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Online Travel and Orbitz, Expedia, Priceline

Posted on Thursday, Dec 6th 2007

I wondered earlier if Priceline (PCLN) would reach its all-time dot.com high of $104/share ever again. The company not only reached the target but exceeded it, and is currently trading at $120/share. Priceline recently posted earnings for Q3 totaling $104.4 million versus $48.8 million in the same period a year ago. Excluding one-time items, Q3 earnings came in at $71.5 million against $30.2 million last year. Annual revenue to date rose 33% to $417.3 million from $313.5 million in 2006. Analysts were instead expecting revenue of $387.5 million.

CEO Jeffrey Boyd pointed overseas for the profits, “European business performing extremely well for several quarters.” In early November, Priceline also upped the ante in price competition. The company announced that it will permanently eliminate airline ticket booking fees on all domestic and international fares. This is a nice play because unlike some of the other players, Priceline is not solely airline dependent. However, by removing the booking fee, Priceline forces other players, especially Orbitz, to have to consider matching the gambit. The fees are estimated to range between $5 to $7 per ticket sold.

Expedia (EXPE), in comparison, was not shaken much by the news; its stock price fell only 2 percent on Priceline’s announcement ($33/share). However, Orbitz (OWW) plummeted more than 14% in value. Expedia, now finds itself pacing an unfamiliar second place to Priceline. I previously noted that the long term prospect of Expedia lies in building itself a travel media business that generates high advertising revenues via TripAdvisor. Instead of spinning TripAdvisor out, Expedia needs to integrate the 4 Cs: Content, Commerce, Community, and Context. Fortunately, we haven’t seen any TripAdvisor spin-off happen yet, which gives me hope that perhaps the company is listening.

Financially, Q3 2007 was Expedia’s best since their 2005 spin-off from IAC, with strong performance across the organization. Quarterly revenue jumped 24% and total consolidated revenue for Q3 was $759 million versus $613 million for Q3 2006. Cost of sales totaled $151 million, leaving a gross profit of $608 million. These results, even with increasing operating costs, beat analyst expectations thoroughly. All of the online travel companies have been booming on European sales, very likely due to the strong Euro versus the Dollar, and Expedia was running with the pack.

However, with Priceline.com booking fee disappearing, Expedia is pressured to do the same. Not doing so would mean that Expedia would have to make up the lost revenue by significantly increasing its conversion rates and profits from cross selling of other services. Expedia has indicated a direction towards lowering its fee to remain competitive in the European market, currently the main cash cow, trading short-term profit for an aggressive growth strategy.

Expedia is not as hampered as Orbitz with the latter’s dependency on just the airline business. Expedia is strong with hotels, and TripAdvisor is a great revenue diversification mechanism that I hope they are learning to appreciate in the face of these price wars.

The recently IPO’d Orbitz (OWW) has had a hard time in the public market. It owns such consumer brands as Orbitz, CheapTickets, eBookers, HotelClub, RatesToGo, and the Away Network, as well as corporate travel brands, such as Orbitz for Business and Travelport for Business. Orbitz went public with its summer IPO in the price range of $16-18/share but has since dropped by half to $8/share. In short, Orbitz’s IPO price was too high, operating margins were low, revenue growth was slow, and management is still paying Travelport a dividend despite weak company value.

Fast forward to 2007 Q3 earnings and their quarterly revenue dropped to $184 million from $221 million a year ago. Net income operating loss from Orbitz’s revenue totaled $32 million versus $9 million the previous year. However, when excluding one-time items such as its $32 million IPO charge, earnings adjusted then reflect $43 million net profit versus an expected $35 million. Analysts expect 2007 to be uneventful for Orbitz and any future growth would more likely occur in 2008.

Orbitz’s market strategy is to get its business further into the non-air markets for future growth, but it still relies primarily on the airline business, with low growth and low margins. And Priceline’s booking fee removal will significantly hammer Orbitz’s revenue stream.

Orbitz could be categorized as a cheap value buy-in to a growing industry (30% annually). In my various Web 3.0 reviews, I have identified a number of the large Internet conglomerates as potential acquirers for Orbitz. I think, this is a very reasonable acquisition target, for instance, for Yahoo.

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