Booking Holdings Inc. (then The Priceline Group Inc.) — Q3 2016 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2016. The company operated Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com and OpenTable. International operations, led by Booking.com, generated most gross profit. Figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3.691B (+18.9%) | $3.103B | $8.395B (+16.2%) | $7.224B |
| Gross profit | $3.589B (+21.8%) | $2.947B | $8.038B (+19.8%) | $6.712B |
| Operating income | $833M | $1.489B | $2.116B | $2.601B |
| Net income | $506M | $1.197B | $1.461B | $2.047B |
| Diluted EPS | $10.13 | $23.41 | $29.19 | $39.40 |
| Gross margin | 97.3% | 95.0% | 95.8% | 92.9% |
- Net income and operating income fell sharply, primarily because of a $940.7M non-cash, non-deductible goodwill impairment related to OpenTable. Excluding this charge, reported operating income would have been approximately $1.774B for Q3 and $3.057B for the nine months; these are simple adjustments, not company-reported measures.
- Gross bookings rose 24.9% in Q3 and 21.7% in the nine months, or approximately 26% and 24% on a constant-currency basis. Accommodation room nights increased 29.4% and 28.1%, respectively; rental car days rose 12.5% and 10.4%; airline tickets declined 2.5% and 5.5%.
- Performance advertising increased 32.5% in Q3 and 25.9% year to date, outpacing gross-profit growth; management cited lower advertising returns and increased paid traffic. Q3 gross profit as a percentage of gross bookings was 19.4%, down from 19.9%, partly reflecting faster bookings growth and a lengthening booking window.
Cash, liquidity and debt
- Operating cash flow for the nine months was $2.818B, up from $2.221B. Capital spending on property and equipment was $168M; operating cash flow less that spending was approximately $2.650B.
- At September 30, cash and cash equivalents were $2.422B, short-term investments $1.956B and long-term investments $9.296B—about $13.675B combined. Approximately $12.2B of cash and investments was held outside the United States, which the company intended to reinvest internationally.
- Debt principal was approximately $7.6B; debt carrying values were about $7.3B, with an additional $34.5M convertible-debt amount presented outside liabilities. The $1.0B 1.0% notes due March 2018 became convertible at holders’ option and were classified as current. The $2.0B revolving credit facility had no borrowings outstanding.
- The company issued $1.0B of 3.6% senior notes due 2026 in May. It repurchased $757M of shares during the nine months and had $2.4B remaining under its $3.0B repurchase authorization at quarter-end.
Material changes, outlook and risks
- OpenTable’s revised strategy scaled back the pace of international expansion and other growth investments after limited progress. Management’s updated forecast reduced long-term expectations while anticipating improved near-term earnings and margins from lower investment. Further goodwill impairment remains possible if forecasts or assumptions deteriorate.
- Management expected accommodation growth rates to generally decelerate as the business scales, while continuing to invest in marketing, technology, personnel and accommodation supply. The filing provides no specific consolidated quarterly or full-year earnings guidance.
- Foreign-exchange movements, including sterling weakness after the Brexit referendum, reduced reported international results; international gross-profit growth was stronger on a constant-currency basis. The company also cited uncertain travel demand, competition, rising advertising costs and seasonal variation as risks.
- Booking.com’s rate-parity practices remained subject to regulatory and legal uncertainty. Germany prohibited narrow parity clauses and the company appealed; legislation and investigations in other jurisdictions could require further changes or result in fines.
- Booking.com faced disputed French tax assessments of approximately €356M for 2003–2012, largely penalties and interest; Italian tax authorities were also reviewing potential obligations. U.S. travel-transaction-tax litigation continued, with about $27M accrued and excess reasonably possible losses not estimable. The company said an adverse Hawaii rental-car tax ruling was being appealed.
- The company’s Ctrip holdings totaled about $2.4B in fair value, exposing it to market and China-related investment risks. A 100-basis-point increase in interest rates was estimated to reduce investment fair values by approximately $187M, an unrealized sensitivity.
Important facts for investors to verify
- How much of earnings deterioration reflects the one-time OpenTable impairment versus underlying operating trends, and whether OpenTable’s revised forecast is being achieved.
- Whether accommodation growth, advertising efficiency and gross profit growth remain durable, including the effects of merchant-booking growth and foreign exchange.
- Cash availability and potential tax costs: most cash and investments were held internationally, and repatriation could trigger U.S. tax expense.
- Developments in the €356M French tax dispute, U.S. travel-tax cases and European rate-parity investigations, including any cash payments, fines or business-practice changes.
- Debt maturities and conversion choices, continued share repurchases, and the valuation and risk concentration of the Ctrip investments.