Booking Holdings Inc. — 2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; the company also provides unaudited quarterly data, including Q4. Booking Holdings operates Booking.com, KAYAK, priceline, agoda, Rentalcars.com and OpenTable. Approximately 89% of 2018 revenue came from its international business, and accommodation reservations generated most revenue. The company adopted ASC 606 in 2018, changing revenue recognition timing and presentation; annual 2018 revenue is therefore compared below with 2017 gross profit where appropriate.
Key financial metrics
| Metric | 2018 | Prior comparable period |
|---|---|---|
| Annual revenue | $14.527 billion | 2017 gross profit: $12.439 billion |
| Operating income | $5.341 billion | $4.538 billion in 2017 |
| Net income | $3.998 billion | $2.341 billion in 2017 |
| Diluted EPS | $83.26 | $46.86 in 2017 |
| Operating cash flow | $5.338 billion | $4.662 billion in 2017 |
| Cash and cash equivalents | $2.624 billion | $2.542 billion at year-end 2017 |
| Debt principal outstanding | $8.787 billion | Approximately $9.7 billion at year-end 2017 |
Annual revenue increased 16.8% versus 2017 gross profit (approximately 16% on a constant-currency basis); the measures are not fully comparable because of the accounting change. Operating margin was approximately 36.8% and net margin approximately 27.5%, calculated from reported 2018 revenue. Net income included a $367 million unrealized loss on marketable equity securities, mostly related to Ctrip, following a change in accounting treatment. The 2018 effective tax rate was 17.3%, versus 46.8% in 2017, which included a substantial one-time U.S. transition tax.
Q4 2018: Revenue was $3.213 billion, net income was $646 million, and diluted EPS was $13.86. Q4 2017 revenue was $2.803 billion and net loss was $555 million; the 2017 quarter included the Tax Act transition-tax charge, so the earnings comparison is substantially affected by that item.
Gross bookings rose 14.2% to $92.731 billion, with accommodation room nights up 12.9% to 760 million. Merchant gross bookings increased 63.2%, reflecting Booking.com’s expansion of merchant transactions. Total revenues as a percentage of gross bookings were 15.7%, compared with 15.3% for 2017 gross profit as a percentage of bookings; definitions and accounting presentation differ.
Operating cash flow increased to $5.338 billion. Investing activities provided $2.215 billion, principally reflecting net investment sales; financing activities used $7.431 billion, primarily $5.971 billion for share repurchases and $1.487 billion for convertible-note payments. The company reported approximately $14.0 billion of cash, cash equivalents and marketable securities, including about $6.4 billion held by international subsidiaries, and said available liquidity should fund operations and obligations for at least 12 months. The $2.0 billion revolving credit facility had no borrowings at year-end; $5 million of letters of credit were outstanding.
Material changes and management commentary
- Booking.com properties grew to approximately 2.18 million from 1.586 million a year earlier, mainly through growth in homes, apartments and other alternative accommodations.
- Performance marketing expense was $4.447 billion, up 6.9%; brand marketing was $509 million, up 17.2%. Management said it pursued improved marketing returns on investment, which can constrain growth while supporting efficiency. The company expects marketing expenses to continue increasing and anticipates deceleration in accommodation growth rates as the business scales.
- Sales and other expenses rose 60.4% to $830 million, primarily with higher merchant transaction volumes, chargebacks and bad-debt expense. Personnel expense rose 23.1% to $2.042 billion, reflecting compensation and headcount growth.
- FareHarbor and HotelsCombined were acquired in 2018. The company also invested $500 million in Didi Chuxing and $200 million in Grab. It repurchased $6.012 billion of shares during the year and had $4.5 billion of authorization remaining at year-end. It has not paid cash dividends and does not expect to do so in the foreseeable future.
- Seasonality remains significant: the third quarter is typically the most profitable. Management reported a contraction in the booking window during 2018 and noted that Easter timing may weigh on Q1 2019 year-over-year growth and benefit Q2.
Risks, contingencies and unusual items
- Key business risks include intense competition—particularly from Google and other large platforms—dependence on paid search and other marketing channels, travel-demand shocks, foreign-exchange movements, and the possibility that alternative accommodations carry lower margins or face tighter regulation.
- In January 2019, the company paid French tax assessments of €356 million to preserve its right to contest them; it disputes the claim and had not recorded a liability for the assessments. A separate French audit covers 2013–2015. Italian authorities assessed approximately €48 million for 2013, and Turkish tax assessments total approximately €71 million; the company contests these matters and had not recorded liabilities for the cited assessments.
- The company accrued approximately $46 million for prior-period travel transaction taxes at a subsidiary and estimated up to $20 million of reasonably possible additional loss. It also faces competition and consumer-protection scrutiny. In January 2019, Booking.com, agoda and KAYAK signed commitments with the U.K. CMA concerning price presentation, search-result information and discount/availability claims.
- Booking.com’s service to Turkish residents remained suspended under a 2017 court order, which management said continued to harm growth and results. The Dutch Innovation Box tax benefit reduced 2018 income-tax expense by $435 million; losing or reducing the benefit could raise the effective tax rate materially.
- Management identified no goodwill impairment in 2018; OpenTable’s estimated fair value exceeded carrying value by approximately 13% at the annual test. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile 2018 revenue and earnings comparisons with 2017, considering ASC 606’s timing and gross-to-net presentation changes and the exceptional 2017 Tax Act expense.
- Review the status and potential cash or earnings effects of the French, Italian, Turkish and other tax matters, including the French payment and the additional French audit.
- Assess whether booking growth and marketing returns can be sustained as growth rates decelerate, paid-channel economics change and merchant processing costs rise.
- Monitor debt maturities, planned buybacks, liquidity and the valuation volatility of Ctrip and other investments; no formal numerical earnings guidance is provided in this filing.