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.

Ladies and gentlemen, at this time, if you have a question, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. And our first question is from Justin Post from Bank of America Merrill Lynch. Your line is now open.

Great. Thank you. I'll just start off with just a high-level question. When you look at your booking growth rate in Q1 and you think about how you're performing versus other companies, it seems like it's a bit of a difference, your guidance versus other people in the travel industry. So how do you kind of reconcile that? And then maybe if you could tell us how much better February was versus January and if you think there was just something really abnormal for the first two months of the year. Thank you.

Hi, Justin. It's Glenn. So As you know, we are very European-centric in our business. We are a global company for sure, but our biggest business is by far in Europe. And Europe has definitely seen and is experiencing a slowdown if you look at any of the macro indicators out there, any of the published information, whether it come from the EU's data people, if it comes out from any of the investment banks that put out predictions for how European economies are going to go. And you see, and even I think it was yesterday, our chairman of the Federal Reserve, who actually said, seeing headwinds in Europe. So I think that is one element that would show a difference. On the other hand, I think if you look at the pure European players, if you look at some of the tour operators, the two who are the biggest in there, and I would just take a look at their numbers and what they said, I think I just see significant consistency with what we're saying right here, right now. And there are a lot of uncertainties there. And uncertainty is something that absolutely makes people a little hesitant to book. And I can go through besides just general macro. We can talk about Brexit, which is obviously creating a tremendous amount of uncertainty and people uncertain. Should I spend a lot of money right now or not? I don't know what's going to happen. I don't know. Are there going to be troubles getting traveling into Europe? Are there going to be troubles with exchanges? Or if you go into political issues in France, weekly political issues with the Yellow Vest protest, which makes it, do I want to go to Paris with that happening on Saturday and Sunday? Go to Germany, where the car industry drives the German economy, which is slowed down, is a secondary impact from trade arguments throughout the world, particularly China. The U.S. has a secondary impact on Germany. Go to Italy, where the government there seems to be a little bit in flux with what they're doing. I can go on and on. The fact is we are more impacted by things that happen in Europe than, say, a U.S.-based company. So I would say that on that one. In terms of actually in February and how that was, I think David said it about as much color as we're going to say is that February was a nice, you know, uptick from January, but it was still below December in Europe. And I think that's about all. David, anything else you want to add?

I just want to make a recap of the other comment which I made. I think, Glenn, you just talked exactly about what I said about Europe. But I also just want to recap just in that you heard that we said this really is an issue that's focused upon Europe and that room-night growth in the other parts of the world are in line with what we saw in December. Got it. Thank you.

Thank you. Our next question is from Mark Mahaney from RBC Capital Markets. Your line is now open.

Okay. Appreciate the, I think, relatively new disclosure on alternative accommodations. I didn't quite expect it to be that high as a percentage of revenue. So maybe talk a little bit more about that. I think you said that it was nicely profitable. So is it as profitable as the core business? Maybe how much faster it's growing than the overall business? And then Any color of their particular regions? Is there any more color about where that growth is coming from in alternative accommodations? Any more color there would be helpful. Thank you.

Hi, Mark. So it is a new disclosure, and we were very proud of that one I mentioned about Q3 and breaking that billion-dollar milestone. I think we were all pretty darn pleased about that. In terms of profitability, nicely profitable. I'm not going to get into the details of it. One thing we have talked about in the past, though, about how sometimes the cost involved in it can be more than the cost with the traditional hotel product. And it's easy to see that when you start talking about scale. If you want to deal with a hotel that has hundreds of rooms, you can distribute that cost much more easily than when you're going property by property by property. And that's about as much color as I'll give in terms of profitability. What we'll say in terms of geographic growth, et cetera. We have made a point in the past, and I'm going to continue this, is that we know that we are, and I just mentioned how we're a European-centric company, and we do very well in the capital cities in the alternative accommodations. We've got great properties there. We are able to produce a very good offer there. In other parts of the world, in the U.S. in particular, we need to increase our properties, particularly a certain type, and that is a single home that is in the beach locations, some of the ski locations. And just to give, I'll just point an example to show this. I was looking, talking about getting a Hamptons house for the family in And I looked at that on our site, and I looked at some of our competitors' sites, and I'm saying, we've got to get some more of that stuff. And that is something that we are doing. That's part of the things that we invest in. And I look at it as a glass half-full type thing. This is a great opportunity for us to increase and really drive the accelerator down a little bit in that area and grow our business.

Okay. Thank you, Clint.

Thank you. Our next question is from Lloyd Wellmsley from Deutsche Bank. Your line is now open.

Thanks. I guess first, it looks like performance marketing spend was up about 12% in the quarter. Call it 16, 17 XFX and almost 20 when you include brand spend. And yet Room Nights Booked was up only about 13. Can you give us a sense for what's going on with marketing ROIs and maybe some more color on how that's trending in kind of acquired channels? Growth is trending in acquired versus direct channels. And then I guess in some of the prepared remarks, you talked a lot about growth investments. It sounds like most of those are going to be on the brand side. Are you also going to be leaning in on the performance side for growth? And any color you can give there would be great.

Yeah, Laurie, this is David. Let me take the start of that. So let me just kind of clarify the difference between what we expected and what we saw in Q4. You have to You have to look at Q4. You have to exclude the impact of the extra revenue when doing your leverage and deleverage calculations. So on a like-with-like basis, we actually expected to get some deleverage in the performance marketing line. We actually wound up with a little bit of leverage. It's part of the reason why we came over on our EBITDA guidance for the quarter. And basically what drove that compared to our expectations was... a little bit less volume than we're expecting in those channels, and actually with ROIs in line with our guidance when we spoke to you about the quarter at the beginning of it. And actually, if you look at my comments about Q1, you see a similar trend as well. We're expecting some leverage in the performance marketing channel again in Q1 because volumes are a little lower. but we're still getting solid ROIs against those volumes. So you see our mix towards direct continue to increase as a result of that leverage we're getting in those channels. And then in terms of growth, I think we gave you the growth investments and we gave you a feel that they're going to impact our EBITDA growth this year by a few basis points. In terms of the income statement, I basically told you where you'll see them. Some of them will appear in the branding line. Some of them will appear in the revenue line in terms of merchandising, customer acquisition, customer incentive programs. You'll see some increases in the personnel line to support those investments. directly. In some of the countries where we talked about investing for long-term returns, there are some increases in performance marketing associated with those countries, but it's not the major part of the investment program.

Okay, thanks.

Thank you. Our next question is from Kevin Copelman from Cowan & Company. Your line is now open.

Hi, thanks a lot. So just to go into the room nights growth a little bit more for the first quarter, the guidance is about 400 basis points slower compared to your guidance for the fourth quarter. So is that fully just from the European kind of macro comments that you were mentioning, or are there any other key factors there for the Q1 nights guide? And then add another one. Thanks.

Kevin, I'll take that. I mean, that really is the major factor. Just kind of stitch together the couple of comments that we made to make sure that you have gotten. So we said that as we said when we guided for Q4, we expected some deceleration in room nights in the fourth quarter. From what we've seen, we obviously came quite strongly out of Q3 in September. We mentioned that we were seeing pretty good deceleration. room night growth in October. And as we expected, we saw a little step down in the fourth quarter. And in fact, November and December room nights were quite comparable to each other, but a little bit less than October and therefore a little bit less than the average of where we came out for the quarter. And then you jump off that point, and I think the rest of it we've kind of been through. We saw a step down, then a bit of a bounce back in Europe, and we really do believe that's tied to the macro, and we've looked at it very carefully. And then we saw a relatively similar performance in the first couple of months this quarter as we saw to the last few months of last quarter outside of Europe.

Okay, thanks for that. And then just to follow up on the investment in customer acquisition programs, particularly the incentive programs. Can you give us more color on what you're doing there? And are you focusing on an incentive-based loyalty program, or is it more on special one-off offers for new customers or all customers? Thanks.

Well, actually, it's actually that and many more. There are lots of different ways to put that money to work and achieve what we want to do in terms of an ROI that we think is acceptable over the long run. And certainly the two you mentioned are there, and there are a lot of other ones. It depends on which geography you're in, too. If you go to some of the things happening in the Asian marketplace where there's significant more price competition with discounting by wholesalers that's being put into retail, all sorts of things, we need to be able to compete with that straight out. If we don't provide a value to our customers, we're not going to get that kind of sales. We've got to do that. Certainly, there is things like potential loyalty programs. There are different things for just bringing in new customers. And even things, and I'll give you an example, it's a small thing, but I got a postcard yesterday from Booking.com that offered up a snail mail that offered me a discount if I went to the site and went in. So lots of different things to do. And on top of those pure ones, It's putting together packages with different types of our inventory, with different types of our products to create a better value that we may end up doing some subsidy for us, but we may also be working partially with suppliers. So, for example, you know, we have new deals with Didi. and grab. Those are ground transportation companies primarily. Working with them, where we made together work to be able to get more customers to those companies in areas that they need, where they help us get us customers in areas that we need, and doing different types of cooperative types of marketing programs that will help us get more customers. Lots of different ways to do that. And we're going to always be measuring which ones are giving us the best ROI.

Thanks, Glenn. And then just housekeeping on the EPS guide. Does that assume the future buybacks now that you expect to use that program in 2019?

Yeah, basically, yes. The EPS guidance from a housekeeping point of view, we said that we expect to use our remaining authorization. So we gave you a specific share count number for Q1, but in our guide for the full year, it assumes we extinguish that remaining authorization.

Thanks, David.

Thanks, Corinne.

Thank you. Our next question is from Doug Anmuth from JP Morgan. Your line is now open.

Thanks for taking the question. Glenn, I was hoping you could drill down more on the key benefits of the payment platform, and then if you could talk a little bit about when you start seeing those benefits more and how long it takes to fully roll out. And then David, just on the 1Q guide, is it safe to assume here that you're assuming further decel as you usually have done in previous quarters in the past? Thanks.

Doug, you're right. This payment platform is a very important thing for Booking.com as we go forward in developing its merchant capability so we can provide this greater merchandising. A couple of things I just mentioned. You need a payment platform to be able to do some of the things I was just talking, answering Kevin's question. So that's the basics there. But there's even more, just simple. I mentioned how important it is for our alternative accommodations business that we want to continue to grow that out. Well, that's also a very important thing to have because as you go out to those single-home property owners who are not that sophisticated, the old agency method that we use primarily at Booking.com is not really the thing that they want to use. They're not planning to be there and take a credit card and then get a bill from us to send us our commission. They want to have a merchant product there. So that's an important thing, too. In turn, it's one of those things, you know, we're always going to be working on because a payments platform is not just a simple thing in America where we're using credit cards. There are new payment systems throughout the world that are coming up all the time. And we need to be able to provide that to both sides of our marketplace. There are people on the supply side. I'd be connected to Alipay. I want to be part of WeChat Pay. That's how I want to get my money, and you've got to do that. Same thing on the customer who wants to pay. They say, hey, I want to use PTM, or I want to do M-Pesa. I can go through an endless list of these things. So when we talk about a payment platform, we're talking about something that's global and able to use throughout and helping reduce that friction in the entire transaction.

And, Dirk, let me just pick up on that and also clarify your question. Of course, payments is very important, but let's make sure it's not going to be the entire business. We do believe that pay at the property, which has been a big piece of our business, continues to be a big piece of our business, is also a very important part of our portfolio. And a lot of our customers and a lot of our partners also like that as well. So it's bringing in an additional capability to complement what we do so well at Booking.com. And then to comment upon your question on the Q1 guide, no, our Q1 guide does not assume a deceleration. That's why I did not say that. In fact, specifically, we said that January was, in fact, again, with the rest of the world being relatively consistent with December, I said that in Europe, January was a step down and February was a step up. So it reflects what we've seen so far and our expectations for the rest of the quarter, but it does not reflect a deceleration. Thank you, Beth.

Thank you. Our next question is from Deepak Madhavanan from Barclays. Your line is now open.

Hey, guys. Thanks for taking the questions. Yeah, some more related question on the payment side. What is currently the go-to-market strategy for the payments platform that's incentivizing hoteliers to choose your payment solution versus their existing one? And then over time, do you think there's additional opportunity to generate economics from the payments efforts? Right now, it sounds like you are probably using some incentives for adoption. I just wanted to get some call out there.

I'll take that, and I'm going to reverse because it is exciting, the second part of your question about being able to use the payment platform, not necessarily something that is increasing costs or is something that actually over time will actually enable us to make more money. And given the volumes that we put through and are going to put through in the future, I believe that is a great opportunity, but that is down the road. Right now, in terms of incentivizations and why, listen, as David just mentioned, our agency product is still the most part of the product. The way people, major hotels are still going to probably want to do for some time. But again, I go back to the thing about merchandising, putting together packages. You know, one of the things we always try and emphasize how we try and work with our supplier partners cooperatively in a way that adds value to both of us. And having that merchant payment product available so that we can combine a hotel with another service in a way that helps bring that customer to that hotel in a way that is frictionless, easy, makes that payment so much easier for the customer. Well, I think hotels are going to want to do that if it gets them more business, and I think that's really the incentive for that service. Over time, there could also be a volume issue where we can do a payment product that is significantly less expensive for smaller hotels in other parts of the world where their costs are higher.

Okay, that's helpful. Thanks, Glenn.

Thank you. Our next question is from Steven Zhu from Credit Suisse. Your line is now open.

Hi, Glenn. So building on your class potential markets commentary earlier, It seems like there's more dialogue around your local efforts in China, both in terms of earnings calls like this, as well as interviews with your local management teams and talking about the opportunity for outbound. So, you know, you've always had your partnerships there, but why is now the right time for what looks like what's probably more of a direct effort to advertise and establish the Booking.com brand in the country? And is perhaps a greater conversion rate from the payment product? Is that what's making, I guess, the ROIs there possible now?

Thanks. I would look at it a little differently, actually. You know, we first started our business in China many, many, many years ago. We now have approximately 1,000 employees there. And we have our, uh, different call centers there. We have always been pushing out our own brands and it's not just booking the comma goat has been operating in China for a very long time. So I think the way we look at it is we're always trying to use all the different ways to get more customers through our platform and be able to provide more value to customers and hoteliers. Uh, so yes, we absolutely are doing deals with lots of different players in China because we think that's a way to help build up our business. But I don't think it's anything different. I don't think there's a change. In terms of the payment product, there is some difference, some things that do help in terms of doing business in China. Having that product there is good. I'd like to point out Agoda has always been a merchant player, and they've done very well there. Bookings, you know, in the past was primarily agency business. They've done very well there. But I do think having that flexibility, particularly with Alipay and with WeChat Pay and some of the other things coming in here, our agreement with Didi, I think these things are helpful to have that platform there. Thank you.

Thank you. Our next question is from Navid Khan from SunTrust. Your line is now open.

Yeah, thanks a lot. I've got two clarifications. On this sort of recent trend and sort of macro-related slowdown in Europe, are you seeing sort of customer eventually book but not really booking in advance, kind of waiting more until the last minute? Is that kind of a behavior you're seeing, or are you seeing kind of demand weaken altogether? And then another question I have is about just the growth in different sort of channels. I think I heard you mention mobile growing faster and alternative growing faster. I did not hear about direct growing faster. Was that still the case, that direct bookings are faster growing?

So I'll take that first one, and I'll let David talk about growth and speed. I think that it'll be interesting. We need more time to see if this uncertainty factor that I met, this propensity perhaps to wait to buck, we'll need a little more time to see if it's been a drastic change, and that is what is happening right now. I would say that it was interesting in the third quarter where we did have a lot of people who – obviously waited to book because it either was World Cup or the heat or whatever. And then we did see that delayed pickup in bookings in the third quarter. I think it's a little early to say exactly what's happening. I think it's also what's going to happen in the macro environment.

Yeah, and then, sorry, I obviously covered a lot of things in my earlier comments, but I did talk about directs. And just to confirm and recap directly, The direct channel did grow faster. We used to say it was approximately 50, approximately half the business. Now we're saying it is over half the business and growing faster than the average. So we have the direct channel at over half and growing faster than the average. We've got mobile at over half and growing faster than the average. And we've got the alternative business at about 20% of our revenues and a high percentage of our room nights and also growing faster. So each three of those are doing well and growing faster than the average.

Great. Thank you, Glenn. Thank you, David.

Thank you. Our next question is from Anthony DiClemente from Evercore. Your line is now open.

Thanks very much for taking my questions. In terms of your investments in the alternative accommodation space, it would be great to understand within that investment bucket how much of it is investing in new supply. Glenn, in your example, you mentioned like beach house listings versus marketing of that supply versus investments in the consumer tools to integrate that supply, whether it be like technology or AI that improves the user interface for the customer. And then related to that, just wondering if you're seeing any consumer behavior that suggests maybe an incremental shift to home versus hotel. Is that inflecting in any way that is notable, or is it more of kind of a steady, linear trend that's going on out there? Thanks a lot.

One of the things, and it may be a little confusing, is the difference between our steady growing listings, growing the business, sort of our steady state, that's what we do all the time, versus what we try and call out a little bit here is that we're doing a step up in investments. The listings is not a step-up added investment. It's going to continue to grow our business. It's something I want to do. It's something important, but we don't see that as a different thing than we're doing right now. So that would not be as part of when we're talking about the step-up investments. In terms of what we need to do to make that business continue to accelerate, do well, is all the elements that we've done in all of our business forever. And that is, I think, some of the key things really is getting that knowledge out among certain groups of customers around the world who may not have as much knowledge that we have this great product. And, yes, I mentioned I called out where I think we have a little bit of a shortfall in some parts of it, but the fact is in the U.S., we got a great product. And we do need, though, to make more customers aware of it. And that's part of coming out with that new branding campaign that we launched two days ago. You won't see it in the stuff you're seeing right these couple of days, but it's coming out as part of it to make sure that people are aware that we have a – non-hotel accommodation product that is out there that is good. And we talk about the reasons why we think it's a great thing, about the fact that instant confirmation. We talk about that you can see that on the same search results as your traditional, so you can do a comparison. We talk about how you don't get hit at the end with a fee at the end. All these reasons that we think we have a great product, but definitely getting that branding out, and that's an area we talked about increasing our spend. In terms of actual looking at numbers and inflection points, I think that there's nothing that I would see that we saw, oh, my God, this is a difference. We're going to have a huge inflection point. This is a little bit of blocking and tackling, do all the right things and continue to do it day in, day out, and we'll get there.

Yeah, and then, Anthony, just to clarify, to build up on Glenn's point and just make sure everybody is clear, when we talk about these incremental investments we were making in 2019, incremental above investments that we normally make with the regular size and growth of the business, these are all focused upon driving growth. They're focused upon branding. They're focused upon customer acquisition. They're focused on merchandising, incentive programs. They're all focused on driving incremental customers to our platform, driving incremental transactions and driving loyalty. So top line focused.

Awesome. Thank you very much.

Thank you. Our next question is from Michael J. Olson from Piper. Jeffrey, your line is now open.

Hey, good afternoon. I just had one. You mentioned several areas of near-term investment. I don't believe experiences is one of those areas. Just curious where that falls in the list of priorities at this point with all the other initiatives going on in alternative accommodations, direct channel growth, payment platform, China, etc.? ? Thanks.

So it is important. And as David just said, you know, we're trying to just show a little difference in what are the incremental things that we're doing to drive growth. It's a very important part of our business. You know, we bought Fair Harbor, put that in. I can tell you now we have over 100 cities now, and I think it's up to almost 120, that have these attractions and things people can do when they show up. And we've talked about in the long run how important it is to offer that holistic solution for a customer. And that goes back to why are we having this payment product? You've got to have that to put together all the elements of the trip and reduce the friction for that customer. So the fact that we didn't throw it out and we didn't talk about it, we didn't. We're half an hour into our prepared remarks and stuff, and I'm glad you asked the question so I could make a point that this is still an extremely important part, and we're very pleased with some of the progress we're seeing there.

And it ties together with the work we're doing in booking also to bring in the cars and rides and put together the integrated trips. So it's a very important part of building out the connected trip experience for our customers. Got it. Thanks.

Thank you. Our next question is from Heath Terry from Goldman Sachs. Your line is now open.

Thanks. This is Daniel Powell for Heath. Just a couple quick questions for us. Just wanted to dig in a little bit more on some of the comments you made around what you saw in your various marketing channels in the fourth quarter. It sounded like the ROIs were stable, but the volumes you were seeing were pretty consistent. Just curious if there was a decision around because of what you were seeing in the macro environment, not to look to lean into other channels, or if there was a lack of ROI that you saw outside of the traditional channels that you weren't getting the volume that you had expected to. And then just another one after that, on the delta between room nights growth and bookings growth in the first quarter that you're guiding to, realize it's not very big, but just curious if there's anything about the growth that you're seeing in alternative accommodations that we should think about over the course of 2019 that could be impacting the delta between those two. Thanks guys.

Yeah, let me take the second one. I think you've got to look at everything on a constant currency Easter adjusted basis. I'm sorry to have to do that, but unfortunately, it's the only way to kind of look at things on a like-with-like basis. So you look at that basis, and for the first quarter, room-night growth is 6 to 8, and gross bookings growth is 5 to 7. So pretty consistent. There's an ADR difference. We do expect ADRs. We're seeing a little bit of pressure on ADRs. tied to the macro. We're seeing it tied to two things. One, we are seeing a little bit less international travel into certain cities, and those international travel transactions typically have a higher ADR. And also, we are seeing some local pricing pressure as well impacting the ADRs. So that's the story between room-light growth and gross bookings on a like-with-like basis during the first quarter. And then just to recap again, and what we said on the fourth quarter, we were expecting to get some deleverage from the performance marketing channels. We got a little bit of leverage. That's because there was just less volume there than we expected, but we were pleased with the ROIs, and we're also pleased with the share that we maintain in those performance marketing channels. So it's really a function of volume we saw in the channel as opposed to anything else.

Gotcha. And there weren't other channels that you thought you could have spent into when you weren't getting that volume, or is there an issue around timing there?

We always are looking at every way we can spend money to bring in growth, and we're always looking at what's the ROI for it, what do we think the long-term benefit's going to be, what's it do for the brand, all things we've talked about in the past about that. We're pleased with the way things were at that point.

And it really just kind of put those two points back together again. If you think about it, we did better than we expected in the Q4 on room nights growth. And as I just said, we got a little bit less volume from the performance marketing channel. So the fact that we were able to beat our room night growth guidance for the quarter and an important channel for us had a little less volume than we expected. I think that's a good thing. And therefore, we were able to still lean in elsewhere and do better than we had told you we thought we might do. Thanks. Appreciate the detail.

Thank you. Our next question is from Brent Hill from Jefferies. Your line is now open.

Thanks. Just back to the growth initiatives for 19, I'm just curious if you could help us prioritize if you had to weight each of the initiatives, where the biggest weight goes and the biggest investments in descending order if You could just give us a high-level view. That would be very helpful.

Yes. I don't think we're going to be able to give you more color on it. Those are the ones we listed out are the important ones. And one thing I'll make a point of is that we set up a budget. We think what it's going to be for the year, and we put it out, and then we start actually executing it. And as you go throughout a year, you may notice some things are performing better than other things where you want to put more money into. You may think things are not working as well, and you pull that back. So even if I were to give a caller and say, okay, this is as of this moment, here's where we're going to spend how much, it's still not going to be that helpful because these things I know will change as the environment changes.

Yeah, and Brett, just to kind of give you a little bit of comment, I can tell you which is the smallest of the three areas. We told you that there was going to be some impact you see on the branding line, some impact you see on the revenue line, some impact you see on the personnel line. Well, the personnel line is by far the smallest of those three. The other two are the major spend areas, and the personnel increases are really those people we're adding to support those growth initiatives. And, Glenn, just a quick follow-up.

If Europe continues to lag significantly, a little bit longer than you would like. Can you just give us a sense of how you think about the alternative opportunities to counter that, what's happening, how you think through that for the back half of the year? Thank you very much.

Yeah, so we believe that areas of slowdown can be great opportunities to gain share, develop loyalty, increase your value to your supplier partners, when things start getting a little bit slower, our hotel partners are looking for getting demand wherever they can. They look for that incremental, and they want to be able to say, can you supply somebody in this bed? And as you know, hotels have high fixed costs. They need to get that person to help hit their bottom line or get as close as they can and make a break-even environment. I've had the fortune of going through some of these in the past. I've been in the company now. It's now more than 19 years. And so we've been through this before. We've been able to add value in the past. And I suspect if things do slow down a bit, that we can position ourselves in a way that as we come out, we'll be even stronger.

Thank you. Our next question is from Justin Patterson for Raymond James. Your line is now open.

Great. Thank you very much. I appreciate the commentary around the payment platform earlier and that providing a more frictionless experience. My question is, as you layer in more of these services, how do you think about really making consumers aware of all of these new features in the in the app, and in turn, how does that change kind of your view of LTV over the long term? Thanks.

Yeah, that is a good point because, as we point out, just having a great service and a great product, it's not very helpful if people don't know about it. One of the great things is people become more mobile savvy, and as they're using their mobile devices more and more, and you're able to push opportunities to them or be able to communicate more with them. you're able to demonstrate what the value can be by going through our system. And we see this developing around the world, this concept of the super app type thing. And this is everything from all the way from the WeChat, which is completely so many different things you can do off that, to things that are a little bit not quite, but our partner now with Grab is doing a lot of different stuff. We need to make sure that our customers are aware of these great things. I'm not as concerned, though, about being able to communicate what the value is, and I think we're going to be there when we set these things up as we continue to set them up. I think it's going to be fine.

Thank you. Our next question is from Tom White from D.A. Davidson. Your line is now open.

Great. Thanks for taking the question. Just one on, you talked about profitability of your alternative accommodation room nights. I think you said solidly profitable. But Glenn, you kind of called out some of the higher costs for that relative to the traditional hotel business. I also remember, Glenn, in the past you've talked about the potential for technologies like AI and better automation to reduce your OPEX per room night. Is that something that should help drive kind of the EBITDA per room night for alternative accommodation? to be more in line with traditional hotel over time, or will it always kind of be, be structurally lower?

So on the first, I just want to make sure we're on the same page. I said nicely nuts, you know, that nicely profitable, just that was the word I used, uh, not totally, but, um, you know, um, I believe that all new types of technologies that we're developing are, uh, going to reduce that cost over time for both non-hotel accommodations and hotel accommodations. And it's interesting which ones will help the most fastest. I don't know the answer to that. I do know, though, that some of the things that we see, even right now, in terms of lowering our customer service costs, and because we do have more customer service contacts with our non-hotel accommodations area, This is an area where we probably will get a benefit more there than we would in hotels, but there could be other examples that go the other way. Fact is that one of the benefits for our company, having the size of scale that we have, the ability to go out, hire lots of really smart AI type people, help develop technologies that we can then put into our platform, distribute throughout the world for all of our supplier partners. We're providing a value that they can't do on their own. That adds to the reason why they connect to us. That's the reason why they give us the employee. That's the reason why they want to work with us. That's something that we do that they can't do as well, particularly somebody who is not a multibillion-dollar global chain. If you're not one of those, you're definitely not going to be able to play in that game. We bring that to them. Thank you.

Thank you. Our next question is from Jed Kelly from Oppenheimer. Your line is now open.

Great question. Just where's the company's strategy around some of the for-by-owner managed inventory that's sort of, you know, I guess more frictional, and what's the overall strategy? And then you signed an agreement with Daver a couple months ago, Have you seen an uplift in that agreement since you started that partnership?

I'll answer the second one. I haven't kept up with the details of that, so I'm going to just have to pass on that. I think that if it was significant right now, though, I'd know. So that's one. Let's go with the second thing. Any type of non-hotel accommodation, whether it be a single home or that is operated by a mom and pop that do it once a year for one week, all the way up to very sophisticated players who have multiple units and are working with multiple distribution channels. We want to be able to get all these people onto the platform. The thing that we want to do, though, is in the right order, at the right time, spend the right amount of money, and obviously go for the more profitable ones first. So that, you know, for the ones you're mentioning, I think those are sometimes more costly. We got a significant number of sophisticated owners to deal with to get them onto the platform, but we'll get to them all eventually. So I want to thank everybody for the call. In summary, I am very pleased with our performance in 2018 as we met many important financial and strategic goals. And I'm truly excited about our upcoming key investments for 2019 as we position the company for long-term growth. And finally, I want to thank everyone who made 2018 such a successful year, including our supplier and marketing partners. We're now more than 24,000 employees distributed across more than 300 offices around the world. Most of all, our traveler customers are out there being what we call in our new advertising campaign, the bookers, the doers, the people out there exploring the world. By doing this, we're making the world a better place. Good night.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you.