Booking Holdings Inc. (then The Priceline Group Inc.) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; comparisons are year over year. Figures are in U.S. dollars unless noted.
Business context
The company operates Booking.com, priceline.com, KAYAK, agoda.com, rentalcars.com and OpenTable. International accommodation reservations remain the primary business driver. OpenTable was acquired in July 2014, affecting year-over-year comparisons.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2.280B | $2.124B | $4.121B | $3.765B |
| Gross profit | $2.093B | $1.883B | $3.765B | $3.289B |
| Operating income | $678M | $733M | $1.112B | $1.172B |
| Net income | $517M | $576M | $850M | $908M |
| Diluted EPS | $9.94 | $10.89 | $16.27 | $17.12 |
- Q2 revenue rose 7.4%, but operating income fell 7.5% and net income fell 10.3%. Gross margin increased to 91.8% from 88.7%; operating margin declined to about 29.7% from 34.5%.
- Six-month revenue grew 9.4% and gross profit 14.5%, while operating income declined 5.1% and net income 6.3%.
- Q2 agency revenue increased 7.3%; merchant revenue declined 3.7%; advertising and other revenue rose 85.8%, including $62M of OpenTable revenue. Lower Name Your Own Price activity contributed to the merchant revenue decline.
- Gross bookings increased 10.5% in Q2 and 11.3% for the half; management said growth was about 26% on a constant-currency basis. Q2 room nights grew 26.2% and rental-car days 20.1%.
- Online advertising expense rose 20.5% in Q2 to $771M and was 36.8% of gross profit, versus 34.0%. Management cited lower advertising returns on investment as a pressure.
Cash flow, liquidity and capital
- Six-month operating cash flow was $911M, compared with $867M. Capital expenditures were $84M; operating cash flow less capital expenditures was approximately $827M.
- Cash and cash equivalents were $1.889B at June 30, down from $3.149B at year-end. Cash, cash equivalents and short- and long-term investments totaled $9.583B; approximately $7.7B was held outside the U.S. and intended for reinvestment abroad.
- Long-term debt carrying value was $5.400B, versus $3.850B at year-end; principal outstanding was approximately $5.7B. The company issued $1.5B equivalent of senior notes in March and established a $2.0B five-year revolving facility, with no borrowings outstanding at quarter-end.
- Six-month financing cash flow included $987M of share repurchases and $1.620B of debt issuance proceeds. The company repurchased 917,890 shares during the half and reported $1.9B remaining under its authorization at June 30.
Changes, outlook and material items
- Revenue growth was substantially outpaced by increases in personnel, advertising and depreciation and amortization expenses. Operating expenses increased 23.0% in Q2; personnel expense rose 30.3% and depreciation and amortization 68.0%.
- A stronger U.S. dollar materially reduced reported international growth: international gross profit grew about 26% in constant currency but 8.3% as reported for Q2. Management said currency headwinds were expected to continue through the remainder of 2015.
- Management expected margin pressure from growth investments to continue during the remainder of 2015, though to a lesser extent in the second half. It expected OpenTable profitability to decline year over year as it invested for growth. No specific consolidated revenue or earnings guidance was provided.
- A favorable Hawaii court ruling led to a $16.4M first-quarter reversal of previously accrued travel transaction taxes, reducing cost of revenues. The travel-tax accrual was approximately $33M at June 30, compared with $52M at year-end.
- Competition authorities accepted Booking.com commitments in France, Italy and Sweden; the company voluntarily extended them across the European Economic Area and Switzerland effective July 1. France’s Macron Law, passed July 10 and then under constitutional review, could prohibit even the narrower parity terms. Outcomes and business effects remained uncertain.
- Other notable exposures include approximately 40 U.S. travel-tax lawsuits, a French tax audit with a potentially significant assessment, and IBM patent litigation seeking unspecified damages. The company said it could not reasonably estimate any reasonably possible loss above recorded accruals for the travel-tax matters.
Key investor verification points
- Assess whether constant-currency booking and gross-profit growth can translate into reported growth if foreign-exchange headwinds persist.
- Track advertising efficiency, expense growth and operating margins, especially as growth investments and OpenTable costs continue.
- Monitor the commercial and regulatory effects of rate-parity commitments, the French law and remaining European investigations.
- Review outcomes and potential cash impacts from travel-tax litigation, the French tax audit and IBM’s patent claims.
- Verify debt, repurchase pace and the liquidity available in practice, including the location and intended use of substantial international cash and investments.