Booking Holdings Inc. quarterly report, Q2 FY2018

Booking Holdings Inc. — Q2 2018 Form 10-Q

Reporting period: Three and six months ended June 30, 2018. Booking Holdings operates Booking.com, priceline, KAYAK, agoda.com, Rentalcars.com and OpenTable, with results driven primarily by international online accommodation reservations.

Financial performance

Metric	Q2 2018	Q2 2017	First half 2018	First half 2017
Revenue / comparable gross profit	$3.54 billion	$2.96 billion	$6.47 billion	$5.30 billion
Operating income	$1.22 billion	$893 million	$1.95 billion	$1.45 billion
Net income	$977 million	$720 million	$1.58 billion	$1.18 billion
Diluted EPS	$20.13	$14.39	$32.42	$23.49
Operating margin, approximate	34.5%	30.2%	30.2%	27.4%

Because of the 2018 revenue-standard change, 2018 total revenue is best compared with 2017 gross profit, not the 2017 reported revenue line. On that basis, comparable revenue/gross profit grew 19.6% in Q2 and 22.1% in the first half; constant-currency growth was approximately 16% in both periods. Net income increased about 36% in Q2 and 35% in the first half.

• Bookings: Gross bookings rose 14.9% in Q2 and 17.9% in the first half (approximately 11% and 12% in constant currency). Accommodation room nights increased 12.0% and 12.6%, respectively.
• Cash flow: First-half operating cash flow was $2.29 billion, versus $1.60 billion a year earlier. Investing activities provided $1.76 billion, mainly reflecting net investment sales; financing activities used $3.39 billion, including $1.91 billion of share repurchases and $1.49 billion paid on conversion of notes.
• Liquidity: At June 30, cash and cash equivalents were $3.19 billion; short-term marketable securities were $4.15 billion. Management reported $16.3 billion of cash, cash equivalents and short- and long-term marketable securities.
• Debt: Outstanding debt principal was approximately $8.9 billion; carrying value was approximately $8.7 billion. The $2.0 billion revolving facility had no borrowings outstanding. The $1.0 billion 0.35% convertible notes due 2020 were classified as current because holders could convert at period-end.
• Tax: Effective tax rate was 19.2% in both 2018 periods, up from 16.6% in Q2 2017 and 15.5% in the first half of 2017.

Material changes and unusual items

• Adoption of the new revenue standard moved travel-reservation revenue recognition from check-out to check-in and changed Name Your Own Price revenue from gross to net presentation. The company recorded a $188.5 million cumulative increase to retained earnings on adoption. Management said the timing change was not expected to materially affect annual revenue or net income, but could affect quarterly results.
• Merchant activity expanded rapidly: merchant gross bookings grew 68.6% in Q2 and 71.2% in the first half. Associated sales and other expenses increased 67% and 59.6%, respectively, principally from higher transaction volumes, payment costs, chargebacks and bad-debt expense.
• First-half performance marketing expense increased 5.4%, while personnel expense rose 38.6%, reflecting headcount growth. Management said it pursued improved performance-marketing returns, which may weigh on growth while improving efficiency.
• First-half other income included $76.4 million of unrealized gains on Ctrip equity securities, recognized in earnings under newly adopted accounting guidance. OpenTable’s new points-expiration policy reduced its loyalty-program liability by approximately $27 million and benefited first-half advertising and other revenue.
• The company repurchased 945,693 shares for $1.9 billion in the first half and had $8.6 billion of remaining repurchase authorization at June 30.

Outlook, risks and contingencies

• Management estimated a 2018 effective tax rate of approximately 18%–21%, subject to uncertainty as the company completes its accounting for U.S. tax reform. The remaining transition-tax liability was approximately $1.2 billion, mostly payable over eight years.
• Management expects accommodation growth rates generally to decelerate as the business scales. It also expects continued investment in marketing, technology and personnel, with potential pressure on operating margins. Alternative accommodations and merchant processing can add costs and affect margins.
• The new revenue-recognition timing was estimated to make Q3 2018 revenue about 1% lower and Q4 about 5% higher than under the prior check-out method.
• Key business risks include intense competition (including from Google and alternative-accommodation platforms), dependence on search and marketing channels, currency movements, travel-demand shocks, cybersecurity and privacy regulation, and increasing regulatory scrutiny of pricing and consumer-protection practices.
• Booking.com’s Turkish-resident accommodation offering remained suspended under a court order, which management said continued to hurt growth and results. The Swedish Patent and Market Court ruled in July 2018 that Booking.com must remove narrow price-parity terms from Swedish hotel agreements; the company planned to appeal.
• French authorities assessed approximately €356 million for alleged unpaid taxes and VAT for 2003–2012; the company contests the assessment, and a further audit covers 2013–2015. Italian tax authorities were also reviewing the company’s activities and transfer pricing.
• After quarter-end, the company invested $500 million in Didi Chuxing preferred shares and agreed to acquire hotel meta-search company HotelsCombined for approximately $140 million in cash, subject to closing conditions. It also expected payments under its Netherlands headquarters construction agreement to continue through completion expected in early 2021.

Facts investors should verify

• How much of reported growth reflects underlying booking and revenue performance versus currency, the revenue-standard transition, acquisitions and the OpenTable liability reversal.
• Whether merchant growth can be sustained while controlling payment-processing, chargeback, bad-debt and personnel costs.
• The final U.S. tax-reform accounting and the company’s ability to maintain the Dutch Innovation Box tax benefit.
• Developments in the French and Italian tax matters, European price-parity proceedings, the Turkish restriction and consumer-protection investigations.
• Capital allocation and liquidity after share repurchases, convertible-note settlements, the Didi investment and planned acquisitions and headquarters spending.