Booking Holdings Inc. (then priceline.com Incorporated) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited consolidated results, compared with Q1 2011. The filing was signed May 9, 2012. Unless otherwise noted, amounts below are in U.S. dollars.
Business context
The company operated Booking.com, priceline.com, Agoda.com and rentalcars.com. International operations—principally Booking.com—were the main growth engine. The company reported that international business generated about 78% of 2011 gross bookings and 88% of 2011 operating income. Its revenue mix includes merchant transactions reported partly on a gross basis and agency transactions generally reported net; management emphasized gross profit as a useful growth measure.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $1,037.2 million | $809.3 million | +28.2% |
| Gross profit | $743.3 million | $505.8 million | +47.0% |
| Gross margin | 71.7% | 62.5% | +9.2 percentage points |
| Operating income | $241.5 million | $154.1 million | +56.8% |
| Net income | $181.8 million | $104.0 million | +74.8% |
| Net income applicable to common stockholders | $182.0 million | $104.8 million | +73.6% |
| Diluted EPS | $3.54 | $2.05 | +72.7% |
| Operating cash flow | $182.4 million | $276.2 million | -34.0% |
Operating margin was approximately 23.3%, versus 19.0%; net margin was approximately 17.5%, versus 12.9%. The effective tax rate declined to 20.6% from 26.1%, primarily reflecting lower foreign tax rates and the Dutch Innovation Box tax benefit.
Gross bookings rose 43.9% to $6.712 billion: international bookings increased 54.2% and domestic bookings 11.7%. Hotel room nights rose 47.0% to 45.9 million; rental car days rose 40.6% to 6.9 million; airline tickets rose 4.9% to 1.6 million. Agency revenue grew 53.0%, while merchant revenue grew 9.1%, reflecting the faster-growing agency mix and lower Name Your Own Price activity.
Liquidity, debt and capital allocation
At March 31, 2012, cash and cash equivalents were $1.192 billion and short-term investments were $2.427 billion, totaling approximately $3.619 billion. The company reported $1.575 billion principal amount of convertible notes: $575 million of 1.25% notes due 2015 and $1.0 billion of 1.0% notes due 2018. The balance-sheet carrying value was $1.370 billion after debt discounts. The $1.0 billion revolving credit facility was undrawn; approximately $1.9 million of letters of credit were outstanding. About $1.7 billion of cash and investments were held internationally and intended for permanent reinvestment.
Q1 operating cash flow was lower year over year despite higher earnings, chiefly due to working-capital movements, including a $165.6 million Booking.com income-tax prepayment. Investing cash flow was an outflow of $371.5 million, including net purchases of investments; financing cash flow was an inflow of $730.5 million, principally from the new notes. The company repurchased $254.2 million of shares during the quarter and had $459.2 million of remaining repurchase authorization.
Material changes, outlook and management commentary
- Revenue mix shifted toward net-reported agency and price-disclosed transactions, lifting gross margin. International gross profit increased to $616.6 million from $388.2 million; management said growth was about 65% in local currency.
- Online advertising rose 49.7% to $277.1 million. Management expected advertising expense to continue increasing as international operations grow and rely heavily on paid traffic.
- Management expected hotel room-night growth to decelerate through 2012 and beyond, following Q1 deceleration versus Q4 2011. It also cited transaction and cancellation volatility and weaker hotel ADR trends in parts of southern Europe. No specific quarterly or full-year revenue or earnings guidance was provided.
- Management expected higher future capital expenditures to support growth, including data centers and offices. It described typical seasonality, with profitability often strongest in Q2 and Q3 for North American and European operations.
- The 2012 Innovation Box benefit was estimated to reduce the consolidated effective tax rate by approximately 4–6 percentage points versus a scenario without the benefit. Continued eligibility depends on Dutch approvals and applicable tax rules.
Risks, contingencies and unusual items
- Hotel occupancy and related tax disputes included approximately 40 lawsuits and numerous audits or inquiries. The company accrued about $33 million, but could not reasonably estimate any additional reasonably possible loss. Management warned adverse outcomes could materially affect results or cash flow; the San Antonio case had an adverse jury finding, with final judgment and appeal still pending.
- The U.K. Office of Fair Trading investigation into hotel online booking practices remained ongoing; the company said it could not predict the outcome or impact.
- Competition from search engines, hotel-owned channels, metasearch and discount offerings; dependence on search traffic; rising paid-acquisition costs; and mobile execution were identified as business risks. The U.S. Name Your Own Price hotel service had a modest reservation decline, and Name Your Own Price airline bookings fell significantly amid limited discounted capacity.
- Foreign exchange exposure remained significant. The company reported a 10% hypothetical strengthening of relevant foreign exchange rates could produce an approximately $119 million derivative liability on its net-investment hedges. A 100-basis-point increase in interest rates was estimated to reduce investment fair values by about $11 million, unrealized unless sold before maturity.
- Q1 included a roughly $3 million charge for vacated leased space related to Booking.com’s Amsterdam headquarters relocation, and a $52.2 million non-cash fair-value increase in redeemable noncontrolling interests. The latter contributed to the increase in that balance-sheet item to $183.3 million.
Investor verification priorities
- Confirm the durability of international booking growth, especially hotel room nights, and track the expected deceleration and southern European trends.
- Assess whether gross-profit growth can continue to outpace online advertising and other operating-cost growth.
- Reconcile operating cash flow with earnings, particularly the tax prepayment and working-capital timing, and monitor cash availability by geography.
- Review the convertible notes’ terms, potential dilution and cash settlement obligations, alongside continued share repurchases.
- Track hotel-tax litigation and the adequacy of the $33 million accrual, as well as developments in the OFT inquiry and Innovation Box eligibility.