Business context and reporting period
Priceline.com Incorporated (the registrant in this filing) reported unaudited results for the three and nine months ended September 30, 2011, compared with the same periods in 2010. Its brands included Booking.com, Agoda, priceline.com and TravelJigsaw. International operations generated approximately 78% of nine-month gross bookings and 88% of operating income.
Key financial metrics
Amounts are in millions of U.S. dollars, except per-share data, percentages and operating metrics.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $1,452.8 | $1,001.8 | $3,364.8 | $2,353.6 |
| Gross profit / margin | $1,100.1 / 75.7% | $666.2 / 66.5% | $2,355.2 / 70.0% | $1,430.6 / 60.8% |
| Operating income | $616.4 | $336.8 | $1,095.1 | $597.8 |
| Net income attributable to common stockholders | $469.5 | $223.0 | $830.7 | $391.8 |
| Diluted EPS | $9.17 | $4.41 | $16.23 | $7.70 |
Q3 operating and net margins were approximately 42.4% and 32.3%, respectively, versus 33.6% and 22.3% a year earlier. Nine-month operating and net margins were approximately 32.5% and 24.7%, versus 25.4% and 16.7%. Revenue growth partly reflects the increasing share of agency and other net-reported transactions, so revenue is not directly comparable across transaction mix; management emphasized gross profit as a useful growth measure.
- Bookings: Q3 gross bookings rose 56.2% to $6.26 billion; nine-month gross bookings rose 60.9% to $16.70 billion. Hotel room nights increased 47.4% in Q3 and 52.5% for nine months.
- Cash flow: Nine-month operating cash flow was $1,060.0 million, up from $597.4 million. Investing used $838.2 million and financing used $156.6 million. Ending cash and cash equivalents were $421.2 million.
- Liquidity: Cash, cash equivalents and short-term investments totaled about $2.4 billion at September 30, including approximately $1.4 billion held by foreign subsidiaries that the company intended to reinvest abroad; repatriation could trigger additional U.S. tax.
- Debt: The company had $575 million principal outstanding on 1.25% convertible notes due 2015. Because the notes met a conversion threshold, their $492.2 million carrying value was classified as current and $82.8 million as mezzanine convertible debt. The notes were convertible at holders’ option; principal would be payable in cash if converted.
Material changes versus the prior comparable period
- Q3 revenue increased 45.0%, operating income 83.0%, and net income attributable to common stockholders 110.6%; diluted EPS more than doubled. Nine-month revenue increased 43.0% and common-stockholder net income increased 112.0%.
- Agency revenue grew 73.9% in Q3 and 73.7% for nine months, largely reflecting Booking.com growth. Merchant revenue rose 15.9% and 19.0%, respectively.
- Gross margin expanded as a larger portion of business came from retail, price-disclosed transactions reported net, rather than Name Your Own Price transactions reported gross with associated cost of revenue.
- Online advertising expense rose 62.1% in Q3 and 67.6% for nine months to support growth. General and administrative expense rose 101.6% in Q3, including increased recruiting, travel and office expansion costs.
- Nine-month operating cash flow increased substantially, while net purchases of investments were $700.7 million. Accounts receivable growth of $202.1 million partly offset higher payables and accrued liabilities.
Outlook, management commentary, risks and unusual items
- Management expected year-over-year hotel room-night growth to decelerate further in Q4 2011 and beyond as the business scale increased. It provided no quantified revenue or earnings guidance and cautioned that uncertain conditions made forecasts difficult.
- Management expected online advertising expense to continue increasing through the remainder of 2011. It considered cash and liquid resources sufficient for operating activities, capital expenditures and obligations for at least the next twelve months.
- Key business risks included economic weakness, higher oil prices, foreign-exchange volatility, intense competition (including search engines and rival opaque hotel offers), supplier access and airline distribution changes, and seasonality. The company noted Q3 deceleration in hotel room-night growth versus Q2, and a decline in U.S. Name Your Own Price hotel room nights year over year.
- Hotel occupancy and related tax disputes remained significant: approximately 50 lawsuits and numerous audits or inquiries were described. The company reserved approximately $31 million at quarter-end, versus $26 million at year-end 2010, but stated ultimate exposure could be materially higher or lower and could include penalties, interest and legal costs. A San Antonio ruling found tax due on markups and service fees; the company intended to appeal. The filing also reported a summary judgment for plaintiffs in the Village of Rosemont matter after quarter-end.
- Other contingencies included a U.K. Office of Fair Trading inquiry into hotel online booking practices and an IRS audit initiated in Q3. The filing did not predict the outcomes.
- Unusual items included a $12.5 million reversal of a reserve for uncertain tax benefits in Q2 2011 and a $41.3 million noncash fair-value increase in redeemable noncontrolling interests. Foreign currency translation reduced nine-month comprehensive income by $27.1 million.
- After quarter-end, the company entered into a five-year, unsecured $1 billion revolving credit facility, replacing its $175 million facility; there were no borrowings as of November 7, 2011.
Important facts for investors to verify
- Whether booking growth and gross-profit expansion persist as management anticipates deceleration and as the revenue mix shifts.
- How online advertising costs, customer acquisition efficiency and competition affect margins.
- The outcome and potential financial exposure from hotel-tax litigation, audits and the Rosemont and San Antonio proceedings; assess the adequacy of the $31 million reserve.
- Whether holders convert the 2015 notes and the resulting cash and potential share-settlement requirements.
- The accessibility and tax implications of foreign-held cash, and the company’s exposure to currency movements and tax-rule changes.
- Whether growth, cash generation and liquidity remain adequate amid seasonality, supplier and macroeconomic risks; the filing states it had no material off-balance-sheet arrangements.