Booking Holdings Inc. (then The Priceline Group Inc.) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016, compared with the corresponding 2015 periods. The filing presents unaudited consolidated results for Booking.com, priceline.com, KAYAK, Agoda, Rentalcars.com, OpenTable and other subsidiaries.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2.556 billion | $2.280 billion | $4.704 billion | $4.121 billion |
| Gross profit | $2.430 billion | $2.093 billion | $4.449 billion | $3.765 billion |
| Operating income | $732 million | $678 million | $1.283 billion | $1.112 billion |
| Net income | $581 million | $517 million | $955 million | $850 million |
| Diluted EPS | $11.60 | $9.94 | $19.06 | $16.27 |
- Q2 revenue grew 12.1%, gross profit 16.1%, operating income 8.0%, and net income 12.3%. Six-month growth was 14.1%, 18.2%, 15.3%, and 12.3%, respectively.
- Gross margin was 95.1% in Q2 versus 91.8% a year earlier; six-month gross margin was 94.6% versus 91.4%. Operating margin was 28.7% in Q2 versus 29.7%; for the six months it was 27.3% versus 27.0%.
- Six-month operating cash flow was $1.310 billion, up from $911 million. Investing cash outflow was $639 million and financing cash inflow was $541 million. Cash and cash equivalents ended June at $2.694 billion.
- Cash, cash equivalents and short- and long-term investments totaled about $12.3 billion; approximately $10.7 billion was held outside the United States and intended for international reinvestment. Current assets were $5.914 billion and current liabilities $2.210 billion.
- Long-term debt carrying value was $7.255 billion, versus $6.158 billion at year-end 2015. The company issued $1.0 billion of 3.6% senior notes due 2026; its $2.0 billion revolving credit facility had no borrowings outstanding.
Material changes and operating trends
- Accommodation room nights rose 24.4% in Q2 and 27.4% for the six months; total gross bookings increased 19.4% and 20.1%, respectively. Rental-car days grew, while airline-ticket reservations declined.
- Agency revenue increased 17.1% in Q2; merchant revenue declined 5.2%, largely reflecting reduced priceline.com Name Your Own Price activity. Advertising and other revenue grew 21.6%.
- Performance advertising increased 21.4% in Q2 and 22.2% for the six months. Management cited continued investment in growth and a long-term trend of declining returns on performance advertising.
- The U.S. dollar’s strength weighed on reported results. International gross profit grew 17.5% in Q2 and 20.1% for the six months, compared with constant-currency growth of approximately 19% and 24%.
- Q2 results were affected by Easter falling in Q1 in 2016 rather than Q2 in 2015; management estimated about $40 million of gross profit shifted into Q1. The 2015 six-month comparison also included a $16.4 million travel-tax accrual reversal.
Outlook, risks and unusual items
- No numerical forward guidance is provided. Management expected accommodation growth rates to decelerate as the business grows, while continuing investment in marketing, technology, personnel, accommodation supply and international expansion could pressure margins.
- The company recorded $63.2 million of cost-method investment impairments for the six months, including a $50 million Hotel Urbano impairment in Q1, a further $10 million write-off in Q2, and approximately $3 million for another private-company investment. Q2 impairment expense was $12.9 million.
- Key risks include foreign-exchange volatility and Brexit uncertainty; intense competition from online travel companies, search and metasearch platforms, and accommodation providers; rising customer-acquisition costs; and potential changes to mobile, privacy, tax and competition regulation.
- Booking.com’s rate-parity practices faced regulatory scrutiny. Germany prohibited its narrow parity clauses and Booking.com appealed; legislation in France and expected legislation in Italy also created uncertainty. Potential outcomes include contract changes, fines or other actions.
- French tax authorities assessed Booking.com approximately €356 million for asserted unpaid taxes, penalties and interest for 2003–2012; the company said it would contest the assessment. Approximately 30 U.S. travel-transaction-tax cases were pending, with a $27 million accrual; management said excess reasonably possible losses could not be estimated.
- Other disclosed contingencies include IBM patent litigation and an Italian tax inquiry. Management stated there were no off-balance-sheet arrangements expected to affect the company materially.
- Management noted OpenTable’s investment and platform work had taken longer than expected, anticipated platform development needed for global expansion to be completed by year-end 2016, and warned unsuccessful investment could lead to goodwill impairment. The filing also identifies Jeffery H. Boyd as interim CEO and reports Darren R. Huston’s separation.
Investor verification points
- Track constant-currency growth, accommodation room-night trends and the mix of agency versus merchant bookings.
- Assess whether performance-advertising growth and mobile/customer-acquisition costs are translating into sustainable gross-profit and operating-income growth.
- Review the value and volatility of the large investment portfolio, particularly Ctrip securities, and monitor further private-investment impairments.
- Evaluate debt growth, repurchases and the availability and tax implications of substantial offshore liquidity.
- Follow developments in the French tax assessment, U.S. travel-tax litigation, rate-parity regulation, and OpenTable’s expansion and impairment assumptions.