Priceline Q2 2015 Earnings Preview: Strategic Initiatives Might Bear Fruit, Though Currency Headwinds Expected To Decelerate Growth

Priceline (NASDAQ:PCLN) is slated to report its Q2 2015 earnings on August 5. Post a successful first quarter, Priceline had guided for a slowdown in Q2 because of currency headwinds. However, on the back of its investments and organic growth, we expect the company to deliver a successful quarter, excluding the currency fluctuation effect. Priceline had been continuing its investment momentum in 2015 and it has also raised senior notes for the same purposes. Finally, Priceline might slowly phase out its Name Your Own Price model in the U.S. as its declining traction is weighing down its revenue.

After delivering a successful 2014 with the help of organic and inorganic growth, Priceline started 2015 on a positive note. Priceline’s revenues for 2014 stood at $8.4 billion, depicting 24% year-on-year growth. In Q1 2015, the company delivered 19% year-on-year growth in gross profit to reach $1.7 billion. The growth drivers were a surge in gross bookings (12% year-on-year growth to $13.8 billion), which, in turn, were fueled by: Priceline’s hotel inventory growth by 40% to around 640,000 across 200 countries on Booking.com, and Priceline’s vacation rental properties growing by 50% to 275,000.

However, despite the healthy outlook, Priceline had guided to a slow Q2 2015, primarily because of currency headwinds. Priceline derives around 80% of its revenues from international markets and the weak Euro exchange rate is currently dampening its European performance. Also, weak domestic currencies are decreasing the international travel propensity in travelers. Priceline had guided to 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 $1,036 for Priceline’s stock.

See Our Complete Analysis for Priceline Here

The Strategic Alliances And Acquisition In 2015 That Might Impact Priceline’s Second Quarter Performance

1. In July, Priceline invested $60 million to own a minority share in Hotel Urbano, the leading OTA in Brazil. As a result of this agreement, Hotel Urbano will use Priceline’s Booking.com to source hotels outside of Latin America (LATAM). Also, Hotel Urbano will use Priceline as the preferred distributor for its vacation packages. At a 65% year-on-year growth rate, Hotel Urbano’s valuation stood at $365 million, as of March 2014. ^[2] Hotel Urbano’s knowledge on the local trends and understanding of the demand-supply dynamics will help Priceline gain a substantial share of the Latin American market. ^[3]
   • By 2016, LATAM is predicted to be one of the top countries in terms of online travel sales growth. It is estimated that LATAM experienced a 25% year-on-year increase in online travel sales in 2014. ^[4] According to a report by Phocus Right, the Latin American travel market is estimated to approach $100 billion by 2016.
   • Also, Brazil is the biggest market in Latin America and Brazil was the fifth largest spender in international travel in 2013, with an estimated $25 billion spend. ^[4] Brazil’s online travel market size is estimated to reach $10 billion by 2016. ^[4]
2. Priceline took over hotel-booking start-up Rocketmiles in Q1 2015. Rocketmiles helps customers in the collection of frequent flier miles (which can be redeemed for bookings in around 12 airlines), if they book through its mobile application or website. Priceline and Expedia are stressing loyalty programs to lure customers to their platforms. Expedia is also on its way to acquire Orbitz (subject to regulatory approval), which is known for its loyalty programs.
3. Post its $500 million investment in Ctrip in mid-2014, Priceline invested an additional $250 million in the company in May 2015. Once the deal is completed, Priceline will own up to a 15% stake in Ctrip. This deal was announced shortly after Expedia’s eLong divestiture and forging of a strategic alliance with Ctrip. ^[5]
   • Currently, Priceline has access to Ctrip’s 100,000 accommodations in the Greater China region while Ctrip has access to Priceline’s global portfolio of over 500,000 accommodations. ^[6] Additionally, Ctrip promotes Priceline’s other products like rentalcars.com and OpenTable to its own users.
   • Post the $500 million investment, Priceline’s outbound business experienced substantial growth after Agoda and booking.com were featured on Ctrip. The Chinese outbound market is one of the largest in the world, currently with the traffic surpassing 100 million in the first 11 months of 2014. ^[7]. This translates to an over 100% growth from 2009 (47.7 million). The number is expected to cross 160 million by 2018. China spent around $129 billion in outbound travel in 2013 and they are considered to be among the top contributers to global travel spendings. ^[8]
   • Priceline’s management had spoken about the acceleration of further rollout of its properties in China in its Q4 2014 earnings. Hence, the additional investment is going to help Priceline’s growth even further. Priceline is the primary non-China hotel partner for Ctrip.

Priceline’s Reserves Allow It To Carry On Its Strategic Moves

Priceline raised $1.13 billion through a senior public offering in February 2015. Again in March 2015, it announced a second set of senior notes offering, dependant on market conditions.The funds are intended to be used for acquisitions along with other corporate needs. At the end of 2014, Priceline had around $8 billion cash on hand. This, coupled with the senior notes, will give it ample reserves to continue the acquisition momentum for the rest of 2015.  In 2014, Priceline spent around $2.5 billion net of cash acquired on acquisitions.

Second Quarter Domestic Revenues Will Suffer Due To Name Your Own Price Model

Currently, Priceline’s domestic business in the U.S. had been hampered due to declining demand for Priceline’s Name Your Own Price business model. ^[9] Under this model, Priceline lets travelers bid for travel services at discounted prices, 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). The customers don’t get to know about the quality of the travel product until they’ve made the purchases, and this is the prime reason for the model’s lackluster demand among travelers. ^[10] Priceline expects the model to continue dampening its Q2 2015 domestic revenues, as well.

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1. The Priceline Group Reports Financial Results for First Quarter of 2015, Priceline Press Release, May 7, 2015 [↩]
2. Battle for Latin America Booking Heats Up as Priceline Invests $60 million in Hotel Urbano, Skift, July 6, 2015 [↩]
3. Interview: Hotel Urban CEO on Using Big Data to Battle Booking Rivals, Skift, October 17, 2014 [↩]
4. Latin American Overview, European Travel Commission Digital Portal, 2014 [↩] [↩] [↩]
5. The Priceline Group Announces Additional Investment in Ctrip, Priceline Press Release, May 26, 2015 [↩]
6. The Priceline Group and Ctrip Expand Partnership, Ctrip Investor Relations, August 6, 2014 [↩]
7. The Top Chinese Travel Trends to Watch for in 2015, Skift, December 2014 [↩]
8. The State of Chinese Outbound Travel in 2014, Skift, September 2014 [↩]
9. Priceline’s Q1 2015 Earnings Call Transcript, Seeking Alpha, May 7, 2015 [↩]
10. Opaque bookings on the wane: Priceline, Hotwire, and a changing landscape , tnooz, July 30, 2014 [↩]