Priceline Delivers A Healthy Q3, Announces A Major Shift To Television Advertising

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Priceline‘s (NASDAQ: PCLN) Q3 2017 earnings results were released on November 6th. The highlight of its earnings discussion was the company’s decision to significantly gear up its television advertisement spend while sacrificing the digital ad spend to a large extent. This might be the first big change in policy decision that Priceline Group CEO Glenn Fogel undertook since he came to office in January this year. The significance of this decision lies in the fact that not only is this a risk Priceline is taking to shake up its media presence and see the results, but this decision might adversely impact companies such as TripAdvisor, Google, and Trivago, the metasearch engines where it has spent the largest chunks of its advertisement dollars. Priceline has until now been the largest OTA spender in digital advertising. In terms of its quarterly performance, the company performed well as expected. Priceline’s revenues grew by 20% to $4.43 billion for the third quarter. Its gross bookings grew by 18% driving the gross profits for the quarter by 22% to $4.4 billion. The gross profit also included $33 million from its acquisition of The Momondo Group in July this year. The company’s net income grew by a whopping 240% to $1.7 billion, however, this was because in Q3 2016, Priceline reported an impairment charge to the tune of $941 million for its 2014 acquisition of OpenTable.  The company has revved up its brand advertising by 55% in Q3 to drive traffic directly to its websites. However, this boost in advertising, especially television advertising, is expected to continue which may put pressure on the company’s bottom line over the next few quarters. That said, Priceline’s CEO reminded once again that even though it is the largest OTA in the world right now, its share in the global travel market is in mere single digit percentage and the scope for future growth is still significant. The company has guided to a modest 8% to 13% growth in its room night for the fourth quarter because it experienced significant growth to the tune of 31% in room nights for Q4 2016, a difficult comp to beat as the company keeps growing bigger in size. We have a price estimate of $1,792 for Priceline’s stock which is 6% lower than its current price.

Booking.com’s TV Ads Are Expected To Build More Awareness Around Its Products

The highlight for the quarter was Priceline’s announcement to gear up on TV advertising for its biggest brand, Booking.com, currently the world’s most popular accommodation booking platform. Till the end of September, Booking.com had 1.5 million bookable properties on its platform (with 26.9 million potentially bookable rooms) reflecting a 41% year-over-year growth. The company wishes to bring in more direct booking customers on to its platform and hence it will be focusing more on TV ads which it believes will not only aid in attracting more users to the Booking.com platform but will also help in building awareness about its vacation rentals offerings, which it is focusing on in a big way to drive future growth. By the end of Q3 2017, Booking.com had over 816,000 vacation rental properties reflecting a 58% year-over-year growth rate. The company expects that the TV ads for Booking.com will be viewed in 30 countries by the end of this year, as against the 12 countries in which they were aired last year. Even though this will dampen margins in the short run, it believes that it will generate enough returns to justify the current investment.

A Cause For Concern For The Metasearch Engines?

Priceline’s CEO spoke about how the investments to maintain a top position in its advertiser’s pages has always been a dampener for the company’s margins. Given the fact that the same advertisers are also competing against Priceline with their hotel booking platforms, it makes little sense for Priceline to keep on giving its money to its competitors. This might spell a major challenge for some of the metasearch engines such as Google and TripAdvisor where Booking.com mostly advertised. According to Skift, Priceline’s ad spends in 2017 is expected to reach over $4 billion, with the biggest share going to Google. However, though Google is too big to be impacted significantly, TripAdvisor in particular might bear a severe brunt of this decision.We had previously mentioned how TripAdvisor‘s Q3 results were adversely affected by a softer cost-per-click. This was mainly because its biggest clients like Priceline and Expedia were not spending aggressively for top slots on its pages. Hence, it looks like this trend is likely to continue as Priceline seems to think that its own in-house advertising will be a better investment rather than spending advertising dollars on TripAdvisor and similar metasearch engines. TripAdvisor’s Instant Booking platform seem to be the cause for concern for Priceline, as Instant booking encourages users to directly book on the TripAdvisor website. We’ve discussed earlier how this problem might arise in the future for TripAdvisor. Instant Booking puts TripAdvisor as a direct competitor for OTAs like Priceline and Expedia, the same companies who contribute to around 50% of TripAdvisor’s advertising revenues. It seems like the OTAs are finally gearing up with their own metasearch engines and their own advertising routes to bypass third-party advertising. This doesn’t spell good news for TripAdvisor though Priceline might actually earn significant benefit from its advertising.

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Notes:

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