Business context and reporting period
The filing is The Priceline Group Inc.’s unaudited Form 10-Q for the three months ended March 31, 2015. The company operated Booking.com, priceline.com, KAYAK, agoda.com, rentalcars.com and OpenTable, acquired in July 2014. International operations—principally Booking.com—accounted for most business activity. Results are affected by seasonality and foreign-currency translation.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $1.841 billion | $1.642 billion | +12.1% |
| Gross profit / margin | $1.672 billion / 90.8% | $1.406 billion / 85.7% | Gross profit +18.9% |
| Operating income | $434.0 million | $438.7 million | -1.1% |
| Net income | $333.3 million | $331.2 million | +0.6% |
| Diluted EPS | $6.36 | $6.25 | +1.8% |
| Operating cash flow | $209.0 million | $177.0 million | +$32.0 million |
- Revenue mix: agency revenue rose 15.2% to $1.199 billion; merchant revenue fell 6.1% to $494.7 million; advertising and other revenue increased 99.1% to $146.7 million, including $60.6 million from OpenTable.
- Gross profit growth reflected stronger agency and net-reported retail business, lower Name Your Own Price activity, OpenTable inclusion and a $16.4 million Hawaii travel-tax accrual reversal. The gross-margin increase also reflects a lower share of gross-reported Name Your Own Price revenue.
- Operating expenses increased 28.0% to $1.238 billion. Online advertising rose 23.5% to $643.2 million; personnel rose 33.1% to $259.0 million; depreciation and amortization rose 69.4% to $65.0 million. Management cited investment, higher headcount and OpenTable-related costs. Operating income declined despite gross-profit growth.
- Cash and cash equivalents were $3.256 billion at quarter-end. Cash, cash equivalents and short- and long-term investments totaled approximately $9.6 billion, including approximately $7.1 billion held internationally. Current assets were $5.967 billion versus current liabilities of $1.703 billion.
- Long-term debt carrying value was $5.304 billion; outstanding principal was approximately $5.648 billion. The company issued $500 million of 3.65% notes due 2025 and €1.0 billion of 1.8% notes due 2027. Its $1.0 billion revolving facility had no borrowings.
Material changes versus the prior comparable period
- Gross bookings increased 12.2% to $13.775 billion as reported, or approximately 26% on a constant-currency basis. International gross bookings rose 13.7% reported and approximately 29% constant currency; U.S. gross bookings rose 2.1%.
- Room nights increased 25.4% to 104.6 million and rental-car days increased 18.0% to 14.6 million; airline tickets declined 3.2% to 2.0 million. Room-night growth slowed from 32% in Q1 2014.
- Currency translation materially reduced reported growth: international gross profit increased 15.7% reported versus approximately 30% constant currency. The U.S. dollar strengthened against the euro, and management said this would continue to weigh on reported results through the remainder of 2015.
- Interest expense rose to $33.5 million from $17.7 million, principally reflecting debt issued in 2014 and 2015. Income tax expense fell to $73.9 million from $84.8 million; the effective tax rate was 18.2%, versus 20.4%.
- Operating cash flow rose, but was affected by working-capital movements, including a $361.4 million Booking.com income-tax prepayment. Investing cash outflow was $1.141 billion, largely reflecting net investment purchases; financing cash inflow was $1.214 billion, mainly from debt issuance. The company repurchased $308.6 million of stock.
Outlook, commentary, risks and unusual items
- Management expected accommodation growth rates to continue decelerating as the business scales. It anticipated margin pressure from investments in OpenTable and BookingSuite for the rest of 2015, but to a lesser extent in the second half after those initiatives reached their anniversary. OpenTable profitability was expected to decline year over year in 2015 as the company invested in growth. No specific consolidated earnings or revenue guidance was provided in the supplied filing text.
- Foreign exchange, uncertain global and European economic conditions, competition, online-advertising costs and mobile-channel economics were identified as business risks. Management reported lower online advertising efficiency year over year, mainly due to lower returns on investment.
- Booking.com’s revised narrow rate-parity commitments were accepted in France, Italy and Sweden in April 2015; other competition investigations remained unresolved. The company said regulatory changes or fines could materially affect its business.
- Travel-transaction-tax accruals were approximately $35 million at March 31, down from $52 million at year-end, following the $16.4 million Hawaii-related reversal. The company was involved in approximately 40 U.S. lawsuits and numerous tax audits or inquiries; it could not reasonably estimate additional possible losses beyond accrued amounts.
- IBM sued the company and subsidiaries in February 2015 over alleged patent infringement, seeking unspecified damages and other relief; the company disputed the claims. Acquisition-related contingent consideration was about $20 million, with undiscounted outcomes ranging from zero to $161 million.
- Other notable items include $127.0 million of foreign-currency translation loss in other comprehensive income, partly offset by $162.4 million of unrealized marketable-securities gains, and cash payments of $147.6 million related to conversion or maturity of 2015 convertible notes.
Important facts for investors to verify
- Whether booking and gross-profit growth remains strong after separating constant-currency performance, acquisition effects and the $16.4 million tax-accrual reversal.
- Whether rising advertising and personnel costs, along with OpenTable and BookingSuite investment, pressure operating income and margins as management described.
- How further currency movements and the concentration of cash and investments outside the United States affect reported results, liquidity and potential repatriation taxes.
- Developments in European rate-parity investigations and U.S. travel-tax litigation, including whether recorded accruals prove adequate.
- Debt levels, interest expense, share repurchases and the uses of proceeds from the 2025 and 2027 note offerings.