Despite the large size of its business, Priceline (
) 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
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
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 (
) 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
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
Operating Margins, Holding Up On Advertising and
Operating Efficiencies, Could Face Pressure Going
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.
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