Booking Holdings Inc (BKNG) — Q3 2018 Earnings Call Transcript

Thank you, and welcome to Booking Holdings' third quarter conference call. I am joined this afternoon by our CFO, David Goulden. We had solid execution in our busiest quarter of the year and passed a new milestone of 200 million room nights booked in a single quarter, reporting 201 million worldwide room nights booked. This is up 13% year-over-year and exceeded the high end of our guidance range. Consolidated gross bookings were up 12% year-over-year in U.S. dollars or about 14% on a constant currency basis. Our revenue increased 11% year-over-year in U.S. dollars or about 13% on a constant currency basis, and adjusted EBITDA grew 8% in U.S. dollars with a similar currency impact on the year-over-year growth rate. Our strong room night growth rate was helped by our later-than-normal summer booking system. In addition, we have higher growth coming from our performance marketing channels, which benefited in part from our lapping the start of last year's optimization efforts. Our guidance for Q4 room night growth of 12% reflects our expectation that we will have more stability in our top line growth rate and reflects the continuation of our marketing spend. And we note that we continue to grow significantly faster than the overall global accommodations market. I am pleased with this strategic approach we have taken with our paid channels this year. Going forward, we expect these markets will remain very dynamic, which is why we'll continue to employ our data-driven approach to achieve the right balance of growth and acceptable ROIs. We will look to spend in the paid channels when we see opportunities to acquire high-quality traffic at attractive ROIs. And as I said before and want to emphasize, we work closely with those advertising partners that help us build our brand and maintain our competitive strengths while working in a manner that is best for our customers. Conversely, we will reduce our participation with those who do not work in a way that we believe best serves our customers. As you can see in our results, we're beginning to ramp up our brand advertising. As we've discussed in the past, we expect to increase our brand advertising efforts to further our goal of bringing more customers directly to our platforms and to increase product awareness, particularly in our home segment. We are increasing our spend in digital channels as they provide efficient reach and allow us to better measure the effectiveness of our spend. This is part of our long-term strategy. And though we expect to increase our investment in this area, we are mindful to spend as efficiently as possible, letting results and data help direct the pace of the investment. We have progressed in many of the investment areas that we have discussed over the current year. In particular, we've expanded our product breadth and customer experience in the areas of alternative accommodations and experiences. We continue to build supply in alternative accommodations. And as of September 30, Booking.com had over 5.7 million reported listings in homes, apartments and other unique places to stay, which is an increase of 21% year-over-year. Booking.com's total reported listings were about 29 million as of September 30. Our room night growth in alternative accommodation remains robust and is higher than our consolidated growth rate. We're also pleased to see that the number of customers whose first-ever booking with us through our home product is growing nicely. We have developed new services specifically for our booking home host. These services include streamlined property onboarding, enhanced guest management tools and property profiling capabilities, which allows hosts to highlight their property's unique aspects. We believe we are building a leading platform to search and discover truly unique accommodations in the same frictionless path that our customers have come to expect from us. And we continue to believe that the best customer benefit comes from offering both hotel and home accommodations on one unified platform. We recognize that building a great home platform is only part of the challenge to building a great home business. And customer awareness of our capabilities, particularly in certain geographies like the United States, is low and will require a higher marketing investment in the coming quarters. However, we believe we are on the right path and, in the long run, will achieve a leading global home business. In the area of experiences, we are building out our product capabilities, creating a seamless integrated way to offer more choices for our accommodations customers. This quarter, Booking.com made progress integrating FareHarbor's products, giving Booking.com access to new local attractions in the U.S. and the ability to leverage FareHarbor's technology to help even more tours and attractions around the world come online. Booking.com's experiences product is scaling well, and we now offer experiences in approximately 70 cities worldwide. In addition, we are making progress with experiences in other areas such as offering at-hotel services and restaurant booking options that we note are nascent efforts. As mobile becomes an increasingly integral part of the travel ecosystem, we continue to invest in our mobile platform, so we can offer all of our products, accommodations, ground transport and experiences, whenever and wherever our customers may be. We are happy with our progress in this area as today, over 50% of our accommodation booking transactions come from mobile devices. We continue to seek ways to promote cross-brand initiatives that allow us to share best practices throughout our company and get further benefits from our multi-brand platform. Priceline and Agoda are now working more closely together in certain overlap markets such as the U.S., and we are seeing some efficiencies there. With greater technical and managerial cooperation between KAYAK and OpenTable, we're excited about the pace of innovation happening at both companies. OpenTable has been growing nicely, and we are confident about its large opportunity. We believe through tighter interaction with our other brands in the future, OpenTable will provide benefits to all of our customers and create additional value to our entire enterprise. The number of restaurants on the OpenTable platform has grown by 55% since its acquisition in 2014. And over the prior 12 months, OpenTable has seated over 330 million diners via its online reservation system, which is 69% higher than during 2014. OpenTable is now increasing its development velocity, and we look forward to some exciting improvements in the platform in the quarters to come. Finally, I would like to note our $200 million investment in Grab, the leading on-demand transportation and mobile services platform in Southeast Asia, that we announced last week. This investment and strategic partnership is consistent with our long-term strategy: to create the optimal worldwide travel platform, which will make all aspects of travel easier for our customers by having an integrated seamless way to experience the world at the lowest friction possible. I have mentioned this long-term strategy before and will always be a work in progress as technology changes and advances. But I am pleased to see the initial foundations being laid out. In sum, I am very pleased with our execution in the third quarter. The pace of innovation remains robust, and I am confident in the long-term growth prospects of the company. I want to thank our approximately 24,000 employees for their hard work and dedication during this busy quarter, providing unparalleled service to both our customers and property partners around the world. I will now turn the call over to our CFO, David Goulden, for the detailed financial review.

Thank you, Glenn, and good afternoon. I'll cover our operating results and cash flows for the third quarter and then provide our guidance for the fourth quarter of 2018. All growth rates refer to the same period last year, unless specified otherwise. As we mentioned last quarter, all year-over-year growth rates I reference in my Q4 guidance will compare the current year's income statement under the new revenue accounting standard to the previous year's statement under the old standard. Gross bookings and metrics like room night reservations remain unaffected by the new accounting standard. Our non-GAAP financial results and forecasts include stock-based compensation and are reconciled to our GAAP results in our earnings release. Now, let's move on to our quarterly results. We are pleased to report a 13% growth in booked room nights in Q3, which exceeded the upper end of our guidance range and accelerated from Q2. When we provided our guidance for the third quarter in early August, we faced considerable uncertainty due to the impact of the World Cup and unusual weather patterns in Europe on the summer travel season. After our earnings call, we experienced an acceleration in our room night growth rate, driven by the late summer travel peak and improved performance from some marketing channels. Our direct channel, which is our primary source of new customers, showed continued progress, representing about half of our booked room nights and growing faster than our overall growth rate. Average daily rates, or ADRs, rose over 1% in Q3 compared to the prior year on a constant currency basis, exceeding our forecast of flat growth. Strong ADRs in key travel markets more than compensated for the negative impact from the mix. Changes in foreign exchange rates adversely affected Q3 growth rates in U.S. dollars by approximately 3 percentage points compared to last year and around 1 percentage point against our guidance. We estimate that these currency fluctuations impacted gross bookings, revenue, and EBITDA growth rates similarly. Q3 gross bookings increased by 12% in U.S. dollars and by 14% on a constant currency basis, surpassing the high end of our guidance range by about 6 percentage points. Consolidated revenue for the third quarter totaled $4.8 billion, reflecting an 11% increase in U.S. dollars and about a 13% increase in constant currency. Revenue for Q3 2018 under our current revenue standard was roughly 1% lower than it would have been under the previous standard. Advertising and other revenue, primarily from KAYAK and OpenTable, rose by 14% in Q3 compared to the previous year, including revenue from Momondo, which we acquired in July 2017. In the third quarter, we began to see the results of our strategy to optimize performance marketing ROIs that started in mid-Q3 2017. Consequently, we continued to gain leverage from performance marketing, although at a lower rate than in the first half of the year. However, this leverage was more than offset by increased sales and other expenses driven by the growth of our merchant business at Booking.com. We expect ongoing pressure on these expense lines as we scale our merchant business. A significant portion of these expenses are offset by revenue. As part of our initiative to boost direct traffic to our websites, we increased our brand marketing spending by 27% compared to Q3 last year, contributing approximately 40 basis points of deleverage. As anticipated, the year-on-year margin pressure from non-marketing operating expenses diminished in Q3 relative to the first half of 2018. GAAP operating income grew by 7%, while GAAP operating margin decreased by about 170 basis points compared to Q3 last year. GAAP operating income for Q3 was negatively affected by a $23 million pretax travel transaction tax charge related to prior periods, recorded in our G&A expense line. GAAP net income was $1.8 billion, or $37.02 per share, representing an 8% increase. This figure includes a $31 million pretax net benefit from unrealized gains and losses on equity investments in Meituan and Ctrip, while also being impacted by the mentioned travel transaction charge. We excluded this unrealized gain and the travel transaction charge from our non-GAAP results. Our non-GAAP tax rate for the quarter was 21%, aligning with our forecast. Adjusted EBITDA for Q3 totalled $2.36 billion, hitting the high end of our guidance range and reflecting an 8% increase year-on-year. As mentioned, our growth rates were negatively affected by changes in foreign exchange since our last guidance. Our adjusted EBITDA margin was 49%, slightly below our forecast, influenced by increased marketing expenses that supported our room night growth. Our non-GAAP EPS was $37.78, marking a 7% increase compared to the prior year. The non-GAAP net income reflected a tax rate of 21.1% in Q3, rising from the previous year due to the U.S. Tax Act impacts and the high Innovation Box Tax rate in the Netherlands. Our 4% reduction in share count in Q3 compared to last year mitigated the adverse effects of higher tax rates on EPS growth. Our cash and investments totalled $16.2 billion at the end of the quarter. In Q3, we generated $2 billion in operating cash flow, growing by 4% quarter-on-quarter and by 22% year-to-date compared to the prior year. Our free cash flow for Q3 was $1.8 billion, reflecting a 2% quarter-over-quarter increase and a 19% year-to-date increase compared to last year. We returned around $2.2 billion to shareholders during Q3 through share buybacks. Since the beginning of the year, we've reduced our fully diluted share count by approximately 4%. On September 30, we had around $6.4 billion remaining on our share repurchase authorization, and we plan to continue with programmed and opportunistic repurchases. Under stable business conditions, we expect to complete this authorization within the 2-3 year timeframe discussed in May. Moving to Q4, our guidance incorporates our quarter-to-date results, anticipating a deceleration in growth rates for the remainder of the quarter, consistent with our long-term trends. Our approach to guidance remains unchanged. Foreign exchange rates are expected to pose a 4 percentage point headwind to year-over-year growth rates in Q4, which we estimate will similarly affect gross bookings, revenue, and EBITDA growth rates. We used a dollar-to-euro exchange rate of 1.145 to set our Q4 guidance, forecasting booked room nights to grow by 9% to 12% and gross bookings to increase by 6% to 9% in U.S. dollars, and by 10% to 13% on a constant currency basis. We expect constant currency ADRs to rise by about 2% compared to last year. We forecast Q4 revenue growth of 13% to 16% in U.S. dollars and 17% to 20% on a constant currency basis. Our Q4 revenue as reported under the new revenue standard is projected to be about 5% higher than it would have been under the old standard. Moreover, our EBITDA margins and growth rates compared to last year will also benefit from the changes in the revenue accounting standard. Q4 adjusted EBITDA is expected to range from $1.19 billion to $1.22 billion, indicating growth of 11% to 14% year-on-year, although we anticipate a modest decline in adjusted EBITDA margin compared to Q4 last year. When excluding the impact of the revenue change, Q4 forecasted EBITDA will be roughly flat compared to last year at the midpoint of our guidance range. It's essential to note that this growth rate was negatively influenced by unfavorable currency changes year-over-year. To clarify the underlying drivers and leverage dynamics in Q4, I will discuss these on a like-for-like revenue basis to eliminate the benefits from the revenue accounting change. We expect to see deleverage from performance marketing expenses in Q4, reflecting the full impact of lapping our ROI optimization efforts that began in mid-Q3 last year. We plan to further invest in certain performance channels where we see high-quality traffic. Additionally, we expect our brand marketing expenses to grow at a faster rate than Q3, adding more deleverage to our P&L. We believe that prudent investment in brand marketing is crucial to driving more direct traffic and building better product awareness. Sales and other expenses are projected to continue exerting margin pressure due to the growth of our merchant business. We are still focused on expanding our merchant platform to enhance our business and for various beneficial transaction effects. Lastly, we anticipate ongoing deleverage in personnel expenses from investments we made in the latter half of 2017 and earlier this year. We project GAAP EPS to be between $18.05 and $18.55 for Q4, assuming a fully diluted share count of about 46.8 million shares, reflecting the positive impacts of our repurchase activity to date, which will lower our share count by 6% compared to Q4 last year. Our non-GAAP EPS guidance for Q4 assumes a tax rate of around 20%. It's worth noting that our GAAP tax rate in Q4 last year was negatively impacted by a one-time expense related to the U.S. Tax Act, rendering it not comparable. We are estimating Q4 non-GAAP EPS of approximately $18.90 to $19.40, representing 12% to 15% growth year-over-year. Our non-GAAP EPS forecast incorporates an estimated tax rate of roughly 20%, higher than the previous rate of 17% due to the effects of the U.S. Tax Act and the increased Innovation Box Tax rate in the Netherlands. The adverse impact from the higher tax rate is more than compensated by a lower share count compared to last year. We have hedge contracts in place to significantly protect our fourth quarter EBITDA and net income from currency fluctuations versus the dollar until the end of the quarter, although these hedges do not shield our gross bookings, revenue, or operating profit from foreign currency impacts. Our forecast does not assume any major changes in macroeconomic conditions or the travel market specifically. We will now take your questions.

I would like to ask about the marketing strategy. I understand you've shifted from performance marketing to focusing more on brand advertising over the past year. It seems that some of the growth you experienced this quarter came from the effects of previous performance marketing efforts. Can you provide insights on this shift towards brand advertising? Do you believe you've reached an optimal balance now? I assume you're continuously experimenting, so I would like to know if, after a year of trying different approaches, you feel you have established a more sustainable growth model due to this marketing shift.

Mark, it's Glenn speaking. So I know you'd like me to be able to tell you it's all fine, stable, and it's going to be the same going forward. But the fact of the matter, these markets, as you all know, are extremely dynamic. So when we find good opportunities, we find high-quality traffic at the ROIs that we like, we step in, and we're going to buy. Similarly, when we think that there's something that we don't like, we're going to step away, whether that's because the platform's acting the way that we don't believe is in the best interest of our customers or for some other reason, we're going to vary how we're going to spend in those pay-for-performance channels. But what I said a year ago and I continue to say it now is the importance of increasing our brand spend. And we're going to continue to do that, and you saw some of the increase already, and we here said we're going to spend more. And the reason is we believe, in the long run, we want to try and drive as much traffic as we can directly, and part of that is creating brand awareness. And we talked about this in the past several times. So I can't give you any sort of specifics about how much we are going to do in performance, is it up or down. I can say there's probably going to be dynamic. There's going to be movements up and down going forward. But I absolutely believe, in the long run, the right thing is we'll try to increase that brand advertising to get people to come direct. David, if you want to add any color, go ahead.

Oh, Glenn, thank you. I think just consistent with Glenn's comments, we did reinforce in my remarks that we're very focused upon the growth and the balance of that direct business, again, which remains our largest single source of new customers and represents about half of our booked room nights. So it's a very strategic part, not the only part. But the spending on brand obviously supports that and also supports our longer-term strategy to expand our portfolios to provide more value to our customers.

I had a couple, if I can. I wanted to first, I guess, follow up on the marketing questions. Can you give us any sense for how we should think about the return timing on the brand spend? And are you planning you're able to scale that up with more confidence around measuring a specific payback? Or is that more of a strategic decision still to spend on brand? And then, I guess, the second one, you mentioned a number of customers making their first booking is growing nicely. So any specific growth kind of rate or relative growth rate to your room nights? Is it faster or slower than overall room nights? Or maybe you can give us an update on that customer count metric given it's been a couple of years since you've updated that. Anything further you can share there?

Lloyd, regarding marketing and our brand strategy, I can't provide specifics on when we expect to see a return on investment. It's still quite early. As we mentioned last year, we talked about increasing our brand marketing and our capabilities to develop tools for measurement, and we are continuing to make progress in those areas. We're pleased with what we're seeing and are increasing our spending. It’s challenging to gauge attribution and determine how much of our brand marketing is contributing to improved performance compared to the past, and there are various ways to assess the true return on investment. We plan to keep experimenting in this area, and I believe our spending will continue to grow, as I mentioned earlier, because we consider it very important. On the second point, I want to clarify what I said – we are seeing an increase in new customers using our "book time with Booking" feature, particularly with our home product. This growth indicates rising awareness of our booking home service, which is encouraging. However, I'm not going to share specific figures in that area.

On the marketing side, the company's marketing spend as a percentage of revenue has been steadily increasing by a couple of hundred basis points each year until recently. It seems like you have now shifted back towards marketing. Should we expect that pace to continue? I'm trying to understand how much the previous year may have been unusual and whether we should look at pre-2017 to gauge the marketing leverage in the business.

Yes, this is David. Let me start by addressing your question. I believe it's important to consider the year in two parts. In the first half, we benefited from our ROI authorization activities compared to less optimized efforts a year ago, and in the second half, we will start to see that effect level out. If you look at the full year, based on the upper end of our guidance for the fourth quarter, we anticipate 13% room night growth, 17% revenue growth, 17% EBITDA growth, and 16% EPS growth, indicating a robust year overall. There have certainly been significant developments throughout the year, and I understand it can be challenging to navigate all the moving parts. A broader perspective on the year can help. Regarding your question about future expectations, I won't provide specific figures for leverage or deleverage at this point, but our long-term outlook for the business remains steady. We are currently in an ongoing ROI adjustment, particularly in our performance channels over the last 18 months, but our longer-term strategy remains unchanged. We aim to invest in the business to achieve above-market growth rates, and we are prepared to accept some modest deleverage in our EBITDA margin rates as we build out our platform and strengthen our market position, while also closely monitoring EBITDA dollar growth. We'll provide more details as we finalize our 2019 plan.

One big-picture question and one housekeeping. On big picture, I think you spent about $100 million more than we thought on marketing, just our estimates, and generated about 6 million more room nights than we were thinking. Did something shift interquarter where you found pockets of better ROI? Or something changed in the market that made you more aggressive on the marketing spend? That's the first question versus your original outlook. And then secondly, just the strength in merchant bookings growth versus agency. Can you just remind us of the dynamics of that?

Sure. I'll take the first one, Justin. I'll let Dave take the second one. So as I remarked earlier, when we see good opportunities, we're going to spend. When we see areas that we don't think are appropriate, we're going to lean back in terms of marketing spend. The markets are extremely dynamic. And as David mentioned, there were some interesting things happening towards the end of Q2, running into Q3 that made things a little bit harder to try and foresee the future. So in each one of those things where we did spend more at certain times, and we did end up with more room nights. That's clearly in the math there, and we're pleased about it. And we hope going forward that we'll continue to find these types of opportunities that are going to help us build the franchise.

Yes, thanks, Glenn. On housekeeping, it's a crucial point. You can really see the transition starting in Q4 '17 when the growth in our merchant bookings began to significantly surpass the growth in our agency bookings as we developed and implemented a global payments platform at Booking.com. This brings numerous benefits for us, our customers, and our partners. For our customers, it provides many more options for how they wish to pay for their transactions, whether in advance or closer to their stay. They have more opportunities to use the payment method of their choice, which may not necessarily be a credit card; it could be something like Alipay, for instance. For us, this allows us to deliver a more consistent service since we control how our payment flow operates. For our partners, we provide greater flexibility to accept various payment forms from customers in different regions, as we can pay them in whatever method they prefer, even though we may have processed the payment on the front end. There are different payment mechanisms, and the construction of that global payments platform, mainly through Booking.com, is driving these changes. You can observe this mix shift has been ongoing as we see merchant revenues, specifically merchant bookings, exceeding the growth of agency bookings.

Okay. And one follow-up, is Agoda simply like growing faster than your other platforms? Can you tell us about that?

We don't usually talk about individual brands, which is growing faster, which ones are not. But I will say that Asia is a fast-growing area. It's also a very competitive area. It's been that way for some time, and I suspect it's going to continue to be that way for some time in the future.

Just a follow-up on the marketing questions. Can you give us an update on your relationship with Google? And given your comments in the prepared remarks, whether you feel they're helping you best serve your customers.

So as you know, we don't generally talk about any individual advertising platform. And we also talked about over many, many years, we've had a wonderful relationship with people at Google, basically helping build out our business together with them, a very symbiotic relationship, helping improve each other's capabilities. And we're very pleased with that. And we hope that continues for a very long time. I can't say much beyond that, that would be helpful to you, I don't think.

Okay, understood. And then just another question on brand marketing. You talked about wanting to grow that. Right now, you're about $500 million annually. How are you thinking about what the right amount is to spend on brand to make sure you're getting out there around the world today?

So as you know, one of the things that we're very proud about is our history of doing experimentation and not trying to make guesses or just projections without data. So what we're going to continue to do is to spend, test; test, spend, see how it goes. It's complicated. It's going to take a long time. And over this long period of time, we will find out what the optimal amount to spend is. But I can't give you a number now given that it's going to take a significant amount of experimentation for a very long time before we are able to come up with what we think is optimal. And the interesting thing about that is because this world is so dynamic, things change so rapidly, I don't expect we're ever going to come up with a set number. It's always going to be moving. One thing, though, I will add that I am happy to see is more and more of the brand marketing is going to digital video. And one of the good things about that is the measurement of that spend is better than it used to be when you're doing over-the-air TV. So at least we're getting better data, the measure against.

Glenn, can you give us the quarter-to-date share repurchase?

Kevin, we'll provide updates every quarter on our performance. I believe I noticed a new policy and I think it’s a positive direction.

I have two. The first one, just trying to a little bit better understand the 3Q and the 4Q guidance. The room night acceleration and the guidance deceleration, can you just talk to any specific regions or products that were the biggest contributors to the overall acceleration and growth? Then the second one, just to kind of, again, better understand the quarter. As you said, direct traffic, it sounds like, grew faster than the overall rate, so I think direct grew in the mix, yet performance probably drove more upside than expected. How did that happen? Were you able to use data to sort of test and deliver more volume at lower ROIs? Or were ROIs more stable than what you thought? Just how did performance come in better than expected? Was it that lower ROI or not?

Brian, let me start, and then I'm sure maybe pass it over to Glenn for a couple of comments. So yes, you asked a number of things there. So yes, just to confirm, direct did increase in mix in the quarter and also our performance growth in the performance channels, again, they did in the early part of the year, specifically in the Q2, to just kind of confirm that. And why did we see some more opportunities there? Well, we always test the amount of kind of elasticity and what the potential is to increase growth rates to return for investment. We're testing constantly in those channels, as I mentioned, a very dynamic and real-time testing kind of what we see as an opportunity. And we saw a little bit more opportunity to drive growth without dropping ROI very much, if that makes sense. The prior elasticity test we had during the year would say that if you were wanting to drive a lot of growth, you have a high reduction in ROI. We saw some opportunities in some of our key channels to drive some more growth with less of a drop in ROI. We thought that was a smart thing to actually do. So that accounts for a number of things we've already talked about. It accounts for kind of why our performance in marketing spend was perhaps a little bit higher than many people have estimated. But as we commented upon the performance in room night, that was part of the reason why we're able to do better, and we know that's not the only reason why we're able to do better in the room nights. And that's why we lent into those channels a little bit more in Q3 than we expected to when we gave our guidance. There were some other factors, of course, that we're very much at the top of our mind when we gave that guidance at the start of the quarter. I mentioned there are other unusual patterns we were seeing in July. In August, those started to get better. Particularly, the whole weather situation in Europe got better, both in terms of the heat wave breaking in the north and the scorch wave breaking in the south. So those are all contributing factors but specifically related to the channels, I think that gives you some color.

I would like to emphasize that I understand the concerns behind the questions regarding our guidance. However, I encourage our investors and those interested in our company to focus on the long term. We aim to grow and build something that benefits our customers and partners. Ultimately, our mission is to help people navigate the world more easily while also improving our profitability. There will be quarters that perform better than expected and others that may not meet those expectations. The market is quite dynamic, with many competitors pursuing their own strategies and brand advertising. We are continually learning what works and what doesn't, influenced by various factors. As long as we focus on enhancing our products and creating a comprehensive system that simplifies travel, I am confident that we can sustain reasonable growth for the company in the long term. As previously mentioned, we still only have a single-digit share in the accommodations sector within the entire industry, indicating there is significant opportunity for expansion.

Maybe a good segue into something that's not marketing-related. But Glenn, just hoping you can talk a little bit more about non-hotel accommodations just pass through the busiest part of the season. How do you sum up where you are here in terms of supply, the value proposition to consumers and also awareness in how that ties into your key priorities as you look into '19?

Yes, it's extremely important, and we see it as a fantastic opportunity. Our reported listings have increased by 21% year-over-year. It's essential to actually have the supply available to succeed in booking. Without that, moving business forward becomes challenging, so that's a positive starting point. We've previously mentioned the necessity of investing in various improvements to encourage property owners to rent their spaces. We also need to raise awareness among potential customers so they know about our great offerings. This requires significant effort, and we are certainly starting off behind some of our competitors. That said, we've discussed our developments, and I mentioned some of our ongoing projects during my prepared remarks. This is a long-term initiative; it won't be completed in one or two quarters, or even in a year. We firmly believe in this approach, which involves showcasing both hotel and home properties on the same platform. Customers will see both options and their reviews together. Additionally, we think it's essential to avoid surprise travel fees at the end of the booking process. Providing the option for instant booking is crucial, allowing customers to finalize their purchases without unnecessary back-and-forth communication. However, trust remains an issue, and we need to equip hosts with tools that help them feel more comfortable with instant booking. There are many developments ahead, but this is a key component of our vision. I've seen customers who booked for the first time with us choose home products and have positive experiences.

It's Naved Khan from SunTrust. Maybe two questions. So can you just maybe talk a little bit about the China outbound demand and maybe plans for HotelsCombined now that you've gotten approval from Europe for acquiring that business? And then I had a follow-up on metasearch.

So, regarding your first question about HotelsCombined, I don't think we have received the final approval yet, so we'll skip that question. Can you ask your question about meta in general?

Yes. I wanted to know if you could provide some insight into the trends related to China outbound demand.

China's outbound travel is incredibly important. I want to emphasize again how much I value China as a driving force in travel. Recent statistics highlight its significance. In 2014, there were 55 million Chinese passports for international travel, which grew to 120 million by 2017, indicating strong growth. People typically obtain passports with the intention of traveling abroad. China is also easing travel for its citizens; in 2015, there were 46 visa-free countries, and now that number has increased to 74, making travel more accessible. When the economy thrives and individuals have more disposable income, they are inclined to travel. In China, when someone can afford international travel, they are eager to explore. Social media reflects this trend, with many sharing their experiences visiting places like London, Paris, and Rome. This interest is global; I've encountered Chinese tourists in places like Alaska and Iceland. It's crucial for us to capture a significant share of this market, which is why we have invested considerable resources, including over 1,000 employees and around a dozen or 14 offices in China. We've made substantial investments in key partners such as Ctrip, Meituan, and recently, DiDi. These investments enable us to connect with Chinese tourists and showcase the excellent offerings we have for them. We are enthusiastic about this opportunity, and we believe it will yield long-term benefits for our company.

And Glenn, if I can just pick up the point on meta because that was in the first question. For obvious reasons, we're not in the so-called HotelsCombined because we have not got the final approvals yet. So we've been working down that path nicely. But what I would say is that we think the meta segment is very important. And it is a segment because I think are a group of people who will always want to go a meta first before choosing their travel, and there are other people who are prepared to build their longest-term relationships with the OTA platforms. And we think that winning model is a global multi-platform model, which we are building in the meta space. So we think it's a very important part of our strategy, and people shouldn't get confused. We don't think it's necessarily competitive with our parts of the business. It's complementary because it addresses a segment of the marketplace that just prefers to go there first, and we want to have a great solution for those customers as well.

That's helpful. Regarding your comments on meta, now that you've implemented the changes from last year about ROI, do you see more opportunities for improving ROI there, or do you think it's currently at the right level?

In terms of meta as a channel for our businesses, we are now fully lapping in the fourth quarter. The biggest share shift we experienced came from the changes made during our ROI authorization effort, which were notably in meta. Therefore, we expect to see benefits in their fourth quarter compared to the previous year. We are pleased with our ROI approach and believe it has reached a satisfactory level for our business. Now that we are revisiting those changes, we are also exploring incremental opportunities, similar to what we did with other channels in the third quarter.

One follow-up on homes. Have you been able to decipher whether or not vacation homes are mostly additive or cannibalistic to traditional bookings? And then separately, on experiences. Should we think about this as being a significant area of investment in the near future? Or is it fairly minor relative to your spend in other categories? Just wondering how that stacks up on the priority list.

I'm sorry, could you read that second one again, Mike?

Experiences, just wondering where it stacks up on the priority list and how much the near-term investments need to be there.

I don't usually consider it as cannibalistic in terms of homes. My focus is on providing choices for consumers, allowing them to decide what works for them. If we don't have a home available, we risk losing potential customers, even if they might initially come to us for hotels. It's crucial for us to offer a wide range of accommodations on our platform, including homes, apartments, and unique options like yurts and igloos. This diversity makes our platform more attractive to travelers, knowing they can find what they want with us. Regarding experiences, while it's an important area for us, we won't rush into heavy investments and jeopardize our financials. We understand that experiences not only contribute to revenue but also enhance the overall travel system, making it easier and better for consumers. Personally, I’ve enjoyed the benefits, such as using QR codes from the Booking.com app to skip lines for various attractions, which builds loyalty and simplifies the process. There are multiple advantages beyond just increasing revenue from individual transactions.

I have two. Glenn, the hotel suppliers themselves have been out there talking about the success of their own direct-to-consumer initiatives. They're competing to grow direct relationships with their guests as you are. So I guess, the question is, how is that going? How much of your spend on brand is really to actually compete with what amounts of your suppliers trying to build those same direct relationships in the channel? And then, second question would be for, I guess, either David or Glenn. What's the right capital structure for Booking Holdings? Is the business overcapitalized relative to what really is steady cash flows over time? So maybe just talking about the puts and takes of stock buybacks versus strategic M&A versus the releases of your capital would be really helpful.

Our business focuses on fostering strong relationships with both our accommodation guests and the providers of those accommodations. Whether it's a large multinational chain or a small hotel owner in a quaint village in France, our goal is to deliver value to both sides. While we recognize that major international chains aim to attract customers directly, which they believe is more cost-effective, this represents only about 15% of our overall business. Our priority is to support and enhance their operations, ensuring our mutual success in the long term. We boast the largest demand platform globally for accommodations, making us the go-to choice for anyone in the hotel business looking to maximize occupancy and revenue. We've invested significantly in efficiently operating in over 40 languages and providing customer service in those languages, which many hotels could not replicate independently. I wish people would stop framing our interactions as a competitive contest. Both sides seek to draw clients to their respective platforms without incurring excessive marketing costs. Ultimately, it's about reshaping the narrative to acknowledge that we are working collaboratively rather than against one another in a symbiotic relationship. Now, I’ll hand it over to David to discuss capital structure.

Yes, Anthony. Capital structure could be a lengthy discussion, and we have limited time, so I'll provide an overview. It's important to recognize our goals for the business. There is a vast travel market opportunity available, and we currently hold a single-digit share in the segments where we are strongest. This leads to an even lower single-digit share of the overall travel marketplace. Our mission is to create the best online global travel marketplace, delivering choice, value, service, and a seamless experience for our customers. Achieving this is crucial, and it’s what we are striving to develop. We are fortunate to possess the financial resources to pursue this mission while also returning substantial amounts of money to our shareholders. The ability to return capital to shareholders has been enhanced by the recent Tax Act. Our commitment to return $10 billion over the next 2 to 3 years represents a significant advancement. However, I want to emphasize that this commitment is set against the backdrop of the larger opportunity to invest both organically and inorganically in this immense market potential. We have the capacity to generate significant value for our customers, shareholders, and partners, which remains our primary goal. I hope this clarifies our perspective.

You've touched on this a little bit but maybe clarify a little bit. You had a strong finish to the third quarter and then better-than-expected guidance for the fourth quarter. I'm trying to figure out how much of that is momentum versus coincidence. Obviously, you don't give us a fourth quarter guide until now. But you spoke to a delayed summer travel booking scenario. I wouldn't think that, that would affect the fourth quarter very much. But I guess, at the end of the day, I'm trying to get at, are you more optimistic about the fourth quarter today than you were 3 months ago? And then maybe as somewhat of a side, maybe talk a little bit geographically. Europe was called out as maybe a headwind to overall growth last time we talked. Obviously, the mix of Europe changes in the fourth quarter. But I'm just trying to figure out if that's sort of resolved itself and whether or not Europe is a headwind or a tailwind as we look into the fourth quarter and beyond.

Yes, James, let me start with that. To answer your question directly, we are more optimistic about Q4 now than we were during our last guidance. Last time, we were focused on the June and July period, which was significantly affected by various macro factors beyond our control, with Europe facing extreme weather patterns. The north experienced warm and dry conditions, leading to a decline in vacation travels, while the south faced cold and rainy weather, which deterred visitors. This greatly impacted our business, and we couldn't anticipate when conditions would improve. Additionally, the World Cup was influencing Europe, with major countries performing well in the tournament, adding to the uncertainty we experienced. As the quarter progressed, however, we saw improvements that exceeded our expectations in most regions, especially in Europe. We ended the quarter with a higher growth rate than the average for that period, despite previously noting expectations for a deceleration in our August call. Thus, we are viewing Q4 through a more favorable lens than we would have if there hadn't been improvements in Q3, which has influenced our Q3 guidance.

Got it. And the geographic question, it sounds like Europe, the concerns there have largely been alleviated. Is Europe now a tailwind to growth going forward?

I'm not going to get into the relative growth rate of different segments. But obviously, a lot of the things that were out of our control, we talked about how it impacted our view of the world in early Q3 were happening in Europe. And yes, we talked about some level of acceleration from Q2 into Q3, and we saw that across most of our major geographies.

I have a question regarding the 50% transaction mix from mobile. As mobile has grown over the past few quarters, has there been a significant change in repeat behavior or customer acquisition costs that could positively impact unit economics going forward, especially now that we have surpassed the 50% threshold? Also, is there a notable difference in the mix of paid versus organic traffic on mobile devices?

We will not discuss the relative costs for mobile or desktop. However, it's important to note that mobile does not equate to app usage nor does it mean it's free. I want to ensure everyone understands this. We are quite pleased as more people transition to mobile devices to facilitate their travel, which allows us to engage with customers throughout their trips. This enables us to offer more services, enhance their experiences, and ultimately foster loyalty for future business, as we consistently provide valuable offerings on mobile. That is the real advantage of mobile. I wouldn't focus too much on whether costs are higher or lower since these are competitive markets. Over time, I expect costs to stabilize and possibly align closely with those of desktop. That's my perspective on mobile. Dave, do you have anything to add?

No, Glenn. I think that's the key point. The key point is that when we talk about the trip and be able to interact with the customer during their trip, their mobile device is always with them. It's always on. The desktop, they can go back to it occasionally, but they tend not to take the desktop with them. So if they open their laptops at night, maybe they want to try today. But the mobile device is there the entire time. So it's a very strategic shift in the business and particularly as we build out all the aspects of the trip. We like our customers interacting with us much more often on mobile than they can on a desktop device.

So thank you for joining us for the call today. Very pleased with our quarterly results, and we remain very excited about the future prospects of the company. I look forward to updating you after our fourth quarter call. Thank you very much, and good night.