Booking Holdings Inc.

Welcome to Booking Holdings Second 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 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, and forecasted in any such forward-looking statements. Expressions of future goals or expectations and similar expressions reflecting something other than historical fact are indeed 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 the 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 Golden. Go ahead, gentlemen.

Thank you and welcome to Booking Holdings second quarter conference call. I'm joined this afternoon by our CFO, David Goulden. We are pleased to report that we produced a solid quarter with 213 million worldwide room nights booked, which is up 12% year-over-year and exceeded the high end of our guidance range. Our year-over-year non-GAAP revenue grew by 7% in U.S. dollars, but was up about 12% on a constant currency basis. Adjusted EBITDA increased by 5% in US dollars and about 10% when adjusted for FX, which was above the high end of our guidance range for the quarter. We are seeing encouraging signs in our business as we extended our global leadership position and accommodations and continue to execute against our long-term strategic vision of building a connected trip for our customers to become the global leader in travel and experiences. Today, we operate the largest online marketplace for accommodations with the greatest global reach and scale. In the first half of the year, we produced over $50 billion in gross bookings and over 430 million booked room nights. We're investing against a large opportunity in the global accommodations market and are developing capabilities like payments, merchandising and loyalty, and expanding our focus in important customer and geographic segments. Our objective for payments is to provide all relevant payment options to customers and partners to power a frictionless global marketplace. This will benefit us by supporting key market growth, enable the connected trip, facilitate merchandising, and attract unique supply. The share of Booking.com's merchant transaction continues to steadily climb as customers can now pay Booking.com in over 45 countries, which represents about 80% of its focused markets. Enabled by the rollout of our payments platform, we've been pleased with the early results of our investments in merchandising capabilities. We view merchandising as an important part of our customer value proposition, which we believe will result in increased loyalty to our brand. Focusing on increased customer acquisition, frequency, and loyalty remains a significant growth opportunity for our core accommodations business. In these areas, we are continuing to focus on our mobile experience, expand the reach of our Genius program, and offer incentives to bring customers to our site directly. We feel good about our progress here with both mobile and direct bookings going faster than our consolidated rate. These capabilities become more important as we continue to witness slowing pay channels. We are driving a deeper focus on specific accommodation segments that will strengthen the business and we believe will drive greater growth. Booking.com has built one of the largest alternative accommodation platforms with approximately 6 million listings as of June 30th. We are making good progress building greater supply choice in this segment and We believe we have the best customer experience with all of our properties being instantly bookable with no consumer fees. We are also developing new capabilities to capture growth in other accommodation segments, such as business travelers and destination-specific choices, such as ski and beach accommodations. We remain focused on select geographic opportunities, such as the U.S., where we are continuing to promote our brand to drive awareness in this important market. We believe it is still too early to fully assess the current brand campaign, but we note that while we see solid direct new visitor traffic growth, we would like to see faster progress in this region. In the longer term, we will meet our customer needs by building distinctive capabilities around the connected trip, removing friction along the entire travel journey. An early step was to integrate rentalcars.com with booking.com. Not only is rentalcars.com operating a leading online rental car marketplace, but it is also building capabilities to book all forms of ground transportation. Today, we provide pre-booked car service in approximately 800 cities globally. Another step was to begin building out an attractions offering at booking.com, which was accelerated with the acquisition of Fair Harbor. Fair Harbor is bringing more attractions online. and now has over 100,000 bookable activities globally. Booking.com is utilizing this platform and it offers attractions in over 280 destinations. Booking is also providing the ability to have someone book experience even if they do not have an accommodation reservation. And while the number of destinations where someone can do this is small as we're just starting out, we expect to grow the number of these markets over time. Attractions are an important part of the connected trip. And we're pleased with the very early data that shows, on average, customers who have used our attractions product increase their frequency of accommodation bookings. Again, these are initial findings, but we like what we see to date. As a group, we have tremendous assets that we can utilize to help build the connected trip, and all of our brands will play a critical role in achieving this vision for the company. Priceline has extensive capabilities in the flight product and has recently developed a world-class packaging product that can be leveraged across our brand companies. Agoda brings extensive knowledge of the APAC region and years of data science and machine learning on merchandising. Kayak's knowledge in operating a multi-product global meta-business helps us to better understand how to better serve our customers. OpenTable's leading online restaurant discovery and booking platform will be an important piece of our connected trip vision. As I commented earlier, we continue to focus on driving growth in accommodations through key initiatives in merchandising, payments, demand channels, and inventory. That is job one. We also remain excited about the connected trip to drive loyalty and engagement across many dimensions of our business, which will help support and grow the accommodation business. As we move through our busy summer season, all of our employees are intensely focused on delivering an exceptional customer experience. I would like to thank our over 26,000 employees around the world for their hard work and dedication, especially during this peak travel season. And I would like to thank all of our supplier partners who we are so proud to be associated with. And finally, we send a great thank you to our millions of customers throughout the world who are out there experiencing the world. I will now turn the call over to our CFO, David Goulden, for the financial review.

Thank you, Glenn, and good afternoon. I'll review our operating results for the second quarter and then discuss our guidance for the third quarter, as well as our thoughts on the full year. All growth rates are relative to the prior comparable period, unless otherwise indicated. Information regarding reconciliation to GAAP can be found in our earnings release. Now onto our results for the quarter. Our booked room night growth of 12% for the quarter exceeded the high end of our guidance range. The Q2 room night outperformance was driven by strong growth in June, as we saw a greater than expected benefit from lapping the low growth rate in June of last year, which was the result of the 2018 World Cup and unfavorable weather in Europe. While the macro environment in Europe remains cautious, our room night growth in the region continued to exceed our expectations this quarter. Room-like growth rates for the rest of the world were largely in line with our expectations and continues to grow faster than Europe in Q2. Average daily rates for accommodations or ADRs were down about 1.5% in Q2 on a constant currency basis, which is better than our guidance of down about 2%. Changes in foreign exchange rates reduced Q2 growth rates in U.S. dollars by approximately 5% versus last year. We estimate the change in FX rates impacted Q2 growth bookings, revenue, and EBITDA growth by similar amounts, and EPS growth rate by about 1% point more. Q2 growth bookings grew by 5% expressed in U.S. dollars and grew by about 10% on a constant currency basis, coming in above the high end of our grinds range. Consolidated long gap revenue for the second quarter was $3.8 billion and grew 7% in U.S. dollars, and by about 12% on a constant currency basis. The shift in timing of the Easter holiday had little less than a 3 percentage point positive impact on our Q2 revenue growth rate, a slightly greater impact than previously expected. Our Q2 non-GAAP revenue growth rate on a constant currency basis and adjusted for Easter was about 9%. Advertising and other non-GAAP revenue, which is comprised mainly of kayak and open table, grew by 9% in Q2. Adjusted EBITDA for Q2 was $1.4 billion, which exceeded the high end of our guidance range and was up 5% year on year on a reported basis and up about 10% on a constant currency basis. Our Q2 adjusted EBITDA growth rate on a constant currency basis and adjusted for each timing was about 3%. We remained disciplined with our spending on performance marketing, which helped drive better than expected leverage of about 90 basis points in the quarter. Leveraging the quarter is driven by an increased mix in room nights from the direct channel, which continues to grow faster than our paid channels. While we keep working to grow our direct channel over time, we continue to see performance marketing channels as an effective way to acquire customers, and we'll spend rationally in these channels to optimize growth. As part of our effort to drive more direct traffic to our websites, we increased our spend on brand marketing in the quarter by 41% versus Q2 last year, which contributed about 110 basis points of deleverage. Sales and other expense grew 22% versus Q2 last year and contributed about 80 basis points of deleverage, primarily due to the growth of our payment platform at Booking.com. Sales and other grew slower than merchant gross bookings in the quarter due to low growth in certain payment-related expenses. Finally, personnel expense came in slightly lower than our forecast and contributed a small amount of leverage in the quarter. Our non-GAAP EPS was $23.59, up 14% versus the prior year. Adjusted for currency needs and timing, non-GAAP EPS grew 12% in the quarter. Non-GAAP net income reflects a non-GAAP tax rate of 19.4% in Q2, which is about in line with the prior year and our estimate for guidance. our 10% lower share count in Q2 benefited EPS growth in the quarter. On a GAAP basis, operating income grew increased by 2% and GAAP operating margins decreased by 215 basis points compared to Q2 last year. GAAP operating income was also impacted by a $53 million favorable adjustment to revenue and a $66 million unfavorable adjustment to personnel expenses. Q2 gap net income amounted to $979 million, or $22.44 per share, up 11% from Q2 2018. Our Q2 gap net income includes $17 million of pre-taxed unrealized gains from our equity investments in Ctrip and Metuan, and $19 million of FX remeasurement losses on our Euro bonds, as well as the two adjustments impacting operating income. We excluded these unrealized gains, remeasured losses, and adjustments from our non-GAAP results. We had a GAAP tax rate of 18.9% for the quarter, which decreased slightly from the prior year. In Q2, we generated $1.8 billion of operating cash flow, which increased 8% compared to Q2 of last year. Our free cash flow for the quarter was $1.7 billion, which increased by 10% compared to the prior year. We repurchased $2.6 billion of our stock in Q2, which completed our previous $10 billion repurchase authorization in early May and reduced the amount outstanding under our new $15 billion repurchase authorization to about $14.2 billion at the end of the quarter. We expect to complete this authorization in the next two to three years, assuming stable business and market conditions. We ended the quarter with $11.4 billion of cash investments and $8.7 billion of outstanding debt. Turning to our guidance, I want to briefly walk through some of the factors we discussed on the last call that will impact our outlook for the full year, then I'll come back to our guidance for Q3. Starting with our growth investments in 2019, as we discussed over the last two quarters, we're investing for growth, customer acquisition, and loyalty. Our new brand marketing campaigns were launched earlier this year. While we're encouraged by the continued growth and mix shift towards our direct channel and by some of the early new visitor direct traffic trends we're seeing from our brand campaigns, the short-term return on our brand spending is running below our expectations. As a result, we plan on refining our spending levels on brand marketing in the second half of the year. We remain committed to building our brand. Turning to our merchandising programs, we continue to see positive results and plan to continue these investments. We are pleased with these merchandising results, but they'll take time to scale. Finally, with regard to our custom acquisition incentive programs, we're seeing some positive results and will continue to spend on the programs with better ROIs. As we told you earlier in the year, as we look at these growth investments, we'll evaluate and scale the ones that are working and will not hesitate to pull back on the ones that are not. so we're intelligently refining our investments as we move through the year and are confident that these investments will benefit us in the long term. Overall, we continue to expect these growth investments will collectively reduce our EBITDA growth rate by a few percentage points in 2019. We now expect the return on these investments to be similar in the second half versus the first half, but the spending will be less in the second half, which results in a small negative impact on EBITDA growth in the second half. This change in our expectations does not have a material impact on our room-light growth for the year. Now turning to the mechanical factors impacting our outlook. Our guidance for Q3 and the full year is impacted by the French digital services tax, which we expect will reduce Q3 and full-year EBITDA by about $25 million and $32 million, respectively. This will reduce our Q3 and full-year EBITDA margins by about 50 basis points and 20 basis points, respectively. This expense will be recorded in our G&A line. Using current FX rates assumed in our guidance, gross bookings and revenue growth through to non-GAAP EPS growth will be reduced by approximately three percentage points for the full year, which is in line with our outlook last quarter. Finally, our outlook does not anticipate any change in the macro environments. 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 global accommodations this year. Let's now turn our attention to Q3, which is our largest quarter of the year. Foreign exchange rates are expected to negatively impact year-on-year growth rates for gross bookings and revenue by approximately 2 percentage points and for EBITDA and non-GAAP EPS by approximately 3 percentage points. We used a dollar-to-euro exchange rate of $1.12 when setting our Q3 guidance. Based on where we are in the quarter and looking at all other factors, we're forecasting booked room nights to grow by 6% to 8% in Q3. As a reminder, Q3 last year benefited from the unusually late summer booking season, which results in a slightly harder compare in Q3 this year. We forecast total gross bookings to grow 1.5% to 3.5% in U.S. dollars and to grow by 3% to 5% on a constant currency basis. Our Q3 forecast assumes that constant currency ADRs for the company will be down about 2.5%, which is a greater decline than we saw in Q2 due to the lapping of the over 1% increase in ADR we experienced in Q3 of last year. We forecast Q3 revenue to be up 2% to 4% in U.S. dollars and grow by 4% to 6% on a constant currency basis. Q3 adjusted EBITDA is expected to range between $2.4 billion and $2.45 billion, which represents 2% to 4% year-over-year growth in U.S. dollars, or 4% to 6% growth on a constant currency basis. We are forecasting continued leverage from the performance marketing expense line in Q3, reflecting lower volumes in the pay channels and our continued focus on acquiring high-quality traffic. As we refine our brand marketing spend and begin to comp against the highest spending Q3 last year, we expect to see a small amount of leverage from brand marketing in the quarter. Finally, sales and other expense is expected to grow faster than revenue, primarily due to the ramp of our payment platform at Booking.com. We're forecasting Q3 non-GAAP EPS of approximately $43.60 to $44.60. Normalizing for currency, we expect sales Q3 non-GAAP EPS to grow approximately 18 to 21%. Our non-GAAP EPS forecast includes an estimated tax rate of approximately 19%, which is lower than Q3 of last year due to a provision of the Tax Act that was clarified in Q4 of last year. We continue to expect our full-year non-GAAP tax rate to be 19 to 19.5% compared with 18.3% last year. Our Q3 non-GAAP EPS guidance assumes a fully diluted share count of about 42.8 million shares, which is 10% below Q3 last year. We forecast GAAP EPS between $42.60 and $43.60 for Q3. Our GAAP EPS guidance for Q3 assumes a tax rate of approximately 19%. We have hedge contracts in place to substantially shield our third quarter EBITDA and then income from any further fluctuation 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. With that, we'll now take your questions. Operator, can we open line for questions, please?