Booking Holdings Inc (BKNG) — Q4 2018 Earnings Call Transcript

Thank you, and welcome to a Booking Holdings fourth quarter conference call. I'm joined this afternoon by our CFO, David Goulden. We had a strong quarter with 171 million worldwide room nights booked, which is up 13% year-over-year and exceeded the high end of our guidance range. Our revenue increased 16% year-over-year in U.S. dollars or about 21% on a constant currency basis. Adjusted EBITDA grew 17% in U.S. dollars and the FX impact was a couple of points higher than it was on revenue. Our non-GAAP EPS was up 33% year-over-year. When I look back at 2018, I am pleased with the financial performance of the company. Our total booked room nights exceeded three-quarters of a billion room nights, and we produced strong year-over-year growth across our key financial metrics. Revenue was up 17%, adjusted EBITDA was up 18%, and non-GAAP EPS was up 20%. We not only drove solid top-line growth, increasing our share in the accommodation market but also stabilized our operating margins through our performance marketing optimization strategy, which we began in the third quarter of 2017. In 2018, we invested in three main areas that we believe can drive the long-term growth of the business, and we will continue to develop these in 2019. First, in alternative accommodations, we continue to add to our supply base. And as of December 31st, Booking.com had over 5.7 million reported listings. However, we are not just focused on the total number of alternative accommodation listings, but are also concentrating on the quality and type of properties joining our platform, so we can provide the best choices for our customers and drive search conversion. Booking.com's alternative accommodation business has meaningful size and scale and recorded approximately $2.8 billion in revenue in 2018, representing approximately 20% of our overall revenue for the year. It also reached the important milestone of over $1 billion in revenues in Q3 2018. It is also growing faster than our consolidated growth rate and is nicely profitable. We believe offering real choice with both alternative accommodations and traditional properties on one platform is the best customer proposition. A telling data point underscoring the attractiveness of our model is approximately 40% of Booking.com's active customers booked an alternative accommodation property at some point during the past 12 months. Second, we invested in 2018, and in 2019 we'll step up our investment in the growth of our business through branding and customer acquisition programs in order to take share in the markets with the highest long-term potential returns. We believe these incremental investments will help drive greater loyalty and higher repeat rates to our direct channel over time. Just two days ago, we launched our new U.S. brand campaign, which we expect will drive further awareness in this important growth market. We will also look to improve brand awareness across our primary markets to increase brand campaigns in both offline and online channels. These marketing programs are taking on greater importance as many of our performance marketing partners are experiencing slower customer growth. Third, we will continue to invest in the rollout of Booking.com's payment platform. This platform provides payment options favored by customers and property partners, particularly non-hotel property partners and provides a platform for merchant product offerings. Merchant offerings provide greater merchandising possibilities for Booking.com. This year, we plan to step-up our investment in this capability to drive growth. This payment platform will also facilitate our transport and local attractions business, where we envision a frictionless customer experience that we believe will drive enhanced loyalty. For example, we look to build upon the integration of Rentalcars.com and Booking.com to deliver a better ground transport offering for Booking.com's customers this year. The number of car rentals and rides booked on the Booking.com platform grew rapidly this past year, contributing to our belief that an integrated offering is highly valued by our customers. China and the broader APAC regions remain an important geographic focus for us, and we invested significantly against this very large opportunity in 2018. As a result of smart growth investments, Agoda produced very solid growth rates in the region despite a very competitive marketplace. We continue to work with our partners Ctrip and Meituan, and we introduced new strategic and financial relationships with DiDi and Grab, all of which we believe will help both Booking.com and Agoda build better brand awareness and acquire customers more effectively in this region. KAYAK completed a busy year with the integration of Momondo and acquisition of HotelsCombined in December. Both acquisitions bring greater geographic diversity and product strength to the KAYAK platform as it continues to build a global multiproduct, multi-brand travel search platform. We also announced the combined reporting structures of KAYAK and OpenTable during 2018 to further drive experimentation and innovation across both platforms. We're already seeing early signs of this with OpenTable recently announcing that its customers can use OpenTable dining points to book discounted hotel space, and I look forward to seeing further innovation from the combined teams. Priceline.com is increasing its momentum, and we're starting to see the benefits of our investments on this platform. The redesigned packaged product is growing very rapidly, gaining acceptance in the U.S. market. We're excited about the potential of this product for the entire company. Finally, as you can see from our Q1 guidance, we witnessed a slow start to the year, primarily in our core European markets, which we believe is largely due to overall macroeconomic factors. The initiatives outlined above are aimed at driving long-term top-line growth and share gains, and will help support the business if macro conditions soften. We believe these steps strike the right balance between driving growth and operating margins. Furthermore, we believe our financial scale and global diversified platform positions us to perform well to meet macroeconomic challenges. In conclusion, we had a very good year in 2018 and believe we have a great long-term opportunity ahead of us. We'll always manage our business with a long-term view and will continue to invest in growth this year with the goal of increasing our share across our primary markets. With that, I will now turn it over to our CFO, David Goulden, for the financial review.

Thank you, Glenn, and good afternoon. I'll discuss our operating results for the fourth quarter and for 2018 and then provide reports on the full year 2019 as well as our guidance for the first quarter. All growth rates are relative to prior year comparable periods unless otherwise indicated. All year-over-year growth rates referenced in my remarks will compare the current year income statements under the new revenue accounting standard to prior under the previous accounting standard. Gross bookings and other metrics, like room night reservations, are not impacted by the revenue accounting standard. Our non-GAAP financial results and forecast include stock-based compensation, and information regarding reconciliation to GAAP can be found in our earnings release. Now, on to our results for the quarter. Our booked room night growth of 13% for the quarter exceeded the high end of our guidance range. In the quarter, we observed a modest step down in growth rates from October levels. Average daily rates for accommodations, or ADRs, were up about 1% in Q4 relative to the prior year on a constant currency basis versus our forecast for about 2% ADR growth in the quarter. Changes in foreign exchange rates reduced Q4 growth rates in U.S. dollars by approximately four percentage points versus last year. We estimate the changes in FX rates impacted Q4 gross bookings and revenue growth rates by similar amounts and the Q4 EBITDA growth rate by a couple of points more. Q4 gross bookings grew by 9% expressed in U.S. dollars and grew by about 13% on a constant currency basis, coming in at the high end of our guidance range. Consolidated revenue for the fourth quarter was $3.2 billion and grew by 16% in U.S. dollars and by about 21% on a constant currency basis, coming in above the high end of our guidance range. Advertising and other revenue, which is mainly comprised of non-intercompany revenues for KAYAK and OpenTable grew by 14% in Q4 compared to the prior year. Total revenue for the fourth quarter 2018 under the current revenue standard was approximately 5% higher than it would have been if reported under the previous revenue standard. As a result, our revenue, adjusted EBITDA, and net income growth rate versus the prior year were positively impacted in the quarter. Additionally, expenses as a percentage of revenue, as well as margins were impacted from the higher revenue when comparing to the prior year Q4. To help you understand the underlying drivers of leverage and deleverage in the business in Q4, I'll talk about these on a like-for-like revenue basis to eliminate the impact of a Q4 benefit from the revenue accounting change. Adjusted EBITDA for Q4 was $1.26 billion, which exceeded the high end of our guidance range and was up 17% year-over-year on a reported basis and up about 4% on a like-for-like basis. As I mentioned previously, our growth rates were negatively impacted by year-on-year changes in FX rates. Our Q4 adjusted EBITDA margin of 36% under the previous revenue accounting standard was above our forecast, largely due to some leverage in performance marketing. We fully lapped our strategy to optimize performance marketing ROIs, which we began in mid-Q3 2017. We remain disciplined in our spending, and we were encouraged to see a modest leverage of 20 basis points from our proposed marketing in the quarter, which was better than the deleverage we anticipated. We continue to see these channels as an effective way to acquire customers, and we'll continue to invest rationally to optimize growth. As part of our continued effort to drive more traffic to our websites, we increased our spending and brand marketing in the quarter by 27% versus Q4 last year, which contributed about 50 basis points of deleverage. Sales and other expenses continue to grow faster than revenue primarily due to the growth of our payments platform at Booking.com. Finally, personal expenses came in lower than our forecast, and contributed a small amount of leverage in the quarter. Our non-GAAP EPS was $22.49, up 33% versus the prior year. Non-GAAP net income reflects a non-GAAP tax rate of 11.3% in Q4, which decreased from the prior year, primarily due to a tax benefit resulting from the application of regulatory guidance issued in November that clarifies a provision of the U.S. Tax Cuts and Jobs Act. Our full-year non-GAAP tax rate was 18.3%. Our 6% lower share count in Q4 versus last year further benefited EPS growth in the quarter. On a GAAP basis, operating income grew by 16%, and GAAP operating margin decreased by 13 basis points compared to Q4 last year. GAAP operating income was negatively impacted by $21 million pre-tax related to travel transaction tax charges from prior periods that are recorded in the G&A expense line. Q4 GAAP net income amounted to $646 million or $13.86 per share, up significantly from the $11.41 loss in Q4 2017, which was negatively impacted by last year's $1.3 billion provisional net income tax expense related to the Tax Act. Our Q4 GAAP net income includes a $474 million pre-tax loss related to unrealized losses on equity investments in Meituan and Ctrip. Q4 GAAP net income was also negatively impacted by the travel transaction charges that I just mentioned. We excluded the unrealized loss and the travel transaction charges from our non-GAAP results. We had a GAAP tax rate of negative 2% for the quarter, which was primarily driven by the reversal of the tax charges related to a provision of the Tax Act that I mentioned previously, as well as the separate $48 million tax benefit related to the finalization of the one-time expense incurred in Q4 2017 due to the Tax Act. Our cash and investments amounted to $14.7 billion at quarter end. For the full year 2018, we generated $5.3 billion of operating cash flow, which increased by 15% compared to the prior year. Our free cash flow for the year was $4.9 billion, which increased by 12%, compared to the prior year. We returned about $1.8 billion during the fourth quarter to our shareholders through share buybacks. Since the start of 2018, we reduced our fully diluted share count by approximately 6% through our $6 billion in repurchases for the full year. As of December 31, we had approximately $4.5 billion remaining of our share repurchase authorization. We will continue to be both programmatic and opportunistic with regard to our repurchases and now we expect to complete this authorization before the end of 2019. Looking back at 2018, we're pleased with our strong performance during the year as we delivered room night growth of 13%, revenue growth of 17%, adjusted EBITDA growth of 18%, and non-GAAP EPS growth of 20%. We exited the year in a stronger position and achieved many of our objectives. We grew our direct channels, which now represents over 50% of our booked room nights. Our mobile platform is strong, with over half of our room nights booked on a mobile device. And finally, as Glenn noted, in 2018, approximately 20% of our revenue and a higher percentage of our room nights were generated by our alternative accommodations business. Each of directs, mobile, and alternative is growing faster than our overall growth rate. Now turning to 2019. I want to start by talking about some factors that will impact the year and then come back to our guidance for Q1. There are four main factors that we believe will impact the shape of 2019. The first is our growth investments; the second is a continued rollout and adoption of our new payments platform at Booking.com; the third is from mechanical timing and comparison factors; and the fourth is the macroeconomic environment. Now let's look at each of these in turn. Starting with our growth investments. As Glenn talked about, in 2019 we're investing for growth, customer acquisition, and loyalty in a number of key areas. These growth investments are a step-up in spend from normal levels. You will see them impact our financials in brand, revenue merchandising, as well as customer acquisition and incentive programs, and you'll also see them in personnel to support these initiatives. We expect there will be some in-year revenue return, but after taking this into account, these growth investments will reduce our EBITDA growth rate by a few percentage points in 2019. These investments start at the beginning of this year. We expect returns to be higher in the second half of the year, so there will be a greater negative impact on EBITDA growth during the first half. This means that our consolidated EBITDA growth will be higher in the second half. Now, moving to payments for Booking.com. In 2018, approximately 10% of the gross bookings of Booking.com was processed via our payments platform, and we expect this to continue to increase. In 2018, payments put pressure on EBITDA in the form of higher sales and other expenses that were not fully offset by associated revenue. This reduced our consolidated EBITDA growth rate in 2018 by a little over 1%. Going forward, we do not expect any additional reduction in EBITDA growth from payments and will continue to see increases in revenue. This will pressure margin rates modestly. We also see the opportunity for payments to drive EBITDA growth in the future. Of course, payment provides advantages in many areas, including merchandising flexibility, a better customer experience, reduced customer service expenses, and the ability to coordinate on most integrated trips. The third set of factors are more mechanical but important as you think about the year. FX is expected to be quite significant this year. Using current FX rates assumed in our guidance, gross booking growth and the revenue growth through the non-GAAP EPS growth will be reduced by approximately 250 basis points for the full year and 500 basis points for the first half of the year. Additionally, the timing of Easter will impact revenue growth in Q1 and Q2. Last year, Easter was on April 1, and therefore, the majority of Easter revenue was recorded in the first quarter. This year, with Easter on April 21, Easter travel revenue will be recorded in Q2. Compared with Easter falling on the same day as last year, we estimate that about $65 million of revenue will move into Q2. We estimate this shift in timing will reduce Q1 2019 revenue growth rate by approximately 200 basis points and increase Q2 2019 revenue growth rates by approximately 200 basis points. The fourth is the external macro environment. We continue to expect travel to grow faster than GDP on a global as well as on a region-by-region basis. Of course, this means that the growth of travel on a regional basis will be impacted by regional GDP and sentiments. Consistent with recent economic indicators, we saw a slow start to the year in Europe and this is impacting our room nights growth guidance for Q1. To provide a little bit more insight, January room nights growth in Europe was a step-down from December and February is looking stronger than January but still below December. We expect to continue to gain share in accommodations in Europe, especially with our investments. Room night growth rates in other parts of the world are more in line with what we saw in December. We think that working through these factors will be helpful as we describe and you build your models for the year. We also think that sharing some expectations for the full year, taking these factors into account, will be helpful as well. For 2019, we expect to gain share in accommodations in each major geographic region, and we are confident that the strength of our business, reinforced by the growth investments we're making this year, will enable us to achieve this. We'll manage the balance between growth and profitability with an expectation that non-GAAP EPS on a constant currency basis will grow in the low double-digits in 2019, after factoring in the impact from the growth investments I previously mentioned. If economic conditions were to further soften, we will still preference growth over realizing short-term margin because we believe this is the best for our business in the long-term. So with that, as a framework, let's turn our attention to Q1. Our Q1 guidance reflects our quarter-to-date actual results forecast for the remainder of the quarter. Foreign exchange rates are expected to be approximately 6 percentage points to 7 percentage points headwind to year-over-year growth rates in Q1, which we estimate will impact gross bookings, revenue, EBITDA, and non-GAAP EPS growth rates by similar amounts. We used a dollar-to-euro exchange rate of 1.13 when setting up our Q1 guidance. We are forecasting booked room nights to grow by 6% to 8% and total gross bookings to be approximately flat at the midpoint of our guidance in U.S. dollars and to grow by 5% to 7% on a constant currency basis. This reflects what we've seen so far this quarter and also limited impact from our growth investments. Our Q1 forecast assumes a constant currency ADRs for the company will be down about 1% compared to the prior period. We forecast Q1 non-GAAP revenue to be approximately flat at the midpoint of our guidance in U.S. dollars and grow by 5% to 7% on a constant currency basis. Normalizing for both Easter and constant currency, we estimate that Q1 non-GAAP revenue to grow by 7% to 9%. We forecast that Q1 GAAP revenue will be down 2% to approximately flat when compared to Q1 last year. Q1 adjusted EBITDA is expected to range between $680 million and $700 million. The resulting growth rate is also negatively impacted by unfavorable year-on-year FX changes and by Easter timing. Normalizing for both Easter and constant currency, we estimate that Q1 EBITDA will grow by 2% to 4%. As I mentioned earlier, this is negatively impacted by our growth investments, especially in our seasonally slowest revenue quarter. We are forecasting leverage from the performance marketing expense line in Q1, reflecting low volumes in the paid channels and our continued focus on acquiring high-quality traffic. We expect to accelerate our brand marketing spend in the quarter, which will contribute to deleverage to the P&L and more than offset leverage we're expecting from performance marketing. Brand marketing is a key area where we're making growth investments to drive more direct traffic to our website and build better awareness. Finally, sales and other expense growth is expected to decelerate relative to Q4 but will continue to grow faster than revenue, primarily due to the ramp-up of our payment platform at Booking.com. We are forecasting Q1 non-GAAP EPS of approximately $10.90 to $11.20. Normalizing for both Easter and constant currency, we estimate Q1 non-GAAP EPS growth to grow in the low double-digits. Our non-GAAP EPS forecast includes an estimated income tax rate of approximately 18%, which is lower than Q1 last year, primarily due to the clarification around the provision of the tax act previously mentioned and a lower than our full year non-GAAP tax rate due to certain discrete tax benefits typically realized in the first quarter. We expect our full year non-GAAP tax rate to be 19% to 19.5%. Our Q1 non-GAAP EPS guidance assumes a fully diluted share count of about 45.6 million shares, which is 7% below Q1 last year. We forecast GAAP EPS between $9.90 and $10.20 for Q1. Our GAAP EPS guidance for Q1 assumes a tax rate of approximately 18%. We have hedge contracts in place to substantially shield our first quarter EBITDA and net income from any further fluctuation 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.

Great. Thank you. I'll just start with just a high-level question. When you look at your bookings growth rate in Q1 and you think about how you're performing versus other companies, it seems like it's a bit of a difference, your guidance versus other people in the travel industry. So how do you kind of reconcile that? And then, maybe if you could tell us how much better February was versus January, and if you think there was just something really abnormal for the first two months of the year. Thank you.

Hi, Justin, it's Glenn. As you know, our business is very focused on Europe. While we operate globally, our largest market is in Europe, which is currently experiencing a slowdown, as indicated by various macroeconomic indicators and reports from the EU and investment banks predicting the future of European economics. Just yesterday, our Chairman of the Federal Reserve mentioned that they are observing challenges in Europe. This is one factor that marks a difference. On the flip side, if you analyze the main European players, particularly some leading tour operators, you'll find that their numbers align closely with what we're discussing. There are many uncertainties affecting bookings, and these can cause hesitation among consumers. We can discuss general macroeconomic factors, as well as specific issues like Brexit, which brings significant uncertainty, leading people to hesitate on spending. They'll question whether it's a good idea to travel given potential challenges such as foreign exchange fluctuations or ongoing political situations, like the yellow vest protests in France, which make potential travelers reconsider visiting Paris. In Germany, the slowdown in the automotive sector is linked to trade issues, particularly with China and the U.S. In Italy, political instability creates further concerns. Overall, we feel more influenced by European events than a U.S.-based company would be. Regarding February, as David noted, it showed improvement over January, but it remained below December's levels in Europe. That's pretty much the situation. David, would you like to add anything?

I just want to maybe recap the other comment I made. I think, Glenn, you just talked exactly what I said about Europe. But I also just want to recap, Justin, that you heard that we said this really is an issue that is focused upon Europe and that room night growth in other parts of the world were in line with what we saw in December.

Got it. Thank you.

Thank you for the update on alternative accommodations. I was surprised by how significant its contribution to revenue is. Could you provide more details about its profitability compared to the core business? How much faster is its growth relative to the overall business? Additionally, can you share more information about the specific regions driving that growth in alternative accommodations? Any further insights would be appreciated. Thank you.

Hi Mark. We're excited about our new disclosure. Regarding Q3 and surpassing the $1 billion milestone, we are quite pleased. In terms of profitability, it was solid, though I won't delve into specifics. We've previously discussed how sometimes the costs can exceed those of traditional hotel products, especially when considering scale. With a hotel that has hundreds of rooms, costs are much easier to distribute than when addressing properties individually. Regarding our geographic growth, I want to emphasize that we are focused on being a European-centric company, excelling in capital cities with alternative accommodations where we offer great properties. However, in other areas like the U.S., we need to expand our portfolio, particularly single homes in beach and ski destinations. For instance, I was recently looking for a Hampton's house for my family and noticed that we need to enhance our offerings in that market. This is part of our investment strategy, and I view it as a half-full situation. It's a significant opportunity for us to drive growth in that area and expand our business.

Okay. Thank you, Glenn.

Thanks. I guess, first, it looks like performance marketing spend is up about 12% in the quarter, call it 16x, 17x effects and almost 20 when you include brand spend, and yet room nights booked was up only about 13. Can you give us a sense for what's going on with marketing ROIs? And maybe some more color on how that's trending in the kind of acquired channels, growth that's trending in acquired versus direct. And then, I guess, in some of the prepared remarks, you talked a lot about growth investments. It sounds like most of those are going to be on the brand side. Are you also going to be leaning in on the performance side for growth? And any color you can provide there would be great.

Yes, Lloyd, this is Dave. Let me start that. So let me just kind of clarify the difference between what we expect and what we saw in Q4. You have to look at Q4 and you have to exclude the impact of the extra revenue when kind of doing your leverage and deleverage calculations. So on a like-with-like basis, we actually expected to get some deleverage in the performance marketing line. We actually wound up with a little bit of leverage, which is part of the reason why we came over on our EBITDA guidance for the quarter. And based on what drove that compared to expectations was a little bit less volume than we're expecting in those channels and actually with ROIs that are in line with our guidance, where we spoke to you about Quarter 1 at the beginning. And actually, if you look at my comments about Q1, you see a similar trend as well. We're expecting some leverage in the performance marketing channel again in Q1 because volumes are a little lower, but we're still getting solid ROIs against those volumes. So you'll see our mix towards direct continuing to increase as a result of that leverage we're getting in those channels. And then in terms of growth, I think we kind of gave you the growth investments, so we gave you a feel that they're going to impact our EBITDA growth this year by a few basis points. In terms of income statement, I kind of basically told you where you'll see them. Some of them will appear in the branding line, some of them will appear in the revenue line in terms of merchandising, customer acquisition, customer incentive programs. You'll see some increases in personnel aligned to support those investments directly. In some of the countries where we talked about investing for long-term returns, there are some increases in performance marketing associated with those countries, but it's not a major part of the investment program.

Okay. Thanks.

Hi. Thank you very much. Can you elaborate on the growth in room nights for the first quarter? The guidance indicates it's about 400 basis points lower than what you projected for the fourth quarter. Is this entirely due to the macroeconomic factors in Europe that you mentioned, or are there additional significant factors affecting the Q1 night guidance? I have another question as well. Thank you.

Kevin, I'll take that. The major factor is that we guided for Q4, anticipating some deceleration in room nights during that period. We came out of Q3 strong in September and observed good room night growth in October. However, we expected a slight decline in the fourth quarter. November and December room nights were quite similar to each other but lower compared to October, and thus below the average we achieved for the quarter. Moving on from that, we noted a decrease followed by a slight recovery in Europe, which we believe is related to macroeconomic factors that we examined closely. Additionally, we observed a performance in the first couple of months of this quarter that was relatively similar to the last few months of the previous quarter, excluding Europe.

Thanks for that. To follow up on your investment in customer acquisition programs, particularly the incentive programs, can you provide more details on what you are doing? Are you focusing on an incentive-based loyalty program, or are you offering special one-off deals for new or existing customers? Thank you.

There are numerous strategies we can utilize to allocate our resources effectively and achieve our desired return on investment over the long term. The two options you mentioned are definitely part of the equation, but there are many other factors to consider depending on the geographic market. For instance, similar dynamics are occurring in Asia, where there's increased price competition due to wholesalers discounting their prices at retail. We need to ensure we can compete directly in that environment. It's crucial for us to provide value to our customers to attract and retain them. We are exploring various initiatives, including potential loyalty programs aimed at both attracting new customers and retaining existing ones. For example, I recently received a postcard from Booking.com offering me a discount for making a reservation through their site, demonstrating the types of incentives we could implement. Additionally, we aim to bundle various types of our inventories and products to enhance perceived value, which might involve some subsidization on our end or collaboration with suppliers. We're also forming new partnerships with companies like DiDi and Grab, which are primarily in the ground transportation sector. We continue to collaborate with them to attract customers who can benefit both companies and engage in different cooperative marketing strategies that facilitate customer acquisition. There are many paths we can take, and we won't necessarily focus on which methods are yielding the highest return on investment at all times.

Thanks. And just a housekeeping on the EPS guide. Does that assume the future buybacks now that you expect to use that program in 2019?

Yeah. Basically, yes. The EPS guidance, from a housekeeping point of view, we said that we expect to use our remaining authorization. So, we gave you a specific share count number for Q1, but in our guide for the full year, it assumes we extinguished our remaining authorization.

Thanks, David.

Thanks for taking the question. Glenn, I was hoping you could drill down more on the key benefits of the payment platform. And if you could talk a little bit about when you start seeing those benefits more and how long it takes to fully roll out. And then David, just on the Q1 guide, is it safe to assume here that you're assuming further deceleration as you usually have done in previous quarters in the past? Thanks.

This payment platform is a crucial method for Booking.com as we progress and enhance its merchant capabilities to offer better merchandising options. A payment platform is essential to accomplish some of the points I just discussed in response to Kevin's question. Additionally, it's vital for our alternative accommodations business, which we plan to expand. Targeting single-home property owners requires a more sophisticated approach. The traditional agency model we used at Booking.com doesn't meet their needs; they prefer a merchant product rather than a system where they’d take a credit card and later receive a bill with our commission. We will continually improve this aspect because our payments platform needs to adapt beyond the straightforward credit card systems used in America. New payment systems are emerging worldwide, and we must support both sides of our marketplace. Some supply partners want to connect to Alipay, and I'm interested in integrating WeChat Pay for transactions. Customers also desire options like Paytm or M-Pesa, among many others. Thus, when we refer to our payment platform, we are discussing a global solution designed to reduce friction in transactions.

And Doug, let me just pick up on that and also clarify your question. Of course, payment is very important but let's make sure it's not going to the entire business. We do believe that pay at the property, which has been a big piece of our business, continues to be a big piece of our business, and a lot of our customers and a lot of our partners also like that as well. So it's bringing an additional capability to complement what we do so well at Booking.com. And then to comment upon your question on the Q1 guide. No, our Q1 guide does not assume a deceleration. That's why I did not say that. In fact, specifically, we said that January was, in fact, again, with the rest of the world being relatively consistent with December. I said that, in Europe, January was a step-down, and February was a step-up. So it reflects what we've seen so far and our expectations in the rest of core, but it does not reflect the deceleration.

Thank you, both.

Hey, guys, thanks for taking the questions. Somewhat related question on the payment side, what is currently the go-to-market strategy for the payments platform? And whether that's incentivizing hoteliers to choose your payment solution versus their existing one? And over time, do you think there's additional opportunity to generate economics from the payments efforts? Right now, it sounds like you are probably using some incentives for adoption. So I just wanted to get some color there.

I'll take that and focus on the exciting part of your question about using the payment platform. It's not necessarily something that will increase costs; in fact, over time, it will enable us to earn more revenue. With the volumes we currently handle and will handle in the future, I see this as a significant opportunity, although that will be down the line. At the moment, regarding incentivization, as David mentioned, our agency product is a valuable part of our progress. Major hotels are likely to continue purchasing one or two for some time. I want to highlight our approach to merchandising by offering packages. We always aim to work collaboratively with our supplier partners in a way that benefits both sides. Having our merchant payment product allows us to combine hotel offerings with additional services, making it easier and more seamless for customers to pay. I believe hotels will be interested in this if it enhances their business. Additionally, there might be future opportunities to create a payment product that is significantly more affordable for smaller hotels in regions with higher costs.

Okay. It's helpful. Thanks, Glenn.

Hi, Glenn. So building on your highest potential market commentary earlier, it seems like there's more dialogue around your local efforts in China both in terms of earnings calls like this as well as interviews with your local management teams and talking about the opportunity for outbound. So you've always had partnerships there, but why is now the right time for what looks like what's probably more of a direct effort to advertise and establish the Booking.com brand in the country? And is perhaps a greater conversion rate from the payment product, is that what's making, I guess, the ROIs there possible now? Thanks.

I would look at it a little differently, actually. We first started our business in China many, many, many years ago. We now have approximately 1,000 employees there, and we have different call centers there. We have always been pushing out our own brand. It's not just Booking.com, Agoda has been operating in China for a very long time. So I think the way we look at this is we're always trying to use all the different ways to get more customers through our platform and be able to provide more value to customers and hoteliers. So yes, we absolutely are doing deals with lots of different players in China because we think that's a way to help build up our business. But I don't think it's anything different. In terms of the payment product, there are some differences in some things that do help in terms of doing business in China, having that product there is good. I'd like to point out Agoda has always been a merchant player, and they've done very well there. Booking in the past was primarily agency business, they've done very well there. But I do think having that flexibility, particularly with Alipay, WeChat Pay, and some of the other things coming in here, our agreement with DiDi, Meituan, I think these things are helpful to have that platform there.

Thank you.

Yeah, thanks a lot. I'd like 2 clarifications. On this sort of recent trend in sort of macro-related slowdown in Europe, are you seeing sort of customers eventually booked but not really booking in advance, kind of waiting more to the last minute? Is that kind of a behavior you're seeing? Or are you seeing kind of demand weakening altogether? And then, another question I have is about just the growth in different sort of channels. I think I heard you mention mobile growing faster and alternative growing faster. I did not hear about direct growing faster. Was that still the case that the direct bookings are faster growing?

All right. I'll start with that and then let David discuss growth and speed. It'll be interesting to see if this uncertainty leads to a trend of delaying bookings. We need more time to determine if this will result in a significant change, which seems to be occurring now. In the third quarter, many people delayed their bookings due to factors like the World Cup or hot weather, and we observed a slowdown in bookings during that period. It's still early to provide a definitive assessment, and I'm also considering the potential impacts of the macro environment.

Yes, I covered a lot in my earlier comments, but I want to confirm and recap that the direct channel has grown faster. We used to indicate it was about half the business, but now it represents over half and is growing at a faster rate. The direct channel accounts for over half and is outperforming the average. Mobile is also over half and growing faster than the average. Additionally, the alternative business makes up about 20% of our revenues, represents a significant portion of our room nights, and is also growing at a higher rate. Overall, direct, mobile, and alternative channels are all performing well and growing faster than the average.

Okay. Thank you, Glenn. Thank you, David.

Thank you.

Thanks very much for taking my questions. In terms of your investments in the alternative accommodation space, it would be great to understand within that investment bucket, how much of it is investing in new supply? Glenn, in your example, you mentioned like beach house listings versus marketing of that supply versus investments in the consumer tools to integrate that supply, whether it be like technology or AI that improves the user interface for the customer. And then related to that, just wondering if you're seeing any consumer behavior that suggests maybe an incremental shift to home versus hotel. Is that inflecting in any way that is notable? Or is it more kind of a steady, linear trend that's going on out there? Thanks a lot.

One area that might be a bit unclear is the distinction between our consistently growing listings and the ongoing business operations versus the new investments we are making. The growth in listings isn’t an additional investment; it's part of our regular business activities. We don’t consider this to be separate from our current operations. What we need for our business to keep accelerating are the same elements we've always relied on, which include sharing our product knowledge with certain customer segments worldwide who may not be fully aware of the quality of our offering. While I pointed out some areas where we may fall short, the fact remains that we have an excellent product in the U.S. However, we need to raise customer awareness, which is why we recently launched a new branding campaign. In the materials being released in the coming days, we want to ensure people know about our non-hotel accommodation option, highlighting its strengths like instant confirmation and competitive comparison with traditional options to avoid last-minute fees. All these factors contribute to the perception of our product. It's crucial that we focus on getting that branding message out while increasing our investments. As for notable changes or inflection points in the numbers, I don’t see anything alarming that indicates a drastic shift. It’s about consistent effort and attention to detail every day to achieve our goals.

And, Anthony, just to clarify, to build on Glenn's point, just to make sure everyone is clear, when we talked about these incremental investments that we make in 2019, incremental above investments that we normally make with the regular size and growth of the business, these are all focused upon driving growth. They're focused upon branding. They're focused upon customer acquisition. They're focused upon merchandising, incentive programs. They're all focused on driving incremental customers to our platform, driving incremental transactions, and driving loyalty. So top-line focus.

Awesome. Thank you very much.

Hey. Good afternoon. I just had one. You mentioned several areas of near-term investment. I don't believe experience is one of those areas. Just curious where that falls in the list of priorities at this point with all the other initiatives going on in alternative accommodations, direct channel growth, payment platforms, China, etc.? Thanks.

So it is important. And as David just said, we're trying to just show a little difference into one of the incremental things that we're doing to drive growth. It's a very important part of our business. We bought FareHarbor, put that in. I can tell you now, we have over 100 cities now, and I think almost 120 that have these attractions and things people can do when they show up. And we talked about in the long run, how important it is to offer that holistic solution for our customer. And that goes back to why we're having this payment problem. You've got to have that to put together all the elements of the trip and reduce the friction for that customer. So the fact that we didn't throw it out, and we didn't talk about it, we're half an hour into our prepared remarks and stuff. I'm glad you asked the question, so I could make a point that this is still an extremely important part, and we're very pleased with some of the progress we're seeing there.

And it sizes together with the work we're doing, booking also to bring in the cars and rides, and put together these great trips. So, it's a very important part of our building out the connected trip experience for our customers.

Thanks. This is Daniel Powell on for Heath. Just a couple of questions for us. Just want to dig in a little bit more on some of the comments you made around what you saw in your various marketing channels in the fourth quarter. It sounded like the ROIs were stable, but the volumes you were seeing were pretty consistent. Just curious if there was a decision around, because of what you're seeing in the macro environment, not to look to lean into other channels. Or if there was a lack of ROI that you saw outside of the traditional channels that you weren't getting the volume that you would have expected to. And then just another one after that, on the delta between room nights growth and bookings growth in the first quarter that you're guiding to. I realize it's not very big, but just curious if there's anything about the growth that you're seeing in alternative accommodations that we should think about over the course of 2019 that could be impacting the delta between those two. Thanks, guys.

Let me take the second one. As you've got to look at everything on a constant currency, Easter adjusted basis. Sorry you have to do that, but unfortunately it's the only way to kind of look at things on a like-for-like basis. So you look at the basis into the first quarter, room night growth is 6% to 8%, and gross booking growth is 5% to 7%, so pretty consistent. There's an ADR difference. We do expect ADR and we're seeing a little bit of pressure on ADRs tied to the macro, we're seeing it tied to two things. One, we are seeing a little bit less international traveler into certain cities, and those international travel transactions since we have higher ADRs. And also, we are seeing some local pricing pressure as well impacting the ADR. So that's the story between room night growth and gross bookings on a like-for-like basis during the first quarter. And then, just to recap again, what we said on the fourth quarter, we're expecting to get some deleverage from the performance marketing channels. We've got a little bit less leverage. That's because there was just less volume there than we expected, but we're pleased with ROIs and we're pleased with the share that we maintained in those performance marketing channels. So, it's a function of volume we saw in the channel as opposed to anything else.

Got you. And there weren't other channels that you thought you could have spent into when you weren't getting that volume? Or is there an issue around timing there?

We always evaluate every opportunity to invest money for growth, considering the return on investment and the anticipated long-term benefits for our brand. These are aspects we've discussed before, and we remain satisfied with how things were at that time.

Really, just to kind of put those two points back together again, if you think about it, we did better than we expected in the Q4 on room nights growth. And as we just said, we got a little bit less volume from the performance marketing channels. So the fact that we were able to beat our room night growth guidance for the quarter and an important channel for us had a little less volume than we expected, I think that's a good thing. Therefore, we were able to still lean in elsewhere and do better than we had thought we might do.

Thanks. Appreciate the detail.

Thanks. Just back to the growth initiatives for 2019. I'm just curious if you could help us prioritize if you had to weigh each of the initiatives, where the biggest rate goes and the biggest investments in descending order. If you could just give us a high-level view, that would be very helpful.

Yes, I don't think we can provide more specifics. The priorities we mentioned are the key ones. It's important to highlight that we create a budget at the beginning of the year and then begin execution. As the year progresses, we might find that certain initiatives are performing better than others, leading us to allocate more resources or scale back on those that aren’t doing as well. Even if I were to provide details on our current spending plans, it wouldn't be very useful because those plans will likely evolve with changing circumstances.

Yeah. Brent, just to kind of give you a little bit of color and tell which is the smallest of the three areas. We told you there's going to be some impact you'll see on the branding line, some impact you'll see on the revenue line, some impact you'll see on the personnel line. Well, the personnel line is by far the smallest of those three. The other two are the major spend areas, and the personnel increase, so really those we're adding to support those growth initiatives.

And Glenn, just a quick follow-up. If Europe continues to lag a little bit longer than you would like, can you just give us a sense of how you think about the alternative opportunities to counter that, what's happening, how you think through that for the back half of the year? Thank you very much.

Yes, we see periods of slowdown as great chances to gain market share, build loyalty, and enhance our value to supplier partners. When demand slows, our hotel partners seek to fill their rooms wherever possible. They focus on optimizing their operations because hotels have substantial fixed costs and need every guest to contribute to their financial health. I have experienced similar situations in my nearly 19 years with the company. We have successfully added value in the past, and I believe that if the slowdown continues, we can position ourselves to emerge even stronger.

Great, thank you very much. I appreciate the commentary around the payment platform earlier and providing more frictionless experience. My question is if you layer in more of these services, how do you think about really making consumers aware of all the features in the app? And in turn, how does that change kind of your view of LTV over the long-term? Thanks.

That’s a valid point. As we highlighted, having excellent service in your product isn't very effective if people aren't aware of it. One of the positives is that as consumers become more adept with mobile technology and use their devices increasingly, we can create more opportunities to engage with them and illustrate the value of our systems. This concept of a super app is emerging globally, seen in platforms like WeChat, which offers a wide range of functions, as well as our partnership with Grab that is exploring various features. It's important that our customers know about these impressive capabilities. I'm not overly worried about our ability to convey the value, and I believe that as we continue to implement these systems, we will be just fine.

Great, thanks for taking my question. Just wondering you talked about profitability of your alternative accommodation room nights, I think you said nicely profitable, but when you kind of called out some of the higher costs for that relative to the traditional hotel business. I also remember that, in the past, you talked about the potential for technologies like AI and better automation to reduce your OpEx per room night. Is that something that should help drive kind of the EBITDA per room night for alternative to be more in line with traditional hotel over time? Or will that always kind of be structurally lower?

So first, I just want to make sure we're on the same page, I said nicely profitable. That was the word I used, not solidly. But, I believe all new types of technology that we're developing are going to reduce that cost over time for both non-hotel accommodations and hotel accommodations. And it's interesting which ones will help the most, fastest I don't know the answer to that. I do know though that some of the things that we see, even right now in terms of lowering our customer service cost. And because we do have more customer service contacts with our non-hotel accommodations area. This is an area where we probably will get a benefit more there than we would in hotels, but there can be other examples that could go on the other way. The fact is though one of the benefits for a company, having the size and scale that we have, the ability to go out and hire lots of really smart AI-type people, help developed technologies that we can then put into our platform, distribute throughout the world for all of our supplier partners, we're providing a value that they can't do on their own. That adds to the reason why they connect with us, that's the reason why they give us the information, that's the reason why they want to work with us. That is something that we do that they can't do as well, particularly somebody who is not a multi-billion dollar global chain. If you're not one of those, you're definitely not going to be able to play that game. We bring that to them.

Thank you.

Thank you for taking my question. Can you explain the company's strategy regarding some of the owner-managed inventory that seems to have more friction? Additionally, what is the overall strategy? I also wanted to ask about the agreement you signed with FareHarbor a couple of months ago. Have you noticed any increase in performance from that partnership since it began?

I'll respond to the second question. I haven't been following the details closely, so I’ll skip that. If it were significant, I would be aware of it by now. Moving on to the second point, we aim to include all types of non-hotel accommodations, from small, occasional operators to larger, more established businesses with multiple properties and distribution channels. Our goal is to onboard these various entities in a strategic manner, ensuring we do so at the right times and with the right investment, focusing initially on the more profitable opportunities. For the types you mentioned, the onboarding process may be more expensive. We have a substantial number of experienced owners to work with, but we will eventually engage all of them. So, I want to thank everybody for the call. In summary, I am very pleased with our performance in 2018 as we met many important financial and strategic goals. And I'm truly excited about our upcoming key investments for 2019 as we position the company for long-term growth. And finally, I want to thank everyone who made 2018 such a successful year, including our suppliers, our marketing partners, and now more than 24,000 employees distributed across more than 300 offices around the world, and most of all, our traveler customers who are out there being what we call our new advertising campaign, the bookers, the doers, the people out there exploring the world. By doing this, they're making the world a better place. Good night.