Besides The Dampening Effect Of Currency Headwinds, Priceline’s Impressive Growth Story Continues

August 6th, 2015 by Trefis Team
PCLN: Priceline Group logo
PCLN
Priceline Group

Priceline Group (NASDAQ:PCLN) reported its Q2 2015 earnings, on August 5th. Leaving aside currency headwinds, the company delivered a strong quarter with a host of strategic alliances and technological developments bolstering its growth. Priceline’s restaurant reservation website, OpenTable, delivered double digit growth and is poised for international rollout after the developments of its B2B and B2C infrastructures. Its metasearch engine, Kayak, delivered a strong bottom line performance. Currently, Kayak has struck a partnership with HomeAway to feature more vacation rentals on its platform. Priceline is aggressively expanding into the emerging markets such as Latin America and China. Priceline’s international growth was bolstered by the robust performance of agoda.com and rentalcars.com.

Priceline’s gross profit for Q2 2015 was $2.1 billion, reflecting an 11% year-on-year growth. International operations accounted for over 85% of Priceline’s gross profit. The gross bookings on Priceline’s websites rose by 10.5% to around $15 billion. Bookings, in turn, were stimulated by the increase in Priceline’s hotel inventories to the tune of 707,000 across 220 countries on Booking.com, and 62% growth in its vacation rental properties to 1.7 million. [1] [2]

The company has guided to a slower growth in Q3 2015, primarily because of the weak Euro exchange rate that continues to dampen its performance in the European regions. Also, weak domestic currencies are thwarting international travels and that is dampening Priceline’s financial performance. The company’s guidance for Q3 2015 include a 1% to 8% year-on-year increase in revenues and a 3% to 10% increase in gross profits (19% to 26% growth of gross profits on a constant currency basis). [1] [2]

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We are in the process of updating our price estimate of $1,040 for Priceline’s stock.

See Our Complete Analysis for Priceline Here

Priceline Builds Its Presence In Vacation Rentals By Tying Up With HomeAway

Recently, Kayak, Priceline’s travel search engine, has decided to list HomeAway’s vacation rental properties on its website. [3] HomeAway is the world’s largest vacation rental marketplace which lists over 1 million live listings in close to 200 countries. HomeAway is the rival of Priceline’s accommodation platform, Booking.com, however, Booking.com doesn’t list a huge number of vacation rentals and this partnership will allow Priceline to foray into the vacation rental space with a stronger presence.

It is important to note that Expedia also has a partnership with HomeAway. In September 2014, Expedia declared that it will continue its partnership (initiated in October 2013) with HomeAway. However, Expedia lists HomeAway’s vacation rentals properties alongside its hotels on the common Expedia.com platform.  Kayak, on the other hand, has decided to create a separate tab to exclusively feature the vacation rental properties and enhance their accessibility and sales. [4]

Why Is The Vacation Rental Segment Important To Priceline?

  • Vacation rentals are privately owned residential properties that property owners and managers rent to travelers on a nightly, weekly, or monthly basis. According to a report by HomeAway, the vacation rental market size for the U.S. and E.U. combined was $85 billion in 2010 (as compared to a $230 billion hotels market in the same period in these regions). A PhoCusWright report stated that the market for vacation rentals in the U.S. stood at $23 billion in 2012, lower than its levels prior to the recession. However, the share of online sales in vacation rentals doubled from 12% in 2007 to 24% in 2012, and this is estimated to have increased by 30% in 2014. [5] Hence, the market for vacation rental is significantly growing with time.
  • Around 50 million vacation rental room nights were booked through Priceline’s Booking.com and Villas.com, over the past twelve months, reflecting a 39% year-over-year growth. [2]
  •  Along with hotels, Priceline currently lists B&Bs, tree houses, and even igloos on its Booking.com platform. Hence, from being the world’s largest online hotel supplier, Priceline moved towards being the world’s largest accommodation provider. Vacation rental is an important segment in the accommodation pie and Priceline wants to gain a bigger share of it.
  • According to Priceline’s management, vacation rentals are being viewed as upgrades by a lot of its customers. For example, when people are in groups and want to stay next to the beach, they might prefer a beach house where they can make their own meals, instead of staying in a hotel, or during an event such as the World Cup or Olympics, when hotel rooms are sold out, people might opt for vacation rentals, instead.
  • Also, Priceline says that the customer who might book hotels for a few trips, might want to book vacation rentals in the next trip. Priceline wants to provide the entire gamut of accommodation selections to its customers so that they can choose from the same website and not need to go a rival’s platform to make bookings for different segments. [2]

Mobile Assumes Huge Importance In Priceline’s Business

Currently, one-third of Priceline’s bookings on the hotels, restaurants, and car rentals segments take place through mobile phones. The company estimates that almost 50% of its business transactions will be through mobile in the next 2-3 years. Recently, the company completed 300,000 mobile transactions on Booking.com. Priceline is investing into the creation of an integrated platform wherein all its offerings can be accessed through all devices in a connected manner. [2]

There are two types of transactions under mobile: web-based and application based. For Priceline, the web-based application is mostly used for booking hotels (through Booking.com) and in this aspect the traffic is mostly directed through search engines such as Google. Hence, Google has been a major catalyst in the hotel bookings through Priceline’s platform, especially for first time bookers.

Searches on Priceline’s Kayak and OpenTable are primarily done through mobile applications and they mostly pertain to Priceline’s existing user base. The checking of flights or booking restaurants are typically higher frequency transactions, hence in this case the mobile applications are more handy and they also help in creating a  loyal customer base. In this aspect, Priceline’s management mentioned that Facebook has been instrumental in generating traffic for the company.

In its Q2 2015 earnings, Facebook’s management mentioned about Facebook’s partnership with Booking.com and the progress Priceline is making with Facebook’s Book Now button. [6]

Priceline’s management further mentioned that most of the business through Facebook is remarketing or re-messaging. The two companies are now trying to “crack the code” on the intent of the users, with regards to booking travel services. Once this trend is known, Facebook would become a major source of demand for Priceline’s business. [2]

Priceline’s LATAM Focus Is Similar In Nature To Its China Focus

Priceline acquired a minority stake in Brazil’s top OTA, Hotel Urbano, in July 2015. Consequently, Hotel Urbano will use Booking.com’s inventories to help its users book hotels outside Latin America (LATAM). According to Priceline’s management this investment is similar to its earlier investment on Ctrip in China. Priceline helps commercialize the local brands in these emerging economies and provides them with an international exposure, and, in turn, benefits from the upside. [2]

Besides, Booking.com launched a TV advertisement campaign in LATAM. Priceline had previously expanded its presence in Argentina and now it is focusing on Brazil. Consequently, there is a high brand awareness for Priceline in the LATAM region. [2]

LATAM is touted as one of the fastest growing markets in the online travel sales domain. LATAM is currently growing at an average of 15% year-on-year growth rate. According to PhoCusWright, the LATAM travel market size will reach almost $100 billion by 2016. [7]

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Notes:
  1. The Priceline Group Reports Financial Results for Second Quarter of 2015, Priceline Press Release, August 5, 2015 [↩] [↩]
  2. Priceline’s Q2 2015 Earnings Call Transcript, Seeking Alpha, August 5, 2015 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
  3. Kayak Partners With Booking.com Competitor HomeAway on Vacation Rentals, Skift, June 1, 2015 [↩]
  4. Analysis: What Does the Kayak-HomeAway Deal Really Mean?, Skift, June 8, 2015 [↩]
  5. Vacation Rentals in the U.S. Are Now a $23 Billion Industry, Skift, October 25, 2013 [↩]
  6. Booking.com Finally Gets the Facebook Marketing Breakthrough It Wanted, Skift, August 5, 2015 [↩]
  7. Online travel in Latin America: A big, complicated opportunity, tnooz, December 11, 2014 [↩]