A Humbler, Happier Priceline

The Web discounter is profitable, but bubble-era boasts are gone

When Priceline (PCLN ) announced on July 24 that it had returned to profitability, making $7.7 million -- or 20 cents a share -- in the second quarter, investors threw a party. Shares leapt $10, to top $35, and the onetime Internet star's market cap climbed back above $1 billion for the first time since 2000.

Priceline's in the black, but is it back? Not if you're expecting its name-your-own-price model to spread to cars or groceries. Those bubble-era dreams are dead. But these days, CEO Jeffery H. Boyd is meeting a more modest target: running a profitable discount travel service focused on leisure travelers. Excluding a $6.7 million noncash charge, analysts expect Priceline to earn $19.7 million in profits this year on $904 million in sales, after losing $21.5 million in 2002 on $1 billion in sales.

Yet even that won't be easy. Boyd is battling tough rivals, led by InterActiveCorp.'s Expedia (EXPE ).com and discount airlines that don't sell through Priceline. The outfit also could become a takeover target. "They grow at about half the rate of other [travel sites]," says Legg Mason (LM ) Inc. analyst Thomas S. Underwood. "They're viable, but they'd also be a good brand addition."

Boyd engineered the comeback by scrubbing much of what made Priceline a boomtime phenom, moving away from low-margin plane tickets in favor of selling hotel rooms. With vacancies near 40%, hoteliers are cutting Priceline good deals. In the second quarter, Priceline sold 446,000 air tickets, off 52% from a year earlier, but hotel sales rose 38%, to 1.5 million room nights. "We've changed the mix of our business," Boyd says.

Boyd also dumped nontravel businesses, including the auto-sales effort and long-distance phone unit. After laying off 65 people in the fourth quarter of 2002 -- 15% to 20% of total staff -- Priceline now breaks even on annual sales of $800 million, down from $1 billion. Of the nontravel businesses, only a 49% stake in Priceline Mortgage remains; it added $1 million-plus to second-quarter profits.

Even a travel-focused Priceline is far from being a market leader. Expedia is eight times bigger. In discount travel, Priceline is feeling heat from upstart Hotwire.com. Its sales are about two-thirds of Priceline's. "Hotwire fragments the market," says Lorraine Sileo, vice-president of travel-consulting firm PhoCusWright Inc. in Sherman, Conn. "And it's not that big a niche."

All this says investors who have bid Priceline up to 63 times estimated 2003 profits are taking a risk. But with the Web travel market growing some 40% a year, they also see plenty of earnings potential. Some may be betting that Priceline will go on the block. With a well-known brand, tight links to hotel suppliers who say Priceline lets them discount more selectively than Expedia -- plus, once again, profits -- Boyd has maneuvering room. And if he does sell, maybe he can name his own price.

By Timothy J. Mullaney in New York

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