Booking Holdings Inc.

Welcome to Booking Holdings' third 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 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 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 Company 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 Goulden. Please go ahead, gentlemen.

Thank you, and welcome to Booking Holdings Third Quarter Conference Call. I'm joined this afternoon by our CFO, David Goulden. I am encouraged by the strong results we are reporting today and by the record level of travel during our peak summer season. In the third quarter, our customers booked 240 million room nights, a little under a quarter of a billion room nights, which was 8% higher than in Q3 2019. We saw an improvement in room night growth during the third quarter from 4% growth in July to 10% growth in both August and September relative to the comparable months in 2019. We note that, sadly, the war in Ukraine continues. And as you know, we suspended our operations in Russia and Belarus shortly after the war began. If we exclude the suspended areas, as well as Ukraine, our root bank growth for the quarter would have been 11%. We are pleased that all of our major regions improved in August and September versus July, and room nights in Asia surpassed 2019 levels for the first time in September. In the U.S., both our Priceline and Booking.com brands continued to execute well and contributed to room night growth of almost 30% in the third quarter versus the third quarter of 2019. We continue to see very strong accommodation ADR growth, which helped drive a 27% increase in global gross bookings in the third quarter or 41% on a constant currency basis, both versus Q3 2019. Despite the strong pricing environment, we have not seen evidence of our customers trading down to lower hotel star ratings or reducing the length of their trips. We took another important step in our company's recovery from a profitability perspective with the third quarter being the first time that adjusted EBITDA surpassed pre-pandemic levels. In fact, the third quarter was our highest revenue and adjusted EBITDA quarter ever. Our Q3 revenue and adjusted EBITDA were 20% and 7% higher than Q3 2019 and grew 34%, and 25% on a constant currency basis. More recently, we have seen resiliency in the level of demand from travelers with room-night growth improving slightly from September levels to about 12% growth estimated for the month of October versus October 2019. Gross bookings in October are estimated to be up about 30%, or just over 45% on a constant currency basis. The slight improvement in October was primarily driven by the continued recovery in Asia, as well as a slight improvement in Europe. As we take an early look at demand into 2023 at Booking.com, we see strong growth in gross bookings on the books for travel that will take place in the first quarter of next year, though I know that a high percentage of these bookings are cancelable. Interestingly, we have strong numbers on our books for early 2023, despite the booking window being shorter than it was at this point in 2019. David will provide further details on our results and on the recent trends we have been seeing. While there is a rising concern around the macroeconomic environment and uncertainty around the spread of consumer spending, We believe the sustained level of demand we have seen through October helps demonstrate our consumers' strong desire to travel further. We believe our solid operating results, substantial liquidity, and strong free cash flow position us well to navigate potential near-term economic uncertainty while we continue our work attracting customers and partners to our platform and making progress on our key strategic priorities of payments and the connected trip vision. Given our confidence in the positioning of our business, the positive long-term outlook for travel, and our strong balance sheet, we have stepped up the pace of our share repurchases since we reinitiated the program at the start of the year. With a $4.2 billion in repurchases for the first three quarters of this year, we have reduced our share count by 5% relative to our ending share count last year. We remain focused on building a better experience for our customers and addressing their needs of value, choice, and convenience. With continued focus on our customers, we aim to increase loyalty, frequency, spend, and direct relationships over time. We are encouraged to see our unique active customers at Booking.com above 2019 levels in the third quarter. which was driven by strong growth in reactivated customers who had not made a booking in over a year, as well as growth in repeat customers. Our mix of customers booking directly on our platforms reached its highest third quarter level ever. Our goal over time is to further increase our direct mix through several initiatives, including continued efforts to enhance the benefits of our Genius Loyalty Program, further building out our Connected Trip vision to increase engagement with our customers and driving more of our customers to download and utilize the mobile app. The mobile app is an important 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. About 45% of our room nights were booked through our apps in the third quarter. which is just over 10 percentage points higher than in 2019. Booking.com's app remains the number one downloaded OT app globally according to a third-party research firm, and we have seen increasing levels of downloads in the U.S. We will continue our efforts to enhance the app experience to build on the recent success we have seen here. When thinking about addressing our customers' need for value, We believe providing attractive prices on accommodations is very important. As has always been the case, our first priority as we think about providing attractive prices is to source competitive rates from our supply partners. We do this by working closely with our supply partners to get the best prices possible and increase participation in our targeted rate programs to ensure that compelling prices are available to our customers. Our Genius Loyalty Program at Booking.com is a great example of a program where hundreds of thousands of our property partners are participating to offer lower rates and other benefits to travelers in ways that meet our property partners' specific revenue needs. In addition to sourcing competitive rates directly from our partners, we have built up our ability to selectively offer discounts and incentives at Booking.com over the last few years. Visibility to merchandise is another lever that we can now pull as we look to deliver value to our customers through more competitive pricing. We believe this competitive tool helps us attract and retain customers and drive improved conversion on our platform. Importantly, we take a disciplined approach to merchandising by very closely monitoring the incremental return on investment on that spend, and we can adjust the level of our spend according to our desired return objectives. We have been pleased with the levels of incremental return we have seen this year for merchandising and will continue to selectively utilize this tool going forward. For our supply partners, we strive to be a valuable partner for all accommodation types on our platform by delivering incremental demand and developing products and features to help support their businesses. Alternative accommodations through nights at booking.com grew about 11% versus 2019, and represented about 30% of booking.com's total nights in Q3. We have continued to make progress with our alternative accommodation offering by increasing our supply base of properties, which has grown by about 300,000 since the end of 2021, and has increased in each of our major regions around the world over that time period. We aim to build on this growth in our alternative accommodation supply base by improving our product offering to our supply partners globally with a continued focus on the U.S. market. Let me now talk about the progress we have made in our interrelated strategic priorities of payments and the connected trip vision. On payments, 40% of Booking.com's gross bookings were processed through our payment platform in the third quarter, which once again is our highest quarterly level ever. 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, Our long-term vision is to make booking and experiencing travel easier, more personal, and more enjoyable while delivering better value to our customers and supplier partners. We are expanding our offering into travel verticals other than accommodations, and then we'll work to link relevant travel components together to provide a more seamless, flexible consumer experience. As a result of this initiative, we believe over time we will drive increases in customer engagement, share of spend, and loyalty to our platform. We continue to make progress on building foundations that connect through vision, including our work to integrate ground transportation options and further develop our 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 over 20% of all of our flight bookings globally are new to Booking.com. There is much more work to do as we strive to give our customers the best possible trip experience, but we are pleased with the early results we have seen so far. In conclusion, I am encouraged by our strong third quarter results and the sustained levels of travel demand we are seeing into the fall and into early next year. We continue to make progress in several key areas, including engagement with our app, the Genius Program, our alternative accommodation offerings, payments at Booking.com, and building towards our connected tradition. I believe these initiatives will help us deliver a better offering and experience for our customers and our partners. While there continues to be 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 Goulden.

Thank you, Glen, and good afternoon. I'll review our results for the third quarter and provide some color on the trends we've seen so far in the fourth 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 third quarter. In the third quarter, we were encouraged to see Runite growth improved to 10% in both August and September, up from the 4% runite growth we previously reported for the month of July. All regions improved in August and September relative to July. For the full third quarter, global runite growth was 8%, with Europe up high single digits, the US up almost 30%, rest of world up over 10%, and Asia down mid-single digits. In September was the first month of room night growth in Asia versus 2019 as the delayed recovery continues in that region. Our mobile apps represented about 45% of our Q3 total room nights, an increase of slightly over 40% in the second quarter. Total mobile bookings represented over 60% of our total room nights in the third quarter, also an increase from the second quarter. In the third quarter, we continue to see an increasing mix of our total room nights coming to us through our direct channel versus 2019 and also versus Q3 2019 and also versus Q3 2021. The international mix of our total room nights in Q3 was about 45% in line with Q2. Our Q3 cancellation rates continue to be below 2019 levels as they were in Q2. In Q3, the booking window of Booking.com remained shorter than in 2019, similar to what we saw in the second quarter of 2022. This booking window expanded meaningfully versus the third quarter of 2021, when we saw a higher mix of near-send bookings due to the COVID-19 Delta variant wave. For our alternative accommodations at Booking.com, our room-night growth rate was 11% in Q3 versus 2019. and the global mix of alternative accommodations was about 30%, which is slightly higher than Q3 2019. Q3 global mix was about in line with 2021. Q3 gross bookings increased 27% versus 2019, or 41% on a constant currency basis. The 27% increase in gross bookings was 19 percentage points better than the 8% moonlight increase due to 28% higher accommodation constant currency ADRs and also due to four points from strong flight growth bookings across the group, partially offset by the 14% points of negative impact from FX movements. Our accommodation constant currency ADRs benefit by about 2% points from regional mix and about 26% points from rate increases across all of our regions, most notably in Europe and North America. Despite the high ADRs in the third quarter, we have not seen a change in the mix of hotel star ratings being booked or changes in length of stay that could indicate the consumers are trending down. We'll continue to watch these dynamics closely. Airline tickets booked in the third quarter were up about 235% versus a smaller base in 2019 and up 45% versus 2021, driven by the continued expansion of Booking.com's flight offerings. Revenue for the third quarter was over $6 billion, which was up 20% versus 2019 and up about 34% on a constant currency basis. Revenue as a percentage of gross bookings was about 110 basis points below Q3 2019 due to a number of factors, including investments in merchandising, which are consistent with our prior commentary about the opportunities for us to lead into a recovering travel market in 2022, and also due to an increase in the mix of flights, the slow recovery of our advertising and other revenues, which have no associated gross bookings, and some negative impacts from FX rates. Q3 take rates were down more than our expectation of being down about 70 basis points, primarily due to timing differences between gross bookings and revenue recognition driven by the improved bookings in Q3, some of which relate to travel in future quarters. Our underlying accommodation take rates were about in line with Q3 2019 levels. Marketing expense, which is a highly variable expense item, increased 27% versus Q3 2019. Marketing expense as a percentage of gross bookings was about in line with Q3 2019, which was better than our expectations, mainly due to higher than expected direct mix. As expected, our marketing ROIs were lower than in Q3 2019, which was in line with our strategy to lean into a recovering travel market in the Q3 peak seasons. Sales and other expenses as a percentage of gross bookings were up about 40 basis points compared to Q3 2021, which was in line with our expectations. About 40% of Booking.com's gross bookings were processed through our payments platform in Q3, up from almost one-third in Q3 2021. Our more fixed expenses in aggregate were better than our expectations, up 17% versus Q3 2021, primarily due to slower than expected ramp into IT expenses, and lower than expected personnel expenses. Adjusted EBITDA was $2.7 billion in the third quarter, which is better than our expectations and about 7% above 2019, and would have been about 25% above 2019 on a constant currency basis. Non-GAAP net income of $2.1 billion results in non-GAAP earnings per share, about $53 per share, which was up 17% versus Q3 2019. On a GAAP basis, we had operating income of $2.6 billion in Q3. We recorded GAAP net income of $1.7 billion in the quarter, which includes a $336 million unrealized loss on our equity investments, primarily related to MESWAG. as well as $125 million expense related to an ongoing French tax matter. Now onto our cash and liquidity position. Our Q3 ending cash and investment balance of $11.8 billion was down versus our Q2 ending balance of $14.2 billion, primarily driven by about $2 billion in share repurchases in Q3, as well as the unrealized losses on equity investments. The $2 billion in share purchases in Q3 was a step up from the $1.3 billion in Q2 as we increased the pace of our repurchases given the pullback in our share price. In October, we repurchased another $595 billion worth of our shares, which brings our year-to-date repurchases up to about $4.8 billion and our remaining outstanding authorization to about $5.6 billion. As Glenn mentioned, we reduced our share count by about 5% since the end of last year. And over the last five years, we reduced our share count by 20%, despite suspending our share buyback activity for 21 months during the COVID-19 pandemic. We had negative $95 million in free cash flow for the third quarter, as our earnings for the quarter were offset by about a $2 billion decrease in our deferred merchant booking balance following the peak travel season in Europe and North America. Now onto recent trends and our thoughts for the fourth quarter. We estimate that October reunites increased about 12% versus 2019, a slight improvement from the 10% growth in September, driven primarily by the continued recovery in Asia, as well as a slight improvement in Europe. In October, all regions were above 2019 levels. The U.S. was up almost 35%, the rest of the world was up high teens, and both Asia and Europe were up high single digits. ADR growth has remained around Q3 levels, and we estimate growth bookings were up about 30% in October, which includes negative impacts from FX pressures. We estimate that constant currency growth bookings were up just over 45% in October. While there continues to be uncertainty in the near term, our comments for the quarter make the assumption that room night growth for the full quarter will be about 10% above 2019. which is in line with levels of growth we've seen over the last three months. 10% room height growth in Q4 versus 2019 would also be an acceleration on a year-on-year basis, from 31% growth in Q3 2022 versus Q3 2021 to 39% growth in Q4 22 versus Q4 21. We expect the strength in ADRs we've seen in recent months to generally continue for the remainder of the fourth quarter, as well as continued growth in flight bookings. We expect about a 15% difference between the level of room night growth and gross booking growth, less than a 19% gap in Q3 due to more FX pressure in Q4. We expect FX to pressure gross bookings growth versus 2019 by about 18% in Q4. We expect Q4 revenue as percentage of gross bookings to be about 120 basis points lower than Q4 2019 due to investments in merchandising, an increase in mixed supplies, and a negative impact on timing differences between gross bookings and revenue recognition. We expect Q4 marketing expenses percentage of gross bookings to be a bit higher than Q4 2019 as we expect to continue to invest in capturing demand and increasing awareness during the continued global recovery of travel demand. We expect Q4 sales and other expenses as a percentage of gross bookings to be about 40 basis points higher than Q4 2021 due to higher merchant 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 in Q4 2021 with personnel, G&A, and IT each up a similar percentage year on year. Taking all this into account, we expect the Q4 adjusted EBITDA to be over 1.1 billion. If it were not for the latest impacts of FX, we expect Q4 adjusted EBITDA to be above Q4 2019. We are maintaining our four-year adjusted EBITDA margin commentary and still expect EBITDA margin for 2022 to be a few points higher than in 2021. And if not for the impact of timing, our expectations for the four-year adjusted EBITDA margins would be higher by another few points. For the full year, we expect our revenue as a percentage of gross bookings to be just over 14%, lower than our prior expectations for mid-14% range, due primarily to timing differences between gross bookings and revenue recognition driven by stronger bookings than previously expected, some of which are related to travel expected to occur in 2023. Compared to the 15.6% take rates in 2019, the expected take rate in 2022 includes almost a full point of negative impact from timing, about 40 basis points from a slower recovery in advertising and other revenue, which have no associated gross bookings, and about 30 basis points from increased mix of flights. The benefit to take rates in 2022 from increased revenues associated with payments is offset by our increased investments in merchandisings, each of which impacts our reported take rates by about 1% in 2022, compared with about half a percent each in 2019. These change in payment revenues and merchant costs versus 2019 are mainly at Booking.com. Looking forward into the winter months, the booking window continues to be shorter than it was in 2019, which means that we would expect lower levels of future stays already on our books. Given this, We are pleased that the gross bookings we've already received at booking.com for staging Q1 are up about 25% in euros versus the same time in 2019. Of course, we note the high percentage of these bookings are cancelable. While this represents a relatively small percentage of the total revenue we'll record in Q1, we think it's a helpful early data point to share. In closing, we're pleased with our Q3 results and the trends that we're seeing into Q4 and early into 2023. We remain confident that our strategic priorities are the right ones and will enable us to provide better travel services for our customers and partners. We'll now move to Q&A, and Sylvie, can you please open the lines?