Leading online travel agency, Priceline (NASDAQ:PCLN), is set to announce its Q2 2013 earnings on August 8. Despite uncertain global economic conditions, Priceline reported strong results in Q1 2013 with 26% y-o-y increase in revenues ($1.3 billion). The robust growth in its international business contributed to a 36% y-o-y increase in total gross bookings ($9.2 billion), and the 43% annual growth in international bookings was driven by a strong global portfolio [Priceline Q1 2013 Earnings Call, Seeking Alpha, May 2013].
The online travel agency [OTA] completed the acquisition of Kayak, the leading meta-search company in the U.S., in the second quarter. It also experienced Easter falling earlier this year (in Q1) compared to 2012, which means its gross bookings and revenue figures will face tougher annual comparisons. Nevertheless, we feel that the company’s expanding international footprint, robust growth in hotel reservations, and investment in developing alternative user platforms and brand-building, position it well to leverage future growth in the OTA industry.
Expanding International Footprint Will Continue To Be An Important Growth Driver
With the acquisition of Booking.com, Agoda and TravelJigsaw, Priceline has significantly expanded its international business. Gross bookings from international markets as a percentage of total bookings have gone up from 55% in 2007 to around 82% in 2012. Robust growth in international bookings, especially hotels, has been one of the most important drivers behind Priceline’s growth momentum.
In Q1 2013, Priceline’s worldwide hotel room nights reservation crossed 60 million, a 38% y-o-y increase. Rising demand from Europe and Asia Pacific contributed to the high growth rate, though domestic demand (U.S.) continued to increase as well. While Booking.com is one of the premium booking platforms in Europe, Agoda is focused on expanding Priceline’s presence in the Asia-Pacific travel market.
The fragmented European hotel market and increasing 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. We believe that the vast international presence is one of Priceline’s core strengths and the company will continue to leverage it. It is now also looking to close the gap with Expedia, the market leader in the domestic (U.S.) market, through the acquisition of Kayak and the launch of its first offline advertising campaign for Booking.com.
Stiff Industry Competition To Put Pressure On Margins
Online travel service is a highly competitive niche segment with stiff competition among OTAs. In an effort to gain a 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. This has impacted both gross margins and operating margins of many industry players. In Q1 2013, Priceline launched its first offline advertising campaign to build the Booking.com brand in the U.S. and continued to spend aggressively to build its international operations, due to which its operating margin declined by 70 basis points year-on-year.
Priceline’s ROI (return on investment) on online advertising has been on a downward trend, compelling it to make incremental investments on online advertising. Last month, Expedia’s Q2 2013 results were impacted due to strong competition in the advertising space from Priceline’s Booking.com [Expedia Q2 2013 Earnings Call, Seeking Alpha, July 2013]. 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.
We will update our price estimate of $642 for Priceline’s stock based on the upcoming quarterly results.
Disclosure: No positions