Booking Holdings Inc. (then priceline.com Incorporated) — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statements are unaudited. Unless noted otherwise, figures below are in U.S. dollars.
Business context and reporting period
The company operated Booking.com, priceline.com, Agoda.com and rentalcars.com, and acquired travel metasearch company KAYAK on May 21, 2013. The results include KAYAK only from the acquisition date. International operations, principally Booking.com, remained the primary business driver.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1.680 billion | $1.327 billion | $2.982 billion | $2.364 billion |
| Gross profit | $1.384 billion | $1.004 billion | $2.394 billion | $1.747 billion |
| Gross margin | 82.4% | 75.7% | 80.3% | 73.9% |
| Operating income | $555 million | $458 million | $865 million | $700 million |
| Net income attributable to common stockholders | $437 million | $352 million | $682 million | $534 million |
| Diluted EPS | $8.39 | $6.88 | $13.18 | $10.41 |
| Operating cash flow | Not separately provided | Not separately provided | $776 million | $614 million |
Q2 revenue rose 26.6%, gross profit 37.8%, operating income 21.1%, and common-stockholder net income 24.1% year over year. Gross bookings increased 38.0% in Q2 and 37.2% for the six months; hotel room-night reservations grew 38.2% and 37.9%, respectively. At June 30, cash and cash equivalents were $1.762 billion and short-term investments were $4.183 billion, totaling $5.945 billion. Approximately $3.3 billion of cash, cash equivalents and short-term investments was held internationally and intended to be permanently reinvested abroad.
Outstanding convertible-note principal was $2.575 billion; carrying value was $2.252 billion, with a further $42.8 million shown as mezzanine convertible debt. The $1.0 billion revolving credit facility had no borrowings. Six-month investing cash flow was negative $986 million and financing cash flow was positive $454 million. The company repurchased $423 million of stock and paid $193 million to acquire remaining rentalcars.com noncontrolling interests during the six months.
Material changes versus the prior comparable period
- Agency revenue rose 37.9% in Q2, driven mainly by Booking.com; merchant revenue rose 5.3%. Advertising and other revenue increased to $35.4 million, including $31.1 million from KAYAK after acquisition.
- Gross margin expanded as retail and semi-opaque services, which are reported net of supplier costs, grew faster than Name Your Own Price services, which are reported gross.
- Online advertising expense increased 47.3% to $463 million in Q2 and was 33.5% of gross profit, versus 31.3% a year earlier. Management cited lower advertising returns, brand mix and greater use of paid channels.
- Interest expense increased to $19.6 million in Q2 from $16.9 million, mainly reflecting additional convertible debt. The effective tax rate declined to 18.3% from 20.9%, largely due to growth in international business.
- Cash and short-term investments increased from $5.183 billion at December 31, 2012 to $5.945 billion at June 30, 2013. The balance-sheet expansion also reflects KAYAK: goodwill rose to $1.738 billion and net intangible assets to $1.052 billion.
Outlook, commentary, risks and unusual items
The filing provides no specific quantitative revenue or earnings guidance. Management expected hotel reservation growth rates to continue decelerating as the business scales, while noting ongoing investment in marketing, technology, personnel and international expansion could pressure margins. It cited macroeconomic uncertainty, weaker hotel average daily rate trends in some regions, foreign-exchange exposure, intense competition, mobile-platform shifts and the possibility of lower paid-advertising returns.
- KAYAK acquisition: Purchase value was approximately $2.1 billion ($1.9 billion net of acquired cash), funded with about $0.5 billion cash and $1.6 billion in stock and assumed vested options. Purchase accounting was preliminary; the acquisition added substantial goodwill and identifiable intangible assets.
- Travel transaction taxes: The company accrued approximately $65 million at June 30, 2013, up from $56 million at year-end, including estimated interest and penalties. It said any reasonably possible loss beyond the accrual could not be estimated. The filing describes numerous lawsuits, audits and assessments, including adverse rulings and required “pay first” payments.
- Competition inquiry: The U.K. Office of Fair Trading’s preliminary allegations concerning hotel pricing practices could result in a fine estimated by the company at $0–$50 million and/or changes to Booking.com business practices; the outcome was uncertain.
- Other items: Q2 included $6.4 million of KAYAK acquisition-related professional fees. The company recorded a $20.5 million first-quarter travel-tax accrual, principally tied to Hawaii and the District of Columbia. The Dutch Innovation Box Tax ruling was extended through 2017, subject to continued eligibility.
- Management reported effective disclosure controls as of quarter-end; KAYAK internal controls were to be reviewed as part of integration.
Important facts for investors to verify
- Whether growth in gross profit and bookings can continue as growth rates decelerate, and whether higher advertising spending produces adequate returns.
- The final KAYAK purchase-price allocation, integration costs and contribution to consolidated results beyond the limited post-acquisition period included here.
- Developments in travel transaction-tax litigation and assessments, including the $65 million accrual, potential additional exposure and cash timing of pay-first obligations.
- Convertible-note terms, conversion or repurchase conditions, and the implications of the $2.575 billion principal balance alongside continuing share repurchases.
- International cash reinvestment and foreign-exchange exposure, including the company’s ability to manage its large overseas cash and investment balances.