Priceline (NASDAQ:PCLN) announced its third-quarter results on Thursday, November 7. Helped by increasing strength in both domestic and international markets, total gross bookings grew 38% year over year to $10.8 billion. Total revenue for the quarter increased 33% to $2.27 billion, while net income was up by 40% to $833 million. The inclusion of Kayak, the travel search engine acquired by Priceline in Q2, added over 4 percentage points (1 percentage point is equivalent to 1%) of inorganic revenue growth for the quarter. 
The leading Online Travel Agency (OTA) delivered broad-based growth with all businesses, including hotel, air and cars, performing at par or above the company’s expectations. Hotel room nights increased 36% year over year to 75 million driven by good execution in core markets and high growth in Asia Pacific and the Americas. Rental car days increased 28% to 12 million as Rentalcars.com gained access to newer markets. Priceline also sold 9% more air tickets (1.8 million) in the third quarter.
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Domestic Market Foothold Strengthens, International Markets Strong As Ever
Priceline’s stellar growth in recent years has come primarily from its expansion initiatives in international markets. International gross bookings have grown by high double digits since 2010. As a result, the contribution of international gross bookings to total gross bookings has gone up from 65% at the beginning of 2010 to 85% presently. The company continued to add hotel supply and expand Rentalcars.com into international markets in the third quarter. It also invested in building its Agoda.com and Booking.com brands in the Asia-Pacific region, particularly to tap the growing Chinese travel market. These efforts translated into a 41% year-on-year rise in international gross bookings compared to the same quarter last year. 
Registering its highest growth rate in 13 quarters, Priceline’s domestic business (U.S.) stole the spotlight in the third quarter; domestic gross bookings grew 17% year over year to $1.59 billion. The remarkable recovery was possible due to the new TV ad campaign launched for Booking.com, to the increasing strength of the Express Deals business, and to the higher visibility of Priceline group brands on Kayak. Kayak is the leading travel search engine in the U.S. with over 50% share of the travel search market. The increasing strength of Priceline’s brands in the largest travel market in the world should help offset the slowdown management anticipates owing to the increasingly large size of the business (the so-called”law of large numbers”).
Operating Margins, Holding Up On Advertising and Operating Efficiencies, Could Face Pressure Going Forward
Priceline launched its first offline advertising campaign for Booking.com in the U.S. this year. It also invested in building the Kayak.com and Priceline.com brands. Despite these investments, Priceline’s adjusted EBITDA margin stood at 46%, approximately the same level as the prior year. Advertising and operating efficiencies helped the company keep its operating margin from falling; however, we note the possibility that it may not be able to maintain its margins in the future, due to increasing competition in the OTA (i.e., Online Travel Agency) space and falling returns on investments on online advertising.
The online travel services industry 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. In our view, Priceline will have to invest heavily in its operations in order to stay competitive. We expect that they will and we forecast that Priceline’s EBITDA margin will remain more or less around the present level for the rest of our forecast period.
We are in the process of updating our $642 price estimate for Priceline based on the quarterly results.Notes:
- Priceline.com Reports Financial Results for 3rd Quarter 2013, Priceline Group Earnings Release, November 7, 2013 [↩]
- Priceline.com Incorporated Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, November 7, 2013 [↩]