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

Okay. Good morning, everyone. Welcome to day 2 of the 2024 NASDAQ Tech Conference. We're really thrilled to have Booking Holdings with us today. Ewout Steenbergen joins us, the CFO of Booking Holdings. Thank you so much for joining us.

Yes, good morning. Thanks, Brian.

We hope it's a really productive day for everyone. Before all the productivity begins, let me read some disclosures. 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 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 Holdings 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.

Good to have that out of the way.

Exactly. We covered that and so far, so good.

All right, Ewout, well, there's a lot to sort of talk about in the overall business and in the travel industry. I know you've been with the company now for about 9 months, but maybe let's just sort of start with the updated 8-K overnight and sort of what you announced there and we can sort of talk about like philosophy and how to think about the impact of that?

Yes. So let me give a little bit of context around that 8-K, where we put some quantifications out with respect to the transformational program that we're undertaking within the company. So first of all, why are we doing this? The first reason is, as we have told you before, our intention is to grow our top line faster than our fixed OpEx line over the next couple of years. And we have been upside down from that perspective in the more recent past. So we need, of course, to take management actions in order to be in that right place because driving efficiencies within the organization is, from our perspective, a really important objective. The second reason why we are doing this is what we are looking for is really transformation. We are looking internally at some employee engagement surveys where we get feedback from our teams and they're saying decision-making has become a bit slower, accountability has become a little bit more unclear. And the reasons why they are saying it, we have been adding so many new initiatives over the last few years from flights to payments to attractions to many other activities and the organizational complexity has grown. So this gives us an opportunity to really simplify the organization, to look at opportunities to make it more agile, faster moving, quicker decision-making, again, more entrepreneurial, basically back to the roots of the company, where the company has originally always been very strong at. So that's the second reason why we are doing it. The third reason is, this gives us a really good opportunity to reinvest in growth initiatives. We want to be very careful with our scarce resources, and we would like to use it as much as possible to drive future growth. And the fascinating part for me of Booking Holdings is that we have so many growth opportunities that we can still go after and actually grow faster than the market over the next couple of years. If this is around, I already mentioned flights, attractions, ride share, rental cars, U.S., Asia, payments and fintech and many other areas. So we would like to free up resources, reinvest in all of these growth initiatives and in that way, be on the trajectory of a faster top line growth than we otherwise would have been over the next couple of years.

Okay. That's good color. I know you -- since you've been in the role, you've talked a lot about fixed costs growing slower than revenue. And now this is sort of an example of that. So it sounds like in the 8-K, we're sort of talking $400 million to $450 million of run rate cost reductions. Just as we're sort of thinking through philosophically, the level of reinvestment of that as opposed to letting flow through, is there any way we can sort of think through how much of that is going to be reinvested in all the core and growth initiatives as opposed to flowing through to shareholders?

Yes. Maybe two comments on that. First, I think it's important to clarify when it is showing up. Because I don't want anyone to really mis-model this. So we would expect that the first benefit would come in more in the second half of 2025. And then the vast majority on the basis of what period we can realize these benefits to come in after 2025. It's not all on fixed OpEx line. There will be also benefits on S&O and some other lines as well. So there will be a big chunk in fixed OpEx, but it also will show in some other lines. Brian, you asked about more the philosophy and from a philosophical perspective. What we're trying to do is to separate these two mechanisms. On the one hand, looking for those opportunities for efficiencies. And obviously, that makes sense with the scale that we have as a company. The next traveler that comes to us, we should be able to achieve much higher economics on that next traveler because we have the fixed infrastructure in place. We have built out this flight platform, payments platform and so on. If the next traveler comes, we don't need a new office space, a new data center. So the incremental economics of that next traveler that comes to us should always be higher. So I think any good organization is always focused on really delivering on healthy efficiencies and economies of scale. But then we separate the process of reinvestments because the areas where you can find the opportunities is not necessarily the areas where you want to reinvest. To earmark a certain budget for that, make very specific decisions with the senior executive team of where do we reinvest by how much, track those initiatives separately and be able to speak to you, to our shareholders, in a transparent way and explain how that works and where those benefits show up. But that means we have a choice. How much do we let flow through the bottom line versus how much do we reinvest? Philosophically, reinvesting, we believe, is the most attractive way to generate value for our shareholders because with our margins, if we can grow the company faster, that's, of course, great. But will there be a little bit of margin expansion at the same time? Yes, that should also be a reasonable expectation.

Understood. Okay. Well, let's talk about the areas of investment in the core and some of the secondary sort of emerging areas. I think your -- the disclosure you gave on regional growth is really helpful nowadays. It's really interesting to me when we sort of look at what's happened with the business where Europe, your largest business, really accelerated nicely to high single-digit growth in the third quarter. Actually, it looks like it's even growing faster than rest of world, which we'll get to in a second. But that Europe business, which is so large accelerating, how much of that is macro as opposed to micro execution? Is there anything that you would call out at a micro level that sort of gives you confidence like here's how we keep Europe growing at this clip off of this large base?

Yes. A couple of things we're seeing in Europe. We have seen consumer sentiment improving from August onwards. Second quarter was a little light. Maybe there was a bit of the destruction and some of the large sports events like the European Football Championship, the Olympics. But what you then usually see that then reversing again in the period afterwards. But here, we're seeing it continuing as well. So there's definitely some positive consumer sentiment. What we're also seeing is an expansion of the booking window. So people are saying, "You know what, I am booking earlier for my skiing trip in February. I'm booking earlier for my trip in Easter next year." So that is adding volume to it. But there is also, I think, idiosyncratic questions. What we are seeing as customers like our proposition, they trust us. They believe we give them a fair deal. We deliver good value and service to them. They go to the app. It's easy and convenient to book there. The credit card is there, easy to adjust, easy to cancel, now we have the flights there. "Oh, you know what, let me try and book a flight. It was actually a good experience. Maybe I do that more in the future. I book my rental car there as well." So I think the effect of travelers liking to come to us, liking our platform, coming back more often, we are seeing more repeat. So more travelers booking more times for us during the year. We're seeing more travelers booking across multiple verticals now. We're seeing travelers moving up more from a Genius loyalty status to Levels 2 and 3, we see more direct business coming to us. So these are, I think, all indicators that the proposition we have in the market is really having positive traction because I think all of these indicators are, of course, very much correlated and are all pointing in the same direction.

Yes, they are. The infamous flywheel in Europe seems to be spinning away. Now in the U.S., it's a little bit of the opposite, it looks like, at least based on your disclosure where it's sort of the U.S. looks like it's sort of growing, call it, 3% to 4% slower than where it had been in sort of the high single digits before that. What -- how do you think about where you want to execute in the U.S. to sort of reaccelerate that and maybe start to see some of the type of growth you're seeing in Europe and the U.S.? What are sort of the executional areas?

Yes. So first, Brian, I think the U.S. from all the regions in the world, from a market perspective has been the slowest grower across the world, more or less flat...

Macro.

In terms of market. We have been growing a bit faster than market. So we believe we're gaining a position in the U.S. step-by-step, slowly, but every quarter, we're gaining a bit of share. So we have been growing low to mid-single digits over the last couple of quarters. Coming out of the pandemic, actually, the company has done very well called the really the turnaround of the market at the right time, started to invest. So I think did very well in improving the position in the U.S. But then after that, it's just a gradual increase every period in terms of our market position. We're a challenger in the U.S. We see it as a growth opportunity. It's the largest travel market. It's great for us to expand our position and over time that add to overall growth in terms of overall company growth over and above market. The U.S. market at some point we expect will definitely become stronger. And I can't call exactly which quarter that will happen, but that's a point consumer confidence will go up, maybe some of the pain that many consumers are feeling from inflation will go away and that will help to grow the market. But again, our objective is to continue to see our growth a little bit above market for each and every of the coming periods.

Got it. Certainly, there's a lot of discussion on that side of the pond about making America great. So we will see. Now the -- in the U.S., I think it's interesting because over the course of the last 10 years, you've had a lot of different marketing and go-to-market strategies in the U.S. You've attacked with search, you've used TV marketing, you've used social marketing, YouTube marketing, discounting and merchandising. As you sort of think about which of those strategies has been most effective to continue to try to grow, anywhere you're sort of more or less excited to press more on next year in the U.S. of those?

I think, as you said, it's a wide set of actions we are taking to improve our position. I think there's a lot around brand marketing because it's important to be seen as a household name, a really good, large, commonly known player in the U.S. so that there's good consumer confidence to book with us. And you have seen us advertising around the Super Bowl, around Major League Baseball World Series and so on. So that is really to establish the brand as a household name in the U.S. We have been investing indeed in products, in promotions and merchandising and so on and in supply. You asked what am I most excited about, I think the room we have to grow in alternative accommodations in the U.S. Because in alternative accommodations, we have said this before, we're around 2/3 of the size of the largest player in this space in terms of room nights globally. We are more or less on par in Europe and in Asia, can differ a little bit country by country, but on a regional basis, on average, that's where we are, but we're a bit lower in terms of room nights in the U.S. That is really adding supply, adding familiarity, more traffic that we can bring, therefore, more supplies, let's say, I can't miss out on that volume. The familiarity part is again a component of that. When we see more and more of that becoming a normal course of business, we would expect that, that will continue to grow faster in the U.S. So that is, again, upside and opportunity for us.

Yes. In the U.S. on the alternatives, the current market leader has a lot of inventory that is from individual hosts, individual owners as opposed to the groups or the property managers. So as you sort of think about the largest area you want to press into inventory on the alternatives, is it going after the individuals in the U.S.? Is it sort of going after the property managers? How do you sort of solve that supply challenge?

When we started to build up our alternative accommodation supply and really we're pushing on this particular element of the strategy. Going towards the professionally managed properties, it make most sense because we are finding a professional manager that, for example, has 25 properties, so we can very quickly scale up in supply. You're right that the next focus is really going after those individual property owners and convincing them that, hey, it actually makes sense not to be listed only on one platform. There are also other platforms. It's actually really attractive to you because you get more volume to you, more bookings, that's a good thing. Or to say it in a different way, I really would like Glenn not to talk during an earnings call anymore that he can't find that one home in the Hamptons, but that we are taking care of that. But maybe one thing to say on this as well. What we really like in terms of how we deal with alternative accommodations is that we have an integrated proposition to travelers. You get the listings with us, traditional accommodations, alternative accommodations on our platform and for us, it's really what is the consumer's preference. We are agnostic. Economically, we're neutral. And what we're seeing often is people going in, looking for one type of property, booking another type of property. The fact that we have that unique proposition that we can bring that all together and show this in an integrated way for travelers is really, from my perspective, also one of those reasons why we're seeing such a healthy growth in alternative accommodations.

Okay. Great. No, it's been very impressive growth. You've been globally adding more room nights than that larger player, I think it's 9 of the last 12 quarters or so.

13 out the last 14.

13 of the last 14, thank you for correcting me. So very impressive growth. Okay, let's round up the globe and talk about Asia. I thought it was really interesting on the last conference call where you talked more about Asia than I think you historically have, at least perception. So maybe talk to us about how you think about the Asia opportunity. And what are the biggest areas of incremental investment? Or sort of how do you think about driving that business to faster growth in '25 and '26?

Yes. Asia is, of course, if we think about Asia as a growth opportunity, that's going to be the region with the fastest economic growth over the next decade, decades, maybe even, plural. And to be already in a position that we are the largest OTA in Asia outside of Mainland China, I think, is a very good position to be in. We have two brands in Asia. So we have Booking.com. But Booking.com is the usual way that Booking.com operates. It's quite a generic approach, a very optimized product and booking has quite a strong market position in several markets like Japan and like in India. And then we have Agoda, which is really the Asian local champion based in Singapore and Bangkok. And what Agoda is really doing well is localizing. So it's a very smart team that is very entrepreneurial, very much making sure that the product looks and feels really tailored to a market. So they make themselves look and feel like a Korean company in Korea. The advertisement, the UX, the payment options, how listings are being presented is very much how they present themselves and they present themselves like an Indonesian company in Indonesia and so on. So really a smart way how to deal with that. We are, therefore, I think, very well positioned. We have to make sure that we are just really staying on top of the market, on top of the competitive dynamics and taking advantage of that growth curve that will automatically come.

Got it. And is it ex China or with China when you're sort of thinking about the Asia opportunity?

Yes. China domestic is really hard for non-Chinese players. China outbound is for us a meaningful part. So to give you a couple of data points around it. So in total room nights, for the company globally, around 24% of room nights are coming from Asia. And by the way, when I speak about regions, we're always speaking about the booker basis. So where is the booker based. But none of the Asian countries, including China outbound is, let's say, outsized in contribution. So each of these is, let's say, single-digit kind of level of contribution to the overall Asia performance. So it isn't we are dependent on one country. And if that goes right or wrong, that will determine the whole outcome. We're actually very well spread out in terms of strong market positions.

Okay. Let's talk about some of the ancillary opportunities you mentioned early on when we were sort of talking about areas of investment. I thought you had a really interesting list, rental car, flights. You mentioned ride share, I'll get there in a second, and attractions. So maybe let's talk about flights. Areas of success you've had with flights and how do you sort of think about areas of investment to continue to keep the flights business and the flight attach going with your hotel bookers?

Yes. We have three flight platforms within the company, one with Priceline, one with Agoda and one with Booking.com. It has a lot of positive traction, again, because of the customer position we have, the value proposition that we bring and the fact that this is an integrated proposition we bring on our platforms. Last quarter, our flight growth was 39% and not over a small base. We had 13 million of tickets that we sold within one quarter. That is, I think, in terms of performance showing that attraction is really healthy because I don't think any player in the airline industry was at that kind of a growth level. And we think it's a great proposition because it is an element towards the connected trip vision because we need to put all these pieces together on the platform, we need to be able to facilitate the payments underneath, over time, put the Gen AI tools on top of it. So we're not looking at these all in isolation. We're really looking at this in a holistic way of a part of the overall connected trip vision and how we're bringing all these pieces together.

Got it. And is it still the situation where flights is sort of the milk and the grocery store where people book their flight first and then are you able to take those flight bookers, retarget them and convert them into hotels? Have you had some success with that and bringing new people on with flights?

Yes. But we see that in general, once we see a customer coming in for one product vertical transaction, the opportunity to offer additional services and products is usually working very well. And there actually, if you look at the economics, that really is something that ultimately helps because often, we get a question of, yes, you are embarking on all these initiatives, but they're all, by itself, lower-margin businesses, flights, attractions, payments and so on. But the fact that we can bring it together that we often have only onetime customer acquisition cost but can offer a really holistic proposition in terms of many additions to one particular first booking is actually helping the overall economics of the company. Or to say it another way, you see that we are growing those verticals, but you're also seeing that we are delivering on EBITDA margin expansion at the same time.

When you and the management team sort of look at your dashboard of KPIs that you're evaluating the success or struggles, what do you look at? Do you look at we acquire a customer, get the transaction and revenue per transaction, revenue per customer, sort of what are the key KPIs that you look at internally to sort of gauge how all the initiatives are going?

Growth of direct customers coming direct to us. Growth of new customers, which is very important because obviously, we'd like to attract new customers that we can convert over time to become more direct and loyal customers. That's why it still makes sense a lot to invest in performance marketing channels because as long as we get attractive marginal returns on that, it's a great source to find new customers. Looking at how often customers are coming back. So the repeat, how often customers are booking across multiple verticals. We have put out some data points with respect to the connected trip that it is now high single digits in terms of overall bookings. So it's not a kind of a dream only it become -- it's real, and it is tangible. It has been growing 40% year-over-year. In this case, what we mean is someone that for one trip is making a booking across more than one vertical. So that is meaningful. Looking at how they are moving up from a loyalty status perspective. So those are a number of the metrics we're looking at in combination. What I find fascinating that all of these are pointing in a positive direction. So it's clear that the proposition we're bringing is really attractive for customers.

It's comprehensive. It's very helpful. Earlier, you mentioned rideshare as one of the areas. How do you think about Booking's position in rideshare offering?

It's just one component in that total offering. But what we see is that customers are looking for a solution, they say, okay, I have that flight and I have that accommodation, but how do I land at that airport, get to my hotel or to my apartment. And that's just a natural addition that we can offer on the platform. So it's just one of the pieces of the puzzle, how we look at it.

Got it. Okay. It's been 26 minutes. We haven't even said the words Gen AI, but it's time. So the Gen AI travel debate has been sort of one of the ones that has ebbed and flowed a lot over the last 2 years. I think there's a lot of debate about how to think about the OTA's positioning in a long-term world where you could very well have next-generation large language model enabled travel agents. Alphabet showed a next-generation travel agent in May. We've -- OpenAI as even showed next-generation travel search, et cetera. So how does Booking Holdings think about how the world kind of shakes out of where the consumer funnel will -- how the consumer funnel will change or how consumer behavior could change for these new tools?

Yes. We are thinking about Gen AI in a couple of different buckets. You're speaking about the very specific bucket. So let me quickly cover the other ones. We believe this is a great way to find efficiencies, implement automation in some of our processes and take advantage of those tools. But over time, probably those will become table stakes and everyone is doing it. Just a quick example is, in customer service, approximately 25% of the time of the agents are used to write out the notes of the call -- after the call. All of that can be automatically summarized. So that's a huge efficiency, not to speak about many of those Gen AI tools will give a human-like interface faster. You don't need to wait. You get an answer faster. So that's one area, but there is, of course, a system development and so on. The second bucket we are thinking of is more what can we do to help our supplier customers. So an example of that or something we're testing is we're helping suppliers writing answers on questions that travelers are sending to them. They can modify it and edit, of course, but it saves them a lot of time that, that question of can I bring my dog to your hotel, that is automatically already written for them. I think where you are touching on, Brian, is probably the most important element that could be a differentiator in terms of Gen AI because Gen AI is like the perfect element to make the real connected trip come to life because those travelers that like to come directly to our platform, in the future, we'll be able to have Gen AI trip planning tools. We're testing with many of those within the company. We have been talking about it during the last call.

Penny.

Penny. We have the AI trip planning tool of Booking.com and many others. When we can make that really personalized, and we have the data and the background of you as a traveler, we know what you're looking for, what you have done in the past, what you don't like. We can build that whole itinerary for you, we can make sure it's immediately bookable, and we know of availability, which, by the way, those other tools, that's the big drawback, it can propose this great trip, but maybe there's no availability, it's sold out already on in that week. So now you have to be back to square one, plus you can't really book it on those platforms today. And then you can do that with us, and that flips to a trip planner kind of environment that if your flight is delayed, we can inform the hotel, adjust the restaurant reservation, if your flight lands, we can make sure the rental car company has your car already ready and so on. That convenience aspect, peace of mind, I think that will be incredibly powerful. But you're right, some of those Gen AI tools might have very good trip planners as well. We are talking to all of them because you could say this is an alternative search methodology for many of our customers, how they search today, maybe through Google or another platform. That's good for us because it means we have opportunities to work with them, see that there's another source for leads that can come to us as a company because this platform ultimately need also a party that helps them to ultimately make sure it is a conversion, and they can make money out of that. So they are still looking all from monetization models, of course.

All right. Great. Well, we are against the flashing red. Ewout, thank you very much for your time. I hope it was productive.

Thank you so much.

Thank you so much. Thanks, everybody.