Booking Holdings Inc.

Welcome to Booking Holdings' fourth 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 and certain tests 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 differ materially from those described in 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 obligations 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 the Booking Holdings speakers for this afternoon, Glenn Fodell and David Golden. Go ahead, gentlemen.

Thank you, and welcome to Booking Holdings' fourth quarter conference call. I'm joined this afternoon by our CFO, David Golden. We had a strong fourth quarter as we booked 191 million room nights, which is up 12% year over year, and exceeded the high end of our guidance range. We produced over $3.3 billion in revenue and approximately $1.3 billion in EBITDA, which are year-over-year increases of approximately 5% and 3% on a constant currency basis, respectively. I will talk first about our full-year performance in 2019, then about our objectives for 2020, and then I will address the current situation regarding the coronavirus. 2019 was a good year for our company. We booked 845 million room nights for the year, which is 11% more than in 2018. Just to put that in context, that means we booked, on average, more than 2.3 million room nights each day. We produced strong year-over-year growth across our key financial metrics. Non-GAAP revenue and adjusted EBITDA were up 8% and 6% on a constant currency basis, respectively. Our non-GAAP EPS was up 15% on a constant currency basis, exceeding our guidance for the year. Our EPS growth rate benefited from over $8 billion of share repurchases during 2019, which demonstrates our disciplined approach to returning capital to shareholders and our confidence in our business. I am pleased with these results considering the macro environment we faced in certain geographies throughout the year. Moreover, We accomplished this top-line growth rate while also producing solid leverage in our performance marketing spec. Our ability to execute consistently in this environment speaks to our scale and global diversity, as well as to the dedicated and talented teams we have at our company. We made solid progress against our key strategic goals for the year, expanding the Booking.com payment platform, improving our alternative accommodations business, and further building our connected trip strategy. As we move into 2020, we will continue to focus on becoming an even more customer-centric company that drives loyalty and increased repeat behavior. We plan to accomplish this goal through smart customer acquisition while providing the best experience in our core accommodations product, using our scale to offer the best value to our customers, and making further progress in our connected trip strategy. In addition, While we have always been a cost-conscious organization, in 2020, we will further emphasize the need to make sure our expenses are appropriate for our revenue. And we'll look at ways to streamline and make all aspects of our company more efficient. Investing in products and processes is important for the long term, but so too is eliminating unnecessary expense. And during 2020, we'll be taking a close look at these opportunities. One of our highlights during 2019 was expanding our payment capabilities at Booking.com. Over 50% of our Booking.com's gross bookings now occur on properties that are enabled on its payment platform. The percentage of Booking.com's gross bookings processed on its payment platform grew from approximately 10% in 2018 to over 15% in 2019, and we expect this to reach approximately 25% in 2020. As we have discussed, this platform provides payment options favored by both our customers and property partners, particularly non-hotel property partners, and provides a platform for merchant product offerings. Merchant offerings also provide Booking.com with merchandising capabilities, and we expect to continue to increase our investment in this capability to drive growth. This payment platform is foundational for our connected trip strategy in which we envision a frictionless customer experience across multiple products that we believe will drive increased loyalty. Our alternative accommodations business grew solidly in 2019 and has large scale. As of December 31, 2019, we had 6.3 million listings in our alternative accommodations business. We remain focused on increasing the quality and variety of properties joining our platform so we can provide the best choices for our customers and drive search conversion. Booking.com's alternative accommodation business recorded approximately $3.1 billion in revenue in 2019, representing approximately 21% of our overall revenue for the year and a solid growth rate of 14% when expressed in euros. It consistently grew faster than our core accommodations business throughout the year and also maintained a healthy profit margin. We believe presenting both alternative accommodations and traditional properties on one platform is the best customer proposition. Last year, we took further steps to create our vision of a connected trip. We're on a journey to build a multi-product offering, including accommodations, flight, attractions, ground transport, and dining, all connected by a seamless payment network and supported by personalized intelligence to provide a frictionless customer experience that we believe will drive enhanced loyalty and support growth. We saw early signs of these benefits last year as we leveraged the integration of rentalcars.com and booking.com to deliver a better ground transport offering for booking.com's customers. Rental car days grew 12% year-over-year in the fourth quarter, primarily due to the increased cross-sell of the product to Booking.com customers. We believe we are in the early stages of seeing the benefit from this cross-sell opportunity. We've also been encouraged by certain incentive programs that provide discounted ground transport options to bookers with higher value accommodations. These programs have shown an increase in conversion at acceptable ROIs. We look forward to further experimentation with these types of offerings during 2020. We also expanded our flight capabilities across the company in 2019. Booking.com launched an integrated flight product, while Agoda and Priceline began building a global flight platform that is initially focused on the APAC region. Currently, Booking.com offers a flight product in 12 countries in Europe, but we plan to expand this throughout 2020. Booking.com's goal for the year is to be able to expose 50% of its total customers to a flight product globally. Developing a robust flight product remains an important investment, considering there are more than 4 billion global flight passengers last year. Having the ability to engage with these customers early in their travel journey gives us a better opportunity to cross-sell our accommodation and other products. But even more important, it enables us to offer a true connected trip experience. This year, we will continue to expand other aspects of a connected trip, such as attractions and dining options. For these offerings, we will utilize not only our own assets, but also partner with third-party providers so we can offer the best customer experience possible. We continue to see loyalty benefits from accommodation customers who also use our attractions product. We will continue to invest in our app platform as it becomes the center of our connected trip experience. Booking.com remains one of the most downloaded travel apps in the iOS and Android stores globally. According to a leading third-party research firm, Booking.com was the only OTA to rank in their top 10 travel apps in the world, ex-China, in 2019, coming in at number three. We've been investing in the app platform for some time, and it is becoming the preferred platform for travel bookings, and we are very pleased with the strong room-night growth that occurs on Booking.com's app. As I mentioned earlier, all of these investments are designed to drive greater loyalty and increase repeat behavior with our customers. We made progress on this front last year. In each quarter of 2019, our direct channel grew faster than our primary pay channels, and our direct channel increased its share for the year. The direct channel represents over 50% of our total booked room nights, and when including rooms booked through branded search terms, This number increases to over 60%. We have a large and loyal customer base today, but we believe we can grow this further and increase market share. Booking.com is best, and most loyal customers are part of its Genius program. This group of customers has grown consistently for several years. In 2019, we had over 70 million active Genius customers, an increase of 9% year over year. These Genius customers were responsible for a growing proportion of Booking.com's booked room nights in 2019, and we thank them for their loyalty. On top of that, we see that Genius customers book more frequently and more often on a direct basis when compared to non-Genius customers. We will continue to focus our efforts on growing this special group of customers and offering them great value as part of their Genius membership. While we are pleased about our long-term prospects, we recognize that current travel demand has been impacted by the coronavirus. At the present time, greater China has been affected the most. The broader APAC region has also been impacted, which is an area in which we have been experiencing strong growth over the last several years. And we are now starting to see a slowdown in travel globally and are aware of the potential for further demand deceleration around the world. David will provide more details in his remarks. But I would like to point out, this is not the first time our company management team has faced an exogenous impact travel demand. We know that travel is fundamental to people's lives, and we believe travel industry growth will rebound to prior growth rates. While the coronavirus impacts travel, we will continue to manage the company in a measured way that builds value for the long term. However, the steps we are taking today include, one, making sure we take care of our customers and help them with their travel plans, which includes facilitating cancellations and working closely with our supply partners. Two, ensuring the health and safety of our over 26,000 employees around the world. Three, managing our marketing efforts appropriately. We will continue to participate in those paid channels that provide us quality traffic and attractive ROIs, recognizing that we need to incorporate higher cancellation rates in our bidding calculations. In regards to brand marketing, we will be very cognizant of when and where brand marketing money should be spent this year. Four, working with our travel suppliers so they are best positioned to achieve success on our platform. And five, continuing to invest for the future. The company that provides a better travel service, a holistic, seamless, frictionless, connected trip, that delivers more value to both the traveler and our supply partners will create a lasting relationship with both travelers and suppliers, and we intend to create this service over time. With that, I will now turn the call over to David for the financial review.

Thank you, Glenn, and good afternoon. I'll review our operating results for the fourth quarter in 2019 and then discuss our thoughts on 2020 and our guidance for the first quarter. 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% in Q4 exceeded the high end of our guidance range as growth accelerated through the quarter with a strong finish in December. Our room night growth in Europe continued to exceed our expectations despite to exceed our expectations in Q4 despite a macro environment that remained cautious. Room-like growth rates for the rest of the world also exceeded our expectations and grew slightly faster in Europe in Q4. Average daily rates for accommodations or ADRs were down about 4% year-on-year in Q4 on a constant currency basis, which was in line with our guidance. As indicated on our last earnings call, the year-over-year ADR decline was impacted by decreases in rates within several key markets such as the U.S., Japan, and Hong Kong, as well as an increasing mix to faster-growing lower ADR markets and the impact of lapping 1% ADR growth in Q4 of last year. Changes in foreign exchange rates reduced Q4 growth rates in U.S. dollars by approximately 1 percentage point versus last year. We estimate the change in FX rates impacted gross bookings, revenue and EBITDA growth in Q4 by similar amounts and EPS growth by less than 1% each point. Q4 gross bookings grew by 6% expressed in US dollars and grew about 7% on a constant currency basis, coming in above the high end of our guidance range. Consolidated revenue in the fourth quarter was $3.3 billion and grew by 4% in US dollars and about 5% on a constant currency basis. Advertising and other revenue, which is mainly comprised of kayak and open table, grew by 3% in Q4 as we lapped the benefit of the hotel combined acquisition in December. Adjusted EBITDA for Q4 was $1.3 billion, which exceeded the high end of our guidance range and was up 2% year-over-year on a reported basis and about 3% on a constant currency basis. Performance marketing expense increased 2% year-on-year, which helped drive leverage of about 40 basis points in the quarter. The year-on-year growth was driven by higher than expected volumes in our paid channels. We spent $86 million on brand marketing in the quarter, which represented a decline of 31% versus Q4 last year and contributed about 130 basis points of leverage. This decrease is in part driven by a ramp-up in spend in the second half of 2018. We remain committed to investing in brand marketing in a disciplined manner going forward. Sales and other expense decreased 1% versus Q4 last year and contributed about 30 basis points of leverage due to reduced chargeback expenses as well as a reclassification of certain sales and other expenses incurred during 2019 into contract revenue in Q4, both of which offset the increase in expenses related to the continued growth of our payments platform at Booking.com. Personnel expense was in line with our forecast, growing 16% year-on-year and contributing about 175 basis points of deleverage in the quarter, as expected, driven in part by lower year-end reversal of bonus accruals than we experienced in Q4 2018. G&A expenses increased 16% year-over-year on a non-GAAP basis, which excludes a $21 million travel transaction tax charge in Q4 of 2018. Non-GAAP G&A expenses contributed about 60 basis points of deleverage in the quarter. This year-over-year increase in G&A was driven largely by higher indirect taxes, including the French DST. Finally, information technology expenses increased 42% year-over-year, driven by several items supporting the growth of the business, including payments to contractors, software license fees, outsourced data center, and cloud costs. Our non-GAAP EPS was $23.30, up 4% on a reported and constant currency basis versus the prior year. Non-GAAP net income reflects a non-GAAP tax rate of 17.7% in Q4, 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 revenue guidance issued in Q4 2018. Our Q4 tax rate was about 1 percentage point lower than our guidance due to some discrete items. Our 9% lower share count in Q4 benefited EPS growth in a quarter. On a GAAP basis, operating income increased by 3%, and GAAP operating margins decreased by about 50 basis points compared to Q4 last year. Q4 GAAP net income amounted to $1.2 billion, or $27.75 per share, up 81% from Q4 2018. Our Q4 GAAP net income includes $326 million of pre-tax unrealized gains on our equity investments in Metron and Ctrip, and $47 million of FX remeasurement losses 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 increased significantly from the prior year due to the tax impact of the items excluded from non-GAAP results, as well as the factors I mentioned that impacted the non-GAAP tax rate. In Q4, we generated $1.1 billion of operating cash flow, which declined 1% compared to Q4 last year. Our free cash flow for the quarter was about $1 billion, which decreased by 1% compared to last year, mainly due to the timing of a payment, which reduced year growth by 15 percentage points. We repurchased $1.3 billion of our stock in Q4, bringing the total repurchases to the year to over $8 billion. As of the end of the year, we had about $11.5 billion remaining under our $15 billion repurchase authorizations. We ended a quarter with $11.8 billion in cash and investments and $8.7 billion of outstanding debts. Looking back at 2019, we're quite pleased with our performance during the year. As we produced steady room night growth in the 10% to 12% range, we delivered a very healthy 39% EBITDA margin while investing in the business and absorbing unplanned DST expenses. And we grew our non-GAAP EPS by 11%, or around 15% on a constant currency basis, which exceeded our annual guidance of low double-digit growth. Turning to 2020, our initial outlook reflected a continuation of this operating model, i.e., to gain share in accommodations with some deceleration in room-light growth, to invest in payments, merchandising, and the connected trip, creating modest pressure on operating margins, and for EPS growth to benefit from our share repurchases. Due to a few mechanical factors, including the lapping of ADR declines and the phasing of personnel and G&A expenses during the year, we expected our earnings growth to be weighted largely to the second half of the year. Now turning to more recent events. The coronavirus has had an impact across our business since it made news headlines on January 21st. The early impacts were greatest in China, but we also saw these impacts across Asia and to a lesser extent in other regions outside of Asia as well. To help with context, the APAC region represents a little over 20% of our room nights with no single country accounting for more than a mid-single-digit share of total room nights. In APAC, we've seen an increase in cancellations, reduction in new bookings, and pressure on ADRs. As you all know, it's not possible to predict where and to what degree outbreaks of the coronavirus will disrupt travel patterns. While the incidence of infections has slowed in China in the last week alone, New outbreaks have occurred in South Korea, Iran, and Italy. We've been able to measure the impacts on our business so far in Asia, and we've seen a recent impact on room-night bookings in Europe following the outbreak in Italy. As a result, we're providing only a near-sim outlook with a wider guidance range to account for the possibility there will be a growing travel disruption in Europe. Based on where we are in the quarter and considering the continued impact of the coronavirus, we're forecasting Q1 booked room nights to be down 5% to 10% versus the prior year. Clearly, we're dealing with a very fluid situation, and it's extremely difficult to predict where Q1 will come out, but this is our best estimate based upon the data we have available now. We forecast total gross bookings to decline 8% to 13% on a constant currency basis and about 200 basis points more in U.S. dollars. our Q1 forecast assumes that constant currency ADRs for the company will be down about 4%. We forecast Q1 non-GAAP revenue to decline 3% to 7% on a constant currency basis and decline 200 basis points more in US dollars. Q1 adjusted EBITDA is expected to range between $560 million and $590 million, which is down 16% to 20% year-over-year on a constant currency basis and about 200 basis points more in US dollars. We're forecasting Q1 non-GAAP EPS for approximately $9.05 to $9.65, which is 14% to 19% below Q1 2019. On a constant currency basis, we estimate Q1 non-GAAP EPS to decrease year-on-year by approximately 12% to 17%. Our non-GAAP EPS forecast for Q1 includes an estimated income tax rate of approximately 18.5%. Our Q1 non-GAAP EPS guidance assumes a fully valued share count of about 41.6 million shares, which is 9% below Q1 of last year. We forecast GAAP EPS to be between $7.95 and $8.55 for Q1. Our GAAP EPS guidance for Q1 assumes a tax rate of approximately 18.5%. We use a dollar-to-euro exchange rate of $1.10, when setting our Q1 guidance. 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. Finally, a housekeeping item. Starting with our Q1 results and going forward, we plan on reporting our performance and brand marketing expenses on a combined basis as we view our overall marketing spend as an investment in customer acquisition and retention. We'll now take your questions. Operator?