Booking Holdings Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Booking Holdings operates Booking.com, KAYAK, priceline, agoda, Rentalcars.com and OpenTable. International operations generated about $2.5 billion of quarterly revenue and remain the principal business driver.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $2.837 billion | $2.928 billion | -3.1%; approximately +3% constant currency |
| Operating income | $556 million | $730 million | -23.8% |
| Operating margin | 19.6% | 24.9% | Down 5.3 percentage points |
| Net income | $765 million | $607 million | +26.0% |
| Diluted earnings per share | $16.85 | $12.34 | +36.5% |
| Net cash from operating activities | $150 million | $640 million | Down $490 million |
| Cash and cash equivalents | $2.334 billion | $2.624 billion at Dec. 31, 2018 | |
| Short- and long-term investments | $10.426 billion | ||
| Debt carrying value | $8.587 billion | $8.649 billion at Dec. 31, 2018 |
Cash, cash equivalents and short- and long-term investments totaled approximately $12.8 billion at quarter-end. Outstanding debt principal was approximately $8.7 billion; $1.0 billion of 2020 convertible notes was classified as current. The company had $250 million drawn on its $2.0 billion revolving facility and borrowed a further $150 million in April.
Performance and changes versus prior year
- Gross bookings rose 1.6% reported and approximately 8% constant currency to $25.410 billion. Accommodation room nights increased 10.3% to 217 million; accommodation average daily rates declined approximately 2% constant currency.
- Agency revenue fell 7.8% to $1.949 billion, while merchant revenue rose 14.6% to $603 million as Booking.com expanded merchant transactions. Advertising and other revenue decreased 1.2% to $285 million.
- Operating expenses increased 3.8% to $2.281 billion. Brand marketing rose 60.9% to $163 million and sales and other expenses rose 29.5% to $215 million; performance marketing declined 6.9% to $1.030 billion.
- Net income benefited from $451 million in unrealized gains on marketable equity securities, mainly Ctrip and Meituan investments, versus $55 million a year earlier. Excluding this item, reported net income growth does not reflect underlying operating performance; the filing does not provide a directly comparable adjusted net income figure.
- Operating cash flow declined substantially, primarily reflecting a $403 million payment to French tax authorities while contesting assessments and higher Dutch income-tax prepayments. Investing cash flow was $2.109 billion, largely reflecting investment maturities and sales; financing cash outflow was $2.548 billion, including $2.773 billion of share-repurchase payments.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management expects accommodation growth rates generally to decelerate over time, while continuing investments in marketing, technology, personnel and accommodation supply.
- Management said Q1 revenue, operating income and margins were negatively affected by Easter falling in Q2 2019 rather than Q1 2018; it expected this timing effect to benefit Q2 year-over-year comparisons. Currency movements also reduced reported results; international revenue grew approximately 4% constant currency.
- The company recognized a $53 million adjustment to merchant revenue related to correction of the timing of revenue recognition for prior periods. A $7 million contingent-consideration fair-value charge also increased general and administrative expense.
- Booking.com paid approximately €356 million ($403 million) in January to preserve its right to contest French tax assessments for 2003–2012; the company disputes the assessments and recorded the payment as an asset. Additional French audit years are under review. Italian and Turkish tax assessments and other tax exposures are also disclosed.
- Competition and consumer-protection reviews remain ongoing. Booking.com, agoda and KAYAK agreed to UK CMA commitments effective September 1, 2019, including changes to price displays and disclosures. Booking.com’s suspension of offers of Turkish accommodation to Turkish residents continues to negatively affect growth and results.
- Other key risks include intense competition and reliance on search and marketing channels, foreign-exchange and investment-price volatility, seasonality, alternative-accommodation economics, payment fraud and chargebacks, data security and privacy regulation, and possible changes to the Dutch Innovation Box tax benefit.
- The board authorized an additional share-repurchase program of up to $15 billion in Q2 2019. The company repurchased 1.619 million shares for $2.856 billion in Q1.
Investor verification points
- Assess the extent to which the $451 million unrealized investment gain, rather than operating trends, drove net income and EPS growth.
- Reconcile revenue and gross-bookings trends, including currency, Easter timing, merchant-model expansion and the $53 million prior-period revenue adjustment.
- Review the sustainability of operating margins given higher brand marketing, payment-related costs and investment in alternative accommodations and merchant processing.
- Track operating cash generation after the French tax payment and Dutch tax prepayments, as well as the timing and outcome of disputed tax assessments.
- Evaluate liquidity and capital allocation alongside current convertible-note classification, revolver borrowings, debt maturities and the newly authorized buyback.
- Monitor regulatory commitments, the Turkey restriction, currency and public-equity investment exposure, and the potential effect of changes to the Innovation Box tax treatment.