Business context and reporting period
The Priceline Group Inc. (now Booking Holdings Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2014. The company changed its name from priceline.com Incorporated on April 1, 2014. Its online travel brands included Booking.com, priceline.com, Agoda, KAYAK and rentalcars.com. International operations—principally Booking.com—drove most gross bookings and operating income.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $1.642 billion | $1.302 billion | +26.1% |
| Gross profit | $1.406 billion | $1.010 billion | +39.3% |
| Gross margin | 85.7% | 77.5% | +8.2 percentage points |
| Operating income | $438.7 million | $309.8 million | +41.6% |
| Net income | $331.2 million | $244.3 million | +35.6% |
| Diluted EPS | $6.25 | $4.76 | +31.3% |
| Cash provided by operations | $177.0 million | $183.1 million | Down $6.1 million |
Operating margin was approximately 26.7%, versus 23.8%; net margin was approximately 20.2%, versus 18.8%. Cash, cash equivalents and short-term investments totaled $6.71 billion at quarter-end, including about $4.9 billion held internationally and intended for reinvestment abroad. Current assets were $7.86 billion and current liabilities $1.43 billion. Convertible debt principal was $2.10 billion (carrying value $1.85 billion); the $1.0 billion revolving credit facility had no borrowings.
Capital expenditure was $29.7 million; operating cash flow less capital expenditure was approximately $147.3 million. Cash flow reflected a $346.4 million Booking.com income-tax prepayment, which management said was made to obtain a discount. The company repurchased $96.7 million of shares, primarily to cover employee withholding taxes.
Material changes versus the prior comparable period
- Gross bookings rose 34.2% to $12.28 billion; international bookings grew 36.8% and domestic bookings 19.5%. Room nights increased 32.0%, rental-car days 24.6%, and airline tickets 22.6%.
- Agency revenue grew 35.2%, while merchant revenue was nearly flat, down 0.3%. Advertising and other revenue rose to $73.7 million, including $69.2 million from KAYAK, acquired in May 2013.
- Gross margin improved partly because faster-growing retail and semi-opaque services are reported net of supplier costs, while Name Your Own Price revenue is reported gross. Gross profit also benefited from KAYAK and comparison against a $20.5 million travel-tax accrual recorded in Q1 2013.
- Online advertising expense increased 29.2% to $520.8 million; offline advertising rose 92.8% to $53.5 million. Online advertising was 37.0% of gross profit, down from 39.9%, partly due to KAYAK’s lower advertising intensity. Personnel expense increased 44.9%, including higher stock-based compensation and KAYAK costs.
- Effective tax rate increased to 20.4% from 15.9%, reflecting KAYAK’s U.S.-weighted tax profile and the prior-year travel-tax accrual’s tax effects.
Outlook, risks and unusual items
- No numerical full-year earnings or revenue guidance is provided. Management expected accommodation-room-night growth to continue decelerating as the business scales; Q1 growth was 32%, versus 38% in Q1 2013.
- Management reported more significant year-over-year declines in online marketing returns on investment so far in Q2 2014 and expected overall offline advertising spending to increase during 2014. It also noted that Easter’s shift into Q2 negatively affected Q1 2014 comparisons.
- Results remain exposed to travel demand, competition, mobile and meta-search changes, reliance on online search advertising, foreign currency movements and international expansion. A stronger U.S. dollar can reduce reported results; international operations represent the substantial majority of the business.
- Travel-transaction-tax litigation and audits span numerous U.S. jurisdictions. The recorded accrual was approximately $54 million; the company said any additional reasonably possible loss range could not be estimated. Adverse outcomes could require substantial payments or affect pricing and competitiveness.
- Booking.com’s UK competition investigation closed without a finding of infringement or a fine, following commitments permitting certain discounts to closed user groups. Appeals and preliminary rate-parity investigations in other European jurisdictions remained pending.
- Q1 included a $3.4 million non-cash loss on early conversion of 2015 notes. The 2015 convertible notes were classified as current; approximately $59 million principal of further early conversions was expected to settle in Q2.
- Foreign-exchange net-investment hedges had a €3.0 billion notional amount and a $75.5 million net liability at quarter-end. Management’s sensitivity analysis estimated a derivative liability of approximately $489 million under a hypothetical 10% strengthening of foreign exchange rates relative to the U.S. dollar.
Important facts for investors to verify
- How much growth and margin improvement came from underlying operations versus KAYAK inclusion and the prior-year tax accrual comparison.
- Whether online advertising returns and customer-acquisition costs stabilize, especially given management’s Q2 observation.
- Developments in travel-transaction-tax cases and European rate-parity investigations, including potential cash or competitive effects.
- Timing and cash-versus-share settlement of the remaining 2015 convertible-note conversions, and the company’s debt and repurchase plans.
- Currency sensitivity and the availability, tax consequences and intended use of cash held outside the United States.