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

We see customer-facing generative AI tools has a clear opportunity for us as a company. And let me explain the different ways how we are going to do that. First of all, is going to help to expand the total addressable market because still about 70% is online, but 30% is still off-line of travel. So we would expect that more people would move faster to really make bookings in a digital way. That's good for us. The second is what we would expect is that our paid channels, so our performance marketing channels, we would see a more diversified set of providers set of auction platform. So you could say the last decade were very much dominated by 1 very big party traditional Google search. So more of those platforms is good for us because we are running very large optimization algorithms. And if we have more platforms where this PVC is happening, that would be good for us because we can diversify and really increase the optimization and get to higher returns. But then I also need to say that the core of our strategy is to make sure that the 2/3 of the travelers that come direct to us today that we want to make sure that they continue to come direct to us today. So we are introducing a lot of AI planning tools on our own marketplace itself. So the people that know us, that trust us that like to come direct to us that now if something goes wrong, we will fix it for them that are part of our loyalty program and see the benefits of that. that they will say, you know what, yes, I can do that AI trip-planning with that stand-alone LLM, but I can do the same thing in your environment. And actually, I like that because then it's interconnected to everything I have there with you, and I know it's taking care of, and I know he's handling my money and I know things get fixed if things go wrong. So we're very much protecting the direct channel, taking advantage of the diversification of more performance marketing channel -- and then we also think there will be a benefit of the total addressable market that will be expanded.

Maybe just to ask a follow-up there that comes up in a lot of investor conversations I have about the industry broadly. How do you make sure as a company, and we've talked about this on some earnings calls, protecting the what comes to you from the LLM is good traffic and doesn't eventually become another proxy for Google and expensive traffic over time while continuing to grow and scale probably your most valuable experiences when consumers are coming direct and have higher conversion than they did in prior periods. How do you make sure you continue to strike the right balance in those relationships?

So let me then dive a little bit deeper in what I just explained. So if we look at the LLM traffic that is coming to us today, that's still very small. So we said during our last earnings call still significantly below 1%, and that's both the paid and the unpaid traffic. So what we see is a lot of consumers are doing research on LLMs. By the way, people have always done and use 5 different platforms on average to do research before they actually make the booking so people do that research also today on jet GPT or on any other platform, LLM platform. But then in the end, that's not where they do the booking because booking travel is high stakes, high emotions, high value, and it can't go wrong. So they still very much would like to go to the platform they know and trust and they rely on. But we are working together with all of these LMs, and we are a launch partner with all of these LLM providers because we learn a lot. We learn where they're moving from a technology perspective. We can observe the behavioral aspects from consumers because we don't know really what has tractions. And because it doesn't have a lot of traction today from endogenic e-commerce perspective doesn't mean it won't have traction in the future. But what we are seeing is that they are all migrating converging to a type of monetization model. And so we think that in the end, it will be like PPC. And by the way, we are a launch partner with open AI the testing of that and they are expanding those tests to several other countries at the moment. So it will be very much Google-like auction models in many different platforms. And again, given our optimization expertise, we think that is going to be a positive. But we are so focused on making sure that people that ultimately start through a pay channel migrate to become a direct customer and that doesn't happen on day 1, that is you first have 1 time in experience with us, a second-time experience. and then third time someone might come direct to us. And so we are, therefore, introducing so many of those AI customer-facing planning tools in our own environment. We have today 5 different of those initiatives going up to our start-ups. So quite innovative concept that are developing, not part of any of our existing organization, so not really constrained by any of the existing thinking and we will expect that those will see some launches in the fall of this year. Then we have 2 initiatives, which are more starting at the planning phase, if you think about the funnel, and then working down to the booking and the inter phase. One is today life, and this is Penny, which is launched by price line. By the way, we have on our Investor Relations website, video of Penny I would strongly recommend you to look at that because this is actually seen by many research parties as the best AI trip letting tool that is out there today. So really look at that. And then also Agoda will launch something similar in the near future. And then Booking.com is actually working in the other direction. Instead of top of the funnel down, they are working on their existing plays in the funnel, their existing are working themselves up because bookings platform is so optimized. You don't want to mess up with customers, confusing customers and impact conversion. So they're adding AI tools in their existing UX and then slowly moving themselves up within the funnel. So we're taking different approaches there. But in the end, that's all focused on making sure that consumers will have the same experience in our environment. as they can get with stand-alone tools.

Okay. You've also been very upfront and talked a lot about how AI is also driving in vernal efficiencies and savings in the organization. I'll you've been 1 of the few companies that have actually articulated some of the returns you've gotten from deploying AI internally. Talk to us a little bit about what you've learned about the cost structure of the company and deploying AI inside the company and where that might go over the next couple of years?

We have I think this nature of AI is deeply embedded in our DNA because even before Gen AI, of course, traditional AI and machine learning, we're already applying that as a company in a very early stage. So we have started to apply more of the newest Gen AI tools, maybe about 2 years ago in customer service, and that's still further being enhanced and improved and what we are seeing is that more and more of customer service tasks can be solved by agentic interactions. It's the time for resolution is shorter and the customer satisfaction is higher. And from a cost perspective, actually, it's we're in a better place. So we see the actual customer service costs total customer service costs for the company coming down. And we have, of course, a unit growth. So in other words, the customer service cost per booking is coming down in a very meaningful way, more than 10% already year-over-year. So that's a huge benefit. Another area, as an example, is in our engineering groups. So we're applying a lot of the AI tools for software development and for coding. We have introduced a number of specific metrics around it, so adoption levels. We're looking at productivity, not just the amount of code written by AI, but ultimately, which of the percentage of merge request that is being put in production, what is the increase there. And we see about a 30% uplift in terms of merge requests that are being put in production because it's not only right in coaches, of course, also the quality controls and the checks and all of that needs to happen before it can be put in production 30% and then we're also looking at the total cost for merger request because, yes, we have AI token costs that are going up and AI license fees that are going up. But because of the merch request productivity uplift. Actually, the average cost per merger requests are coming down in a meaningful way for us as a company. So that's including the people cost and the AI cost at the same time. So clearly, very positive ROI we are having there. And we're looking now at implementing many other tools and many other parts of the company. The other part where it's also very positive from an ROI perspective is very early stage. But in the consumer phasing part of the AI tools, we saw shorter time to booking. We see higher conversion rates and we see also lower cancellation rates. So all of that is, of course, also very positive in the end from a unit economic perspective. for us.

Understood. Okay. I want to come back to what you said before about direct bookings and the mobile app. Can you talk to us a little bit about personalization and loyalty and building scale around those offerings and how that builds more momentum around direct traffic and direct to mobile traffic. And the second part of the question would be, how do you think about the optimal mix? Because interestingly, before you said we want direct traffic, but we also want some indirect traffic because those also can generate newer customers for us. So against the efforts of building scale and direct, how do you also think about the optimal mix?

Yes. I love that you are bringing this up, Eric, because -- this is, of course, a very important part of where we are focused on because what is our strength? The data that we have of our travelers. I think the trust that we have that people know that we are taking care of their data, of their payments, of their booking in a very careful way. the loyalty, the fact that people are coming back and the benefits they get from the loyalty, the brand recognition that we're having, the investments we can make around it, and that we can connect to this very broad set of very fragmented supply, so we have 4.7 million properties, 4.7 million properties that we have real-time data about availability, pricing, what kind of rooms and so on. So we have a lot of benefit on that marketplace and that value proposition that we have for the suppliers there because how how can that small hotel family-owned hotel really reach the world and market itself and particularly in the busy world with AI and everything that's happening from Astra to any new tools like they are confused, so they need players like us to help them to really get that demand to them. And please don't forget, just to throw 1 more statistic out from the number of room nights that is being booked on our marketplace, almost 90% almost 90% is coming from alternative accommodations, independent hotels and smaller chains. So smaller change is not the top 10. So people here in the U.S. are often confused. They think the whole market is dominated by Marriott, Hilton and IHG that's not how the accommodation market looks in the world. It's actually very fragmented. And we have only just over 10% coming from the top 10 chains, and almost 90% is coming from all the small supply partners that we're helping to really get the reach in the world. So what does that mean for us, we are, therefore, explicitly investing and will be investing in the near future in even more benefits coming from the loyalty program even more in the brand, even more in the AI tools. so that we can really strengthen further strengthen all those assets we have around our marketplace. -- travelers and suppliers.

Okay. Understood. You've laid out the goals around your transformation program. Can you just go a little bit deeper into the building blocks of what drives some of the efficiencies you're finding in the business and how investors should think about the SKU of reinvesting some of those savings back in all these growth initiatives we've talked about today and how much of it will inform the potential for margin trajectory going forward as well.

So maybe first, it's important to frame this particular point by stating that we already have today industry-leading EBITDA margins. and that's on a fully loaded basis, including stock-based compensation and so on. And it's about 70% higher than our largest peers. So it's already we have a very strong starting point. is definitely in our DNA that we are always focused on managing our expenses in a disciplined way. We're always trying to drive efficiency, both marketing leverage and fixed operating leverage. And we do that through, for example, that transformation program we announced during the last earnings call that we found another $100 million of savings opportunity. And this was in the existing categories that we put out. So in this case, it was mostly in procurement because think about the procurement in the past each of our brands were doing their own procurement and they're buying their own cloud compute at AWS, for example, their own servers from HPE and so on. So we have really started to put that together and take advantage of the scale we have as a company. So we have found more opportunities. And so therefore, we could increase it by another $100 million. We're always trying to drive the top line growth faster than our fixed operating expense line. Travel is a skilled business. We are the largest player, so we should take advantage of that. We have fixed cost base that shouldn't really step up with more volume. So that's another benefit that we have there. And then we will find other opportunities, for example, none of this except for customer service benefits on AI, none of this is really taking into account the geni benefits in terms of internal productivity yet. So that's still what comes on top of it. Eric, you make a very other important point around reinvestments because, yes, we have a lot of opportunities to reinvest in the business. From our perspective, there's so much more we can do in growing the company in the future. So we are reinvesting in the business, but that's a separate mechanism. So on the 1 hand, driving the efficiencies taken really the cost benefit out freeing up resources and then reinvesting it in other areas where we can really drive growth in the future and with very clear business cases we have around that. So every year, we make decisions around how much we want to reinvest and what are the best opportunities we have there. But these are very 2 very separate mechanisms. And basically, what is seen in the margin line is basically the net of those 2 effects. But there's a lot of self funding in other words, in our system.

Understood. Speaking about how that translates into external, Talk to us a little bit about capital allocation. You guys have returned a lot of capital to shareholders over the last couple of years. Talk a little bit about the journey you've been on with capital allocation and how investors should think about the balance you're trying to strike between growth investments, capital returns and potentially if it ever presents itself, maybe M&A or external investments as well.

I think the way to look at our capital approach is I always think about 3 words. It's disciplined. It is predictable and it is consistent. I think the benefit we are having is very strong balance sheet, very strong cash position, very strong free cash flow generation north of $9 billion. So overall, that gives us a lot of opportunity to do a few things. as I already said, organically reinvest in the business. That's always our priority. We know our businesses. We know our management, we know our opportunities the best. Secondly, if there are attractive M&A opportunities to step into that. But generally, we don't do a lot of M&A because we are very careful always from a valuation perspective, and it has to be really attractive from a strategic perspective, but we could definitely find opportunities there we want to also invest inorganically. And then there's always a lot of room also to return capital to shareholders. And we are definitely taking advantage if there are certain periods where there is a dislocation of our share price that we're actually scaling up our buyback activity. So in the first half of this year, we bought back $7.3 billion. of our own stock. So at a very attractive level. So when those opportunities arise, we will continue to do that as well.

Very clear. We only have a few minutes left. -- when you talk to investors and you look at where the company is going over the medium to long term, any messages you want to leave investors with in terms of what you think might be underappreciated or misunderstood about booking as a company.

Yes. I would say, I think what is misunderstood is the underlying durability of our marketplace, the underlying durability of our marketplace because this is a marketplace where a lot of value is added on both sides. On the 1 hand, we have those 4.7 million properties where we provide them with marketing, with sales, with insights we provide them with data protection with regulatory, with the payments, with customer service and as I said before, almost 90% are those individual property owners, family owners or the smaller chains they need that help, and we can provide that to them. So we have a very strong value proposition on the supply side. . And then we have this value proposition on the traveler side where people like our platform come back more frequently. We have about 2/3 that comes direct. We have high 50% of the bookings are coming from our Genius levels 2 and 3. So it's about 30% of our customers, but they do almost 60% of our actual bookings. So is that really we have a lot of loyal customers that like to come back and do more of their trips with us. And we see that frequency, therefore going up. And I think that's the value we're adding there on the traveler side, plus, of course, the data we have and the personalization. And so the investments we're making on that whole marketplace. I think in the future we'll make it only more durable. So we're not just the owner of an antiquated search engine because I think that's a real misperception. I think we're on a very sophisticated, very high value-add marketplace, and we will continue to invest in that. in order to really strengthen that value proposition. And so we very much believe this flywheel will stay into effect for a very long period of time.

Well, look, I always appreciate the opportunity to have a conversation. Thanks so much for being part of the conference. Please join me in thanking Booking for being here this year.