Booking Holdings Inc (BKNG) — Q1 2019 Earnings Call Transcript

Thank you, and welcome to Booking Holdings’ first quarter conference call. I’m joined this afternoon by our CFO, David Goulden. We produced a solid quarter with 217 million worldwide room nights booked, which is up 10% year-over-year and exceeded the high end of our guidance range. As we discussed on our last call, the timing of Easter and foreign exchange rate movements meaningfully impacted our U.S. dollar financial results this quarter. Our year-over-year non-GAAP revenue growth was down slightly in U.S. dollars but up 6% on a constant currency basis and up about 8% when further adjusting for Easter. Adjusted EBITDA declined year-over-year by 10%, but increased about 6% when adjusting for FX and Easter, which was above the high end of our guidance range for the quarter. We are pleased with our results for the quarter, and we continue to see encouraging metrics in our business. Our direct channel is growing faster than our paid channels. Our mobile share is increasing, and our alternative accommodation business is growing faster than our overall business. As we continue to execute against a very large market opportunity, we will look to drive shareholder returns through the combination of organic growth investment, share repurchases, and opportunistic M&A. As we discussed on our last earnings call, we are investing to support the growth in our core accommodation business, primarily through brand marketing, merchandising, and customer acquisition programs. These investments are aimed at driving long-term top-line growth and share gains. We are on target with the launch of our new brand campaigns. And while it's early, we have confidence that they will increase our brand awareness over time. We're also pleased with the early results of some of our merchandising and customer acquisition programs and look to expand these as we move into our busy travel season. Our branding goals include driving greater awareness of our alternative accommodation listings, as we continue to expand and improve our offering here. We were pleased to announce during the quarter that Booking.com passed the milestone of three quarters of 1 billion guest stays in its alternative accommodations since 2007. And as of March 31, Booking.com had approximately 5.8 million reported listings in alternative accommodations, which grew approximately 13% year-over-year. More importantly, our individually owned properties represent the fastest category of supply and booked room night growth. This is a key area of our focus as we look to provide the broadest possible selection of unique places to stay, which helps drive conversion benefits across our platform. We will continue to utilize M&A and strategic investments to accelerate key growth opportunities. For example, FareHarbor has enabled us to accelerate our growth in the attractions market and has given us key capabilities to build a truly connected trip, where we envision a frictionless customer experience that we believe will enhance loyalty in our accommodations offering. Our strategic investments in China and broader Asia, accompanied with local marketing partnerships, will continue to help us expand in these key underpenetrated markets, where we believe we can have long-term growth. Finally, in terms of share repurchases, we completed the remaining portion of our $10 billion share repurchase program, buying approximately $4.5 billion to date in 2019. Consistent with our historical approach to share repurchases, we took advantage of the opportunity to invest in our owned stock during the quarter. This year alone, we have purchased 5% of our fully diluted shares. Additionally, our Board of Directors approved a new $15 billion repurchase authorization that we will look to execute over the next two to three years, assuming stable business and market conditions. David will provide some more color in his prepared remarks. But this new authorization reflects our strong financial position, our high cash flow generation, and demonstrates our confidence in the future of the business. In conclusion, we had a solid quarter as our team remains in full execution mode. We'll continue to drive long-term shareholder returns through a combination of organic investment, share repurchases, and opportunistic M&A. As you can see, we are actively pulling on all three of these levers. We remain absolutely focused on the large global opportunity that lies ahead of us, and we’ll manage our business with a long-term view to capture it. I'll now turn the call over to our CFO, David Goulden for the financial review.

Thank you, Glenn, and good afternoon. I will go over our operating results for the first quarter, update you on our capital structure, and discuss our guidance for the second quarter as well as our thoughts on the full year. All growth rates are compared to the same period last year unless stated otherwise. Details on our reconciliation to GAAP are available in our earnings release. Now, let’s take a look at our results for the quarter. Our booked room night growth of 10% for the quarter surpassed the upper end of our guidance range. We were satisfied with our performance, particularly given the slow start in Europe and the growth challenges in our main performance marketing channels. Despite a sluggish environment in Europe, room night growth rates in that region exceeded our expectations. Room night growth for the rest of the world was also slightly above expectations and outpaced Europe. Average daily rates were down about 2% in Q1 on a constant currency basis, which was worse than our guidance of a decline of about 1%. Changes in foreign exchange rates reduced Q1 growth rates in U.S. dollars by roughly 6 percentage points compared to last year. We estimate the shifts in FX rates impacted Q1 gross bookings, revenue, and EBITDA growth rates by similar amounts, and the EPS growth rate by about 1 percentage point more. Q1 gross bookings increased by 2% in U.S. dollars and 8% on a constant currency basis, exceeding the high end of our guidance range. Consolidated non-GAAP revenue for the first quarter was $2.9 billion, reflecting a 0.4% decline in U.S. dollars and about a 6% growth on a constant currency basis. As anticipated, the timing of the Easter holiday had an approximately 2-percentage-point negative impact on our Q1 revenue growth rates. Last year, Easter fell on April 1st, meaning the bulk of Easter-related travel revenue was recorded in the first quarter. This year, with Easter on April 21st, that revenue will be recorded in Q2. Our Q1 non-GAAP revenue growth rate on a constant currency basis, adjusted for Easter timing, was around 8%. Advertising and other non-GAAP revenue, primarily from KAYAK and OpenTable, increased by 9% in Q1. Adjusted EBITDA for Q1 was $718 million, which exceeded the high end of our guidance range and reflected a 10% year-over-year decline on a reported basis, while showing about a 6% increase on a constant currency and Easter-adjusted basis. Our Q1 adjusted EBITDA margin was 27%, after adjusting for Easter, which also surpassed our forecast. We maintained discipline in our performance marketing spending, which helped achieve better-than-expected leverage of 250 basis points in the quarter. Even with slowing growth across our performance marketing channels, we still view these as effective customer acquisition methods and plan to continue spending wisely to enhance growth. As part of our 2019 growth investments, coupled with efforts to enhance direct traffic to our websites, we raised our brand marketing spend by 61% compared to Q1 last year, which contributed to approximately 250 basis points of deleverage. Sales and other expense lines increased with merchant gross bookings growth, contributing 172 basis points of deleverage, mainly from the expansion of our payment platform at Booking.com. Personnel expenses came in below our forecast, adding a small degree of deleverage for the quarter. Our non-GAAP EPS was $11.17, a 7% decline compared to the previous year, but after adjusting for currency and Easter timing, grew 11% in the quarter. Non-GAAP net income reflected a non-GAAP tax rate of 18.9%, a slight decrease from last year, which was higher than our guidance estimate due to discrete items. The 8% reduction in our share count in Q1 aided EPS growth for the quarter. On a GAAP basis, operating income declined by 24%, and GAAP operating margin decreased by 532 basis points compared to Q1 last year. Q1 GAAP net income stood at $765 million or $16.85 per share, which is significantly up from Q1 2018. This included $451 million of pre-tax unrealized gains on equity investments in Ctrip and Meituan, which we excluded from our non-GAAP results. Our GAAP tax rate for the quarter was 21%, an increase from the prior year, primarily due to discrete tax provisions related to those gains. Our operating cash flow and free cash flow were negatively affected by a $403 million payment to the French tax authorities to maintain our right to contest an assessment in court, along with an increase of $48 million in income tax prepayments in the Netherlands. We entered 2019 with about $4.5 billion remaining from our $10 billion share repurchase program launched in May 2018. In the first quarter, we repurchased another $2.7 billion of our stock under this program. Since the end of Q1, we completed the remaining $1.8 billion reauthorization of share purchases, reflecting both the buying opportunity and our confidence in the business. We ended the quarter with $12.8 billion in cash and investments and $8.7 billion of outstanding debt. With this authorization completed, we want to share our capital structure thoughts and next steps for capital allocation. We view our strong balance sheet as a strategic asset, enabling us to seize growth opportunities in our core online travel businesses while executing our strategy to offer a fully connected trip. Our top priorities include investing in our business growth, both organically and inorganically, while having financial resources to strengthen our competitive position, even amid a macro downturn. In April, our Board authorized a new $15 billion share repurchase program that we plan to complete over the next 2 to 3 years, assuming stable business and market conditions. We aim to fund this program and potential M&A through cash on hand, operational cash flow, and additional borrowing capacity while preserving strong investment-grade credit ratings. In connection, we have decided to transfer $3.6 billion of cash from euros into our U.S. cash pool. This adjustment means that starting in Q2, our euro-denominated debt will no longer be fully hedged against currency fluctuations for GAAP purposes. Going forward, you will see non-cash gains or losses in our foreign currency transactions reflected in the other line of our GAAP income statements. Nonetheless, our euro-denominated liabilities still remain economically hedged through ongoing capacity generation from euro-denominated operations. At maturity, we plan to refinance the debt in euros or repay it using euro-denominated cash flow. Hence, we will exclude these non-cash gains or losses from our non-GAAP financial presentation. Now, regarding guidance. Allow me to briefly outline some factors that we mentioned during our last call affecting the year's outlook before returning to our Q2 guidance. Beginning with our growth investments in 2019, as discussed last quarter, we are investing for customer acquisition and loyalty growth. Although it’s still early, we are on schedule with our brand campaign launches and are encouraged by the initial results from our merchandising and customer acquisition endeavors. We anticipate these growth investments will reduce our EBITDA growth rate by a few percentage points in 2019, with a more significant negative effect expected during the first half of the year. Regarding payments at Booking.com, we noted last quarter that we did not foresee any additional reduction in EBITDA and growth from payments this year. However, we now expect payments to have a modestly negative effect on EBITDA growth for the year due to timing changes in revenue recognition concerning a component of merchant revenue. Nevertheless, we do not expect any further negative impact on EBITDA growth from payments in 2020. We believe payments offer significant benefits across various areas, including merchandising flexibility, improved customer and partner experiences, lower customer service costs, and better integration of trips. Now, let's examine the factors affecting our outlook. Based on current FX rates included in our guidance, we expect gross bookings growth and revenue growth to reduce non-GAAP EPS growth by approximately 3 percentage points for the entire year. This impact is larger than what we previously anticipated due to the euro-dollar exchange rate drop since our last announcement. Additionally, the timing shift of Easter will affect Q1 and Q2 revenue growth rates. Lastly, our outlook assumes no changes in the macro environment, which, as I mentioned, remains sluggish in Europe. That said, we still expect non-GAAP EPS on a constant currency basis to grow in the low double-digits in 2019. We are confident that we will gain share in accommodations across each major geographic area, supported by our business strength and the growth investments we're making this year. Now, let’s focus on Q2. Foreign exchange rates are expected to create an approximately 5 percentage point headwind on year-over-year growth rates in Q2, which we estimate will affect gross bookings, revenue, EBITDA, and non-GAAP EPS growth by similar amounts. We are using a dollar to euro exchange rate of $1.12 for our Q2 guidance. The Easter timing shift discussed earlier will positively affect revenue growth in Q2, with an estimated increase in Q2 2019 revenue growth rates of around 2 percentage points. Based on our current quarter standings and all other factors, in line with our usual guidance approach, we are forecasting booked room nights to grow by 6% to 8%, while gross bookings are expected to remain roughly flat in U.S. dollars and grow by 4% to 6% on a constant currency basis. Our Q2 outlook assumes a constant currency ADR decline of about 2%. We predict Q2 revenue growth in U.S. dollars to be between 5% to 7% and grow 10% to 12% on a constant currency basis. Normalizing for both Easter and constant currency, we expect Q2 revenue to rise by 8% to 10%. Q2 adjusted EBITDA is estimated to range between $1.295 billion and $1.325 billion, indicating roughly flat year-over-year growth. Adjusted for both Easter and constant currency, we estimate Q2 EBITDA growth to be similarly flat. We expect modest leverage from the performance marketing expense line in Q2, reflecting lower volumes in paid channels while we continue to focus on acquiring high-quality traffic. Additionally, we plan to significantly increase our brand marketing spending in the quarter, which will contribute to deleverage on the P&L, outweighing the leverage we anticipate from performance marketing. The benefits from brand marketing will be realized over multiple quarters. Lastly, sales and other expenses are expected to remain elevated, continuing to grow faster than revenue, mainly due to the ramp-up of our payment platform at Booking.com. We forecast Q2 non-GAAP EPS to be approximately $22.15 to $26.60. After normalization for both Easter and constant currency, we estimate Q2 non-GAAP EPS growth at around 7% to 9%. Our non-GAAP EPS forecast includes an assumed income tax rate of about 19%, consistent with Q2 last year. Our full-year non-GAAP tax rate is anticipated to be between 19% and 19.5%. Our Q2 non-GAAP EPS guidance assumes a fully diluted share count of around 43.6 million shares, which is 10% below last year’s Q2. We project GAAP EPS to be between $21.10 and $21.55 for Q2, with an assumed tax rate of about 19%. We have hedging contracts in place to largely protect our second quarter EBITDA and net income from further currency fluctuations against the dollar until the end of the quarter, though these hedges do not shield our gross bookings, revenue, or operating profit from the effects of foreign currency fluctuations. Our forecast does not factor in significant changes in macroeconomic conditions or the travel market specifically. We will now take your questions.

Thanks, I have two questions if I can. First, just on the performance spend, it looks like it declined again on a year-over-year basis. Can you talk about how much of that was a function of changing ROI targets versus just not seeing the traffic from some of the paid channels or maybe how much was counter revenue from the new acquisition programs? And then, second one, as you look to Q2, are things fairly stable, anything strange to call out on a bookings and room nights outlook? Wondering if Easter is a bit of a headwind to bookings in Q2? And then, does your guidance assume deceleration for the remainder of the quarter or anything you can share that would be helpful?

Okay, Lloyd, let me take it in reverse order, so we can remember your first question last. So, relative to Q2 guidance and what we are expecting from a room night point of view, our April room night growth was actually in line with the high end of our guidance range, to answer your question on deceleration. But that was impacted by a little bit of negative impact from the timing of Easter holiday, so, in line with the high end but with some pressure from the timing of these with that shift. In terms of what have we factored in to our Q2 guidance, our approach hasn't changed. We've obviously looked at the macro; there is some uncertainty out there; Europe continues to be a little sluggish. But we've taken all those factors into account, and consistent with our private practice that really supports the way we came out with guidance. And then, on your first question on the performance marketing spend, we’re pleased with our share in those channels. Our ROIs were fairly consistent with what we expected them to be. And that kind of drives the leverage that we're seeing in the performance marketing channel.

Can you provide insight into the significance of counter revenue from new acquisition programs and merchandising?

Obviously, as we go through the year, that's going to increase. Q1, nothing specifically material to talk about. We talked about the fact that those investments will ramp during the year. So, Q1 will be the smallest impact as we go through the year.

Hi guys. This is Ben on for Mark. Thanks for taking my questions. Firstly, just on the alternative accommodations. Last quarter, you talked about specifically building out inventory and non-urban and single home vacation destinations in the U.S. Any, like kind of update on the progress there, or any relative performance of U.S. versus Europe performance in the market? And just secondly, are there any kind of preliminary results you can report from the brand marketing campaign, any significant upticks in direct traffic to call out? Thank you.

So, we did call out previously about how important we think it is to have the breadth of all types of alternative accommodations. And we marked that in our portfolio, we felt an area we need to grow more was the single property owners. And I'm pleased to say, we continue to make progress there; we continue to grow that very fast, but it’s still a smaller portion of the overall portfolio of alternative accommodations. So, there's room to grow there. In regard to brand, we are pleased with the early, early part of our rolling out the campaigns. And I think in any type of new campaign you need to have some time before you declare victory or not. So, we will say just that it's early, and so far, so good.

Thanks, Glenn. And any comments on kind of how your AA performance has been in Europe versus the U.S. overall, like in general?

I don't think we break that out like that. But we've always said how Europe is a bigger portion of our overall business than any other part of the world. And we have pointed out in the past in terms of awareness that if you went to somebody on the street and said, 'Where can I get a home in the U.S.,' they probably would not go to Booking.com, but if you're walking in the capital city in Europe, a much higher likelihood that they would say Booking.com.

I have two. First one for David. If your April was 8% in terms of room nights booked, I was hoping you could give a little bit more color in terms of the guide, 6% to 8%. Is there something that you're expecting over the next couple months or is this just kind of your natural expectation for deceleration that you've kind of had in previous quarters? And then, Glenn, I couldn’t help but notice that you mentioned opportunistic M&A, I think three times in your script. I'm curious what kinds of things you guys are kind of considering and looking at, any kind of color that would be helpful? Thanks.

Sure. Let me go first on the guidance goal, on the guidance comments. Not to repeat what I said, maybe to put a bit more flavor on it. April was in line with the high end of our guidance range. I mentioned we had a little bit of pressure in April from the timing of Easter. When we look at our guidance for the quarter, we haven't changed our guidance approach. We are looking at a number of things that are happening out in the marketplace, and the macro, there's always some uncertainty out there, but not really kind of lays into our guidance, but again our approach to guidance hasn't changed. So, don’t read anything more into it than that.

And in terms of opportunistic M&A, as you know, we wouldn't talk about any specific targets or anything of that nature. But, we’ve built this company over time by bringing in great teams, great products. And that's what we're going to continue to do. I think the best way to look at this is over the past couple of years of where we've been spending our money, bringing in things that we didn't really have. And I'll just point to our most recent acquisition, which we just closed a couple of days ago, Venga, a small acquisition, but it brings in a CRM platform for our OpenTable operation with restaurants. It makes the idea of how we can provide a personalized experience for a consumer, a diner, much more powerful in terms of the overall restaurant operating system. Now, that is part of our overall strategy of the connected trip. And we talked about this in the past about providing a service, a value to a traveler that is much more than just going on to a site and booking a hotel. That's what we're trying to do, to create all these different things together in a way that provides significantly more value than any single service could do on its own.

Thanks a lot. First, just kind of a follow-up on your last comment there. Can you give us more detail on your rollout of the attractions product? It’s an area where you had kind of a pilot in place for a long time, but we haven't seen that broader product. So, what can we expect in attractions?

Sure, Glenn speaking here. So, as you know, we've been building out the attraction business now for a while. We went out and we bought a company called FareHarbor, which provides a backend solution to enable smaller and medium-sized attraction suppliers to go digital and get on board. And we talked in the past about more than 100 cities where you can now get attractions. And the whole idea is to create this frictionless, seamless way for a consumer who is using, say, the Booking.com app, to be able to see all the different things you can do in a city because you don't go to a city just to sit in the hotel room or in the home; you do it to do things. And providing this very easy, frictionless experience where you're provided with a QR code that enables you just to go up to some type of attraction and go through either quicker, because we're offering up something like a skip the line benefit, or it's cheaper, and these are things we can do because of our overall huge demand. We can negotiate with these suppliers and get these kinds of benefits for our customers that others may not be able to get. That's the whole idea. Now, in terms of rolling it out, we continue to add more cities and more attractions all the time. And I think you will be able to go to more cities as we roll it out in the near future.

And then, just one other question if I may on revenue in the first quarter was a little lower than expected, despite the strong nights? Can you give us some color on the puts and takes there, and to what extent was that impacted by the new merchandising programs? Thanks.

Kevin, this is David. Let me take that. I think that's really more due to the timing on room nights, if you think about it, we were speaking to you last at the end of February. And therefore, the booked room nights were clearly in the month of March. And those room nights came in later during the quarter. Therefore, they have less of an impact in Q1 and more of an impact in future quarters.

I guess, as you look at last quarter's bookings and this quarter's guidance of 4 to 6 ex-FX, so more deceleration there. I'm just trying to think about the long-term growth rate. So, could you talk about if there's some unusual factors that you're seeing in 2Q? Obviously the 2% ADR declines. Other things you're seeing? And do you feel like your growth rate can improve from the 4% to 6% level in 2Q over time from here? Thank you.

I'll start and then David can add some thoughts too. We have noted that Europe continues to show sluggishness. As previously mentioned, our presence in Europe is larger compared to other regions. Regarding your question about potential improvement, it certainly extends beyond just macroeconomic factors. I’d like to take this opportunity to outline our long-term strategy. We believe that by enhancing our service and integrating various offerings, we can create something unique. Additionally, we are investing significant resources in machine learning and leveraging our extensive data analytics to provide superior service to consumers. We are confident that this approach will enable us to achieve a turning point in the future. Our goal is to make Booking.com the preferred choice for travel arrangements. Do I believe this is achievable? Absolutely, and that’s what motivates our efforts. David, do you have anything to add?

Yes. And Justin, just to kind of drill a little bit more into numbers this year. You've got a couple of things going on. Bear in mind, we didn't guide to the top-line for the year; we did give you some guidance on the bottom-line. But, we do expect to get some additional benefits from our investments as we move throughout the year. That's one of the factors to think about this year, in addition to the longer-term factors that Glenn spoke about.

I have two if I could. Just kind of curious how much of the slowdown in bookings and also the ADR pressure might be, not so much a macro factor, as it is sort of hotel pricing competition? We've picked up on bookings efforts around early payment benefits and some other efforts that seem more responsive to sort of pricing competition. Just wondering how much that in fact is to accounts for some of the slowdown in bookings and pressure on ADRs? And then, my second question is around the non-GAAP EPS growth in low double-digits this year. I believe that you talked about share account declines of about 10%. So, is that kind of the way we should be thinking about the non-GAAP EPS growth for this year, ex the buyback, so it’s kind of in the very low single-digits? Thanks.

So, let me talk about the beginning, and you started off by talking about hotels. I think we’re going to have to expand that question into price competition in general. And in previous quarters, we've talked about certain areas of the world, particularly Asia, where price competition can be very strong. And one of the things that we talk about is building out that merchandise payment platform for Booking.com, so we could have an ability to compete on price when appropriately, but even more so the whole idea of merchandising. And that's not necessarily just discounting a hotel, which anybody could do, and that may not be the thing to do. What you can do instead is package something. So, for example, we made an investment into DiDi, we made an investment into Grab in Southeast Asia. And the idea is that a customer comes to us and we can offer them ground transportation along with their hotel. And on that merchandise platform, we can do different things with the overall price, the overall cost to the consumer in a way that makes it much more advantageous for that consumer to come to us. So, that's the way we'll have an advantage in competing in these areas of high competition. And I'm looking forward to that as we continue to roll that out. And David, I don’t know, is there anything you want to add there?

Yes. Well, I think there are a couple of things. So, Mark, you asked about the ADRs. I’ll give you bit more color on that. They were down a little bit more than we expected for the quarter. It wasn't really a full form because that was a fairly important rounding factor. So, it was down less than 1% more than we thought, but there were down for the quarter year-on-year by 2%. And there are two factors that are really almost equal weighting. One was to do with rate and pricing. I wouldn't necessarily say that was rate and pricing pressure that we were creating, just kind of rate and pricing pressure in the marketplace. And the other was geo mix impacts as the some of the higher growth countries or some of the country with the lower ADRs. And then, moving to your question about non-GAAP EPS, constant currency on low double-digit basis. We clearly are going to get benefit from share account reduction this year. I talked to you about a 10% reduction. That was a Q2 share count reduction. Obviously, we bought very heavily in the first month and that will impact Q2 share count. So, it's something a little bit less than that for the full year. But bear in mind that we're also making significant investments this year as well. We talked about the fact that investors we’re driving are costing us a few basis points of EBITDA growth rates. So, there are a few different things going on in the income statement this year. But, you need to kind of look at the investments as well as the share account reduction because they both have an impact on that growth rate. So, I would say, the good news is here that even though we're making some very significant investments, we're still looking to return low double-digits in non-GAAP EPS growth on a constant currency basis in a year when we’re making that level of spend.

I just wanted to ask a couple about alternative accommodations. Could you just sort of talk about any learnings you've had from commission rate adjustments or take rate adjustments on alternative accommodations? And how should we think about your strategy on take rate in the alternative accommodation space? And then, for any other areas of investment, I guess, talk to us about how you think about integrating more OpenTable into the platform, maybe driving more attach on non-hotels to the traveler's experience? Thanks.

Hi, Brian, it's Glenn. We’ve discussed alternative accommodations, and the take rates are quite similar to those of hotels. However, the costs associated with these accommodations can be higher than those for hotels. The main reasons for this are that you can't distribute your costs as effectively, and you have limited capacity to fill rooms since there’s usually only one property available. Additionally, the customer acquisition costs in the accommodations sector tend to be higher than for hotel nights, which also increases expenses. Our strategy is to remain competitive in the market, and with increased demand, we can achieve the desired take rates. As we expand and gain more knowledge about our operations, we aim to lower costs in the accommodations space. The development of technology, especially in natural language processing for automated customer responses, will further assist us. Our Booking.com chatbot is already performing well in English, and improving this technology will help reduce costs. Regarding the integration of OpenTable, I am optimistic about the progress we can make. Although it's frustrating that we haven't started implementing it yet, I see it as a future priority. Travelers are not just at home, and we need to offer a combined product that leverages all the customer data we have to enhance their experience. This also benefits our restaurant clients using the OpenTable platform as a marketing tool, as we understand their customer habits and preferences. Integrating these services will boost customer loyalty and encourage repeat visits. I hope we can accelerate this progress and see positive developments in the near future.

Maybe following up on a couple of points made during the call so far. How far along are you to where you want to be on realigning your marketing against your longer-term goals? What comes from performance versus direct channels, lining up against direct traffic and sort of loyalty and reward type behavior from your core users and growing acquisition, but also growing retention of spend across users on the platform? Just want to understand how far through that process we are, and what some of the big friction points you're still trying to solve for that you think line up against your broader goals of how to stand and what kind of ROI you'll get from the broader marketing budget? Thanks, guys.

In terms of our progress, we assess daily the balance of our marketing expenditures, always considering the return on investment and the long-term benefits we can achieve, including customer loyalty. Historically, we have been data-driven, seeking to understand the outcomes from our initiatives. However, measuring the impact of brand marketing, especially with new campaigns that have yet to yield substantial responses, presents challenges. As I indicated before, we are still in the early stages of this process. Nonetheless, we firmly believe in the importance of continuing to invest in brand awareness, particularly in the U.S., where we feel we are not fully reaching our potential. It’s critical that people recognize the quality of our services and products to grow our market share, similar to what we’ve accomplished in other regions. That said, competitors are constantly adjusting their strategies in these dynamic markets, whether through paid advertising or brand initiatives, necessitating ongoing evaluations of their activities. I feel confident about our current position and am satisfied with our ROIs, anticipating stability in the near future.

Maybe if I could just ask one follow-up. As you’ve seen some of the performance channels evolve, how are you thinking about what they donate to you in terms of traffic and conversion measured against what kind of ROI you're getting? There is sort of a neutral, the declining ROI environment, which you can't sort of abandon them from a volume standpoint, how are you thinking about the puts and takes of some of your performance channels and what they deliver in 2Q?

We consider all factors when spending on our marketing channels. We're always analyzing the data we receive in various forms to determine if the expenditure is justified. This includes assessing whether we should increase or decrease our spend and understanding the elasticity of the spend at that moment. However, I won't go into specifics about any individual aspect.

Erick, I’d just add that these channels are all important to us. So, it's not one versus the other. It’s always both. And we acquire new customers through each of these channels. And people sometimes move from channels to channels, so there's a little dynamic. So just one point, it’s really always a question of and, it’s not a question of or, how we kind of look at these channels?

Thank you. I have two questions. First, related to brand marketing, how far along are we with the size of the program? There are limits to how large the program can be in different markets, but you expect it to grow in the second quarter. When do you anticipate reaching a scale where these programs are sufficiently established in your key markets? Secondly, David, you mentioned that margin pressure from payments is greater than expected. Is this impact due to increased adoption of payment offerings with higher volumes, or can you share some of the main factors contributing to this? Thank you.

So, I'm going to take the first one. And I’m going to say we don't use words like innings. We're a global company. And baseball is not actually played in much of the world. So, when we talk about it the way you did, I'm going to use a football term and say we hit the ball. So I’d say, look, it’s still first quarter, first half, depending on which one you're playing, in a high school game or you're playing out in a world game. So, definitely first half and maybe the early part of that. There's a lot of things still to be done. And as I said, this is early in terms of getting response. But, I want to commit again that this is an important area we're going to continue to spend. We may have to change things down the road, but we're going to go continue to spend.

And Glenn, let me just follow up and answer the question on payments. So, let me just recap again what's going on with payments. So, last call, we went through a long explanation on payments in February. And we said we didn't expect any additional reduction in EBITDA growth from payments in 2019. We now expect that this year payments will have a negative impact on EBITDA growth for the year. So what's changed? Nothing's changed in terms of the adoption of payments and the cash flow economics of payments. What’s changed is due to a change in the revenue recognition timing of a component of merchant revenue that we will not recognize this year. And we expect to start recording some of this revenue again in 2020. So, it's a timing issue of revenue recognition; it doesn't change underlying cash flow economics, it doesn't change the long-term economics. It will impact us in 2019. And that's what's going on.

Glenn, maybe you can give us some additional commentary around the macro. Back in February when you were on the call, it seemed like Europe was kind of not that great. And now, two months out, is your view incrementally better or how do you view the European macro? And then, I have a follow-up.

I'm just going to have to stick to it being sluggish, compared to the last call. Things we've called out in the past seem to be continuing somewhat; Germany and France, the confidence fell. Germany reduced the full-year growth outlook, Brexit. Even though we got off the cliff, it still is something in people's minds. And I think it also hurts confidence in the UK about making decisions. So, I can't say more than we believe it’s sluggish and it's not dissimilar.

I had a follow-up question regarding the ADR being down compared to your expectation of just a 1% decline. Is there a trend where consumers are choosing hotels or accommodations that may not have the same ADR as before?

Not specifically. In terms of the mix impact, which is part of the ADR component, it’s really more a mix impact, it’s impacted by different geographies and where some of the higher growth markets are. Some of the higher ADRs are in the U.S. and Western Europe whereas some of the lower relative growth markets, places like Asia and countries like Vietnam have lower ADR. So, that mix impact is a bigger factor than trading up or trading down within a particular local marketplace.

So, Glenn, in the emerging markets and Asia where you may be plugging into these super apps to source demand, how much easier or more difficult do you think it will be for you to get users to come directly to Booking or Agoda, so you do not have to pay for those transactions every single time? And second, would you also talk about what's going on behind the scenes between Agoda, alternative accommodations versus hotels, and your push to run your own payments, and how these factors may be influencing your agency versus merchant booking growth? Thanks.

So, regarding the super apps like Grab, I can’t provide specifics because we haven't launched the product yet. We have some hypotheses, but we lack data to determine how easily we can attract direct users. I won't be able to answer that until we start gathering data, which will give us a clearer understanding. We only have hypotheses at this point. Concerning Agoda, I believe you mentioned their home business, the alternative accommodations for Agoda, is that right?

I think Agoda versus everything else and the consumer behavior, choosing alternative accommodations versus hotels and you're pushing payments and how that's influencing the merchant bookings growth rate, maybe at the expense of the agency.

Yes. So, one thing people may not be aware of is that Agoda has an alternative accommodation product too. And unlike Booking where every single property on Booking is instantly bookable, on Agoda in Asia some of their properties, they're not absolutely instantly bookable. And that is because they're localized in certain areas of Asia where it's important to have some of the product that is not instantly bookable. So, little difference there between the Booking one and the Agoda one. But it's growing nicely; it's much smaller than the Booking.com product, but it is an important part, as you probably have seen out in Asia, the growth in the alternative accommodation market is very, very fast. And I’ll let David talk about…

Yes. The evolving payment landscape is significantly influencing our growth. When comparing year-on-year growth in agency versus merchant bookings, we see that the increase is largely attributed to a shift towards more payments at Booking.com. Both Agoda and Priceline have had payment platforms for several years, and the composition of payments in their overall businesses hasn't changed dramatically. However, last year, we saw a jump from a relatively small percentage to 10% of the total transaction value at Booking.com coming from payments, and we anticipate this figure will continue to rise this year. We expect the payment percentage to increase substantially over the next few years as well. Nevertheless, we also recognize that our agency products at Booking.com remain a crucial component of our portfolio. The shift in mix and the effects of payments reflected in our income statement are fundamentally driven by the developments at Booking.com.

Thank you. I understand there has been some discussion regarding marketing efficiency. I would like to explore that topic further. We have experienced a six-quarter period where we saw significant leverage on our marketing spending. However, in the past couple of quarters, we've started to witness a decrease in that leverage when examining advertising as a percentage of revenue. Historically, when such a decrease occurred, it resulted in accelerated bookings growth or revenue and gross profit growth when you reported those figures. Is there a target level you consider appropriate from a growth perspective regarding your acceptable advertising return? I'm looking to gain insight into your current strategy and thoughts on optimizing growth in relation to advertising returns following your efficiency efforts.

This is David. Let me take that. So, you're right. We basically had a period of time from late 2017, up through Q3 of ‘18, where we had a strategy to explicitly optimize the performance marketing spend or improve ROIs. And you saw some fairly dramatic amounts of leverage as we went through that period of time; for example, Q2 2018 was a great example with over 600 basis points leverage in the performance marketing spend. We essentially lapped the execution of that strategy in Q4 of ‘18. So, from Q4 of ‘18 onwards, it's really been a function of against our now more optimized spend that we feel is the appropriate balance between growth and profitability. What opportunity do we see? How much traffic is being presented to us? Where can we find attractive traffic or good ROIs? Our ROI targets from that point of view haven't really changed; the actual ROI themselves, a function of what happens in the dynamic marketplace, the amount of traffic that gets presented to us and where the opportunities are. We always look to try and lean in and find growth in those channels subject to our ROI targets and our ROI returns that we are quite pleased with. So, we kind of post the big change in optimization, we’re now into driving more opportunistic efficiency for most channels. And like everybody else, we operate in those channels, where function of how much volume they represent to us and also what the competitive dynamic is in those channels at any point in time.

It seems that you're indicating the emphasis is still on achieving efficiencies rather than focusing on growth, even though you’ve stabilized at this level of growth compared to the 20% you were experiencing before you initiated this effort. Would you agree with that?

Our approach to various channels has differed significantly from others. For instance, our core search channels are still experiencing growth, though some have seen declining growth rates as previously noted. Meanwhile, certain major channels are no longer growing and, in fact, are moving in the opposite direction. This situation is influenced by the dynamics within those channels and the growth opportunities they present to us. Once we complete our optimization and adjust to our new ROI targets, we are actively striving for growth aligned with those targets. If we achieve a higher ROI in a given quarter, it reflects the market dynamics at play. Currently, we are focused on pursuing growth that aligns with our ROI target, and we feel confident about it.

Thank you. Maybe first for David. One of your competitors reported a deceleration in its alternative accommodation segment’s bookings in the Q1 specifically. And so, I know you don't explicitly break out alternative in your reporting. But, did you see stable growth in alternative accommodations bookings in the Q1, or did you likewise see a deceleration there as compared to the 4Q? And then, secondly, maybe for Glenn, you've talked on this call and in the past about investments in your customers, customer acquisition and loyalty programs. Just can you give me a couple of specific examples of loyalty or customer retention features that are working for you? And just maybe more broadly, what are the things you can do to deliver more value to drive incremental loyalty from customers Booking Holdings? Thank you.

Do you want to take…

This one is easy, because we said this several times. Our alternative accommodation business continues to grow faster than our core business. So, that's been going on for a very long time and continues to grow on and we're very pleased with the way we're building out that product.

But compared to last quarter, is it maintaining stable growth, accelerating, or slowing down in year-over-year growth rates compared to previous periods?

Right, but we don't break out that in that detail to that granularity.

Thank you. So I just want to say how pleased we were with our solid Q1 results and remain excited about our future as we continue to execute on our long-term growth plans. Thank you very much.