Booking Holdings Inc. (then priceline.com Incorporated) — 2012 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012; it is an annual report, not a standalone Q4 filing. The company operated Booking.com, priceline.com, Agoda.com and rentalcars.com, with international business generating about 82% of gross bookings and 92% of operating income. The filing reports in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $5.261 billion | $4.356 billion | +20.8% |
| Gross profit | $4.084 billion | $3.080 billion | +32.6% |
| Gross margin | 77.6% | 70.7% | +6.9 percentage points |
| Operating income | $1.830 billion | $1.399 billion | +30.8% |
| Net income attributable to common stockholders | $1.420 billion | $1.056 billion | +34.4% |
| Diluted earnings per share | $27.66 | $20.63 | +34.1% |
| Operating cash flow | $1.786 billion | $1.342 billion | +33.1% |
Gross bookings rose 31.4% to $28.456 billion; hotel room nights increased 39.5% to 197.5 million. Revenue growth was led by agency revenue, up 34.4%, while merchant revenue rose 5.0%. The shift toward retail, net-reported services contributed to higher gross margin. Online advertising expense increased 38.6% to $1.274 billion, or 31.2% of gross profit versus 29.8% in 2011; management cited lower year-over-year advertising returns.
At year-end, cash and cash equivalents were $1.536 billion and short-term investments were $3.647 billion, totaling approximately $5.183 billion. About $3.1 billion of cash and short-term investments was held internationally and intended for reinvestment abroad. Outstanding convertible-note principal was approximately $1.575 billion; the $1.0 billion revolving facility was undrawn. Total assets were $6.570 billion and total liabilities were $2.458 billion. The company reported no off-balance-sheet arrangements.
Fourth-quarter 2012 revenue was $1.191 billion, gross profit $940 million and net income $290 million, compared with $991 million, $725 million and $226 million, respectively, in Q4 2011. Fourth-quarter hotel room-night growth was 38%, down from 53% a year earlier.
Material changes versus the prior year
- International gross bookings increased 38.2% as reported (about 46% in local currency); domestic gross bookings grew 7.1%. International revenue grew 39% in U.S. dollars, versus approximately 48% in local currency, reflecting foreign-exchange effects.
- Operating income grew faster than revenue, but online advertising and personnel costs rose materially. The company recorded a one-time Dutch payroll-tax levy of about $14 million, approximately $10 million after tax.
- Interest expense rose to $62.1 million from $31.7 million, principally following the March 2012 issuance of $1.0 billion of 1.0% convertible notes due 2018.
- Operating cash flow increased to $1.786 billion. Investing activities used $1.563 billion, primarily reflecting net purchases of investments; financing activities provided $669 million, principally from the convertible-note issuance, partially offset by $257 million of share repurchases.
Outlook, risks, contingencies and unusual items
- Management expected long-term growth rates to decelerate as the hotel business grew larger, and anticipated further deceleration beginning in Q1 2013; no numerical earnings or revenue guidance was provided. It cited weaker European economic conditions, lower hotel average daily rate trends in some regions and currency exposure.
- Competition pressured U.S. opaque hotel reservations, which declined year over year. The company launched Express Deals in 2012; management cautioned that it might not restore market share. Mobile bookings were growing, but could generate lower gross profit per transaction.
- The company agreed to acquire KAYAK for a stated value of $1.8 billion ($1.65 billion net of acquired cash), including $500 million cash and $1.3 billion in stock and assumed options. Closing was expected in the first half of 2013, subject to regulatory and shareholder approvals.
- Hotel occupancy and related tax disputes included approximately 40 lawsuits and numerous audits or inquiries. The recorded accrual rose to about $56 million from $33 million; the company could not reasonably estimate additional reasonably possible losses. Hawaii and the District of Columbia rulings drove approximately $21 million of 2012 cost-of-revenue accruals, including estimated interest and penalties.
- The U.K. Office of Fair Trading investigation of Booking.com could result in a fine estimated at $0–$50 million and changes to business practices. Related antitrust class actions were also pending.
- The Dutch Innovation Box tax benefit helped reduce the effective tax rate to 19.2% from 22.6%; the ruling was valid through 2014 and depended on continuing eligibility. The company also disclosed approximately $3.1 billion of foreign cash and potential U.S. tax costs if repatriated.
- The 1.25% convertible notes due 2015 were convertible at holders’ option at year-end; principal repayment upon conversion is in cash. Management stated available liquidity should fund operations and obligations for at least 12 months. The independent auditor gave an unqualified opinion, and management and the auditor found internal control over financial reporting effective.
Investor verification priorities
- Reconcile the annual and Q4 results with the audited statements, and track hotel room-night growth, gross bookings and agency-versus-merchant mix.
- Assess whether advertising expense growth and weaker advertising returns affect future margins and earnings growth.
- Monitor the $56 million hotel-tax accrual, subsequent court decisions, appeals, possible pay-first payments and the potential for unestimated additional exposure.
- Verify KAYAK closing terms and funding, including the cash and share consideration and any dilution.
- Review convertible-note conversion and repayment terms, foreign-cash accessibility and foreign-exchange exposure.
- Track Booking.com’s OFT proceedings, possible business-practice changes, and continuation of the Innovation Box tax benefit.