Priceline.com Incorporated (now Booking Holdings Inc.) — Q2 2010 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2010; statements are unaudited. Priceline operated domestic and international online travel services, including Booking.com, Agoda and, following its May acquisition, TravelJigsaw. International hotel reservations were the principal growth and profit driver.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $767.4m (+27.1%) | $603.7m | $1,351.8m (+26.8%) | $1,065.8m |
| Gross profit / margin | $445.3m / 58.0% | $305.2m / 50.6% | $764.4m / 56.5% | $513.6m / 48.2% |
| Operating income | $173.2m (+58.3%); 22.6% margin | $109.4m; 18.1% margin | $261.1m (+71.5%); 19.3% margin | $152.2m; 14.3% margin |
| Net income applicable to common stockholders | $115.0m; diluted EPS $2.26 | $67.0m; diluted EPS $1.38 | $168.8m; diluted EPS $3.31 | $92.0m; diluted EPS $1.92 |
| Operating cash flow | Six-month period: $292.0m | Prior six-month period: $168.2m |
Q2 gross bookings rose 43.3% to $3.41bn; hotel room nights increased 48.2%. International gross bookings grew 59.5% (about 67.1% in local currency), while domestic gross bookings grew 19.6%. Agency revenue increased 55.3% in Q2, mainly with Booking.com growth; merchant revenue rose 13.7%. Gross margin benefited from a greater mix of retail, price-disclosed transactions reported net of supplier costs. Online advertising expense increased 47.1% in Q2 to $132.5m; total operating expenses rose 38.9%.
Financial position, cash flow and material changes
- At June 30, cash and cash equivalents were $356.0m and short-term investments were $864.2m, totaling approximately $1.22bn. About $0.5bn of cash and short-term investments was held by international subsidiaries.
- Total assets were $2.45bn versus $1.83bn at December 31, 2009. Stockholders’ equity was $1.38bn versus $1.32bn.
- Six-month cash flow: operating activities provided $292.0m; investing activities used $419.6m, including $111.0m for acquisitions and net purchases of investments; financing activities provided $293.0m. Cash ended the period at $356.0m, up $153.9m from year-end.
- In March, Priceline issued $575m of 1.25% convertible notes due 2015. Convertible debt principal was $625.0m at June 30, with a $508.0m carrying value; approximately $50m principal of older notes was classified as current because conversion thresholds had been met. No borrowings were outstanding under the $175m revolving credit facility.
- The company repurchased $125.4m of common stock during the six months and reported $459.2m remaining under repurchase authorizations. A $500m authorization was approved in March.
- TravelJigsaw was acquired for $108.5m net of cash acquired. The acquisition added $105.3m of goodwill and $94.5m of identifiable intangible assets. Agoda contingent consideration of approximately $40m to $60m was anticipated in 2011, subject to performance targets.
Outlook, management commentary and risks
- No numerical revenue or earnings guidance was provided. Management expected hotel-room-night growth to decelerate through the second half of 2010, with tougher comparisons and less favorable prior-year promotional pricing. The April Icelandic volcanic eruption also disrupted travel.
- Management believed cash and liquid resources would fund operations, capital expenditures and other obligations for at least the next 12 months. This assessment depends on cash generation and access to financing if needed.
- Risks included weak travel demand and recession, intensifying competition and higher online customer-acquisition costs, reliance on search engines and third-party traffic, supplier concentration and capacity constraints, and volatility in the euro and pound. The U.S. dollar strengthened against the euro from about $1.43 at year-end 2009 to $1.22 at June 30, weighing on translated results if exchange rates persisted.
- Hotel occupancy and related tax disputes remained a significant contingency. The company had approximately 50 lawsuits and numerous audits or inquiries; a San Antonio jury had found against the company, with penalties and other amounts still unresolved. A $23m reserve was recorded, but ultimate exposure could be materially higher or lower. Atlanta also ordered prospective tax collection and remittance under its merchant model; the company said it would comply while assessing appeal options.
- Other unusual items included $8.1m of six-month losses on debt conversions and substantial unfavorable currency translation adjustments. Management reported disclosure controls were effective; it planned to review TravelJigsaw’s internal controls following the acquisition.
Important facts for investors to verify
- Whether Booking.com and Agoda booking growth and margins sustain as growth rates decelerate and online advertising costs rise.
- Current status and potential financial exposure of hotel-tax litigation, assessments, and the $23m reserve, including possible customer pricing or margin effects.
- Convertible-note conversion activity, related cash settlement requirements, dilution, and the timing and effectiveness of conversion spread hedges.
- Foreign-exchange exposure and the impact of currency movements on international revenue, earnings, assets, and cash.
- TravelJigsaw integration, acquisition-related costs and assets, and the eventual Agoda contingent consideration payment.