Booking Holdings Inc. (then The Priceline Group Inc.) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited, compared with the same 2013 periods. The company changed its name from priceline.com Incorporated to The Priceline Group Inc. on April 1, 2014. The business operated Booking.com, priceline.com, agoda.com, KAYAK and rentalcars.com; OpenTable was acquired after quarter-end.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Change | Six months 2014 | Six months 2013 | Change |
|---|---|---|---|---|---|---|
| Revenue | $2,123.6 | $1,680.2 | +26.4% | $3,765.4 | $2,982.3 | +26.3% |
| Gross profit | $1,883.0 | $1,383.9 | +36.1% | $3,289.5 | $2,393.5 | +37.4% |
| Gross margin | 88.7% | 82.4% | +6.3 pts | 87.4% | 80.3% | +7.1 pts |
| Operating income | $733.0 | $554.8 | +32.1% | $1,171.7 | $864.7 | +35.5% |
| Net income attributable to common stockholders | $576.5 | $437.3 | +31.8% | $907.7 | $681.6 | +33.1% |
| Diluted EPS | $10.89 | $8.39 | +29.8% | $17.12 | $13.18 | +29.9% |
- Booking activity: Q2 gross bookings increased 33.8% to $13.54 billion; room nights rose 29.2% to 89.6 million. For the first half, gross bookings increased 34.0% to $25.82 billion and room nights rose 30.5% to 173.0 million.
- Revenue mix: Q2 agency revenue increased 38.5% to $1,474.4 million, merchant revenue declined 2.2% to $567.3 million, and advertising and other revenue rose 131.6% to $81.9 million. The company attributed gross-margin expansion chiefly to faster growth of net-reported retail and semi-opaque services relative to gross-reported Name Your Own Price services.
- Cash flow: First-half operating cash flow was $867.0 million, versus $776.5 million. Investing activities provided $1,535.3 million, largely reflecting net sales of investments; financing activities used $193.2 million. Cash and cash equivalents increased to $3,503.9 million from $1,290.0 million at year-end.
- Liquidity and debt: At June 30, cash, cash equivalents and short-term investments totaled approximately $7.16 billion. Short-term investments were $3.66 billion. Convertible-note principal was approximately $2.04 billion, with carrying value of $1.81 billion; there were no revolver borrowings at quarter-end. Approximately $5.4 billion of cash and investments was held outside the U.S. and intended for reinvestment abroad.
Changes, outlook and management commentary
- Growth remained strong, led by international accommodation reservations, but management noted that room-night growth had decelerated to 29% in Q2 from 38% in Q2 2013 and expected growth rates to continue decelerating as the business scales.
- Online advertising expense increased 38.1% in Q2, faster than gross profit growth of 36.1%. Management reported lower year-over-year online advertising returns on investment, with more significant declines in Q2 and early Q3, and expected continued investment in online and offline marketing. No specific earnings or revenue guidance was provided in the filing.
- International business was the primary growth and profit driver. Currency movements aided reported Q2 international revenue growth: 38% in U.S. dollars versus approximately 36% on a local-currency basis. The company cautioned that a stronger U.S. dollar could reduce reported results.
- Post-quarter OpenTable acquisition: Closed July 24, 2014, for approximately $2.5 billion (about $2.4 billion net of acquired cash). Funding included $995 million drawn on the revolver and U.S. cash; management said it intended to explore longer-term financing. OpenTable results were not included in Q2 financial statements.
- Other subsequent event: On August 6, the company invested $500 million of international cash in a five-year Ctrip senior convertible note.
- Other notable items: First-half results included a $6.1 million non-cash loss on early conversion of 2015 convertible notes. The 2013 comparison included approximately $20.5 million of travel-tax accruals that reduced gross profit. The company cited Easter timing as a favorable factor in Q2 2014 year-over-year comparisons.
- Risks and contingencies: The company had an approximately $55 million accrual for travel transaction tax matters; it could not reasonably estimate potential losses beyond that accrual. It faced roughly 40 tax-related lawsuits and numerous audits or inquiries. Booking.com competition investigations concerning rate-parity practices were ongoing in several countries; possible outcomes included contract changes or fines. Other material risks discussed included intense competition, advertising efficiency and reliance on search traffic, foreign exchange exposure, travel-demand volatility, and mobile-platform changes.
Investor verification checklist
- Verify whether advertising ROI and acquisition costs continued to weaken, and how marketing expense affected margins after Q2.
- Track room-night and gross-bookings growth, including the pace of deceleration and the contribution of international markets and currency translation.
- Assess the post-quarter OpenTable funding, resulting debt and cash balances, and whether longer-term financing was obtained.
- Monitor travel transaction tax litigation and the adequacy of the $55 million accrual, as well as rate-parity investigations and potential business-practice changes.
- Review international cash deployment, potential U.S. tax consequences of repatriation, and exposure to foreign-exchange movements.
- Consider comparability impacts from KAYAK’s partial inclusion in the 2013 comparison, 2013 tax accruals, and Q2 holiday timing.