Booking Holdings Inc. (then priceline.com Incorporated) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; financial statements are unaudited and compare with Q1 2010. The filing covers the predecessor company under its 2011 name, priceline.com Incorporated.
Business context
The company operated online travel services under the priceline.com, Booking.com, Agoda and TravelJigsaw brands. International hotel reservations were the principal growth driver. TravelJigsaw, an international rental-car reservation service, had been acquired in May 2010 and is included in the reported results.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $809.3 million | $584.4 million | +38.5% |
| Gross profit / gross margin | $505.8 million / 62.5% | $319.1 million / 54.6% | Gross profit +58.5% |
| Operating income / operating margin | $154.1 million / 19.0% | $87.9 million / 15.0% | Operating income +75.2% |
| Net income | $104.0 million | $53.9 million | +93.0% |
| Net income applicable to common stockholders | $104.8 million; $2.12 basic and $2.05 diluted per share | $53.9 million; $1.16 basic and $1.06 diluted per share | |
| Operating cash flow | $276.2 million | $104.7 million |
- Merchant revenue was $454.8 million (+23.5%); agency revenue was $351.4 million (+64.8%). Agency growth largely reflected Booking.com. Other revenue was $3.1 million.
- Gross bookings rose 57.3% to $4.665 billion: international bookings were $3.536 billion (+79.0%) and domestic bookings $1.129 billion (+14.1%). Hotel room nights increased 55.8% to 31.2 million.
- Operating expenses increased 52.1% to $351.7 million. Online advertising rose 63.7% to $185.1 million, primarily supporting international growth and reflecting the inclusion of TravelJigsaw.
- At March 31, cash and cash equivalents were $551.1 million and short-term investments were $1.195 billion, totaling approximately $1.746 billion. Current assets were $2.106 billion and current liabilities $1.087 billion (current ratio approximately 1.94).
- Convertible-note principal outstanding was approximately $575.2 million; the 2015 notes became holder-convertible in Q2 2011 after the conversion threshold was exceeded. The company had no borrowings under its $175 million revolving credit facility.
- Operating cash flow included a $177.8 million increase in accounts payable, accrued expenses and other current liabilities, including approximately $124 million accrued for withholding taxes paid in April on vested stock awards. Investing cash flow was positive $55.1 million; financing cash flow was negative $147.2 million, principally reflecting $157.3 million of share repurchases.
Material changes versus Q1 2010
- Revenue, gross profit and earnings increased substantially, led by international hotel bookings. International revenue rose about 80%; the filing reports approximately 79% growth on a local-currency basis.
- Gross margin improved as retail, price-disclosed revenue—generally reported net—made up a larger share of revenue than Name Your Own Price transactions, which are reported gross with related cost of revenue.
- Interest expense increased to $7.7 million from $4.8 million, mainly due to higher average debt. Foreign currency transactions and other expense increased to $7.1 million from $3.1 million; Q1 2010 included a $5.3 million debt-extinguishment loss, while Q1 2011 included greater foreign-exchange transaction losses.
- Cash from operations rose, but was materially supported by working-capital movements, including the accrued stock-award withholding taxes. The 2015 notes’ reclassification to current liabilities contributed to a sharp increase in reported current liabilities.
Outlook, commentary and risks
- Management expected Q2 2011 year-over-year room-night growth to decelerate from Q1, citing the scale of the business and tougher comparisons. No numerical revenue or earnings guidance was provided.
- Management expected online advertising expense to continue increasing during 2011. It also expected the Dutch Innovation Box Tax benefit to reduce the consolidated tax rate by approximately 1–2 percentage points in 2011, subject to eligibility and continued certification.
- Management said existing cash and liquid resources should fund operations, capital expenditures and obligations for at least the next 12 months. Approximately $0.9 billion of cash and short-term investments was held internationally and intended for reinvestment; repatriation could create additional U.S. tax liability.
- Key risks include intense competition, search-engine dependence and rising customer-acquisition costs; supplier access, airline/GDS changes and rental-car availability; foreign-exchange volatility; travel-demand shocks, including Japan’s earthquake and tsunami and potential unrest in Thailand; and seasonal variability.
- Hotel occupancy and related tax disputes involved approximately 50 lawsuits and multiple audits or inquiries. The company recorded a reserve of approximately $28 million, but stated that ultimate exposure could be materially higher or lower and that it could not estimate the maximum potential loss.
- The U.K. Office of Fair Trading was investigating possible competition-law issues concerning hotel online booking prices. The company was cooperating and said it could not predict the outcome or impact.
- Disclosure controls and procedures were reported effective at quarter-end; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether booking growth and profitability persist as management anticipated slower year-over-year growth and tougher comparisons.
- How much operating cash flow reflects sustainable earnings versus working-capital timing, particularly the stock-award withholding-tax accrual.
- The conversion, cash-settlement and dilution implications of the 2015 convertible notes, and the effect of their current-liability classification.
- Developments in hotel-tax litigation and assessments, including whether the $28 million reserve remains adequate.
- Whether the Innovation Box Tax benefit remains available and whether currency movements materially affect reported results and hedge values.