Booking Holdings Inc.

Welcome to Booking Holdings' third 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 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 Fogel and David Golden. Go ahead, gentlemen.

Thank you, and welcome to Booking Holdings' third quarter conference call. I'm joined this afternoon by our CFO, David Goulden. We executed well in our busiest quarter of the year as we booked 223 million or almost a quarter of a billion room nights, which is up 11% year over year and exceeded the high end of our guidance range. We are pleased that room night growth has been reasonably consistent this year. We produced over $5 billion in revenues. and approximately $2.5 billion in EBITDA, which are year-over-year increases of approximately 7% and 8%, respectively, on a constant currency basis. While we believe these financial results show that we have meaningful size and scale, we note that against a very large global travel market opportunity, we are still a small share of the marketplace, which means we have substantial opportunity in front of us. I am pleased that our performance this quarter delivered better than expected room night growth, driven by solid growth in our direct channel, though I note that we continue to witness slower growth in our paid channels. And while we look to find ways to drive growth through the paid channels, we will remain disciplined and will invest only if we like the quality of traffic and the associated return on investment. We remain firmly in execution mode as we work to deliver against our goal of extending our lead in core accommodations market through key initiatives in customer acquisition, merchandising, our payments platform, and improving the selection of properties on our websites. We expect these initiatives to improve customer conversion and drive incremental growth from our existing demand channels. We continue to execute against our long-term strategy of building the connected trip with Booking.com recently launching a flight offering in certain European countries. The launch is still in its very early days, and we will continue to make product enhancements and improve the customer experience to create what we believe will be a better offering over time. We remain excited as our long-term vision of the connected trip is being translated into new Booking.com services. We believe the connected trip has tremendous potential to create a more robust travel ecosystem that will result in greater loyalty and engagement for Booking.com's very large active customer base, and it is an opportunity for our large supplier base to merchandise their offerings. In conjunction with Priceline.com, Agoda has also launched a flight product that is initially focused on select countries in the EPAC markets, which we believe will complement its existing accommodations offerings. I am proud of our interbrand cooperation development of this product, which demonstrates how we are able to leverage our deep travel expertise across our company to build new services. We look forward to introducing other areas of collaboration across the brands in the future. We are also excited to announce our partnership with Grab is now showing tangible benefits to our customers. One of the goals of the partnership is to give Booking.com app users access to the largest fleet of drivers across eight countries in Southeast Asia, providing our customers traveling in these countries a frictionless experience, removing language and currency barriers. Right now, Booking.com app users can access Grab services in Singapore, and we will be expanding this service to Indonesia and Thailand by the end of the year and to the remaining markets by early 2020. Another point to note about the partnership is Grab previously introduced a connection to hotel bookings through its own Grab app using both Agoda and Booking.com. In our alternative accommodations business, Booking.com continues to build richer content for both its customers and supply partners. Booking.com recently announced a series of new tools and product enhancements specifically designed to help professional short-term rental partners more effectively market and simplify the day-to-day management of their properties on Booking.com's platform. In terms of our listings count, Booking.com's total alternative accommodation listings now stand at over 6.2 million as of September 30th. A key goal continues to be improving both the quality and variety of our listings in this area. We are encouraged with the progress in alternative accommodations business and continue to witness growth outpacing our overall business while maintaining solid profitability. In regards to the overall global travel market, we believe it is generally healthy, but see some mixed results in geographies throughout the world. Europe remains stable, but is still impacted by somewhat sluggish GDP growth, which is consistent with what we have seen throughout most of the year. Southeast Asia continues to grow nicely, However, markets like China and particularly Hong Kong are placing pressure on our overall growth rate due to certain macro events. International travel into the United States has been negatively impacted by a strong dollar. Like this year has shown, though, our global scale has helped us navigate a tricky macro environment, and we remain confident that we will continue to do so in the future. In conclusion, I am very pleased with our performance in the third quarter. and we remain confident that the efforts we are making now will support the long-term growth prospects of the company. I want to thank our over 26,000 employees for their hard work and dedication during the busy third quarter, providing unparalleled service to both our customers and supplier partners around the world. I will now turn the call over to our CFO, David Golden, for the detailed financial review.

Thank you, Glenn, and good afternoon. I'll review our operating results for the third quarter and then discuss our guidance for the fourth quarter. 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 for our results for the quarter. Our books room-night growth of 11% for the quarter exceeded the high end of our guidance range. Our room-night growth in Europe continued to exceed our expectations this quarter despite a macro environment that remains cautious. Room line growth rates for the rest of the world also exceeded our expectations and grew approximately in line with Europe in Q3. Average daily rates for accommodations or ADRs were down about 3% year over year in Q3 on a constant currency basis, which was a larger decline than our guidance of down about 2.5%. The year-on-year ADR decline was impacted by decreases in rates within several key markets such as the US, Japan, and Hong Kong, as well as an increased mix to faster growing lower ADR markets. The increasing pressure on ADRs we're seeing in the second half of the year is influenced by lapping about a 1% growth in ADRs in the second half of last year, and by a number of macroeconomic driven factors, including less travel in key international corridors due to trade and political issues, as well as the strength of the US dollar. Changes in foreign exchange rates reduced Q3 growth rates in U.S. dollars by approximately three percentage points versus last year. We estimate the changes in FX rates impacted gross bookings, revenue, EBITDA, and EPS growth in Q3 by a similar amount. Q3 gross bookings grew by 4% expressed in U.S. dollars and grew by about 7% on a constant currency basis, coming in above the high end of our guidance range. Consolidated revenue for the third quarter was $5 billion dollars, and grew by 4% in U.S. dollars and about 7% on a constant currency basis. Advertising and other revenue, which is mainly comprised of kayak and open table, grew by 12% in Q3. Adjusted EBITDA for Q3 was $2.5 billion, which exceeds the high end of our guidance range and was up 5% year over year on a reported basis and about 8% on a constant currency basis. Performance marketing expense declined 2% year over year, which helped drive leverage of about 150 basis points in the quarter. This leverage was driven by an increased mix in room nights from the direct channel, which continues to grow faster than our paid channels. While we'll keep working to grow our direct channel over time, we continue to see performance marketing channels as an efficient way to acquire customers and will maintain our approach to spend rationally in these channels. We spent $124 million on brand marketing in the quarter, which represented a decline of 22% versus Q3 last year, contributing about 80 basis points of leverage. As we mentioned on our Q2 earnings call in August, we are refining and focusing our brand spend in the second half of this year. Sales and other expense grew 13% versus Q3 of last year and contributed about 50 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 of 36% in the quarter due to low growth in certain payment-related expenses. Personnel expense came in slightly lower than our forecast and contributed a small amount of deleverage in the quarter. Finally, G&A expenses increased 41% year-over-year on a non-GAAP basis. Note that non-GAAP G&A expenses in Q3 last year excluded a $23 million travel transaction tax charge, which negatively impacted GAAP results in the prior year. Non-GAAP G&A expenses contributed about 120 basis points of deleverage in the quarter, driven by a $29 million year-to-date impact from the French digital services tax, as well as an additional $10 million related to travel transaction taxes from prior periods. Our non-GAAP EPS was $45.36, up 20% versus the prior year. Adjusted for currency, non-GAAP EPS grew about 24% in the quarter. Non-GAAP net income reflects a non-GAAP tax rate of 18.8% in Q3, which is lower than the prior year due to a provision of the Tax Act, which was clarified in Q4 of last year. Our 10% lower share count in Q3 benefited EPS in the quarter. On a GAAP basis, operating income increased by 5% and GAAP operating margins increased by 70 basis points compared to Q3 last year. Q3 GAAP net income amounted to $1.95 billion or $45.54 per share of 23% from Q3 2018. Our Q3 GAAP net income includes $49 million of pre-tax unrealized losses on our equity investments in C-TRIP and Metuan, and $72 million of FX remeasurement gains on our Euro bonds. We excluded these unrealized losses and remeasurement gains from our non-GAAP results. We had a GAAP tax rate of 17.5% for the quarter, which decreased from 21.1% in the prior year due to beneficial adjustments made in Q3 2019 and related to the Tax Act that were excluded from our non-GAAP results and from the factors I mentioned that impacted non-GAAP tax rates. In Q3, we generated $1.9 billion of operating cash flow, which decreased 6% compared to Q3 last year. Our free cash flow for the quarter was $1.8 billion, which decreased by 4% compared to the prior year, mainly due to seasonal effects from a higher mix of merchant revenues and the impact this has in the third quarter due to a high concentration of check-ins. During the course of the year, we expect the growth of our merchant business will be a modest positive driver of cash flow. We purchased $1.3 billion of our stock in Q3, bringing the amount remaining under our $15 billion repurchase authorization to to about $12.9 billion at the end of the quarter. We continue to expect to complete this authorization in the next two to three years, assuming stable business and market conditions. We ended the quarter with $11.8 billion in cash and investments and $8.6 billion of outstanding debt. Before returning to our guidance, We note that the returns from our growth investments for the year are tracking in line with what we said last quarter, and we still expect these investments to impact EBITDA growth for the full year by a few percentage points. Let's now turn our attention to Q4 guidance. Foreign exchange rates are expected to negatively impact year-over-year growth rates for gross bookings, revenue, EBITDA, and non-GAAP EPS by approximately 1.5 percentage points. We use a dollar-to-euro exchange rate of $1.11, when setting our Q4 guidance. Our Q4 outlook does not anticipate any change in the macro environments. Based on where we are in the quarter and looking at all of the factors, we're forecasting booked room nights to grow by 6% to 8% in Q4. We forecast gross bookings to grow 2% to 4% on a constant currency basis and about 150 basis points less in US dollars. Our Q4 forecast assumes constant currency ADRs for the company will be down about 4%, driven by the same factors that impacted Q3 ADRs. A number of these factors are occurring in Asia, and Asia is a seasonally larger quarter in Q3. We forecast Q4 revenue to be up 1% to 3% on a constant currency basis, and by about 150 basis points less in US dollars. Q4 adjusted EBITDA is expected to range between $1.21 billion and $1.235 billion, which is approximately flat year-on-year on a constant currency basis. We're forecasting continued leverage from the performance marketing expense line in Q4, reflecting low volumes in paid channels and our continued focus on acquiring high-quality traffic. We expect to see continued leverage of brand spending in Q4. Although we've reduced our brand spending in the second half of the year, we still expect to grow our brand spend for the full year. We expect growth in personnel expenses to reduce EBITDA growth by several percentage points in the quarter due to an expected lower year-end reversal of bonus accruals than we experienced last Q4. Sales and other expenses expected to grow slower than merchant bookings growth, but faster than overall revenue growth. We're forecasting Q4 non-GAAP EPS of approximately $21.50 to $22 even. Normalizing for constant currency, we estimate Q4 non-GAAP EPS to decrease year-over-year by approximately 1% to 3%. This range for Q4 implies a full-year constant currency non-GAAP EPS growth rate of about 13%, which is in line with our full-year expectation for low double-digit growth. Our non-GAAP EPS forecast for Q4 includes an estimated income tax rate of approximately 19%, which is significantly higher than Q4 last year due to a one-time adjustment of approximately $72 million in Q4 2018 related to a provision of the Tax Act that was clarified by regulatory guidance issued in Q4 2018. If we exclude the one-time benefit from Q4 last year, our EPS growth in the quarter would be about 7% higher. We expect our full-year non-GAAP tax rate to be approximately 19% compared with 18.3% last year. Our Q4 non-GAAP EPS guidance assumes a fully valued share count of approximately 42.2 million shares, which is 9% below Q4 of last year. We forecast GAAP EPS between $20.40 and $20.90 for Q4. Our GAAP EPS guidance for Q4 assumes a tax rate of approximately 19%. We have hedge contracts in place to substantially shield our fourth quarter EBITDA and that income from any further fluctuations 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. We'll now take your questions.