Booking Holdings Inc. (then The Priceline Group Inc.) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing reports the company under its then-legal name, The Priceline Group Inc. Results below are annual unless identified as fourth quarter; the filing does not provide standalone fourth-quarter cash flow or balance-sheet data.
Business context
The company operated Booking.com, priceline.com, Agoda, KAYAK, rentalcars.com and OpenTable, and reported one aggregated segment. International operations generated approximately 88% of gross bookings, 86% of gross profit and 94% of operating income. Accommodation reservations were the principal source of gross profit.
Financial and operating results
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Gross bookings | $55.53 billion | $50.30 billion | +10.4%; approximately +25% constant currency |
| Revenue | $9.224 billion | $8.442 billion | +9.3% |
| Gross profit | $8.592 billion | $7.584 billion | +13.3%; approximately +27% constant currency |
| Gross margin | 93.1% | 89.8% | +3.3 percentage points |
| Operating income | $3.259 billion | $3.073 billion | +6.0% |
| Net income | $2.551 billion | $2.422 billion | +5.4% |
| Diluted EPS | $49.45 | $45.67 | +8.3% |
| Operating cash flow | $3.102 billion | $2.914 billion | +6.4% |
Operating margin was approximately 35.3%, compared with 36.4% in 2014; net margin was approximately 27.7%, versus 28.7%. The improvement in gross margin largely reflected a lower share of priceline.com Name Your Own Price transactions, which are reported gross with corresponding cost of revenue, and faster growth in net-reported services.
Fourth quarter: Revenue was $2.000 billion versus $1.840 billion in Q4 2014; gross profit was $1.879 billion versus $1.675 billion; and net income was $504 million versus $452 million. Diluted EPS was $10.00 versus $8.56.
- Accommodation room nights rose 24.9% to 432.3 million; rental-car days increased 15.6% to 59.9 million; airline tickets declined 1.6% to 7.7 million.
- International gross bookings increased 12.2% as reported, but approximately 28% at constant currency. U.S. gross bookings decreased 1.6%.
- Agency revenue increased 11.7%; merchant revenue declined 4.7%; advertising and other revenue grew 49.5%, partly because 2015 included a full year of OpenTable versus a partial year in 2014.
- Online advertising expense rose 18.5% to $2.797 billion and equaled 32.6% of gross profit, up from 31.1%; management cited weaker advertising returns on investment.
Liquidity, debt and capital allocation
At year-end, cash, cash equivalents and short- and long-term investments totaled approximately $10.6 billion, including about $9.8 billion held outside the United States. Current assets were $3.553 billion and current liabilities $1.439 billion. Operating cash flow of $3.102 billion was partly offset by $3.895 billion of investing outflows, primarily net investment purchases, and $730 million of financing outflows.
Debt principal outstanding was approximately $6.489 billion, with a balance-sheet carrying value of $6.158 billion. The company issued $2.399 billion of senior notes in 2015 and reported $160 million of interest expense. Its $2.0 billion five-year revolving credit facility had no borrowings at year-end. The company repurchased approximately 2.54 million shares for $3.1 billion during 2015. The board authorized a new repurchase program of up to $3.0 billion in the first quarter of 2016.
Changes, outlook and notable items
- Room-night growth decelerated to 25% from 28% in 2014, 37% in 2013 and 40% in 2012. Management expected growth rates to continue to decelerate as the business scaled.
- The stronger U.S. dollar substantially reduced reported international growth: international gross-profit growth was 11.6% as reported versus approximately 28% constant currency. Management said currency translation affected reported results but not operating margins significantly, as expenses were generally denominated in currencies similar to revenues.
- Management intended to continue investing in marketing, technology and personnel, including OpenTable expansion and BookingSuite. No specific quantified earnings or revenue guidance was provided in the supplied filing text.
- OpenTable investment execution took longer than expected and post-acquisition EBITDA was lower than pre-acquisition levels. Its carrying value only slightly exceeded estimated fair value at the September 2015 impairment test; unsuccessful investments could result in a material goodwill impairment.
- Hawaii tax rulings and refunds reduced 2015 cost of revenue by $16.4 million and a further net $13.7 million. The company accrued approximately $27 million for U.S. travel-transaction tax matters, versus $52 million at year-end 2014.
- French tax authorities assessed Booking.com approximately €356 million for alleged unpaid taxes, interest and penalties for 2003–2012; the company disputed the assessment and said it might need to pay a substantial amount upfront to challenge it in court. Italian tax authorities were also evaluating potential obligations.
- European competition matters remained unresolved in some jurisdictions. Germany prohibited Booking.com’s narrow price-parity provisions; the company planned to appeal. The French Macron Law prohibited price-parity agreements, and further investigations, fines or required contract changes remained possible.
- Other identified risks included foreign-exchange exposure, travel-demand shocks, intense competition and rising customer-acquisition costs, reliance on search and mobile platforms, cybersecurity and service disruptions, tax-law changes, and litigation, including an IBM patent suit seeking unspecified damages.
Most important facts for investors to verify
- Whether constant-currency booking and gross-profit growth can be sustained as room-night growth decelerates and U.S. gross bookings weaken.
- Advertising efficiency, paid-traffic dependence and margins, particularly as online advertising expense grows faster than gross profit.
- Resolution and potential cash impact of the French tax assessment, U.S. travel-tax litigation and European rate-parity proceedings.
- Debt maturities, interest costs, the use and liquidity of overseas investments, and the funding and pace of the new share-repurchase authorization.
- OpenTable’s operating progress and impairment headroom, and the valuation and risks of the substantial Ctrip investment.
- Q4 performance in context: seasonality affects quarterly comparisons, and the filing gives no standalone Q4 cash-flow figure.