Booking Holdings Inc. (BKNG) Earnings Call Transcript & Summary

All right. Good morning, everybody. It's Mark Mahaney, Head of Internet Research here at RBC. Thrilled to have is our next presenter and session, Glenn Fogel, who's the CEO of Booking Group Holdings. We've got 30 minutes. [Operator Instructions] And with that, Glenn, thanks a ton for joining. We've kind of glibly -- overly glibly referred to this as the vaccine conference because this is the first investor conference after we've had what looks to be very constructive news about vaccines and the potential reopening of cultures, economies, societies, et cetera.

I think it's fair to say that Booking has been one the most negatively impacted businesses. Talk about how you think about the recovery of Booking's fundamentals and business in the wake of, hopefully, some successful vaccine news by deployment. How long do you think it could take for a recovery in online travel to really occur?

No, first, Mark, thanks for inviting me. Thanks for having me. I always liked doing this with you. It's always been a real great time to get, again, information out to investors. And actually, I just enjoy talking with you. So great first question, of course, because that's what the news everybody is looking, at is the incredibly wonderful news coming out of the pharmas about vaccines that are showing incredible effectiveness. And it's just wonderful. And on the other hand, though, it's not exactly a giant surprise as everybody's been talking to that. We'd probably get some sort of news in the fourth quarter, and we've gotten the news now, just as was expected for a very long time. So no big surprise here. And we certainly were putting together our projections trying understand what the future looks like for us based on all that good news that we all expected to hear, which we have now heard. So it really doesn't change anything. Not a lot of changes happened here. We recognize that it's great that there are effective vaccines, but we also -- the same thing that people have talked about, there would be news that they'd be hopefully effective fourth quarter or first quarter. It was always coupled with, "But it will take a long time to roll the stuff out." And we all know that. And the more we read about these things about logistical issues that could get some of the stuff out and how fast people will start being inoculated, vaccinated and what that means, it's not as though there's a light switch around that we just flick a switch, and all of a sudden, we all go back to 2019. That's not the way it's going to be, and we all know that. So we still believe it's going to take years, not quarters. We've talked about a U-shaped recovery into the fall and winter. Look, we're all hopeful that people will be protected quickly, and we all hope that these -- what are increasing rates of infection peak could start coming down quickly. We all hope for that, too. But everybody should be aware that this is not a, "Okay. We're all back to normal." Because that's not what it is.

Thanks for the -- it makes sense, Glenn. So when you say it could be years, not quarters, as you have to do some planning for your business out in the next couple of years, do you assume that we recover to 2019 levels by '22 or '23? Do you have a specific year in mind? Or this is something that you just constantly update and revise and it's just too hard right now to make that kind of call?

Yes, the latter. Look, we've got scenario planning. We have, "If this, then that", "If this, then that", and obviously, we always have to try and plan ahead in terms of what kind of investments to make today for the long run. And that's what we're doing. But in terms of trying to come out and pinpoint, "Okay. We will pass 2019's numbers on this exact day, week, month, even quarter, year," no, I'm not going to do that. What I'll say is that we are very hopeful that these vaccines will be effective and will stay effective, by the way. Let's not forget that part too, everyone. We all are thrilled with the effectiveness that has come out of the several months of testing right now. But we'll also be even more thrilled if we find out a year from now that the effectiveness of these vaccines are still up to these numbers that have been published. Wouldn't that be wonderful? But nobody knows because we haven't had a year of testing yet, have we, of these vaccines. So we'll see. Regardless, we've got a plan for the future, and we are doing that.

Glenn, just the big negative question. Do you at all -- are you at all concerned that there's going to be some just fundamentally permanent negative -- even if we have a fully distributed vaccine in the middle of next year and everybody gets vaccinated, are you concerned that there are going to be some permanently impaired parts of travel? Do you think that there are -- 10 years down the road, do you think we're just not going to -- what's the risk level that we just don't recover in a meaningful period of time, 5 to 10 years, to 2019 levels? What's that risk like in your mind?

I think there's a higher probability that certain types of travel that was done in the past is going to not be done as much. So absolutely 10 years from now, there's going to be more travel than there was in 2019. I have no doubt of that in 10 years from now. But the question is, though, as a percentage of travel, how much business travel, corporate travel, what share will that be of total travel in the future? And I just look at myself first, myself. I'm not going to do as many long-haul trips that I'm meeting just with one person. I mean, it's just an incredible use of -- hard use of time and money. Why would I do that when I can have really good video communication with one person or one company? And I think a lot of other people are thinking about that too in terms of the cost of travel for corporate corporations. Will that be something that people will look at very closely, that will reduce the number of trips and not do as many. Certainly, there'd still be corporate travel. It's not going away. But I think, as a share, it will be lower. Now what does that do for the economics of travel? Because we know our supplier friends, the airlines and our hotel friends who are -- who have been able to make a lot of money off the front of the buses, they say, oh, those first-class seats up at the -- in front of the plane or the very expensive 5-star hotel rooms, things like that, I think there's going to be a change. And I think that's going to mean that the supplier is going to have change. So that could be, in the long run, effective for us because we're more leisure than business. So it could be beneficial in the long run. But again, that's something that I think will happen, but not my -- not something I'm really thinking about much right today because today, we've got other issues to deal with.

Glenn, can you remind us what percentage of your bookings are business? Is it somewhere in that 5% to 15% range that would be self-managed business corporate travel?

So here's what I'm going to say. I'm going to say, first of all, right now, it's pretty small right now. Really small right now. But I think you were referring more to in the past.

Yes.

And the past, it's really hard to know. We have -- so we do self-surveys and stuff, is a business -- am I going to be able to click this business or not? And you'd say, "Wow, somebody is doing a one-night stay in a major center city type there." That's probably a business who's using that check in or not. And we go around -- I'm not going to go back to that number. And I'll tell you why. Because nobody knows what the future is going to be. We really don't. You can look at some of the stuff we said in the past. But nobody knows yet how fast and what level that's going to come back from. And don't want to -- I want everybody to think real hard about, "Gee, it's a new world coming down the pike." And in terms of modeling this out, I'm not sure if you can depend on whatever it was done in the past.

Okay. And then I just want to tease out your comment, Glenn, because I think it's really important about the impact on economics. Leisure travel, for most, just in the lodging business is, I think, the less profitable part of lodgings for the major lodging companies. And so I'm trying to understand what your perspective is on this. Is it that as corporate travel probably -- as that front of the bus probably gets smaller, does that mean you may actually get more leverage with hotel suppliers because you'd become more important to their economics because leisure travel is a bigger part of their business?

Could be, could very well be. And as you know, we are -- we've never been big in the -- what is known as the travel managed area, the TMCs, the Amexes of the world. Those guys can do that big company corporate travel. That's not been our area. But if I'm a supplier, and I'm no longer getting that business, I got to be looking around where am I going to get from. And that's the leisure area. Well, who's got leisure demand? Well, we have leisure demand. So you're absolutely right, Mark. I think that could be something that bodes well for us in the long run. But again, that's a long run thing, not today, not tomorrow. The other thing to think about as well, on how the market is shifting. And I'm going jump -- it will just sound a little different, but I think it's an important thing to factor, is what's going to happen to supply in general? I mean, we have issues of -- issues thinking about, will some hotels may not be around in the long run? Possible. But then you have all the new supply coming in from alternative accommodations. And my thinking is the more supply is actually going to overpower the overall changes in the market. And that, again, bodes well for a distributor who's got a lot of demand. If I'm a hotelier, I got to worry -- now I got to worry because now my corporate travel is diminished, but now I got to compete a lot more with the alternative accommodations because the whole thing that just happened from the pandemic is the -- there's been a step function in terms of the number of people who have been exposed to that product, and they're not going to forget about it going forward. So you got 2 issues there, which, again, positive for a distributor.

Okay. Okay. Let me go right there then in this alternative accommodation. So -- and I know you've disclosed it. I'm doing this off the top of my head. I think you'd said that in Q2, alternative accommodations were something like 40% of bookings. Lodging bookings in Q3, it was more like 30% to 35%. And our estimate was that prior to COVID, it was more like 20%. So you've seen the step up. And your -- you feel like it's a reasonable conclusion that, that's probably a structural improvement. We're going to have people just in the future. Alternative accommodations is going to be increased as a percent of the mix for leisure travelers as a permanent thing.

Yes. So let's go through the numbers a little bit and then think how things are going to play out. So 40%, second quarter, that was the share for the new bookings that were alternative accommodations. Of course, that means 60% we're doing hotels. And then third quarter bookings, it dropped, and I think it was about 1/3, let's call, which is right the middle of what you were saying there. Now both those were higher than the year before, 2019. So shares were up on that. In fact, in the third quarter, it wasn't that much of an increase in the share. Actually, a couple of points only in the third share -- in the third quarter. But here's the thing. The second quarter, of course, was where people were booking for the third quarter. The third quarter, people are booking for the third quarter. So it all got dumped into the third quarter, the actual stays, and that's what people were looking at. The key thing for me is that once somebody has tried this, you don't forget about it. And yes, maybe you won't use it the next trip, but you're certainly going to be going to think about it. And what that does is it's accelerated a trend that have been happening for a long time, which is more and more use of alternative accommodations. There had been a trend. And the pandemic has brought forward that trend. It's brought forward people who may not have thought about this for until next year or the year after. Well, now more people are thinking about it. And that is something that, of course, as a distributor, and us, who have really the largest of both hotel and alternative accommodations together, that's a great advantage for us. Because when people come to a site, decide where to stay, many times, they really don't know. They really don't know. We see in the way people come on to our site and go use our app, and they're looking at different stuff. They look at a hotel. Then they look at a home. Then they look at a hotel. Then they look at a home. And then they make a decision. So we have a great advantage having all the types of accommodations, one-stop shopping, not having to go from site to site to site and then make decisions. It really is a much easier way to do things.

Okay. Let me keep throwing on that. So if alternative accommodations becomes a bigger part of your business -- well, becomes a bigger part of leisure travel, it's beneficial to a distributor like you because you have more inventory and then maybe you have higher match rates. The unit economics, does that change? Is it more profitable for you to sell alternative accommodation versus a traditional hotel lodging? Is it less profitable?

Well, in the past, and we've always talked about this, our alternative accommodation is nicely profitable. That's the past. Of course, we're all in a new world of everything right now. One of the key things is, of course, is not all -- the take rates are generally the same. That's not the issue. The issue is how efficient can you be with a different kind of supply. So there's always a scale issue. So if you're dealing with individual homeowners or something like that and you're having to set them up and you're going to have to deal with them when there is some sort of an issue, or customers also, higher contact rates on the alternative accommodations that on hotels, those costs can make it generally less profitable than the hotel does. Our job is to continue to make things more efficient, make things smoother, using all the tools that we're creating to try and bring up the efficiency of all our products. So in the long run, I don't know how it's going to play out. If in the long run, people are going to be able to stop asking questions like, "Well, are there towels at this home or do I have to bring my own towels?" We can come up with a better way of getting that answer so that the person is not actually using up a customer service operator's time. So we'll see. But I'm hopeful that we will continue to improve the profitability of the alternative accommodation.

Okay. Okay. Let me switch gears. You've had to, unfortunately, have some layoffs, I think, the first time in Booking's history during this crisis. I think you announced something like almost $330 million to $380 million in run rate savings. Booking has always been known for being a highly profitable, highly efficient business model, running for years at 40% EBITDA margins. Assuming that you're back to 2019 and then higher levels at some point in the next 3 to 5 years, is there a reason to think that Booking comes out of this as an even leaner and meaner business model with higher margins than it was pre-COVID?

Well, first, it's quite correct. We -- at Booking Holdings, we have a number of different companies and we have been through layoffs in the past. And I've actually been -- I had to participate them in the past. And it emotionally doesn't get any easier just because you do more of them. And we did it back when the bubble burst in 2000, 2001, and we had to do it again in the recession in 2003. So we've been through letting people go. We know how a tragic that really is. I don't -- I never want to think about it is easy or some that just as a, "Oh, it's fine. It's not a big deal." It is a big deal. We've done it, and it's still hard even now while we're in the middle of doing this. And you're right. We do want to be efficient. We try and be efficient. We try and maintain good margins. The trend over time, though, and we talked about this, our strategy, building out a connected trip using payments. And there are a lot of elements that the actual operating margin of these different products and different things we're doing actually is going to lower the overall average margin, the number, but absolutely where you want to have more margin dollars. We want to get to grow the bottom line. But as a margin number and the operating margin you're talking about, which a lot of people look very closely at, you got to expect there will be pressure over time as we continue to bring in more lower-margin business flights. We don't make a lot of money on a flight, but it can be very important for the connected trip. Same thing for much of the other things. So I think that people have to be cognizant that while we may not have the same high operating margins, we will be having lots of high operating dollars.