How Priceline is trouncing the pessimists

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With so many published stories forecasting a dire summer for a disaster-hit travel industry, Priceline caught stock markets out. Sally White reports

The world’s largest OTA thoroughly trounced the pessimists and beat Q2 forecasts and its own guidance on all counts. Both agency and merchant businesses are showing strong momentum, room nights are growing at an accelerating rate, rental cars are strong and the only weak point is airline tickets.

In a conference-call with analysts last week Priceline said that recent terrorist attacks in Belgium and France had hurt travel to those countries but pushed travellers to other destinations like south Spain and Portugal. For Europe overall there had been “little damping of demand”. Even Brexit and the fall in sterling were, it said, expected to have “minimal effect” as UK destination gross profit and source gross bookings were only around 10% of the business.

Priceline also said that hotel chains’ marketing campaigns to attract direct booking from travellers had had minimal effect, too. Comment from interim CEO Jeffrey Boyd was: "At some point, it actually might not be a great idea to push the market and push consumers to expect only discounted prices.”

The actual numbers for Q2 were: room nights up 24% on a year ago at 141 million, gross travel bookings up 19% at $17.9 billion and underlying earnings up eight per cent at $867 million. The shares, up 7% so far this year, rose 5% more on the news.

So, no one believes Priceline is not going exceed its own guidance again in Q3. It is targeting room nights up 18-23%, gross travel bookings up 14-19% and revenue up 12-17% on a year ago.  

There was also good news for Facebook. In the conference-call Jeffrey Boyd said he expects lower returns in the current quarter from bookings generated from Priceline advertising, much of which goes through Alphabet’s Google. As a result Priceline plans to increase spending on Facebook's targeted ads. "We found that a number of things we've done on Facebook work well," he said. "We would like to spend more money on Facebook going forward."

Higher advertising costs were one of the factors cited by Priceline when it warned a few months ago that the second-quarter figures might disappoint. In the event neither those, nor the adverse effect of currency moves, stopped Priceline announcing great figures.

Priceline moved in with a clever strategy by first offering Ctrip access to American hotel listings through

Dr KC Ma, Professor of Finance, Stetson University

Looking for explanations for just why Priceline’s numbers were better than those of rival Expedia, online news site US News quoted investment specialist Dr K C Ma, at Stetson University, who put it down to the stake in China Ctrip. His view was that: "After Expedia's failure to compete in China in 2011, Priceline moved in with a clever strategy by first offering Ctrip access to American hotel listings through, a subsidiary of Priceline. After $1 billion invested, today Priceline owns a 15% stake in Ctrip, a high-growth player in today's global travel industry.” First-quarter revenue at Ctrip was up 80%!

Taking apart the numbers, analysts at Zacks research group in Chicago said that Priceline generates the bulk of its revenue from international markets “where the agency model is more popular”. A Zack’s report commented: “This is reflected in the merchant/agency split of revenue, which was 22/70% in the last quarter (previous quarter split was 20/72%).” Merchant revenues were up 10.2% sequentially and down 5.2% year over the year. Agency revenue grew 23.5% per cent sequentially and 17.1% on a year ago.  

Advertising & Other revenue was up 3.9% sequentially and up 21.6% from last year, accounting for the balance. “This is basically non inter-company revenue from Kayak and OpenTable, of which OpenTable grew 22% year over year. The restaurant reservation service that Priceline acquired some time back is rapidly building on the number of restaurants in North America and also expanding internationally,” it added.

Priceline’s room night growth is attributable to its very geographically diverse inventory and brand recognition that tends to balance out macro uncertainties…

Room nights, rental car days and airline ticket volumes grew a respective 24.4%, 7.6% and 4.8% from last year. “Priceline’s room night growth is attributable to its very geographically diverse inventory and brand recognition that tends to balance out macro uncertainties related to any one market as well as growing competition from local and international players. The company did however see ADRs declining. also did quite well but there was some softness in ticket volumes,” said the analysts.

Management stopped breaking out US and international bookings this year but is providing some colour on some gross profit contributions. Merchant bookings were up 19.1% year-on-year and agency bookings grew 19.4% on a year ago.

Yet to be announced is the name of the group’s new CEO. Not that investors are fretting that Boyd is once again running Priceline. He oversaw a decade of tremendous growth as the CEO between 2002 and 2013. In April he stepped back in on an interim basis when Darren Huston resigned after an internal investigation revealed an inappropriate relationship he had with a co-worker.

The search for a permanent successor is still underway. Meanwhile Boyd is one again delivering great numbers.

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