Business context and reporting period
Booking Holdings Inc. was then named priceline.com Incorporated. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012, compared with the same periods in 2011. The company operates online travel brands including Booking.com, priceline.com, Agoda.com and rentalcars.com; international operations, principally Booking.com, drive most gross profit.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1.327 billion | $1.103 billion | $2.364 billion | $1.912 billion |
| Gross profit | $1.004 billion | $749.2 million | $1.747 billion | $1.255 billion |
| Operating income | $458.4 million | $324.7 million | $699.9 million | $478.8 million |
| Net income applicable to common stockholders | $352.3 million | $256.4 million | $534.3 million | $361.2 million |
| Diluted EPS | $6.88 | $5.02 | $10.41 | $7.06 |
- Q2 revenue rose 20.3% year over year; gross profit increased 34.0%, and gross margin expanded to 75.7% from 67.9%. Operating income grew 41.2%; common-stockholder net income grew 37.4%.
- Agency revenue increased 35.6% in Q2, largely on Booking.com growth; merchant revenue rose 3.9%. Management said faster growth in net-reported retail services and a smaller share of gross-reported Name Your Own Price sales lifted gross margin.
- Q2 gross bookings were $7.329 billion, up 26.8%; hotel room nights rose 39.1% to 50.2 million. Domestic gross bookings grew 5.3%, versus 33.1% internationally. Name Your Own Price hotel and rental-car reservations declined.
- Online advertising expense rose 33.1% to $314.5 million in Q2. For the first half, it rose 40.4% to $591.6 million; management expects online advertising to remain a growing expense as international brands expand.
- Six-month operating cash flow was $614.0 million, up from $499.5 million. Investing used $1.102 billion, principally reflecting net purchases of investments; financing provided $677.5 million, including $1.0 billion of convertible-note proceeds and $255.2 million of share repurchases.
Liquidity, debt and capital
At June 30, 2012, cash and cash equivalents were $812.8 million and short-term investments were $3.130 billion; management reported $3.9 billion in cash, cash equivalents and short-term investments. Approximately $1.9 billion was held by international subsidiaries and was intended to be permanently reinvested abroad. Current assets were $4.578 billion versus current liabilities of $1.367 billion.
Outstanding convertible-note principal totaled $1.575 billion: $575 million of 1.25% notes due 2015 and $1.0 billion of 1.0% notes due 2018. The 2015 notes were classified as current because holders could convert at quarter-end; the 2018 notes were long-term. The company had a $1.0 billion revolving facility with no borrowings and approximately $1.9 million of letters of credit. It reported $459.2 million remaining under share-repurchase authorizations.
Changes, outlook and notable items
- Management reported decelerating year-over-year hotel-room-night growth in Q2 and expected further growth-rate deceleration through 2012 and beyond. It also cited weaker transaction growth and hotel average daily rate trends in parts of Europe amid economic and sovereign-debt uncertainty.
- The March 2012 issuance of $1.0 billion of 2018 convertible notes increased debt and interest expense. Q2 interest expense was $16.9 million, compared with $7.8 million a year earlier.
- The company estimated its 2012 effective tax rate would be four to six percentage points lower than without the Dutch Innovation Box Tax benefit; eligibility and renewal depend on ongoing certifications and tax treatment.
- A Dutch payroll levy enacted in July was expected to add approximately $13 million of personnel expense in 2012, mostly in Q3, with about $11 million after tax.
- Management expected higher capital spending than historical levels to support growth. No specific revenue or earnings guidance was provided in the supplied filing text.
- U.S. hotel occupancy and related tax litigation and audits remained unresolved. The company accrued approximately $33 million, but said a reasonably possible loss beyond that amount could not be estimated; an adverse outcome could be materially greater.
- On July 31, 2012, the U.K. Office of Fair Trading issued Booking.com a Statement of Objections concerning alleged restrictions on discounting. The company disputed the allegations; a potential fine was estimated at $0–$50 million, and business-practice changes were also possible.
- Foreign-exchange translation reduced Q2 comprehensive income: currency translation adjustments were a $60.1 million loss. The company reported substantial currency exposure despite using derivatives for certain hedging purposes.
Investor verification priorities
- Track hotel-night growth, agency versus merchant mix, international and domestic booking trends, and continued weakness in Name Your Own Price reservations.
- Assess whether rising online advertising, personnel and technology costs preserve operating leverage and margins as growth moderates.
- Review the conversion and liquidity terms of the 2015 and 2018 notes, future interest costs, and the company’s share repurchases and capital allocation.
- Monitor outcomes and potential exposure from occupancy-tax disputes, including the adequacy of the $33 million accrual, and the OFT proceeding and any required changes to Booking.com practices.
- Verify the continuing availability of the Dutch tax benefit, the effect of the new payroll levy, and the tax and liquidity implications of cash held overseas.