Booking Holdings Inc. (then The Priceline Group Inc.) — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; filed November 4, 2014. The company changed its name from priceline.com Incorporated to The Priceline Group Inc. on April 1, 2014. Financial statements are unaudited.
Business context and results
The group operated Booking.com, priceline.com, agoda.com, rentalcars.com and KAYAK, and included OpenTable from its July 24, 2014 acquisition. International operations—principally Booking.com—were the principal growth driver.
| Metric | Q3 2014 | Q3 2013 | First nine months 2014 | First nine months 2013 |
|---|---|---|---|---|
| Gross bookings | $13.823bn (+28.4%) | $10.765bn | $39.641bn (+32.0%) | $30.035bn |
| Revenue | $2.836bn (+25.0%) | $2.270bn | $6.602bn (+25.7%) | $5.252bn |
| Gross profit / margin | $2.620bn / 92.4% | $1.989bn / 87.6% | $5.909bn / 89.5% | $4.383bn / 83.4% |
| Operating income | $1.323bn | $1.047bn | $2.494bn | $1.912bn |
| Net income | $1.062bn | $833.0m | $1.970bn | $1.515bn |
| Diluted EPS | $20.03 | $15.72 | $37.13 | $29.00 |
Financial position, cash flow and debt
- At September 30, cash and cash equivalents were $5.044bn; short- and long-term investments totaled $3.159bn. The company reported $8.2bn in cash and investments, of which approximately $6.6bn was held outside the United States and intended for reinvestment abroad.
- Nine-month operating cash flow was $2.159bn, versus $1.747bn in 2013. Investing cash outflow was $282m, including $2.496bn of acquisitions and net sales of investments; financing cash inflow was $1.925bn.
- Debt principal was approximately $4.3bn (carrying value of long-term debt $3.887bn, plus $38m current convertible debt). The $1.0bn revolving facility had no outstanding borrowings at quarter-end; the $995m used to help fund OpenTable was repaid during Q3.
- Total assets were $15.184bn and stockholders’ equity was $8.733bn. Current assets of $7.304bn exceeded current liabilities of $1.589bn.
Material changes and unusual items
- Q3 revenue growth came mainly from agency revenue, up 33.2%; merchant revenue declined 1.2%, while advertising and other revenue rose 70.0%. OpenTable contributed $41.2m of revenue after acquisition.
- Room nights increased 26.7% in Q3 and 29.1% year to date. Management noted that Q3 room-night growth had slowed from 36% in the prior-year quarter and expected growth rates to continue decelerating as the business scales.
- Gross margin rose chiefly because faster-growing retail and semi-opaque services are reported net of provider costs, while priceline.com’s Name Your Own Price services are reported gross. Cost of revenue in the 2013 nine-month comparison also included a $20.5m travel-tax accrual.
- Operating expenses increased, including online advertising (+31.3% Q3), offline advertising (+79.5%), personnel (+39.2%) and depreciation and amortization (+61.1%). Management attributed increases to growth, marketing investment, acquisitions and expansion.
- OpenTable was acquired for approximately $2.5bn ($2.4bn net of acquired cash). Preliminary purchase accounting included $1.612bn goodwill and $1.245bn identifiable intangibles; allocation was not yet final. Goodwill impairment testing identified no impairment.
- The company issued $1.0bn of 0.9% convertible notes due 2021 and €1.0bn of 2.375% senior notes due 2024. It also invested $500m in a Ctrip convertible note and $150.9m in Ctrip ADSs; the investments showed unrealized losses at quarter-end.
- The travel transaction-tax accrual was approximately $51m, down from $55m at year-end. Management could not reasonably estimate possible losses above the accrual. Approximately 40 lawsuits and numerous audits or inquiries were described.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or revenue guidance. Management highlighted expected continued room-night growth deceleration, ongoing investment in marketing, technology and personnel, and uncertainty from economic conditions and the stronger U.S. dollar. The dollar’s reported exchange rate moved from $1.38 per euro at the start of 2014 to $1.26 at September 30, creating a translation headwind.
Key risks include intense competition and rising customer-acquisition costs; reliance on search engines, especially Google; mobile-platform changes; foreign-exchange exposure; travel demand and seasonality; and integration and performance of OpenTable. Booking.com’s rate-parity practices faced competition-authority investigations in multiple countries. A U.K. tribunal vacated the accepted commitments and remitted the matter for reconsideration. The filing also describes travel-tax disputes and possible additional taxes, interest, penalties and legal costs. Management stated that adverse travel-tax outcomes were not expected to materially affect liquidity given available cash, but could materially affect results or cash flows in a period.
The company reported effective disclosure controls at quarter-end and no material change in internal control over financial reporting during the quarter. It planned to review OpenTable’s internal controls as part of integration.
Important facts for investors to verify
- Whether booking-volume growth and international performance remain strong as room-night growth decelerates, and how much reported growth reflects acquisitions and currency effects.
- Whether advertising, personnel and integration costs grow faster than gross profit, and whether reported margin expansion persists as revenue mix changes.
- The final OpenTable purchase-price allocation, subsequent operating contribution and goodwill/intangible impairment exposure.
- Debt maturity and conversion terms, including the 2015 notes, and the use of proceeds from the 2021 and 2024 note offerings.
- Developments in travel transaction-tax litigation and Booking.com rate-parity investigations, including whether losses exceed recorded accruals.
- Performance and valuation of the Ctrip investments, which had unrealized losses at September 30, 2014.
- Cash held abroad, its intended reinvestment, and potential tax costs if repatriated.