Aggressive Geographic Expansion Initiatives Will Boost Priceline’s Results

by Trefis Team
-3.96%
Downside
1154
Market
1108
Trefis
PCLN
Priceline
Rate   |   votes   |   Share

Priceline (NASDAQ:PCLN) is set to announce its Q3 2013 earnings Thursday, November 7. Despite the large size of its business, the leading Online Travel Agency (OTA) managed to continue growing robustly in the second quarter of 2013. It delivered better than its quarterly guidance with a 27% year-over-year increase in revenues (to $1.68 billion). Worldwide gross bookings also grew sharply by 38% year-over-year to $10.1 billion, driven by increases of 38% and 46%, respectively,  in hotel reservations and rental car days. [1]

Unlike its closest competitor, Expedia (NASDAQ:EXPE), Priceline’s Q2 results largely escaped the impact of both by TripAdvisor’s transition to meta-search and the continuing adverse economic conditions in Europe. Priceline’s vast international presence is one of its core strengths and it  has enabled the company both to outperform its peers and to  beat its guidance quarter after quarter. The company has taken several more steps in 2013 to build a stronger foothold across the globe. For instance, it is looking to close the gap with Expedia, the market leader in the domestic (U.S.) market, through the launch of its first offline advertising campaign for Booking.com, the acquisition of KAYAK, and the partnership with NYC and Co. In our view, this could help Priceline surpass Expedia as the preferred OTA in the U.S., the world’s largest travel market.

See our complete analysis for Priceline

Rapid Expansion In Different Markets To Fuel Bookings Growth

Priceline has considerably expanded its international business through the acquisition of Booking.com, Agoda and TravelJigsaw. These actions helped the company to increase International bookings by 44% year over year in Q2 2013, thereby continuing the growth momentum gained in previous quarters. International bookings now account for about 85% of the company’s total gross bookings. Outperformance in high-growth markets, such as Asia-Pacific and South America, has been the major driver behind this trend. Booking.com’s strong growth in the core European market has also contributed significantly.

The fragmented nature of the European and the Asian hotel industries, and rising per capita income in the emerging economies, offer immense growth opportunities for travel agencies. Furthermore, Internet penetration in these economies is relatively low but is expected to rise at a fast pace. Priceline is rapidly expanding into international markets and adding hotel supply to leverage the trend. Its Booking.com brand now has over 330,000 hotels and accommodations. It is also the most preferred OTA in Europe with about 47% share of the OTA market.

After building a strong presence in Europe, Booking.com is now increasing its focus on the U.S. market. It launched a new ad campaign in the U.S. this year, and entered into a partnership with NYC and Co. to power bookings on New York City’s official tourism website. (Read: Priceline Partners With NYC Tourism Website In U.S. Push)

Priceline intends to also build out its Rentalcars.com business into a global brand, both by replicating its successful expansion strategy for Booking.com, and by supporting this with increased investment in advertising and marketing. Additionally,  management believes that it could help KAYAK expand globally by providing it necessary resources and expertise that were not available to it as an independent company. [2]. KAYAK is the new meta-search engine acquired by Priceline in the second quarter. Based on the above mentioned factors, we believe Priceline’s gross bookings will continue to rise sharply in Q3 2013.

The following table summarizes Priceline’s total gross bookings in the last 9 quarters in $ billions:

Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013
5.78 6.26 4.96 6.71 7.33 7.83 6.58 9.15 10.12

High Competition And Heavy Dependence On Agency Model To Put Pressure On Revenue Margins

Contributing over 85% to Priceline’s valuation, hotel bookings are the most important division in the company’s portfolio, contributing much of the revenue. Priceline’s hotel revenue margins have declined, however, from 39% in 2007 to 21% in 2012. The primary reason for this decreased profitability is the rapid growth in international markets, where the agency model of bookings is more popular. Priceline’s proportion of gross bookings from the agency model stands at over 80%. In the agency model net revenues are generated in the form of commissions and booking fees, resulting in lower revenue margins.

Despite the squeezing margins, Priceline does not intend to increase commissions on hotel bookings in order to maintain its competitive position amongst OTAs. [3] We expect the decline in commissions to continue due both to intense competition from other OTAs and supplier websites, and to the increasing proportion of bookings coming from emerging markets.

We will update our $642 price estimate for Priceline based on the upcoming quarterly results.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Priceline.com Reports Financial Results for 2nd Quarter 2013, Priceline Q2 2013 Earnings Release, August 8, 2013 []
  2. Priceline.com’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, August 8, 2013 []
  3. Asia “Very Very Competitive” For Online Travel Agents, Travel Trends, May 12, 2013 []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Priceline Logo
  • commented 1 years ago
  • tags: TZOO TRIP EXPE PCLN
  • The industry is consolidating, as an example Priceline has recently purchased Booking.com, Agoda and TravelJigsaw. The smaller fish get eaten by the bigger fish. When I travel I have been using one of the now popular online hotel aggregator websites like http://www.reservationshopper.com to make comparing hotel rates easier. I have found this site to deliver up the best deals with significant savings on hotel rooms. It is an easy way to find the best rates in your destination city.
    Priceline Logo
  • commented 1 years ago
  • tags: TZOO TRIP EXPE PCLN
  • I have to travel a lot for my business,mostly in Europe,but often in the States.I used to use sites like Travelocity,but I quickly found the better way to find deals is to go to the second level-those sites like http://hotelbookingreservation.weebly.com who compare hundreds of different booking sites in one single search.So you not only see trivago or expedia deals but ALL of them in one place.I must've save over 3,000 euros since I started using them.I agree,just using one of the top booking sites is not the best idea.