Despite the large size of its business, Priceline (NASDAQ:PCLN) continued to grow robustly in the final quarter of 2013. Hotel room nights increased 37% year over year to 63 million, driven by strong performance of Express Deals, increased online advertising on Kayak and higher spending on offline advertising. This helped boost total gross bookings by 39% year over year to $9.1 billion. The airlines business demonstrated strength in particular, selling 28% more tickets compared to the year-ago period. The double-digit growth in ticket sales was the first in several quarters and came about as Priceline began powering airline ticket bookings on Kayak. Exceeding the management’s guidance, Priceline posted $1.54 billion in revenues for the quarter with an operating margin of 37%. Management had provided guidance for revenue growth in the range of 19% to 26%.  
We are in the process of updating our $642 estimate for Priceline’s stock.
International Business Will Maintain Its Strength As Domestic Business Accelerates Further
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Priceline’s growth in recent years has come primarily from its expansion initiatives in international markets. Priceline is pursuing aggressive expansion in Asia-Pacific via its Agoda.com and Booking.com brands. The company posted 41% year-on-year growth in international gross bookings in Q4 mainly due to the increasing geographic mix of Asia-Pacific bookings. Travel in Asia-Pacific is seasonally stronger toward the end of the year.
Booking.com’s dominance over the core European market also contributed significantly to Priceline’s growth. Booking.com is the leading online travel agency in Europe with 31% share of the market. In 2013, Booking.com increased its hotel supply by 54% to end the year with an inventory of 425,000 hotels and accommodations in 195 countries. The brand is now aiming to enhance its presence in Australia, Canada and the U.K. through its Booking.yeah advertising campaign. The campaign was first launched in the U.S. and received an encouraging response from viewers. 
While Priceline has successfully gained share in international markets, it has lost out to Expedia (NASDAQ:EXPE) in the domestic landscape. Priceline has 16% share of the U.S. OTA market compared to Expedia that has over 40%.  Priceline is taking different routes to increase its share. The company launched its first offline advertising campaign (Booking.yeah) for Booking.com in the U.S. last year. It entered into a partnership with NYC and Co. to power bookings on New York City’s official tourism website. It also completed the acquisition of Kayak, the leading meta-search engine in the U.S. with over 50% share of the travel search market. Acquiring Kayak has helped Priceline’s brands to gain more visibility in the U.S. market.
Domestic bookings account for about 15% of Priceline’s total gross bookings. The company registered 26% year-on-year growth in domestic gross bookings in Q4, and we expect the growth to accelerate further.
Operating Margins, Holding Up On Advertising and Operating Efficiencies, Could Face Pressure Going Forward
Priceline delivered adjusted EBITDA of $578 million in Q4, better than the management’s guidance of $540 million, due to advertising and operational efficiencies. Advertising efficiencies resulted from the acquisition of Kayak. Kayak spends less on online and more on offline advertising. Further, the amount spent by Priceline’s brands for ad placements on Kayak is eliminated from the consolidated results. This helped the company to experience a softer impact of declining return on investments (ROI) on online advertising and keep operating margins from falling.  However, we note the possibility that Priceline may not be able to maintain its margins in the future, due to increasing competition in the OTA space and falling returns on investments on online advertising. Additionally, the company launched offline advertising campaigns for its Booking.com brand in Canada and the U.K. this year. The company expects to incur between $220 million and $240 million on offline advertising expense in 2014.Notes:
- Priceline.com Reports Financial Results for 4th Quarter and Full-Year 2013, Priceline Investor Relations Website, February 20, 2014 [↩]
- Priceline.com’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, February 20, 2014 [↩] [↩] [↩]
- PhoCusWright: Online travel spending on the rise in Europe, Travel Weekly, January 15, 2014 [↩]