Booking Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Comparisons are with the corresponding 2018 periods unless noted. Amounts are U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $3.850B | $3.537B | $6.687B | $6.465B |
| Operating income | $1.247B | $1.221B | $1.803B | $1.951B |
| Net income | $979M | $978M | $1.744B | $1.585B |
| Diluted EPS | $22.44 | $20.13 | $39.17 | $32.42 |
| Operating margin | 32.4% | 34.5% | 27.0% | 30.2% |
Q2 revenue rose 8.9% as reported (approximately 14% constant currency); first-half revenue increased 3.4% (approximately 9% constant currency). Accommodation room nights grew 11.8% in Q2 and 11.1% in the first half. Gross bookings increased 4.8% and 3.2%, respectively, as reported, or approximately 10% and 9% constant currency.
Merchant revenue grew 35.0% in Q2 and 26.3% for the first half, reflecting expansion of merchant accommodation bookings. Agency revenue rose 1.6% in Q2 but declined 2.6% for the first half. Q2 merchant revenue included a favorable $53M timing correction from revenue deferred in Q1. Revenue as a percentage of gross bookings was 15.4% in Q2 versus 14.8%; the filing attributes much of the increase to Easter timing and the $53M correction.
Operating income increased 2.1% in Q2 but fell 7.6% in the first half; operating margin declined in both comparisons. Q2 net income was nearly flat, while diluted EPS rose partly alongside lower weighted-average share counts. First-half net income included $468M of unrealized gains on marketable equity securities, versus $76M in 2018; this materially boosted reported earnings.
Cash flow, liquidity and debt
- Six-month operating cash flow was $1.937B, down from $2.290B. The company cited the $403M French tax-assessment payment and working-capital movements. Capital expenditures were $199M; operating cash flow less capital expenditures was approximately $1.738B.
- At June 30, cash and cash equivalents were $5.256B, short-term investments $1.553B, and long-term investments $4.618B. Management reported $11.4B in cash, cash equivalents and short- and long-term investments; this total includes equity and other investments, not solely cash-like assets.
- Debt carrying value was $8.661B: $975M of current convertible debt and $7.686B of long-term debt. The $1.0B 0.35% convertible notes due June 2020 were classified as current. No revolving-facility borrowings were outstanding at quarter-end; the facility is $2.0B.
- The company repurchased 3.06M shares for $5.5B in the first half and had $14.2B of remaining repurchase authorization at June 30. It reported no off-balance-sheet arrangements with a current or reasonably likely future material effect.
Material changes, outlook and notable items
- Merchant bookings shifted the revenue mix and drove higher payment-processing, sales and other costs. Management expects these costs to rise with merchant growth and said that merchant expansion may pressure operating margins.
- Brand marketing increased 50% in the first half to $338M; performance marketing was $2.222B, broadly flat year over year. Management plans continued investment in marketing, technology and personnel, even where it puts pressure on margins.
- Management expects accommodation growth rates generally to decelerate over time and warned that alternative accommodations can carry higher servicing costs and lower margins. It provided no specific numerical earnings or revenue guidance in the supplied filing text.
- Q2 results benefited from Easter falling later in 2019 than in 2018. The $53M merchant-revenue timing correction also raised Q2 reported revenue and revenue-to-gross-bookings conversion; the filing does not present it as a recurring growth driver.
- A $66M wage-related Netherlands tax accrual for prior periods was recorded in personnel expense in Q2. France’s new 3% digital-services tax was estimated to create about $15M of first-half liability, with expense to be recorded in Q3.
- The company paid $403M to French tax authorities while contesting assessments concerning 2003–2012; the payment is recorded in other assets and is refundable with interest to the extent the company prevails. Further French audits cover 2013–2018. Other tax exposures include an Italian assessment of approximately €48M and Turkish assessments of approximately TRY433M; no liabilities were recorded for those assessments.
- Competition and consumer-protection reviews, foreign exchange, travel demand, search-platform dependence, cyber and payment risks, and regulatory changes remain material risks. CMA commitments on pricing disclosures, search rankings and discount or availability claims take effect September 1, 2019. Booking.com’s Turkish-resident accommodation offering remained suspended under a court order, which management said continued to hurt growth and results.
- The filing corrected a prior-period presentation error in 2018 comprehensive income: six-month 2018 comprehensive income was revised from $1.3B to $1.5B. The correction did not affect previously reported net income, balance sheets, equity-change statements or cash flows.
Important facts for investors to verify
- How much reported revenue and earnings growth is supported by underlying booking trends versus Easter timing, the $53M revenue correction and investment fair-value gains.
- Whether merchant-booking growth can offset its associated processing and service costs without further margin pressure.
- The timing and outcome of the French, Italian and Turkish tax matters, including potential additional assessments and the recoverability of the $403M French payment.
- Cash generation and working-capital trends, while distinguishing cash and short-term investments from longer-term and equity investments.
- Funding plans for the $1.0B convertible notes due in June 2020 and the scale and pace of share repurchases relative to other capital needs.
- Execution of the CMA commitments and developments in competition, consumer-protection and Turkish regulatory proceedings.