Booking Holdings Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dollar amounts are in millions unless otherwise noted. The company operates Booking.com, KAYAK, priceline, agoda, Rentalcars.com and OpenTable, with results heavily dependent on travel and accommodation reservations.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2,640 | $5,040 | $5,558 | $11,727 |
| Operating income (loss) | $315 | $2,370 | ($478) | $4,173 |
| Net income | $801 | $1,950 | $224 | $3,694 |
| Operating cash flow | Not provided for quarter | $662 | $3,788 |
- Q3 revenue declined 47.6%; nine-month revenue declined 52.6%. Gross bookings fell 47.1% in Q3 and 62.9% for the nine months.
- Q3 room nights declined 43.1%; rental car days declined 55.6%. Nine-month room nights declined 57.2% and rental car days declined 61.9%.
- Marketing expense fell 48.3% to $731 in Q3 and 54.9% to $1,793 for the nine months. Personnel expense declined 8.6% in Q3 and 13.8% for the nine months. Q3 restructuring costs were $41; nine-month costs were $75.
- Q3 operating income was $315, while net income included $730 of gains on marketable equity securities, principally Meituan. Nine-month results included $1,258 of such gains, $1,062 of goodwill impairment and a $100 investment impairment.
- Nine-month operating cash flow was $662, down from $3,788. Investing cash flow was $2,703, primarily from investment sales and maturities; financing cash flow was $1,532, including $4,108 of debt issuance proceeds, $1,244 of convertible-debt conversion payments and $1,299 of share repurchases.
Financial position and liquidity
- At September 30, cash and cash equivalents were $11,197; cash, cash equivalents and long-term investments totaled $14.9 billion. Total assets were $22,145 and stockholders’ equity was $4,913.
- Debt carrying value was $11,808, comprising $979 of current convertible debt and $10,829 of long-term debt. Outstanding debt principal was approximately $12.0 billion. Long-term debt increased from $7,640 at year-end 2019, primarily following $4.1 billion of April debt issuance.
- The $2.0 billion revolving credit facility had no borrowings outstanding. The company reported compliance with its $4.5 billion minimum-liquidity covenant at quarter-end. An October amendment extended the covenant arrangement and imposed conditions on distributions and share repurchases.
- The company suspended repurchases under its authorization after March 2020; it had $10.4 billion of authorization remaining. Nine-month repurchases totaled $1.3 billion.
Material changes and unusual items
- COVID-19 caused an unprecedented decline in travel demand, cancellations and revenue. Q3 results remained sharply below 2019 despite summer improvement in newly booked room nights.
- OpenTable and KAYAK goodwill was impaired by $573 in Q3, following a $489 charge in Q1; combined 2020 impairment was $1,062. Management no longer expected these businesses to return to 2019 profitability within five years.
- Meituan’s equity value produced a $727 unrealized gain in Q3 and $1.4 billion for the nine months, materially affecting reported net income. Investment values and resulting earnings remain market-sensitive.
- Expected credit-loss expense rose materially amid partner financial distress. The receivables allowance was $208 at quarter-end, versus $49 at year-end 2019; the company also recorded allowances on partner prepayments.
- Q3 revenue included a $96 reduction from additional partner rebates, partly offset by a $21 benefit from travel-provider recoveries and lower estimated traveler refunds. Nine-month revenue included $42 of reductions related to refunds without estimated partner recovery.
- The company recognized $122 of government assistance for the nine months as a reduction of personnel expense. It estimated approximately $100 of additional restructuring expense in late 2020 and early 2021 and targeted annualized personnel savings of $330–$380.
Outlook, risks and contingencies
- Management had no reliable forecast because the pandemic’s duration and effects were uncertain. It expected Q4 2020 financial performance to be more adversely affected than Q3 if renewed infections and travel restrictions continued. No numeric revenue or earnings guidance was provided.
- Newly booked room nights had fallen more than 85% year over year in April, then improved through summer; more recent trends reversed, particularly in Europe. Domestic travel drove much of the recovery, while international travel remained weak.
- Key risks include continued travel disruption, cancellations and refunds, partner insolvencies and credit losses, further goodwill or investment impairments, liquidity and debt-covenant requirements, foreign-exchange volatility, competition and regulatory scrutiny.
- Tax and legal exposures include French tax assessments and proceedings, Italian and Turkish tax matters, competition investigations and litigation, and a Dutch pension-fund dispute. The company disclosed a potential maximum loss of approximately $265 for the pension matter, excluding interest and penalties, but had not accrued a liability. It recorded a $59 tax benefit adjustment related to potential resolution of French tax matters.
- Booking.com’s workforce reductions were ongoing; the company expected the workforce to decline by up to approximately 25% from the start of the restructuring, including attrition. Management cited risks to execution, employee retention and service delivery.
Investor verification priorities
- Track room-night bookings, cancellations, ADRs, gross bookings and recovery trends by domestic versus international travel.
- Separate recurring operating performance from volatile Meituan-related gains, goodwill impairments, foreign-exchange effects and government assistance.
- Monitor cash generation, partner credit-loss allowances, refund obligations, debt maturities and compliance with revised credit-facility covenants.
- Assess whether announced restructuring savings are achieved and whether further costs, impairments or accommodation-provider losses emerge.
- Review developments in French and other tax disputes, the Dutch pension matter, and competition or consumer-protection proceedings.