Business Context and Reporting Period
Registrant: priceline.com Incorporated, then operating as The Priceline Group; the filing covers the fiscal year ended December 31, 2013. The supplied filing also reports unaudited fourth-quarter results. The company operates Booking.com, priceline.com, Agoda, rentalcars.com and, following its May 2013 acquisition, KAYAK.
International operations generated approximately 85% of gross bookings and 94% of operating income. Accommodation reservations remained the main source of gross profit. Because some merchant bookings are reported gross and agency and other bookings net, management emphasizes gross profit as a more comparable measure of business growth.
Financial Results and Key Metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $6.793 billion | $5.261 billion |
| Gross profit / gross margin | $5.716 billion / 84.1% | $4.084 billion / 77.6% |
| Operating income | $2.412 billion | $1.830 billion |
| Net income attributable to common stockholders | $1.893 billion | $1.420 billion |
| Diluted EPS | $36.11 | $27.66 |
| Operating cash flow | $2.301 billion | $1.786 billion |
Gross bookings rose 37.7% to $39.173 billion. Accommodation room nights increased 36.9% to 270.5 million, rental-car days rose 37.0% to 43.9 million, and airline tickets increased 9.1% to 7.0 million. Reported revenue grew 29.1%; gross profit grew 40.0%. Gross margin expansion largely reflected faster growth in net-reported retail and semi-opaque services than in gross-reported Name Your Own Price bookings. Operating margin was approximately 35.5%, compared with 34.8% in 2012.
Fourth quarter: Revenue was $1.541 billion, gross profit $1.333 billion, net income $378.1 million and diluted EPS $7.14. In Q4 2012, the corresponding figures were $1.191 billion, $939.8 million, $289.6 million and $5.63.
Liquidity and debt: At year-end, cash and cash equivalents were $1.290 billion and short-term investments were $5.463 billion, totaling about $6.753 billion in cash and short-term investments. Approximately $4.9 billion was held by international subsidiaries and intended for reinvestment abroad. Outstanding convertible-note principal was $2.160 billion; the company had no revolving-credit borrowings and had a $1.0 billion facility available. Total assets were $10.444 billion, total liabilities $3.526 billion and stockholders’ equity $6.910 billion.
Investing cash outflow was $2.162 billion, including $1.7 billion of net investment purchases and $331.9 million of acquisition payments, net of cash acquired. Financing cash outflow was $403.5 million, including share repurchases and repayment of converted notes. Capital expenditures were $84.4 million. The company said existing liquid resources should fund operations, capital spending and obligations for at least 12 months.
Material Changes Versus the Prior Comparable Period
- International gross bookings grew 42.5%, versus domestic growth of 15.5%; international revenue rose 41.2% as reported in U.S. dollars.
- Room-night growth slowed to 36.9% from 40% in 2012 and 53% in 2011. Management expected growth rates to continue decelerating as the business scaled.
- Agency revenue increased 40.3%, while merchant revenue increased 5.1%. Advertising and other revenue rose to $171.1 million, primarily reflecting KAYAK, including $154.5 million of KAYAK advertising revenue after acquisition.
- Online advertising expense rose 41.2% to $1.799 billion; offline advertising increased to $127.5 million from $35.5 million. Online advertising returns on investment were down year over year.
- Operating expenses increased to $3.303 billion from $2.254 billion, including higher advertising, personnel and acquisition-related amortization. Personnel expense rose 49.7%, partly reflecting growth, KAYAK and higher stock-based compensation.
- On May 21, 2013, the company acquired KAYAK for approximately $2.1 billion, including $0.5 billion in cash and equity and assumed options. KAYAK contributed to results from the acquisition date; its standalone and pro forma results were not presented as immaterial.
Outlook, Risks, Contingencies and Unusual Items
- Outlook: No quantified earnings or revenue guidance is provided in the supplied filing. Management intended to continue investing in marketing, technology and personnel, even where this pressures margins, and expected offline advertising spending to increase in 2014. It highlighted likely continued growth deceleration and the possibility of margin pressure as newer markets and non-hotel accommodations expand.
- Competition and customer acquisition: The filing cites intense competition from online travel agencies, search and meta-search platforms, and travel providers’ own sites. Paid-search dependence, rising advertising costs, lower advertising returns and pressure on priceline.com’s U.S. opaque hotel business could weigh on growth and margins. Mobile is an opportunity but may produce lower gross profit per transaction.
- Travel-tax litigation: The company disclosed approximately 40 lawsuits and inquiries or audits involving at least 79 municipalities or counties and 13 states. It accrued about $55 million for travel-transaction-tax matters at year-end, but said additional reasonably possible loss could not be estimated. It paid $20.6 million under protest to Hawaii in 2013; key appeals remained pending. An adverse outcome could lead to significant additional liabilities or higher customer prices.
- Other legal and regulatory matters: The U.K. Office of Fair Trading closed its investigation of Booking.com in January 2014 after accepting commitments, without a finding of infringement or a fine. Commitments permit discounts only to qualifying closed-group members in covered bookings. Preliminary rate-parity investigations remained open in several European countries. A U.S. hotel-pricing antitrust complaint was dismissed without prejudice in February 2014, with plaintiffs able to seek leave to amend.
- Tax and one-time items: The 2013 effective tax rate was 17.6%, benefiting from lower foreign tax rates and the Dutch Innovation Box regime, whose ruling was valid through 2017 subject to continued eligibility. A Dutch wage levy added about $12 million of personnel expense in Q4 2013. Early conversion of 2015 notes resulted in a $26.7 million non-cash loss. The company also recorded travel-tax accruals, including a $20.5 million charge in Q1 and a $6.3 million credit in Q4.
- Other material risks: Foreign-exchange movements affect reported results; the company’s international concentration, data security and system reliability, supplier access, and KAYAK integration and goodwill are also identified risks. A 10% adverse interest-rate sensitivity would reduce investment fair value by about $16 million; net-investment currency hedges had a $121.3 million net liability at year-end.
Most Important Facts for Investors to Verify
- Review whether accommodation growth, particularly Booking.com, can sustain profitable expansion as room-night growth decelerates and advertising costs rise.
- Track online advertising return on investment and whether spending continues to grow faster than gross profit.
- Assess the outcomes and potential cash exposure of travel-tax cases, especially Hawaii, Chicago, San Antonio and other unresolved jurisdictions, against the $55 million accrual.
- Monitor European rate-parity investigations and the commercial effects of the U.K. commitments.
- Evaluate KAYAK’s post-acquisition contribution, access to travel data and advertiser relationships, and whether its goodwill remains supportable.
- Confirm the liquidity impact of offshore cash, potential repatriation taxes, convertible-note conversions and share repurchases.