Booking Holdings Inc.

Good afternoon, everyone, and welcome to Booking Holdings' second quarter 2022 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 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' earning 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 speakers for this afternoon, Mr. Glenn Fogel, CEO, and Mr. David Goulding, CFO. Go ahead, gentlemen.

Thank you, and welcome to Booking Holdings' second quarter conference call. I'm joined this afternoon by our CFO, David Goulding. I am pleased to announce that we reached another milestone in our company's recovery with room nights for Q2 being the first quarter in which we have surpassed 2019 pre-pandemic levels. Our customers booked 246 million room nights in the second quarter, so just shy of a quarter of a billion room nights, which represented an increase of 16% versus Q2 2019 and a significant improvement from the 9% decline in Q1. We continue to see very strong accommodation ADR growth, which helped drive an even higher 38% increase in gross bookings in the second quarter, or 48% growth on a constant currency basis. Both our room nights and gross bookings in Q2 were our company's highest quarterly amounts ever for these metrics. While we continue to see bookings growth in July versus 2019, the pace of growth moderated to about 4% for room nights and just over 20% for gross bookings, or about 35% growth on a constant currency basis, with room night and gross bookings growth slightly improving in the back half of the month versus the comparable weeks in 2019. For the remainder of the summer period through the end of Q3, we see higher gross bookings on the books than at this point in 2019. which we believe will result in a record revenue for the third quarter, which is our seasonally largest revenue quarter. Looking towards the rest of the year at Booking.com, we see solid gross bookings for the fourth quarter, which are about 15% higher than at this same point in 2019 on a Euro basis, though I know that a high percentage of these bookings are cancelable and current FX rates will negatively impact that growth rate in dollars by about 10 percentage points. The booking window remains shorter than it was at this point in 2019, which somewhat limits our visibility into how Q4 will continue to develop. And although conditions could change rapidly, we are cautiously optimistic on the data we are seeing so far. David will provide further details on the recent trends we have been seeing. Now, we recognize that there is uncertainty around the macroeconomic environment and questions about the strength of consumer demand through the end of this year and into next year. And while it is extremely difficult to accurately predict the near-term economic environment, I am as confident as ever in consumers' strong desire to travel, the attractive long-term growth profile of the travel industry, and our improving longer-term competitive positions. With our industry-leading margins, high-quality earnings, strong free cash flow and liquidity position, and solid balance sheet, we believe we are well-positioned to navigate any potential near-term economic uncertainty and continue our work attracting customers and partners to our platform while making progress on our key strategic priorities of payments and the connected trip vision. In terms of attracting customers to our platform, Our unique active customers at Booking.com surpassed 2019 levels in the second quarter, driven by very strong growth in returning customers who have not made a previous booking over a year, as well as growth in repeat customers. Our mix of customers booking directly on our platforms reached its highest second quarter level ever. We aim to build on increasing our direct mix through several initiatives, including by continuing to enhance the benefits of our Genius Loyalty Program, further building out our connectivity vision to increase engagement with our customers, and driving more of our customers to download and utilize the mobile app. In our mobile app, we see the strongest direct repeat customer behavior when compared to our other platforms like desktop or mobile web. Consistent with the first quarter, over 40% of our room nights were booked through our apps in the second quarter, which is about 10 percentage points higher than in 2019. Booking.com's app continued to set new records in terms of monthly active users in Q2 and remains the number one downloaded OTA app globally according to a third-party research firm. As I said before, The app is a critical platform as it allows us more opportunities to engage directly with travelers, and ultimately, we see it as the center of our connected trip vision. We will continue our efforts to enhance the app experience to build on the recent success we have seen here. For our supply partners, we strive to be a valuable partner to all accommodation types on our platforms. by delivering incremental demand and developing products and features to help support their businesses. Alternative accommodation room nights at Booking.com grew about 25% versus 2019 and represented about a third of Booking.com's total room nights in Q2. We continue improving our alternative accommodation product globally with an additional focus on the U.S. market. In the first quarter, we launched partner liability insurance for our alternative accommodation supply partners with global coverage. In the second quarter, we launched an enhanced payment solution for professional property managers in the U.S. and have made progress increasing adoption by our partners. Finally, we started rolling out the damage policy option for partners in the second quarter and have continued expanding this option to more countries in the third quarter. Each of these initiatives helps add important features to our alternative accommodation offering, which we believe strengthens our efforts to attract more properties and partners onto our platform. In the second quarter, we saw the largest sequential net increase in alternative accommodation properties since 2019, and we now have 6.6 million alternative accommodation listings on Booking.com. We are encouraged by the increase in alternative accommodation supply that we have seen so far this year, and we aim to further build on this growth as we move through the second half of the year. Let me now talk about the progress we have made in our interrelated strategic priorities of payments and the connected trip vision. On payments, 38% of Booking.com's gross bookings were processed through our payment platform in the second quarter. which is our highest quarterly level ever. We continue to increase adoption of payments by our property partners with over 60% of our total Q2 gross bookings coming from properties that have adopted payments. So this means that about two-thirds of the bookings at payment-enabled properties are being processed via payments. We believe Booking.com's payment services drive benefits for both our travelers and our supplier partners across hotels, alternative accommodations, cars, flights, and attractions. Furthermore, we believe that Booking.com's payment platform helps deliver a more seamless and frictionless booking experience, which are important elements of our larger Connected Trip vision. On the Connected Trip, I think it's a helpful reminder to talk through what we are hoping to achieve with this vision. Our vision for the connected trip strives to make booking and experiencing travel easier, more personal, and more enjoyable while delivering better value to our customers and a way to provide marketing opportunities to our supplier partners. And as a result, we believe over time we will drive increase in customer engagement, share of spend, and loyalty. First, we are looking to increase the engagement of customers on our platform by solving more of our customers' travel problems than just finding the right accommodation on Booking.com as we've done in the past. A simple example of solving a problem and drawing additional engagement would be proactively suggesting options for top attractions that can evoke seamlessly in our app while a traveler is in destination and looking for something to do. Another example is our testing discounted transportation from the airport to the hotel for, say, a high-value accommodation customer. And the ground transportation supplier might in the future be providing a discounted price that is specific for our customer because we are able to provide incremental business. Second, we see the opportunity to increase our share of customers' travel spend. We estimate that pre-pandemic, our customers' annual spend on Booking.com represented only about 25% of their total travel spend on average. We believe that by making it easier to book multiple elements of a trip in one place, we can bring more of that travel spend onto our platform. Even in core accommodations and even with top customers, we believe there are opportunities to improve our share of spend over time. and we want to increase customer loyalty and drive a higher direct mix through our app over time. We believe by addressing our customers' critical needs of value, choice, and convenience through our Connected Trip vision, we will deliver an improved experience and increase the likelihood that our customers come back to us again on a direct basis. This year, we continue to make progress as we work on building the foundations of the Connected Trips. including developing a flight offering on Booking.com. This flight offering gives us the ability to engage with potential customers who choose their flight options early in their discovery process, and it allows us an opportunity to suggest other services to these flight bookers. Jites continues to be a source for new customers, with about one quarter of all of our flight bookers globally being new to Booking.com, with an even higher share of new customers in the U.S. In conclusion, I am encouraged by our strong second quarter results and the record level of summer travel we are seeing now. Our teams are working hard to continue making progress in several key areas, including the app, the Genius Program, our alternative accommodation offering, payments at Booking.com, and building towards our Connected Trip vision. Through this work, we believe we are building a better offering for our customers and partners while strengthening our long-term competitive positioning. While there is uncertainty around the near-term macroeconomic environment, we are as confident as ever in the long-term growth of travel and in the opportunities ahead for our company. I will now turn the call over to our CFO, David Gould.

Thank you, Glenn, and good afternoon. I'll review our results for the second quarter and provide some color on trends we've seen so far in the third quarter. All growth rates for 2022 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. Now onto our results for the second quarter. Room nights in the second quarter were up 16%, a 25-point improvement from Q1, and our first full quarter of room night growth versus 2019. On our May earnings call, we discussed how we started off the quarter with a 10% increase in room nights for the month of April, which was a 14-point improvement from March. As we moved into May, we saw further strength in room nights, resulting in 22% growth for the month. June room night growth of 14% landed between April and May. For Q2 on a regional basis, room nights in Europe were up over 20%. The US was up about 30%. The rest of the world was up in the mid-teens, and Asia was down high single digits, with all regions improving from Q1 levels. The improvement from Q1 was helped by all regions, with Europe and Asia contributing the most. Mobile bookings, particularly through our apps, represent about 60% of our total room nights in the second quarter. Our apps were over two thirds of our mobile bookings and over 40% of total room nights, which was in line with the first quarter. In the second quarter, we continue to see an increasing mix of our total room nights coming to us through the direct channel versus Q2 2019 and versus Q2 2021. The international mix of our room nights in Q2 was about 45%, an increase from about 40% in Q1. Q2 international room nights were up mid-single digits compared to Q2 2019 levels, which was the first quarter of growth versus 2019 for international. And these international room nights drove most of the overall improvements in room night growth from Q1 to Q2. The improvements in international room nights we saw continued to be driven by travel within Europe, and these cross-border room night bookings continue to have, on average, longer length of stay and a shorter booking window than comparable bookings in 2019. In Q2, we also saw an encouraging improvement in long-haul international room nights, which almost recovered to 2019 levels. We saw very strong growth in our domestic room nights in the second quarter, also an improvement from Q1. We were pleased to see our cancellation rates below 2019 levels in Q2. You'll recall our Q1 cancellation rates were about in line with 2019. In Q2, the booking window of Booking.com moved closer to 2019 levels than it was in Q1, but remained shorter than 2019 across all major regions. The booking window expanded versus the second quarter of 2021. For alternative accommodations at Booking.com, our room night growth rate was 25% in Q2 versus Q2 2019, and the global mix of alternative accommodation room nights was about 32%, which was about in line with Q2 2021, and a couple of percentage points higher than Q2 2019. Within Europe, our mix of alternative accommodations continues to be meaningfully higher than the global average. In North America, Our mix of alternative accommodations remains low relative to global average. However, we did see an encouraging increase in mix versus Q2 2021 in that region. Q2 gross bookings, about $35 billion, increased 38% versus Q2 2019, or 48% on a constant currency basis. The 38% increase in gross bookings was 22 percentage points better than the 16% room night increase due to 25% higher accommodation constant currency ADRs and also due to a few points from strong flight booking growth across the group, partially offset by the 10 percentage points of negative impact from FX improvements, from FX movements. Our accommodation constant currency ADRs benefited by about 2 percentage points from regional mix and about 23 percentage points from rate increases across all of our regions, most notably in Europe and North America, especially in high-demand leisure-oriented destinations. Constant currency ADR growth versus 2019 accelerated from 18% in Q1 to 25% in Q2, due primarily to higher rates in Europe. Despite the higher ADRs in the second quarter, we have not seen a change in the mix of hotel star rated levels being booked or changes length of stay that could indicate that consumers are trading down. We'll continue to watch the dynamics closely. Airline tickets booked in the second quarter were up about 190% versus a small base in 2019 and up 31% versus 2021, driven by the continued expansion of Booking.com's flight platform. Consolidated revenue for the second quarter was $4.3 billion, which was up 13% versus 2019, up about 20% on a constant currency basis. Revenue as a percentage of gross bookings was about 275 basis points below Q2 2019, down more than our expectations due primarily to timing differences between gross bookings and revenue recognition driven by stronger bookings than we expected in Q2. Our underlying accommodation take rates were about in line with Q2 2019 levels. Marketing expense, which is a highly variable expense item, increased 27% versus Q2 2019. Marketing expense as a percentage of gross bookings decreased by about 40 basis points versus Q2 2019, which is better than our expectations, mainly due to higher than expected marketing ROIs in a high intent travel environment. Additionally, our direct mix was a little higher than we expected. Sales and other expenses were up 87% versus Q2 2019 due to a higher volume of merchant gross bookings and higher third-party call center costs. 38% of Booking.com's gross bookings were processed through our payments platform in Q2, up from 16% in Q2 2019. Compared with Q2 2021, Sales and other expenses as a percentage of previous bookings were up about 40 basis points, slightly better than our expectations of up 60 basis points. Our more fixed expenses in aggregate were better than our expectations, up 7% versus Q2 2021, primarily due to a slower than expected ramp up in some of our G&A and IT expenses. Adjusted EBITDA was $1.1 billion in the second quarter, which is better than our expectations. If we were to normalize for negative timing impact on revenue in the second quarter, our adjusted EBITDA would have been immediately higher than in Q2 2019. In addition, the changes in FX rates are negatively impacting the translation of our EBITDA to US dollars. Our Q2 EBITDA would have been about 10% higher if FX were in line with Q2 2019. Non-GAAP net income of $776 million results in non-GAAP EPS of about $19 a share, which is down 19% versus Q2 2019. On a GAAP basis, we had operating income of $1 billion and net income of $857 million in Q2. Now onto our cash and liquidity position. Our Q2 ending cash investment balance of $14.2 billion was up versus our Q1 ending balance of $12.8 billion, primarily driven by $2.6 billion of free cash flow, partially offset by about $1.3 billion in share repurchases in Q2. The increase in free cash flow included a $2.1 billion benefit from changing working capital due to the increase in our deferred merchant bookings and other current liabilities, partially offset by the increase in our accounts receivable. We continue to return capital to shareholders, and more recently, have increased the pace of our repurchase given the pullback in our share price. In addition to the $1.3 billion of share repurchase in Q2, we repurchased another $840 million of our shares in the month of July, which brings our year-to-date repurchases to just over $3 billion and our outstanding organization to about $7.4 billion. Given our recent increased pace of share repurchases, we now believe will complete our current authorization in about two years from when we started the repurchasing back in January. Now onto recent trends, our thoughts for the third quarter. July room nights increased about 4% versus 2019, or about 7% excluding Russia, Belarus, and Ukraine. Growth fluctuated a bit in July and was strong in the second half of the month versus the comparable weeks in 2019. ADR growth remained at Q2 levels, and gross bookings were up just over 20% in July, including some help from flights, partially offset by negative impacts of FX pressure. In July, constant currency gross bookings were up about 35%. Compared with June, growth rates in July moderated in all regions, with North America showing the smallest change. In July, Europe room night growth was up mid-single digits. and up low double digits, excluding Russia, Belarus, and Ukraine. Growth in the US was about 25%. The rest of the world was up low single digits, and Asia was down about 10%, all versus 2019. When thinking about the rest of Q3, we realized there continues to be volatility in the environment, and our commentary assumes that room-light growth for the full quarter will be at the same levels we saw in July. We do expect the strength in ADRs this early July to continue for the remainder of the third quarter, as well as continuous strength in flight bookings. We expect the difference between the level of room-light growth and gross booking growth for the full third quarter to be a few percentage points less than the 22% it was in Q2, due to factors including more FX pressure in Q3. We expect FX pressure gross bookings by about 12% in Q3. In July, the overall booking window of Booking.com remained shorter than it was in 2019, similar to Q2. We expect Q3 revenue as a percentage of gross bookings to be about 70 basis points lower than in Q3 2019 due to investments in merchandising consistent with our prior commentary about the opportunity for us to lead into a recovering travel market in 2022 and due to an increase in the mix of flights and some impact from FX rates. we expect our underlying accommodation take rates to remain stable. We expect Q3 marketing expense as percentage of gross bookings will be slightly above Q3 2019 as we expect to invest in capturing demand and increasing awareness during the peak travel season. We expect Q3 sales and other expense as percentage of gross bookings to be about 40 basis points higher than it was in Q3 2021 due to a higher gross bookings mix and higher third-party call center costs, including the impact of our partnership with Major Realm. We expect our more fixed expenses in aggregate will be about 20% higher than Q3 2021, with personnel up about 10% and both G&A and IT up meaningfully versus Q3 of last year. The year-on-year increase in G&A is driven by higher digital sales taxes, which are tied to revenue, as well as increased personnel-related expenses due to return to hybrid work environments. We expect IT expenses to increase year-over-year at a similar rate to what we saw in Q2. Taking all this into account, we would expect Q3 adjusted EBITDA to be slightly above Q3 2019. As I noted for Q2, the comparison of our Q3 EBITDA expectations to Q3 2019 is negatively impacted by changes in FX rates. Our current exchange rates, we expect that our FX neutral Q3 EBITDA growth versus 2019 will be about 15% points higher than our expectation on a reported basis. We know there's a lot of interest in what will happen beyond the summer. Booking.com's gross bookings for the Q4 travel period are over 15% higher than they were at this time in 2019, but with a high percentage of cancelable bookings. The booking window is still shorter than it was in 2019, which reduces the amount of gross bookings that we'd expect on the books for Q4 at this time. The shorter booking window limits our visibility into Q4, and we recognize the conditions could change rapidly. Please note, these booking.com gross booking trends for Q4 period are on a Euro basis. On a dollar basis, these growth rates would be about 10 percentage points lower. We are maintaining the full year EBITDA margin commentary we provided in February and May, and we still expect EBITDA margins for 2022 to be a few points higher than in 2021. As a reminder, timing negatively impacts adjusted EBITDA and EBITDA margins for the year. If it were not for the impact of timing, our expectations for the full year EBITDA margins would be a few points higher than our guidance for the year. As the year has progressed, we revised our allocation of our growth investments between marketing and merchandising. We now expect marketing spend as we're saying to growth bookings to be about the same as it was in 2019 and expect to spend more on merchandising. This higher merchandising along with a higher than anticipated mix of flights and some negative FX impacts means we expect our take rates per year will now be in the mid-14% range. Our underlying accommodation take rates remain about the same as they were in 2019. In conclusion, we're encouraged by our strong Q2 results and by the continued growth above 2019 levels we have seen in July. We remain confident that our focus on customer acquisition and our strategic priorities is the right approach for 2019, sorry, for 2022. We'll now take your questions. Michelle?