Booking Holdings Inc. (then priceline.com Incorporated) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results compared with Q1 2012. The filing was signed May 9, 2013. The business included Booking.com, priceline.com, Agoda.com and rentalcars.com.
Financial and operating performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $1,302.0 million | $1,037.2 million | +25.5% |
| Gross profit | $1,009.7 million | $743.3 million | +35.8% |
| Gross margin | 77.5% | 71.7% | +5.8 percentage points |
| Operating income | $309.8 million | $241.5 million | +28.3% |
| Net income | $244.3 million | $181.8 million | +34.4% |
| Diluted EPS | $4.76 | $3.54 | +34.5% |
| Operating cash flow | $183.1 million | $182.4 million | +0.4% |
- Agency revenue rose 43.2% to $769.9 million, principally reflecting Booking.com growth. Merchant revenue rose 6.5% to $528.6 million. Management said the faster growth in net-reported retail businesses and the smaller share of gross-reported Name Your Own Price revenue lifted reported gross margin; gross profit is therefore an important growth measure.
- Gross bookings increased 36.4% to $9.15 billion: international bookings rose 42.8%, domestic bookings 8.7%. Hotel room nights grew 37.7% to 63.2 million; rental-car days grew 43.3% to 9.9 million; airline tickets grew 1.4% to 1.7 million.
- Operating expenses increased to $699.8 million. Online advertising rose 45.5% to $403.2 million and offline advertising rose to $27.7 million from $11.2 million. Online advertising equaled 39.9% of gross profit, versus 37.3% a year earlier; management cited weaker advertising returns and brand and channel mix.
- The effective income tax rate fell to 15.9% from 20.6%, largely reflecting growth in international earnings and lower foreign tax rates, including the Dutch Innovation Box benefit.
Liquidity, cash flow and debt
- Cash, cash equivalents and short-term investments totaled approximately $5.18 billion at March 31, 2013. About $3.0 billion was held by international subsidiaries and intended to be permanently reinvested abroad; repatriation could trigger additional U.S. taxes.
- Operating cash flow was nearly flat year over year despite higher net income. Management attributed the result to $111.6 million of unfavorable working-capital changes, including a $224 million Booking.com income-tax prepayment and higher receivables, partly offset by increases in payables and accrued liabilities.
- Cash increased $74.9 million to $1.61 billion during the quarter. Investing activities used $16.0 million and financing activities used $71.0 million, primarily for $76.4 million of share repurchases, mainly employee tax withholding.
- Convertible notes had $1.575 billion aggregate principal outstanding: $575 million of 1.25% notes due 2015 and $1.0 billion of 1.0% notes due 2018. Their balance-sheet carrying value was $1.413 billion, excluding $48.8 million shown separately in mezzanine equity. The 2015 notes were classified as current because their conversion threshold had been met. The $1.0 billion revolving credit facility had no borrowings.
- Current assets were $6.03 billion and current liabilities $1.61 billion. The filing reported no off-balance-sheet arrangements expected to affect financial condition, results, liquidity or capital resources.
Material changes, outlook and notable items
- Management said hotel room-night growth was 38% in Q1, versus 47% in Q1 2012, and expected further growth-rate deceleration in Q2 2013 and beyond. It also cautioned that Q1 revenue, gross-profit and operating-income growth benefited from Easter falling in Q1 in 2013 rather than Q2 as in 2012. No specific full-year financial guidance was provided.
- International operations generated approximately $894.4 million of gross profit, up about 45% on a local-currency basis. U.S. priceline.com gross profit declined approximately 9%, principally due to travel-tax accruals; opaque hotel room nights declined slightly amid competition.
- Travel transaction tax accruals reached approximately $78 million, up from $56 million at year-end. Q1 cost of revenue included an approximately $20.5 million accrual, principally related to adverse Hawaii and District of Columbia developments. The company said the reasonably possible loss above its accrual could not be estimated; outcomes could include substantial taxes, interest, penalties and legal costs.
- Booking.com faced a U.K. Office of Fair Trading competition inquiry concerning hotel pricing practices. The company estimated a possible fine of $0 to approximately $50 million and said changes to pricing or hotel-contract practices could also be required.
- The pending KAYAK acquisition was valued at $1.8 billion, with $500 million in cash and the balance in shares and assumed options; closing was expected around May 21, 2013. In April, the company purchased the remaining TravelJigsaw/rentalcars.com noncontrolling interests for approximately $192.5 million.
- Other risks highlighted included macroeconomic and travel-demand uncertainty, foreign-exchange exposure, rising online advertising costs and competition from search engines, meta-search services, hotel suppliers and mobile platforms. Management said online advertising returns had recently declined year over year.
Investor facts to verify
- Whether the anticipated Q2-and-beyond deceleration in room-night growth materialized, and how growth and margins differed by brand and geography.
- Whether advertising efficiency improved or continued to weaken as online advertising expense grew faster than gross profit.
- Subsequent rulings, appeals, payments and changes to the $78 million travel-tax accrual, including potential exposure beyond recorded amounts.
- The outcome and business-practice implications of the OFT inquiry and related hotel-pricing litigation.
- Completion and final consideration for KAYAK, and the cash and financing impact of both that transaction and the April rentalcars.com buyout.
- Conversion, repayment or reclassification of the 2015 notes, and the tax and liquidity consequences of international cash remaining abroad or being repatriated.