daniel Shulman said.
"Also ... certain promotional strategies we pursued during August and September negatively impacted average offer and ticket sales prices and did not result in targeted increases in ticket sales," Shulman said.
Shulman also said the company expects its non-airline revenue to increase 20 percent in the third quarter from the second quarter and to improve operating margins. The company is scheduled to report its third-quarter earnings on Nov. 2.
Taking the long view
In a news conference Wednesday morning, Shulman said that the fourth quarter is seasonally the company's weakest, and that he believes the company is poised for sequential revenue growth as it enters the seasonally strong spring period next year.
In an optimistic outlook for the longer term, Shulman also said Priceline has an array of new product offerings and plans for global expansion.
"In the fourth quarter, we will introduce new features to our telephone service, as well as introducing our first insurance product, with our term life offering," Shulman said. "Also in the fourth quarter, we will introduce a number of business-to-business services and anticipate the launch of international operations in Australia, Canada and Europe."
After the company's warning, Merrill Lynch analyst Henry Blodget slashed his intermediate rating on Priceline stock to "neutral" from "accumulate."
"While we still believe the model is compelling long term, the business continues to be heavily dependent on airline ticket sales," Blodget said in a research note. "As a result, it appears management has limited visibility to accurately forecast the business."
Jefferies & Co. analyst Michael Legg told CNNfn.com that he downgraded Priceline's rating to "hold" from "buy" because of the company's near-term third-quarter prospects and the fourth quarter being seasonally weak.
"I think that the travel business is their core business right now and that they're going to add to that over time. As they add to that, they're going to be less dependent on it. But in the near term, it's still very important to their stock," Legg said.
"Long term, they've built a great business model and there's a lot of verticals they can go into, including financial services, telecom, and they have international opportunities, so there's a lot of growth opportunity and huge markets for the company," Legg said.
Banc of America analyst Tom Courtney told CNNfn that Wednesday's warning illustrates problems with customer activity. [438K WAV] or [438K AIFF] Courtney rates Priceline a "market performer," but said he is revising his model.
"The numbers suggest, in our view that Priceline's existing customers are not coming back frequently enough to make additional offers, nor, more importantly, additional purchases," Courtney said.
Heath Terry from Credit Suisse First Boston, who rates the company a "buy," lowered his revenue and earnings-per-share estimates significantly on Wednesday and advised investors to take a wait-and-see approach.
"We believe investors will be best served by allowing Priceline to settle between now and the company's third-quarter conference call," Terry said.
Priceline's warning impacts all types of investors, including former Star Trek star William Shatner, who acts as the company's spokesman and stars in its attention-grabbing commercials.
Shatner agreed to act as pitchman for Priceline in exchange for 125,000 stock options back in March 1998, rather than accept a fee, according to published reports.
That proved to be a savvy business move for the former Captain Kirk, who saw his shares equal roughly $7.5 million when Priceline went public a year later.
In March, Shatner cashed in 35,000 options, when Priceline was trading at $95 a share, garnering him over $3 million. However, now that Priceline shares are hovering just below $11 a share, the company's executives may be wishing to be "beamed up."