Booking Holdings Inc.

Welcome to Booking Holdings' second 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 fact are intended to identify forward-looking statements. For a list of factors that could cause the booking holdings actual results to differ materially from those described in the forward booking 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 Bookingholding's earnings press release, together with an accompanying financial and statistical supplement, is available in the For Investors section of Bookingholding's website, www.bookingholdings.com. And now, I would like to introduce Booking Holdings' first speaker for this afternoon, Mr. Glenn Fogel. You may begin your conference.

Thank you, and welcome to Booking Holdings' second quarter conference call. I'm joined this afternoon by our CFO, David Goulden. I'm encouraged by another quarter of meaningful improvement in our accommodations business with Q2 room nights up sequentially 59% versus Q1. This compares very favorably to our pre-pandemic historical pattern of a slight decline in Q2 room nights versus Q1. Compared with 2019, Q2 room nights were down 26%, which was significantly better than the 43% decline we previously reported for the month of April and the 54% decline in Q1. The acceleration in the second quarter was primarily driven by domestic and international booking trends in Europe, following a ramp-up in vaccination rates and the relaxation of many travel restrictions in the region. The growth of international bookings in Europe was mainly from bookings within the European region. The very strong room-night growth in the United States that we saw in April and highlighted our last earnings call continued in May and June, resulting in very strong U.S. room night growth for the full quarter versus Q2 2019. David will provide additional details on our second quarter results in his remarks. We are, of course, closely monitoring the impact of the Delta variant on the rising COVID case counts around the world, as well as some newly imposed travel restrictions which have led to a modest pullback in our booking trends in the month of July relative to June. However, the July booking trends were improved from our full Q2 results. While the rise of the Delta variant demonstrates the volatility and uncertainty around the exact timing and shape of the recovery for travel, we remain confident that we will eventually see a strong recovery in travel demand globally. The sharp return to growth initially in the U.S. and then the European markets that we have witnessed this year shows us clearly that leisure travelers are eager to get back to booking trips on our platform when restrictions are lifted and customers are able to travel. We expect to be much closer to our 2019 revenue levels in Q3 than we were in Q2, driven by the strong booking improvements we have seen in the last few months. As we have done throughout the pandemic, we'll continue to build on the strengths of our core accommodation business and support its long-term growth. The strength of our core business comes from the flywheel effect we get from our two-sided marketplace, where we drive benefits to our traveler customers and our supply partners alike. For our customers, we strive to deliver the best choice of accommodations, offer the most value, and provide the easiest booking experience. all backed by excellent customer service and support. By addressing these critical needs of choice, value, and ease, we create a superior booking experience and strengthen the relationships with our customers. I'm pleased to report that at Booking.com, we are seeing pre-pandemic customers coming back to us to book their trips while also attracting new customers. and the current mix of prior and new customers is not significantly different than prior to the pandemic. One of the ways we drive value to our large customer base at Booking.com is through our Genius Loyalty Program. This program provides discounts for Genius members at hundreds of thousands of properties on our platform and also offers value in other benefits like complimentary breakfasts, free room upgrades, and more recently, discounted airport taxis, just to name a few. We will continue innovating and adding to the ways we provide value to our Genius customers who have historically had a higher repeat rate and a higher mix of direct bookings when compared to non-Genius customers. Our app is an important way we deliver an easier booking experience to our customers. Globally, in Q2, Booking.com was the number one downloaded OTA app according to a third-party research firm. In the US in Q2, we were the most downloaded major OTA app as downloads of the Booking.com app in the second quarter significantly increased sequentially. We also saw US app users in Q2 meaningfully surpass the prior peak observed before the COVID pandemic. In the second quarter, We again saw a higher mix of our customers booking directly with us than in the comparable period in 2019. It is encouraging to see these gains, even as we look for opportunities to lean into performance marketing channels where we see attractive ROIs. We have a long history of effectively managing our performance marketing channels to bring bookers to our platform profitably. We plan to continue with this proven approach in the future. In addition, we're leveraging our marketing expertise and ROI focus as we test into other channels like social and digital media, as well as when we deploy promotional campaigns like our back to travel campaign, which we ran first in the US and then launched in the UK and across Europe. We will continue to expand the diversity of our marketing and customer acquisition channels as we aim to drive incremental traffic to our platform and increase consumer awareness of our brands. While we will remain focused on our efforts to grow and retain our customer base, we believe we will continue to benefit from the secular tailwind of more people booking their trips online instead of offline. Historically, the accommodation industry has seen a steady increase in online share each year, and looking ahead, we believe this trend will continue for the foreseeable future. In April, McKinsey published a 24-country survey with results showing that across 11 major consumer-facing industries, travel had the greatest percentage of customers that planned to increase their usage of digital channels after the pandemic. On the other side of our marketplace, we are focused on helping our supply partners reach a broader audience of potential customers. Our scale and global reach allows us to connect our supply partners with a significant amount of demand from around the world, demonstrated by the 845 million roommates booked across our platforms in 2019. In addition to being a large demand channel for our partners, we add value to our accommodation partners in other ways by providing customer service support for travelers in over 40 languages, localized partner service support teams, market intelligence and data, product innovations in response to new traveler trends, and fraud liability shift and access to alternative payment methods for payment-enabled transactions. Whether an alternative accommodation or an independent hotel or a large global hotel chain, we strive to be a valuable partner to all types of accommodations on our platform. In the second quarter, we saw the first sequential increase in the number of properties on Booking.com and the lowest number of properties coming off of our platform in a quarter since the onset of the COVID-19 pandemic. As of June 30th, we had over 28 million reported listings on Booking.com, of which 6.6 million were for alternative accommodation properties. Within alternative accommodations in the U.S., Booking.com continued to add targeted new properties in the quarter and also saw encouraging shared gains with some of our larger professional managers. While these are positive early developments, we recognize there is much work ahead to improve and grow our alternative accommodations product in the U.S. market. Our alternative accommodations business in Europe was strong in the quarter and represented an increasing share of our European accommodations business. I want to move to our key strategic priorities of expanding Booking.com's payment platform and building the connected trip vision, both of which we believe will further enhance the strength of our core accommodation business and support its continued growth. On our integrated payment platform at Booking.com, we have made continued progress with increasing the adoption of payments by our supply partners in the U.S. including adding some major hotel chains in the second quarter. Around 24% of Booking.com's total gross bookings in Q2 were processed through its payment platform, which is up from about 22% for the full year 2020. We recently announced the organization of all of our payments initiatives and efforts into a new FinTech unit at Booking.com. First, The FinTech unit will be focused on enabling Booking's core business to run better, faster, and more efficiently for both customers and our supply partners. In addition, we recognize that we have opportunities to better monetize our overall transaction flows. In 2019, we did almost $100 billion of transaction value, and we believe setting up a separate FinTech unit to better capitalize on these flows will benefit us in the long run. On our connected trip vision, I mentioned on our last earnings call that the development of a connected trip this year will be focused on enabling travelers to book the major elements of their trip in one place on Booking.com. The top priority on this front has been to scale up a robust flight platform on Booking.com, which will give us the ability to engage with flight bookers fully in their travel journey and allow us an opportunity to cross-sell our accommodation and other services to these bookers. Since our last earnings call, we have launched our flight product in six new markets and are now live in 24 countries. Air tickets booked through Booking's flight offering have continued to meaningfully exceed our expectations. However, they still represented a small portion of our total reported air tickets, which were up 120% in Q2 versus Q2 2019. Primarily, this was driven by price line. What remains early days for Booking's flight product, we are seeing positive data indicating we are getting entirely new customers for Booking.com. In addition, we are seeing an encouraging attach rate of accommodation bookings from these new customers. These early data points help demonstrate that a flight offering creates a new funnel to bring incremental customers to the platform and then cross-sell an accommodation to these new customers. We expect to continue to build on the early success we are seeing with flights at Booking.com. In conclusion, I am encouraged by the signs of recovery we are seeing in some parts of the world and am confident that we will eventually see a strong recovery in travel demand globally. We continue with our most important work to strengthen our company's position and execute against our strategic priorities. And our teams are working hard to support the strong summer travel season this year in North America and Europe. As I said before, we are thinking about our business beyond just getting back to 2019 levels of demand. And we are focused on building a larger and faster growing business that generates more earnings after the full recovery and for the long run. I will now turn the call over to our CFO, David Goulden.

David. Thank you, Glenn, and good afternoon. I'll review our operating results for the second quarter and provide some color on trends we've seen so far in the third quarter. To avoid comparison to pandemic-impacted periods in 2020, all growth rates will be relative to comparable periods in 2019 unless otherwise indicated. Information regarding reconciliation of non-GAAP results to GAAP results can be found in our earnings release. Now on to our results for the second quarter. On our last earnings call, we discussed the improvement in trends in Q1, which continued into April, driven by strong results in the U.S. and improvements in Europe. On the earnings call, we saw the overall improvements in our trends accelerate in May and continue to get better in June. which resulted in our Q2 reported room nights declining 26% versus Q2 2019, which was significantly ahead of the 54% decline in Q1, the 43% decline we saw in April, and our expectations in May. The improvement in Q2 room night growth rate versus Q1 was driven by Europe and the U.S., as well as better results in the rest of the world. Europe showed the greatest level of recovery in the quarter and actually achieved slight room-night growth versus 2019 in June. Booking trends in Europe clearly benefited from a notable improvement in vaccination rates as well as loosening travel restrictions. The U.S. was again the strongest performing major country in Q2 and had very strong room-night growth versus 2019 for the full quarter. Asia partially offset the improvements in other regions with greater room night declines in Q2 than in Q1 due to the increase in COVID outbreaks with related travel restrictions. In the month of June, our room nights were down 13% and our monthly active unique customer accounts at Booking.com reached about 90% of the level we saw in June 2019. As Glenn mentioned, we're pleased to see the solid rebound in our customer base at Booking.com, as well as a healthy mix of new customers, which is only a little lower than the mix of new customers in Q2 2019. Mobile bookings, particularly through our apps, represented over 60% of our total room nights. Our app continues to represent an increased percentage of our mobile bookings. Our direct channel increased as a percentage of our room nights year-on-year and relative to Q2 2019. Domestic room nights grew in the mid-teens in Q2. While international room nights remained down significantly versus 2019, we saw a sequential improvement in our international bookings, resulting in the international mix of our room nights increasing to about 25% in Q2 from about 15% in Q1. Our cancellation rates improved from Q1 and were in line with Q2 2019 levels in the quarter. The percentage of our Q2 2021 bookings made with flexible cancellation policies remained significantly higher than in Q2 2019. The booking window at Booking.com remained shorter than it was in the second 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 prior three quarters. The mix of alternative accommodation room nights on booking.com in Q2 was 32%, which is three points higher than Q1. In June, our alternative accommodation room night growth was flat versus June 2019, the first time we've reached 2019 levels for this segment since the start of COVID. The sequential improvement from Q1 to Q2 was due primarily to the overall improvements in room night growth in Europe in the quarter. As we noted last quarter, Europe is where we have our highest mix of alternative accommodations. Within Europe, our mix of alternative accommodations remained about the same as Q1. This represents a continued increase from 2019 to 2020 and in to 2021. Gross bookings declined 12% in Q2, which is less than the decline in reported room nights. due to an increase in average daily rates for accommodations of about 11% versus 2019 on a constant currency basis, and also due to a few points of changes in FX rates and strong performance in our flights business. Our accommodation constant currency ADR benefited by about 7% from an increased mix of business in North America, which is a high ADR region, and a decrease of mix of business in Asia, which is a lower ADR region. Excluding regional mix effects, constant currency ADRs were up approximately 4%, driven mainly by rate increases in North America and in Europe. The increase in North America were driven by high levels of demand for beach-oriented leisure destinations, and in Europe were driven by a higher mix of summer bookings, which have higher ADRs. Airline tickets booked in the second quarter were up 120% versus 2019, driven by strong growth of Priceline and by flight bookies at Booking.com and Agoda, neither of which have flight products in Q2 2019. We are encouraged to see another record-breaking quarter for air tickets booked through our flights business, which is a key component of our multi-product connected trip strategy. Consolidated revenue for the second quarter was $2.2 billion and decreased 44% versus 2019, which is better than our expectations. Revenue in the quarter declined meaningfully more than gross bookings due to bookings made in the quarter that are expected to check in in future quarters, at which point the revenue will be recognized. Take rates in Q2 were about 10% largely driven by these timing differences. As you'll recall, we discussed the impact of timing on take rates in Q1, Q2, and for the full year during our last call. We continue to expect these timing factors to impact full-year take rates, although the second half of the year will be less negatively impacted than the first half of the year. Removing the impact of timing, our take rates on accommodation bookings in Q2 were stable versus Q2 2019. The better than expected top line performance resulted in adjusted EBITDA of $48 million in the second quarter, which came in better than our expectations. With the exception of Q3 last year, this is the first EBITDA-positive quarter since the first wave of COVID. Marketing expense, which is a highly variable expense line, decreased 29% versus 2019. Marketing expense declined more than gross bookings due to higher ROIs in the pay channels and to an increase in our direct mix. Sales and other expenses in Q2 were significantly higher than they were in Q1 on a dollar basis. sales and other expenses as a potential revenue in Q2 was better than our expectations due to low and unexpected bad debts and customer service related expenses. Personnel expenses in Q2 were higher than they were in Q1 on a dollar basis, primarily due to the $136 million expenses related to our decision to repay the government aid in the second quarter. Excluding this repayment, personnel expenses in Q2 would have been in line with our expectations. G&A and IT expenses were both higher in Q2 than they were in Q1 on a dollar basis, and were in line with our expectations. We recorded a non-GAAP loss of $105 million in the quarter. On a GAAP basis, we had an operating loss of $56 million in Q2. We recorded a GAAP net loss of $167 million in the quarter, which includes income tax expense of $126 million. On a GAAP and non-GAAP basis in Q2, we recorded a tax expense on a pre-tax loss due to higher earnings expectations for the full year relative to our expectations for Q1. For the full year, we expect our GAAP and non-GAAP tax rates to be slightly higher than in 2019. Now onto our cash and liquidity position. Our Q2 ending cash and investment balance of $16.1 billion was down versus our Q1 ending balance of $16.4 billion. However, our Q1 ending balance benefited from the timing of the $2 billion raise in our Europe bond offering, which we completed in March, and the subsequent redemption of the two higher coupon senior notes occurring in April. Adjusting our Q1 ending cash balance for the redemption of the two notes that happened in April would have resulted in an adjusted Q1 cash balance of $14.4 billion. Our Q2 ending balance was higher than the suggested Q1 balance, primarily due to operating cash flow of $1.2 billion and a $.5 billion unrealized gain on long-term investments. The $1.2 billion operating cash flow in the quarter was driven almost entirely by change in working capital. Change in working capital represented a source of cash of $1.2 billion in the quarter due to the increase in our deferred motion bookings and other current liabilities, partially offset by the increase in our account for zero. We will continue to focus on maintaining a strong liquidity position given the continued uncertainty created by the COVID pandemic. Of the $16.1 billion in cash and investments at the end of Q2, $4.3 billion was related to our long-term strategic investments, and $11.7 billion was cash and short-term investments. We ended the quarter with about $12.3 billion in debt, which is about $3.6 billion higher than our pre-pandemic levels. We have a $1 billion convertible note maturing in Q3. While return of capital to shareholders will be an important component of our value creation strategy in the future, we remain on pause and will wait till reinitiate until we believe each of our three major regions is beyond the risk of a significant reversal in trends due to COVID. We're not there yet given the current trend we're seeing in Asia and with our current close watch on how things are developing in Europe. Now onto our thoughts for the third quarter. With the recent rising case counts driven by the Delta variant in many countries, some governments around the world have responded with new travel and leisure restrictions, as well as some stricter vaccination and testing requirements for tourists. However, there are indications that hospitalization rates are lagging the recent increases in case counts, particularly in countries with high vaccination rates, which could be an important factor in how governments plan their responses to the recent increase in COVID cases. We're closely watching the UK, where the vaccination rate is high and the government has moved forward with relaxing travel restrictions despite rising case counts in the country, which are among the highest in Europe. We're encouraged by the recent declining new case counts and by the continued lower level of hospitalizations in the UK compared with other outbreaks. We saw booking trends improve in the UK in July, leading up to and after travel restrictions were lifted on July 19th. Our July room nights declined about 22% versus 2019, which was a modest pullback from the 13% decline in June, primarily to softening booking trends in Europe. Looking within Europe, we saw reductions in room nights in July across several of our key countries, including Germany, France, and Italy. But despite the recent pullback in these countries, at the end of July, we had a higher amount of gross bookings on the books for the remaining summer period in Europe than we did at this same point in time in 2019. Outside of Europe, the U.S. continued to have very strong room night growth in July, although modestly below future levels, while Asia and rest of the world room night declines were about the same in July as they were in June. Asia continues to be the least recovered region in July and continues to be down significantly from 2019 levels. The change in growth rates from June to July were similar for domestic and international room nights, with domestic remaining positive and international room nights remaining down significantly versus 2019. Given the recent additional uncertainty around COVID, driven primarily by the Delta variant, it's difficult to predict exactly how room nights in August and September will compare with the 22% reduction we saw in July. To change the income statement, we expect Q3 gross bookings to decline several points less than room nights, driven by expected improvements in reported ADRs and by flight bookings. We expect that the Q3 revenue decline will significantly improve from Q2, reflecting the strong improvement in bookings in the last few months. I just mentioned we have more gross bookings for summer than at this time in 2019 for Europe. The same is also true for North America. We expect our Q3 revenue as a percentage of gross bookings will increase meaningfully from Q2 due to the high concentration of check-ins expected in the third quarter and will be about in line with Q3 2019. As a reminder, the exact relationship between revenue and gross bookings in Q3 will be impacted by how our bookings trend in August and September. We expect marketing expenses in Q3 will decline several points less than gross bookings as we expect to invest in capturing demand and increasing awareness during the peak travel season and ahead of the continued global recovery of travel demand. We expect sales and other expenses in Q3 to be up significantly versus Q2 on dollar basis due to higher gross booking volumes in the third quarter as well as an increase in the mix of gross bookings process on a merchant basis. However, we expect sales and other revenue in Q3 will be a bit lower than in Q2. We expect our more fixed expense categories in Q3 in aggregate to be about in line with Q2 on a dollar basis. We expect Q3 EBITDA will be the highest since Q3 2019. In conclusion, we are pleased with our better than expected results in Q2, which benefited from a recovering travel demand and also reflects the strong fundamentals of our business and the good execution by our teams. We remain confident in the eventual full recovery of travel demand globally, and we're looking forward to a strong summer travel season this year in North America and Europe. We'll continue to responsibly invest in our business to ensure we're well positioned for the full recovery of travel and for building a larger and faster-growing business that generates more earnings than prior to the pandemic. We'll now take your questions. Maria, if you could open the line for questions, please.