Booking Holdings Inc.

Welcome to the Booking Holdings First Quarter 2019 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 guarantees 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' speaker for this afternoon, Glenn Fogle and David Goulden. Go ahead, gentlemen.

Thank you, and welcome to Booking Holdings' first quarter conference call. I'm joined this afternoon by our CFO, David Goulden. We produced a solid quarter with 217 million worldwide room nights booked, which is up 10% year over year, and exceeded the high end of our guidance range. As we discussed on our last call, the timing of Easter and foreign exchange rate movements meaningfully impacted our U.S. dollar financial results this quarter. Our year-over-year non-GAAP revenue growth was down slightly in U.S. dollars, but up 6% on a constant currency basis and up about 8% when further adjusting for Easter. Adjusted EBITDA declined year-over-year by 10%, but increased about 6% when adjusting for FX and Easter, which was above the high end of our guidance range for the quarter. We are pleased with our results for the quarter, and we continue to see encouraging metrics in our business. Our direct channel is growing faster than our paid channels. Our mobile share is increasing, and our alternative accommodation business is growing faster than our overall business. As we continue to execute against a very large market opportunity, we will look to drive shareholder returns through the combination of organic growth investment, share repurchases, and opportunistic M&A. As we discussed on our last earnings call, we are investing to support the growth in our core accommodation business primarily through brand marketing, merchandising, and customer acquisition programs. These investments are aimed at driving long-term, top-line growth and share gains. We are on target with the launch of our new brand campaigns, and while it's early, we have confidence that they will increase our brand awareness over time. We are also pleased with the early results of some of our merchandising and customer acquisition programs and look to expand these as we move into our busy travel season. Our branding goals include driving greater awareness of our alternative accommodations listings as we continue to expand and improve our offering here. We were pleased to announce during the quarter that Booking.com passed the milestone of three-quarters of a billion guest stays in its alternative accommodations since 2007. And as of March 31, Booking.com had approximately 5.8 million reported listings in alternative accommodations, which grew approximately 13% year over year. More importantly, our individually owned properties represent the fastest category of supply in booked room night growth. This is a key area of our focus for us as we look to provide the broadest possible selection of unique places to stay, which helps drive conversion benefits across our platforms. We will continue to utilize M&A and strategic investments to accelerate key growth opportunities. For example, Fair Harbor has enabled us to accelerate our growth in the attractions market and has given us key capabilities to build a truly connected trip where we envision a frictionless customer experience that we believe will enhance loyalty in our accommodations offering. Our strategic investments in China and broader Asia, accompanied with local marketing partnerships, will continue to help us expand in these key under-penetrated markets where we believe we can have long-term growth. Finally, In terms of share repurchases, we completed the remaining portion of our $10 billion share repurchase program, buying approximately $4.5 billion to date in 2019. Consistent with our historical approach to share repurchases, we took advantage of the opportunity to invest in our own stock during the quarter. This year alone, we have purchased 5% of our fully diluted shares. Additionally, our board of directors approved a new $15 billion repurchase authorization that we will look to execute over the next two to three years, assuming stable business and market conditions. David will provide some more color in his prepared remarks, but this new authorization reflects our strong financial position, our high cash flow generation, and demonstrates our confidence in the future of the business. In conclusion, we had a solid quarter as our team remains in full execution mode. We will continue to drive long-term shareholder returns through a combination of organic investment, share repurchases, and opportunistic M&A. As you can see, we are actively pulling on all three of these levers. We remain absolutely focused on the large global opportunity that lies ahead of us and will manage our business with a long-term view to capture it. We'll now turn the call over to our CFO, David Goulden, for the financial review.

Thank you, Glenn, and good afternoon. I'll discuss our operating results for the first quarter, provide an update on our capital structure, and then discuss our guidance for the second quarter as well as our thoughts on the full year. All growth rates are relative to the prior year comparable period unless otherwise indicated. 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 10% for the quarter exceeded the high end of our guidance range. We were pleased with our performance considering the slow start in Europe and the growth challenges in our primary performance marketing channels. Despite a sluggish environment in Europe, room night growth rates in the region exceeded our expectations, and room night growth rates for the rest of the world were slightly ahead of our expectations and grew faster than Europe. Average daily rates for accommodations or ADRs were down about 2% in Q1 on a constant currency basis, which was more than our guidance of down about 1%. Changes in foreign exchange rates reduced Q1 growth rates in U.S. dollars by approximately 6 percentage points versus last year. We estimate the changes in FX rates impacted Q1 gross bookings, revenue, and EBITDA growth rates by similar amounts, and EPS growth rate by about 1 percentage point more. Q1 gross bookings grew by 2% expressed in US dollars and grew by 8% on a constant currency basis, coming in above the high end of our guidance range. Consolidated non-GAAP revenue for the first quarter was $2.9 billion and declined by 0.4% in US dollars and grew by about 6% on a constant currency basis. As expected, the shift in timing of Easter holiday had an approximately 2 percentage point negative impact on our growth rate, on our Q1 revenue growth rate. As a reminder, last year Easter was on April 1st, and therefore the majority of Easter-related travel revenue was recorded in the first quarter. This year, with Easter on April 21st, Easter travel revenue will be recorded in Q2. our Q1 non-GAAP revenue growth rate on a constant currency basis and adjusted for each timing was about 8%. Advertising and other non-GAAP revenue, which is mainly comprised of non-intercompany revenues for Kayak and OpenTable, grew by 9% in Q1. Adjusted EBITDA for Q1 was $718 million, which exceeded the high end of our guidance range and was down 10% year-over-year on a reported basis, and up about 6% on a constant currency and Ether adjusted basis. Our Q1 adjusted EBITDA margin of 27% after adjusting for Easter was also ahead of our forecast. We remained disciplined with our spending on performance marketing, which helped drive better than expected leverage of 250 basis points in the quarter. While we've seen slowing growth across our performance marketing channels, we continue to see these channels as an effective way to acquire customers, and we will continue to spend rationally to optimize growth. As part of our 2019 growth investments, as well as our continued efforts to drive more direct traffic to our websites, we increased our spend on brand marketing in the quarter by 61% versus Q1 last year, contributing to about 250 basis points of deleverage. Sales and other expense line grew with Virgin Growth Booking's growth and contributed 172 basis points of deleverage primarily due to the growth of our payment platform at Booking.com. Finally, personnel expense came in lower than our forecast and contributed a small amount of deleverage in the quarter. Our non-GAAP EPS was $11.17, down 7% versus the prior year. Adjusting for currency and Ether timing, non-GAAP EPS grew 11% in the quarter. Non-GAAP net income reflects a non-GAAP tax rate of 18.9%, which decreased slightly from the prior year and was higher than our estimate for guidance due to discrete items. Our 8% lower share count in Q1 benefited EPS growth in the quarter. On a GAAP basis, operating income declined by 24%, and GAAP operating margins decreased by 532 basis points compared to Q1 of last year. Q1 GAAP net income amounted to $756 million, or $16.85 per share, up significantly from Q1 2018. Our Q1 GAAP net income includes $451 million of pre-tax unreliable gains on our equity investments in Seachip and Metwan. we excluded these unrealized gains for our non-GAAP results. We had a GAAP tax rate of 21% in the quarter, which increased from the prior year primarily due to discrete tax provisions related to the C-TRIP and METOAN gains. Our operating cash flow and free cash flow in the quarter were negatively impacted by a payment of $403 million to the French tax authorities in order to preserve our right to contest an assessment in court as well as an increase of $48 million of income tax prepayments in the Netherlands. We entered 2019 with approximately $4.5 billion remaining from our $10 billion share repurchase program, which we announced in May of 2018. In the first quarter, we repurchased another $2.7 billion of our stock under the program, and since the end of Q1, we've completed the remaining $1.8 billion share purchase reauthorization, reflecting both a buying opportunity and a confidence in the business. We ended the quarter with $12.8 billion in cash and investments and $8.7 billion of outstanding debt. With this authorization complete, we wanted to update you on how we're thinking about our capital structure and next steps for capital allocation. We believe that our strong balance sheet is a strategic asset as we look to capitalize on the growth opportunities ahead in our core online travel businesses and also as we execute our strategy to deliver the full connected trip. Our top priorities are investing in the growth of our business, both organically and inorganically, and having the financial resources to enhance our competitive position even in the event of a macro downturn. In April, our board authorized a new $15 billion share repurchase authorization, which we expect to complete in the next two to three years, assuming stable business and market conditions. We intend to fund this authorization as well as future M&A via cash on hand, cash flow from operations, and additional borrowing capacity consistent with maintaining strong investment-grade credit ratings. On a related note, as we have deployed more of our cash, we have decided to move $3.6 billion of cash we were holding in euros into our U.S. cash pool. This means that starting in Q2, our 3.75 billion of Euro debt will no longer be fully hedged from currency fluctuations for GAAP purposes. And going forward, you'll see these non-cash gains or losses in our foreign currency transactions and other line in our GAAP income statements. These Euro denominated liabilities remain economically hedged by our ongoing cash generation from Euro denominated operations And at maturity, we intend to refinance the debt in euros or repay it with euro denominated cash flow. As such, we intend to exclude these non-cash gains and losses from our non-GAAP financial presentation. Turning to guidance, I want to briefly walk you through some of the factors we discussed on our last call that will impact the outlook for the year, and then I'll come back to our guidance for Q2. Starting with our growth investments in 2019, as we discussed in detail last quarter, we're investing for growth, customer acquisition, and loyalty. While it's early days, we're on target with the launch of our brand campaigns. We're also encouraged with the initial results from some of our merchandising and customer acquisition programs. We continue to expect these growth investments will reduce our EBITDA growth rates by a few percentage points in 2019, and they'll be at a greater negative impact on EBITDA growth during the first half. Moving to payments for Booking.com. Last quarter, we noted that we do not expect any additional reduction in EBITDA growth from payments this year. We now expect the payments will have a modestly negative impact on EBITDA growth for this year due to a change in the timing of revenue recognition on a component of merchant revenue. However, we do not expect any additional negative impact on EBITDA growth from payments for 2020. As a reminder, we believe payments 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. Now to the mechanical factors impacting our outlook. Using current FX rates assumed in our guidance, Gross bookings growth and revenue growth through to non-GAAP EPS growth will be reduced by approximately 3 percentage points for the full year, which is greater impact than anticipated on our previous guidance due to the reduction in the EURUSD exchange rate since we last announced. Additionally, the shift of timing of Easter will impact Q1 and Q2 revenue growth rates. Finally, our outlook does not anticipate any change in the macro environments, which, as I previously mentioned, remain sluggish in Europe. With that context, it remains our expectation that non-GAAP EPS on a constant currency basis will grow in the low double digits in 2019. We continue to 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. Let's now turn our attention to Q2. Price change rates are expected to be an approximately 5 percentage point headwind to year-over-year growth rates in Q2, which we estimate will impact gross bookings, revenue, EBITDA, and non-GAAP EPS growth rates by similar amounts. We use a dollar-to-euro exchange rate of $1.12 when setting our Q2 guidance. The shift in timing of Easter discussed earlier on the call will positively impact revenue growth in Q2. We estimate this timing shift will increase Q2 2019 revenue growth rates by approximately 2 percentage points. Based on where we are in the quarter and looking at all other factors and consistent with our usual approach to guidance, we're forecasting booked room nights to grow by 6% to 8% and gross bookings to be approximately flat in U.S. dollars and grow by 4% to 6% on a constant currency basis. Our Q2 forecast assumes that constant currency ADRs to the company will be down about 2%. We forecast Q2 revenue to be up 5% to 7% in U.S. dollars and grow by 10% to 12% on a constant currency basis. Normalizing for both East and constant currency, we estimate Q2 revenue to grow by 8% to 10%. Q2 adjusted EBITDA is expected to range between $1.295 billion and $1.325 billion, which represents approximately flat year-over-year growth. Normalizing for both East and Constant Currency, we estimate Q2 EBITDA growth also to be approximately flat. We are forecasting modest leverage from the performance marketing expense line in Q2, reflecting lower volumes in the paid channels and our continued focus on acquiring high-quality traffic. We expect to continue to meaningfully grow our brand marketing spend in the quarter, which will contribute deleverage to the P&L and more than offset leverage we're expecting from performance marketing. Of course, the benefits from brand marketing will be realized over multiple quarters. Finally, sales and other expense growth is expected to remain elevated and continue to grow faster than revenue, primarily due to the ramp of our payment platform at Booking.com. We're forecasting Q2 non-GAAP EPS of approximately $22.15 to $22.60. Normalizing for both Easter and constant currency, we estimate Q2 non-GAAP EPS to grow approximately 7% to 9%. A non-GAAP EPS forecast includes an estimated income tax rate of approximately 19%, which is in line with Q2 last year. We continue to expect our full-year non-GAAP tax rate to be 19% to 19.5%. Our Q2 non-GAAP EPS guidance assumes a fully diluted share count of about 43.6 million shares, which is 10% below Q2 last year. We forecast a GAAP EPS between $21.10 and $21.55 for Q2. Our GAAP EPS guidance for Q2 assumes a tax rate of approximately 19%. We have hedge contracts in place to substantially shield our second 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 impacts of foreign currency fluctuations. Our forecast does not assume any significant change in macroeconomic conditions in general or in the travel market in particular. We'll now take the questions.