Broad-Based Growth Helps Priceline Post Another Set Of Strong Quarterly Numbers
Priceline (NASDAQ:PCLN) delivered healthy top line and bottom line growth in the first quarter of 2014. Revenues increased 26% year on year to $1.64 billion, helped by a 34% rise in gross bookings. The growth was broad-based with increase of 32% in hotel room nights, 25% in rental car days and 23% in airline ticket volumes. There was an additional $69 million in advertising revenue resulting from the acquisition of Kayak. The effects of the solid revenue growth also trickled down to the bottom line. The company’s net income for the quarter stood at $331 million, 36% higher compared to the year ago period. [1]
Priceline’s growth in recent years has come from its expansion initiatives in international markets, primarily Europe. The company bought out the online travel agency Booking.com in 2005, which grew to become the market leader in Europe with over 30% share in 2012. Priceline is now aggressively targeting high-growth international regions such as South America and Asia-Pacific. This helped the company to register 37% year-on-year growth in international gross bookings in Q1 2014, and we believe that international markets will continue to be the primary growth driver for Priceline in the near future.
We are in the process of updating our $642 price estimate for Priceline, based on the quarterly results that were recently announced.
See our complete analysis for Priceline
Domestic Business To Maintain Its Strength Through The Year
While Priceline has successfully gained share in international markets, it has lost out to Expedia (NASDAQ:EXPE) in the domestic landscape. Priceline has 16% share of the U.S. OTA market compared to Expedia that has over 40%. [2] The former is taking different routes to increase its share. The company launched its first offline advertising campaign (Booking.yeah) for Booking.com in the U.S. last year. It entered into a partnership with NYC and Co. to power bookings on New York City’s official tourism website. It also completed the acquisition of Kayak, the leading meta-search engine in the U.S. with over 50% share of the travel search market to gain more visibility in the U.S. market.
All these initiatives have helped Priceline to accelerate domestic gross bookings growth in the last few quarters to high-teens to 20s from high-single-digit to low teens. We expect the domestic business to demonstrate continued strength for the rest of the year.
Operating Margins, Holding Up On Advertising And Operational Efficiencies Could Face Pressure
Priceline delivered a 340 basis points expansion in operating margins in Q1 owing to advertising and operational efficiencies. Advertising efficiencies resulted from the acquisition of Kayak, a company that spends less on online and more on offline advertising; ROI (return on investment) on online advertising is lower than on offline advertising. Further, the amount spent by Priceline’s brands for ad placements on Kayak is eliminated from the consolidated results. [3]
We believe that Priceline will not be able to substantially grow its margins in the future, due to increasing competition in the OTA space, falling returns on investments on online advertising and the anniversary of Kayak’s acquisition on May 21 this year. Additionally, the company recently launched offline advertising campaigns for its Booking.com brand in Canada and the U.K. It expects to incur between $220 million and $240 million on offline advertising expense in 2014, which will put increased pressure on margins.
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Notes:- The Priceline Group Reports Financial Results for 1st Quarter 2014, Priceline Investor Relations, May 2014 [↩]
- PhoCusWright: Online travel spending on the rise in Europe, Travel Weekly, January 15, 2014 [↩]
- Priceline Group’s (PCLN) CEO Darren Huston on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 [↩]