2023-05-04 23:15:29 ET
Summary
- Gross Bookings and Room Nights set historic records for this quarter.
- Booking Holdings has fully recovered from the difficult period caused by the pandemic.
- The company has about $20 billion for its share repurchase program. This may have a positive impact on BKNG's EPS.
Although Booking's ( BKNG ) Q1 2023 beat analysts' estimates , it immediately plummeted about 5% in after-hours.
- Expected EPS was $10.67 versus the actual $11.60.
- Expected revenues were $3.76 billion versus the actual $3.77 billion.
Overall, although the market reacted negatively, I view this quarterly as positive, as not only the company showed that it has fully recovered from the pandemic, but also broke some historical records in a difficult macroeconomic environment.
The reason I do not consider BKNG stock a buy is only because it is currently a bit expensive , so I limit my rating to a hold. Should the slump continue in the coming weeks, I would have no problem increasing my position. After all, we are talking about a company with a significant competitive advantage, an impressive free cash flow margin, and good growth prospects.
Comments on Booking Holdings' Q1 2023 results
In Q1 2023 total revenues were $3.77 billion, up 40.20% from the prior-year quarter. In addition, growth in constant currency was 47%, so the strong dollar was once again an issue.
Gross Bookings reached $39.42 billion, an all-time record in Booking's history for this quarter. The achievement of this milestone was largely due to growth in the merchant rather than agency model, but after all, Booking has been veering more toward the latter for years.
For the uninitiated, the difference is simple but important:
- In the merchant model, the customer pays the entire final price to the OTA, thus to Booking and not to the hotel. After the check-in date, the OTA pays the net price to the hotel calculated as the difference between the final price and the agreed commission.
- In the agency model, the customer pays the final price to the hotel either when booking or at check-in. Then, after the month of check-out, the hotel pays the agreed commission to the OTA, in this case to Booking.
The difference between these two models generates completely different cash flows, as in the merchant model Booking gets the full final price right away and only after check-in pays the net price to the hotel, while in the agency model it is basically the other way around. In the merchant model Booking can use the cash it later has to devolve to the hotels at check-in to invest it in other operations or create new competitively priced packages for its customers. The merchant model generates a kind of temporary liquidity that can be used for other purposes in the immediate term.
Initially, in order to grow ever more popular, Booking adopted the agency model, which was viewed favorably especially by hoteliers. However, as time passed and popularity grew Booking was able to veer toward the merchant model. And today, for the first time, the merchant model has generated more Gross Bookings than the agency model.
But there is another important record in this quarterly report.
For the first time in Q1, Room Nights reached 274 million, up 38.30% from the prior year quarter. In addition, Rental Car Days and Airline Tickets are also on the rise, a signal that customers appreciate the low-cost packages offered by the platform.
But how did this affect revenues and profitability in detail?
As expected, merchant revenues grew much faster than agency revenues, however the latter did slightly better; $1.78 billion vs. $1.75 billion. There was certainly a marked improvement over Q1 2022, however, it should be considered that the latter was negatively affected by the pandemic restrictions. Anyway, even comparing the current figure with the pre-pandemic period, this would still be an important growth. In fact, in Q1 2019 revenues were $2.83 billion, while in Q1 2018 they were $2.92 billion.
Different discussion, however, for operating income. Although it improved compared to Q1 2022, it is still below pre-pandemic values ($106 million more in 2019 and $280 million more in 2018). Marketing expenses of $1.51 billion, higher than in the past, were a major influence here; in 2019 and 2018 they were $1.19 billion and $1.20 billion, respectively. Either way, since advertising expenses are variable and not fixed, I am not worried about Booking's margins.
Free cash flow for Q1 2023 was $2.80 billion, an impressive result achieved by a margin of 74.10%. However, there is a premise to be made.
The merchant model, as explained earlier, allows Booking to get cash inflows even before the customer checks in, and this obviously positively affects cash flow from operations. However, it is only a momentary benefit, since in subsequent quarters when the customer checks in Booking will see a cash outflow equal to the value of the net price agreed with the hotel. So, it is certainly not sustainable to maintain a free cash flow margin at these levels throughout the year. In any case, this does not detract from the excellent result achieved in this Q1 2023.
Now let's take a look at the buyback.
In Q1 2023 , the Board of Directors authorized a share repurchase program of up to $20 billion. However, there was still about $3.5 billion left from the previous $15 billion buyback announced in May 2019. As of today, the company has another $21.88 billion available to continue its share repurchase program.
Personally, I tend to favor buybacks, however, I often notice that the timing of the purchases can turn out to be wrong. When the price per share was at $2.257 only 149,275 shares were purchased, while when it was higher at $2.536 the amount of shares purchased was about 3 times higher. In short, I would prefer it to be the other way around, more buying on declines so as to make the buyback as efficient as possible.
In conclusion, here are the company's main forecasts for the next quarter (Q2 2023):
- Room nights growth will be up mid-single digits year-over-year. This is not a huge growth, but it should be considered that the previous Q2 2022 results had a strong rebound after Q1 2022 was hurt by the Omicron variant. All in all, even if the growth will be modest, I consider it sufficient, not least because it would still be a 20% increase over the pre-pandemic values of 2019. In all of this, the macroeconomic environment has changed for the worse and it certainly does not help.
- Q2 gross bookings will grow about four points more than room nights on a year-over-year basis, thanks to a few points of growth in flight bookings and more favorable exchange rates.
- Fixed expenses in Q2 will grow about 25% year-over-year due to higher personnel and related expenses, indirect taxes, and IT expenses.
- Q2 adjusted EBITDA to be around 35% higher than last year
Final Thoughts
Personally, I find it difficult to view this quarterly as negative, so I do not agree with the market reaction. Gross Bookings and Room Nights got major improvements, as did revenues (especially merchant revenues). Free cash flow achieved a very high margin, and with still about $21 billion to be used for buyback there is ample room to increase EPS in the coming quarters. Finally, the guidance for the next quarter shows that Booking's growth is not over, and that the damage done by the pandemic is now just a bad memory. I conclude this quarterly analysis with the comments of CEO Glenn Fogel, who also appeared quite pleased with the results:
We saw a strong start to the year with first quarter room nights and gross bookings reaching our highest quarterly levels ever and both metrics surpassing our previous expectations. Our focus remains on continuing to improve our offering to both our supply partners and travelers, and I am encouraged by the progress our teams continue to make.
For further details see:
Booking Holdings: The Pandemic Is Just A Bad Memory