Business context and reporting period
Priceline.com Incorporated (now Booking Holdings Inc.) filed this Form 10-K for the fiscal year ended December 31, 2010. The company operated Booking.com, priceline.com, Agoda and, following its May 2010 acquisition, TravelJigsaw. Its online travel business centered on hotel reservations, with additional U.S. air, rental car, vacation package and other services. International operations generated approximately 69% of gross bookings and 82% of operating income.
The filing is annual, not a standalone fourth-quarter report. Fourth-quarter figures are identified separately below where available.
Financial and operating performance
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Gross bookings | $13.646 billion | $9.310 billion | +46.6% |
| Revenue | $3.085 billion | $2.338 billion | +31.9% |
| Gross profit | $1.909 billion | $1.261 billion | +51.4% |
| Gross margin | 61.9% | 53.9% | +8.0 percentage points |
| Operating income | $786.8 million | $470.8 million | +67.0% |
| Net income attributable to common stockholders | $527.5 million | $489.5 million | +7.8% |
| Diluted EPS | $10.35 | $9.88 | +4.8% |
| Cash provided by operating activities | $777.3 million | $509.7 million | +52.5% |
Operating margin was approximately 25.5%, versus 20.1% in 2009. Net margin was approximately 17.1%, versus 20.9%; the prior-year result included a $183.3 million non-cash tax benefit from releasing part of the deferred-tax valuation allowance. The 2010 effective tax rate was 29.2%, compared with (10.7)% in 2009.
- International gross bookings rose 67.3% to $9.480 billion; domestic gross bookings increased 14.3% to $4.166 billion. International revenue was approximately $1.4 billion, up from $852.0 million.
- Hotel room nights booked increased 52.3% to 92.8 million; rental car days rose 45.3% to 16.3 million, including TravelJigsaw; airline tickets sold were flat at 5.9 million.
- Online advertising expense increased 51.1% to $552.1 million. Management attributed the increase mainly to growth and traffic acquisition for Booking.com, Agoda, priceline.com and TravelJigsaw.
- FY 2010 fourth-quarter revenue was $731.3 million, gross profit $478.4 million, net income $135.1 million and diluted EPS $2.66. The comparable 2009 quarter recorded revenue of $541.8 million, gross profit of $313.2 million, net income of $78.5 million and diluted EPS of $1.55.
Liquidity, cash flow and debt
At December 31, 2010, cash and cash equivalents were $359.0 million and short-term investments were $1.303 billion, totaling approximately $1.662 billion. Approximately $949 million of cash and short-term investments was held outside the United States and management intended to reinvest it in foreign operations. Operating cash flow was $777.3 million; investing activities used $841.1 million, primarily reflecting net purchases of marketable securities and acquisition spending; financing activities provided $213.0 million.
The company issued $575 million of 1.25% convertible senior notes due 2015. Reported debt carrying value was approximately $476.4 million, reflecting unamortized debt discount; outstanding principal was approximately $575.2 million. A $175 million revolving credit facility had no borrowings outstanding. Total assets were $2.906 billion, total liabilities $1.047 billion and stockholders’ equity $1.813 billion. Management said existing cash and liquid resources should fund operations, capital expenditures and other obligations for at least the next 12 months.
Material changes versus the prior comparable period
- Growth accelerated in hotel volume and international activity: total gross bookings rose 46.6%, led by hotel room-night growth and Booking.com and Agoda.
- Gross margin improved as a larger share of activity came from retail, price-disclosed agency and merchant services recorded net, rather than Name Your Own Price transactions recorded gross.
- Net income and EPS growth were much slower than operating-income growth, principally because 2009 included the $183.3 million deferred-tax benefit.
- TravelJigsaw expanded the business into international rental-car bookings from May 2010 and contributed $185 million of gross bookings from acquisition through year-end. Acquisition-related earnout consideration also increased goodwill.
- Cash and short-term investments increased substantially, while the company issued new convertible debt and repurchased approximately $106.1 million of shares under its public repurchase authorization.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected international operations to continue gaining importance, but cautioned that hotel room-night growth would generally decelerate sequentially as the business scaled. It planned continued investment in marketing, technology, personnel and international expansion; online advertising expense was expected to continue increasing in 2011.
- Management expected the Dutch Innovation Box tax treatment to reduce the consolidated effective tax rate by approximately 1–2 percentage points in 2011. Eligibility depends on periodic R&D certification and future tax rulings; the benefit was not material to 2010 results.
- Hotel occupancy and related tax exposure is a significant contingency: the company disclosed approximately 50 lawsuits and about 60 municipal or county audits, assessments or inquiries. It had a $26 million reserve at year-end, but stated ultimate exposure could be materially higher or lower and that it could not estimate the maximum loss. Historical U.S. merchant hotel gross profit was approximately $1.1 billion.
- The U.K. Office of Fair Trading was investigating possible hotel-room resale-price practices involving online travel companies and suppliers; the company said it was cooperating and could not predict the outcome.
- Key risks include travel-market cyclicality and disruptions, currency movements, competition and rising customer-acquisition costs, supplier or GDS access changes, online search dependence, data security, regulation and tax disputes, and execution of international expansion and acquisitions. The 2010 business also faced Icelandic volcanic travel disruption, Thailand civil unrest and stronger year-end dollar exchange rates against the euro and pound.
- Unusual financial items include $11.3 million of losses on early convertible-debt conversions; a $1.7 million general and administrative charge following a South Carolina tax ruling; and $13.4 million of cumulative stock-based compensation adjustment for performance awards.
Most important facts for investors to verify
- Review the audited statements and notes for the composition and sustainability of 2010 growth, particularly hotel volume, international contribution and the gross-versus-net revenue presentation.
- Track hotel-tax litigation, assessments, appeals and reserve adequacy; the disclosed $26 million reserve is not a cap on potential exposure.
- Assess the $575 million 2015 convertible notes, conversion terms, dilution exposure, and the company’s ability to meet debt and acquisition-related payments.
- Confirm the location and accessibility of foreign cash, related repatriation taxes, and the conditions for continuing the Dutch Innovation Box benefit.
- Monitor advertising efficiency, supplier and search-engine dependence, hotel and airline availability, and quarterly seasonality; reported quarterly revenue may not track bookings because retail revenue is recognized when travel is completed.