Who’d have thought it? Norwalk, Connecticut–home of one of the hottest Internet companies around.
JP Morgan’s Imran Khan:
Priceline reported 3Q revenue, EBITDA, and EPS of $731M, $225M, and $3.45, well ahead of our expectations for $710M, $196M, and $3.05. Following are our key points:
- Gross bookings growth accelerates for the second straight quarter. Total gross bookings grew 33% Y/Y, ahead of our estimate for 26% Y/Y growth and well ahead of 2Q’s 13% growth. We are pleased with this acceleration despite increased competition from competitors removing or lowering booking fees. We are now modelling F’10 gross bookings growth of 29% Y/Y (prior est. was 28%).
- Advertising expense growth was slower than gross profit dollar growth. Gross profit grew 37% Y/Y on 33% growth in advertising expense highlighting that unit profitability continued to remain healthy. We think lower advertising costs and increased brand awareness helped drive this unit profitability, slightly offset by pressure from lower ADRs. While we expect the advertising environment to be more competitive next year resulting in higher CPCs, we think higher ADRs and increased brand awareness (better organic traffic) will help gross profit growth continue to outpace ad expenses. We are modelling ad expenses to grow 27% compared to gross profit growth of 28% in 2010.
- International markets now represent ~73% of gross profit dollars. We are particularly pleased that int’l is such a large portion of gross profit as we think this growth is much more sustainable than domestic growth. We see healthy growth in the international markets continuing due to 1) secular penetration growth, 2) new market entrance, 3) recovery of ADRs, 4) a more fragmented market which favours aggregators, and 5) modest take rate increases. Finally, while we cannot give much credit to this point, they will also benefit from foreign exchange. We are now modelling F’10 int’l gross bookings growth of 42% Y/Y vs. our prior estimate of 39% growth.
- Domestic gross bookings growth implies market share gains. While Priceline posted 25% Y/Y growth, Orbitz saw domestic gross bookings decline 5%, while Expedia posted 9% growth. We are encouraged by their success in a very competitive market and are now modelling 10% Y/Y F’10 domestic gross bookings growth.
- Valuation is attractive. PCLN is trading at 17x our F’10E EPS vs. the peer group avg. of 43x. Given its high EBITDA growth, we feel this discount is unjustified and reiterate our OW rating. We are increasing our price target to $216.