Priceline (NASDAQ:PCLN), one of the leading online travel agencies in the world, is set to announce its Q2 2012 earnings on Tuesday, August 7. Leveraging its international brands – Bookings.com and Rentalcars.com – Priceline achieved tremendous top-line growth, posting $1.04 billion in revenues last quarter. A 54% growth in international bookings, primarily in the Asia Pacific and Latin America regions, and expansion of hotel reservations and car rentals segments in international markets led to impressive top-line and net income growth.
Expedia (NASDAQ:EXPE), one of Priceline’s biggest rival, reported a solid Q2 2012 on July 26 with 14% growth in revenues. (Read: Expedia’s Results Impress And Show Focus On European And Asian Growth) We believe that Priceline’s earnings on Tuesday will not be any different, though on account of current macroeconomic headwinds, we do not expect the company to sustain its Q1 growth rate.
With a continued focus on strengthening its foothold in international markets, we believe that Priceline will be able to maintain solid top-line growth. However, we feel that on account of stiff competition and high promotional spending, the operating margins might remain range-bound for the rest of our forecast period.
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Opportunity for Higher Growth in International Markets
The relatively low Internet penetration, high GDP growth rate and a growing middle class is expected to fuel travel demand from the emerging economies, while scope for higher Internet penetration and a fragmented hotel market makes Europe an attractive destination for online travel companies.
With the acquisition of Booking.com, Agoda.com and TravelJigsaw, Priceline has been increasing its focus on expanding its business internationally, which is buoyed by more than 20% increase in international markets’ contribution to gross bookings. Gross bookings from international markets as a percentage of total booking have gone up from 55% in 2007 to around 78% in 2011, and we expect the upward trend to continue in the future.
Priceline is consistently adapting its service offerings to international markets and ensuring that customers have easy access by launching new mobile apps and offering content in over 41 languages. The hotel booking division, which contributes over 87% to our price estimate for the company, continues to register strong growth in international markets. The company has already extended its product portfolio to facilitate access to 210,000 hotels worldwide and continues to focus to increase the same.
However, we expect the revenue margins on hotel bookings, which is the highest among all categories, to register a gradual increase hereon till the end of our forecast period. This could negatively impact the top-line growth rate for this division.
Downward Pressure on Operating Margins
Online travel services remain a competitive niche segment with stiff competition among Expedia, Priceline, Orbitz (NASDAQ:OWW) and Travelocity. The macroeconomic headwinds have further intensified competition leading to lower revenue margins and high promotional spending, thereby squeezing operating margins. Additionally, the relatively low entry cost makes the industry vulnerable to potential threats from new players.
In an effort to gain competitive advantage, travel companies are creating new promotions and consumer value features such as eliminating processing fees, waiving cancellation and change fees, etc. The intense price competition affects operating margins in two ways: first, it puts a downward pressure on prices and, second, it increases the company’s promotional spending to lure more customers to its websites.
The promotion of Priceline’s brands in international markets will involve significant operational expenses through utilization of online search, affiliate marketing, and online advertising strategies to name a few. While in the last quarter Priceline registered a slight improvement in operating margins, we feel that the above factors will restrict margin growth for the rest of our review period.
We have a price estimate of $561 for Priceline, which is at a discount of over 10% to the current market price.