Booking Holdings Inc.

Welcome to Booking Holdings' second quarter 2020 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 Holding's 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 Holding's 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 for 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' second quarter conference call. I'm joined this afternoon by our CFO, David Goulden. We felt the full impact of COVID-19 during the second quarter, with reported room nights, which includes the impact of cancellations declining 87% year-over-year. Newly booked room nights, excluding the impact of cancellations, declined 68% in the quarter. The high cancellation rate of pre-COVID bookings, which we witnessed in March and April, combined with the overall weak travel demand environment, significantly impacted our revenue and EBITDA this quarter. Revenue declined 84% versus last year, and we recorded an adjusted EBITDA loss of $376 million, the first time we have produced a quarterly EBITDA loss since 2001. We witnessed the greatest negative impact from the virus in April as newly booked room nights in that month declined over 85% year over year. After April, Room night trends have steadily improved with newly booked room nights in July declining about 35% year over year. The improved booking trends were primarily driven by domestic travel, with international trends seeing much more limited improvement. In July, we reached slightly positive year over year growth for overall domestic newly booked room nights, though, of course, there are many countries that still have negative year-over-year growth rates. In addition, it is an obvious point that our domestic business is benefiting from prohibitions and restrictions on international travel, which forces consumers who want a holiday to travel domestically. While almost all of our global markets showed improvement through the quarter, Europe and the United States have the highest contribution to the improved domestic booking trends. As a reminder, A very high percentage of our new bookings have been made with flexible cancellation policies and may be canceled in the future. And as we see new outbreaks of COVID-19, cancellations may increase again. While we are pleased to see signs of a recovery in domestic travel, we want to emphasize that it is impossible to tell how the coming months will unfold, unfortunately. Many areas of the world continue to have very high infection rates, and in some regions, they're dealing with new outbreaks after having significantly lowered their infection rates. As a result, after a period of relatively steady improvement in many geographies, in recent weeks, we are seeing these growth rates worsen in some countries. We continue to believe that in order to recover to pre-COVID levels, we will need to have a vaccine or effective treatment. which will take time to produce and distribute globally at the scale needed. We're pleased to have recently read news about progress on this front, but we believe it will be years and not quarters before the travel market returns to pre-COVID volumes. In those countries and regions where shelter-in-place rules were relaxed and economies reopened, we witnessed booking trends improve quickly. We believe part of this initial burst of demand is due to people's pent-up desire to go somewhere after being in a lockdown situation. It also demonstrates people's deep desire to travel, providing it is safe. Throughout this initial reopening phase, we have seen new customer booking and travel patterns emerge. In line with our growth in domestic travel, we are seeing that bookers are choosing to stay closer to home and are more interested in less urban areas than pre-COVID. the share of these types of bookings on our platform has increased meaningfully this quarter. We also see that our customers are booking more alternative accommodations than in the past, which often have the benefit of reduced potential interaction with other travelers. In Q2, booking.com alternative accommodations represented about 40% of all new bookings in the quarter. We've also seen an increase in travelers booking stays with more flexible cancellation policies due to the uncertain travel environment we currently face. Our platform is well positioned to capture these travel demand patterns due to our very capable marketing teams, global footprint, extensive accommodation choice, and diversification of cancellation policy and rate types. We've adapted our marketplace to operate more efficiently in this new travel demand environment to benefit both our supply partners and customers. We are working closely with our supply partners so they can more effectively market on our platform to capture the growing travel demand. As our partners seek assistance to better respond to these new domestic and intra-regional demand patterns, we are working to provide more information and advice as to the nature of the demand and offering the best programs on our platform that will help them capture this demand. We are also helping our partners more effectively communicate and showcase the steps that they have taken to increase their own health and safety protocols at their properties, something we know travelers are keen to understand in order to make informed booking decisions. Finally, we continue to extend our payments platform to more of our supply partners, and it remains a key initiative for us this year. Developing merchant capabilities has valuable benefits for both our supply partners and bookers. As we discussed on our Q1 earnings call, we articulated a series of plans to help navigate the company through these challenging times. The first phase was focused on stabilizing the business in the initial stages of the crisis, which included supporting our employees and increasing our cash positions. The second phase was focused on optimizing the business for the expected decrease in travel demand over the next few years. The final phase is focused on positioning the business to capture travel demand as it develops so that we can emerge from the crisis on a strong footing and extend our leadership position. We completed the stabilization phase and are now working through our optimization phase. These actions have allowed us to lay the important groundwork that will set us up to emerge from the pandemic in a position of strength. During our optimization phase, we assessed our total cost structure and developed plans to align it with expected market demand over the next few quarters. We completed this work at Kayak, OpenTable, and Agoda in the second quarter, and recently completed it at Priceline in July. The restructuring charge we took in the second quarter only relates to the right-sizing activities at Kayak, Open Table, and Agoda. These actions have the effect of reducing headcount by approximately 22% across these brands, including some furloughed employees. While the cost savings net of restructuring costs will be modest this year, we expect that these cost reductions will produce over $80 million of annual personnel savings. With respect to Booking.com, We have further developed our intentions for the appropriate level of personnel and other cost reductions in light of expected business levels. Booking.com is in the process of consulting with its works councils and employee representatives and working through local labor regulations in the countries where we operate. We hope to finalize our plans and to have more definitive news over the coming months. We expect that up to about 25% of Booking.com's global workforce could be impacted by these actions. We expect that business functions most closely tied to transaction volumes will be impacted the most. At this time, and subject to our consultation with the Dutch Works Council, employee representatives, and other organizations, we estimate that these cost reductions at Booking.com could produce annual personnel savings between $250 to $300 million. This preliminary estimate may change, and we will update you in the coming months on the expected restructuring costs associated with these reductions. It is our hope to make all announcements to employees about these cost reductions by the end of 2020. In conclusion, We have learned from when we could not travel how important travel is to our lives. Whether to see family or friends or to explore new places and cultures, travel is fundamental to who we are. Our wish list campaign, which drew on insights from millions of customers liking accommodations they would want to visit, affirmed the innate desire and demand that will always endure for travel. This campaign reiterates the energy and passion that we know remains for travel. This has been a challenging quarter, and we've had to make some very difficult decisions. We believe it will take years for travel to fully recover, but I have great confidence in our employees and our capabilities, and I could not be more proud of how our entire team has handled themselves during these trying times. I will now turn the call over to our CFO, David Goulden.

Thank you, Glenn, and good afternoon. I'll review our operating results for the second quarter and provide some color on the trends we saw through the quarter and into July. All growth rates are relative to the prior year comparable period, unless otherwise indicated. Information regarding reconciliation of non-gap to gap can be found in our earnings release. Now, on to our results for the quarter. In our last earnings call in May, we discussed the trends we saw early in the second quarter. including a year-over-year decline in newly booked room nights of about 85% in April. As a reminder, newly booked room nights exclude the impact of cancellations. April ultimately proved to be the low point for newly booked room night declines in Q2, as we saw a steady improvement in both May and June driven by increasing levels of domestic travel. Domestic room night declines improved steadily in Europe, North America, and across Asia. However, we saw less improvements in the domestic declines in South America, Middle East, and Africa. Newly booked room nights for the full quarter declined about 68% as we exited the quarter down about 50% in the month of June. Our Q2 reported room nights, which include the impact of cancellations, decreased 87% for the full quarter. reported room nights in June declined by about 55%, improving from an over 100% decline in April when we received more cancellations than new bookings. We saw a continued improvement in the cancellation rate since April as we worked through the waiver cancellations for bookings made prior to COVID-19. Although we're now getting closer to pre-COVID levels for cancellation rates, this improving trend could easily reverse if we see a continued if you see continued outbreaks of the virus or new impositions of travel restrictions, especially considering the very high percentage of our recent bookings that are being made with flexible cancellation policies. Rose bookings declined 91% in Q2, which is greater than the decline in reported room nights due to the average daily rate for accommodation decreasing about 35% year over year on a constant currency basis. Note that the high level of cancellations in the quarter significantly distorted ADRs. As a point of comparison, our newly booked ADRs, excluding the impact of cancellations, declined year over year by only a couple of percentage points in Q2. An increasing rate of bookings in the high ADR markets like the U.S. and Western Europe helped largely offset the pressure of the broader lodging industry ADR declines. On Saturday, revenue for the second quarter was $630 million and decreased 84% year over year. Revenue in the quarter was less negatively impacted than reported room nights and gross bookings due to the fact that some of the cancellations we received in Q2 were for check-ins that were expected to occur in later quarters. This dynamic created by cancellations in the quarter also substantially increased the ratio of revenue as a percentage of gross bookings in the quarter. The substantial reduction in revenue contributed to an adjusted EBITDA loss for $376 million in Q2. While we made significant reductions in our variable expense lines, like marketing, sales, and other, our more fixed expenses decreased to a lesser extent in Q2. As Glenn mentioned, we've taken actions across the quarter to reduce operating expenses as we optimize and align our cost structure with the new demand environments. However, the cost benefit of these actions were not fully realized in Q2, and the cost reductions and other restructuring charges are expected to be modest in 2020. Marketing expense, which is a highly variable expense item, decreased 85% year-over-year, as we saw a significant reduction in demand in the paid channels. In addition, we substantially reduced our brand marketing spend in response to the diminished travel demand environments. We expect our marketing expenses will remain significantly below 2019 levels for the remainder of the year. Sales and other expenses decreased 47% year-over-year due primarily to a reduction in expenses associated with payment transactions as well as lower outsourced customer service costs as we moved through the quarter and needed less support in processing reduced levels of cancellations in May and June. Bad debt and other credit losses were up about 25% year-over-year in the quarter. However, we saw a far smaller increase in provisions in Q2 than what we recognize in Q1. We expect sales and other expenses will continue to be down year-on-year in the second half of 2020. However, the extent of the decline will be impacted by the level of volume we see in the business. Personnel expenses decreased 18% year-over-year on non-GAAP basis, primarily due to a $100 million benefit from government aid packages, primarily in the Netherlands and the U.K., Currently, we do not anticipate further material benefits to personnel expenses from government aid in future quarters. We expect personnel expenses in the second half of 2020 will decline less than we saw in Q2, as we'll no longer see the benefit from government aid. We expect the personnel cost reductions we made in Q2 at a GODA, CAIA, and Open Table, plus the reductions we made early in Q3 at Priceline, to produce over $80 million of annualized personnel savings starting in the second half of 2020. As Glenn mentioned, we've further developed our intentions for the appropriate levels of personnel at Booking.com and are in the process of reviewing these potential reductions with Works Councils, employee representatives, and other organizations. We estimate that the potential cost reductions at Booking.com could produce annual personnel summary savings between $250 and $300 million. And because of the processes we have to go through at Booking.com over the next few months, we expect the majority of these savings will not be realized until 2021. As Glenn mentioned, we'll update you on the estimated cost of achieving these savings as soon as they're available, at which time we'll file any required amendments to our 8K. G&A expenses decreased 43% year-over-year, largely driven by reduced discretionary spend, such as T&E, and other personnel related expenses, as well as lower office expenses due to employees working remotely. We expect the G&A will continue to be down meaningfully year over year in the back half of the year. However, the level of decline may be less than what we saw in the second quarter. Information technology expenses decreased 1% year over year due to lower outsourced data center and cloud costs. We expect the IT expenses will remain roughly flat versus the prior year in the back half of the year. Finally, we've broken out the restructuring charges separately in the operating expenses in the P&L. The $34 million in restructuring charges to be recorded in the second quarter only relates to the right-sizing activities at Kayak, OpenTable, and Agoda. I note these restructuring charges are included in our non-GAAP results. On a GAAP basis, we incurred an operating loss of $485 million in Q2. We recorded GAAP net income of $122 million in the quarter as we benefited from an $835 million pre-tax gain on our equity investments, primarily related to our investments in MetOne. This gain was partially offset by $55 million of FX remeasurement losses on our Euro bonds. We excluded these gains and remeasurement losses from our non-GAAP results. Now on to our cash and liquidity position. Our Q2 ND cash and investment balance increased to $13.4 billion over from a March ending balance of $9.2 billion, primarily due to the $4.1 billion bond and convertible note offering we completed in early April. Our long-term investment balances benefited from the $835 million gain on equity investments in the quarter I previously mentioned. These increases to our cash and investment balance were partially offset by the $1.2 billion cash settlements of one of our convertible notes in June. We have $122 million in positive operating cash flow and $52 million in positive free cash flow in the quarter. Changes to working capital were a source of about $300 million of cash in the quarter compared to an $820 million use of cash in Q1. The improvement from Q1 was largely driven by a Q1 prepayment of taxes in the Netherlands of about $720 million that was subsequently refunded in April. The small reduction in Q2 relative to Q1 in our deferred merchant bookings and other current liability balances were mostly offset by a small reduction in our account receivable balance in the quarter. Our improvements, our improved liquidity position is the result of efforts we took to stabilize our business from the immediate shock of the crisis. We'll continue to focus on a strong liquidity position given the high level of uncertainty created by the COVID pandemic. As a part of these efforts to bolster our liquidity and consistent with our comments last quarter, we've halted our repurchases of stock and will not initiate repurchases until we have better visibility into the shape and timing of a recovery. Now onto our thoughts for the third quarter. Consistent with our approach last quarter, I'll not provide full quarterly guidance, but will instead provide you with some color on our preliminary July results, which will help you get a better sense of recent top line trends. As Glenn mentioned, our newly booked room nights in July were down about 35% year over year. Of course, these new bookings may be cancelled in the future, especially as a very high percentage of new bookings continue to be made with flexible cancellation policies. The year over year decline in reported room nights in July was about 45%, which is worse than our newly booked room night decline in the month as the cancellation rate remains above prior levels. Bookings for the full for the full third quarter may vary from July results depending on the level of travel demand and cancellations we experience in August and September. We expect gross bookings in the third quarter will decline year over year by several percentage points more than our reported room nights due to negative pressure on local currency ADRs. And we expect revenue declines in the quarter will be roughly in line with what we see in gross bookings. We currently expect adjusted EBITDA will be positive in the third quarter, given the trends we're seeing in our business so far through July, as well as the fact that Q3 is our seasonally strongest quarter. This expectation is based on the assumption we do not see a meaningful increase in travel restrictions or shelter-in-place rules or a decrease in consumer willingness to travel as a result of continued or increased COVID outbreaks in the quarter. As we've noticed, as we noted, we've seen an improvement in our newly booked room night trends that continue into July, largely driven by domestic travel. Our newly booked domestic room nights increased slightly year over year in the month of July for the first time during the COVID pandemic. Domestic room nights represented over 70% of our newly booked room nights in both Q2 and July, up significantly versus 2019, which was about 45%. At Booking.com, its domestic alternative accommodation newly booked room nights increased nicely year over year in July, and its domestic core accommodation newly booked room nights were down slightly. We continue to monitor other changes in Booking.com's customer booking behavior. We've seen the length of the booking window begin to return to prior year levels in June after expanding versus the prior year in both April and May. Mobile bookings, particularly through our app, continue to gain share in the second quarter into July. And finally, we continue to see greater than 50% of our newly booked room nights come to us through the direct channel. On a regional basis, Europe and the United States have been the largest contributors to the improvement in newly booked room night trends since April. However, as Glenn mentioned, in the past weeks, we've witnessed a plateauing or deterioration of new booking trends in several places that have seen increasing outbreaks of COVID-19 cases, including Spain, Belgium, Australia, Japan, Vietnam, Taiwan, and the U.S. We've also seen an associated increase in cancellation rates in many of these places. These recent trends are a reminder we're still in the very early days of a fragile recovery that will likely be uneven for some time to come. As Glenn emphasized, this has been a challenging quarter that involved some very difficult decisions and a number of other actions that will ultimately help us optimize our business to the expected level of market demand. We have confidence that through these actions, we'll be well positioned to come out of the crisis and extend our leadership role in the global travel marketplace. With that, we'll now take your questions.