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

All right. Thank you, everyone, for joining us. Welcome to day 2 of the 2023 Nasdaq Investor Conference. We hope it's been a productive couple of days. We're very thrilled to have David Goulden with us, the CFO of Booking Holdings. Before we get started, David, let me read the all important disclosures.

Thank you. Please do that.

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. Some of the statements made today by Booking Holdings may be considered forward-looking. These statements include 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 Form 10-Q for a discussion of the risk factors that may impact actual results. How are you doing?

Good, you?

Good. Good.

Great being here.

Thanks for joining us again.

Very welcome.

Our annual catch up on what is going on in the state of travel and the year ahead in travel.

So maybe let's sort of start with that. So the state of the overall travel market and sort of you've made some comments at earnings about sort of the demand resiliency and demand trends around the consumer. What are sort of the latest commentary you're making about sort of the state of travel demand you're seeing through Booking?

Yes. So what we're seeing is a very healthy consumer profile right now. We look at a couple of things to understand what's happening. Obviously, the growth rate, that's kind of obvious, and the growth rates are strong. But then we look into future, we see what are the early indicators. And typically what happens is if things do slow down, which is kind of what's on the back of people's mind, it manifests itself in 2 ways. People will either trade down from a higher star to a lower star property or they will shorten their length of stay. We're not seeing that in any of our markets. And moreover, we're actually seeing the length of stay increase. So people -- the booking window increase. So people are actually wanting to book more foot ahead than where we thought it usually would be a sign of confidence. So we see the consumer demand as strong. We see, obviously, we look at the data, we see a movement towards services are on goods. And also bear in mind that the average travel, if there is such a thing, on a platform and they're spending a few thousand euros or dollars a year on the family vacation, maybe once or twice or 3 times or more. They're in the upper category from an income point of view. So the balance sheet is a little stronger than the average as well. So I think that bodes positively. But we see a strong outlook. And because of the longer booking window, we actually have more visibility and more on the books in 2024 than we've had either this time looking into '23 or in 2019, looking into 2020.

Got it. Okay. I want to sort of get into the regions a little bit and ask about the U.S., but maybe before I do the U.S. discussion, could you just talk ADRs a little bit. ADRs over the course of this year, and it is macro demand linked, have held in better than we thought certainly in a lot of different channels. So maybe just sort of talk to us about what you're seeing from an ADR perspective. And how do you think about sort of reasonable ranges of outcomes for ADRs looking into 2024?

Yes. So obviously, ADRs have acted a little differently in this recovery than they have in prior recoveries. Typically, it's a lagging indicator. Demand comes back first, then ADRs catch up. This time around, ADRs accelerated faster than demand, right? So ADRs will be elevated for a couple of years now and obviously, we're only getting back to probably the total levels of travel from a volume point of view than we were in 2019, so that's a little unusual. A lot of that was driven by inflationary pressure we believe. Talking to the hoteliers and property owners, they were very much at the epicenter of multiple factors around inflation, whether it be labor costs or utilities, food, beverage, all those things were high cost drivers. What we're seeing right now is we're seeing a reduction in the rate of increase. So it's a bit like inflation is coming down, but they're still going up, but the reduction in the rate of increase is there. We believe that for this quarter, the fourth quarter, we guide to probably about a 2% year-on-year increase in ADRs. It's lower than it has been and more in line with inflation. We have a couple of points of geo mix against us on there because Asia is still recovering faster. So a 4 percentage points increase on a like region basis, but that's a more moderate rate. So I think going forward, that seems to be the way of thinking about ADRs into next year. Assuming there's not a big downturn, I think ADRs will be steady to increasing a little bit, probably more in line with inflation, and not doing what they've been doing for the last couple of years in terms of the rate of increase.

Got it. And is there any difference in the ADR trends in your traditional hotel business versus your alternative accommodation properties?

Nothing appreciable. No. I mean they're both up 30% versus 2019. It seems like a big number, and it is, but bear in mind, we're talking 4 years worth of compounding impact, right? So on that basis, it doesn't look quite so crazy. But no, I would say nothing to call out in terms of differences.

Okay. Let's talk about the U.S. a little bit. You made some very good progress in the U.S. and taking more share of the overall leisure travel business, leisure travel demand post COVID, but it seems like the business has decelerated a bit based on your 3Q commentary and sort of extrapolation into 4Q, et cetera. I guess the question is, as we look into '24, what strategic initiatives do you have in place to sort of reaccelerate the U.S. growth to sort of start taking share once again?

Yes, I think you have to separate the market from us in both these cases. I think that the U.S. growth rate, the market growth rate has struggled a little bit this year compared to other regions because if you remember, U.S. had a significant rebound in growth in 2022, it was way ahead of the rest of the world. So I think year-on-year, there's been some digestion comparisons in the U.S. I think other markets in the world have recovered on a more linear basis. So maybe it will be less of a factor there. When we look at how we're doing in our core segment in the U.S., which is really the business to consumer leisure segment, right? So take out business to business, takeout of business travel, take out [ retail ], et cetera, I think we've been doing well there, growing faster than the market, although not getting quite as much share we gained in the last couple of years, but still gaining share. So the path forward is not that much different than the path we've been taking. It's the kind of same playbook we've worked in, in other markets about having a better product, enabling people to find the right property at the right price, having great customer service, that's the playbook. And then of course, adding to that with the other elements of the business, providing payments, providing flights, providing ground transportation, doing great marketing, increasing our brand awareness, building out the alternative profile, which is obviously something we have a bit more lifting to do in the U.S. than elsewhere. And ultimately pull that all together in the connected trip. I mean that is what our playbook is. And that's how we'll continue to gain in the U.S.

Okay. There's some other data as well that sort of speaks to how some of the cross-border demand trends have stayed stronger than even domestic U.S. trends, that's part of it probably too impacting it.

Yes, I think people in the U.S. have been more exposed to domestic travel, really had a tough year this year because in the U.S. the big rebound we saw in growth last year was a lot of domestic travel, and then a lot of that has moved to international. Now, of course, we see both sides of that. But if you've been a travel player and more for, you'll look at some of those smaller regional airlines that have been more exposed to domestic travel. They've had a much harder time, for example, than the international airlines. And the same would apply to the OTAs as well.

Yes. Yes, that makes sense. Okay. So let's talk about sort of the guideposts and targets you've sort of laid out for the post-COVID growth algorithm. I know in the past, you sort of talked about how you think about growth 2019 versus post COVID, like how fast you're going to grow versus 2019. Walk us through again sort of your latest way to think about KPI, bookings, revenue, EPS growth. However, you think about it going forward versus pre-COVID? And what are the initiatives to kind of drive those numbers?

Yes. Great, Brian. So that's very helpful. So the KPIs, if you look at where we were pre-COVID, let's call it, 2019, our last clean full year before COVID, and look at what the growth rates were in the business, I point you to kind of 3 key numbers. And this is in constant currency to make it comparable with what you might look at going forward. Our bookings and revenue were both growing at 8%. Earnings per share were growing at 15% and our model going forward is based upon all the things we've done to invest and build from the capabilities in the business, which I'll come back to just a second. Our model is or the algo is that when we get to normal market growth rates again, whenever they are, it's probably '24, '25 or '24, that's where the market -- our growth rate would turn back to a more normal rate, we believe we can grow faster than we did in those -- against each of those metrics than we did in 2019, even though the business is and will be that much bigger. So you may say, well, that is defying the law of physics a little bit, but it's not because we built a lot of capabilities that didn't exist in the business. So if you go back to the business in 2019, obviously, most of our business is Booking.com, it was Booking.com, so I'll focus there. We had 2 major, if you like, pillars to the stool that supported that growth. We had a great accommodations business, very broad and with scale advantage over anybody else globally, and we had great performance marketing. Those really were the 2 foundations that, that business was grown upon. And we've kept those and we've enhanced it but we added a whole lot to it. So in the accommodation space, now we have a much big alternative offering to complement our core hotel offering. Alternatives are 1/3 of our total business. Performance marketing is still a strong asset. We've built out our payments platform, which now accounts for over half of our TCV of bookings. On the back of that payments platform, we've built a second marketing muscle called merchandising. We weren't participating in the pricing equation at all in 2019. Now we can selectively and targetedly. So that's the second marketing engine we didn't have before. We've become much more proactive and strategic in brand. So we really now have 3 demand generating channels compared to only one. Back in 2019, in Booking.com, we only sold accommodations. Now we have Booking.com flights, attractions, ground transportation, taxi insurance, none of those existed prior to that. The app was about just over 1/4 of our bookings in 2019, now it's over half. And we have Genius and we have a lodging program, which is now branded and very strong and well recognized with 3 different tiers. The Genius program, that was an internal only program only. So I'd say shame on us, if we can't grow that new profile faster than we grew the old profile, which is exactly why we believe we can support that commitment.

It's pretty layered cake. A lot of layers to that. That makes sense. Over the course of the last 12 months, you and I have had a lot of discussions about AI. A lot of generative AI discussions. It's about a year ago. We were hanging out and everyone sort of figuring out what is the ChatGPT thing, 12 months have now passed. So we're 12 months since last year when all that discussion really started. Let's sort of start with the opportunities and how you think about what are the biggest opportunities for Booking.com and the OTAs in general from using these large language models and generative AI capabilities over the long term?

Yes. I put it into 3 buckets. So the first would be our vision. So we, for a long time, back in 2019, have been talking about this concept of a connected trip where we want to use technology to enable customers to plan, book and experience travel in a fundamentally different way. That has always depended upon the availability of more sophisticated AI technologies that exist in them. We've built our business on AI for decades plus, right? Almost all the things that our platforms do are powered by AI, where it's how we bid on paid channels, how we present offerings to customers, it's AI engines behind that. So first, this is great because this now enables us to go forward in our vision. And so what are we doing? We're doing a couple of things. So we're already using some of these LLMs powered tools to create travel systems inside of our entire offering. So we talked about booking.com, how important the app is now. Now if you're in the U.S. or in the U.K., so far, it's only in those 2 markets, but we now have an AI-powered, gen AI-powered travel assistance in the booking.com app that will let you start planning about your trip, and it's very smart because it has an abstraction layer, so we can plug in multiple large language modules in the future. And not only does it rely upon the public data, it also through our machine learning gateways gets to our data. So it brings up our data which includes things like availability on properties that aren't available on the public sector. So it lets you basically use the best of both worlds to plan and then book a trip. You don't need to leave the chat system to actually book. So far, it only works on accommodation, but we'll make it work across the entire set of our offerings. So we're using it. We're getting great feedback. It actually, it works. We were in Frankfurt this week, and I pulled it out and showed it to some investors and everybody was kind of impressed, and so was I because I hadn't used it for a couple of weeks, and it got better than it did last time. We have other parts of the business where we're experimenting again in the customer booking path in Priceline, one of our U.S. brands. We have, again, a travel assistant. We put that at the bottom of the booking funnel, right, where people might want to book a hotel and it's there to ask questions to it just before you make your booking. And it will -- we're again getting great experience. So people will go in and ask maybe about locations, what's nearby, cancellation policies to go back into our data to find that out, pet policies, may go back to hotel site, et cetera. These are things that people look at and interestingly enough, in terms of the productivity side, we now have good data that says of people who actually use that tool before they book are less likely to make a customer service call afterwards. So I just save some money. I just converted more expensive customer service call into a large language module query. So those are things that we're doing internally. We really believe that we can enhance our products and particularly Booking.com, where the connected trip is the kind of centerpiece of the vision. This is what we need to get there. We need to be able to massively personalize the booking experience, the planning experience, the booking experience, and we need to be able to reactively and proactively provide customer support to people based upon what happens to their booking. And we also need to be able to act with them, react with them in trip based on what's happening. Maybe you've gone to a beach vacation and it's raining, so what do we do? We kind of recommend places that you might want to go. And by the way, here's an offer to go book it and give access to the path on Booking.com. All these things are possible with this influx of technology. So it really plays into our strategy. And then internally, I shouldn't miss up the internal side of this, there are productivity gains in multiple parts of the business. I think many parts of most businesses will be touched in some way, shape or form by these technologies, we have our focus on 2 areas right now where we're running a bunch of programs and projects. One, I mentioned customer service. I talked about how we can avoid customer service calls by using these tools upfront. But obviously, the customer service experience. We already have chatbots, but to make them much more intelligent and to be able to replace more of the human interaction with the machine interaction. That's real. We're doing some work there. And then the other big that, I'd say, for tech companies like ours is developer productivity, using these tools to help developers become more productive, convert your lower experienced engineers into higher experience engineers, there's real leverage there, and we're getting some good results in the work we're doing there as well. Okay?

That's great. There's a lot there. Let me throw the AI question at you a different way. There's a point in the consumer funnel where a lot of people still start on Google to do their travel research, even though, again, you still have a very, very successful performance business to buy traffic off of Google to bring to your site. We think there's a possibility that at some point, Google could have a next-gen travel assistant to roll out where they could help plan my trip for the weekend in Europe. How do you sort of think about that risk of a higher percentage of people using a Google tool first instead of a Booking tool to do like travel assistant? Does that impact the paid mix? Like how do you sort of think about that long term?

I think there's a few aspects to that. I mean, Google will, I'm sure, want to continue to monetize their search business. So they'll want to make sure it's attractive to people like us to want to advertise on their platform. We spend billions of dollars a year. We're one of their biggest customers. So I'm sure as their search experience evolves, and we'll evolve with them as we have done over many years, of course, we'll be building our own through that, and I talked about what we're doing on Booking.com. We -- now, by definition, well over half of our mix is direct. More than half of our bookings are starting on our platforms rather than somebody else's platform, which we're paying to bring into our platform. To the extent that I'm sure there'll be people will -- I'm sure there'll be AI-powered travel assistance and they'll do some of the planning function, right? We'll have a great planning tool as well, but that's probably where they'll stop because what these travel systems won't have is the full depth of capability that we as an online travel agent have. We have active relationships with over 3 million properties around the world in the accommodation space where we have real-time availability. That's not available publicly. We have similar with airlines and all the other players. We have thousands of people doing customer service. We have a payments platform where you can pay for it all in one place and manage, and I can go on and on. So again, it's kind of how you -- to your point, what do you do at the top of the funnel and what tools can you create? We believe we are a combination of our travel assistant sitting inside of our data and so the travel assistant having access to public data and all the data that we have, we think we can still build in totality, a differentiated travel offering. And we believe in that world, we continue to increase our direct mix.

In this new AI world, data is more valuable than ever. And all the connections, the live real-time connections that you have with all the hotels is really valuable. So that's going to be a key differentiator. I agree with that. Okay. Earlier you mentioned sort of the marketing muscle, the merchandising muscle and sort of the way you developed a couple -- multiple ways to bring people into the funnel to convert. So remind us again how we should think about marketing plus merchandising as a percentage of bookings this year and then sort of strategically into 2024, how do we think about sort of leverage or spend on marketing and merchandising in '24.

Yes. So I'll rewind a little bit to what we did during the current recovery year. So if you go back to 2019, again, our benchmark year for the kind of growth hurdles, that year, we spent 5.5% of our total gross bookings on marketing and merchandising combined. And we actually -- and that was less than we spent in 2018 because of the direct mix had increased. So that was going down. So -- but what we decided to do during COVID was something that may be bold, but it's worked out well for us. We chose to kind of lean in and spend more because how many opportunities do you get for the travel industry to grow at 30%, 40%, 50% a year, what it did in '21 and '22 as it was recovered. So we did that proactively. So you get to last year, and that spend on marketing and merchandising went up to close to 6% of gross bookings, which, of course, as potential revenue is a really big impact, right, a pretty bold increase. but there again, back to what we were doing, back to where we are now, as a result of that, let's assume that travel demand globally from a room night point of view is back to almost breakeven. We're 25% above where we were in 2019. So we've really -- that's paid off for us. So -- and this year, you can see that we've started against the higher -- we're still leading in because we think there's a good opportunity to continue to gain share. But this year, we will spend less on marketing and merchandising than we did last year, so starting to lever and still [indiscernible] in 2019. And that leverage on the marketing and merchandising spend because marketing and merchandising combined is the biggest spend in our income statement, that leverage, we do expect to see continuing going forward, probably driven more than anything else by the direct mix increase, obviously, that's a key part of our strategy. And to the extent that continues, which we expect it to, then you just got a small piece of the total business where you're having to spend on marketing and merchandising and more of it coming in directly.

Got it. Okay. And then the other pieces of the OpEx, you mentioned sort of the customer service, seeing some benefits from AI, assisted quoting, seeing some benefits from AI. Is it -- are we far enough along or you could see efficiency in those lines in '24 yet? Or is it still too early in sort of customer service and gen AI benefits to developers to see leverage in '24?

Yes. I don't think the gen AI is going to drive a quantum change in things in '24. I think, I guess, incremental benefits, we'll be rolling it out more particularly in something like customer service, you have to have build the technology in and you have to have a modern customer search platform, which we now have, but that's going to take some time. We'll probably be introducing some more -- some smarter bots and things. I don't think it will make a big difference. I think the developer productivity one may come a little quicker as we roll that out across a bigger piece of our development team. But -- and generally, I think our story on the more direct fixed costs, which is kind of where you're talking, Brian, is that we have been investing, right? When I talk about what we did in 2019, what we do in 2024 and all the differences, you don't get that for free. There's a lot of technologies, there's a lot of investment, there's a lot of new people you need to build out these capabilities. And we have been delevering on that more fixed cost base for a couple of years, again, kind of by design. And if you think about it, a fairly bold strategy because we were spending more on marketing merchandising and more on fixed cost, but obviously, you can see the benefit in both sides, right? You see the growth on one side and you see the capabilities that we've built on the other side. So I think -- so our commitment is that next year, we'll grow that fixed cost combination of G&A, IT and personnel appreciably slower than we are doing this year. And we do expect to get back to leverage over time on our fixed cost base.

Got it. Okay. That's helpful. One of the other pieces of the layer cake you mentioned earlier was Genius and Loyalty. And I feel like over the years in online travel, we have this debate is Loyalty high ROI, low ROI. Where are we now on Loyalty is sort of has swung back and forth over the last 15 years. So a question on Genius. One, what is sort of the latest update you have on Genius adoption, Genius penetration that you'll share? What can you tell us about purchase behavior of geniuses versus non-geniuses? And then on the go forward, what are the keys to driving further Genius adoption on the platform?

Yes. So as I mentioned in my comments before in '19 versus now, we have the single Genius, it was internal. And it's a little story because the marketing [indiscernible] said, well, I want to make sure that I always have a holdout group of unlucky geniuses who don't get Genius to see exactly the benefit of one versus the other. And that's a helpful thing from a marketing point of view, but doesn't outweigh the benefit of actually bringing the program out into the wild and making a think of it, which is what we did in 2020 and beyond. So now Genius, so when we made Genius public, its first versions, there is basically 2 tiers, Genius 1 and Genius 2 and to get to Genius 1, you had to book and stay twice in 2 years, and the Genius 2 book and stay 5x. And that was the -- and then that was obviously the higher end of our customer base. Now Genius has expanded further. We, in 2021, introduced a new redefined Tier 1 to anybody who has logged-on account. So you don't have to make your first booking, you get a Genius benefit and then raise the bar on the other 2 tiers. So now becoming Genius Level 2, you have to have booked and stay 5 times in 2 years and Genius level 3 booked and stay 15 times in 2 years. And we have millions of people with Genius Level 3, right? So it's not just -- given the size of our customer base, that's a big group still. So that now enables us to create tiered benefits, right? So the base unit is level 1 benefits are very attractive, but obviously, you get better and better when you go to 2 and 3. Now where are we taking it? Not surprisingly, we've taken it in the direction of the connected trip. So Genius historically has been an accommodation centric program. That's where most of the benefits lay right now. By the way the genius of Genius is that almost all those benefits are provided by the hoteliers or by the property providers because we can show them that they're going to get incremental demand if they market themselves attractively to our top customers. So that's really good. Also, it makes our, if you like, Genius closed user group more attractive than people who are not in that program. But where we're going to take it is now you start to see us offering Genius benefit for rental cars inside of Booking.com. And our plan would be sometimes around next year, all verticals that we have will have Genius benefits. And then we'll take more of our merchandising and apply that to Genius customers. So entice more loyal customers towards the connected trip, give them incentives for doing more than one thing with us. For example, if you're at Genius level 3 customer and you're making a high-value accommodation booking, we may say, okay, we'll pay for your pickup ride from the airport or train station, et cetera, and that's another form of merchandising. So it's actually an important program. It will become more prominent as we get further down the route towards the connected trip.

The genius of Genius.

Exactly.

It felt like an ad campaign. If you -- basically the tagline. Let's talk about alternative accommodations. So you've -- another area you've made a lot of progress is alternative accommodations in the last few years. So one, just sort of update us, you mentioned is about 1/3 of the business or 30% of the business. How fast is that growing at this point? Where have you made the most progress? And as you kind of look into '24, what geos or types of inventory are you sort of most focused on adding to the alternative accommodation business?

Yes. So we have made good progress. We're very pleased with it. It's now 1/3, not 30%. It's 1/3 of our bookings at Booking.com are from the alternative segment, that grew 24% year-on-year last year -- last quarter, sorry, in Q3 compared to '15. In total, you do the math, that meant that the hotel sector were still double digits, low double digits. So twice the rate. No, I don't think we're going to have that 2:1 difference going forward. But we're very pleased with how things are going. I think we expect the alternative segment to grow a few percentage points faster than the total business going forward. We have been adding inventory. We now have 7.2 million listings in the alternative space. That's up 9% higher than last year. We want to continue to build that out. In terms of focus, we talked about the average being 1/3, the average mix being 1/3, in Europe, that's a fair amount higher than 1/3. And in the U.S., we've been very vocal about this, it's a fair amount lower because the main reason but one is that we've been doing alternative accommodations in Europe for 15-plus years, and we are several years behind that in terms of just time of evolution in the U.S. So we're probably 7 or 8 years behind that in terms of when we started building out one versus the other. Now we don't expect it to take 7 or 8 years for us to catch up. We'll take advantage of the learnings, but that's a key area. So to answer your question, the U.S. continues to be a big -- a key focus for acquisition. The listings grew faster in the U.S. than any other marketplace compared to other markets when I look at that 8%, 9% growth in year-on-year listings, and we continue to push to grow the listing of the business in the U.S., the fastest.

Got it. So grow a few hundred basis points faster than the other piece.

Than the total.

Than the total, okay. That's helpful. And by my math, I think you're adding more alternative accommodation room nights than the other leader in that category. So it's been very, very good growth, you have to comment, that's just my math.

I'll let you do the math.

The last thing before the clock expires is around capital allocation. You sort of talked about the targets going forward versus 2019 and sort of EPS growth. Just talk to us again about how you think about capital allocation, share repurchases and offsetting some of the stock-based compensation dilution.

Well, I mean, capital allocation should more than offset stock-based compensation dilution. We view stock-based compensation as a real expense. We actually view it as a more valuable currency than cash because it should go up more than cash does in value and we don't back it out of any of our EPS numbers. So -- and as you've seen, our buybacks are making a significant difference to our share count and therefore, way offsetting stock-based compensation dilution. Going forward, we put out our framework, we said we'd spend $24 billion on buybacks over 4 years starting this year. We're on track to do more than that. And we also laid out a framework where between growth in the EBITDA of the business and being a little bit less conservative on our balance sheet and staying around 2x gross leverage on EBITDA and going to 1x net on net leverage, we can actually turbocharge the buybacks over an extended period of time. So expect us to continue to be aggressively returning capital to shareholders.

All right. Well, David?

Thank you.

Genius of Genius, it's TV. This is where you heard it first.

Thank you.