Priceline Q3 Earnings Preview: Company Surging On The Back Of Acquisitions, Though Margin Performance May Slow
Priceline (NASDAQ:PCLN), the online travel giant, is set to release its third quarter earnings on November 4th. The company demonstrated steady top line and bottom line growth in the first half of 2014. It posted revenues of $3.8 billion with 26% year-on-year growth. The growth was across segments with a 34% year-on-year increase in gross bookings due to a 31% rise in hotel room nights, a 19% increase in car rental days and a 22% increase in air ticket volumes. Priceline’s acquisition of Kayak led to a surge in advertising revenues by 300% to $156 million. The topline growth positively impacted the bottom line with a 33% increase in net income to $908 million. [1]
For Q3 2014, the company expects 22%-32% growth in international gross travel bookings and a 10%-15% growth in domestic gross travel. The revenue is expected to surge by 10%-15% and the hike in gross profit will be between 21%-31%. The company expects adjusted EBITDA to fall within $1.265 billion to $1.365 billion.
Our $1151 price estimate for Priceline is in line with the current market price. We will update our valuation after the Q3 2014 earnings release.
See our complete analysis for Priceline
Global Acquisitions Stimulating Growth
International expansion has been a major reason fueling Priceline’s success in recent years. Priceline acquired the online travel company, Booking.com in 2005 which led to its securing the top position in the European market with over 30% share, in 2012. Priceline’s recent focus areas are South America and Asia Pacific. Its activities in Asia Pacific included inventory accumulation, mobile functionality enhancement, and localizing content at Agoda.com. Agoda is gaining popularity as a leading site among Asia-Pacific bookers. In absolute terms, while domestic gross bookings have nearly tripled since 2007, international gross bookings have increased over tenfold. This pursuit helped achieve a 36% year-on-year growth in international bookings in Q2 2014.
Also, Booking.com being the leader in the European online travel market helped in achieving this target. Booking.com is penetrating into Australia, Canada, Germany, and the U.K. through its Booking.yeah advertising campaign. Booking.com has also increased the supply of hotels by 58% in Q2 2014, consequently ending the quarter with an inventory of 525,000 hotel rooms and accommodations across 205 countries [2]. In the near future, we expect international markets to be a primary growth driver for Priceline.
Focusing On A Stronger Domestic Performance
Priceline strengthened its presence in the domestic market (U.S.) by elevating brand awareness, adding hotel supply, and integrating Kayak in a larger way. In order to beat its major rival Expedia (NASDAQ: EXPE) on the domestic turf, Priceline launched its first offline advertising campaign (Booking.yeah) for Booking.com in the U.S. in 2013. It partnered with NYC and Co. to power bookings on New York City’s official tourism website. Also, its acquisition of Kayak will help increase its domestic exposure. Kayak’s revenue comes primarily from advertising. The company receives about 80% of its total revenue ($292 million in 2012) from the U.S. and has over 50% share of the country’s meta-search market. Its top-line has grown at a compounded annual rate of over 40% since 2007. Kayak added approximately $150 million to Priceline’s advertising revenues from its date of acquisition to the end of 2013. We estimate that advertising revenues will more than double in 2014 since Kayak will bring in revenues over the complete year.
Sustainable Growth Of Operating Margins is Questionable
Priceline experienced a 200 basis points rise in its operating margins in the first half of 2014, primarily due to the advertising and operational efficiencies. The acquisition of Kayak lead to enhanced advertising efficiencies, as Kayak’s expenditure on online advertising — which yields a lower return on investment (ROI) than offline advertising — is less than that of offline advertising. Also, the sum invested by brands under Priceline to place advertisements on Kayak was eliminated from the consolidated results [2].
However, we believe that this surge in margins will significantly slacken with intensifying competition in the online travel agency (OTA) space and declining ROI on online advertising. This, along with the huge offline advertising spending on campaigns for its Booking.com brand in Canada, Germany, Australia, U.S. and U.K., will put pressure on margin performance. The company expected the offline expense to be $130 million in 2014, with more than 50% of the expenditure to occur in Q3.
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