Business context and reporting period
Priceline.com Incorporated (the company identified in this 2011 filing; now Booking Holdings Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. Its brands included Booking.com, priceline.com, Agoda and TravelJigsaw. International hotel reservations were the principal growth driver.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Change |
|---|---|---|---|
| Revenue | $1,102.7 million | $767.4 million | +43.7% |
| Gross profit | $749.2 million | $445.3 million | +68.3% |
| Gross margin | 67.9% | 58.0% | +9.9 percentage points |
| Operating income | $324.7 million | $173.2 million | +87.5% |
| Net income applicable to common stockholders | $256.4 million | $115.0 million | +123.0% |
| Diluted EPS | $5.02 | $2.26 | +122.1% |
For the six months ended June 30, revenue was $1,912.0 million versus $1,351.8 million (+41.3%); gross profit was $1,255.0 million versus $764.4 million (+64.2%); operating income was $478.8 million versus $261.1 million; and net income applicable to common stockholders was $361.2 million versus $168.8 million. Diluted EPS was $7.06 versus $3.31.
Q2 agency revenue rose 79.3% to $569.2 million, primarily on Booking.com growth; merchant revenue increased 18.8% to $530.5 million. Gross margin expansion reflected a greater share of price-disclosed transactions recorded net, rather than gross, than Name Your Own Price transactions. Online advertising rose 78.3% to $236.3 million, reaching 31.5% of gross profit versus 29.8% a year earlier.
Six-month operating cash flow was $499.5 million, compared with $292.0 million. Investing used $100.1 million and financing used $155.8 million. Cash and cash equivalents were $611.2 million at June 30; short-term investments were $1,338.2 million. Management reported $1.9 billion in cash, cash equivalents and short-term investments, including about $1.0 billion held internationally that it intended to reinvest abroad.
Convertible notes had $575 million principal outstanding. The notes were classified as current at June 30 because holders could convert after the contingent conversion threshold was met; principal would be paid in cash. The $175 million revolving facility had no borrowings outstanding. The company repurchased $158.7 million of stock in the first half and had $459.2 million of repurchase authorization remaining. Management said available liquidity should fund operations, capital expenditures and obligations for at least 12 months.
Material changes versus the prior comparable period
- Gross bookings grew 69.5% in Q2 to $5.78 billion; international bookings increased 98.2% and domestic bookings 13.4%. Hotel room-night reservations increased 55.6% to 36.1 million.
- International revenue grew about 90% in Q2 and 86% in the first half in reported dollars; local-currency growth was approximately 71% and 74%, respectively. TravelJigsaw contributed to growth following its May 2010 acquisition.
- Q2 operating expenses rose 56.0% to $424.5 million, led by online advertising and growth-related personnel costs, but gross profit grew faster, lifting operating income and margin.
- Six-month cash flow improved alongside earnings and seasonal increases in payables and accrued liabilities; accounts receivable also increased substantially.
- The effective tax rate was 19.1% for Q2 and 21.2% for the first half. A $12.5 million uncertain-tax-position reserve reversal following an audit contributed to the lower rate.
Outlook, management commentary, risks and unusual items
Management reported that year-over-year hotel room-night growth had decelerated in early Q3 compared with Q2 and expected further deceleration through the rest of the quarter, citing a difficult comparison with strong Q3 2010 growth and the company’s scale. It expected online advertising expense to continue increasing during the remainder of 2011 and said it could not assure sustained revenue growth or profitability.
Key risks included competition from online travel companies, search engines and daily-deal services; rising customer acquisition costs and dependence on search traffic; supplier access and airline/GDS changes; foreign-currency movements; travel-demand and geopolitical shocks; and technology, privacy and security risks. Management noted adverse travel-demand effects from Japan’s 2011 earthquake, tsunami and nuclear emergency.
Hotel occupancy and related tax disputes remained material: approximately 50 lawsuits and numerous audits, assessments or inquiries were described. The company recorded a $29 million reserve at June 30, versus $26 million at year-end, but said ultimate exposure could be significantly higher or lower and could not estimate a maximum loss. A San Antonio court had found liability on hotel markups and service fees, with penalties and interest also addressed; the company intended to appeal. The UK Office of Fair Trading was investigating possible hotel online-booking pricing practices; outcome and impact were uncertain.
Other notable items: the company paid $62.6 million in March for contingent Agoda acquisition consideration; the fair-value adjustment to redeemable noncontrolling interests was $33.7 million for the first half; and a 405 million euro net-investment hedge had a $16.4 million liability at quarter-end. The filing also said a hypothetical 10% strengthening of foreign exchange rates relative to the U.S. dollar would have produced an approximately $75 million liability on those hedge contracts.
Important facts for investors to verify
- Whether hotel-night growth and international agency growth continued to decelerate after Q2, and how that affected gross bookings, gross profit and marketing efficiency.
- How much of reported growth reflected currency movements, TravelJigsaw’s inclusion and changes in merchant-versus-agency revenue mix.
- Current status and potential financial exposure of hotel tax litigation, especially the San Antonio matter, and whether the $29 million reserve remains adequate.
- Whether Booking.com maintained eligibility for the Dutch Innovation Box tax treatment; management expected a 2–4 percentage-point reduction in the 2011 effective tax rate from the benefit.
- Conversion, dilution and cash-funding implications of the $575 million convertible notes, along with the availability and use of international cash and repurchase authorization.