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

Okay. So I know we're -- people are still going to be finding their seats. But in the interest of time, I think we're going to get started here. Our next fireside chat here in the Grand Ballroom is with Booking Holdings. It's my pleasure to welcome back to the conference, Ewout Steenbergen, Executive Vice President and CFO.

I would like to start with something a little more fun. You asked me before we came on stage. And unfortunately, this conference didn't allow me a lot of summer travel. But what did you do this summer? What was exciting for you, whether it was travel, something else? Like let's start on a lighter note before we get into the business.

Yes. Actually, on the personal side, travel is something that I really enjoy already much longer and before actually joining Booking. It was actually one of the reasons I joined was this is something I'm very passionate about. So yes, I spent a lot of time on planes. I probably do this year 70-ish flights or so in a year. I've done years much, much higher. My wife is usually spending time over the summer in Europe. So I go a little bit back and forth and work from there and then back to the U.S. But we had time in the last week of August, my wife and I to have a personal trip to Japan. And I love Japan, just the culture, and it's just such a beautiful country, so well organized. The food is fantastic. So we had a couple of very nice days just before and around the Labor Day weekend.

Well, I'm glad you got some time off. You have earnings, you go right into August, and then now you're here at this conference. So I'm glad you got a little bit of downtime. I wanted to kick us off with a big picture question. There's always such interesting things going on in the company. What would you frame up as your key strategic priorities? I mean there's always the themes that we hear on the earnings call, but whether it's connected trip or driving more relationship with the consumer, level set for us like what are the big strategic priorities that you and Glenn are focused on?

Absolutely. So first of all, I think the good thing for us is we're, of course, in an industry where the product is a lot of fun. I mean it's nice to travel. It's nice to dine. So it's a really good business to be in. Fortunately, for you, Eric, that you didn't have a lot of time together over the summer, but I hope the firm gives you more time over the next period. But we also know travel is sometimes not easy. There's a lot of planning that goes on. There's a lot of coordination, things happen, that has to be adjusted. So that brings me to the vision, the overall vision for the company for the traveler to bring together the connected trip. And so as your question about what are the objectives we have, the strategic objectives, it is all derived from the connected trip, making it easier, more seamless to have all the parts of a trip all hanging together. So the first is more on the top of the funnel, the customer interactions, what we are doing to really have customers coming more direct to us, more loyalty, more working on an agentic experience in the future. And I think you have seen from a numbers perspective, we're doing very well, and our direct traffic is going up. It's now mid-60% level from a B2C perspective, just to give a data point to it. The second objective we have strategically coming from that vision of connected trip is to expand the offering to have more verticals we have a really good offering. And that is going very well. Alternative accommodations is growing very rapidly. We have flights growing now last quarter, 44%. And last year, we did already 50 million airline tickets. Attractions is growing very rapidly. We doubled in size in the second quarter year-over-year. We have, of course, rides, cars. We have to still start with the integration of OpenTable. So there are so many things we can do to really, from a verticals perspective, the overall offering to expand. The third is our geographical expansion. We still have a lot of opportunity there. Asia is a huge growth area. We are the market leader with Agoda and Booking.com outside of Mainland China. So I think that positions us very well for future growth. And we are a challenger in the U.S. So in the U.S., we have a lot of opportunity to really get our fair share in the market over the next couple of quarters and years. So that is the third area. The fourth area is around payments and fintech. We don't talk a lot about it. But it's actually a really important area for us. It's a huge P&L contributor. Just to give you, again, a couple of data points around it. About 70% of our bookings, we currently facilitate payments. So over the volumes that we are doing, this is already a north of $100 billion kind of business. It's strategically very important. It's an underpinning of the connected trip. It is, of course, adding a lot of value for travelers and supply partners, but it is also an important part of the growth of our P&L as well. And the fifth strategic objective over the next period, I would say, is around our financial strategy, our capital strategy. We have a very disciplined approach, productivity, efficiency, taking advantage of our scale, freeing up resources, reinvesting this in very attractive areas of growth in the future for the company, generating a lot of free cash flow, returning that to our shareholders, a very repetitive model. So those are the five areas, but all derived from that overarching vision of the connected trip.

Okay. Probably the two overarching themes at this conference are AI, we'll get to that one and also the health of the consumer. So you sit in a unique spot being a global company really at the heartbeat of what's happening from a consumer demand standpoint. Maybe just reflect on what the key messages were coming out of this last earnings report, how the audience should be thinking about the health of the consumer, how the consumer is interacting with your product, how that maybe informs some of your forward forecast from this level?

Yes. And I just -- and you know that, Eric, but just for the audience, I need to explain that we don't give as a company intra-quarter updates. So everything I say is up to and including the end of July when we did our second quarter earnings call. So generally, the way how we describe the market is the word steady. We really think that's the theme, the word of where we are today, and steady is good for our industry because if we see steady growth in an industry that can be cyclical, that's a good position to be in. We see Europe in a good place. Europeans book earlier. The book against higher prices. It's a big part of their lifestyle of priorities, how they spend their income. We see healthy growth in Asia, a little bit better than in the first quarter. There were a couple of external events in the first quarter. They are not around anymore. So Asia is in a very good position. U.S. sequentially a little bit better. So that is optimistic, and you hear this from other travel providers as well. There is still a little bit of a but around it because I would feel even better about the U.S. if we see an expansion of the booking window, if we see an expansion of the length of stay, if we see pricing ADRs going up instead of going down. So there's still a few elements where I say the U.S., it's better, but it's not completely out of the woods yet. And there's also a little bit still that bifurcation of the U.S. consumer economy. We have been speaking about it for several quarters now that the top end does much better than the lower end income segments in the U.S. So that's overall, I think, the picture.

Yes, and not your statement, but we got a statement similar to that from Delta Airlines in the U.S. here this morning that's on the news headlines as well. So just looking forward and not guidance per se, but just are there things you want investors to keep in mind about how your business evolves from an ADR perspective or a geo perspective or a take rate perspective that could be levers or elements of the business that you just want to make sure people are aware of where there's nuance in the business on a go-forward basis?

Yes. I think actually ADRs is what we see more recently versus what is the medium-term perspective. It's much more positive from a medium-term perspective. Over time, ADR should grow more or less in line with inflation. Short term, there can be some fluctuations. We saw the U.S., as I just said, negative ADRs on a constant currency basis in the second quarter. But over time, that should be a helpful contributor to growth to the company, stronger than what we have seen in the recent past. In terms of take rates, actually, we are in a really good position. It's very stable. If you go one layer deeper, there's a few underlying dynamics that are going on. Accommodation take rates are, again, very stable. So that's good. So we don't see any pressure on that, meaning the value we add to suppliers is really being recognized. Then growing flights is putting some pressure on take rates because just in general, take rates for flights is a bit lower. But then the flip side is growing our payments business adds to the take rate. So therefore, overall, it's stable on a net basis.

Okay. Super clear. You referenced it when we talked about strategic priorities. You've built a very large alternative accommodation business in the last couple of years, and it continues to be something that you and Glenn talk about on the public call. Talk a little bit about the journey you've been on in building that business and how investors should think about that tying back to elements of growth and executing on these strategic priorities over the long term.

Yes. Super excited about alternative accommodations, where we are now and still the potential we have from here over the next period. One data point we're really proud about that we have been outgrowing the market leader in this space now for 16 out of the last 17 quarters. So I think that's a really fantastic accomplishment by the whole Booking team, of course, to accomplish that. I think what makes our proposition unique is that we offer traditional accommodations and alternative accommodations, both on the same platform. So many providers, you have to go to one platform for -- if you're -- when you're looking for apartments and homes and another when you're looking for hotels or resorts. For us, you get it all together, and we see people very often switching, going in with intention to buy a hotel room and then in the end, buying -- booking an apartment or the other way around. So that's very fluid. I think that makes that proposition really unique. I think we are really strong in Asia. We are really strong in Europe. We still have an opportunity to grow much more in the U.S. On a relative basis, our position in the U.S. is still quite modest. But from a product perspective and the investments, our product gets better and better and more at par, request to book, chat function with the homeowner. Actually, it's interesting that the industry now moves now more to our pricing model. So they are moving away from all the additional fees at the checkout, the cleaning fee and the administration fee. We always had an all-in price approach and the industry is moving there. That's actually good news for us because the optics of a higher price for a consumer and the consumer then goes for the other alternative, but gets all these fees in the end, that is going away. And even for suppliers, for suppliers, they now like us in the same way as other providers. So overall, the expectation from our perspective is alternative accommodations will continue to grow faster than traditional accommodations for the foreseeable future in all regions in the world. Maybe not by as much as in the past because in the past, it was maybe only 10% of our overall room nights, now it's 37%. So by definition, just the math is saying that the growth level should get smaller because the composition has changed, but it will still be an overall growth driver for the company.

And maybe just one follow-up. How critical is continuing to grow supply in terms of alternative accommodations? I mean you have a particularly powerful engine by mixing traditional alternative accommodations on one platform and presenting them to consumers. How do you think about the equation of continuing to acquire supply, build scale to supply? Because as you proved out in hotels, supply advantages can lead to conversion advantages.

Yes. It's very important. we continue to grow. Again, it's now a really sizable number of listings we have, 8.4 million listings at the end of the second quarter globally in alternative accommodations only that grew 8% year-over-year. So we're very much focused on continuing to drive that growth. That will be helpful. I don't think that will be, in the end, a limiting factor or a limiting early indicator because if we look at how much we actually get booked through our platforms of the overall availability of those accommodations for the full year, there's still a lot of upside that we can deliver in existing accommodation levels and listings that we have on our platform. So I'm not overly concerned that if that growth levels in listings comes down, that will implicitly start to impact the overall growth level given the fact that there's so much more we can do in the overall availability for the full year.

Okay. Understood. Pivoting to the strategic priorities around the connected trip. When you think about getting that priority to where you want it to be over the next couple of years, what are the biggest unlocks you're trying to solve for in terms of stimulating adoption and booking habits around the connected trip? And talk a little bit about how air fits into that broader strategy.

And Eric, I need to give you an answer that is a 2-part answer. The one-part answer is more where we are today and what it means today. And what we are seeing, and this is more in general, what we are seeing within our platforms, we see more and more customers coming frequently to us. So the number of times that they're booking on our platforms per year on average is going up. They're booking more across multiple verticals. So it could be an apartment and a rental car, it could be a hotel room and an attraction. So some kind of a combination. And then people are coming back more and more on our platform coming more direct to us as well. So all of these elements hang together. If we today disclose statistics around connected trip, and we said with our second quarter results that we grew 30% and that it is now low double-digit level of our overall bookings. We're speaking about multi-vertical. So this is someone again, that books two different verticals that could be a flight and an activity or some kind of a combination for the same trip. So that's now low double digits. So it's real. Compared to a few years ago, this was a concept, it's real, and it's meaningful and particularly, of course, over the huge volumes that we are doing as a business. Now the second part of my answer. This is about the future. This is not what we have today. But connected trip as a product, what Gen AI can do to let that come to life is going to be phenomenal. This is -- Gen AI is really going to give us the opportunity to unlock the real connected trip. And what I mean with real connected trip is, you get inspired about where you want to go and what kind of trips you want to make. It provides you a whole itinerary. It's very personalized based on your background and what you have done and what we know about you, and obviously, we have a lot of that data within the company. Then you can ultimately get it to one transaction where all these pieces are being booked. There is a natural intelligence layer in it that all these things hang naturally together. We know you travel with a young child. So the child seat is being added to the rental car. You have a rental car, so we only propose accommodations that have a parking place with it, your flights get delayed, everything gets automatically updated. So it will be the peace of mind, natural things how they are hanging together, connecting all the dots. It becomes a trip management tool. It can become very proactive. Hey, you're walking in Paris, we see you're close to the Louvre, shall we get you some tickets to get into the Louvre. Hey, we know you see -- you are in Denfert. You don't have a dining reservation. We know you like sushi. We can get you this great sushi restaurant reservation through OpenTable close to your hotel, you want to book it? I mean that is, of course, the future, and that is possible with connected trip. So in other words, today, we're already in a good place, and it's real and it's growing, and we see the platform effect. What it can mean in the future from a vision perspective is going to be something that is going to be super attractive.

Yes. And I want to build on that because I think Glenn on the earnings calls gives off a very positive messaging, and you guys are clearly leaning into AI broadly. So you touched upon it a little bit there. But when we think about the multiyear road map for this company, like how many elements of how the consumer interacts with your platform are going to be touched by AI and you think could generally change the consumer landscape with respect to travel?

Yes. Already a lot that we are doing today, but I have to tell you about different components. I'm not going into now all the efficiency of that we are doing in our development, system development work and other areas. So only where we touch the consumer. So maybe the first I have to mention is around customer service. So more and more, we're applying generative AI tools in customer service and it has already today significant tangible results. I know a lot of people speak about, oh, yes, we're applying Gen AI. And you as investors ask the question, where do I see it showing up in the P&L and then it gets very silent. Actually, we can point to a number of areas. In customer service, what is happening is the average cost per booking are coming down very rapidly and the customer satisfaction scores are going up at the same time. And you see that showing up in our S&O, sales and other expense line item that is actually showing a very different trend than in the past. So that's already a clear positive. And I like, of course, that the customer satisfaction scores are going up. Then we have more in-product development. So think about something that we call smart filters. Instead of clicking several boxes, okay, I want to have 3 or 4-star hotels with a pool and it needs to be in the city center and all these things, you can now put a natural language box in to describe what you are looking for and that automatically filters accommodations that fulfill those requirements. It can be much more refined. What is the benefit we see coming out of it is lower cancellation rates, which intuitively makes sense because if you can find an accommodation that fits really what you're looking for, then the probability that you continue to search somewhere else and then ultimately cancel is getting lower. So on our volumes, a bit lower cancellation rates is having a very meaningful impact. Now I go to the top of the funnel. And here, I think it becomes also very interesting. On the one hand, we're working very closely together with all the hyperscalers, and we have close partnerships with OpenAI, with Google, with Microsoft, with Amazon, with Salesforce. That's important for us, and we are a launch partner with them, and why it's important? We learn a lot. We know what's the latest technological advancements. We learn how consumers are responding to it. And we see this ultimately as a different form of our performance marketing channels. It will just be diversifying our performance marketing channels in the future, lead generators, but we also learn how consumers are reacting to that. But the other thing is, obviously, we're also focused on developing over time, the best agentic experience for someone that comes direct to us because we really want customers to continue to come direct to us, and if you can get an experience that is as good as of some of the LLMs, but maybe more personalized and from a provider that you know, you trust and if something goes wrong, you know where to go to, we think that is a very attractive alternative that we should provide to our traveler customers as well. So we're working on all of these elements at the same time. For us, it's really important to lean in. It's part of our investment program, and I think no one can really predict where is the future, but for us, it's really important for whatever scenario, how this is going to play out that we have a good position in those scenarios.

Okay. Understood. The -- and sticking with the idea of scenarios and now it all sort of evolves over time. I think -- and you probably get this question a fair bit. The overriding debate continues to be how the travel funnel might change over time. So when you think about what's in your control and what's out of your control, talk a little bit about future-proofing with AI for eventualities or different scenarios in travel. Maybe just build on that last part of the answer, and then I actually want to build into loyalty and things, which probably feed into this as well.

Yes. Eric, the question is very often framed more from a threat potential disruption. Yes, that's absolutely there. I think, by the way, any company that would today say there is no risk of -- or threat of being disrupted by Gen AI in some form or way, I think they're probably sleeping. So we think about that question a lot. We think the whole fulfillment part of the value chain is very hard to replicate because we have 4 million properties. We have real that we are connected to real life information, inventory, pricing. There's a lot that is part of all of that, the customer service, the payments, the regulatory, the data privacy and so on. So that's not easy to get replicated. But obviously, we're trying to take advantage ourselves by helping, for example, those supply partners with Gen AI tools. Now that question at the top of the funnel is an interesting one. Again, for us, it's so important to build agentic experience for a customer that is coming directly to us because for us, it's really important that we preserve the direct traffic to our platform, and that what is happening with the large language models on the other hand, that it is basically substitute for the traditional Google search, and we're always trying to diversify there. We have been expanding in social media and in other areas so that, that is the other side where we're trying to expand, and in the end, it will always be a mix. It won't be 100% this or that. There's always going to be a kind of mix between all those different channels.

But one thing you guys have been very aggressive about is you've moved a lot towards direct relationship with consumers, right, which is one of your strategic priorities. Talk about the journey you've been on with respect to building brand and then also building loyalty and the continued investment piece you're on there and how to think about it as the output for the business as you continue to build scale, both in direct traffic, brand and loyalty.

Yes. There's a few things that go there in the mix. So sometimes the question is, do you want to have 100% of your traffic coming direct, and the answer on that question is a little cynically, is we can have 100% tomorrow because we just shut off all of the performance marketing channels, wouldn't be a very value-enhancing way to run the company. So why do we always have some performance marketing channels is it's a good source of new customers coming to us, and as long as the incremental ROIs we pay on that traffic to us are attractive, we will continue to invest in that. It's about 90% of our marketing that we spend today is on performance marketing, about 10% is on brand. Brand is important, just to have some brand awareness, some kind of familiarity, but probably we would never spend too much because at some point, it's -- you don't want to underspend, but overspend is also not very smart, but then in the end, when someone is a new customer to us, we like to bring that customer in our ecosystem, get them more familiar, get the loyalty up, get them higher up from a loyalty program perspective, about 55% of our Genius level tiers 2 and 3, 55% of the bookings come from them, they come back more often. They book more across multiple verticals, they get more familiar. And over time, the intent is that they then become direct customers. So that is the whole system, how we bring it together. And all these things are, in the end, interrelated. So we don't look at loyalty as a separate thing. It is all about how do this all hang together that over time, we bring more people to our platforms, become repeat, higher loyalty, more value that we can add, more direct, but performance marketing remains important for the acquisition of new customers.

Okay. I want to build on what you said there because even within performance marketing, you've been on a bit of a journey where you talk more positively today about the output you're getting from social media than you did 2 years ago. So even the mix within your performance marketing continues to evolve. Talk about some of the key learnings as that performance marketing dollar has shifted and what you've seen from an efficacy standpoint as you've changed some of that mix?

Yes. This is actually an area where I think the company has really unique capabilities because the science that goes behind performance marketing, the optimization models, how we allocate the next incremental dollar in the most value-enhancing way with the highest incremental returns, and by the way, to some extent, that's not only performance marketing, we look at merchandising in combination, although from an accounting perspective, it shows up in a different way. To some extent, those dollars are fungible. So we're always looking, but always based on a quantitative way to prove what is the best way where to invest and how fast to grow. Performance marketing budget, by the way, is not a fixed number. Sometimes that's misunderstood that they think we have a number in our budget, and that's what we spend. If the market is really good and there is a very positive return, we continue to lean in until the next dollar we spend, the incremental return we make on that falls below our ROI floors, then we stop, and the other way around, if the market is generating less demand. The composition and the mix is shifting. So I think, again, it's really positive for us as a company that we are becoming less and less dependent on the one big gorilla, but that we have more and more alternatives. Leaning in with social media is such a great example, but I think that's just really the indicator how ultimately, over time, the same will happen with large language models. We built a specific environment where we can measure, and we started to do that originally with Meta in a special data clean room environment we did. I don't want to give too much details to make others smarter than they are today, but that gave us the opportunity to measure incrementality, and incrementality is really important because incrementality means we can measure that, that booker where he will invest ultimately create an additional booking with us. If that traveler would anyhow wouldn't have booked with us, then obviously, that's money not well spent. So we can measure incrementality. Once we knew that, that was positive and we could substantiate that, then we started to lean in and spend more with Meta. We continue to expand. We are now in the second quarter, we grew our social media spend by 25% year-over-year. We will continue to expand with Meta, but also with other social media platforms. There are some that are leaning now in with us as well. So I think over time, it will be more and more. So I think this is a great opportunity and that we can really unlock it now, and we have the evidence that really the science behind it to prove that it is incremental and generates value for our shareholders, and of course, more to come in the future with all the other developers.

So we've talked a lot, I know we have only a few minutes left, but we've talked a lot about where the company is going, the strategic priorities, all the growth initiatives. For a room full of investors and folks on the webcast, bring it back to what is your key messages around the margins in this business over the next couple of years?

We have, as a company, I think we are in a really good position from an EBITDA margin perspective. I think you probably know, Eric, what I'm going to say now because we always give that advertisement, but it is really important to look at EBITDA margins on an apples-to-apples basis. So including stock-based compensation, don't play gimmicks with just capitalizing a lot and it doesn't show up in EBITDA and therefore, in EBITDA margins. So really playing it in a very transparent way, and that is how we do that as a company. So we're already at the highest EBITDA margins of any of the travel competitors that we are having. Of course, when we think about competitors, we think more than only about travel, but the strict travel competitors, not including the hotel chains, we're already at the highest, approximately 35% EBITDA margins last year. And this year, our guidance is another 125 basis points expansion on top of that. Where are the opportunities coming from? First of all, we have a productivity program going on right now. This year, we will realize about $150 million in a year. So it's at least another $300 million that we will realize mostly in 2026. Secondly, we're always driving efficiency opportunities. So we are quite disciplined around that we always want to see operating leverage in our fixed and variable expense line items. We need to take advantage. We are the largest player. We have a scale benefit. We need to take advantage of that and realize that. That comes with a lot of planning discipline around it every year. But then on the other hand is, as we discussed over the last half hour, how many growth opportunities has this company. I mean it's just phenomenal, and we haven't even touched on all of them. So we also want to make sure that we're reinvesting enough in those growth opportunities when we have sufficient good business cases with the right returns and to be able to be very transparent to our investors to show both sides. Where are we finding the efficiencies? What is the benefit? Where are we investing? What do you get in the future, but all focused on really growing the company as fast as we can at healthy margins in the future.

I just want to end on one last question because it's probably an area where we've been so consistent over the last couple of years. When investors think about capital allocation inside this company, especially shareholder returns, just remind folks what is the framework that you use on capital allocation, so investors know the way you think about an incremental dollar of capital and possibly returning it to shareholders.

Yes. Very consistent, no changes, which I personally think when we speak about capital generation, capital allocation is a good thing when it is very stable, consistent and predictable growth leverage of 2x, net leverage of 1x. Yes, we're a little bit below. That gives us opportunities. We generate a lot of free cash flow, trailing 12 months, it was around $9 billion as a company. We have a lot of investment opportunities around that. Organically, of course, that's the best way we would like to reinvest. Then inorganic, if there are opportunities, but to be honest, we are a little bit limited, particularly in Europe from an antitrust perspective and then also an active program to return capital to shareholders as well. So very, very similar. I think return of capital, we do through dividends and buybacks. The buybacks, we have some price sensitivity. So it might go up and down in some periods. But over time, that is averaging out. But I think overall, if you look at the balance sheet, the cash flow generation, the repetitive model of the company around that, I think that's a clear positive.

All right. Well, thank you so much for being part of the conference. Please join me in thanking Booking Holdings for being part of the conference this year.

Thank you, Eric.