Business context and reporting period
Priceline.com Incorporated (now Booking Holdings Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2012. Its online travel businesses include Booking.com, priceline.com, Agoda.com and rentalcars.com. International operations generated approximately 82% of gross bookings and 91% of operating income in the first nine months of 2012.
Financial performance
Amounts are in U.S. dollars; financial amounts below are in millions except per-share data. Comparisons are year over year.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,706.3 (+17.4%) | $1,452.8 | $4,070.3 (+21.0%) | $3,364.8 |
| Gross profit / margin | $1,396.5 / 81.8% | $1,100.1 / 75.7% | $3,143.9 / 77.2% | $2,355.2 / 70.0% |
| Operating income | $755.6 | $616.4 | $1,455.5 | $1,095.1 |
| Net income applicable to common stockholders | $596.6 | $469.5 | $1,130.9 | $830.7 |
| Diluted EPS | $11.66 | $9.17 | $22.05 | $16.23 |
| Operating cash flow | Not reported separately | Not reported separately | $1,288.9 | $1,060.0 |
Q3 operating income increased approximately 22.6% and common net income approximately 27.0%. For the first nine months, operating income increased approximately 32.9% and common net income approximately 36.2%. Gross margin improved largely because faster-growing retail, price-disclosed businesses are recorded net of supplier costs, while Name Your Own Price revenues are recorded gross.
Liquidity, debt and cash flow
- At September 30, 2012, cash and cash equivalents were $898.5 million and short-term investments were $3,769.5 million, totaling approximately $4.67 billion. Approximately $2.6 billion of cash and investments was held by foreign subsidiaries and intended to be reinvested abroad.
- Current assets were $5.37 billion versus current liabilities of $1.48 billion. Deferred merchant bookings were $343.3 million.
- Convertible notes had $1.575 billion aggregate principal outstanding ($1.391 billion carrying value): $575 million of 1.25% notes due 2015 and $1.0 billion of 1.0% notes due 2018. The $1.0 billion revolving credit facility had no borrowings; approximately $1.9 million of letters of credit were outstanding.
- Nine-month investing cash outflow was $1.70 billion, primarily reflecting net purchases of investments. Financing cash inflow was $678.2 million, principally from the 2018 note issuance, partly offset by $255.4 million of share repurchases and $61.1 million to purchase rentalcars.com noncontrolling shares.
Material changes, outlook and risks
- Gross bookings grew 25.2% in Q3 and 31.0% in the first nine months. Hotel room-night reservations grew 35.9% and 40.1%, respectively. Management reported deceleration in hotel reservation growth during 2012 and expected further deceleration in Q4 and beyond; no numerical earnings guidance was provided.
- International revenue growth was 31% in Q3 and 39% in the first nine months in U.S. dollars, below local-currency growth of approximately 42% and 50%, respectively, due to foreign exchange effects. Domestic gross bookings grew more slowly than international bookings.
- Online advertising expense rose 34.0% in Q3 and 37.9% year to date, outpacing gross profit growth for the nine-month period. Management cited mix effects and lower year-over-year advertising returns on investment.
- Personnel expense included an approximately $13 million one-time Dutch payroll tax levy in Q3 (approximately $11 million after tax). The company also recorded a $4.8 million accrual, including interest, following an adverse District of Columbia hotel-tax ruling. Hotel occupancy and other tax accruals totaled approximately $39 million.
- Key exposures include numerous U.S. hotel-tax lawsuits and assessments, and a U.K. Office of Fair Trading investigation of hotel booking practices. The company estimated a possible OFT fine of $0–$50 million and said business-practice changes could also result. Other risks cited include weaker travel demand, competition from search engines, hotels and online travel rivals, foreign-currency volatility, and the possible loss of Dutch Innovation Box tax benefits.
- Management expected capital expenditures to remain above historical levels to support growth. It also noted pressure on operating margins from investment in growth and lower-margin newer markets. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether hotel-tax judgments, pending cases, assessments or “pay first” requirements materially increase the $39 million accrual or affect demand and margins.
- Whether the OFT investigation results in a fine or changes to Booking.com pricing practices or hotel contract terms.
- Whether hotel booking growth continues to decelerate, and how international growth, ADRs and currency movements affect reported results.
- Whether online advertising returns improve or rising acquisition costs constrain operating leverage.
- Whether the Dutch Innovation Box tax benefit remains available and whether foreign cash is repatriated, potentially increasing taxes.
- How convertible-note obligations, repurchases, investment spending and working-capital seasonality affect liquidity and capital allocation.