Priceline Group reported its second quarter earnings this morning, US time.
The topline: Looking at the first half of the year, the online travel giant reported total revenue of $3.76 billion, jumping 26% from the first half of 2013 -- as hotel and car bookings rose.
Nice margins, but lowering expectations: Even as its revenue has grown rapidly, Priceline’s operating margin has increased steadily to 35.6% so far this year -- steadily upward from 10% in 2007. Yet the company issued guidance for the third quarter that was lower than analyst expectations, suggesting some mild headwinds ahead.
Notable numbers: Advertising costs – primarily for online ads – remained at 38.6%, the same as a year earlier. Ad costs seem to be hovering at a new plateau, having drifted upward since the economic recovery in 2011, when ad costs were only 31.1% of gross profit.
Continued ad spend: The company says it will keep its pedal on the floor when it comes to US and Europe advertising for Booking.com, which it bought in 2005.
The context: Overall Priceline still relies heavily on search and traditional TV marketing to drive sales -- two demand-generation methods whose effectiveness are threatened by long-term trends. The company plans to push users to sign up via accounts to establish a relationship and encourage more repeat, direct business.
Mobile growth: More of Priceline Group's customers who arrive via mobile bookings arrive directly than do so through other channels, a behavior that reduces the company’s marketing costs. But the company doesn’t talk specifically about the percentage of its business done on mobile or the percentage that comes direct through all channels.
Referral trends: Executives on a conference call said metasearch has been less strong in contributing to growth and demand in recent months, with click-per-commission (CPC) ads showing the greatest weakness, as Google struggles with users switching from desktop to mobile devices.
Fun facts: While it is technically a US company, more than 86% of Priceline Group's gross bookings came from overseas markets in the first six months of 2014 through sites such as Booking.com and Agoda. Yet Priceline Group's fastest growing market is domestic travelers touring within the US in leisure travel, say executives.
Kayak update: Kayak, one of Priceline's recently acquired companies, is on track to become the largest travel websites outside the United States, according to the company. Ad spending in Europe has focused on air bookings. Huston says he often teases Kayak chief Steve Hafner about how Priceline's brands, especially Booking.com and Agoda, could be better represented on the metasearch site, but says there's a Chinese wall separating the business decisions.
Chinese takeout: Saying it's still too early to talk details, executives on the call offered little purview into their plans around an investment in Shanghai-based online travel company Ctrip.com. The deal will effectively give it 10% ownership of the Chinese portal. Asia accounts for the smallest portion of Priceline's revenue, at 12%. The Ctrip affiliate relationship drives much of that.
What wasn't on the menu: Priceline is expanding its international presence. But executives on the call said little about the purchase of OpenTable for $2.6 billion in cash -- a deal that closed July 24. It remains unclear when Priceline brands will start making available access to OpenTable’s agreements with more than 23,000 American restaurants or how much money it will pour into the brand. They did say that through the autumn it will work on translations of the listings to assist the international expansion. Co-marketing and co-promoting the OpenTable app is also expected to happen in the third quarter, too.
Buuteeq acquisition update: CEO Darren Huston said on the call that:
"On the direct hotel marketing front, before we acquired Buuteeq and HotelNinjas, we had products we were selling B2B as white-label marketing tools, such as Agoda's booking button, which allowed a hotel to add booking functionality to their site at no cost.
Now we're looking at cloud-based solutions, warming up those existing relationships and adding more, and there will be more to report on that in the coming months and quarters."
Expect more from vacation rentals: The company plans to get even deeper into selling apartment rentals and self-catered properties. Said Huston:
Villas.com, its one brand, is just one of many tactics we're taking to prove out various options for being successful in vacation rentals, part of a broader set of actions.
The investor's view: In the second quarter Priceline reported $10.89 earnings per share, up from $8.39 a share a year earlier -- besting the expectations of analysts surveyed by FactSet, who expected $10.46 a share.
Priceline trades around $1,280 -- above its 1999 high of $975, back when it was a high-flier in the first Internet boom -- but down from its all-time record of $1,370.43.