Priceline Posts A Solid Quarter Though Growth Might Decelerate

Despite macro headwinds and unfavorable exchange rates, Priceline (NASDAQ:PCLN) closed its fiscal 2012 with a strong Q4. Backed by robust y-o-y growth in hotel room nights (37.6%) and car rental days (36.5%) bookings, Priceline registered a 20% y-o-y increase in Q4 2012 revenue. Additionally, despite higher marketing expenses, its net income grew by more than 23% compared to Q4 2011.

Owing to rising supply and an expanding global footprint, Priceline’s top-line continues to rise, albeit at a slower pace. For fiscal 2012, the company reported $5.3 billion in revenues and net income of $1.4 billion, which was 21% and 34% higher compared to 2011 respectively.

We believe that an increasing international presence and an expanding hotel inventory will continue to fuel Priceline’s top-line growth. Though the higher operating expenses might suppress margins, we feel that the continued investment in building its brand will help drive Priceline’s future growth in domestic as well as international markets.

See our complete analysis for Priceline

International Business Performs Well Despite Economic Headwinds

With the acquisition of Booking.com, Agoda and TravelJigsaw, Priceline’s gross bookings from international markets as a percentage of total bookings have gone up from 55% in 2007 to 82% in 2012. Asia-Pacific and South America contributed for a majority of acceleration in gross bookings that Priceline reported in Q4 2012.

As the US travel market nears saturation, most OTAs are focusing on leveraging the growing demand from international markets. The fragmented European hotel market and rising per capita income in emerging economies provide tremendous growth opportunities for travel agencies. Additionally, Internet penetration in these economies is relatively low but is expected to rise at a rapid pace.

On the flip side, since the key European markets represent approximately 60% of Priceline’s total booked room nights, its increasing share in the region makes the company more vulnerable to the European debt crisis. Additionally, as emerging markets account for an increasing percentage of Priceline’s business, the average daily rates (ADRs) could further decline in the future impacting Priceline’s growth rate. In Q4, international ADRs declined by 1% annually.

Though Priceline’s performance remains strong across geographies, it anticipates its growth rate to decelerate in the current quarter.

Stronger Hotel Inventory To Support Growth; 41% Annual Increase In Inventory

Contributing over 86% to Priceline’s valuation, we estimate hotel bookings to be the most important division in Priceline’s portfolio. With over 20% revenue margins, hotel booking is also the most profitable division compared to airlines (3%) and car rentals & cruises (9%). We consider this business to be of strategic importance for Priceline’s future and believe the company has fared well so far to leverage growth not only in the US but in the international markets as well.

Priceline’s growth in hotel room nights bookings accelerated to 38% in Q4 2012 compared to 36% in Q3 2012. The company continues to build on its worldwide hotel supply platform and currently has over 275,000 hotels and other accommodations in 180 countries and territories, up 41% annually. Apart from an increase in the hotel supply base, we feel the greater penetration of existing hotels is also equally important to drive momentum in unit growth.

Increasing Investments Could Restrict Margins

In 2012, Priceline incurred 35% higher advertising and marketing expenses compared to 2011. The online travel services is a highly competitive niche segment with stiff competition among OTAs. In an effort to gain competitive advantage, travel companies have expanded their advertising budgets and are creating new promotions and consumer value features such as eliminating processing fees, waiving cancellation and change fees, etc.

Priceline launched its first offline advertising campaign to build the Booking.com brand in the U.S. and continues to spend aggressively to build its international operations. Though the high operating expenses put pressure on operating leverage, the company intends to continue investing in product development and customer acquisition to drive future growth. Since it currently has an insignificant market share in some international regions which offer tremendous opportunities, we expect Priceline to continue investing in building its global image.

Though we believe that high expenditure incurred will help drive future growth, we estimate Priceline’s EBITDA margin to remain more or less around the present level for the rest of our forecast period.

Q1 2013 Outlook

– Gross booking to increase by 30% to 37%: continuation of strong top-ling performance and early Easter this year

– ADR will be almost flat compared to prior year

– Revenue will grow between 17%-24%

– Adjusted EBITDA to range between $316 – $346 million

– Non-GAAP fully diluted EPS of $4.9-$5.3 par share

We are in the process of updating our price estimate of $584 for Priceline.

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