Susquehanna International Group, LLP (SIG) analysts Brian Nowak Michael Costantini take a close look at Priceline.com’s latest earnings report.
Priceline reported strong results
Last night, Priceline.com Inc (NASDAQ:PCLN) reported strong results as gross profit was up 42%, 1% above us and 4% above the Street. Profitability was also better than expected as 4Q non-GAAP EBITDA of $578mn was 4% ahead of us and 7% ahead of the Street.
Priceline.com Inc (NASDAQ:PCLN) continues to execute around the globe, as 2-year stacked int’l constant currency bookings growth accelerated for only the second time in 3 years…rising to 85% growth vs. us at 77% prev (See Fig 1). PCLN called out broad-based strength in its core European market, APAC, S. America, and N. America, and we believe seasonality around APAC and S. America (4Q and 1Q travel markets) also contributed to the acceleration.
1Q:14 int’l constant currency bookings guidance of 25%-35% YoY growth (midpoint of
30%) was also better than our previous 27%. Given it’s already Feb 20 and the avg booking
window is 30-60 days, we believe the company has strong visibility into its 1Q guidance.
Combine that with Priceline.com Inc (NASDAQ:PCLN)’s conservative nature, beating the top-end of int’l bookings guidance each of the past 6 quarters, and it’s a good bet they’ll deliver upside again in 1Q.
Online ad spending efficiency was better than expected, with online ad spend falling by
271bp YoY as a % of GP vs. us at 200bp as Priceline.com Inc (NASDAQ:PCLN) said they are seeing less pressure on ROI than in ?the previous quarters.? Improving paid search efficiencies even while growing bookings 39% is a very healthy sign as it gives Priceline.com Inc (NASDAQ:PCLN) more dollars to flow down the income statement or, as is the case now, to invest.
PCLN plans to continue its U.S. Booking.com TV ad campaign
In the near-term, Priceline.com Inc (NASDAQ:PCLN) is re-investing the online ad efficiencies and ramping their offline TV spending to go for more marketshare. PCLN plans to continue its U.S. Booking.com TV ad campaign (they are seeing success and share gains from the spend) and will also spend in Australia, Canada and the UK. The UK will be PCLN’s first TV campaign in Europe, and surprisingly Priceline.com Inc (NASDAQ:PCLN) said that Booking.com has low aided brand awareness in the UK, even though it is broadly used (and we believe the market leading OTA). This has the potential to be bullish, as an effective offline ad campaign could mean even more share gains in Priceline.com Inc (NASDAQ:PCLN)’s already-strongest region. While brand-building may weigh on near-term margins, it has the potential to lead to larger bookings growth and long-term earnings power.
We raise our forward gross profit estimates by 1% (given the higher bookings trajectory). Our EPS estimates are unchanged as PCLN’s higher offline ad spending offsets the larger gross profit. In all, we see Priceline.com Inc (NASDAQ:PCLN) earning $52 per share in 2014 (See Fig 2), which may prove conservative if current bookings and gross profit momentum continue…or if discretionary offline ad assumptions prove to be smaller than expected. Priceline.com Inc (NASDAQ:PCLN)’s bookings and gross profit performance/guidance (even as laws of large numbers kick-in) re-affirm it as the best executor in online travel. We remain Positive on the name and lift our PT to $1,500 from $1,350 as we raise our target relative earnings multiple to 163% (vs. 145%) given the faster top-line growth.