Booking Holdings Inc.

Welcome to Booking Holdings' first quarter 2021 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 facts 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 would like to introduce Booking Holdings' speaker for this afternoon, Glenn Fogle and David Golden. Go ahead, gentlemen.

Thank you, and welcome to Booking Holdings' first quarter conference call. I'm joined this afternoon by our CFO, David Golden. I am pleased to start by reporting further improvement in our accommodations business, with first quarter room nights declining 54% versus Q1 2019, which was six percentage points better than our fourth quarter 2020 decline. This improvement was driven by solid signs of increasing travel demand in certain countries and by our team's strong execution. David will provide the details on our first quarter results in his remarks. As we have said before, we believe that the rate of recovery for travel will depend heavily on the rate and severity of new COVID-19 cases, the timing of effective and broad-based vaccine distribution, and, hopefully, even more effective treatments in the future. While the pace of vaccine distribution remains frustratingly slow in most places around the the UK, and the US are benefiting from successful vaccine distribution programs. In each of these countries, we have seen encouraging booking trends, which supports our view that vaccine distribution is a key to unlocking pent-up travel demand. In our own survey work earlier in the year, we found that over 70% of Americans said that the early distribution stage of COVID-19 vaccines made them feel more hopeful and optimistic about traveling in 2021. As countries ramp up vaccine distribution, which we are now starting to see in more European countries, we believe that we will start to see booking strength expand to more parts of the world. While there are encouraging signs of recovery in some countries right now, the current situation in other countries, such as India, where we are seeing staggering increases in COVID-19 cases and an enormous human tragedy happening, reminds us that recovery is not underway everywhere, and unfortunately, in some countries, the situation is getting worse. Last week, the World Health Organization warned that the pace of the pandemic is accelerating. We are mindful that governments may continue to take actions, such as general area lockdowns, or reintroducing travel restrictions, including barring people from high-infection locations from entering a country. Any of these actions can have an impact on our performance, and it's difficult to predict when and to what extent such actions may be taken in the future. Furthermore, international travel must recover for there to be a complete global travel recovery, and many governments may be cautious in fully opening international travel for some time. Focusing on the U.S., where the vaccination program is going well, I am very pleased with our first quarter results in the U.S. and the strong rebound in U.S. travel demand. For Q1 in the U.S., we had positive room night growth versus Q1 2019, and it was our strongest performing major country. These results were driven by domestic bookings, as our international business is still very slow. We were pleased to see improvements in our U.S. room night trends each month in Q1, and these improvements continued into April. This strengthened the market benefit in all of our travel products, can help drive the highest number of air tickets ever booked in a single quarter for our company, and we know that both Priceline and Booking.com had good U.S. results during the first quarter. In this improving environment, we continue to press ahead with one of our most important strategic strategies, strengthening the Booking.com brand in the U.S. You may have seen Booking.com's U.S. Back to Travel promotional campaign that we launched in April, which offered a $50 post-date promotional travel credit for U.S. travelers who activated the promotion in the Booking.com app and booked travel by the end of May. This is just one example of the marketing methods that we will be employing to increase awareness of the Booking.com brand in the U.S., and in this case, drive further consumer engagement with our app. We also remain focused on expanding the supply of Booking.com's alternative accommodation offering in the U.S., and we targeted and signed new properties to the platform in the quarter. However, we recognize there is more work to be done to improve the breadth of this product in the U.S., During the first quarter, we continue to execute against other key strategic priorities, such as expanding Booking.com's payment platform and building the connected trip vision. Regarding our integrated payment platform at Booking.com, we have made recent progress primarily through increased adoption by our supply partners in the U.S. As I have mentioned previously, This platform provides payment options favored by both travelers and our supplier partners across hotels, alternative accommodations, cars, flights, and attractions, and is foundational for enabling our connected trip strategy. The connected trip is our vision of a multi-product offering, including accommodations, flights, ground transportation, attractions, and dining, connected by our payment network and ultimately supported by personalized intelligence to provide a frictionless, seamless experience for our bookers, all the way from first thinking about the initial booking to experiencing their trip to arriving back home. Building out our full Connected Trips vision will be a multi-year endeavor. However, we expect that our business will benefit from the steps we are taking to achieve this vision long before reaching the ultimate end state. For example, developing a robust flight product at Booking.com gives us the ability to engage with flight bookers early in their travel journey and allows us an opportunity to cross out our accommodation and other services to these bookers. We have not had these opportunities historically at Booking.com given its accommodation-only focus in the past. As we think about the journey for building the connected trip, this year we'll be focused on enabling travelers to book the major elements of their trip in one place on Booking.com. This means we will be working to build up our non-accommodation products like flights, ground transportation, and attractions by increasing supply as well as exposing more of our customers to these products. In Booking.com's flight offering, we are now live in 18 countries with the most recent launch in the U.K. We can now expose a large segment of customers to flights as these 18 countries collectively represented more than half of Booking.com's room nights booked in 2019. Booking.com's flight offering is now fully native in the app and, while early, we are in the process of beginning to utilize marketing channels to bring potential customers to the product. On attractions, We have continued to expand the breadth of supply available to our travelers through our recent partnership with Viator, along with our ongoing partnership with Musement that was announced last year. We see real benefits of a strong attractions offering, given the potential bundling opportunities, as well as the ability to increase traveler engagement with the app while travelers are in destination. Across many of our key strategic priorities, I have mentioned the app. which indicates the importance of the app for our business. We've been investing in the app platform for some time and will continue to invest as the app becomes the center of our connected trip experience. In addition, we see better customer loyalty, lower customer acquisition costs, and more opportunities to engage directly with travelers through our app. Booking.com was the most downloaded travel app globally in the first quarter, according to a leading third-party research firm. We now see over two-thirds of our bookings come through the mobile devices, the majority of which are on the app. One of Booking Holdings' goals is to do well in the area of sustainability. I was very pleased to recently make public our 2020 sustainability report. And one achievement that I am particularly proud of is Booking Holdings becoming operationally carbon neutral in 2020. This is a significant milestone for our business and one we are working towards even prior to the pandemic. We intend to remain carbon neutral in our operations in the future and look forward to making progress on our sustainability strategy, including diversity and inclusion and sustainable travel. In conclusion, the exact shape and timing of the full recovery for travel remains uncertain. However, I'm encouraged by the signs of recovery we are seeing in some countries, and I'm confident that we will eventually see a strong recovery in travel demand globally. That being said, we are likely to experience volatility between now and then, with some countries recovering well, others beginning to recover, and unfortunately, some getting worse. I'm proud of the actions that our teams across Booking Holdings continue to take to strengthen our company's position and execute against our strategic priorities. We are thinking about our business beyond just getting back to 2019 levels of demand. We are focused on building a larger and faster growing business that generates more earnings after the recovery and for the long run. I will now turn the call over to our CFO, David Goulton.

Thank you, Glenn, and good afternoon. I'll review our operating results for the first quarter and provide some color on the trends we've seen so far in the second quarter. To avoid the comparison to the initial spread of the pandemic in 2020, all growth rates are relative to the comparable period in 2019 unless otherwise indicated. Information regarding reconciliation of non-GAAP results to GAAP results can be found in our earnings release. I also want to remind you that during the period the bookings are recovering, revenue will recover more slowly than bookings due to timing differences, and this will impact our booking to revenue take rates. Now onto our results for the first quarter. On our February earnings call, we discussed the improvements in trends we saw starting the middle of January and continuing into February, driven by domestic travel in most parts of the world. The improvement in trends continued into March, resulting in our Q1 reported room nights declining 54% versus Q1 2019, which was a 6% improvement versus the decline we reported in Q4. As a reminder, reported room nights include the impact of cancellations. The improvements in the Q1 room night decline rate versus Q4 was driven by the U.S. and Europe, while Asia and rest of world declines were about the same in Q1 as they were in Q4. The U.S. was the strongest performing major country in Q1 and had a positive room night growth versus 2019 for the full quarter. The trends in the U.S. improved through Q1 with very strong room-night growth versus 2019 for the month of March. Spring break was a contributor to growth in March. U.S. domestic room-night growth was positive for each month of the quarter with very strong growth for the full quarter. In Q1, other countries also experienced very strong domestic room-night growth, including Russia and Australia, and we saw continued strengthening in domestic bookings in Israel. While Europe improved for the full quarter compared with Q4, we did see trends soften towards the end of March, driven by rising COVID case counts and new impositions of travel restrictions. Europe was the least recovered region in terms of room nights booked in Q4, and it remained the least recovered region in Q1. Mobile bookings, particularly through our apps, continue to represent over two thirds of our total room nights. Our direct channel gained share both sequentially and year on year. Domestic room nights represented about 85% of our reported room nights in Q1, in line with our Q4 2020 mix of room nights, and up significantly versus 2019. Our cancellation rates continue to be elevated versus 2019 in the quarter, but improved from levels we saw in Q4. The booking window of Booking.com remained shorter than it was in the first quarter of 2019, as we continue to see a higher mix of near-term bookings. However, the booking window contracted less than it did in the fourth quarter. As we noted on the last call, in January and February, we saw an expansion of the booking window versus 2019 in Western Europe. And this expansion continued into March as the share of further out bookings including those for summer travel, increased versus the same time in 2019. Due to the situation in Europe with new COVID cases, vaccination rates, and travel restrictions, bookings are generally either very near term or for the summer period. The overall mix of customers booking alternative accommodations on Booking.com in Q1 was about the same as Q1 last year. As we noted last quarter, Europe is where we have our highest mix of alternative accommodations, and Europe was the slowest growing region in the first quarter, which negatively impacted our alternative accommodation mix on a global basis. The mix of alternative accommodation bookings in Europe increased by several percentage points year over year. Gross bookings declined 53% in Q1, which is less than the decline in reported room nights. primarily due to strong performance in our flights business and partially offset by a 1% decline in average daily rates for accommodations versus 2019. Airline tickets booked in the first quarter were up 49% versus 2019, driven by strong growth at Priceline and by flight bookings at Booking.com and Agoda, both of which did not have flight products in Q1 2019. Our accommodations average daily rates only declined 1% versus 2019, benefiting from a higher mix of North America, which is a higher ADR region. Excluding regional mix effects, ADRs were down approximately mid-single digits. ADRs in the quarter were helped by the higher mix of summer bookings in Western Europe, which typically have higher ADRs. Consolidated revenue for the first quarter was $1.1 billion and decreased 61% versus 2019. Revenue in the quarter declined more than gross bookings due to bookings made in the quarter that are expected to check in in future quarters, at which point in time the revenue will be recognized. Take rates in Q1 were a little less than 10%, largely driven by these timing differences. As you'll recall, we discussed the impact of timing on take rates in 2020 and 2021 during our last call. We expect timing to impact take rates all year, assuming the booking growth continues to improve during the year. The 61% reduction in revenue resulted in an adjusted EBITDA loss of $195 million in the quarter. We significantly reduced our variable expense lines, like marketing, sales, and other, our more fixed revenue, Expenses in Q1 were broadly in line with the commentary we provided on our last call. Marketing expense, which is a highly variable expense line, decreased 61% versus 2019. Marketing expenses declined more than gross bookings due to an increase in our direct mix and slightly higher ROIs in paid channels. Sales and other expenses in Q1 were lower than they were in Q4 on a dollar basis, which was slightly better than our expectations. Personnel expenses were in line with our expectations. Q1 expenses were higher than they were in Q4 on a dollar basis, due primarily to increased stock-based compensation expenses and seasonal increases in benefit costs, partially offset by a higher amount of savings in Q1 related to the restructuring actions we have taken. G&A expenses were lower in Q1 than they were in Q4 on dollar basis versus our expectation for them to be about in line due to lower than expected personnel related costs and professional fees. Information technology expenses were higher in Q1 than they were in Q4 on dollar basis, but were lower than our expectations due to timing of spend. Finally, we recorded $8 million restructuring charges in Q1, which was lower than our prior expectations primarily due to timing of real estate restructuring charges. I note these restructuring charges are included in our non-GAAP results. We recorded a non-GAAP net loss of $215 million in the quarter. Our Q1 non-GAAP tax rate of 38% was immediately higher than our 2019 tax rate of 19% due to the greater impact of non-tax deductible expenses on a lower base of earnings. On a GAAP basis, we had an operating loss of $311 million in Q1. we recorded a gap net loss of $55 million in the quarter, helped by an income tax benefit of $223 million. Our Q1 tax rate of 80% was immediately higher than our 2019 tax rate of 21%, due to the impact of non-tax deductible expenses on lower base of earnings and the impact of discrete items recorded in the quarter. Now on to our cash and liquidity positions. Our Q1 ending cash investment balance of $16.4 billion benefited from the $2 billion raised in our Eurobond offering completed in March. In April, we used all the proceeds from the Eurobond offering to redeem two higher coupon senior notes that we issued earlier in the pandemic last year. These refinancing actions we took will result in approximately $70 million for annualized interest rate expense savings and were NPV positive transactions. Adjusting our Q1 ending cash investments for the redemption of the two senior notes that happened in April will result in a balance of $14.4 billion, which is down from our December ending balance of $14.8 billion. We had a $207 million operating cash outflow in the quarter, driven primarily by changing working capital, which represented a use of cash of about $216 million in the quarter. We will continue to focus on maintaining a strong liquidity position given the high level of uncertainty created by the COVID pandemic. And consistent with our comments of last year, we've halted our repurchases of our stock and will not initiate repurchases until we have better visibility into the shape and timing of a recovery. Now on to our thoughts for the second quarter. There continues to be considerable uncertainty about the shape and timing of recovery for travel. which means that we are unable to provide detailed guidance at this time. April room nights declined about 43% versus 2019, which was better than the decline in March. Domestic room night growth was about flat versus 2019 for the month of April, the best monthly result for domestic room nights since last summer. On a regional basis, the US continued to have very strong room night growth in April and was above March levels. Europe room nights declines were better in April than in March, recovering from a softening of trends we saw at the end of March and the first week of April. Room light declines in Europe were down over 50% in April. Asia room light declines worsened in April versus March as outbreaks and new cases increased, vaccination progress has been slow, and governments continue to impose restrictions on travel. Asia was the least recovered region in April. The rest of the world declines were about the same in April as they were in Q1 and Q4. While difficult to predict with accuracy, if current trends continue, Q2 room-night declines could be a few percentage points better than in April. To give you a snapshot of what we are seeing recently, room-night declines over the last seven days of April were about 38%. As I noted earlier, in Western Europe, the booking window expanded in Q1, This expansion continues into April, and we continue to see positive summer booking trends in Western Europe. Across all of Western Europe, gross bookings for the summer period are now within 30% of where they were at the same time in 2019. And for the UK, they're now at about the same level as they were at the same time in 2019. We remind you that the significant majority of summer bookings are cancelable. Turning to the income statements, As I said, we expect Q2 room night declines could be a few percentage points better than the decline in April. We expect Q2 gross bookings to decline slightly less than room nights driven by the same trends we saw in the first quarter. We expect Q2 revenue to decline more than gross bookings due to timing factors we have discussed. As a result, we expect our Q2 revenue as percentage of gross bookings will improve from Q1 to but will be a few percentage points lower than in Q2 of 2019. We expect market expenses in Q2 will decline a little more than gross bookings, but less than revenue. We expect sales and other expenses in Q2 to be up significantly versus Q1 on a dollar basis, and will be a high percentage of revenue due to high gross booking volumes in the second quarter, as well as an increase in the mix of gross bookings processed on a merchant basis. We expect personnel expenses in Q2 will be about the same as they were in Q1 on a dollar basis. Compared with Q1, SBC and benefit expenses are expected to be less, but this is offset by an increase in bonus accruals, which are recorded proportional to revenue. We expect G&A expenses in Q2 will be higher than Q1 on a dollar basis, driven by higher personnel-related costs such as recruiting and T&E, as well as higher professional fees and digital service taxes. We expect IT expenses in Q2 will be higher than Q1 on a dollar basis due to increased investments in security, data privacy, and some operational systems enhancements, including some deferred expenses from Q1. We currently estimate the full year restructuring charge related to our actions at Booking.com will be approximately $30 million, and we expect to record about half of these charges in the second quarter. Given what we just explained, especially the timing difference between the recovery of bookings and revenue, we expect to record an EBITDA loss in Q2, albeit less of a loss than recorded in Q1. Depending upon how demand develops during the quarter, this could potentially be a small EBITDA loss in Q2. For the full year 2021, we continue to expect that the overall environment for travel will improve during the year, but the shape and timing of that improvement remains uncertain. As Glenn mentioned in his remarks, while we're seeing recovery and other encouraging signs in some countries, other countries and regions are struggling with a rapidly growing COVID wave. Globally, the number of new cases reported is increasing, with a record 5.7 million new cases recorded the week of April 19th. This is directly impacting our business across much of April, of Asia. As a reminder about mechanics of our model during recovery, We continue to expect that if we see continued recovery in 2021, there will be more bookings made in 2021 that will check in in 2022 than there were bookings made in 2020 that checked in in 2021. This timing factor could have a meaningfully negative impact on our revenue as a percentage of gross bookings and also drive deleverage in our market expenses in 2021, as we incur the majority of our market expenses at the time of bookings. To remind you, in 2018 and 2019, our revenue as a percentage of gross bookings was approximately 15.6%. This increased to 19.2% in 2020. We expect this percentage will be well below 15.6% in 2021, and the faster the recovery occurs, the lower this percentage will be. Before closing, there's been a lot of interest in our commentary in February about the longer-term model for our business. I want to reiterate what we said previously and also provide some more color. We continue to believe it will be years, not quarters, before we see a full recovery of the travel market, especially international travel. Looking beyond 2021, we continue to look forward to being a larger business with more diverse offerings and with more earnings than we had prior to COVID. We also remain focused on the potential for higher growth and market share. We expect to continue to have energy-leading EBITDA margin rates, albeit most likely at levels below those in 2019, driven by mixed shifts within the business that I discussed on the last call. As a reminder, these mixed shifts include the continued growth of payments and the growth of flights and other connected ship verticals, which will add revenue in EBITDA, but at much lower margin rates than traditional accommodations. As we think about the future shape of our accommodation business, there are a few factors to consider. As discussed on the last call, we expect our personal expenses in 2021 to be about the same as in 2019, as the savings from restructuring actions taken in 2020 are expected to be offset by personal run rate investments made pre-COVID and personal investments expected in 2021. Of course, some of these investments are to support payments and the connected trip. As we look beyond 2021, the $370 million in savings from our restructuring actions were mainly in volume-related functions, meaning that as volumes grow back to levels which we expect, which means as volumes go beyond the levels we expect in 2021, we'll need to add expenses back to business. As we mentioned before, we'll look to do this in cost-effective ways, but the work will come back. And when added to our 2021 personnel cost base, we'll put pressure on our accommodation business EBITDA margins relative to 2019 at the same level of volumes we had in 2019 and at the same growth rate. Of course, there are offsetting factors that could improve margins, including variable cost efficiencies for additional scale as we go beyond 2019 volumes and fixed cost efficiencies and from increased direct mix. The last thought I'd like to leave you with on this topic is that we believe that the recovery of the travel market will create opportunities to invest to gain share in accommodations, which could put pressure on margins during the period of share gains. In conclusion, we are pleased to see the recovery we discussed in February continue into March and April in some parts of the world, leading to improvement in our top line metrics. We're also watching the spread of COVID and the distribution of effective vaccines very carefully. and realize that this may lead to continued volatility ahead. We remain confident that we can emerge from this crisis in a stronger position. With that, we'll take your questions, and Grace will hand over to you to open the line for questions.