Booking Holdings Inc.

Welcome to Booking Holdings, a third quarter 2020 conference call. Booking Holdings would like to remind everyone that this call may contain forward-looking statements, which are made pursuant to safe harbor provisions of the Public Security 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 and or expectations and singular expressions reflecting something other than historical facts are intended to identify forward-looking statements. For a list of factors that could cause a 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 holdings earnings prep 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 prep 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' third quarter conference call. I'm joined this afternoon by our CFO, David Golden. While the impact of COVID-19 continues to weigh heavily on our results, we were pleased to see a sequential improvement in trends in our third quarter, which is our seasonally largest and by far most profitable quarter. Reported room nights, which includes the impact cancellations, were down 43% year-over-year in the third quarter, which was a marked improvement from the 87% decrease we experienced in the second quarter. Continued pressure on ADRs in the quarter, slightly offset by a one-point FX benefit, led growth bookings and revenue to decline by about four percentage points more than room nights. We recorded approximately $1 billion of adjusted EBITDA in the quarter, which was an improvement from the $376 million loss we reported in Q2, but this was 60% lower than in the third quarter last year. As our results show, and we are operating significantly below pre-COVID levels. However, we were encouraged by our improvement versus the second quarter, and we're pleased to see travelers and supply partners connecting through our platforms as they emerge from the spring's first wave of coronavirus infections. Delivering these results in what continues to be an extremely challenging and unpredictable environment is a credit to our team's relentless efforts to provide the best value and service to our traveler customers and supply partners. The improvement in booking trends in the third quarter versus the second quarter was almost entirely driven by domestic travel with a very modest improvement in international travel. As we noted last quarter, our domestic business is benefiting from government restrictions on international travel, which forces consumers who want to travel, they have to do it domestically. we believe the improvements in trends we've seen in this challenging environment demonstrate people's deep desire to find a way to travel, with Q3 results benefiting from some pent-up demand after the lockdowns in Q2. Looking more closely at the shape of the quarter, the year-over-year decline in reported roommates was relatively consistent in each month of Q3, as the steady improvement in global trends that we saw from April through July find out in August and September. In October, Reported room nights declined by about 58% compared to October 2019. And over the last seven days through yesterday, declined by about 70%. We believe this worsening result is driven by increased virus infections and certain governments reimposing public health-related restrictions. We believe that travel will continue to be greatly affected by infection trends and government's public health responses. David will provide some more color on the regions in his remarks. As we think about the full fourth quarter, it's difficult to predict exactly what the next two months will look like in terms of travel demand as we enter the winter months in the Northern Hemisphere amid rising COVID case counts in many areas. Given the trends we are currently seeing, we believe that year-over-year room-night declines will be greater in Q4 than what we observed in October. If this turns out to be the case, it will be very challenging for us to reach profitability in Q4. Despite the expected challenging fall and winter ahead of us, I remain confident in the long-term outlook for both our industry and our company. I strongly believe that people have an innate desire to travel, which will ultimately drive a recovery out of this crisis. When we think about the timing and shape of this recovery, We continue to believe that a key milestone will be a widely distributed vaccine or effective treatment, which will give people confidence that it is safe to travel. While we are encouraged by the news of progress being made on the front, we understand that it will take time to produce and distribute any vaccine on a global basis to achieve effectiveness. I'm also encouraged to see some governments, such as Japan and Thailand, taking concrete incentives to incentivize travel. More programs like these and increased cooperative action from governments around the world would help accelerate the travel recovery. One of the progress we are seeing leaves me optimistic on the long-term outlook for our industry. I continue to recognize there will likely be years and not quarters before the travel market returns to pre-COVID volumes. In the meantime, we continue to execute against a series of plans to navigate the company through these challenging times, and lay the important groundwork that will set us up to emerge from the pandemic in a position of strength. As we previously discussed, we've assessed our total cost structure and developed plans to align it with expected market demand over the next few quarters. This work is complete at Kayak, OpenTable, Agoda, and Priceline, and we've started to see some of the associated $80 million of annual cost savings fade in during the third quarter. We are making progress with our initiatives to reduce the workforce at Booking.com by up to approximately 25%, with an associated annualized savings estimated between $250 million to $300 million. We have been taking restructuring action at Booking.com in various countries, and in some countries we have implemented voluntary leader schemes. We are continuing to work with our works councils, employee representatives, and other organizations finalized plans in other countries. It is our hope to make the vast majority of the announcements to employees about these personnel reductions by the end of 2020. It is important to stress that these personnel restructuring decisions are difficult, and we do not take them lightly. Given the expected timeframe of the recovery that we have discussed, we believe that our restructuring plans are the correct access for the company in order to right-size the business. In addition to our cost reduction actions, we're being focused on positioning the business to capture more travel demand as it develops during recovery and over the long term. Part of this effort is continuing to build towards our long-term vision of the Connected Trips seamless multi-product offering, which we believe will ultimately improve the customer experience on our platform and drive enhanced loyalty and frequency over time. In addition, We believe offering other travel products will provide opportunities through merchandising and customer acquisition to enhance the growth of our core accommodation business. Booking.com has continued to take important early steps to build a flight product and recently announced the launch of flights on Booking.com in the U.S. We see flights as a key component of the connected trip. It is an obvious opportunity for us to remove friction in the booking process for our customers. The Connecticut vision of providing this frictionless customer experience will be brought together by a seamless payment network, which we continue to develop and extend to more of our supply partners. We strongly believe that developing these payment capabilities has valuable benefits for both our bookers and supply partners, including potentially lower payment costs for suppliers. Also, we will continue to work closely with our supply partners to help them respond to this environment and more effectively market their properties on our platform in order to capture more travel demand as it returns over time. Finally, I want to address a matter that we are following closely and that many of you may have questions about. The European Commission is working on a new regulatory framework for the digital economy, which, among other things, proposes to designate some large online companies who operate across Europe as gatekeepers. and to establish rules and regulations for these businesses. The criteria for being a gatekeeper and the associated rules and regulations are in development, so the potential impact is difficult to estimate at this time. There have been questions and speculations that Booking.com may be one of the designated gatekeepers, which we firmly believe would be incorrect for a number of reasons. The principal reason is that the accommodations market in Europe is very open and very competitive. Consumers have multiple online and offline choices to book accommodations, and accommodation providers have multiple online and offline channels to attract customers. To put this into perspective, Booking.com booked about 7% of all potentially bookable accommodation room nights across all properties on our platform globally in 2019. Across Europe, that number was about 11%. As I mentioned, the new European regulatory framework is under development, and we will update you on developments during future calls. In conclusion, we believe we are responding well to this pandemic crisis. We have provided great service to our customers and are working with our supply partners to ensure that together we can get them as much business as possible during these difficult days. I am incredibly sad that we've had to let go and are still in the process of letting go So many dedicated and hardworking people, but it is a necessary step. And we expect to have some challenging quarters ahead of us. As I said before, we believe it will take years for travel to fully recover. However, I am confident in our team's ability to execute during these unprecedented times and continue to deliver value to our traveler customers and supply partners alike and to emerge from this crisis on a strong footing. I will now turn the call over to our CFO, David Golden.

Thank you, Glenn, and good afternoon. I'll review our operating results for the third quarter and provide some color on the trends we saw through the quarter and into October. All growth rates relative to the prior year comparable period unless otherwise indicated. Information regarding reconciliation of non-GAAP to GAAP can be found in our earnings release. Now on to our results for the quarter. On our last earnings call in August, we discussed the trends that we saw throughout the second quarter and into July, including the year-over-year decline in newly booked room nights steadily improving from about 85% in April to about 35% in July, driven by increased levels of domestic travel. As a reminder, newly booked room nights exclude impact cancellations. As Glenn noted, the steady improvements in global trends that we saw from April to July flattened out in August and September, resulting in our newly booked room nights declining about 37% for the full quarter. Our QC reported room nights, which include the impact of cancellations, decreased 43% for the full quarter, which is worse than our newly booked room night decline in the quarter, as the cancellation rate remained above prior year levels. This improvement in room light declines versus Q2 was helped by pent-up demand from lockdowns and other travel restrictions earlier in the year. At a regional level, we saw North America continue to improve as we moved throughout the third quarter. However, this improvement was offset by softening trends in Europe. Room light declines in Asia were consistent throughout Q3. Unfortunately, as we move into September, we saw COVID case counts climbing higher in many European countries and governments beginning to respond with imposition of travel restrictions. This difficult pattern continued throughout the month of October, leading to a further slowdown in bookings in Europe. In October, we also saw a slowdown in North America, while the room night declines in Asia remained consistent with Q3. As a result, Global newly booked room nights for October were down about 50% year-over-year, and reported room nights for October were down about 58%. Over the last seven days through yesterday, these trends have further deteriorated, with newly booked room nights declining about 58% year-over-year, and reported room nights declining about 70% year-on-year. This is the global average, and in Europe, these decline rates are much higher. These recent trends are a reminder that this is a fragile recovery and that we're now seeing a second dip in our business driven by COVID. We believe that the recent increase in COVID cases in Europe and the U.S., coupled with cold weather and travel restrictions in new geographies, will likely result in the second dip being U-shaped and lasting until the early spring of 2021. Domestic room nights represent over 70% of our newly booked room nights in both Q3 and in October, up significantly versus 2019, which was about 45%. After growing year-on-year in the third quarter, our newly booked domestic room nights reverted back to a year-over-year decline in October. Booking.com's domestic alternative accommodation newly booked room nights also decreased year-over-year in October after increasing nicely in the third quarter. Our October reported room-night decline, which includes the impact of cancellations, was worse than our newly booked room-night decline in the month, as the cancellation rates remained above prior year levels. Although we saw continued improvement in the cancellation rate through the third quarter, this trend also reversed course in October. Given the recent high COVID case counts and increased travel restrictions, we expect to see further pressure on cancellation rates for the remainder of the fourth quarter, especially considering the percentage of our recent bookings that are being made with flexible cancellation policies that remains higher than the prior year. We continue to monitor other changes in Booking.com's customer booking behavior. In Q3, we continue to see an increase in the mix of customers booking alternative accommodations versus the prior levels. However, as we progress through the quarter and into October, we saw this increase in the alternative accommodation share moderate. Booking.com's alternative accommodations represented approximately one-third of all new bookings in the quarter. We've also seen the length of the booking window contract in the third quarter after expanding versus the prior year in the second quarter as customers made a higher share of bookings in both quarters to stay in the peak summer period. The booking window continues to shrink versus last year in October as customers focused on their short-term travel needs. Mobile bookings, particularly through our app, continue to gain share in the third quarter and October. And finally, we continue to see greater than 50% of our newly booked room nights coming to us through the direct channel. Gross bookings declined 47% in Q3, which is a greater decline than reported room nights due to the average daily rate for accommodations decreasing about 8% year on year on a constant currency basis. As a point of comparison, our newly booked room-night ADRs, excluding the impact of cancellation, declined year-over-year by only a couple of percentage points in Q3. An increasing mix of bookings in higher ADR markets like Western Europe and the U.S. helped offset and at large offset the pressure of the broader lodging industry ADR declines. Consolidated revenue for the third quarter was $2.6 billion and decreased 48% year-over-year, about in line with the growth booking decline. Adjusting EBITDA of $1 billion in Q3 was down 60% year-on-year. And while we significantly reduced our variable cost lines, like marketing and sales and other, our more fixed expenses decreased to a lesser extent in Q3. As Glenn mentioned, we continued our actions in the quarter to reduce operating expenses as we optimize and align our cost structure with the new demand environments. However, for 2020, we expect the savings recognized in our personnel expense line related to these actions will be more than offset by charges reported in the restructuring and other exit costs line. Marketing expense, which is a highly variable expense line, decreased 48% 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 environments. We expect our margin expense will remain significantly below 2019 levels in the fourth quarter. Sales and other expenses increased 53% year-over-year, primarily due to reduction in expenses associated with payment transactions, a reduction in the provision for bad debt and credit losses as we saw an improvement in our collection rates relative to our prior expectations, as well as lower outsourced customer service costs as we needed less support in processing reduced transaction volumes. We expect sales and our expenses will continue to be down year-over-year in the fourth quarter. However, the extent of this decline will be impacted by the level of volume we see in the business. Personnel expenses decreased 9% year-over-year, primarily due to low bonus accruals and reduced headcounts. The restructuring actions we completed at the GODA open table and price line benefited the personnel expenses by approximately $20 million in the third quarter. Additionally, personnel expenses benefited from $22 million in government aid packages primarily related to programs we were already participating in within the Netherlands and the UK. Currently, we do not anticipate further material benefits to personnel expenses from government aid in future quarters. And we expect the personnel expenses in the fourth quarter will decline about the same as it did in the third quarter. DNA expenses decreased 34% year over year. largely driven by reduced discretionary expenses such as T&E and other personnel-related expenses, lower indirect taxes, 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 fourth quarter, a value line with the decline we saw in the third quarter. Information technology expenses were up 1% year-over-year. We expect the IT expenses will be up slightly versus the prior year in the fourth quarter. Finally, we've broken out restructuring charges separately in operating expenses in the P&L. The $41 million in restructuring charges recorded in the third quarter primarily relates to rightsizing activities of Booking.com. I note that these restructuring charges are included in our non-GAAP results. With respect to Booking.com, in September, we initiated the first wave of restructuring actions in over 40 countries, which did not include the UK and the Netherlands, where Booking.com continues to consult with its works councils and employee representatives. We currently estimate that the remaining restructuring charge related to our actions at Booking.com will be approximately $100 million, some of which we expect to record in the fourth quarter and the rest into early 2021. At this time, on subject to our consultation with the Dutch Works Council, employee representatives, and other organizations, we currently estimate that these selected cost reductions plus attrition at Booking.com could impact up to about 25% of the global workforce. and could produce annualized run rate personnel savings between $250 and $300 million, which we expect to be almost fully phased in in the second quarter of 2021. Again, these estimates may change and will update you in the coming months. It's our hope to make vapid drive announcements to employees affected by these personnel reductions by the end of 2020. Our non-GAAP EPS was $12.27, down 73% versus the prior year. Non-GAAP net income reflects a non-GAAP tax rate of 41%, which is significantly higher than Q3 last year due to the impact of disproportionate non-deductible expenses, including SBC, relative to a low projected full-year pre-tax earnings estimates. On a GAAP basis, we had operating income of $350 million in Q3, as our GAAP operating expenses in the quarter included a charge of $573 million related to an impairment of goodwill for OpenTable and Clack. This non-cashing payment charge is driven by reduced financial projections and a longer expected recovery for Clack and OpenTable due to the COVID-19 pandemic. We reported GAAP net income of $801 million in the quarter, and we benefited from an unrealized $730 million increase pre-tax gain on our equity investments, primarily related to our investment in Metla. In addition, we recorded a $64 million pre-tax expense in the quarter related to our French and Italian tax matters. There was also $117 million of FX remeasurement losses on our Euro bonds. We excluded the impairments, the tax expense, the unrealized gains, and the remeasurement losses from our non-GAAP results. Now onto our cash and liquidity position. Our Q3 ending cash and investments balance increased to $14.9 billion from our June ending balance of $13.4 billion due to positive operating cash flow as well as the unrealized gain on our long-term investments. We generated $920 million of operating cash flow and $848 million of free cash flow in the quarter, both down approximately 50% versus the prior year. Changes in working capital represented a use of cash of about $300 million in the quarter, driven by seasonal effects and the impact this had in the third quarter due to a high concentration of check-ins, which resulted in an increase in our accounts receivable balance. We'll continue to focus on maintaining a strong liquidity position given the high level of uncertainty created by the COVID pandemic. Consistent with our points last quarter, we halted repurchase of our stock and will not initiate repurchase until we have better visibility into shape and timing of a recovery. Now onto our thoughts for the fourth quarter. Consistent with our approach last quarter, I will not provide full quarterly guidance, but instead will provide you some additional color from our preliminary October results, which will help give you a better sense of our recent top line trends. As I mentioned earlier, our newly booked room nights and reported room nights in October declined year-over-year about 50% and 58% respectively and at higher rates in the last week. Road night declines for the fourth quarter will likely vary from October's results, especially considering the recent rise of COVID-19 cases and an imposition of travel restrictions and the impact that will have on the level of travel demand and cancellations in November and December. We expect the road night declines in November and December will be worse than they were in October. We expect gross bookings in the fourth 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 that revenue declines in the quarter will be several percentage points less than the decline in gross bookings, primarily due to book-to-save timing differences similar to what we saw during the first wave of the pandemic. Given our expectations for further reductions in room-like growth from October, coupled with continued ADR pressures, we expect it will be very challenging to reach a positive adjusted EBITDA in the fourth quarter. On a more positive note, if we compare our internal outlook for the full year 2020 now with where we were when we spoke to you in August, we're ahead on all major income statements and cash flow metrics. In conclusion, as Glenn emphasized, we're quite pleased with our third quarter results in a challenging environment. And while we expect the fourth quarter to be an even more difficult environment, we have confidence that we will continue to execute against what we can control. We've made some difficult decisions and taken a number of actions that will help us optimize the business. We have confidence that through these actions, we'll emerge from the crisis in a stronger position. We'll now take your questions. So, Laura, can you please open the line for Q&A?