Booking Holdings Inc.

Welcome to Booking Holdings Third Quarter 2018 Conference Call. Booking Holdings would like to remind everyone that this call may contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guaranteed of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed, implied, or forecasted in any such forward-looking statements. Expressions of future goals or expectations and similar expressions reflecting something other than historical fact are intended to identify forward-looking statements. For a list of factors that could cause Booking Holdings' actual results to differ materially from those described in the forward-looking statements, please refer to the Safe Harbor Statements at the end of Booking Holdings' earnings press release. as well as Booking Holdings' most recent filings with the Securities and Exchange Commission. Unless required by law, Booking Holdings undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. A copy of Booking Holdings' earnings press release, together with an accompanying financial and statistical supplement, is available in the For Investors section of Booking Holdings website, www.bookingholdings.com. And now I'd like to introduce Booking Holdings speakers for this afternoon, Glenn Fogle and David Goulden. Go ahead, gentlemen.

Thank you, and welcome to Booking Holdings' fourth quarter conference call. I'm joined this afternoon by our CFO, David Goulden. We had a strong quarter with 171 million worldwide room nights booked, which is up 13% year-over-year and exceeded the high end of our guidance range. Our revenue increased 16% year over year in U.S. dollars, or about 21% on a constant currency basis. Adjusted EBITDA grew 17% in U.S. dollars, and the FX impact was a couple of points higher than it was on revenue. Our non-GAAP EPS was up 33% year over year. When I look back at 2018, I am pleased with the financial performance of the company. Our total booked room nights exceeded three-quarters of a billion room nights, and we produced strong year-over-year growth across our key financial metrics. Revenue was up 17%. Adjusted EBITDA was up 18%, and non-GAAP EPS was up 20%. We not only drove solid top-line growth, increasing our share on the accommodation market, but also stabilize our operating margins through our performance marketing optimization strategy, which we began in the third quarter of 2017. In 2018, we invested in three main areas that we believe can drive the long-term growth of the business, and we will continue to develop these in 2019. First, in alternative accommodations, we continue to add to our supply base. And as of December 31st, Booking.com had over 5.7 million reported listings. However, we are not just focused on the total number of alternative accommodation listings, but are also concentrating on the quality and type of properties joining our platform so we can provide the best choices for our customers and drive search conversions. Booking.com's alternative accommodation business has meaningful size and scale and recorded approximately $2.8 billion in revenue in 2018, representing approximately 20% of our overall revenue for the year. It also reached the important milestone of over $1 billion in revenues in Q3 2018. It is also growing faster than our consolidated growth rate and is nicely profitable. We believe offering real choice with both alternative accommodations and traditional properties on one platform is the best customer proposition. We believe a telling data point underscoring the attractiveness of our model is approximately 40% of booking.com's active customers booked an alternative accommodation property at some point during the past 12 months. Second, We invested in 2018 and in 2019, we'll step up our investment in the growth of our business through branding and customer acquisition programs in order to take share in the markets with the highest long-term potential returns. We believe these incremental investments will help drive greater loyalty and higher repeat rates to our direct channel over time. Just two days ago, we launched our new U.S. brand campaign, which we expect will drive further awareness in this important growth market. We will also look to improve brand awareness across our primary markets to increase brand campaigns in both offline and online channels. These marketing programs are taking on a greater importance as many of our performance marketing partners are experiencing slower customer growth. Third, we will continue to invest in the rollout of Booking.com's payment platform. This platform provides payment options favored by customers and property partners, particularly non-hotel property partners, and provides a platform for merchant product offerings. Merchant offerings provide greater merchandising possibilities for Booking.com, and this year we plan to step up our investment in this capability to drive growth. This payment platform will also facilitate our transport and local attractions business, where we envision a frictionless customer experience that we believe will drive enhanced loyalty. For example, We look to build upon the integration of rentalcars.com and booking.com to deliver a better ground transport offering for booking.com's customers this year. The number of car rentals and rides booked on the booking.com platform grew rapidly this past year, contributing to our belief that an integrated offering is highly valued by our customers. China and the broader APAC regions remains an important geographic focus for us, and we invested significantly against this very large opportunity in 2018. As a result of smart growth investments, Agoda produced very solid growth rates in the region, despite a very competitive marketplace. We continue to work with our partners, Ctrip and Metuan, and we introduced a new strategic and financial relationships with GD and Grab, all of which we believe will help both Booking.com and Agoda build better brand awareness and acquire customers more effectively in this region. Kayak completed a busy year with the integration of Momondo and the acquisition of Hotels Combined in December. Both acquisitions bring greater geographic diversity and product strength to the Kayak platform as it continues to build a global multi-product, multi-brand travel search platform. We also announced the combined reporting structures of Kayak and OpenTable during 2018 to further drive experimentation and innovation across both platforms. We're already seeing early signs of this with OpenTable recently announcing that its customers can use OpenTable dining points to book discounted hotel stays. And I look forward to seeing further innovation from the combined teams. Priceline.com is increasing its momentum, and we're starting to see the benefits of our investments on this platform. Their redesigned package product is growing very rapidly, gaining acceptance in the U.S. market. We're excited about the potential of this product for the entire company. Finally... As you can see from our Q1 guidance, we witnessed a slow start to the year, primarily in our core European markets, which we believe is largely due to overall macroeconomic factors. The initiatives outlined above are aimed at driving long-term top-line growth and share gains, and will help support the business if macro conditions soften. We believe these steps strike the right balance between driving growth and operating margins, Furthermore, we believe our financial scale and global diversified platform positions us to perform well through macroeconomic challenges. In conclusion, we had a very good year in 2018 and believe we have a great long-term opportunity ahead of us. We will always manage our business with a long-term view and will continue to invest in growth this year with the goal of increasing our share across our primary markets. With that, I will now turn it over to our CFO, David Goulden, for the financial review.

Thank you, Glenn, and good afternoon. I'll discuss our operating results for the fourth quarter and for 2018 and then provide thoughts on the full year 2019 as well as our guidance for the first quarter. All growth rates are relative to prior year comparable period unless otherwise indicated. All year-over-year growth rates referenced in my remarks will compare the current year income statements under the new revenue accounting standard to prior year under the previous accounting standard. Gross bookings and other metrics like room-night reservations are not impacted by the new revenue accounting standard. On non-GAAP, financial results and forecasts include stock-based compensation and information regarding reconciliation to GAAP can be found in our earnings release. Now on to our results for the quarter. Our booked room night growth of 13% for the quarter exceeded the high end of our guidance range. In the quarter, we observed a moderate step down in growth rates from October levels. Average daily rates for accommodations or ADRs were up about 1% in Q4 relative to the prior year on a constant currency basis versus our forecast for about 2% ADR growth in the quarter. Changes in foreign exchange rates reduced Q4 growth rates in U.S. dollars by approximately four percentage points versus last year. We estimate the changes in FX rates impacted Q4 gross bookings and revenue growth rates by a similar amount and the Q4 EBITDA growth rate by a couple of points more. Q4 gross bookings grew by 9% expressed in U.S. dollars and grew by about 13% on a constant currency basis, coming in at the high end of our guidance range. Consolidated revenue for the fourth quarter was $3.2 billion and grew by 16% in U.S. dollars and by about 21% on a constant currency basis, coming in above the high end of our guidance range. Advertising and other revenue, which is mainly comprised of non-intercompany revenues for kayak and open table, grew by 14% in Q4 compared to the prior year. Total revenue for the fourth quarter of 2018 under the current revenue standard was approximately 5% higher than it would have been if reported under the previous revenue standard. As a result, our revenue, adjusted EBITDA, and net income growth rates versus the prior year were positively impacted in the quarter. In addition, expenses as a percentage of revenue as well as margins were impacted from the higher revenue when comparing to the prior year Q4. So to help you understand the underlying drivers of leverage and deleverage in the business in Q4, I'll talk about these on a like-for-like revenue basis to eliminate the impact of the Q4 benefit from the revenue accounting change. Adjusted EBITDA for Q4 was $1.26 billion, which exceeded the high end of our guidance range and was up 17% year-over-year on a reported basis and up about 4% on a like-for-like basis. As I mentioned previously, our growth rates were negatively impacted from year-on-year changes in FX rates. Our Q4 adjusted EBITDA margin of 36% under the previous revenue accounting standard was above our forecast, largely due to some leverage in performance marketing. We fully lapped our strategy to optimize performance marketing ROIs, which we began in mid-Q3 2017. We remained disciplined in our spending and we were encouraged to see a modest leverage of 20 basis points from our performance marketing in the quarter, which was better than the deal leverage we anticipated. We continue to see these channels as an effective way to acquire customers and will continue to invest rationally to optimize growth. As part of our continued effort to drive more traffic to our websites, we increased our spending on brand marketing in the quarter by 27% versus Q4 last year, which contributed about 50 basis points of deleverage. Sales and other expense continued to grow faster than revenue, primarily due to the growth of our payments platform at Booking.com. Finally, personnel expense came in lower than our forecast and contributed a small amount of leverage in the quarter. Our non-GAAP EPS was $22.49, up 33% versus the prior year. Non-GAAP net income reflects a non-GAAP tax rate of 11.3% in Q4, which decreased from the prior year primarily due to a tax benefit resulting from the application of regulatory guidance issued in November that clarified a provision of the U.S. Tax Cuts and Jobs Act. Our full-year non-GAAP tax rate was 18.3%. Our 6% lower share count in Q4 versus last year further benefited EPS growth in the quarter. On a GAAP basis, operating income grew by 16%, and GAAP operating margins decreased by 13 basis points compared to Q4 last year. GAAP operating income is negatively impacted by a $21 million pre-tax related to travel transaction tax charges from prior periods that are recorded in the G and A expense line. Q4 gap net income amounted to $646 million, or $13.86 per share, up significantly from the $11.41 loss in Q4 2017, which was negatively impacted by last year's $1.3 billion provisional net income tax expense related to the Tax Act. Our Q4 gap net income includes a $474 million pre-tax loss related to unrealized losses on our equity investments in Metuan and Ctrip. Q4 gap net income was also negatively impacted by the travel transaction charges that I just mentioned. We excluded the unrealized loss and the travel transaction charges from our non-gap results. We had a gap tax rate of negative 2% for the quarter, which was primarily driven by the reversal of the tax charges related to a provision of the Tax Act that I mentioned previously, as well as a separate $48 million tax benefit related to the finalization of the one-time expense we occurred in Q4 2017 due to the Tax Act. Our cash investments amounted to $14.7 billion at the end of the quarter end. For the full year 2018, we generated $5.3 billion of operating cash flow, which increased by 15% compared to the prior year. Our free cash flow for the year was $4.9 billion, which increased by 12% compared to the prior year. We returned about $1.8 billion during the fourth quarter to our shareholders through share buybacks. Since the start of 2018, we reduced our fully diluted share count by approximately 6% through our sixth quarter. billion in repurchases for the full year. As of December 31st, we had approximately $4.5 billion remaining of our share repurchase authorization. We will continue to be both programmatic and opportunistic with regard to our repurchases, and now we expect to complete this authorization before the end of 2019. Looking back at 2018, we're pleased with our strong performance during the year, as we delivered room night growth of 13%, revenue growth of 17%, adjusted EBITDA growth of 18%, and non-GAAP EPS growth of 20%. We exited the year in a stronger position and achieved many of our objectives. We grew our direct channel, which now represents over 50% of our booked room nights. Our mobile platform is strong, with over half of our room nights booked on a mobile device. And finally, as Glenn noted, in 2018, approximately 20% of our revenue and a higher percentage of our room nights were generated by our alternative accommodations business. Each of direct, mobile, and alternative is growing faster than our overall growth rate. Now turning to 2019, I want to start by talking about some factors that will impact the year and then come back to our guidance for Q1. There are four main factors that we believe will impact the shape of 2019. The first is our growth investments. The second is a continued rollout and adoption of our new payments platform of Booking.com. The third is some mechanical timing and comparison factors. And the fourth is the macroeconomic environment. Now let's look at each of these in turn. Starting with our growth investments, as Glenn talked about, in 2019, we're investing for growth, customer acquisition, loyalty, and a number of key areas. These growth investments are a step up in spend from normal levels. You'll see them impact our financials in brand, in revenue, via merchandising, as well as customer acquisition and incentive programs, and you'll also see them in personnel to support these initiatives. We expect there will be some in-year revenue return But after taking this into account, these growth investments will reduce our EBITDA growth rate by a few percentage points in 2019. These investments start at the beginning of this year. The expected returns are higher in the second half of the year, so there'll be a greater negative impact on EBITDA growth during the first half. This means that our consolidating EBITDA growth will be higher in the second half. Now moving to payments for booking.com. In 2018, approximately 10% of the gross bookings at Booking.com was processed via our payments platform, and we expect this to continue to increase. In 2018, payments put pressure on EBITDA in the form of higher sales and other expenses that were not fully offset by associated revenue. This reduced our consolidated EBITDA growth rate in 2018 by a little over 1%. Going forward, we do not expect any additional reduction in EBITDA growth from payments and will continue to see increases in revenue. This will pressure margin rates modestly. We also see the opportunity for payments to drive EBITDA growth in the future. Of course, payment provides important advantages in many areas, including merchandising flexibility, a better customer and partner experience, reduced customer service expenses, and the ability to coordinate and manage integrated trips. The third set of factors are more mechanical but important as you think about the year. FX is expected to be quite significant this year. Using current FX rates assumed in our guidance, gross booking growth and revenue growth through to non-GAAP EPS growth will be reduced by approximately 250 basis points for the full year and 500 basis points for the first half of the year. Additionally, the timing of Easter will impact revenue growth in Q1 and Q2. Last year, Easter was on April 1st, and therefore the majority of Easter revenue was recorded in the first quarter. This year, with Easter on April 21st, Easter travel revenue will be recorded in Q2. Compared with Easter falling on the same day as last year, we estimate that about $65 million of revenue will move into Q2. We estimate the shift in timing will reduce Q1 2019 revenue growth rates by approximately 200 basis points and increase Q2 2019 revenue growth rates by approximately 200 basis points. The fourth is the external macro. The fourth factor is the external macro environments. We continue to expect travel to grow faster than GDP on a global as well as on a region by region basis. Of course, this means that the growth of travel on a regional basis will be impacted by regional GDP and sentiments. Consistent with recent economic indicators, we saw a slow start to the year in Europe, and this is impacting our room night growth guidance for Q1. To provide a little bit more insight, January room night growth in Europe was a step down from December, and February is looking stronger than January but still below December. We expect to continue to gain share in accommodations in Europe, especially with our investments. Room-like growth rates in the other parts of the world are more in line with what we saw in December. We think that walking you through these factors will be helpful as we describe a new bill your models for the year. We also think that sharing some expectations for the full year, taking these factors into account will be helpful as well. For 2019, we expect to gain share in accommodations in each major geographic region. And we're confident that the strength of our business reinforced by the growth investments we're making this year will enable us to achieve this. We'll manage the balance between growth and profitability with an expectation that non-GAAP EPS on a constant currency basis will grow in the low double digits in 2019 after factoring in the impact from the growth investments I previously mentioned. If economic conditions were to further soften, we will still preference growth over realizing short-term margins because we believe this is the best for our business in the long term. So with that as a framework, let's turn our attention to Q1. Our Q1 guidance reflects our quarter-to-date actual results and our forecast for the remainder of the quarter. Foreign exchange rates are expected to be an approximately 6% to 7% headwind to year-over-year growth rates in Q1, which we estimate will impact gross bookings, revenue, EBITDA, and non-GAAP EPS growth rates by similar amounts. We used a dollar-to-year exchange rate of 1.13 when setting our Q1 guidance. We are forecasting booked room nights to grow by 6% to 8%, and total gross bookings to be approximately flat at the midpoint of our guidance in U.S. dollars and to grow by 5% to 7% on a constant currency basis. This reflects what we've seen so far this quarter and also limited impact from our growth investments. Our Q1 forecast assumes that constant currency ADRs for the company will be down about 1% compared to the prior period. We forecast Q1 non-GAAP revenue to be approximately flat at the midpoint of our guidance in US dollars and grow by 5% to 7% on a constant currency basis. Normalizing for both Easter and constant currency, we estimate that Q1 non-GAAP revenue to grow by 7% to 9%. We forecast that Q1 GAAP revenue will be down 2% to approximately flat when compared to Q1 last year. Q1 adjusted EBITDA is expected to range between $680 million and $700 million. The resulting growth rate is also negatively impacted by unfavorable year-on-year FX change and by Easter timing. Normalizing for both Easter and constant currency, we estimate that Q1 EBITDA will grow by 2% to 4%. As I mentioned earlier, this is negatively impacted by our growth investments, especially in our seasonally smallest revenue quarter. We are forecasting leverage from performance marketing expense line in Q1, reflecting lower volumes in the pay channels and our continued focus on acquiring high-quality traffic. We expect to accelerate our brand marketing spend in the quarter, which will contribute to deleverage to the P&L and more than offset the leverage we're expecting from performance marketing. Brand marketing is a key area where we're making growth investments to drive more direct traffic to our websites and build better awareness. Finally, sales and other expense growth is expected to decelerate relative to Q4, but will continue to grow faster than revenue, primarily due to the ramp-up of our payment platform at Booking.com. We are forecasting Q1 non-gap EPS of approximately $10.90 to $11.20. Normalizing for both Easter and constant currency, we estimate Q1 non-gap EPS growth to grow in the low double digits. Our non-GAAP EPS forecast includes an estimated income tax rate of approximately 18%, which is lower than Q1 last year, primarily due to the clarification around the provision of the Tax Act previously mentioned, and lower than our full year non-GAAP tax rate due to certain discrete tax benefits typically realized in the first quarter. We expect our full year non-GAAP tax rate to be 19% to 19.5%. Our Q1 non-GAAP EPS guidance assumes a fully diluted share count of about 45.6 million shares, which is 7% below Q1 last year. We forecast GAAP EPS between $9.90 and $10.20 for Q1. Our GAAP EPS guidance for Q1 assumes a tax rate of approximately 18%. We have hedge contracts in place to substantially shield our first quarter EBITDA and net income from any further fluctuation in currencies versus the dollar between now and the end of the quarter. But the hedges do not protect our gross bookings, revenue, or operating profit from the impact of foreign currency fluctuations. Our forecast does not assume any significant change in macroeconomic conditions in general or in the travel market in particular. With that, we'll now take your questions.