Business context and reporting period
This is The Priceline Group Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company, now Booking Holdings Inc., operated Booking.com, priceline.com, KAYAK, agoda.com, rentalcars.com and OpenTable. Its results were primarily driven by international accommodation reservations.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data. Comparisons are year over year.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3,102.9 (+9.4%) | $2,836.5 | $7,224.0 (+9.4%) | $6,601.9 |
| Gross profit | $2,947.3 (+12.5%); 95.0% margin | $2,620.0; 92.4% margin | $6,712.4 (+13.6%); 92.9% margin | $5,909.4; 89.5% margin |
| Operating income | $1,488.7 (+12.5%) | $1,322.7 | $2,601.0 (+4.3%) | $2,494.4 |
| Net income | $1,196.7 (+12.7%) | $1,062.3 | $2,047.1 (+3.9%) | $1,969.9 |
| Diluted EPS | $23.41 | $20.03 | $39.40 | $37.13 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $2,221.2 | $2,159.1 |
For Q3, agency revenue rose 11.7%, while merchant revenue declined 2.8%; advertising and other revenue increased 30.3%, including OpenTable. Online advertising expense was $801.1 million, up 14.5%. For the nine months, online advertising expense rose 19.1% to $2,215.2 million.
Liquidity, debt and cash flow
At September 30, cash and cash equivalents were $1,841.7 million, short-term investments $1,211.2 million and long-term investments $6,327.6 million, for total cash and investments of about $9.38 billion. Approximately $8.7 billion was held outside the U.S. and management intended to reinvest those funds internationally. Current assets were $4,299.0 million and current liabilities $1,582.8 million.
Long-term debt carrying value was $5,421.3 million; outstanding principal was approximately $5.73 billion. The company issued $1.0 billion of euro-denominated notes and $500 million of notes in March 2015. Its new $2.0 billion revolving credit facility had no borrowings at quarter-end; the company reported borrowing $100 million under it in October.
Nine-month operating cash flow was $2,221.2 million; investing cash outflow was $2,674.0 million and financing cash outflow was $709.2 million. The company repurchased $2.3 billion of shares during the period. Cash and cash equivalents declined $1,307.0 million from year-end 2014, including a $144.9 million adverse effect from exchange-rate changes.
Changes, outlook, risks and unusual items
- Gross bookings increased 6.9% in Q3 and 9.8% for the nine months as reported, versus approximately 22% and 25% growth on a constant-currency basis. International gross profit grew about 29% and 28% on a constant-currency basis, but 11.4% as reported in both periods. A stronger U.S. dollar materially reduced reported growth.
- Q3 room nights rose 22.0% to 115.6 million; rental-car days increased 13.0%. Management said accommodation growth rates had decelerated from the prior year and expected further deceleration, with the rate subject to variation. The filing provides no numerical earnings guidance.
- Management reported lower online advertising returns on investment and expected that trend to continue. It also cited competition, mobile economics, expansion spending and the potential margin effects of adding more vacation rentals and other non-hotel properties.
- Hawaii travel-tax developments reduced cost of revenue by $16.4 million in Q1 and by a net $13.7 million in Q3, principally reflecting a cash refund. The travel-transaction-tax accrual was approximately $27 million at September 30, versus $52 million at year-end 2014.
- French authorities were expected to assess approximately €350 million for alleged unpaid income and value-added taxes, mostly penalties and interest, relating to 2006–2012. The company disputed the anticipated claim and said it would contest an assessment; court challenge could require upfront payment.
- European competition reviews of Booking.com’s rate-parity terms remained a risk. The company implemented narrower parity commitments across the EEA and Switzerland; French law prohibited even narrow parity terms, and the company expected the German authority to seek similar restrictions. Potential outcomes include contract changes or fines.
- OpenTable’s carrying value was $2.5 billion, including $1.5 billion of goodwill; its estimated fair value only slightly exceeded carrying value. Management warned unsuccessful investments or weaker assumptions could lead to impairment. Other reporting units substantially exceeded carrying value; no goodwill impairment was recorded.
- The company held substantial Ctrip convertible debt and equity investments, with an unrealized loss of $50.5 million on the debt and an unrealized gain of $38.5 million on the equity at quarter-end. Interest expense increased, partly reflecting new debt issuance.
Important facts for investors to verify
- Assess underlying growth using constant-currency bookings and gross profit, and distinguish it from reported U.S.-dollar growth.
- Track online advertising efficiency, booking growth, and the effect of promotional competition and changing channel mix on margins.
- Monitor the French tax assessment, U.S. travel-tax litigation and accruals, and European rate-parity regulation for potential cash, business-practice or earnings effects.
- Review OpenTable’s performance and goodwill valuation assumptions, and the market value and concentration risk of the Ctrip investments.
- Reconcile cash and investments with debt, international cash-reinvestment plans, subsequent borrowing and share repurchases.