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

Okay. I think we're on. David, are you all set? Your audio all set?

Yes. I'm all set, Brian. Can you hear me?

I can hear you perfectly. All right. Great. Well, thank you, everyone, for joining us this morning, afternoon, evening, wherever you're zoomed in from. We're thrilled to have David Goulden from Booking Holdings with us. He's the CFO of Booking Holdings. He's been with the company since the first quarter of 2018, I think March of 2018. A lot has changed with the company and with the travel industry '18 to '19 and now '20 has been 2020. So there's always a lot going on in travel and with your company, David. So we're thrilled to have you.

Thank you, Brian. Great to be here.

I have to read the obligatory disclosures before we get started. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions about the research disclosures or anything related to the disclosures, please reach out to your Morgan Stanley sales representative.

With that covered, David, I wanted to sort of start with a sort of high-level picture about the macro environment. I guess a lot has changed in 2020 sort of to the point at the beginning. Talk to us about some of the key learnings that you all have had sort of managing this business through the pandemic and how do you think about some of the biggest opportunities for Booking to emerge even stronger in '21 and '22 after travel returns?

Yes. Great. Thanks, Brian. And obviously, 2020 has been a helter-skelter year to put it mildly. There were lots of things we had to do to manage the business differently. Big focus upon our customers, they are our lifeblood, and we really went out of our way there. For example, we let people cancel noncancelable trips. In some cases, we refunded them ourselves before we got paid back by our property partners. The property partner, a big focus there as well because 2 sides of the marketplace, we need to kind of keep them both dynamic and healthy. So we spent a lot of time with our partners on this, helping them understand how demand was shaping up so they could optimize their marketing to get access to the local demand as it returned. Nimble marketing, really had to kind of change the way we go after the performance marketing channel, identifying and responding to new demand patterns. Of course, unfortunately, rightsizing the business, painful to do, but also necessary for the health of the business going forward. Many, many others, I don't want to spend the whole time on this answer, but it's been a year where we've had to do things we haven't done before. Many learnings of them, many, many learnings from these things will help us in the future. You have to really make sure you take advantage of what happens. And in terms of the opportunities, you asked about that. And I think a couple of things. First of all, we think we're in a strong position for 2 reasons. One, we can continue to invest through the downturn in the key programs like payments and the connected trip. And also, we have the financial resources to invest in capturing the demand when it returns and wherever it returns because this is going to be a very global recovery and it might be different in different parts of the world.

Got it. That makes sense. Your global scale is a big advantage. And you guys, you're, by far, the biggest player in the space. That makes sense. I think one of the things you mentioned are sort of some of the difficult decisions on cost reductions this year. I know I'm asked a lot about this, but I think it's good to sort of set expectations and talk a little bit about it. So some of these cost saves you've done this year, just remind us again of sort of the dollar magnitude that you've spoken to? And then how do we think about sort of the temporary nature of those cost saves as opposed to really reducing the cost structure permanently from this and the opportunity for this higher long-term margins and earnings power even if it's at similar room night levels in the past?

Yes. Sure, Brian. So I mean I would say that before the COVID virus hit, we ran a fairly lean business, and we've always been very efficient and frugal on our costs. So when we looked at the cost savings and just to recap the numbers across the business, we said that we're going to achieve run rate cost savings of between $330 million and $380 million, starting from the cost base we have, let's call it, in the early part of 2020. The restructuring actions we took, they were primarily focused on the reduction in volume-related positions in order to rightsize the business for where we thought the demand environment would be over the next several quarters. So they're really related to reduced workload. So as the travel recovery occurs, we're going to have to bring most of the work back. Now having said that, we're going to look for opportunities for how efficient we can be with how we bring back these activities. And the efficiency opportunities are in a couple of different areas in terms of technology and automation, but also in global sourcing of these activities when they come back into the business. So as I said, the work will come back and the opportunities are to drive efficiency. These were not fixed cost reductions. These were variable cost reductions in the business. And as I said, as demonstrated by our pre-COVID margins, we've always operated in a lean, mean mode as a company. We're going to continue that approach going forward.

40% margins are high. That's the place where you're starting from, right?

It's a high place to start from. A place that we're very proud of, but a place that obviously has reflected a lot of work in the business.

Yes. That's good context. One of the areas you talked about in investment is the connected trip. So I wanted to sort of ask you a little more about the connected trip. Give us some context of areas where you've made the most progress in sort of expanding the connected trip and getting early adoption. And how do you sort of think about the key investment areas you have to throw investment dollars at to really drive more adoption and make the connected trip a bigger part of the overall business?

Sure. Great question. So the connected trip really pulls together a lot of different initiatives we're driving within the company. So one of the big underlying enablers of the connected trip is the payments platform. And as you know, particularly Booking.com, our biggest brand, we started out as an agency model where we didn't touch the payments. And in the context of the connected trip, we want to basically sell and manage the full portfolio, payments becomes a big part of it. So we've been building out our payments platform. As you know, in 2019 about 15% of the TCV at Booking.com went through payments. That gives you a flavor for how far we have to go there. It will never become 100%. But as we go through time, it can certainly go over 50 points of mix from payments. Then the other part is to build out the different verticals. And the connected trip verticals include ground transport, where we've obviously got a very good, well built out offer. We have Rentalcars.com. And we moved that into Booking.com about 18 months ago to help facilitate this connected trip cross-pollination of assets. Air is an important one where we're much early on. We have launched air in Booking.com partnering with Etraveli in Europe. And now just in the U.S. and also between Agoda and Priceline, we're also building out an international air product. We kind of leverage those assets as best we can in the future across the company. And then the last piece of it from a vertical would be the attraction side, where we're now, in addition to building out some of our own capabilities, we're also partnering with Musement to access more supply. And of course, we invested in FareHarbor to help bring some of the long tail attraction to come online and plug into platforms like us. So that's where we're at. It's absolutely a journey and it will not roll out in a big bang. It will roll out on a market-by-market basis, and we want to get to critical mass of having that capability. But we see a big prize, right, and we continue to invest in it. We haven't slowed down our investment during the crisis.

Got it. Okay. I did have one about just sort of investment priorities and capital allocation a little bit. You talked about the connected trip and cars and air and alternative accommodations and even in-destination experiences. I know we're going to talk a little bit about the U.S. I'm going to ask you about the U.S. Just from an external perspective or looking in, how should we think about the pecking order of where you're most investing and kind of like top priorities as opposed to the ones that are sort of more on the lower prioritization between U.S., air, in-destination, alternative accommodations, et cetera. What is the top to the bottom of the priorities?

Yes. It's a great question. I don't want to put anything on the bottom because then everybody at the company who works on that thing will hate it. Again, to answer that question, what I'd say is that we've said we'd have real focus, right? So there are many more things that we could be doing that we're not doing. We're kind of focusing on the things that we just spoke about. So payments is a very big piece of it. The connected trip verticals are key enablers. Again, they're going to be things that we provide value to our customers, to kind of cross-sell back into accommodations, to strengthen the accommodation offering by offering a more complete service. But we're also building out some of the foundations, some of the underlying trip management capabilities and also making sure that we can do seamless customer support, be able to support a customer across these multiple verticals also require some investment in technology and people. So they are all kind of connected and I don't want to kind of call one the most important, the one least important. I'd say that we focus upon them. We know exactly what they are. And we're kind of moving forward on all of them. Now the good news is that for most, in most cases, it's really about building out technology and systems. We're not, in most cases, we don't have to put big teams on the ground to go source supply like we do in the accommodation space. We have smaller teams and we can work with aggregators. And of course, some of these other verticals that we're moving into are much more concentrated from a supply point of view. So this investment is generally built into our income statement right now largely. I'd say these capabilities are going to give us incremental bookings, incremental revenue, incremental EBITDA. But obviously, these new verticals are going to have a lower margin rate than the core accommodation business, but we will drive incremental EBITDA, EPS and also strengthen the core accommodation portfolio.

Got it. That's helpful. Well, I have a series of alternative accommodations questions. I didn't ask, but I'm getting a bunch of them in my e-mail. So I think investors want to talk a little bit about alternative accommodations. Let me go there. The first one is just sort of on what you've seen from a user behavior on alternative accommodations throughout COVID and shelter in? And how do you think about sort of retaining new people who have come into alternative accommodations into 2021 and beyond?

Yes. So there's been an interesting shift in user behavior. And as you know, we saw an increase in share in our alternative accommodation bookings in 2019 as well. So we do see kind of a small shift toward that segment of the marketplace. Obviously, that has been accelerated at least in the short term because of the crisis, but we have 2 different things going on. So in Q2, the mix of bookings to alternative accommodations were as high as 40%. And then Q3 normalized back towards 33%, still elevated compared to where it was last year, but we certainly saw a shift back towards a more normalized level. Now bear in mind, in both quarters, the non-alternative was still the biggest piece of the business. In Q3, 67% of the business was from hotel and hotel-type properties. So we saw a couple of things driving that. Obviously, we saw the early recovery after the depths of April. People were very concerned about where they're traveling, and they opted for safety. They opted for more rural locations. And then people felt a bit more comfortable and the bookings they made in Q3, again, the Q3 bookings were a bit more balanced, but still were biased towards alternative. What we think going forward is that now because more people have been exposed to segments, there maybe would just be more interest and awareness in the alternative segment. So we certainly saw that slight shift mix in 2019. And when things normalize, we just think more people will have been exposed to the offering and therefore, be more open to it than they were before. And then, of course, there's the longer-term issue of what the new normal looks like. If people are not working back in the office 5 days a week, then the concept of kind of long weekend staycation, work from somewhere else may become more a factor. And that would typically favor an alternative property because they're more likely to have an office or a studio or something that the typical 2 bedroom occupancy hotel room doesn't do well if you're working from somewhere else.

Yes. Is there anything, in that long term trend, that's a big debate that we have a lot. Is there anything in sort of like the bookings behavior you're seeing yet where people are doing that? Are you seeing more longer average stays in these alternative accommodations or anything like that or it's still too soon?

I think it's too soon, Brian, because we're kind of in the depths of the virus still. I mean, people are still not working. I mean, people are working from wherever they're working from full time now. So I think a lot of people are working from somewhere else, but that's not the new normal. I think the new normal will be some kind of a mixed work environment where I'm sure that some companies are going to go back to a 5-day workweek environment. A lot of companies are probably going to go back for maybe a 3 days in, 2 days out type thing. That gives people a new opportunity. If you've only got a 2-day weekend, you're probably not going to travel quite as far as if you've got a 4-day weekend. And then if you've got a 4-day weekend, you're working on 2 of those days, you may want to be working from somewhere you've got a bit more space. So we'll have to see how all that plays out.

Yes. After this year, we can all use a 4-day weekend, take a 7-day weekend. On the other side of the alternative accommodations equation is the supply. You guys have done an amazing job at scaling up the supply, over 6 million listings now. Just talk to us about sort of where you've made the most progress in bringing on supply in alternative accommodations and sort of where you see the next key areas of alternative accommodation supply coming onto the platform? Where does it come from? What does it look like, et cetera?

Yes. So I think I'll give you a bit of a flavor in terms of the mix of our business across different parts of the world. The alternative platform is most mature in the European marketplace. We have been out for longer. Also, the European marketplace is actually more fragmented from a mix of accommodation point of view. So it just made more sense to focus there early on. So our portfolio in Europe is very broad, very robust, very complete and includes the full spectrum of all the way from single property owners, to more things like bed and breakfast and unique places to stay. You can get canal boats on Booking.com, et cetera. It's a fairly broad portfolio. The U.S., we under-index compared to our European business in terms of the percentage of our business that is from the alternative space. So in terms of where we're focused, that's a key focus for us. Obviously, other people, that is their backyard. So we have some ground to gain there. We are looking at a couple of opportunities. One is that we are seeing a professionalization of the alternative accommodation marketplace. So increasingly we see even for single property owners, them engaging property managers, maybe managing multiple homes and that property management firm maybe is taking care of renting that property out. So then it's appropriate for us that we are focused upon in the U.S. In the U.S., in particular, we're focused on building out our supply more in rural locations and more in single property owners. And that's where the current focus is.

Got it. Got it. Okay. And then as part of that single property owner strategy and the rural strategy, I guess, I mean, it's sort of interesting the way the take rate structure of this in the alternative accommodations is so different between your competitors and versus you all. Do you think that is the 14% to 16% take rate charge to host, was that something you guys sort of think through as maybe we need to offer a lower take rate to get the inventory or is that not a point of friction to bring on the listings?

Well, we have a fairly uniform pricing structure across the different segments of the marketplace. And we think for the take rate which we offer where basically people are not paying a thing unless we give them a customer, right, and in turn, they're tapping into all the billions of dollars we've spent on marketing and our customer service, all the language support which we give them, the kind of the listing that we put up on our site so they can advertise themselves, we think it's actually a pretty good deal. And right now, I'd say that our focus really is more on working with those supply partners to make sure we get great availability and great pricing from them that kind of make us both look better on the platform. That's the bigger focus for us than normal take rate.

Got it. Okay. That's helpful. All right. Let me ask you one about direct traffic mix and sort of where the -- how you guys get traffic. You guys have talked in the past about a majority of the business or a majority of the traffic comes direct. I think you had some success over the last few years. Can you talk to us about sort of areas that have driven success in increasing the percentage of the business that comes direct as opposed to still, you think, opportunities to really improve the overall percentage of the business that comes direct and not through Google channels?

Yes. So overall paid channels, right, they're more from paid channels, right? So yes, we want to continue to increase the direct share. And it's all about providing a better service. So a lot of things we talked about in terms of enhancing our capability, enhancing our offerings around the connected trip, around things, things that we can do, just providing more value to our customers. So that's what the real big driver is of the direct channel. And even in our performance channel approach, we are looking to bid and spend more time and more effort on those channels that have a higher repeat direct potential for us, and those customers that have a higher repeat direct potential for us. Now I won't however characterize one's good and one's bad because they've both got a key role to play. The performance channels are great sources of potential new customers for us. Obviously, we don't want to have to pay too many times to acquire the same customer. But sometimes, you have to have them come in more than once through a paid channel. And also understand, I think the market is not just one size fits all either. The market is a segmentation across billions of potential customers, some of whom like to use either a meta channel or a search channel as the place that they start shopping all the time. And that's the case. That's fine. And then there's a bunch of customers who are relatively loyal to an accommodation brand like ours or maybe even to a hotel partner brand, for example. So I think you have to look through this through a segmented lens. So at some point in time, we'll even kind of lean in quite heavily to the paid channels when we think the demand is out there. So this summer was a good opportunity where we leaned in quite heavily. As we said, our ROIs were a little bit less in Q3 than they were in Q3 a year ago. And it looks like we probably did quite well relatively in the marketplace, but we still maintained our share above 50% in the direct channel even with that going on.

Got it. Yes, the ROI point, you mentioned leaning into performance and the ROIs were a little less even though, to your point, the volumes were great. There's this often discussion that I have with investors who say, ROIs in paid search or in performance marketing for Booking should be structurally higher coming out of this downturn. This is the discussion that you have with Wall Street where they say, well, Expedia is saying they'll spend less. Booking is the smartest spender in the room. I think you guys are. And if hotels aren't spending, why wouldn't ROIs be higher, meaning margins could go a lot higher? I think maybe just talk to us about some of the dynamics in the paid search and the performance marketing ROI world that, that's either missing or is that the right way to think about it?

Yes. I think the first thing to kind of go back to, these are sophisticated marketplaces where there are more bidders than people realize. It's not just the big OTAs bidding in these channels. Of course, we do make a big piece of the bidding profile, but you've got the meta channel bidding in these same channels. You've got the hotel chain. They're not going to go away and stop bidding completely. So they're fairly dynamic and historically quite efficient marketplaces. So yes, there's always the opportunity for things to improve. But also, there's also, things change quite rapidly. We, for example, back in 2017, did a really good job optimizing our spend in those channels and actually drive some nice leverage from an ROI point of view in 2018 versus 2017, mainly because people kind of did the same thing as we did and followed along. So you see how things can change. So there's always the opportunity, but I think we have to realize these channels are quite direct and there are multiple people bidding in these channels.

Yes. No, that's really helpful. The other side of the marketing coin is branded marketing. You have a new CMO. You have a new CMO at Booking. I guess talk to us about just sort of philosophically how, is anything changing with the view on the importance of performance marketing versus branded marketing now that you have a new CMO running the ship?

Yes. So of course, the performance has historically been by far the bigger piece of it, right? So brand marketing has been like about 10% of our total marketing spend and performance is more like 90% so. And then, of course, even more now because we've shut brand right down, no point in doing brand advertising in the middle of the crisis where people are thinking it's wise not to travel, perfectly certain to say the least. The marketing team is quiet from a brand point of view, but they are at work because we do recognize there's going to be a time for us to re-emerge with brand advertising. And hopefully, when we into the spring and if the news about the vaccine continues to -- or vaccines continue to improve, people might feel much more optimistic about their travel, their future travel plans, and that will be a time to get back in from a brand point of view. We have been doing a little bit of spend. Recently, we did a small digital scale campaign in the U.S., Booking is for everybody. We ran that just before the election. Priceline, for example, while our sister brand, has been more active on TV. So it hasn't been completely without activity, but the brand teams are hard at work looking at what we do when we get to better times.

Got it. That's helpful. Stay tuned for the ad campaign. You brought up the U.S. and the U.S., the small U.S. campaign from November. Let me ask you kind of bigger picture about the U.S. The U.S. has been this market that you guys are sort of, you've been focused on for years. Where do you think you've had the most success in really improving your competitive position for Booking.com in the U.S. and then maybe talk to us about sort of 1 or 2 of the key investment areas or the key hurdles you need to overcome to really grow that U.S. business at a more durable, faster rate coming out of this?

Sure. The first thing to realize is that over the years, we actually have built a sizable business in the U.S. at Booking.com, but there's still a good opportunity or certainly a better situation in Europe by comparison. Most of the things that we need to do in the U.S. fall into what I call the blocking and tackling category. So let me give you some examples. We're continuing to improve the product for the American audience to make sure we match content with what the American customer wants; increasing the awareness in Booking.com so we're more top of mind; pushing our payments platform across the U.S., which we're in the process of doing right now; driving greater collaboration between the Booking brand, so allowing eligible customers to see Booking.com Genius rates even if they're browsing some of our other platforms, for example, like, let's say, on KAYAK, for example; and continuing to develop the alternative product in the U.S., as I mentioned just before. So those are things that we really focus upon. There's not a single silver bullet. But together, we think we can kind of drive ourselves to continue to gain share as we have over the last few years done that.

Got it. Okay. That's helpful. One of the areas that are on that connected trip has sort of been attractions and sort of driving attach and driving attach of in-destination events. Maybe talk to us about where you've had the most success with attractions. I know you've had some acquisitions with FareHarbor. You've done some partnerships. Where do you sort of see the attraction business going from here? And one, how you bring on supply? And two, how you really drive continued traveler adoption of those products?

Yes. So the attractions business for us is a nice additional capability to offer to our core accommodation customers. It won't be a game changer in terms of how it impacts the income statement. It will be helpful. But obviously, we're talking about smaller TCV activities and attractions give you a lot more price than a hotel room and small take rate. So economically, it's not going to have the same impact. Having said that, we do think though, people, obviously, when they go travel, they don't go travel to sit in their hotel room or in their alternative accommodation room, they want to visit things. So we've been building out the capability, again, with a European-centric focus to start with. We've done some work to source and connect to supply ourselves. We also recognize that getting more supply quickly is important, which is why we're going to do a combination of partnering there, which is why we're partnering with Musement to build things out. We also realize that broadly speaking the attraction or the experience marketplace is the least online of any piece of travel. That's why we bought FareHarbor because we can basically help those experience or attraction to get online and plug into platforms like ours. So we're trying to enable supply and also capture that also and bring it forward to our Booking customers. We have had some good experience. The customer experience of the attractions offering on the platform is good. You don't have to go pay things separately. You usually get a discount. Sometimes you skip the line. It's easy to book, a very pleasurable experience. And we've had some good results in the testing that we've done where we've got a lot of groups of customers who've used attractions with accommodations and those who haven't in a similar cohort, a positive return rate and repeat rate for those that use both. So we think it's an important enabler within the overall connected trip strategy.

Got it. Okay. Last one I had for you was on China. Eventually, god willing, we'll all be traveling everywhere sooner than later. The long-term China outbound and even global travel opportunity is big. And you guys have been pretty well positioned there between partnerships and even organic build in China over the years. So I guess the question is, how has the strategy evolved big picture the last couple of years in China? And what do you think are sort of the keys you need to execute on right with your China business just to make sure that as the world recovers and China outbound travel picks up, you guys are really able to kind of capitalize on that China global travel opportunity.

Yes. So Brian, so you summarized the strategy quite well. And to a large extent, the strategy hasn't changed. It is very much a big focus upon the international travel, the outbound opportunity. That's where we have a very strong value proposition. And as you say, we operate organically. We have 2 brands operating, both Agoda and Booking.com both play in China. We're playing in Asia as well. So we have now 2 different ways to get to market directly. And also the partnerships are important there because you don't have the same search engine dynamic in China for obvious reasons as you do in other parts of the world. So partnering with big players where we can expose our brand to their customers, and particularly our strongest partners there will be Meituan and Didi are both very, very powerful, very well-known companies with huge customer bases, is just a way to expose our offering to those players. So through the combination of working organically and through the partnerships, that really is the kind of secret sauce for us, we believe, again, with our focus being upon the international travel, typically outbound travel where we're well known. We have great inventory, great capabilities for those customers. And they can really tap into all the global capabilities we do outside China as well.

Great. Hopefully, that travel is sooner than later. And hopefully, next year, we're together in London 1 year from now as part of that.

That will be awesome. If we can, I guarantee, I'll be there.

Sounds good. All right, David, thank you so much as always. I always appreciate it. I hope it was helpful for everyone who zoomed in. And David, we'll talk soon. Thank you, everyone.

Thanks, Brian. Take care.