Priceline posts strong Q3 2014, fears slowdown in Q4 due to Economic and Natural Crises
Priceline Group (NASDAQ:PCLN), the online travel giant and the owner of Booking.com, Kayak and OpenTable, posted its Q3 2014 earnings on November 4th. The Group reported revenue of $2.8 billion, reflecting a 22% year-on-year growth. This was aided by a 28% increase in the gross bookings (which refers to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by its customers), to $13.8 billion. The growth was broad-based, with increases of 27% in hotel room nights, 18% in rental car days and 8% in airline ticket volumes. The effects of the revenue growth also boosted the bottom line. The company’s non-GAAP net income for the quarter stood at $1.2 billion, 29% higher compared to the year ago period.
The company’s guidance for the Q4 2014 includes: an 8% to 15% year-on-year increase in total gross travel bookings, an 11% to 18% increase in revenues, adjusted EBITDA of approximately $625 million to $665 million, and non-GAAP net income per diluted share between $9.40 and $10.10. [1]
Priceline has guided to a slow to moderate pace of growth in Q4 2014, primarily because of the scenarios affecting its operation in recent times. The threat of Ebola and certain Asian disasters like the fire in Vietnam and Malaysian Airlines Accidents, have slowed down international travel. In addition, the weak Euro exchange rate continues to dampen its performance in the European regions. This has led to an expectation of slowdown in the Q4 2014 performance by the company. [2] However, if we focus on the long run, we expect Priceline to steer ahead in its performance trajectory, backed by its strategic investments and global partnerships.
Our $1151 price estimate for Priceline is higher than the current market price. We are in the process of updating our valuation.
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International Partnerships And Investments Will Fuel Future Growth For Priceline
In August 2014, Priceline invested $500 million in Ctrip (NASDAQ:CTRP), the leading Chinese OTA. The investment is expected to enhance the strength of the commercial partnership which the two OTAs have shared since 2012. As a consequence of this investment, both the OTAs will increase the cross-promotion of their hotel reservation networks mutually. Ctrip now has access to over 500,000 of Priceline’s global accommodations, while the latter will gain access to Ctrip’s 100,000 accommodations in the Greater China region [3]. From a revenue sharing perspective, Ctrip books the marketing costs associated with a Ctrip customer booking on Priceline portals, such as booking.com and Agoda, as revenues through the extended partnership. [4] With this partnership, Priceline can increase its share of profits by delving further into the Chinese market, one of the most promising and growing online travel markets of recent times.
Priceline acquired OpenTable, America’s leading restaurant reservation service, in June 2014. OpenTable generates revenue from two important sources: First, they install software in a restaurant’s computer system that helps them effectively manage seating capacity by controlling the flow of guests, recording preferences and other details about regular diners and collecting reviews from the diners. Second, they allow restaurants to take online reservations from diners through their websites and mobile apps, thereby overcoming the inefficiencies that arise in traditional phone reservations. OpenTable is more concentrated in North America, where it caters to about three-fourth of its total customer base of 31,500 restaurants. With OpenTable, Priceline plans to integrating on three aspects: co-marketing, international expansion and Pay with OpenTable. The co-marketing phase is currently in an experimental stage with Booking.com, and the company plans on expanding this aspect to its other brands in the future. The company is in the process of expanding OpenTable’s international presence. Pay is also being expanded to different cities in the U.S. Additionally, OpenTable, which was primarily built as a B2B tool, is now gaining traction in the B2C space. Hence, management feels OpenTable has performed slightly above expectations and will continue doing so with its foray into the B2C segment.
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Notes:
- The Priceline Group Reports Financial Results for 3rd Quarter2014, Priceline, Nov 2014 [↩]
- Priceline Group’s (PCLN) CEO Darren Huston On Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Nov 2014 [↩]
- The Priceline Group and Ctrip Expand Partnership, Ctrip, August 2014 [↩]
- Priceline Group’s (PCLN) CEO Darren Huston on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, August 2014 [↩]