Booking Holdings Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Booking Holdings operates Booking.com, priceline, KAYAK, agoda, Rentalcars.com and OpenTable; accommodation reservations are its principal business. International operations generated most revenue.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue / comparable prior-year gross profit | $4.849B | $4.380B | $11.314B | $9.676B |
| Operating income | $2.247B | $2.102B | $4.198B | $3.552B |
| Net income | $1.768B | $1.720B | $3.352B | $2.896B |
| Diluted EPS | $37.02 | $34.43 | $69.07 | $57.85 |
| Operating cash flow | Not provided separately | Not provided separately | $4.254B | $3.488B |
- Management’s comparable revenue growth was 10.7% for Q3 and 16.9% for the nine-month period; constant-currency growth was approximately 13% and 15%, respectively. Operating income grew approximately 6.9% and 18.2%; net income grew 2.7% and 15.7%.
- Q3 diluted EPS increased about 7.5%; nine-month diluted EPS increased about 19.4%. Operating income was 46.3% of 2018 revenue in Q3 and 37.1% for the nine months; comparable 2017 operating-income-to-gross-profit ratios were 48.0% and 36.7%.
- Gross bookings rose 11.5% in Q3 and 15.7% year to date (constant currency approximately 14% and 12%). Accommodation room nights increased 13.4% and 12.9%, respectively. Merchant gross bookings grew 65.7% in Q3 and 69.2% year to date.
- At September 30, cash and cash equivalents were $2.973B, short-term investments $4.158B, and long-term investments $9.114B. Total cash, cash equivalents and short- and long-term investments were approximately $16.2B. Current assets were $9.468B and current liabilities $3.930B.
- Debt principal was approximately $8.856B, with a carrying value of $8.704B; no revolving-facility borrowings were outstanding. The $2.0B unsecured revolving facility had approximately $4.7M of letters of credit issued.
- Nine-month investing cash flow was positive $1.806B, principally reflecting net sales of investments; financing cash flow was negative $5.592B, largely from $4.1B of share repurchases and $1.5B paid on conversion of senior notes. Capital expenditures were $356M.
Changes, outlook, commentary and risks
- Accounting comparability: Booking adopted the new revenue standard on January 1, 2018. Travel reservation revenue is now recognized when travel begins rather than when completed, and priceline Name Your Own Price transactions are reported net. Accordingly, 2018 total revenue is compared with 2017 gross profit as the more relevant measure; 2018 reported revenue was about 1.2% lower for Q3 and 1.1% lower year to date than it would have been under the prior timing standard. Adoption added $188.5M to opening retained earnings.
- Q3 and year-to-date results included net unrealized gains on marketable equity securities of $30.9M and $107.2M, respectively. The company also recorded a $27M OpenTable loyalty-liability reversal in Q1, benefiting nine-month advertising and other revenue.
- Management expects accommodation growth rates generally to decelerate as the business scales, while continuing to invest in marketing, technology and personnel, even where this pressures margins. Performance marketing spend is expected to increase; management noted that returns on this spend have a long-term downward trend, though individual periods may differ. No specific revenue or earnings forecast is provided in this filing.
- Management estimated a 2018 effective tax rate of approximately 18%–21%; the nine-month rate was 20.2%. The Tax Act accounting remained provisional, and final amounts could differ. The Netherlands Innovation Box benefit materially reduces the tax rate but could be reduced or lost.
- Key operating risks include intense competition (including from Google and alternative-accommodation platforms), dependence on paid search and other marketing channels, foreign-exchange movements, travel-market disruptions, and rising costs as merchant transactions expand. Management cited potential margin pressure from payment processing, chargebacks and other merchant-related costs.
- Legal and contingent matters: Booking.com faces a contested French tax assessment of approximately €356M for 2003–2012, with a further audit covering 2013–2015; an upfront payment could be required to contest the matter in court. A separate 2018 accrual of approximately $29M relates to prior-period travel transaction taxes at a subsidiary; the company estimated up to approximately $20M of reasonably possible additional loss. Competition scrutiny of parity clauses continues, including a Swedish court order under appeal and a German prohibition under appeal. A Turkish court order barring offers of Turkish accommodations to Turkish residents is expected to continue harming results.
- Other notable commitments include €161M remaining under the Booking.com headquarters construction agreement, payable through anticipated completion in early 2021. A planned hotel meta-search acquisition for approximately $140M in cash was subject to regulatory approval and other closing conditions. A $200M investment in Grab occurred after quarter-end.
Important facts for investors to verify
- Use the filing’s accounting-adjusted comparisons when assessing revenue growth and margins; do not compare 2018 reported revenue directly with 2017 reported revenue without accounting for the revenue-standard change.
- Track accommodation room-night and gross-bookings growth alongside marketing efficiency, merchant transaction costs, bad-debt provisions and chargebacks.
- Assess the sustainability of earnings growth excluding investment fair-value gains and the OpenTable loyalty-liability reversal.
- Monitor the French and Italian tax matters, the newly accrued travel-tax exposure, competition proceedings and the Turkish operating restriction for potential cash and business impacts.
- Review capital allocation: the company repurchased $4.1B of stock year to date and had $6.4B of remaining repurchase authorization at September 30, while carrying approximately $8.9B of debt principal.