Booking Holdings Inc. (then The Priceline Group Inc.) — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The filing was signed August 8, 2017. The company operated Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com and OpenTable.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $3.025 billion | $2.556 billion | $5.444 billion | $4.704 billion |
| Gross profit | $2.952 billion | $2.430 billion | $5.286 billion | $4.449 billion |
| Operating income | $893 million | $732 million | $1.450 billion | $1.283 billion |
| Net income | $720 million | $581 million | $1.176 billion | $955 million |
| Diluted EPS | $14.39 | $11.60 | $23.49 | $19.06 |
| Gross margin | 97.6% | 95.1% | 97.1% | 94.6% |
Q2 revenue rose 18.3%, gross profit 21.5%, operating income 22.0% and net income 24.0% year over year. First-half revenue rose 15.7%, gross profit 18.8%, operating income 13.0% and net income 23.1%. Gross profit growth was approximately 24% in Q2 and 21% in the first half on a constant-currency basis. The company attributed growth principally to accommodation reservations; Q2 comparisons also benefited from Easter falling in Q2 rather than Q1.
Q2 agency revenue increased 25.9%, while merchant revenue decreased 3.8%, mainly because priceline.com’s gross-reported Name Your Own Price business declined. Room nights increased 21.0% in Q2 and 24.1% in the first half; rental car days grew 11.7% and 13.4%, respectively. Airline ticket reservations fell 8.7% and 5.6%, respectively.
Performance advertising rose 24.6% in Q2 and 25.1% in the first half, outpacing gross profit growth; management cited lower advertising returns and changes in traffic mix. Q2 performance advertising was 38.9% of gross profit, versus 37.9% a year earlier. The first-half effective tax rate was 15.5%, compared with 17.2%, reflecting a greater share of income in lower-tax jurisdictions and tax benefits from equity-award vesting.
Cash flow, liquidity and debt
- First-half operating cash flow was $1.602 billion, up from $1.367 billion. Investing activities used $1.537 billion, principally reflecting net investment purchases; financing activities provided $420 million.
- Cash and cash equivalents were $2.634 billion at June 30. Cash, cash equivalents and investments totaled approximately $16.6 billion, including about $14.7 billion held by international subsidiaries.
- Total debt principal was approximately $8.7 billion; reported debt carrying value was about $8.46 billion, including $899 million of 2018 convertible notes classified as current. A $2.0 billion revolving credit facility had no borrowings outstanding.
- The company issued €1.0 billion of 0.8% senior notes due 2022 during the first quarter. First-half share repurchases totaled approximately $556 million; $3.7 billion of authorization remained at June 30.
- Prepaid expenses and other current assets included substantial Dutch income-tax prepayments, including $500 million in the first half, made to obtain prepayment discounts.
Changes, outlook and notable items
- Management expects accommodation growth rates to generally decelerate as the business grows, while noting that the pace may vary. It also expects advertising investment to continue and performance-advertising returns to face ongoing pressure. No numerical company guidance was provided in the supplied filing text.
- Management said the international business drives most results and remains exposed to currency translation, macroeconomic conditions, travel demand, cancellations and seasonality. Foreign exchange reduced reported growth; international gross profit grew 23.7% in Q2 and 20.7% in the first half, versus constant-currency growth of approximately 26% and 23%.
- On July 24, 2017, after quarter-end, the company acquired Momondo Group for approximately $550 million in international cash.
- First-half 2016 results included $63 million of cost-method investment impairments, including $13 million in Q2; there were no such impairments in 2017. Q2 2017 included a $7 million litigation accrual in general and administrative expense.
- Marketable-security gains, principally related to Ctrip, increased other comprehensive income. The company held Ctrip convertible debt and equity securities with a combined fair value of approximately $2.695 billion at June 30; it said future accounting changes could put Ctrip equity fair-value changes through net income.
- Material legal and regulatory exposures include Booking.com price-parity investigations and restrictions, a Turkish court order suspending offers of Turkish accommodations to Turkish residents, approximately €356 million of French tax assessments for 2003–2012, and U.S. travel-transaction-tax litigation. The U.S. tax contingency accrual was approximately $26 million; management could not reasonably estimate potential loss above that accrual. The company paid $13.1 million to appeal a Hawaii rental-car tax judgment.
- Management identified competition, reliance on search and advertising channels, mobile-market changes, foreign exchange, travel-industry disruption, cybersecurity, taxes, and substantial debt as risks. It stated that disclosure controls were effective at quarter-end and that no material change in internal control over financial reporting occurred during the quarter.
Key facts for investors to verify
- Whether room-night and gross-bookings growth converts into sustained gross-profit growth as growth rates decelerate and vacation rentals and merchant payments expand.
- Advertising efficiency, cancellation trends and the effects of Google and other traffic-channel changes on customer-acquisition costs.
- The status and potential business impact of price-parity restrictions, the Turkish suspension order, French tax assessments, and U.S. travel-tax and patent litigation.
- The valuation and concentration risks of the Ctrip investments, and the effect of future accounting treatment on reported earnings.
- Funding and repayment plans for the current 2018 convertible notes, alongside repurchases, the Momondo acquisition and other capital needs.
- The impact of currency movements, international cash and any changes to the Dutch Innovation Box tax benefit.