The Priceline Group Inc. (now Booking Holdings Inc.) — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. The business operated Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com and OpenTable; international operations generated approximately 88% of consolidated gross profit. Figures below are U.S. dollars.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $10.743 billion | $9.224 billion | +16.5% |
| Gross profit | $10.315 billion | $8.592 billion | +20.1% |
| Gross margin | 96.0% | 93.1% | +2.9 percentage points |
| Operating income | $2.906 billion | $3.259 billion | -10.8% |
| Net income | $2.135 billion | $2.551 billion | -16.3% |
| Diluted EPS | $42.65 | $49.45 | -13.7% |
| Operating cash flow | $3.925 billion | $3.102 billion | +26.5% |
Fourth-quarter revenue was $2.348 billion versus $2.000 billion a year earlier; gross profit was $2.276 billion versus $1.879 billion, and net income was $673.9 million versus $504.3 million. Diluted Q4 EPS was $13.47 versus $10.00.
- Bookings and volume: Gross bookings rose 22.6% to $68.1 billion (approximately 25% constant currency). Room nights increased 28.7% to 556.6 million; rental-car days rose 11.2% to 66.6 million; airline tickets declined 5.2% to 7.3 million.
- Revenue mix: Agency revenue grew 22.3% to $7.982 billion; merchant revenue fell 1.7% to $2.048 billion, mainly as priceline.com Name Your Own Price activity declined; advertising and other revenue grew 16.3% to $712.9 million.
- Margins and costs: Gross profit as a share of gross bookings decreased to 15.1% from 15.5%, reflecting booking-to-travel timing, a longer booking window, business mix and discounted closed-user-group rates. Performance advertising rose 27.1% to $3.479 billion, or 33.7% of gross profit versus 31.9%; management cited increased paid traffic, lower advertising returns and booking/travel timing.
- Cash, liquidity and debt: Cash, cash equivalents and investments totaled $13.9 billion at year-end, including $12.6 billion held outside the U.S. Current assets were $5.402 billion and current liabilities $2.859 billion. Debt principal was approximately $7.4 billion; the $2.0 billion revolving facility had no borrowings outstanding. Operating cash flow less property-and-equipment additions was approximately $3.705 billion.
Material changes and unusual items
- Operating income and net income declined despite revenue and gross-profit growth, primarily because of a $940.7 million non-cash, non-deductible OpenTable goodwill impairment following a more measured growth strategy and lower long-term forecasts. The charge reduced FY diluted EPS by $18.79.
- The company recorded $63.2 million of cost-method investment impairments, mainly related to Hotel Urbano. The effective tax rate increased to 21.3% from 18.4%, in part because impairment charges were not tax deductible; the Dutch Innovation Box tax benefit reduced 2016 tax expense by approximately $324.6 million.
- Net cash used in investing activities was $3.333 billion, principally reflecting net investment purchases. Financing cash flow was $57.7 million, including $994.7 million of debt proceeds and approximately $1.0 billion of share repurchases.
Outlook, risks and contingencies
- Management provided no specific full-year 2017 numerical guidance in the supplied filing text. It expected accommodation growth rates to generally decelerate as the business scales, while continuing investment in marketing, technology, personnel and international expansion. Advertising costs and competitive pressure on returns were expected to remain important.
- Management said existing cash and liquid resources should fund operations, capital expenditures and obligations for at least 12 months. It intended to keep international earnings reinvested abroad; estimated U.S. tax on approximately $13.0 billion of accumulated unremitted earnings was $2.3 billion if that intent changed.
- Key exposures include intense competition (notably search and meta-search platforms, direct hotel booking and vacation rentals), foreign-exchange movements, travel-demand shocks, dependence on paid traffic and mobile execution, cybersecurity and service interruptions, and changing privacy, tax and competition regulation.
- Booking.com faced a French tax assessment of approximately €356 million for 2003–2012, which the company contested; French authorities also planned to audit 2013–2015. U.S. travel-transaction-tax litigation and proceedings remained ongoing, with a $27 million accrual; the company said a reasonably possible loss above that amount could not be estimated. Booking.com parity-practice investigations and appeals remained unresolved in some jurisdictions. The filing also disclosed an IBM patent suit, with trial scheduled for August 2017; no liability was recorded because a loss was not considered probable or reasonably estimable.
- Subsequent events: a February 2017 agreement to acquire Momondo Group for approximately $550 million, subject to regulatory approval, and authorization for an additional $2.0 billion share-repurchase program. Booking.com’s Netherlands headquarters construction agreement was approximately €270 million, with expected completion in late 2020.
Important facts for investors to verify
- How much of reported earnings deterioration is attributable to OpenTable and investment impairments, and whether further impairment is possible.
- Whether gross-bookings and room-night growth can continue while advertising efficiency and gross profit per booking remain under pressure.
- The outcomes and potential cash requirements of the French and Italian tax matters, U.S. travel-tax cases, and Booking.com parity proceedings.
- The maturity, convertibility and cash-settlement implications of the approximately $7.4 billion of debt, including the 2018 convertible notes classified as current at year-end.
- The extent of international cash repatriation taxes and the sustainability of the Innovation Box tax benefit.