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

Thank you, everyone, for joining us. My name is Brian Nowak. I'm the Head of Internet at Morgan Stanley. We hope it's been a productive conference. We are very thrilled to have our next fireside chat with Booking Holdings. We have David Goulden, the CFO of Booking Holdings, with us to have a discussion about everything going on in the travel space, the slope of the recovery from a macro perspective, all of the exciting initiatives that Booking is undertaking, including recent M&A. Have been pretty busy on that front lately, David. So thank you for joining us.

Great to be here, Brian. Thanks for the invite.

Before we get started, I do have to read all the disclosures. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures. And usually, they'd be at the registration desk, but not yet. Hopefully, next year, we'll have a live registration desk. Some of the statements made today by Booking Holdings may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements made today by the company are based on assumptions as of today, and Booking undertakes no obligation to update them. Please refer to Booking Holdings' Form 10-K or 10-Q for a discussion of the risk factors that may impact actual results. Okay. David and I, we have a lot of things to cover. I wanted to sort of start high level about the macro environment and the variants and sort of there's been a lot of rapidly developing factors going on with the variant as it sort of spreads around the globe, et cetera. Be curious to hear just sort of what you have seen from a consumer behavior perspective? Any changes you can tell us about sort of on the slope of the recovery as we've gone through this unfortunate past week, 1.5 weeks?

Yes. Thanks, Brian. Obviously, there's been a lot of news and very closely relative to the variant. And it's it's still too early, and there are too many unknowns that were always to hear about, the first one in terms of how transmissive all the variant is, then how effective the vaccines are and then third, what the severity are of illnesses that could be caused by the variants. And it looks like it's going to be at least a couple of more weeks before we get answers to those questions all even before the answer to those questions, in fact, start to emerge. It's clearly creating a period of high uncertainty. We've seen it's led to some government actions targeting travel restrictions, as you mentioned. I'm not inclined upon what we're seeing our sites today, but I can tell you that during the pandemic when people have total restrictions imposed, it's had a negative impact on booking trends and has led to periods of elevated cancellations as plans need to be changed. Now what we do believe is that we're not in the same place as we were in early 2020. I don't think a lot of people do believe that. We've got widely distributed vaccines available, more effective treatments being developed and online. And we've said consistently through this whole process, the path to recovery will not be linear, and this is a clear example of that. We've also seen that when travel restrictions are lifted, the demand for leisure travel has been and we expect it will be strong.

Okay. All right. It's very helpful. Now I want to turn to some of the micro factors with bookings specifically. And really, I want to talk about a few things. I want to talk about product I want to talk about the U.S., but maybe let's just start with product because it's sort of interesting, as you sort of look at how your offering has evolved and where your focus has evolved throughout sheltering and through reopening, you continue to put more emphasis on the connected trip, the flight product continuing to be expanded. So maybe talk to us about areas where you've had success on cross product and sort of pushing into flight on top of the core hotel business, talk to us about alternative accommodation. Talk to us about any of the noncore hotel initiatives where we've made the most progress that really excite you heading into 2022.

No. Great. That's a really good question. We are excited about what we're seeing here. We -- first of all, if you step back, we believe that the connected trip is really an important part of our future because even with what we've done around booking hotel accommodations right now and taking a lot of friction out of that aspect of travel for customers, the leisure travel experience is still full friction. You're getting with multiple parties. You're dealing with paying multiple places and dealing with multiple itineraries, multiple support centers and having help if anything goes wrong. And we all know, in many cases, in our personal leisure travel experiences, it's the rhetoric when something doesn't go wrong somewhere. So we believe that being able to take friction, resolve that complexity, be a much more comprehensive partner for our traveling customers is really a powerful proposition. And the more we do it, the more we get excited about the potential. So you mentioned our peak [indiscernible]. You mentioned flights. It's still early days in our flight offering. So far, we're pleased with what we're seeing. When we launched flights initially, we expected that almost all of our clients' customers would be coming from existing customers are accommodation customers basically booking flights because that's where we're offering the product primarily. But we've been encouraged to see even in this stage that over 25% of the bookers that were seeing booking flights with us are new to us, completely . We haven't seen it ever on our platform on Booking.com. And a healthy percentage of them are booking accommodations because obviously, that -- it's that new fly cohort that's going to be the one that brings us new customers. And we're seeing a positive cross-sell. So there's early signs demonstrate that not only can we provide value to our existing customers, and we also find existing customers, the more things they book with us, the more likely they are to come back as a direct customer in the future, which is very important. But we're also now seeing that we're gaining new customers coming to us even at this relatively early stage in decent amounts on our flight platform, and we can drive cross-sell from those flight customers into accommodation. So we are pleased with how things are going there.

Maybe can you just -- that 25% number is really helpful. Maybe talk to us about that cross-sell opportunity you just mentioned. What strategies do you have in place? Or how do you think about keys to really retaining those new people you brought to the platform and making them Booking.com, Hotel and alternate accommodation customers?

Yes. So obviously, what we're doing is we through all of our booking funnels, particularly somebody coming into the flight but we're booking new, we want to get that flight booking because we want to convert our customer, make money. But we're also going to basically expose them to the accommodation offering either directly or via promotional discounts that make that available. It's relatively early stages in what we're doing. We're still experimenting different ways to optimize that conversion in other parts of our business like Priceline.com, we've got flights and accommodations for many many years and we've done a good job of optimizing that flight to a correlation cross-sell. We're at the earlier stage on Booking.com, although making progress and obviously using some of the tools from our toolbag we have elsewhere inside of the company. The other thing Booking.com is actually use the product, you see some of the intelligence at the back end starting to come through into the front end. So as you make bookings and if you make them within a roughly similar time period, it will automatically start to create a trip for you on the platform. And it will talk to you about your trip to wherever you're going next to. You don't need to make them at the same time as long as you make them to travel in a roughly comparable window, we'll start freeing a trip out of those combination of bookings. So we have the intelligence in the back end to start recognizing that you're doing more than one thing with us. So specifically, on our flights cross-sell, we're still experimenting different ways to either promote through availability or just visibility and/or through economic promotion for people to want to come back and book their accommodation with it afterwards. As you said, it really all drives in the same direction. What we're really trying to do here is drive is drive lot and drive repeat customers and frequency is the biggest factor for that. So not surprisingly, if you look at our Genius customers, our Genius customers will come back to us directly more often than our non-Genius customers. Our Genius Level 2 customers will come back to us more often directly than our genius Level 1 customers. So there's a big correlation between frequency and loyalty. Those things all drive together. I also mentioned there's a positive correlation between being able to solve multiple travel problems for customer and also being able to bring them back directly and not surprising, I think we'll come on to this later. We find the app is also very sticky in terms of how all of our mechanisms are bringing customers back directly. There are 3 ways you can interact with our platform as a direct customer. You can be an app customer, you can go the worldwide web or you can go on desktop. There is a app direct customers who also wants to come back to us more frequently as well.

Got it. That's good color. There's so much you can do to remove more friction in the booking process through using your targeting tools to reactivate people and to drive more loyalty and retention and frequency. One of the geographies where you really do seem to have made some good progress coming out of recovery has been the U.S. You talked about being above 2019 levels now since the first half of this year. It's much faster than your competitor in that region. I know there is a loss of small and large numbers, they're playing a role. . But I guess if we could sort of talk a little bit about the U.S. specifically, a couple of questions. Are there -- what factors do you sort of attribute to the success and what we think our share gains in the U.S. through recovery? And how do you think about that continuing into '22? And then you talked about new customers coming to the platform. As you're growing this U.S. business, are these new credit cards? Are these new people you haven't had before on the platform? Or is it more of just sort of your old customers who used to go to Europe, who used to book in Europe are now booking in the U.S.?

Okay, multiple aspects to that. So let me start off, we just can't recap on how well we're actually doing. So we've been seeing a very strong growth rates relative to 2019 in the U.S. since March of this year. And by very strong, I mean, much stronger than we were seeing in an normal environment. And it's dipped down to strong and back to very strong. So we've been doing well since the early part of this year in the U.S. marketplace. When we talk about the U.S. marketplace, we're talking about U.S. brokers, by the way, just to be clear. So we're not talking about people flying from Europe to the U.S. We're talking about how we're doing with people who are living in the U.S. And obviously, that has been much more driven towards the domestic bookings until recently because the international borders have been closed in all places like U.S. bookers traveling to Mexico in place led out also been strong. So we're talking about a U.S. bookers here when we talk about the U.S. marketplace. In terms of what we've been doing, it's not been a single board. We've been working on many, many ways to make our platform more interesting, more competitive than we have in the past for U.S. bookers. So we've been making sure we've been offering great value to our customers by improving our payment platform, which enables us to new bundling and merchandising opportunities. We've been working much more closely with our accommodation partners. We've been driving awareness through marketing and promotion. It seems like our back to travel campaign. We've expanded our alternative accommodations availability in the U.S. We've launched flights on the U.S. platform recently. And so we now bring a multiproduct offering to the marketplace, which we believe resonates in many U.S. customers. In addition, it's not only Booking.com, but Priceline has also been executing very well with a lot of blocking, tackling and all together, that creates a value proposition for their private customer segment. So we've been pleased, and I think we continue to do well. I think that what we've done is certainly is a set of sustainable gains, but it's not been wanting a thing. There are a lot of things all coming together with a much more focus on that U.S. book and what U.S. book is looking for, make sure we show up very strongly in the U.S. One of the things that I've often commented is that up until recently, the way we show up in the U.S., particularly on Booking.com as a platform is less complete than it used to be incase if you shop through European booker. And we had a whole lot of great success in the European marketplace. We're really kind of taking a leave from that and saying, okay, all those capabilities we offer to the European costs. We're going to make sure we offer most of them to the U.S. customer or be in a much more U.S. friendly centric point of view.

Got it. Let's talk about marketing a little bit and just sort of the strategic decisions that you've been making to get more people to that site and to raise awareness for the second. I think in 3Q '21, if we just look at ad spend as a percentage of gross bookings, it was somewhat elevated even relative to 3Q '19 levels. . You weren't alone. The other player -- the other leading OTA had a similar dynamic. I'm sure part of that is linked to getting awareness to capture demand as the world recovers. But I'd be curious to hear about what are you seeing from an ROI perspective? And then as you sort of as you look into '22 and you sort of think about how does the need to spend on advertising to continue to capture more users -- to bring more users to the platform, how does that play into your calculus of managing growth versus profitability?

Okay. So let's talk about the different pieces of that. So in the first half of '21, if you recall, we saw higher ROIs in our paid marketing than we did in 2019. In Q3, we saw slightly lower ROI, but don't forget, we called that at the beginning of the quarter. We should expect lower ROIs in Q3 from us because we think there's going to be a good bounce back in demand in travel in Q3, and we think there's an opportunity to kind of lean in. Remember, the best form of marketing is actually getting people to use our products. So the more people we get on the platform, the more likely the want to come back as repeat customer. We just talked about that dynamic a little minute or so ago. So we expected that level to be elevated. Over the long term, we think of that marketing channel as a very important channel for us. It's a great source of capturing new customers. We do capture new customers through our direct channel as well, but I think having a healthy balance across the business is a good thing. We want to continue to drive an increasing mix of direct customers. And we've been able to do that quite successfully. We saw a small dip back in the direct mix in 2020, although it stayed over 50%, which we'd be pleased about. But we're now higher than we were in 2019 and continue to increase in a positive direction. And obviously, that increase in direct mix will actually help us longer term. In fact, it helped us in Q3, just going back to Q3, there was some deleverage in the marketing line in Q3, so actually less than we expected. And if you kind of look at what we said about how much -- deleverage do we expecting in Q3, we said several points. We actually only saw a few points. That's because the ROIs actually came out roughly where we expected them to be in Q3. We had a slightly higher mix than we expected in the direct channel. So net-net, that was positive for us and actually worked out slightly better than we expected in Q3 when we made the comment at the beginning of the quarter.

Got it. Okay. Then the direct traffic mix point, I want to sort of follow up on that a little bit because I feel like there is this perception on Wall Street that Booking Holdings is very focused on increasing the percentage of business that's direct if there's like a target internally where you want to go from over 50% to over 60% or something. I guess I have 2 questions for you. one, what is your reaction to that? Is that actually the way you guys are thinking about direct traffic? You have goals where you want to reach a certain percentage thresholds? Or is it more dynamic? And then secondly, as you sort of think about the keys to increasing that direct traffic mix the next couple of years, what are sort of those some strategic areas to do that?

We don't have our goal. It is much more dynamic because ultimately, what we want to do is have more customers on our platform, build a bigger platform, a bigger market share. It will be great if everybody always came back directly. We don't really know that's not going to happen, and there are cohorts and segments of customers out there. There are the customers that we have who are more customers. And we're going to mention -- we now mention the app a little more. The more we can get them to use the app, the better. We have -- we disclosed that we now have more than 100 million monthly active users on the Booking.com app. That's a huge cohort. It's the most downloaded travel app globally, and that is another driver of direct. And there's a nice correlation between the increase in mix in total of our app and the increase of our direct business, and that's something that we are looking for. But we don't sit here and say, "Hey, it has to be 60 . It has to be 70," because we just want to have we will be very happy if the whole business got bigger on both sides as long as we're mixing in the right direction. So we don't want to have long growth expense of the other, if we can get both on continue to grow and we can get the positive conversion over time towards direct, and that's also a great equation for us as well. So in terms of drivers, a lot of the things that we're doing, I mentioned in the brief before, do help us get towards more direct interaction, laundry programs, connected trip and genius. We've recently done a soft launch in Genius Level 3. If you're a Genius customer and you done more than 15 bookings over the last 2 years and you open your app today, you see that you're now a Genius Level 3 customer, and you get more benefits from that you do on Genius Level 2. We expanded the Genius program down a little bits, So now to get to Genius Level 1, you have to be logged on with the account on the systems. So we made ourself benefits available to a much larger cohort than it was before. I mentioned that briefly, but I'll just say a few more issues about the app. The app is very strategic because not only is it a great booking experience because it's clean and it's on a phone, but it's a very important piece of real estate. Down the road, you think that app mobile users mean some people have hundreds of apps on their phone, but most people only use a couple of handfuls, maybe 20. And being one of those ones that are used a lot is a very powerful position to be and that app real estate is very important. And not just for the booking but also the app will be the best way to experience the connected trip because think about the connected trip, we're not just booking your accommodation of flights but we'll also help you with the ground transport, potentially with your traction that you want to go see a chain somewhere. We want to interact with you in -- on the internal experience. We want the customer support to be the best available via the app. It's something that actually becomes very dynamic with you. So that again drives frequency and drive use and drive people towards the platform. So those are all important things. And actually, you've seen us recently if you look at some of the programs we driving in terms of marketing, We've really been encouraging to download and use the app. If you think of the back to travel campaign we launched in the U.S. back in the spring. We rolled it out around Europe for most of the summer months. The credits that we offer to people for making their first booking the use on the second booking to do that, you have to download the app or if you haven't download the app you had to make the booking via the app. So that's a very important aspect of this whole equation as well.

Yes. The app to increase stickiness and just having a higher frequency and really just like more higher lifetime value customer, it's still -- it's key. And the connected trip seems to be part of that. Let me ask you about M&A a little bit. I think part of this actually may be linked and we sort of think about the connected trip. The Etraveli acquisition, I probably mispronounced it.

Good. Good. You did just right.

Not bad. I do my best. Because previously, you were business partners. I guess as you sort of think about bringing this asset in-house, what are sort of the strategic reasons to do that? And how does that impact your overall capability and flow on the flight product?

Yes. So you're right, Brian. We've been partnering with Etraveli for a couple of years, and Etraveli has been the technology that's been powering the rollout of flights at Booking.com. And the European flight market has a number of complexities, and opportunities that are different from the U.S. flights market. Although Etraveli is a global platform, its initial strength has been in the European marketplace where we are, of course, very strong from a Booking.com point of view. And having it in-house allows us to do more things directly together that we can't do on an arm's length relationship, including optimizing supply, emphasizing what Booking.com might need, integrating the pricing capabilities. There's a very sophisticated pricing engine that the travel like team has built because the most of their business, they expose via a number of meta-site brands right now, which is very helpful to have that capability. And then also bringing their -- just their management and their expertise in-house and we're all casting around the same table together. So it's -- we talked about flights, we talked about how important flights are for the connected trip. It's really important that we own our own destiny and how that technology and that management team are capability in-house. So we're excited about it. So we've always just announced, it's not closed yet, but we're excited about the potential of being on the same team as we look around and we really try and drive as much market share compliance as we can.

I'll watch for the integration, the changes to that after hopefully is approved and closed. Similar question on Getaroom. There's -- I know there's been sort of a lot of back and forth and sort of debates the last 5 to 10 years about how Booking.com and how Expedia are going to fit into the B2B space. So maybe talk to us about how you think about the B2B space how Getaroom fits in. And how do you think about the investments needed to really make that a larger part of the overall portfolio?

Yes. The B2B space is interesting. And to your point, it doesn't get as much exposure because it doesn't have a customer-facing brand, right? We basically -- we're signed to other travel partners who have their customer-facing brands. But the B2B space is intent from a couple of points of view: a, kind of with Getaroom being principally a U.S.-based company, and it helps us further with our footprint globals in the U.S. But also when we go talk to our hotel partners, it gives us a broader conversation. We're not just talking about our own brands and what we do on the B2C side, but let us have a B2B conversation with the partners as well. So we become a more complete potential partner for them from a distribution channel point of view. It's also a business that's not new to us. We actually have today, with Pricelines, we call PPN, a Priceline Partner Network, which is a B2B player. Again, the reason I just talked about doesn't get a lot of airtime externally, but with Getaroom and PPN, we've become a much more capable, much more complete player in the U.S. marketplace and in fact, we'll be doing a reverse integration. We'll be actually merging PPN into Getaroom to create a bigger, more competitive business that will actually sit on the price line. So this is another nice fit for us as well. And we're excited about both [indiscernible]. We obviously do reason -- different market political points different reasons, but you can see how they kind of fit our strategy with obviously Etraveli booking and the connected trip and Getaroom and more back into the U.S. marketplace. We just talked a little about earlier and having a more complete offering so we can be more competitive as a partner for the hotel suppliers and mainly in the U.S. marketplace. Okay.

Ask another about supply, specifically alternative accommodation supply. This is a widely debated topic in the industry about alternative accommodation supply in general between you and the other players in the space. So my question, I have a couple of them. One, talk to us about geographically, where you've made the most progress from a supply perspective. Two, where do you still see the most area for low-hanging fruit to really grow that supply? And then the third one is, as you observed behavior on the platform, user behavior, are there any areas where you are alternative accommodation supply-constrained, where you're seeing churn or people not booking because you don't have the inventory you'd like to have yet?

Okay. Let's take those in order. So where we'd be most invested for longer in alternative accommodations is in Europe. We've been building a business there for over 15 years. And we have a broad portfolio of alternative supply in Europe. And I think that our European customers don't necessarily draw the distinction. They say, "Hey, Booking.com is just a great place to book accommodations. And I've got the widest choice available. It's all in one place," and that's exactly what we wanted to think, and our supply there is very deep and very broad. In the U.S., where a lot of the conversation goes, we've got to remember, it has not been a focus for us until recently when Booking.com came into the U.S. It was less category hotel platform. Remember how well we've been doing so far in the U.S.? That's basically off that great hotel platform with obviously less mix of alternative accommodations because we don't lie for a few years. And that's why to your point a low hanging fruits, I think we have more opportunity there moving forward. We have been adding supply to the platform, and we're still focused upon adding more single property owner type supply in more rural locations, generally through multi-property partners as a way to get access to that supply more efficiently. And we continue to see that as a low hanging fruit. In terms of your last question, areas where we are constrained, I'd say that people are not as aware of our alternative offerings in the U.S. as they would be within Europe. And you'll see us over time start to kind of address that. Obviously, you have to get supply have equally address the [indiscernible] you'll see us work on that. Again, in Europe, I don't think that is a factor. But I would say this -- and then also just comment is that there's been a fairly interesting dynamic during COVID where there's a huge shift towards alternative accommodations in summer 2020. Remember, there was a massive mix shift for us and for the industry when things were much more uncertain. And I point out to everybody that, across the sector, hotels did very well in Q3 of this last year. So relative to Q2, hotels had a much better recovery than alternative data. When we look across our business, in Q3, yes, there was a mix shift towards alternative compared to 2019, but it was not that pronounced because the hotels have really done a good job at kind of responding to the market and balancing back again. So we still believe that the best long-term solution is to have both. But of course, we haven't had both for as long in every part of the world.

We're up against the Zoom clock. I want to ask one more about capital returns and the balance sheet. You've talked about how you plan on restarting returning capital to shareholders in early '22. There were plans to complete your $10.4 billion authorization over the next few years. I guess that would imply $3 billion to $3.5 billion a year if we just sort of straight line it. If I go back to 2019, I think you guys bought about $8 billion of stock back. So just as we are sort of trying to assess externally puts and takes of what would cause faster or slower repurchases to return more capital to shareholders, what are the factors that you guys are considering to sort of determine how fast is fast?

You're right with the numbers. There's no point in repeating those. You've got them spot on. We wanted to signal that we're -- that we expect to start a more structured and regular return of capital to shareholders. Obviously, the business hasn't recovered yet. So we're not sitting in 2019 levels of EBITDA right now. We don't expect it at the time in which we restart our purchase so that's a factor. And then of course, we've also got to evaluate the level of spend on repurchase over time on ways against the other primary needs for cash for the business, which is investing in the business organically and inorganically. Again, we're talking about returning our excess cash to shareholders. The best thing we can do with our cash is invest in the high ROI projects in Chile. And you saw we just made a couple of acquisitions that we haven't done as many recently, but there are opportunities. and then we want to have -- make sure we have money to invest in the business and think about some of these market share opportunities, some of these new verticals which we're building out. So it's a balance. But I think that the primary driver would be how quickly we get back to full recovery.

Got it All right. David, thank you very much for your time. It's always good to see you. Hopefully, we will see each other live next year in London. Stay safe, and we will talk to you soon. .

Thank you, Brian, and I look forward to that live game to you.

Done and done. Thank you, everyone.