Driven by international expansion and an expanding hotel portfolio, Priceline (NASDAQ:PCLN) has registered rapid top line growth since 2008. The company has been reporting increasing quarterly revenue since the start of 2012, albeit at a slower pace compared to previous years. Despite maintaining a conservative estimate for its Q3 2012 earnings, Priceline saw growth in all its business segments, which translated into a 17% y-o-y and 29% q-o-q increase in its Q3 earnings.
Priceline is set to announce its Q4 2012 earnings on February 26, and we anticipate slower growth on account of macro headwinds and the higher revenue/gross bookings base last year. While we maintain a positive outlook for Priceline’s long term potential, we think the current growth rate is difficult to sustain in the long run and estimate this to slow over our review period.
Stabilizing International Operations To Be An Important Growth Driver
With the acquisition of Booking.com, Agoda and TravelJigsaw, Priceline has been increasing its focus on expanding its business internationally. Gross bookings from international markets as a percentage of total bookings have gone up from 55% in 2007 to around 78% in 2011.
While expanding its presence in international markets is clearly an important growth driver for Priceline, its increasing share in the European market makes the company more vulnerable to the debt crisis in the region. After the acquisition of Bookings.com in 2005, Priceline has been steadily increasing its market share in Europe. Key European markets represent around 60% of its total booked room nights. However, despite its concentration in European countries experiencing weak economic conditions, Booking.com’s growth held up in Q3 2012.
Priceline is probably more sensitive compared to other OTAs to any adverse developments in the region due to the high contribution of hotel bookings from the European markets to its revenues. However, we feel that growth in Q3 earnings was proof that the European economy is stabilizing, which is an encouraging trend for Priceline.
Strengthening Hotel Business
Contributing over 86% to Priceline’s valuation, we estimate that hotel bookings are the most important division in its portfolio. Not only do hotel bookings account for the majority of Priceline’s revenue, but with over 20% revenue margin, it is also the most profitable division compared to airlines (3%), car rentals and cruises (9%).
While Booking.com is concentrated in Europe, Agoda.com is focused on Asian markets. Priceline has been focused on aggressively expanding its presence in both of these regions. Currently, Booking.com has over 245,000 hotels and other accommodations, a 44% increase from last year. Additionally, Agoda is significantly building scale in Asia-Pacific and is also witnessing strong room night growth.
At 55.2 million units, Priceline’s global hotel room nights reservations were up 36% y-o-y in Q3 2012, only a slight deceleration from 39% growth in Q2 2012. Apart from an increase in the hotel supply base, we feel the greater penetration of existing hotels is also equally important to drive momentum in unit growth.
Pressure On Operating Margins Remain A Concern
Online travel services remain a competitive niche segment with stiff competition among OTAs. Macro-economic headwinds have further intensified competition leading to lower revenue margins and higher promotional spending, thereby squeezing operating margins. Additionally, the relatively low entry cost makes the industry vulnerable to potential threats from new players.
Priceline registered a marginal decline in operating margins in Q3 2012 and expects the downward pressure to persist in Q4 as well. Online advertising and personnel expenses impacted margins last quarter as online advertising grew faster than gross profit due to the continued shift in business to paid channels.
Priceline intends to continue investing in marketing and people to build its brand and expand its international operations in addition to investing in supply, product and service innovation. The high expenditure puts pressure on the company’s operating leverage, and we estimate Priceline’s EBITDA margin to remain more or less around the present level for the rest of our forecast period.
We believe that high expenditure incurred will help drive future growth for the company.
We will update our price estimate of $584 for Priceline after the Q4 2012 earnings release.