Business context and reporting period
The Priceline Group Inc. (now Booking Holdings Inc.) reported unaudited consolidated results for the three months ended March 31, 2017, compared with Q1 2016. Its brands included Booking.com, priceline.com, KAYAK, Agoda, Rentalcars.com and OpenTable. Accommodation reservations—predominantly international—were the principal business driver.
Key financial and operating metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $2.419 billion | $2.148 billion | +12.6% |
| Gross profit / gross margin | $2.334 billion / 96.5% | $2.019 billion / 94.0% | Gross profit +15.6% |
| Operating income | $556 million | $550 million | +1.1% |
| Net income | $456 million | $374 million | +21.7% |
| Diluted EPS | $9.11 | $7.47 | +22.0% |
| Operating cash flow | $381 million | $345 million | +10.4% |
| Gross bookings | $20.687 billion | $16.653 billion | +24.2% reported; approximately +27% constant currency |
Accommodation room nights rose 27.4% to 173.9 million; rental car days rose 15.4% to 18.6 million; airline tickets declined 2.1% to 1.8 million. Agency revenue grew 19.0%, while merchant revenue fell 6.0%, mainly reflecting declines in priceline.com’s Name Your Own Price services. Advertising and other revenue grew 7.9%.
Performance advertising expense increased 25.8% to $981 million, or 42.0% of gross profit versus 38.6% a year earlier. Gross profit as a share of gross bookings decreased to 11.3% from 12.1%. The company reported a 13.6% effective tax rate, down from 18.7%. Q1 2017 operating margin was approximately 23.0%, versus 25.6% in Q1 2016; net margin was approximately 18.8%, versus 17.4%.
Liquidity, debt and cash flows
At March 31, 2017, cash, cash equivalents and short- and long-term investments totaled approximately $15.5 billion, including about $13.3 billion held by international subsidiaries. The company reported approximately $8.5 billion of debt principal; debt carrying values included $975 million of current convertible debt and $7.286 billion of long-term debt. Its $2.0 billion revolving credit facility had no borrowings outstanding.
Operating cash flow was $381 million. Investing activities used $893 million, principally reflecting net investment purchases of $822 million and $71 million of capital expenditures. Financing activities provided $843 million, mainly from approximately $1.1 billion of proceeds from euro-denominated senior notes, partly offset by $210 million of share repurchases. The company prepaid $500 million of Netherlands income taxes during the quarter to obtain prepayment discounts.
Material changes, outlook and commentary
- International gross profit grew 17.2% reported and approximately 19% constant currency; foreign exchange movements reduced reported growth. Management said the first-quarter comparisons for revenue, gross profit, operating income and margins were adversely affected by Easter falling in Q2 in 2017 rather than Q1 in 2016, and by the extended booking window.
- Management expects accommodation growth rates generally to decelerate as the business grows, though growth may fluctuate. It expects continued investment in marketing, technology and personnel; performance advertising costs and declining advertising returns remain concerns. The filing gives no specific numerical earnings or revenue guidance.
- In March, the company issued €1 billion of 0.8% senior notes due 2022. The 2018 convertible notes were convertible at holders’ option; the company reported $975 million carrying value as current and had received conversion notices for $40.8 million principal through May 8, 2017.
- The company agreed to acquire Momondo Group for approximately $550 million, funded with international cash, subject to regulatory approval. It also planned a Booking.com headquarters building in the Netherlands under an approximately €270 million agreement, with remaining construction payments extending through expected completion in late 2020.
- Unrealized gains on marketable securities lifted other comprehensive income; the quarter included a $346 million net-of-tax unrealized securities gain, including a substantial Ctrip-related gain. This was not operating income. Net income also benefited from a lower tax rate; Q1 2016 included a nondeductible $50 million cost-method investment impairment.
- Accounting changes adopted in Q1 included recognition of previously unrecognized U.S. equity tax deductions, producing a $301 million deferred tax asset and a cumulative retained-earnings adjustment. The new revenue standard, expected to be adopted in Q1 2018, is expected to change the timing of accommodation revenue recognition to check-in from check-out; management did not expect a material annual gross-profit or net-income impact, but quarterly effects may be more significant.
Risks, contingencies and unusual matters
- Booking.com’s Turkish offering to Turkish residents was ordered suspended by a court in March 2017; the company was appealing and said the order was likely to continue to negatively affect growth and results.
- Competition authorities continue to scrutinize rate-parity clauses. German restrictions, French and Austrian legislation, Turkish enforcement, and possible further actions or fines create uncertainty for Booking.com’s contracts and economics.
- French tax authorities assessed approximately €356 million for alleged unpaid taxes and penalties for 2003–2012; the company disputes the assessment and may have to pay some or all upfront to litigate. Authorities also announced audits of 2013–2015.
- The company disclosed approximately 30 U.S. travel transaction tax lawsuits and an accrual of about $27 million, while stating that additional reasonably possible losses could not be estimated. A Hawaii rental-car tax ruling required $13 million to appeal. IBM patent litigation remained pending, with trial scheduled for August 2017; no liability was recorded because management did not consider a loss probable and estimable.
- Other important exposures include travel-demand and currency volatility, intense competition (including search and mobile platforms and direct hotel sales), higher paid-marketing costs, data-security and technology risks, and reliance on Dutch Innovation Box tax treatment. The company stated that about $13.3 billion of cash and investments was held outside the U.S. and intended to reinvest international earnings; it estimated a $2.3 billion deferred tax liability if cumulative unremitted earnings at year-end 2016 were not indefinitely reinvested.
Most important facts for investors to verify
- Whether room-night and gross-bookings growth translates into sustained gross-profit and earnings growth, given booking-to-travel timing, seasonality and currency effects.
- Performance-advertising efficiency, customer-acquisition costs and the margin impact of merchant payment processing and vacation-rental expansion.
- Developments in the Turkish suspension, European rate-parity regulation, French tax assessments and U.S. travel-tax litigation, including any cash payments or changes in accruals.
- Debt and capital-allocation plans, including 2018 convertible-note conversions, the Momondo acquisition, the headquarters project and continued share repurchases.
- Changes in the value and accounting treatment of Ctrip investments, and the tax benefits and risks associated with international earnings and Dutch Innovation Box eligibility.