Booking Holdings Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; unaudited quarterly results are also summarized below. The company operated Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com and OpenTable. International operations generated approximately 89% of gross profit. The company changed its name from The Priceline Group Inc. to Booking Holdings Inc. in February 2018.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Revenue | $12.68 billion | $10.74 billion | +18.0% |
| Gross profit | $12.43 billion | $10.31 billion | +20.5%; gross margin 98.0%, versus 96.0% |
| Operating income | $4.54 billion | $2.91 billion | +56.2%; 2016 included a $940.7 million OpenTable goodwill impairment |
| Net income | $2.34 billion | $2.13 billion | +9.6%; 2017 included a major tax-reform charge |
| Diluted EPS | $46.86 | $42.65 | 2017 was reduced by $26.94 per share from the Tax Act’s net impact |
| Operating cash flow | $4.66 billion | $3.98 billion | Increase included a $1.25 billion transition-tax liability in other operating items |
Gross bookings rose 19.3% to $81.2 billion (approximately 19% constant currency). Accommodation room nights increased 20.9% to 673.1 million; rental-car days rose 9.6% to 73.0 million; airline tickets fell 5.3% to 6.9 million. Accommodation reservations drove most gross-profit growth.
At year-end, cash and cash equivalents were $2.54 billion, short-term investments $4.86 billion and long-term investments $10.42 billion—approximately $17.8 billion combined. Total assets were $25.45 billion and total liabilities $14.19 billion. Debt principal was approximately $9.7 billion; the company also reported $8.81 billion of long-term debt carrying value and $710.9 million of current convertible debt. No borrowings were outstanding under its $2.0 billion revolving facility.
FY 2017 operating margin was approximately 35.8% and net margin approximately 18.5%; the net margin was materially affected by the tax charge. The reported 98.0% gross margin reflects revenue presentation and business mix, including declining gross-presented Name Your Own Price transactions; it is not directly comparable to many businesses’ gross margins.
Changes versus the prior comparable period
- Revenue growth accelerated to 18.0% from 16.5% in 2016; gross profit growth was 20.5% versus 20.1%.
- Operating income rebounded from the 2016 OpenTable impairment. Excluding that unusual charge, the year-over-year operating-income comparison is less pronounced.
- Net income rose despite income tax expense increasing to $2.06 billion from $578 million. The 2017 provision included approximately $1.6 billion of provisional Tax Act transition tax, partly offset by a $217 million deferred-tax remeasurement benefit. The recorded transition-tax liability was approximately $1.3 billion after expected use of tax attributes.
- Performance advertising increased 19.0% to $4.14 billion; brand advertising increased 32.4% to $392 million. Performance advertising was 33.3% of gross profit, slightly below 33.7% in 2016.
- Operating cash flow increased, while investing cash outflow rose to $4.20 billion, including net investment purchases and acquisitions/other investments. Financing cash outflow was $78.7 million, including $1.83 billion of share repurchases and $2.04 billion of debt issuance proceeds.
Outlook, commentary, risks and unusual items
- Management expects growth rates to generally decelerate as the accommodation business grows, while continuing to invest in marketing, technology and personnel. It expected 2018 brand advertising expense to increase significantly and identified a 2018 effective tax-rate estimate of approximately 18%–21%.
- Beginning in 2018, revenue recognition for travel reservations moved from check-out to check-in; Name Your Own Price revenue moved from gross to net presentation. Management expected no significant annual revenue or net-income effect from timing, but estimated 2018 revenue would be more than 2% lower in Q1, slightly less than 1% lower in Q2 and Q3, and 4% higher in Q4 than under the former check-out timing. The net presentation change means the company will no longer report cost of revenue or gross profit in its income statement.
- The company acquired the Momondo Group in July 2017 for $555.5 million. Rentalcars.com began operating as part of Booking.com on January 1, 2018. It also invested $450 million in preferred shares of Meituan-Dianping.
- Principal business risks include intense competition—particularly from Google, other large technology companies, online travel agencies and direct hotel channels—dependence on search and paid advertising, foreign-exchange movements, travel-demand shocks, cybersecurity and service interruptions, and changing regulation of alternative accommodations.
- Regulatory and legal exposures include Booking.com price-parity investigations and restrictions, including the German decision under appeal; a Turkish court order suspending offers of Turkish accommodations to Turkish residents; and approximately 20 U.S. travel-transaction-tax lawsuits. The company accrued about $12 million for travel-tax matters at year-end, but said potential losses above the accrual could not be reasonably estimated.
- French tax authorities assessed approximately €356 million for 2003–2012, principally penalties and interest, alleging a French permanent establishment; the company disputes the assessment, and a similar audit covers 2013–2015. An adverse result could require substantial payment.
- Other notable items: a $19.3 million fourth-quarter IBM patent settlement charge; a $12 million travel-tax accrual reversal benefiting cost of revenue; and a fourth-quarter net loss of $555 million, principally reflecting the Tax Act provision. For comparison, Q4 2016 net income was $674 million.
- Contractual obligations totaled $13.33 billion, including $11.03 billion of scheduled senior-note principal and interest and $1.26 billion of U.S. transition-tax liability. Management stated available cash and liquid resources should fund operations and obligations for at least 12 months. The board authorized an additional $8.0 billion repurchase program in early 2018.
Most important facts for investors to verify
- Reconcile the provisional Tax Act charge, transition-tax liability, payment schedule and the stated 2018 effective tax-rate outlook as tax accounting is finalized.
- Assess underlying operating growth apart from the 2016 OpenTable impairment, foreign-exchange effects, acquisition contributions and changes in gross-versus-net revenue presentation.
- Track accommodation room-night growth, booking-window trends, ADRs, cancellations and the contribution and margins of alternative accommodations.
- Monitor advertising efficiency and customer-acquisition costs, especially dependence on Google and the effect of rising brand advertising.
- Review the outcomes and potential cash consequences of the French tax assessment, U.S. travel-tax cases, price-parity proceedings and Turkish restrictions.
- Evaluate debt maturities, the March 2018 convertible-note repayment, investment-portfolio risk and the scale and funding of share repurchases.