Business context and reporting period
Priceline.com Incorporated (the registrant in this 2010 filing; now Booking Holdings Inc.) reported unaudited results for the quarter and nine months ended September 30, 2010, compared with the same 2009 periods. Its online travel businesses included priceline.com, Booking.com, Agoda and, following its May 2010 acquisition, TravelJigsaw. International operations, principally Booking.com, generated about 69% of nine-month gross bookings and 82% of operating income.
Key financial metrics
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $1,001.8 | $730.7 | $2,353.6 | $1,796.5 |
| Gross profit / margin | $666.2 / 66.5% | $434.0 / 59.4% | $1,430.6 / 60.8% | $947.6 / 52.7% |
| Operating income | $336.8 | $200.8 | $597.8 | $353.0 |
| Net income attributable to common stockholders | $223.0 | $319.0 | $391.8 | $411.0 |
| Diluted EPS | $4.41 | $6.42 | $7.70 | $8.42 |
- Revenue increased 37% in Q3 and 31% for the nine months. Agency revenue, driven mainly by Booking.com, rose 56% and 60%, respectively; merchant revenue rose 24% and 16%.
- Gross profit increased 54% in Q3 and 51% year to date. Management attributed margin expansion largely to a greater mix of retail, price-disclosed transactions reported net rather than merchant Name Your Own Price transactions reported gross.
- Gross bookings increased 47% in both periods; hotel room nights rose 54% in Q3 and 53% year to date. International gross bookings increased 67% and 68%, respectively.
- Net income and EPS fell year over year despite higher operating income, principally because 2009 included a $181.9 million tax benefit from reversing a deferred-tax valuation allowance. 2010 effective tax rates were 29.5% for Q3 and 30.5% year to date.
- Online advertising expense rose 50% in Q3 and 53% year to date; personnel expense increased 61% and 44%. Q3 foreign-currency transactions and other expense was $10.7 million, versus $1.2 million a year earlier.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $597.4 million, versus $363.4 million in 2009. The filing does not provide a separate Q3 cash-flow figure. The 2010 total included $51.0 million of favorable working-capital changes; receivables increased $112.8 million.
- Nine-month investing cash outflow was $449.1 million, including $364.1 million net purchases of investments and $111.0 million for acquisitions and other equity investments, net of cash acquired. Financing cash inflow was $174.5 million.
- At September 30, cash and cash equivalents were $533.1 million and short-term investments were $941.9 million, totaling $1.475 billion; approximately $0.8 billion was held by international subsidiaries. The company reported $1.5 billion in cash, cash equivalents and short-term investments.
- Convertible-note principal was approximately $575 million, primarily 1.25% notes due 2015; their balance-sheet carrying value was $471.1 million after unamortized discount. The $175 million revolving facility had no borrowings outstanding. The company said available liquidity should fund operations, capital expenditure and other obligations for at least 12 months.
- The company repurchased $125.7 million of common stock during the nine months and had $459.2 million remaining under repurchase authorizations. It anticipated $50–$70 million of contingent Agoda consideration in 2011, subject to performance targets.
Material changes, outlook and risks
- TravelJigsaw was acquired in May 2010 for $108.5 million net of cash acquired. Its results contributed $86 million of Q3 and $130 million of nine-month gross bookings since acquisition. The deal also increased goodwill and identifiable intangible assets.
- Management reported that hotel-room-night growth accelerated in Q3 as volcanic travel disruption subsided, European macroeconomic concerns eased and airfare increases moderated. It expected online advertising expense to continue rising through the remainder of 2010 and cautioned that growth rates could decelerate as the business expands. No quantified earnings or revenue guidance was provided.
- Key operating risks include travel-demand and economic uncertainty, foreign-exchange movements, intensifying competition and search-engine dependence, supplier concentration, airline and rental-car capacity constraints, and seasonal revenue recognition. The stronger U.S. dollar in Q2 and Q3 weighed on reported international growth.
- Hotel occupancy and related tax litigation, audits and assessments remained significant. The company had about 50 related lawsuits and numerous jurisdictional inquiries; its reserve was approximately $23 million, but ultimate exposure could be materially higher and the maximum loss could not be estimated. Some jurisdictions may require payment before a challenge can proceed.
- The U.K. Office of Fair Trading opened an early-stage inquiry into possible hotel-booking price restrictions; Priceline and Booking.com were cooperating, and the outcome was uncertain. The filing also disclosed that the company could not predict the effect of the inquiry.
- Other unusual items included a $6.4 million Q3 stock-compensation charge from revised performance-award estimates and a favorable $2.7 million adjustment to general and administrative expense related to tax issues at the company’s headquarters.
Important facts for investors to verify
- Whether hotel tax litigation, assessments or settlements change the $23 million reserve or create additional cash-payment, pricing or operating exposure.
- How much of reported growth and profitability is attributable to underlying booking volume versus currency translation, acquisition contributions and the shift toward net-reported agency revenue.
- Whether online advertising and personnel costs continue to grow faster than gross profit, and how that affects margins.
- The terms, timing and dilution or cash effects of convertible notes, conversions, hedges, share repurchases and the expected Agoda contingent payment.
- Developments in the OFT inquiry, foreign-exchange exposure, supplier access and other risks that could affect demand, margins or liquidity.