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Priceline (Buy, $1,920 PO) Stock view: Expect solid 1Q top-line, but 2Q can be rough for guidance Priceline’s metric trends and commentary, along with 1Q booking and room night guidance, indicate that the company continues to capture strong market share growth in the category, with little impact from hotel direct booking initiatives or competitive OTA marketing spend. We expect a strong 1Q, with perhaps a little less upside than usual due to the late 4Q reporting date. Looking forward to 2Q, we have our usual caution on guidance as 2Q is the most back- end loaded quarter for bookings and revenues. However, in 2017 the Easter shift is a positive factor and will help 2Q revenues and earnings. We also expect 1Q bookings and room night growth upside to translate into higher 2Q gross profit growth, and management indicated that there is less marketing ROI pressure expected in 1H'17 than in 2H'16. Overall, we expect Priceline’s strong business trends to continue, and would use extra conservatism in guidance as a buying opportunity. Given strong execution and higher exposure to more fragmented International markets, Priceline remains our top long-term idea in Online travel. However, on a near-term basis, we think Expedia could see a bigger stock benefit from an acceleration in room night growth over the summer. Key theme/metric(s) for 1Q: Room night growth We expect Priceline to report 26% y/y room night growth (deceleration v. 31% in 4Q), ahead of the company’s outlook of 20-25% hotel room night growth. Priceline has a history of guiding 1Q conservatively, looking at Priceline’s historical 1Q results for Bookings, revenue and EPS vs guidance suggests modest upside to our bookings growth forecast of 22% and reported 1Q’17 EPS closer to $9.55 (13% upside vs. the midpoint) vs. our estimate of $9.08 and the Street’s estimate $8.75. Table 20: 1Q Bookings Growth, Revenue Growth and EPS Guidance vs. Actuals 1013 1Q14 1015 1Q16 1Q17 Guidance Actual Upside Guidance Actual Upside Guidance Actual Upside Guidance Actual Upside Guidance Actual Upside Bookings 30-37% 36% No 23-33% 34% Yes 29% 12% Yes 12-19% 21% Yes 17-22% 2? International Bookings FX-Neutral 35-42% 43% Yes 25-35% 38% Yes 17-24% 29% Yes NA NA NIA Revenue 17-24% 26% Yes 15-25% 26% Yes 4.11% 12% Yes 9-16% 17% Yes NIA EPS $4.90-$5.30 $5.76 Yes $6.35-$6.85 $7.81 Yes $/.20-7.75 $812 Yes $9.00-9.60 $10.54 Yes | $8.25-8.65 7? Source: BofA Merrill Lynch Global Research estimates, Bloomberg, Priceline Biggest 1Q issues/risks: ¢ Concerns on threat of increasing marketing competition with Expedia and TripAdvisor ¢ Potential pressure on US inbound traffic given the Trump travel ban (unlikely to impact Priceline given high Intl exposure) « Marketing deleverage — our model assumes 340bps of y/y online marketing deleverage in 1Q « Pressure on hotel revenue take rates given less hotel participation in commission programs and longer booking windows Early 1Q RevPAR data mixed Priceline’s Booking.com has roughly 1.2mn properties on its site (>611k hotels and 576k vacation rental properties). According to STR, 1Q US RevPAR through initial March readings decelerated 30bps to 3.0% y/y, and European RevPAR through February accelerated 600bps q/q to 3.6% y/y (FX-neutral). The STR data reflects a continued 32 __Internet/e-Commerce | 06 April 2017 Bankof America <2 Merrill Lynch HOUSE_OVERSIGHT_014918