Priceline Shows Feverish Growth In Asia And Latin America Bookings

Priceline (NASDAQ:PCLN) posted revenues of $1.04 billion and impressive growth of 28% this quarter. Net income swelled by 74% this quarter led by expansion of hotel reservations and car rentals segments in the international markets. The operating margins have improved from 19% to 23% despite stiff competition and high promotional spending. Priceline has leveraged on its international brands – Bookings.com and Rentalcars.com to achieve tremendous top-line growth. Although the European markets have fared well, the company has seen weakness in the Southern European periphery. While rival travel agency Expedia’s (NSDQ:EXPE) stock appreciated by 23% post the earnings release, Priceline’s stock fell by 5.26% to close at $681 due to disappointing guidance figures for the second quarter.

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APAC, LATAM Lead Top-line Growth

Higher average daily rates (ADRs) supported 54% growth in international bookings primarily in the Asia Pacific (APAC) and Latin America (LATAM) regions. Worldwide hotel room night bookings, which drive the company’s Hotels division, were up 47% this quarter. The hotel segment accounts for 90% of the Trefis price estimate for Priceline, and the valuation of the company is highly sensitive to growth in hotel room night bookings.

Though the company has performed well in this quarter, the performance is expected to drop in the second quarter with 18-23% revenue growth in Q2 2012. The company is expecting flat ADRs and international gross bookings growth of 32-37%. While the stock may have fallen recently on these concerns, we believe that the company has strong fundamentals to support its continued strong growth.

Improved Operating Margins Despite Promotional Spending

Priceline’s gross profit rose 47% as a fall in costs of 3% further boosted the 23% top-line growth. The travel agency spent heavily on online advertising which increased by 50% this quarter.

These advertising expenses were aimed to support increased hotel room night reservations for Booking.com and Agoda. Despite increased online advertising expenditure, which comprise more than half of the total operating expenses, the operating margins improved by four points to 23% this quarter.

Such healthy operating margins were achieved through reduced spending in offline advertising and controlled expenditure in sales and marketing. The company has shown excellent performance on the operational front which indicates that it can sustain high profitability despite competitive pressures.

We have a $588 Trefis price estimate for Priceline, which is about 10% below the current market price. We are in the process of revising these estimates based on this quarter’s earnings release.

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