Booking Holdings Inc (BKNG) — Q2 2018 Earnings Call Transcript

Good morning, and thank you for joining this morning's call. I want to start by apologizing for rescheduling the call from last evening to this morning. We needed the additional time to complete our checks on room nights and gross bookings. Now turning to our results for the quarter. I am pleased to report Booking Holdings performed well during the second quarter. Our revenue increased 20% year-over-year in U.S. dollars or about 16% on a constant currency basis. And adjusted EBITDA grew 35% year-over-year to approximately $1.3 billion. Our worldwide 191 million booked room nights was an increase of 12% year-over-year, exceeding the high end of our guidance range. Consolidated gross bookings were up 15% year-over-year in U.S. dollars or about 11% on a constant currency basis. While we are pleased with our financial results, we saw slower-than-expected room night growth towards the end of the quarter, which we believe is due in part to a greater-than-expected impact from the World Cup, in combination with some unusual weather in some of our core European markets which extended into the third quarter. David will provide further details on this in his remarks. Our performance marketing ROI optimization has continued to impact year-over-year growth rates, as has slower growth in some performance marketing channels. We have talked about this in the past about our desire to decrease our historical dependency on performance marketing channels and increase our direct business. At this time, we are pleased with the trends we are seeing in our traffic mix. Our direct channel, which represents approximately 50% of our total booked room nights, is not only one of our fastest-growing channels but also represents a significant source of new users to our platform. These are important metrics we use to evaluate the long-term health of our business, which you can see in our strong bottom line results. A year ago, I talked about the importance of measuring the effectiveness of our paid channels, and we will continually evaluate the efficiency of our performance marketing spend in paid channels. We said we would deploy capital in the channels that offer us attractive ROIs and provide the best user experience for our customers. Our strategy has not changed since then, and we remain open to leaning into channels that make themselves more attractive to us as an advertiser, work with us to improve the customer experience, and help us build our brand. Regarding brand marketing. We have not been able to ramp the spend as quickly as we had hoped in the first half of the year. But we believe we are exercising appropriate prudence regarding new brand campaigns and channels. And we remain confident that over time, we will build a strong brand marketing effort, which, in the long term, will produce a beneficial impact and increase our direct business. Overall, we are executing on our long-term strategies that we outlined at the end of last year, which is to provide a more holistic travel experience for our customers in order to further drive loyalty and build a larger direct brand. Providing the most accommodation choice with the best customer value and experience is a key piece of this strategy, and I am pleased with our progress in building a leading alternative accommodations platform. As of June 30, Booking.com had a total of approximately 28.8 million reported listings, consisting of approximately 23.3 million reported listings in hotels, motels, and resorts; and approximately 5.5 million reported listings in homes, apartments, and other unique places to stay. Reported listings for our alternative accommodation category was up 23% year-over-year. And booked alternative accommodation room nights continues to grow faster than our consolidated growth rate, which shows that our focus on providing maximum choice for our customers is delivering results. Providing local experiences, in-stay services, and ground transportation are also important components of our holistic travel vision. And we are in the early stages of building a robust local experience product through both organic investment in acquisitions such as FareHarbor, which we announced last quarter. While the volume of attractions and other travel-related services is still very small compared to the size of our accommodation business, we are happy to report that the foundational blocks are being laid. And we believe that in the long term, providing a frictionless booking and payment experience in this area will be a competitive advantage. As we have said in prior calls, the APAC region remains an important growth market for us, and we continue to make investments in this region. Agoda is growing faster than our consolidated growth rate. China remains a focus of ours, and we are building there organically as well as through strategic partnerships. The recently announced DiDi investment and strategic relationship is an example of this strategy. We are pleased about this partnership and potential to help both DiDi's and our customers travel in a more seamless way. Also during the quarter, we announced the acquisition of HotelsCombined, a leading hotel metasearch brand with a strong presence in several APAC markets. HotelsCombined will report into KAYAK and will further help us become the global market meta leader through increased scale, greater geographic breadth in the world's fastest-growing region, and expanded hotel and affiliate services. We hope to close this transaction later this year. In summary, we produced a solid quarter with industry-leading cash flow and margins. We continue to invest in the business for the long term and remain focused on driving quality growth that we believe will make us a stronger and more competitive player in this enormous global travel market opportunity. I will now turn the call over to our CFO, David Goulden, for the detailed financial review.

Thank you, Glenn, and good morning. I'll discuss our operating results and cash flows for the second quarter, and then provide guidance for the third quarter of 2018. All growth rates are relative to the prior year comparable period, unless otherwise indicated. As we discussed last quarter, all year-over-year growth rates referenced in my remarks and Q3 guidance will compare the current year income statement under the new revenue accounting standard to the prior year under the previous accounting standard. Gross bookings and other metrics, like room night reservations, are not impacted by the new revenue accounting standard. Our non-GAAP financial results and forecast include stock-based compensation and are reconciled to our GAAP results in our earnings release. Now on to our results for the quarter. In the second quarter, our strategy to optimize performance marketing ROIs drove significant improvement in our operating margins. The result was a third quarter in a row of expanding adjusted EBITDA margins and bottom line performance that substantially exceeded our guidance range and analyst estimates. Room nights booked in Q2 grew 12%, which beat the high end of our guidance range. Stayed room nights in Q2 grew faster than booked room nights. As I mentioned on the last call, we have factored some impact from the World Cup into our room night guidance for June. I also commented that the actual impact was difficult to predict. We observed that the impact during the World Cup period in late June, but also running into early July, was larger than we had estimated, in part due to many of our larger booking country's national teams making it deep into the tournament. We also believe that unusually warm and dry weather in Northern Europe during the World Cup period had a compounding impact on bookings. Post-World Cup, we've seen a pickup in bookings in Europe, although the unusually warm and dry weather in Northern Europe continues. Average daily rates for accommodations, or ADRs, were relatively flat for Q2 versus prior year on a constant currency basis, which was better than our forecast of down about 1%. Foreign exchange rates favorably impacted Q2 growth rates in U.S. dollars by about 400 basis points. However, given the strengthening of the U.S. dollar since our last guidance, exchange rates for the quarter were unfavorable by about 100 basis points from that time. Q2 gross bookings grew by 15%, expressed in U.S. dollars, and grew by about 11% on a constant currency basis, coming in about 2 percentage points above the high end of our guidance range. Consolidated revenue for the second quarter was $3.5 billion and grew by 20% in U.S. dollars and by about 16% on a constant currency basis. Future revenue includes $40 million from the Momondo Group, an acquisition we closed in July 2017. Revenue for the second quarter of 2018 under the current revenue standard was about the same as it would have been reported under the previous revenue standard. Advertising and other revenue, which is mainly comprised of non-intercompany revenues from KAYAK and OpenTable, grew 34% in Q2 compared to the prior year, including revenue from Momondo. GAAP operating income grew by 37%, and GAAP operating margins increased by 432 basis points compared to Q2 of last year. GAAP net income amounted to $977 million or $20.13 per share, which grew by 40%. Our GAAP net income includes a $21.8 million benefit related to an unrealized gain on our equity investment in Ctrip, which is now recorded in the income statement rather than the balance sheet due to an accounting change that took effect in Q1. We excluded this unrealized gain from our non-GAAP results. Our GAAP tax rate for the quarter was 19.2%, which was a little better than forecasted. Adjusted EBITDA for Q2 amounted to $1.313 billion and grew by 35%. Adjusted EBITDA also excludes the previously mentioned Ctrip gain. Our adjusted EBITDA margin of 37% was substantially better than our forecast, due mainly to performance marketing efficiency, higher revenue in the quarter, and lower-than-expected spending on brand marketing due to the factors that Glenn discussed, plus some timing, primarily in digital channels. As expected, non-marketing OpEx pressured year-over-year margins as we continue to invest in new markets and new capabilities, as Glenn described in his remarks. Our non-GAAP EPS was $20.67, up 36% versus the prior year. Non-GAAP net income reflects a non-GAAP tax charge of a 19.3% tax rate in Q2, which increased from the prior year due to the impacts of the U.S. Tax Act and the higher Innovation Box tax rates in the Netherlands. Our cash and investments amounted to $16.8 billion at quarter-end. In Q2, we generated $1.6 billion of operating cash flow, which grew by 35% compared to the prior year. Our free cash flow for the quarter was $1.5 billion, which is 35% higher than Q2 of '17. We returned about $1.2 billion during the second quarter to our shareholders through share buybacks. Since the start of the year, we reduced our fully diluted share count by approximately 2%. As of June 30, we had approximately $8.6 billion remaining of our share purchase reauthorization. We continue to be both programmatic and opportunistic regarding our repurchases and, under stable business and market conditions, expect to complete this authorization within the remainder of the 2 to 3-year time period we talked about last quarter. Turning to Q3. Our guidance reflects our quarter-to-date actual results and assumes that our growth rates will decelerate over the remainder of the quarter, mainly due to the size of our business and consistent with long-term trends. Our approach to guidance has not changed. Foreign exchange rates are expected to be an approximately 200 basis point headwind to year-over-year growth rates in Q3, which represents an approximately 300 basis points unfavorable change from where FX rates were at the end of April and approximately 200 basis points from the date of our last earnings call. We used a dollar to euro exchange rate of 1.17 when setting our Q3 guidance. We are forecasting booked room nights to grow by 69% and total gross bookings to grow by 3% to 6% in U.S. dollars and by 5% to 8% on a constant currency basis. Our Q3 forecast assumes that constant currency accommodation ADRs for the company will be about flat compared to the prior year. We forecast Q3 revenue to grow by 6% to 9% in U.S. dollars and by 8% to 11% on a constant currency basis. Q3 adjusted EBITDA is expected to range between $2.3 billion and $2.36 billion, which represents 5% to 8% growth versus the prior year. We forecast that adjusted EBITDA margin will be slightly lower than Q3 last year. Our Q3 forecast assumes that our ROI optimization efforts will continue to yield year-on-year performance marketing efficiency. However, we expect the year-over-year improvements to moderate as we begin to lap these optimization efforts, which started in the middle of Q3 last year. We expect the deleverage from our investments in brand marketing and non-marketing OpEx expenses will more than offset the leverage from performance marketing in the quarter. On the last call, we commented that deleverage from non-marketing OpEx and brand marketing will diminish in the second half as we lap investments we made last year. We expect this to continue to be the case for non-marketing OpEx. But due to the phasing of our brand spending, we expect deleverage in the second half of the year. We forecast GAAP EPS to be between $35.85 and $36.85 for Q3, which represents 4% to 7% growth versus the prior year. Our EPS guidance assumes a fully diluted share count of about 48 million shares, which reflects a beneficial impact of our common stock repurchases we made to date. Our GAAP EPS guidance for Q3 assumes a tax rate of approximately 21% compared to the prior tax rate of 17%. Our current year tax rate is higher than last year due to impacts of the U.S. Tax Act as well as the increased rate of Innovation Box Tax in the Netherlands. We're forecasting Q3 non-GAAP EPS of approximately $36.70 to $37.70, which represents 4% to 7% growth versus the prior year. Our non-GAAP EPS forecast includes an estimated income tax rate of approximately 21%, which is higher than the prior year rate of 17%, due to the same reasons I just discussed for the GAAP rates. We have hedged contracts in place to substantially shield our third quarter EBITDA and net earnings from any further fluctuation in currencies versus the dollar between now and the end of the quarter, but the hedges do not protect our gross bookings, revenue, or operating profit from the impact of foreign currency fluctuations. Our forecast does not assume any significant change in macroeconomic conditions in general or in the travel market, in particular. With that, we'll now take your questions.

I have two. The first one, on the performance marketing optimization. Just curious, as we think into the back half and into 2019, philosophically, are you still looking for further areas for ROI and performance optimization of business more efficient that we should expect to go into the back half and into next year? And then secondly, on Europe. Just kind of looking for any further color on the growth of your largest business in Europe as you're guiding to a single-digit overall room night growth. How should we think about the potential for European growth rate over the next, call it, 2 years or so, given how large the business is at this point?

Brian, it's Glenn. I will share my thoughts on this first, and then I'll let David weigh in. Regarding optimization, we've discussed our reasons for optimizing and our goal of developing a stronger brand and direct marketing strategy. Predicting outcomes in these fast-changing pay-for-performance markets is challenging due to various influencing factors, especially competitor actions. However, as I mentioned in my prepared remarks, it goes back to what I said nearly a year ago. For advertising platforms that are open to collaborating with us, we can create a better business together that enhances customer experience and builds our brand. We are eager to work with them, and we have successfully partnered with several, although some are more cooperative than others. The outcome depends significantly on the actions of others. As for Europe, we have a substantial business there, making it our largest geographical market. However, it still represents a relatively small portion of the overall travel sector in Europe. We have many opportunities left, particularly in our core hotels located in urban areas, as well as in the fast-growing non-hotel accommodation sector with NHA. We also aim to provide a comprehensive travel service. I believe there is still plenty of room for growth, and we are at different developmental stages in these areas. Thus, I don’t think we are running out of potential. I'll now pass it over to David.

Thanks, Glenn. I want to emphasize that in exploring the market opportunity, even in our strongest areas, there is significant potential for growth. This applies not only to new markets but also to the traditional hotel segments where we dominate certain travel segments while having less presence in others. We see considerable growth potential that exceeds the market growth rates in Europe. Regarding performance marketing optimization, Glenn summarized it well. These markets are dynamic, and we achieved strong results in Q2, surpassing our expectations due to effective optimization, which contributed significantly to our performance. We understand the importance of these channels and continuously seek optimization opportunities, but they also serve as growth avenues for us. It’s all about finding the right balance. As Glenn mentioned, it is a dynamic marketplace that's somewhat unpredictable. Currently, we feel well-positioned in balancing growth and profitability through our optimization efforts. However, we are constantly experimenting in these channels, which is likely the best way to describe our approach.

I know it's probably nitpicking, but just obvious question would be, if it's possible in any way to quantify the incremental impact that you think you had from World Cup that you weren't anticipating as well as some of the poor weather. Also, I think in the past, you said that weather tends to not be a focus as consumers tend to be pretty flexible. But why is that not necessarily the case this time around? And just on a follow-up, what, if any, impact are you seeing with Google's news and changes in the hotel search arena in terms of your share of overall travel traffic from that channel?

So Mark, I'll address the first question and then I’ll let Glenn take the second. It’s useful to clarify what we factored into our Q2 guidance regarding the World Cup. As I mentioned in the previous call, the main influences included the performance of various teams. To start, we incorporated less than half a point into our guidance. We noticed a combination of factors, particularly with many major booking countries situated in Northern Europe experiencing unusual weather during the World Cup. I spent a lot of time in Holland during that period and witnessed the activity firsthand. We believe that the combination of these two aspects had a more significant impact than we initially expected. It's challenging to quantify as it's hypothetical, but it’s worth noting. Towards the end of the World Cup, which obviously affected the last two weeks of June and the first two weeks of July, several larger booking countries made it to the semifinals. Historically, we’ve found that when teams perform well in the World Cup, it positively influences bookings, which is evident during the games and over time as well. This trend continued into July, and we wanted to highlight that. After the World Cup, we observed a rebound in bookings in Europe, but the ongoing weather conditions are significant enough to mention. Currently, Europe is experiencing an unusual weather pattern; Northern countries are hitting temperatures in the 30s Celsius, while Southern Europe is reaching 40s, making it less appealing to sit on the beach in such heat. Others have pointed this out, and we wanted to emphasize it as the World Cup played a role in our Q3 guidance, alongside the weather impacts. We notice this particularly when we analyze the travel patterns from Northern to Southern Europe, leading us to call attention to these factors in our business outlook for this quarter.

And regarding Google, I'd want to emphasize a couple of things. One, we have been working with Google for a very, very long time. Symbiotic relationship helps build both of our businesses in the travel vertical, and we're continuing to do that. And we are pleased with where our share is in Google in all their different products right now. And they continue to develop new products, new ways to reach out to their customers to provide their customers with a good experience. And we work with them and provide that travel service to our customers. And it's really worked well for us over the last more than a decade, and I think it's going to continue to work that way. Clearly, in certain parts of the world where travel growth is faster, Google has less of an ability to get customers. I, of course, speak to China right away. I mean, that's an area where, as of today, Google would not be a supplier of customers to us of any great state. So we are going to continue to work with them well. And I have confidence that we're going to have a good relation going forward, and we're always looking forward to the new things they're working on because that can help our business.

I have two, if I can. First, just asking a question in another way. Given your view that there's a lot of room left in the core markets and in your newer NHA markets, are you guys happy with the outlook for single-digit room night growth? Or is your base case that you can grow faster than that looking out over the next few years, given the runway left? And then second one, just kind of strategically, as you guys shift the focus beyond hotels, it seems like the different products are still a bit siloed. So I'm just wondering what the strategy is for integrating your experience. Is that effort being led by the Booking.com team? And what kind of product investments do you need to make here? Whether that's building out individual products, building an underlying platform, and do you see risk at core hotel conversion as you develop this strategy of kind of a more holistic travel product? Just curious if you can share some thoughts there.

Sure. It's Glenn speaking. In response to your question about our growth, I want to clarify that I'm never satisfied with our progress. No matter how quickly we grow, my desire is always to grow faster. We're a competitive organization, and we aim to excel at every level. Regarding whether we're going to remain in single-digit growth, part of our strategy revolves around balancing profit and growth through careful optimization. While it's possible to acquire more growth, we must consider the cost and whether it benefits our long-term goals. Currently, we are content with our investments and the positive impact they’re having on our bottom line. We believe our efforts in developing a holistic travel system will offer a significantly improved solution for global travelers and bring us competitive advantages. As for your point about the various siloed companies within our organization, we are actively addressing that. Earlier this year, we integrated our rental car company under the Booking.com umbrella to streamline ground transportation services for our customers. This effort extends beyond just rental cars to all forms of ground transportation. We're also collaborating behind the scenes between Agoda and Priceline to enhance our systems. While it's important to consider the risks involved, particularly concerning our core hotel business, we are mindful of those risks and are implementing safeguards to ensure our strategy does not adversely affect it. I believe we are managing this well and feel positive about our current position and future direction.

Could you elaborate on the advertising strategy, particularly the shift from performance marketing to brand advertising? It appears that you weren't able to spend as quickly as anticipated on brand advertising. Can you explain why that is? Was it a matter of not finding the right pricing or channels, or was the return on investment not as favorable as expected? Additionally, in the larger context, your goal seems to be building customer loyalty, which should ideally reflect in improved margins. How do you plan to measure the success of this strategy? Are there specific growth goals for room nights or bookings that you're targeting? I understand you're aiming for both margins and growth, but what specific growth objectives do you have in mind with this shift towards brand advertising?

Yes, the brand, and I wanted to highlight that we did not spend as quickly as we would have preferred. This is due to the strategy we discussed at the beginning, which focuses on a more direct approach that includes enhancing our brand initiatives. From the outset, I made it clear that we would approach this wisely. I've consistently emphasized the importance of being prudent in our strategy. Our approach involves experimentation: we test and analyze data, and if something is effective, we scale it; if it isn't, we adapt and determine what adjustments are needed. This process is iterative. Many factors contribute to this, such as the type of creative we are using, the feedback we receive, and the various channels employed. With the emergence of new channels beyond just TV, particularly various video platforms, we monitor how those responses are performing. Overall, our focus remains on experimentation, evaluation, and iteration, similar to how we developed our pay-for-performance model. Currently, we believe this approach is appropriate, and it doesn't make sense to spend excessively without expecting results. As for measuring success, the best indicator is the growth in our direct business; an increase here indicates that our brand efforts are effective. Approximately 50% of our bookings are now coming from direct channels, which is on the rise, and we are attracting new users in this segment. This is what I'm using as a gauge to determine whether our branding is successful.

A couple of things. First, on the market share, you haven't gained as much this year as in prior years. Has anything really changed in June or July? If we see the industry data that you're looking at, do you think you've held up your market share in the last couple of months? Any big changes there? And then, David, on your guidance, did you guide deceleration off of a slow start in July? Or was that off of kind of the more recent improved trends? And then maybe one housekeeping. Your take rates are much higher this quarter, and I'm assuming that's just because the booking growth slowed a bit in your marketing strategy. Was there any change to the underlying take rates in the hotel business?

Justin, thanks. I'll address your questions in the order you presented them. Regarding market share, when we evaluate our percentage of the total rooms available in our portfolio, which is what we can measure and manage, we continue to see growth in our share on a quarterly and monthly basis, and we find that encouraging. Some refer to this as our sell-through rate. We are pleased with our ongoing share gain within an expanding portfolio. As for the guidance, I want to emphasize that our approach has remained consistent. This is a crucial point to consider. When we provided the guidance, we took into account several factors, including the trends we observed in June and July, which were influenced by some of the earlier comments I made. Additionally, the guidance reflects a deceleration throughout the remainder of the quarter, suggesting there may be some opportunities ahead. These are the elements that shaped our guidance figure. Regarding take rates, there is not much to note except for the effect of the book-to-stay ratio, which as we mentioned over the past couple of quarters, may be leading to slightly shorter windows. This is also influenced by various timing factors in the second quarter. Essentially, the book-to-stay window likely has the most significant impact on the take rates you’re observing.

Just a couple of questions. First, to clarify your earlier comments, have you experienced any negative impact from the weather? Can you quantify the effect of the heatwave in Northern Europe or provide an estimate of how much it has affected growth? To be clear, since this situation is still ongoing, have you adjusted your projections downward based on that, rather than expecting an improvement due to better weather? I have one more question.

Kevin, to clarify, it's difficult to predict the weather. If anyone could do that, we wouldn’t be here; we would be engaged in other activities. However, we did experience some impact at the end of July due to the weather pattern, especially in conjunction with the latter half of the World Cup, and that influenced our July results. As we typically do, we have adjusted our Q3 guidance to reflect a certain level of deceleration based on that information. This reiterates what I mentioned in my prepared remarks. What was your second question?

Okay. Okay, understood on that part. And then just a question on the direct business. You said it accounts for about 50% of nights. And can you give us more information on how you're defining that? So specifically, are you adjusting out direct nights where users have been influenced by clicking on your online advertising in the prior 30-day period? And in addition, are you including SEO? Are you including brand SCM on branded keywords? And are you including mobile app traffic that may have been driven by advertising? Just so we can understand that metric that you disclosed a little bit better.

Sure. The direct traffic consists of users who come through unpaid channels, which includes SEO but excludes brand searches or brand paid search clicks. To be clear, we are using a narrow definition of direct traffic, and while others may have taken a broader approach, we are sticking to a pure perspective. It is worth noting that traffic from our advertising efforts is acknowledged, and a significant portion of direct traffic comes from mobile app users. Importantly, we are focusing on users who have not been influenced by paid advertising when they make a booking.

I definitely appreciate the color on the World Cup and European weather. But just given the fact that the comp is certainly notably easier into 3Q, is there anything else that's impacting room nights and the FX-neutral bookings growth in the third quarter? So that's for David. And then, Glenn, just on China, can you talk a little bit more about the investments in DiDi and Meituan and your strategy here and how they tie operationally to your efforts in China? Should we view the value there more in the equity investments, in the stakes, or in how they can help actually drive bookings business?

Yes, Doug, I'll address the first part. I believe you are referring to the performance marketing optimization comparison. Let me clarify what's happening there. As we've mentioned, performance marketing optimization has benefited our profitability but has also cost us some growth over time. However, we do not think we have significantly lost market share in the performance marketing channels overall. While our reduction in spending has led to lower growth in those channels, we believe our share has remained relatively stable. Additionally, last quarter’s optimization was only a partial implementation, so we haven't had a full comparison this time. Therefore, we do not anticipate a significant increase in growth in Q3 due to changes in market share in those channels, mainly because the share change was minimal and because it’s only a partial comparison.

I'll discuss our strategy in China. We've identified China as a key driver of growth in the global travel industry, presenting significant opportunities. Notably, less than 10% of Chinese citizens currently hold passports, indicating vast potential for expansion that we aim to capture. However, working in China can be challenging for foreign companies. Our strategy focuses on maximizing our potential by building our brand and developing our capabilities in China, while also partnering with local companies that have robust customer bases leveraging the Internet. We've established collaborations with DiDi and Meituan, and also have a significant partnership with Ctrip, where we invested over $2 billion. We committed around $450 million in Meituan and $500 million in DiDi. The investment in DiDi revolves around three key pillars. First, we aim to create a holistic travel system, with ground transportation being crucial as foreign visitors typically do not rent cars in China. By teaming up with DiDi, we intend to offer a seamless experience through our Booking.com and Agoda apps, providing our customers with easy access to ground transportation. Second, this partnership will aid in building our brand amongst DiDi’s users through various marketing efforts. Third, we naturally seek a solid return on our investments. Meituan and Ctrip also offer strong travel services, and we cooperate by sharing inventory for outbound hotels, enabling their customers to access accommodations abroad while we work together on inbound opportunities. While progress is challenging, we're excited about the potential and future developments, including the DiDi-integrated app that is still in the works.

Just a couple. So Glenn, can you just maybe give us some more color on this direct traffic? And I think you mentioned that it's becoming the fastest-growing channel for new customer acquisition. Is there any positive impact on this direct traffic from the brand advertising purse that you have been doing for the last, at least, a year? And then I have a follow-up.

It's challenging to determine the exact reasons when someone approaches us directly. We hope part of it is related to brand spending. A portion of this is certainly due to our excellent service. People may have initially found us through a paid advertisement, used our service, enjoyed it, and are now coming directly to us. The key is that improving our systems fosters loyalty. Looking at companies outside the travel sector, we can observe the advantages they gain. For example, people don’t use search engines to shop on Amazon; they go directly to Amazon because it offers superior service. Therefore, we recognize the need for brand marketing to raise awareness and attract customers. Ultimately, success in the long run relies on offering the best in numerous areas, such as pricing, availability, selection, ease of use, and customer service. Those are our focus areas. We are also working on various initiatives, which is why we’ve hired more staff, including data scientists, and are investing in machine learning to personalize our service, ensuring it’s smooth and easy. We aim to create a travel experience that's as convenient as using Uber, where everything is seamless and unobtrusive, allowing people to achieve our mission, which is to help them explore the world. What would you like to ask next?

Yes, yes, on just the cloud efforts. Are you doing anything on the cloud? And anything on the AI machine learning front?

Well, of course, we're doing a lot of things on AI. We've hired a lot of people. We brought in companies. We bought a company called Evature out of Israel. It's very highly specialized in some natural language processing stuff. And we've done a lot of things to try and make sure that all technologies are being brought in as quickly as possible and utilized. Now I'm not going to get into specifics about cloud. Of course, we do some things at cloud. Some things are on our own data center stuff. And I'll leave it up to our extremely qualified and capable IT people to determine what's the best way to do it, what's the most efficient way to do it, what gives most flexibility and all of those things, but we're not going to call out anything in particular. And David, who actually comes from a technological background, I'm going to let him add to that.

Yes, I would characterize our cloud strategy as very much a hybrid cloud, which is a recognition of its value in both private clouds and public clouds and certain applications based upon volumes, capacity, performance, decent troughs, et cetera, are better sitting inside a private cloud and some are in a public cloud. And we're basically looking at that spectrum across a whole range of attribution capability, including things like natural language, machine learning, et cetera. So hybrid is the approach that we're taking, and I think that's the appropriate approach.

A couple of quick follow-ups regarding the brand spending. We value the iterative testing you're doing and your intention to deploy this brand spend. Are you experiencing any effects from GDPR? While it may not have a direct cost for you, is there a general sense of sluggishness as the EU digital advertising sector adjusts to its implementation? Glenn, what are your thoughts on your NHA inventory? It seems to be expanding well, and how does the bookability look?

GDPR has caused some temporary delays in our brand spending, but it's not a long-term issue. Certain platforms needed to pause their efforts to prepare for GDPR compliance, which pushed back some of our testing and experimental initiatives. However, this is just a short-term timing matter, and we're focused on the long haul, so a couple of months isn't a major concern. Regarding NHA, we currently have 5.5 million listings, and while I'm not entirely satisfied and always want to see more, there are specific categories where we need to continue developing. We've discussed the single-property owners as an area needing more attention, especially for those with homes in places like the Outer Banks or Vail, and we need to extend those efforts globally. It's crucial to build our marketplace not only by increasing inventory but also by making sure customers worldwide are aware of our excellent service. I believe we offer a great service, allowing customers to easily compare NHA options with our core hotel offerings. Our payment process is straightforward, with no surprise customer fees at checkout, which enhances the experience. We're aiming for a holistic approach that goes beyond just accommodations. Specifically, we need to increase our inventory, particularly in the U.S., where I find customers are less aware of our offerings compared to Europe, where awareness is higher. This is the direction we're focused on.

Just had a few I wanted to get a sense on. Glenn, I know we've spent a lot of time talking about brand marketing. But if we look at the first half, brand is still only about 1/10 of what you're spending on, on customer acquisition. Where do you see that settling out? With this emphasis, does that become half? Does it become the majority over time? What's the goal that you and your teams have for that? And then competitively, I'm kind of curious how you think about the benefit to your competitors as you pull back on marketing spend like this. I think it's notable that Expedia was able to maintain their growth rate and expand margins for the first time in several quarters as you and others in the space were pulling back on marketing. How do you think about what that does to sort of the long-term competitive balance in the space? And then, David, you mentioned that your approach to guidance hasn't changed. In the past, you guys have averaged about 300 basis points above the high end of your guidance on bookings. Was that line specifically to suggest that what we've seen these last few quarters relative to your guidance is less of an indicator of how we should think about Q3?

On the brand question, it's quite challenging to establish a long-term target. It's not only because it’s difficult to make predictions about the future, but also because the landscape of branding is evolving rapidly with new channels and measurement methods emerging. For instance, a few years ago, advertising on YouTube was not very effective, but now it’s growing quickly. I want to clarify that when I mention growth, I'm referring to YouTube advertising as a whole, not just for the travel sector. Measuring effectiveness can be tricky, and the dynamics in social media advertising are also changing swiftly. It’s hard to determine specifics since branding methods are continually evolving. As we’ve consistently stated, our approach involves experimentation and testing, and if we find it to be increasingly effective, we’ll escalate our efforts. I truly believe that over time, we will be able to leverage brand advertising to expand our direct business, but I won't commit to a specific percentage of our spend for year four. What was your second question, by the way?

The competitive point regarding Expedia and others.

Oh, yes. So what's interesting, of course, when the advertisers go to optimize, and there's less revenue now going to a particular or several advertising platforms, they then have less money to go out and try and get customers. So their growth then slows. So if their growth slows, even though all the advertisers may be in the same share and doing the same amount of share, they may not have the growth rate they had before because the core platform is not growing as rapidly as it used to do. So I think when we look back and we see the amount of spend being done by some of the advertising platforms in the past of very, very heavy weeks, that probably brought forward some people who may not have been as familiar with how to get travel online. And now perhaps those people who came on and now because they're slowing in terms of the amount of spend in that type of brand to bring customers to these advertising platforms, maybe that is an influence on the overall flow or amount of growth in that area. That would be the way I'd say it.

And then, Heath, to pick up your third point, I was going to say I'll avoid getting into the specific quantification. But what I'll just say is that the way the company has approached guidance over the last several years and quarters, I think is one that's been beneficial and appropriate. And we haven't changed that as I've come in and worked with the team, and we continue to factor in the same issues when we look at our guidance. And obviously, we leave ourselves some potential to do better.

Two questions. First, with the HotelsCombined acquisition and then Momondo previously, should we view these acquisitions as a strategy to sort of build out a portfolio of diverse smaller metasearch channels? Are there opportunities to continue this strategy? And then more broadly on performance, you know that you're willing to reinvest on certain performance channels, depending on the levels of branding that you get on them. Is it kind of safe to say that prices and ROIs on these channels are something that you're comfortable now at these levels?

I'm happy to address that, and I'll let David provide additional details. We're pleased with the HotelsCombined deal, which hasn't closed yet but we anticipate it will before year-end. Regarding Momondo, you’re right that we’ve partnered with some smaller players. Our strategy focuses on scalability in these areas. By integrating these meta companies with established customer bases and unique strengths, we can optimize our operations and reduce the number of people required to manage everything. There are synergies to be gained, and if more opportunities arise at the right price, we would definitely be interested. We believe we're in a stronger position now than before acquiring Momondo and anticipate similar growth with HotelsCombined. This approach actually began long before the KAYAK acquisition when KAYAK initially explored similar opportunities. Steve Hafner, our CEO, was instrumental in that deal, and his vision remains unchanged.

Yes. Our performance channels are very important for us and our customers, making them a strategic part of the business. As Glenn mentioned, our strategy in these channels remains consistent, and we will focus on the channels that are most appealing to us as advertisers. This will enhance our customer experience and strengthen our brand. Our relationship has been excellent, and we expect it to continue. Compared to a year ago, we are pleased with the returns we are seeing from these channels, maintaining a good balance between growth and profitability. As Glenn said, we are not fully satisfied; there is always room for improvement. We are currently seeking incremental enhancements and closely monitoring ROI and growth in these channels. I would summarize our current position as pleased but not satisfied.

Just a couple of follow-ups. Can you talk about hotel inventory, just geographically where you're really focused on adding supply this year, if anywhere? And does that give you incremental opportunities to maybe spend on performance marketing later in the year as you get bigger in certain markets? And then second, just what does your direct booking retention rate look like today versus, say, I don't know, 2, 3 years ago?

Regarding inventory, we do not specify where we are aiming to increase it. Some of our competitors have been more open in the past, which has benefited us in terms of our strategy. However, I prefer not to share similar specific details. Our team is consistently working to acquire more inventory because we see it as a key driver for business growth, and they are actively engaged in this effort. We have highlighted the significance of enhancing our offerings in non-hotel accommodations, as we recognize that it's an area where we need to make further improvements. Now, I'll let David address the next topic.

Yes. I think in terms of retention rates, we're not going to give you a specific data point, but I'd say that we're certainly pleased with our Genius customer group in terms of how well that has developed and the level of retention in repeat booking we get out of those customers, which has continued to be a focus on the business. So we've seen not only is direct increasing and becoming now very close to half the business, but we do see, obviously, a much stronger retention rate, particularly in those customers who are part of our different closed-use programs. So that is a good trend for us, not only in terms of the growth as the mix of the business shifts towards more direct, but also, as Glenn said, building out this loyalty factor where we want people to be coming back to us as their preferred travel partner with a whole broad range of capabilities and travel experiences.

Okay. So I want to thank everybody again. I want to just reemphasize a couple of points. One is that we believe we're on the right track. We believe we are building the business the way we want to. We believe we have the right mix in terms of profit and growth right now. And we are pleased with our level and where we are at this stage of progress. I also want to thank all our employees around the world who have worked so hard. This is a very, very busy season for them right now, and I just want to reach out to them, and we appreciate greatly the amount of effort they are putting in there. And of course, we always want to thank our supplier partners and our customers who, without them, there'd be no reason for us to be here. So thank you, and see you in three months.