Booking Holdings Inc. (then The Priceline Group Inc.) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited, compared with Q1 2015. The company operated Booking.com, priceline.com, KAYAK, Agoda, Rentalcars.com and OpenTable. Results are seasonal, and Q1 comparisons benefited from Easter falling in March rather than April.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $2.148 billion | $1.841 billion | +16.7% |
| Gross profit / gross margin | $2.019 billion / 94.0% | $1.672 billion / 90.8% | Gross profit +20.8% |
| Operating income / margin | $550.3 million / 25.6% | $434.0 million / 23.6% | Operating income +26.8% |
| Net income | $374.4 million | $333.3 million | +12.3% |
| Diluted EPS | $7.47 | $6.36 | +17.5% |
| Operating cash flow | $344.3 million | $209.0 million | +$135.3 million |
- Gross bookings were $16.65 billion, up 20.9% reported and approximately 26% at constant currency. Accommodation room nights rose 30.5% to 136.5 million; rental car days increased 10.9%; airline tickets declined 7.2%.
- Agency revenue rose 25.1%; merchant revenue fell 5.0%, principally reflecting declines in priceline.com's Name Your Own Price services; advertising and other revenue increased 21.4%.
- International gross profit increased 23.5% reported and approximately 31% at constant currency. A stronger U.S. dollar reduced reported growth.
- Performance advertising increased 23.1% to $779.9 million, or 38.6% of gross profit, versus 37.9%. Brand advertising decreased 4.7% to $69.8 million.
Liquidity, debt and capital allocation
- At March 31, cash and cash equivalents were $1.857 billion; short-term investments were $1.526 billion and long-term investments $7.594 billion. Management reported $11.0 billion of cash, cash equivalents and investments in total, of which approximately $10.3 billion was held internationally and intended for reinvestment abroad.
- Current assets were $4.865 billion and current liabilities $1.988 billion. The company reported $6.321 billion of long-term debt carrying value, with approximately $6.6 billion principal outstanding. A $2.0 billion revolving credit facility had no borrowings outstanding; a separate $100 million short-term borrowing used March 31 was repaid April 1.
- Operating cash flow was $344.3 million; investing activities provided $147.3 million, largely from net investment sales; financing activities used $134.0 million, including $259.4 million of share repurchases. Cash and cash equivalents increased $379.9 million during the quarter.
- The board authorized up to $3.0 billion of repurchases in February 2016; $2.9 billion remained authorized at quarter-end. The company repurchased 201,919 shares for $259.4 million during Q1.
Material changes, outlook and commentary
- Net income included a $50.4 million impairment of the company's Hotel Urbano cost-method investment, following weak results and forecasts and difficult Brazilian conditions. The impairment was non-cash in the operating cash flow reconciliation and increased the effective tax rate because it was not tax deductible.
- Management estimated that Easter timing shifted approximately $40 million of gross profit into Q1 2016 from Q2. Q1 2015 gross profit had also benefited from a $16.4 million reversal of accrued travel transaction taxes following a favorable Hawaii ruling.
- No specific numerical full-year guidance was provided. Management expected accommodation growth rates to continue decelerating as the business scales and planned continued investment in marketing, technology, personnel and accommodation supply. It noted that merchant processing and expansion of vacation rentals may pressure margins.
- On April 27, 2016, CEO and President Darren Huston resigned following a board-supervised investigation into conduct inconsistent with the company's Code of Conduct and board expectations. Chairman Jeffery Boyd became interim CEO and President while the board searched for a permanent CEO; Gillian Tans became Booking.com CEO.
- Principal risks include foreign-exchange movements, travel demand and macroeconomic uncertainty, intense competition and advertising costs, mobile-platform shifts, and regulatory constraints on Booking.com's rate-parity practices. The German regulator prohibited narrow parity agreements; Booking.com intended to appeal. France's Macron Law also prohibited such agreements.
Contingencies and unusual exposures
- French tax authorities assessed Booking.com approximately €356 million for alleged French income-tax and VAT obligations for 2003–2012, mostly penalties and interest. The company disputed the assessment; litigation could require substantial upfront payment. Italian tax authorities were also examining potential tax obligations.
- The company faced approximately 30 U.S. lawsuits concerning travel transaction taxes and had accrued approximately $27 million for these matters. Management said any reasonably possible loss above the accrual could not be estimated.
- IBM patent litigation against the company and subsidiaries continued; the company's motion to dismiss was denied without prejudice. The company disputed the claims.
- Currency translation reduced reported growth. The company also disclosed that a hypothetical 100-basis-point rise in interest rates would reduce the fair value of its available-for-sale investments by approximately $137 million; the effect would be unrealized unless investments were sold before maturity.
Investor verification priorities
- Assess underlying growth against the reported figures, including currency effects and the estimated $40 million Easter timing benefit.
- Track performance-advertising efficiency, accommodation booking growth, merchant revenue trends and the margin effects of vacation-rental expansion.
- Review the carrying value and risks of the large investment portfolio, particularly Ctrip securities and the impaired Hotel Urbano investment.
- Monitor the French and Italian tax matters, U.S. travel-tax litigation, and European rate-parity regulation for potential cash, earnings or business-model effects.
- Confirm CEO succession developments, repurchase execution, international cash deployment and debt obligations.