Priceline Delivers Strong First Quarter But Gives Soft Guidance On Currency Headwinds

Priceline Group (NASDAQ:PCLN), the online travel giant and owner of Booking.com, Kayak and OpenTable, reported strong Q1 2015 earnings, on May 8th. The Group reported gross profit of $1.7  billion, reflecting 19% year-on-year growth. International operations contributed to over 80% of Priceline’s gross profit. Growth was aided by a 12% increase in gross bookings (which refers to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by its customers), to $13.8 billion. Gross bookings growth was fueled by the 40% growth in hotel inventories to the tune of 640,000 across 200 countries on Booking.com. The vacation rentals properties for the company, including villas, chalets, and apartments, increased by 50% to 275,000. Priceline’s growth was broad-based, with increases of 25% in hotel room nights to 105 million and 18% in rental car days to 15 million.

The company has guided for slower growth in Q2 2015, primarily because of the scenarios affecting its operations in recent times. Priceline’s international operations comprise over 80% of its revenues.The weak Euro exchange rate continues to dampen its performance in the European regions. Also, weak domestic currencies are thwarting international travels in many countries where Priceline operates. The company’s guidance for Q2 2015 include a 0% to 7% year-on-year increase in revenues and a 1% to 8% increase in gross profits. ^[1]

We are in the process of updating our price estimate of $1036 for Priceline’s stock.

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Priceline’s Name Your Own Price Business Is Dampening Domestic Growth

Priceline’s domestic business was hampered by its diminishing opaque business. ^[2] In the United States, Priceline enables its customers to purchase a full range of travel services under the traditional price disclosed model (in which it earns a commission) or lets them bid for services at discounted prices under Name Your Own Price model, where it earns the difference between the price an individual is willing to pay and the price charged by the travel service establishment (hotel, airlines, etc). Under Priceline’s proprietary Name Your Own Price service, customers can quote their own price for a travel product (hotel room stay, air ticket, etc). Priceline matches the quotes with the discounted, but otherwise undisclosed, fares provided by the suppliers and determines whether to accept the booking without disclosing the identity of the supplier.

One of the primary reasons for waning demand for the opaque model is that shoppers aren’t aware of the quality of the travel product purchased until they have paid for it. ^[3] This uncertainty about quality has worked against the model. The company expects its Q2 2015 revenue growth to be negatively impacted by its shrinking Name Your Own Price business model.

Priceline Started The First Quarter With An Acquisition that Focuses On Loyalty Programs

In Q1 2015, Priceline acquired hotel-booking start-up, Rocketmiles. The deal enhanced user experience on the Priceline platform by allowing users to book lodgings via Priceline’s network, as against booking directly with hotels. Rocketmiles aids customers in gaining frequent flier miles by booking through its mobile application or website. These miles in turn can be redeemed for bookings for an array of around 12 airlines. The online travel agency leaders seem to be stressing on loyalty programs for expanding their customer base. Rocketmiles is being managed independently as part of the Priceline Ventures portfolio.

In February 2015, Expedia (NASDAQ:EXPE) announced its intention to acquire Orbitz Worldwide. One of the advantages which Expedia would gain from Orbitz is the Orbucks loyalty program. The rewards programs would allow the OTAs to gain a competitive advantage against airlines and hotels, who in turn try attracting customers to their own websites.

Mobile Is Boosting Growth For Priceline Products

Mobile applications are one of the strongest drivers of Priceline’s sales. The company is on a continuous path of innovation through mobile applications. Some of the mobile booking options on the Priceline platform are Booking.com’s Booking Now application for last minute bookers, priceline.com’s iWatch application, mobile application to book restaurant tables through OpenTable, and Kayak’s mobile itinerary management tools. There have been over 100 million application downloads across the Priceline group, in the last twelve months.

In Q1 2015, Priceline’s Booking.com launched Booking Now, the mobile phone application for spontaneous bookers and Booking Suite, Priceline’s partner facing software services platform. ^[2]

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1. The Priceline Group Reports Financial Results for First Quarter of 2015, Priceline Press Release, May 7, 2015 [↩]
2. Priceline’s Q1 2015 Earnings Call Transcript, Seeking Alpha, May 7, 2015 [↩] [↩]
3. Opaque bookings on the wane: Priceline, Hotwire, and a changing landscape , tnooz, July 30, 2014 [↩]