Booking Holdings Inc. (then priceline.com Incorporated) — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited, compared with the same 2012 periods unless noted. The company operated Booking.com, priceline.com, Agoda.com, rentalcars.com and, following its May 2013 acquisition, KAYAK. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2.270B | $1.706B | $5.252B | $4.070B |
| Gross profit | $1.989B | $1.397B | $4.383B | $3.144B |
| Gross margin | 87.6% | 81.8% | 83.4% | 77.2% |
| Operating income | $1.047B | $756M | $1.912B | $1.455B |
| Net income applicable to common stockholders | $833M | $597M | $1.515B | $1.131B |
| Diluted EPS | $15.72 | $11.66 | $29.00 | $22.05 |
Q3 revenue increased 33.0%, gross profit 42.4%, operating income 38.6%, and common-stockholder net income 39.6%. Nine-month growth was 29.0%, 39.4%, 31.3%, and 33.9%, respectively. Revenue mix shifted toward agency and other net-reported services; management identifies gross profit as a more useful growth measure than revenue because merchant Name Your Own Price transactions are reported gross.
- Bookings: Q3 gross bookings rose 37.5% to $10.765B; nine-month bookings rose 37.3% to $30.035B. Hotel room nights grew 35.6% in Q3 and 37.1% year to date. International bookings grew 41.8% and 42.9%, respectively, while domestic bookings grew 16.7% and 12.4%.
- Cash flow: Nine-month operating cash flow was $1.747B, versus $1.289B. Investing used $2.201B, including net investment purchases and acquisition spending; financing provided only $2M, after $883M of share repurchases and $193M to buy out rentalcars.com noncontrolling interests.
- Liquidity: Cash and cash equivalents were $1.096B and short-term investments $5.488B at September 30, for $6.584B combined. Approximately $4.4B was held by international subsidiaries and intended to remain invested overseas. The company reported no revolving-credit borrowings and had a $1B facility.
- Debt: Convertible-note principal totaled $2.575B, with a reported carrying value of about $2.306B including the mezzanine amount. This included $1B of 0.35% notes due 2020 issued in May 2013. The 2015 notes were classified as current; after quarter end, holders submitted early conversion notices for about $390M principal, with approximately $390M cash principal payment expected in Q4 2013.
Material changes and unusual items
- KAYAK was acquired on May 21, 2013 for approximately $2.1B ($1.9B net of cash acquired), funded with $0.5B cash and shares and assumed options. The acquisition materially increased goodwill and intangible assets; KAYAK contributed $68.4M of Q3 advertising revenue after acquisition.
- Advertising and other revenue was $72.6M in Q3, largely reflecting KAYAK. Online advertising expense increased 42.1% in Q3 and 44.7% year to date; management said online advertising returns on investment had declined year over year. Offline advertising rose substantially, including Booking.com’s first U.S. campaign.
- Operating expenses also reflected acquisition-related amortization, higher staffing and stock compensation. Q3 stock-based compensation was $34.6M versus $17.6M; nine-month amounts were $91.0M versus $51.7M.
- The company recorded a $20.5M first-quarter travel-tax accrual, principally related to Hawaii and District of Columbia rulings; the tax reserve was approximately $60M at September 30. It paid $20.1M under protest to Hawaii during the first nine months.
- The company repurchased $804.7M of shares during Q2 and Q3 under a $1B authorization and reported $654.5M remaining under its authorizations at September 30.
Outlook, commentary and risks
- The filing provides no formal financial guidance. Management expected hotel-room-night growth rates to continue decelerating as the business scaled, while noting uncertainty from macroeconomic conditions, weaker hotel average daily rate trends in some regions, and currency movements.
- Management described intense competition across online travel, metasearch, mobile and direct supplier channels. It cited pressure on U.S. opaque hotel bookings, rising customer-acquisition costs and the risk that lower advertising returns or expansion into lower-margin markets could constrain margins.
- The company expected a possible Dutch payroll levy for 2013, estimated at approximately $12M before tax, subject to adoption. Booking.com’s Dutch Innovation Box tax ruling was valid through 2017; loss or reduction of the benefit could raise the effective tax rate.
- Travel-transaction-tax litigation and audits remained significant contingencies. The company could not reasonably estimate a possible loss above its approximately $60M accrual; adverse outcomes could include taxes, interest, penalties and legal costs. The OFT was considering proposed commitments concerning Booking.com’s pricing practices; a potential fine, if the investigation proceeded adversely, was estimated at $0–$50M.
- Other disclosed risks include foreign-exchange exposure, economic and travel disruptions, dependence on suppliers and search traffic, mobile-platform competition, cybersecurity and system availability, and challenges integrating KAYAK. Management said the company had no material off-balance-sheet arrangements.
Key facts for investors to verify
- How much reported growth and margin expansion reflects underlying operations versus KAYAK, currency effects, and the changing mix of gross- versus net-reported revenue?
- Whether online advertising returns, acquisition costs and growth in lower-margin markets affect future profitability.
- The ultimate financial and operating effects of travel-tax litigation and the OFT proceedings, including whether the recorded accruals prove adequate.
- Cash availability and potential tax consequences of repatriating the approximately $4.4B held internationally, alongside the company’s convertible-debt maturities and conversions.
- Whether KAYAK integration, share repurchases and ongoing investment support durable growth without impairing liquidity or margins.