$PCLN,...Priceline: Solid Top-Line Growth This Quarter But Margins May Contract
Jul. 30, 2014 5:11 PM ET
Summary
> Priceline is set to release its results for Q2 FY2014 on Friday, August 1.
> Despite the continuous decline since 2007, Priceline’s margins are healthier than that of its closest competitor, Expedia.
> Priceline’s stellar growth in recent years has come primarily from its expansion initiatives in international markets.
Priceline (NASDAQ:PCLN) is set to release its results for Q2 FY2014 on Friday, August 1. Despite the large size of its business and uncertain global economic conditions, the leading Online Travel Agency (OTA) grew robustly in the first quarter, registering top-line growth of 26% year over year. This remarkable growth came on the back of a rapidly expanding presence in the international markets and a stronger foothold in the domestic U.S. market. For the second quarter, the company has provided guidance for revenue growth in the range of 19% to 29%.
Priceline delivered a 340 basis point expansion in operating margins in Q1, owing to advertising and operational efficiencies. Advertising efficiencies resulted from the acquisition of Kayak, a company that spends less on online and more on offline advertising; ROI (return on investment) on online advertising is lower than on offline advertising. Further, the amount spent by Priceline’s brands for ad placements on Kayak is eliminated from the consolidated results.
Although the revenue outlook is good, margins are another story. We believe that Priceline will not be able to substantially grow its margins in the future, due to increasing competition in the OTA space, falling returns on investments on online advertising and the anniversary of Kayak’s acquisition on May 21. Additionally, the company recently launched offline advertising campaigns for its Booking.com brand in Canada and the U.K. It expects to incur between $220 million and $240 million on offline advertising expense in 2014, which will put increased pressure on margins.
We will update our $642 price estimate for Priceline after the upcoming results announcement.
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