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Online Travel Sector Consolidates

Posted on Friday, Nov 30th 2012

A major headline in this quarter’s coverage of the online travel industry is that Priceline made a notable acquisition. Last week, Priceline (NASDAQ:PCLN) announced plans to acquire travel search player Kayak for $1.8 billion. Kayak (Nasdaq:KAYK) had released its long-awaited IPO four months ago.

Priceline’s Kayak Acquisition
For Kayak, the acquisition price of $40 a share was a significant premium over the listing price of $26. Kayak recently announced its third quarter results. Revenues for the quarter grew 29% to $78.6 million, ahead of the Street’s target of $77.36 million. Kayak’s earnings grew to $0.26, surpassing market expectations of $0.19. The number of search queries on the site grew 31% over the year to 302 million.

The most significant story here is that Priceline now has a search advertising business line which adds revenue model diversification beyond its online travel agent (OTA) business.

Also, Kayak earns 78% of its revenues from the U.S., suggesting strong potential for international growth. Kayak also recently started growing its footprint in Europe. It launched a site in Russia and also acquired travel search companies in Germany and Austria. In tune with Priceline’s international strategy, Kayak’s search advertising business is also looking outward.

Priceline’s Financials
Priceline has been delivering strong results independent of the acquisition. Its Q3 revenues grew 17% over the year and 29% over the quarter to $1.7 billion, significantly ahead of market expectations of $1.04 billion. EPS for the quarter grew 27% to $11.66 and surpassed the Street’s projections of $11.47.

Agency revenues grew 27% over the year to $1.12 billion and merchant revenues grew 2% over the year to $0.58 billion. Despite the weak European market, Priceline fared well in international markets. International revenues grew 31% over the year to $1.2 billion. Globally, hotel room nights increased 36% and the rental car business increased the number of rental car days by 35%.

Priceline projects current quarter EPS of $6.12-$6.57, compared with analyst estimates of $6.30.

The market has reacted favorably to Priceline’s bold acquisition. The stock is trading at $665.74 with a market capitalization of $32.2 billion. It touched a ten-year high of $774.96 in April 2012.

Expedia’s Financials
Competitor Expedia (Nasdaq:EXPE) saw Q3 revenues grew 18% over the year and 15% over the quarter to $1.20 billion, ahead of the market’s expected revenues of $1.17 billion. EPS of $1.32 grew 4% over the year and was ahead of market projections of $1.26.

By segment, leisure customers generated 93% of revenues, growing 15% over the year. Revenues from corporate customers grew 77% over the year and brought in the remaining 7% of revenues. Expedia benefited from growth in the hotel segment, where revenues were up 20% over the year.

International revenues accounted for 45% of revenues and increased 22% over the year. Domestic revenues grew 14% over the year.

Expedia’s Growth Moves
Expedia continues to take steps to gain market share. It relaunched its Hotels.com website with several improvements that make the user experience simpler and better. Expedia claims that the website changes have helped to raise the booking conversion rate by 20% on the website.

It is also faring well on the mobile front. After the successful launch of the Hotel.com app, which has been downloaded more than 10 million times since launch, it recently launched an iPhone app for Hotwire. Expedia also launched a new program called Expedia Travelers Preference that lets users choose to pay for a hotel either at the time of booking or at the time of checkout. The program has received positive reviews from both consumers and hoteliers alike.

As part of its continued international expansion, last month, Expedia entered into an agreement with Chinese travel player, eLong. According to market researcher PhoCusWright, the Asia Pacific travel market is expected to be worth $357 billion by the year 2013. Currently internet penetration in the region is modest at 26%. Analysts believe that increased Internet growth will help the online travel industry. Expedia is counting on the growth through the tie-up. eLong has an inventory of more than 32,000 hotels in China and 155,000 in 100 other countries, and it offers the largest selection of directly-bookable hotel options. Expedia is already the largest shareholder in eLong. The added agreement will help the two companies to work more closely together to handle competition and potential acquisition opportunities in the region.

Expedia’s stock is trading at 52-week highs of $61.59, with a market capitalization of $8.31 billion.

Orbitz’s Financials
Meanwhile, Orbitz (Nasdaq:OWW) delivered a dismal performance for the quarter. Revenues fell 2% over the year to $198.3 million, missing the Street’s projections of $200.9 million. EPS of $0.14 was, however, 27% higher than previous year’s and surpassed market expectations of $0.07.

Orbitz is focusing on growing revenues from its hotels segment. During the last quarter, hotel revenues accounted for 38% of the revenues. Orbitz aims to raise that contribution to 50%.

While other players are making bold moves in the segment, Orbitz seems to be struggling. A few analysts believe that at their current valuations, Orbitz may be the next possible acquisition target. Although its revenues may be declining, Orbitz does have its strengths with a strong brand, global presence, and an open source Linux-based technology platform.

The stock is trading at $2.29 with a market capitalization of $240.57 million. It touched a 52-week high of $4.75 in August 2012.

Last year, Google acquired ITA Software to make its big move in the travel vertical search. At the time of the acquisition, ITA accounted for close to 60% of Kayak’s airfare query results. Since then, Kayak has managed to lessen its dependence on ITA. But both the Priceline–Kayak merger and other online travel players are facing increased competition from Google. Using ITA’s software, Google has launched a new flight search tool to compare flights and fares, and this tool is already getting the highest volume of queries. During the last quarter, Kayak’s dependence on ITA dropped to 40% through tie-ups with other providers such as Amadeus. Priceline too has been heavily dependent on Google and is among the larger customers for Google. Priceline’s acquisition of Kayak will help it reduce its own dependence on Google.

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