Business context and reporting period
The Priceline Group Inc. (now Booking Holdings Inc.) filed this Form 10-K for the fiscal year ended December 31, 2014. It operated Booking.com, priceline.com, Agoda, Rentalcars.com, KAYAK and, from July 24, 2014, OpenTable. Results are annual unless identified as fourth-quarter; the filing is not a standalone Q4 report. International operations generated approximately 87% of gross bookings and 94% of operating income.
Key financial metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $8.442 billion | $6.793 billion | +24.3% |
| Gross profit | $7.584 billion | $5.716 billion | +32.7% |
| Gross margin | 89.8% | 84.1% | +5.7 percentage points |
| Operating income | $3.073 billion | $2.412 billion | +27.4% |
| Net income | $2.422 billion | $1.893 billion | +28.0% |
| Diluted EPS | $45.67 | $36.11 | +26.5% |
| Operating cash flow | $2.914 billion | $2.301 billion | +26.6% |
| Cash, cash equivalents and investments | $8.0 billion | — | — |
| Debt principal outstanding | $4.2 billion | — | — |
Revenue growth was led by agency revenue, up 32.5%; merchant revenue declined 1.1%, while advertising and other revenue rose 139.6%, partly reflecting acquired businesses. Gross margin improvement primarily reflected a smaller share of gross-reported Name Your Own Price sales. Annual operating margin was approximately 36.4%, versus 35.5% in 2013.
Fourth-quarter results
Q4 2014 revenue was $1.840 billion, gross profit $1.675 billion and net income $451.8 million; diluted EPS was $8.56. Compared with Q4 2013, these increased approximately 19.4%, 25.6%, 19.5% and 19.9%, respectively. The filing does not provide clear quarterly cash-flow, debt or liquidity figures.
Material changes versus prior period
- Gross bookings increased 28.4% to $50.3 billion; accommodation room nights rose 27.9% to 346.0 million, rental-car days rose 18.1% to 51.8 million, and airline tickets rose 12.0% to 7.8 million.
- Room-night growth decelerated to 28% in 2014 from 37% in 2013, 40% in 2012 and 53% in 2011. Management expected growth rates to continue to decelerate as the business scaled.
- OpenTable was acquired for approximately $2.5 billion ($2.4 billion net of cash acquired). The acquisition contributed $100.6 million of revenue from its acquisition date. Goodwill and intangible assets increased substantially.
- Online advertising expense rose 31.2% to $2.360 billion; offline advertising rose 81.5% to $231.3 million. Personnel expense increased 36.0% and depreciation and amortization 76.2%.
- Foreign-exchange translation reduced reported international growth: Q4 international gross profit grew approximately 32% in local currency but 24.2% in U.S. dollars. A stronger dollar was expected to materially weigh on reported 2015 gross bookings growth.
Liquidity, debt and capital allocation
Cash, cash equivalents and investments totaled approximately $8.0 billion at year-end, of which $6.9 billion was held outside the United States and intended for reinvestment abroad. The $1.0 billion revolving credit facility had no borrowings outstanding at year-end. Debt principal was $4.2 billion, including $1.0 billion of 0.9% convertible notes due 2021 and €1.0 billion of 2.375% senior notes due 2024. The company repurchased $750.4 million of shares during 2014 and authorized an additional $3.0 billion repurchase program in February 2015. Management said available cash and liquid resources were sufficient for operating needs, capital expenditures and obligations for at least the next 12 months.
Outlook, risks and unusual items
- Management anticipated continued accommodation growth but deceleration, and warned that currency movements would significantly reduce reported 2015 growth. No specific 2015 revenue or earnings guidance was provided in the supplied filing text.
- Management planned to invest in OpenTable’s international expansion and customer and restaurant offerings, and expected OpenTable profitability to decline year over year in 2015 as a result.
- Principal risks include intense competition and rising customer-acquisition costs; reliance on online search and advertising channels; mobile economics and execution; foreign-exchange volatility; travel-demand and macroeconomic shocks; supplier access; cybersecurity and service disruptions; and execution and impairment risk related to acquisitions.
- Booking.com faced competition-authority reviews of rate-parity provisions in several countries. The U.K. commitments were vacated and remanded for reconsideration; proposed narrower parity commitments in France, Italy and Sweden remained subject to review.
- Approximately 40 U.S. travel-transaction-tax lawsuits and tax proceedings were disclosed, with an accrual of approximately $52 million at year-end. The company could not reasonably estimate potential losses above the accrual. A French tax audit was also expected to produce a preliminary response in the first half of 2015.
- IBM sued the company and certain subsidiaries in February 2015, alleging patent infringement and seeking unspecified damages and other relief; the company said it would contest the claims.
- The $500 million Ctrip convertible note and $421.9 million Ctrip equity investment recorded unrealized losses of $74.0 million and $86.6 million, respectively, at year-end. The filing also reported a $157.3 million after-tax unrealized loss on marketable securities in other comprehensive income.
- The 1.25% convertible notes due March 2015 were convertible at holders’ option; principal was payable in cash. The filing reported effective disclosure controls and an unqualified audit opinion on the financial statements.
Important facts for investors to verify
- How much of reported growth and margin expansion reflects underlying booking activity versus acquisition timing, revenue presentation mix and foreign exchange?
- Whether room-night growth and advertising returns can be sustained as growth decelerates and paid marketing expense remains substantial.
- OpenTable’s progress against its expansion plan, its profitability trajectory and the carrying value of acquired goodwill and intangibles.
- Developments in travel-tax litigation, competition investigations and the French tax audit, including any amounts ultimately payable beyond recorded accruals.
- Debt maturities, cash available in the United States versus abroad, repatriation-tax exposure, and the funding and pace of the new repurchase authorization.
- Reported and local-currency performance, given the filing’s warning that currency translation could materially affect 2015 results.