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The Call @ Hedgeye | March 28, 2024

INTRODUCTION: We chose not to opine ahead of the 2Q16 print largely because our tracker appeared to have exaggerate bookings guidance on the last print, and was once again calling for an acceleration in bookings growth into 3Q16, which we had a hard time trusting.  2Q bookings growth (ex Fx) decelerated by 5% points, but naturally was suppressed by a flurry of negative events late in 2Q; suggesting the 2Q guide was sandbagged even more than the beat suggested.  PCLN’s 3Q guide accelerated off the range it provided for 2Q, suggesting mgmt may be expecting an acceleration off of actual 2Q results; agreeing with our tracker.  Moving forward, we’ll be providing tracker updates for our original tracker (ARPU) as well a new tracker (volume) we recently built.  Below are our earnings call notes; we’ll provide another update after we see where consensus shakes out

 

MANAGEMENT COMMENTS 

  • Happy with results despite competition and macro volatility
  • Currently have 1 million alternative accommodation rental properties on their booking.com platform, grew by +30% YoY
    • Listings are up have doubled in the last year
    • Currently have 493K instant book Vacation Rentals (VR),  +39% YoY
  • 23.7 million total listings
    • 16.3 million via their hotel partners
    • 7.3 million in homes and other unique places to stay
  • Broke their companywide record of daily bookings as 1 million reservations  were booked in 1 day this Q
  • Agoda continues to grow – running a world class merchant model.  Pleased to see group members leveraging the large supply platform
  • Kayak exceeded expectations
    • Search queries revenue growth and profit were up YoY
    • FB messenger service getting traction
  • Car days growth seen mostly through rentalcars.com platform, which showed pronounced strength across all major markets
  • Mobile channel continues to grow and building share continues to be a top priority
  • Feel good about their outlook for 3Q despite the volatility and frequency associated with terrorist attacks and other geopolitical events
  • Performance look back
    • Growth in room nights didn’t decelerate like they expected, leading to stronger than forecasted room night growth and total gross bookings. This momentum has also carried into 3Q
    • Exposure to UK destination and source business is about 10% or less of PCLN
    • Hotel ADR’s were consistent with their forecast
    • FX impacts were slightly unfavorable compared to the prior year and guidance
    • Difference in constant currency bookings growth and room night growth is largely driven via the decline in airline ticket bookings, lower accommodation ADRs and slower rental car bookings
    • Timing of Easter hurt 2Q profitability & margins
    • Int’l gross profit up 19% y/y, US up 8%
    • Operating margins pressured on a y/y basis by Easter shift, and ad budget shifting from 1Q to 2Q
    • Performance Advertising ROIs under pressure y/y, extending into 3Q
    • Net income benefited from a lower tax rate -due to the impact on deferred tax balances of a change in state tax law, but hit by $12.9M write-down of Hotel Urbano
    • Operating cash flow +38% YoY
    • Repo’d $299 million worth of common stock in 2Q and have repo’d $69 million in 3QTD
  • Guidance Update 3Q 2016
    • 3Q guidance implies deceleration later in the Q following a strong start in July, mainly due to size of their business and longer term trends
    • FX basket weakened by 2% since their last call
    • Expect 260bps of deleveraging non-GAAP op margins
    • Pressure to advertising ROI due to strengthening comparisons
    • Forecast does not assume any changes in the macro and travel market 

Q&A

  • China outbound
    • Continues to be a market they view as great opportunity, favorable demographics
    • China economy slowing down, but still very attractive for them in the immediate term
    • China exposure through Ctrip partnership (PLCN int’l inventory shown to Ctrip travlers), and booking.com & Agoda directly (China outbound)
  • Alternative accommodation
    • Inventory of dynamically bookable listings should fuel future growth
    • Distribution network also key to driving future growth
    • Network and ability to market these properties is highly competitive    
  • Cancellation trends – all factored into their guidance
    • Cancellations were up slightly in the quarter and there was more volatility but within expectation and have factored it into their guidance
  • Brand spend –
    • Expected seasonally higher brand spend in 2Q but it came in slightly below their forecast, should continue to see similar level of spend in the US for 3Q.
  • Geo Segment Trends:
    • Europe continuing to grow solidly, but at slower rates given the size of its market and law of large numbers.
    • US growing faster than their consolidated growth rate   
  • Bookings for alternative accommodation? Will not provide that number
  • Markets stricter on alternative acoomm giving the hotels any lift? No not that they can see
  • Would look to work with FB more, have had success with them early on.  Would look to add more performance oriented placements
  • Corporate bookings roughly 1/5 bookings, trends?
    • Opportunity to grow in the future but difficult to suggest how the share of overall bookings will shake out
    • Business transient is only 30% of room nights to begin with (in the US)
    • Unlikely that the share of bookings shifts to 50/50
  • Kayak FB messenger service – fairly new product but the opportunity is big
  • Environment with Hotels pushing direct bookings
    • Don’t expect hotels to go too far given that they need to charge higher ADRs, if they did push lower rates, PCLN is more than appropriately positioned for that kind of environment
  • Lodging cycle impact on when hotels need to lean in on OTAs?
    • They feel they should always be leaning on the OTAs but naturally towards the end of the cycle the hotels would be more reliant
    • If occupancy drops then hotels would be more inclined to use the OTA product
      • GLL note: Occupancy is currently flat to negative on YoY basis in the US)
  • What does the TAM look like for new hotel room additions?
    • “There still is opportunity in the hotel space as well. So in some, substantial opportunity to continue to increase the size of the platform, although diminishing return in terms of the number of rooms available per property.”
    • Typical average size of the new properties they are bringing on is smaller since they are mostly dealing with alternative accommodation and smaller hotels   
  • Vacation Rental (VR)
    •  feel they have the superior product, one day people will shop for VR like they do for hotels
    • They like their scale and offerings – feel they are positioned for this inevitable transition in the VR business
  • Travel Trends
    • Spain and Portugal performing very well.  Ireland and Germany also doing well.
    • Turkey, France, Belgium doing poorly – naturally as a result of recent events
    • Nothing they can see from their side that would suggest corporations are pulling back on overall travel 
  • CEO search continues – right in the middle of it 

 

Let us know if you have any questions or would like to discuss in more detail. 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet   

Todd Jordan
Managing Director


@HedgeyeSnakeye