Booking Holdings Inc. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019; comparisons are with the same periods in 2018. Booking Holdings operates Booking.com, KAYAK, priceline, agoda, Rentalcars.com and OpenTable. Online accommodation reservations generated about 88% of revenue in both third quarters. The company reorganized its operating segments from six to four during Q3; it continued to report one aggregated reportable segment.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.040B | $4.849B | $11.727B | $11.314B |
| Operating income | $2.370B | $2.247B | $4.173B | $4.198B |
| Net income | $1.950B | $1.767B | $3.694B | $3.352B |
| Diluted EPS | $45.54 | $37.02 | $84.06 | $69.07 |
| Operating margin | 47.0% | 46.3% | 35.6% | 37.1% |
- Q3 revenue rose 3.9% as reported (about 7% in constant currency); nine-month revenue rose 3.6% (about 8% constant currency). Q3 operating income increased 5.5%, while nine-month operating income declined slightly.
- Room nights increased 11% in both periods. Gross bookings rose 4.1% in Q3 and 3.5% year to date as reported (about 7% and 8% in constant currency). Accommodation ADRs declined approximately 3% in Q3 and 2% year to date on a constant-currency basis.
- Merchant revenue grew 25.1% in Q3 and 25.8% year to date, reflecting expansion of merchant accommodation bookings. Agency revenue fell 3.0% and 2.8%, respectively, partly as bookings shifted to the merchant model.
- Q3 net income included a $49M net unrealized loss on marketable equity securities, compared with a $31M gain in Q3 2018. Nine-month results included $419M of such gains, versus $107M in 2018, making reported earnings sensitive to investment valuations.
- Q3 revenue included a $37M reduction in loyalty and other incentive liabilities from revised redemption estimates. Treat this as an unusual revenue benefit, not necessarily recurring operating growth.
- Nine-month cash from operations was $3.788B, down from $4.254B. The company attributed much of the decline to a $403M payment to French tax authorities to preserve its right to contest assessments. Investing activities provided $6.954B, primarily from investment sales and maturities; financing activities used $6.876B, including $6.840B for share repurchases.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $6.466B, short-term investments $973M and long-term investments $4.319B—approximately $11.8B combined. Current assets were $10.056B versus current liabilities of $5.528B.
- Debt carrying value was $8.494B, including $982M of 2020 convertible notes classified as current and $7.512B of long-term debt. The 2020 notes’ holders gain an unconditional conversion right in March 2020. A new $2.0B five-year revolving facility had no borrowings outstanding at quarter-end.
- The company repurchased $6.812B of shares during the first nine months and had $12.9B of remaining repurchase authorization at September 30. It said repurchases continued in Q4, subject to market conditions and other capital uses.
- Cash, cash equivalents and investments were $11.8B, including approximately $3.8B held by international subsidiaries. A $1.1B U.S. transition tax liability remains payable over seven years.
Outlook, commentary and risks
- No numerical earnings or revenue guidance is provided in the supplied filing text. Management expects accommodation growth rates generally to decelerate as the business scales and markets mature, while noting growth may vary.
- Management expects alternative accommodations to pressure margins because they can involve fewer booking opportunities and higher customer-service costs. Merchant growth also brings payment-processing, fraud, chargeback and personnel costs that may weigh on operating margins.
- The company cites intense competition, particularly from Google and other large online platforms; reliance on search and paid marketing channels; declining ADRs and performance-marketing returns; foreign-exchange exposure; and macroeconomic, political and travel-disruption risks.
- Material legal and regulatory exposures include French tax assessments of approximately €356M ($403M), which were paid under protest and recorded in other assets; Italian and Turkish tax assessments that the company contests and for which it has not recorded liabilities; and accrued travel transaction taxes of $65M, with approximately $25M of reasonably possible additional loss. It also accrued $61M for a Netherlands wage-related tax matter and $29M for France’s 3% digital services tax.
- In October 2019, after quarter-end, a Turkish court ruled that Booking.com must meet registration requirements to offer Turkish accommodations to Turkish residents. Failure to appeal successfully or meet the requirements could continue to affect results.
- The company reported no goodwill impairment and effective disclosure controls. Its annual goodwill test found reporting-unit fair values substantially above carrying values.
Important facts for investors to verify
- Whether constant-currency room-night and gross-bookings growth can continue despite lower ADRs and reported revenue growth being affected by foreign exchange.
- How much future revenue and margin are affected by the continuing shift from agency to merchant bookings and the related payment, fraud and service costs.
- The recurrence and size of non-operating investment mark-to-market gains or losses, and the $37M incentive-liability release that boosted Q3 revenue.
- The outcome and potential additional exposure from the French, Italian, Turkish and other tax matters, including the Turkish registration ruling issued after quarter-end.
- Near-term funding and capital-allocation plans for the $1.0B principal amount of 2020 convertible notes, substantial share repurchases and remaining transition-tax payments.