Booking Holdings Inc (BKNG) — Q2 2019 Earnings Call Transcript

Thank you, and welcome to Booking Holdings' second quarter conference call. I'm joined this afternoon by our CFO, David Goulden. We are pleased to report that we produced a solid quarter, with 213 million worldwide room nights booked, which is up 12% year-over-year and exceeded the high end of our guidance range. Our year-over-year non-GAAP revenue grew by 7% in U.S. dollars, but was up about 12% on a constant-currency basis. Adjusted EBITDA increased by 5% in U.S. dollars and about 10% when adjusted for FX, which was above the high end of our guidance range for the quarter. We are seeing encouraging signs in our business as we extended our global leadership position in accommodations and continued to execute against our long-term strategic vision of building a connected trip for our customers to become the global leader in travel and experiences. Today, we operate the largest online marketplace for accommodations, with the greatest global reach and scale. In the first half of the year, we produced over $50 billion in gross bookings and over 430 million booked room nights. We're investing against a large opportunity in the global accommodations market and are developing capabilities like payments, merchandising, and loyalty, and expanding our focus in important customer and geographic segments. Our objective for payments is to provide all relevant payment options to customers and partners to power a frictionless global marketplace. This will benefit us by supporting key market growth, enabling the connected trip, facilitating merchandising, and attracting unique supply. To share, Booking.com's merchant transaction continues to steadily climb as customers can now pay Booking.com in over 45 countries, which represents about 80% of its focus markets. Enabled by the rollout of our payments platform, we have been pleased with the early results of our investments in merchandising capabilities. We view merchandising as an important part of our customer value proposition, which we believe will result in increased loyalty to our brand. Focusing on increased customer acquisition, frequency, and loyalty, remains a significant growth opportunity for our core accommodations business. In these areas, we are continuing to focus on our mobile experience, expand the reach of our Genius program, and offer incentives to bring customers to our site directly. We feel good about our progress here, with both mobile and direct bookings going faster than our consolidated rate. These capabilities become more important as we continue to witness slowing paid channels. We are driving a deeper focus on specific accommodations segments that will strengthen the business and we believe will drive greater growth. Booking.com has built one of the largest alternative accommodations platforms, with approximately 6 million listings as of June 30. We are making good progress building greater supply choice in this segment, where we believe we have the best customer experience, with all of our properties being instantly bookable with no consumer fees. We are also developing new capabilities to capture growth in other accommodation segments, such as business travelers and destination-specific choices, like ski and beach accommodations. We remain focused on select geographic opportunities, such as the U.S., where we are continuing to promote our brand to drive awareness in this important market. We believe it is still too early to fully assess the current brand campaign, but we note that while we see solid direct new business or traffic growth, we would like to see faster progress in this region. In the longer term, we will meet our customer needs by building distinctive capabilities around the connected trip, removing friction along the entire travel journey. An early step was to integrate Rentalcars.com with Booking.com. Not only is Rentalcars.com operating a leading online rental car marketplace, but it is also building capabilities to book all forms of ground transportation. Today, we provide pre-booked car service in approximately 800 cities globally. Another step was to begin building out an attractions offering at Booking.com, which was accelerated with the acquisition of FareHarbor. FareHarbor is bringing more attractions online and now has over 100,000 bookable activities globally. Booking.com is utilizing this platform and to date, offers attractions in over 280 destinations. Booking is also providing the ability to have someone book experiences even if they do not have an accommodation reservation. And while the number of destinations where someone can do this is small, as we're just starting out, we expect to grow the number of these markets over time. Attractions are an important part of the connected trip, and we're pleased with the very early data that shows, on average, customers who have used our attractions product increase their frequency of combination bookings. Again, these are initial findings, but we like what we see to date. As a group, we have tremendous assets that we can utilize to help build the connected trip, and all of our brands will play a critical role in achieving this vision for the company. Priceline has extensive capabilities in the flight product and has recently developed a world-class packaging product that can be leveraged across our brand companies. Agoda brings extensive knowledge of the APAC region and years of data science and machine learning on merchandising. KAYAK's knowledge of operating a multiproduct global meta business helps us to better understand how to serve our customers. OpenTable's leading online restaurant discovery and booking platform will be an important piece of our connected trip vision. As I commented earlier, we continue to focus on driving growth in accommodations through key initiatives in merchandising, payment, demand channels, and inventory. That is job one. We also remain excited about the connected trip to drive loyalty and engagement across many dimensions of our business, which will help support and grow the accommodation business. As we move through our busy summer season, all of our employees are intensely focused on delivering an exceptional customer experience. I would like to thank our over 26,000 employees around the world for their hard work and dedication, especially during this peak travel season. And now I'd like to thank all of our supplier partners, who we are so proud to be associated with. And finally, we send a great thank you to our millions of customers throughout the world, who are out there experiencing the world. I will now turn the call over to our CFO, David Goulden, for the financial review.

Thank you, Glenn, and good afternoon. I'll review our operating results for the second quarter, and then discuss our guidance for the third quarter as well as our focus on the full year. All growth rates are relative to the prior year comparable period, unless otherwise indicated. 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 12% for the quarter exceeded the high end of our guidance range. The Q2 room night outperformance was driven by strong growth in June as we saw a greater-than-expected benefit from lapping the low growth rate in June of last year, which was the result of the 2018 World Cup and unfavorable weather in Europe. While the macro environment in Europe remains cautious, our room night growth in the region continued to exceed our expectations this quarter. Room night growth rates for the rest of the world were largely in line with our expectations and continue to grow faster than Europe in Q2. Average daily rates for accommodation, or ADRs, were down about 1.5% in Q2 on a constant-currency basis, which was better than our guidance that called for a decline of about 2%. Changes in foreign exchange rates reduced Q2 growth rates in U.S. dollars by approximately 5% versus last year. We estimate the change in FX rates impacted Q2 gross bookings, revenue, and EBITDA growth by similar amounts and EPS growth rate by about 1 percentage point more. Q2 gross bookings grew by 5% expressed in U.S. dollars and grew by about 10% on a constant-currency basis, coming in above the high end of our guidance range. Consolidated non-GAAP revenue for the second quarter was $3.8 billion and grew 7% in U.S. dollars and by about 12% on a constant-currency basis. The shift in the timing of the Easter holiday had a little less than a 3 percentage point positive impact on our Q2 revenue growth rate, a slightly greater impact than previously expected. Our Q2 non-GAAP revenue growth rate on a constant-currency basis and adjusted for Easter was about 9%. Advertising and other non-GAAP revenue, which is comprised mainly of KAYAK and OpenTable, grew by 9% in Q2. Adjusted EBITDA for Q2 was $1.4 billion, which exceeded the high end of our guidance range, and was up 5% year-on-year on a reported basis and up about 10% on a constant-currency basis. Our Q2 adjusted EBITDA growth rate on a constant-currency basis, adjusted for Easter timing, was about 3%. We remain disciplined with our spending on performance marketing, which helped drive better than expected leverage of about 90 basis points in the quarter. Leverage in the quarter was driven by an increased mix in room nights from the direct channel, which continues to grow faster than our paid channels. While we keep working to grow our direct channel over time, we continue to see performance marketing channels as an effective way to acquire customers, and we'll spend rationally in these channels to optimize growth. As part of our effort to drive more direct traffic to our websites, we increased our spend on brand marketing in the quarter by 41% versus Q2 last year, which contributed about 110 basis points of deleverage. Sales and other expenses grew 22% versus Q2 last year and contributed about 80 basis points of deleverage, primarily due to the growth of our payment platform at Booking.com. Sales in other grew slower than merchant gross bookings in the quarter due to lower growth in certain payment-related expenses. Finally, personnel expense came in slightly lower than our forecast and contributed a small amount of leverage in the quarter. Our non-GAAP EPS was $23.59, up 14% versus the prior year. Adjusted for currency and Easter timing, non-GAAP EPS grew 12% in the quarter. Non-GAAP net income reflects a non-GAAP tax rate of 19.4% in Q2, which is about in line with the prior year and our estimated guidance. Our 10% lower share count in Q2 benefited EPS growth in the quarter. On a GAAP basis, operating income grew by 2%, and GAAP operating margin decreased by 215 basis points compared to Q2 last year. GAAP operating income was also impacted by a $53 million favorable adjustment to revenue and a $66 million unfavorable adjustment to personnel expenses. Q2 GAAP net income amounted to $979 million or $22.44 per share, up 11% from Q2 2018. Our Q2 GAAP net income includes $17 million of pre-tax unrealized gains from our equity investments in Ctrip and Meituan, and $19 million of FX remeasurement losses on our eurobonds as well as the 2 adjustments impacting operating income. We exclude these unrealized gains, remeasurement losses, and adjustments from our non-GAAP results. We had a GAAP tax rate of 18.9% for the quarter, which decreased slightly from the prior year. In Q2, we generated $1.8 billion of operating cash flow, which increased 8% compared to Q2 of last year. Our free cash flow for the quarter was $1.7 billion, which increased by 10% compared to the prior year. We repurchased $2.6 billion of our stock in Q2, which completed our previous $10 billion repurchase authorization in early May and reduced the amount outstanding under our new $15 billion repurchase authorization to about $14.2 billion at the end of the quarter. We expect to complete this authorization in the next 2 to 3 years, assuming stable business and market conditions. We ended the quarter with $11.4 billion of cash and investments and $8.7 billion of outstanding debt. Turning to our guidance. I want to briefly walk through some of the facts, as we discussed on the last call, that will impact our outlook for the full year, then I'll come back to our guidance for Q3. Starting with our growth investments in 2019. As we discussed over the last 2 quarters, we're investing for growth, customer acquisition, and loyalty. Our new brand campaigns were launched earlier this year. And while we're encouraged by the continued growth and mixed shift towards our direct channel and by some of the early new visited direct traffic trends we're seeing from our brand campaigns, the short-term return on our brand spending is running below our expectations. As a result, we plan on refining our spending levels on brand marketing in the second half of the year. We remain committed to building our brand. Turning to our merchandising programs. We continue to see positive results and plan to continue these investments. We are pleased with these merchandising results, but they'll take time to scale. Finally, with regard to our customer acquisition incentive programs, we're seeing some positive results and we'll continue to spend on the programs with better ROIs. As we told you earlier in the year, as we look at these growth investments, we'll evaluate and scale the ones that are working, and we won't hesitate to pull back on the ones that are not. So we're intelligently refining our investments as we move through the year and are confident that these investments will benefit us in the long term. Overall, we continue to expect these growth investments will collectively reduce our EBITDA growth rate by a few percentage points in 2019. We now expect the return on these investments to be similar in the second half versus the first half, but the spending will be less in the second half, which results in a smaller negative impact on EBITDA growth in the second half. This change in our expectations does not have a material impact on our room night growth for the year. Now turning to the mechanical facts that are impacting our outlook. Our guidance for Q3 and the full year is impacted by the French digital services tax, which we expect will reduce Q3 and full year EBITDA by about $25 million and $32 million, respectively. This will reduce our Q3 and full year EBITDA margins by about 50 basis points and 20 basis points, respectively. This expense will be recorded in our G&A line. Using current FX rates assumed in our guidance, gross bookings and revenue growth through to non-GAAP EPS growth will be reduced by approximately 3 percentage points for the full year, which is in line with our outlook last quarter. Finally, our outlook does not anticipate any change in the macro environment. With that context, it remains our expectation that non-GAAP EPS on a constant-currency basis will grow in the low double digits in 2019. We continue to expect to gain share in global accommodations this year. Let's now turn our attention to Q3, which is our largest quarter of the year. Foreign exchange rates are expected to negatively impact year-on-year growth rates or gross bookings and revenue by approximately 2 percentage points, and for EBITDA, our non-GAAP EPS by approximately 3 percentage points. We use a dollar-to-euro exchange rate of $1.12 when setting our Q3 guidance. Based on where we are in the quarter, and looking at all other factors, we're forecasting booked room nights to grow by 6% to 8% in Q3. As a reminder, Q3 last year benefited from the unusually late summer bookings season, which resulted in a slightly higher comparison in Q3 this year. We forecast total gross bookings to grow 1.5% to 3.5% in U.S. dollars, and to grow by 3% to 5% on a constant-currency basis. Our Q3 forecast assumes that constant-currency ADRs for the company will be down about 2.5%, which is a greater decline than we saw in Q2 due to lapping the over 1% increase in ADR we experienced in Q3 of last year. We forecast Q3 revenue to be up 2% to 4% in U.S. dollars and grow by 4% to 6% on a constant currency basis. Q3 adjusted EBITDA is expected to range between $2.4 billion and $2.45 billion, which represents 2% to 4% year-over-year growth in U.S. dollars or 4% to 6% growth on a constant currency basis. We are forecasting continued leverage from the performance marketing expense line in Q3, reflecting lower volumes in the paid channels and our continued focus on acquiring high-quality traffic. As we refine our brand marketing spend that begins to compare against a higher spending Q3 last year, we expect to see a small amount of leverage from brand marketing in the quarter. Finally, sales and other expense is expected to grow faster than revenue, primarily due to the ramp-up of our payment platform at Booking.com. We are forecasting Q3 non-GAAP EPS of approximately $43.60 to $44.60. Normalizing for currency, we expect Q3 non-GAAP EPS to grow approximately 18% to 21%. Our non-GAAP EPS forecast includes an estimated tax rate of approximately 19%, which is lower than Q3 of last year due to a provision of the tax act that was clarified in Q4 of last year. We continue to expect our full year non-GAAP tax rate to be 19% to 19.5% compared with 18.3% last year. Our Q3 non-GAAP EPS guidance assumes a fully diluted share count of about 42.8 million shares, which is 10% below Q3 last year. We forecast GAAP EPS between $42.60 and $43.60 for Q3. Our GAAP EPS guidance for Q3 assumes a tax rate of approximately 19%. We have hedge contracts in place to substantially shield our third quarter EBITDA and income from any further fluctuation in currencies versus the dollar between now and the end of the quarter, but the hedges do not protect our gross bookings revenue or operating profit from the impact of foreign currency fluctuations.

Hi. Thank you. Can you provide us with an update on what you're observing in the environment as we begin the third quarter, specifically regarding room nights growth trends and advertising returns on investment? Additionally, could you guide us through the comparisons, starting with the easier comparisons during the heatwave and moving to the more challenging comparisons later in the quarter? Thank you.

Okay. Let me address that. There are a few key points to understand regarding the Q3 guidance. As you mentioned, going back to June, we had strong guidance and results in Q2, which was supported by a relatively easy comparison. Last year, the delayed summer booking season resulted in more bookings moving into Q3, making the upcoming comparison tougher. It's essential to take a step back and assess the situations in Q1 and Q2 along with our Q3 guidance, given some normalizing factors. Easter positively affected Q1 in terms of room nights, while it had a negative impact on Q2. Similarly, the World Cup and weather had contrary effects: positive in Q2 and negative in Q3. When we normalize for these factors, the room night growth projections for Q1, Q2, and Q3 are relatively aligned. As we progress through Q3, the comparisons will become more challenging since last year we experienced significant growth in September. However, we aim to avoid getting too caught up in month-to-month comparisons and instead want to provide a sense of how the quarter will look while reminding you that our guidance approach remains consistent.

Okay. Great. That's very helpful. And then if I can ask one other question. Can you just give us an outlook for the digital tax across Europe as you see kind of legislation in other countries, and how you're expecting that to play out?

Sure, Kevin. So you saw that France passed the tax, and there are a number of other countries that are also lining up to potentially put a similar tax into effect. We are, of course, very disappointed to have seen this. We believe companies should pay their fair share of taxes, but we want those taxes to be done equitably and fairly applied to all companies. So what has been applied does not do that. It's very hard to guess what's going to happen. You may have seen some of the remarks that have come out of the U.S. administration that we're very against the French tax, that believe it is focused primarily against American companies, and there have even been some remarks by the American administration about tariffs against France as a counter. So who knows how this is going to play out? End of the story is we can't write the laws. We can only lobby and express that we do not believe this DST is the right way to go forward to ensure that people are paying their fair taxes.

Thanks, Glenn. Thanks, David.

I apologize for that. It's on mute. Could you discuss the brand advertising? It seems like you're not achieving the desired results. Is there a specific timeframe you have in mind, like one or two years? You've been experimenting with brand advertising for over a year now. It's possible that the industry may not be suitable for brand advertising, and performance advertising could be the better marketing channel. When do you decide if you should continue with it or not, or is that never a clear decision? Also, what safeguards do you have in place if display or brand advertising continues to underperform? Secondly, can you elaborate on the synergies between accommodations and activities? Glenn, you mentioned it briefly, but are you seeing instances where customers come in for activities and you cross-sell them on combinations? Or is it mostly the reverse? Help us understand the potential opportunities from the activities segment in the coming years. Thank you.

Sure, Mark. So in terms of the brand advertising, let's say it's a mixed situation right now, but I think we laid it out really when David talked about it. We always want things to do better, but we've always been very clear in saying that we are a company that believes in experimenting, testing, seeing results, and adjusting if things aren't what we want them to be. So we're going to continue to do that. Though, as David said, we are going to be refining going for the second half of the year, in terms of what the spend will be. I do believe that brand advertising has an important part in the overall way to bring customers to us. Particularly, it brings us direct. And we've talked about this in the past how important it is for us to continue to build our direct business. That is one of our key strategies going forward. And I think if you look at some other people in the travel space, you will see that some who have achieved certain positive results by doing brand advertising. And we talked in the past how we believe that as things become more and more digitally based, brand advertising has the potential for being much more effective in terms of understanding what the ROIs will be. So in terms of when do you say, "Oh, it's not working. Let's stop doing it.?" I don't think that's ever going to happen. I think print advertising is always going to be important for anybody who's in the retail business. I do believe that we need to continue to work on this and improve upon it, and I'm looking forward to us doing that. In terms of your second question about the attractions business, we believe that attractions is a very important part of our connected trip. Nobody goes to a city to sit in the hotel. They want to do things. So we believe that providing something that is seamless, frictionless, easy to use and giving people all the information they need to do things helps provide a better experience in terms of how they are going to get these attractions. We believe that, and we've seen it very slightly right now, and I said they are very early, but we're seeing benefits from people who have bought an attraction from us, achieving a very seamless, frictionless, easy-to-do thing, and for whatever reason, believe that this is the way we should book travel. And they are coming back more frequently. I don't know how big it will be yet, but I do know that we are pleased with the results so far, and we're going to continue to build on it. And as I mentioned in my prepared remarks, we're also slowly beginning to roll out the ability to buy attractions separate from having first bought an accommodation. I don't have any data to come back to you in terms of how much that's going to make people in the future come and sort of cross-sell these accommodations to them, but I do believe that by bringing people all the things they need when they travel, making it a one-stop shop, and giving them all the things they need, plus all the customer service that you can bring them in case something goes wrong and being able to fix everything at once, because when things go wrong, they cascade throughout the trip, I believe that provides a better result for the customers and one of the reasons that we will be able to build greater loyalty.

Okay. Thank you.

I wanted to follow up on your comments, Glenn, regarding brand spending not being as effective as you anticipated. Are you talking about the expenditures made in the last one or two quarters, or is it more about the spending from the past few quarters that hasn't met your expectations? Additionally, how does this align with the fact that your direct traffic continues to grow at a faster rate?

Well, I am speaking specifically about the new campaign that we launched at the end of February. And how I reconcile that, the fact that we're still doing well, I guess would be that I'd like us to be doing better. I don't know how else to say that except I'd like to see us do better. And again, I'm not saying it's not doing okay. I'm just saying I'd like it to do better. There are certain parts when you look at our brand health metrics that are good, and you look at some that you would like them to be better. As we said, we're always going to test and learn, and this is just another way that we're going to do it.

Understood. And then a follow-up, if I may. On your outlook for the third quarter, what are you baking in, in terms of the macro environment and another Brexit deadline sort of looming in October?

Well, we take all factors when we're putting together our guidance, and we do it the same every quarter. We look at everything we can and put everything into the calculations, and this is what we come up with. I will say that we all recognize that there are some interesting things happening right now that may have some negative impacts on travel down the road. And everything from what you've recently seen, certain of those central banks have indicated that the macro environment may be weakening to certain other parts in terms of unrest between certain countries. U.S., China being a big one, and then, certain local things whether it be in Europe or others. So we've put everything together, and this is the number that we came up with.

Thank you.

Thanks. Two questions, if I can. First, Glenn, you guys have, obviously, strong assets across hotel booking, flight meta search, car rental, restaurants. So when you think about the long-term vision, to what extent are you guys just trying to kind of make the best of the assets you have versus looking at where the product should get to with a clean sheet of paper and kind of building to that vision? And how do you see these things all working together versus maybe building some new things? And what is it going to take in terms of like a tech stack rebuild or otherwise to get there? And then, I guess, just a second one, Glenn, any big changes we should expect at Booking.com as you kind of take the reins as the CEO operating that asset moving forward? Thanks.

Yes. In the tech world, it's ideal to begin every project with a clean slate and the latest technology, but that rarely happens. We usually have to improve and integrate existing systems. Our clear goal is to provide customers with a seamless travel experience that simplifies their lives and adds value. Some integrations will be straightforward, as we've already seen, like using OpenTable dining points to book hotels. We're also excited about leveraging Priceline's new package product across all our brands, which is manageable. Other areas will need more effort, and while I can't specify investment amounts or timelines, I believe we have the best chance of anyone to achieve this. Scale is crucial here, and we have the resources to invest and develop this system. Additionally, the success of these systems relies not just on technology, but also on the data gathered from various parts of the travel ecosystem, as well as our investments in machine learning and AI to enhance personalization for customers. I believe we hold a competitive advantage in this regard. What was your second question?

The second question was just, how should we expect things to change at Booking.com now that you're kind of taking the reins as the CEO of that asset in addition to Group CEO?

Well, it kind of ties to that first question, actually. One of the benefits that I've had is being part of bringing all the different companies into the group. So I know what they do well. I know where our strengths are, and I know how they can work together. And one of the key things is understanding all the senior management in all the different companies and helping us all work together to create this greater system. So that's one of the biggest reasons. The second reason is I want to bring the execution rate faster. I want to make things happen quicker. I believe that urgency is important in this business, and I want to come and bring this new holistic system to our customers faster.

Thank you. I have a couple of questions, one short-term and one longer-term. David, can you remind us about your exposure to Brexit? I believe that was one factor that may have affected 1Q bookings. How do you view a no-deal Brexit concerning your exposure to the U.K.? And longer-term, Glenn, I’d like to ask you. You exceeded bookings by $1 billion this quarter, and the room nights were better. Are any of the longer-term initiatives, despite your comments on branding not performing as well, such as merchandising, making a significant difference and providing you with encouragement for the long term? Thank you.

Okay. Sure. Justin, sure. So let me go to Brexit first. We've not disclosed how much the U.K. is. I think a couple of years ago, we went back in 2016 and said it was less than 10% of our business. And broadly, that's not too bad a data point to think about. What we see happening simply in these situations is around an event people might slow down, and they get nervous. But after the event, they kind of recover. So we saw that in the early part of the year when it looked like there was a Brexit going to happen in the early part of the year into the U.K. We saw a bit of a slowdown, then we saw a nice rebound in the market when it looked like that was being pushed off. So I think we do see some short-term sentiment changing around the actual event itself. Obviously, there's 2 factors today. There's what level of uncertainty is great. And then if there's any impact to the currency, does that devalue the pound? Does that make it more expensive for British travelers to go overseas? But generally, our experiences have been short-term in nature and they rebound quickly. So it's hard to give a precise number. But as Glenn said, we kind of looked at all those things. Right now, of course, that's looking like a Q4 thing rather than a Q3 thing, but it's something that we're watching quite carefully.

And in terms of what our investments to date and what we think that's done in terms of our result, for us, I think we have so much upside still ahead of us. We really haven't started to get the great benefits I believe we're going to get at what we're trying to create and all the things that we're spending money on. And I can give you some examples of things that I see down the road, and they all come together. We've talked a little bit about attractions already. I believe that is a big win. Not a lot of people are using it yet. Yes, we have over 100,000 different things people can do. Yes, we have more cities, but that 200 and something locations, that's relatively small compared to the world, but even more so the awareness of it. So we're going to be pushing that out. The thing I mentioned about that ground transportation, I believe when you can provide a much more efficient, seamless way to get that ride from your home to the airport, to the hotel, and then to do things, I believe that's going to help increase things. When I look at things like we've talked about our investments in Grab and DiDi, we have not yet rolled out those apps that will enable the people to be able to get around very efficiently using the Booking.com or the Agoda apps. So there are so many things down the road that we have not yet begun to actually see the results in the top and bottom lines, and I am just very encouraged about the future.

Thank you.

Thanks for taking my questions. I have two. Glenn, just to go back to sort of the connected trip and sort of your comments about frequency. You mentioned it a little bit, in the previous question, but we've seen OpenTable partner with Caviar and GrubHub and UberEats. Just talk to us about how you think about potentially using food delivery as a high-frequency purchase potentially helping the overall booking business grow faster in the U.S. Is that potentially a way to grow it even better than branded advertising? And the second one, a couple of quarters ago, you gave us an update on the size of the alternative accommodations business. We think it's growing pretty quickly. Any help at all on how fast that business is growing? Or how large that piece is becoming in the overall room nights? Thanks.

Let me address the second part first, as it’s straightforward. We haven't provided additional disclosure on that. I can say that it's still growing faster than our main hotel business, which is about all I can share at this point. Regarding OpenTable, there are two key points to consider. First, I've emphasized before that the primary reason we acquired OpenTable is that all our traveling customers need dining options away from home. This service is valuable for them. Secondly, there's the aspect of awareness. One of our investments in China, Meituan, began in food delivery and then expanded into travel, leveraging frequent food delivery to build a customer base that engages in travel. This method can enhance awareness for our travel business, which is a positive sign. While I don't have specific return on investment data since we're just in the initial rollout, I view this as a strategy to boost awareness and create merchandising opportunities. When we offer multiple services, it presents various value propositions that encourage customers to use our services more frequently.

Great. Thanks for taking my questions. So first one, I wanted to ask about the customer acquisition programs like loyalty and referrals? David, you've noted that they are performing better. Are the ROIs on these programs currently comparable with some of the other performance standards? Or when do you think we can reach that? And then how big are these programs currently in terms of driving transactions? And then the second piece of it, also for David, the 12% room night that you reported was very strong, right about your forecast. Clearly, 3Q, as you pointed, is kind of like a unique quarter. Trends were being strong later last year. So should we think of the 3Q guide in the context of extra conservatism for the uncertainty in the back end that you haven't seen this year? Thank you.

Sure. Let me address two of those questions, Deepak. I previously discussed our customer acquisition programs, which are one of the three areas we are investing in. We mentioned that some points of EBITDA growth investments would impact us this year. The other two areas are merchandising and brand. We are seeing positive results from some of the programs, although not all, and we continuously shift our spending toward those with higher returns on investment. We can't compare the different brands at this point, but we are seeing positive ROI against our expectations. For obvious reasons, we won't disclose which programs are performing well or not, and we know you wouldn't want us to. However, we are pleased with the number of programs we've rolled out, adjusted some of our focus, and are now concentrating on those that show promising returns and drive growth. Overall, these investment programs haven’t significantly impacted our room night growth this year. We've adjusted our expectations for returns to be more aligned between the first and second halves of the year. That's the overview I can provide on customer acquisition programs. Regarding the Q3 room night guidance, I won’t repeat what I said earlier, as I've covered several points. You should understand that our guidance approach remains consistent. We can’t account for everything happening around us, and we strive to maintain consistency in our guidance expectations. Year-on-year comparisons, especially when unusual events are involved, complicate our process a bit. We were pleased with the positive performance in June and are aware that September presents a strong comparison. However, as noted, we can't factor everything in, including macroeconomic factors discussed by Glenn, while providing our best view on guidance based on those considerations.

Hi. This is Dae Lee on for Doug. Just a question on reducing friction. You talked about it a lot. And you talked about the ways you could do that across kind of a trip. But looking more specifically on the accommodations side, are there consumer pain points that you think you could help improve going forward? I assume payments help there, but are there other areas where you see opportunity? And then, turning to accommodation, in the past, you talked about wanting to onboard more single unit supply. Could you give us an update on how you're doing there?

So in terms of reducing that friction, and you mentioned payments there is a very important area. People want to pay in different ways, but not every accommodation has the ability or even wants to have the ability to accept payment that way. As you know, Booking.com grew up on an agency platform where the customer paid at the desk, at the hotel, at the end of the stay. That doesn't work so well if somebody wants to use M-Pesa or Paytm, and I can go through an incredibly large number of different payment methods. We removed that friction. Somebody can come to us and use the payment method they want, and we're then able to pay the accommodations in an easy way. So right away, that's removing a part of the friction that goes much beyond that. And so, for example, in the attractions, when somebody has already booked a hotel with us in Booking.com and then goes to get an attraction, I've used the service, and I'm looking at something to do, I just one-click; my payment method is already in the Booking.com system. I don't have to do anything else. So when I'm going, I'm just showing a QR code at the place of attraction, and I'm through the line. Much easier. Really removes that issue. And even more so, you can do all friction merchandising we talked about; suppliers that want more demand can offer up to us lower prices that we can then push out to our customers and bring more demand to those suppliers. Lots of ways to play with that. So I think there are all different ways, and I think that's one of things down the road that again will give people a reason to be using our service throughout their travel trip. Regarding single properties, we haven't given any more data about that. But it's doing well. Look, we know how important it is. We know it's critical, to continue to have an incredible breadth of different types of alternative accommodations, and I'm pleased with what's being done around the world on that, but I don't have a specific number to give you on that.

Thanks for taking my questions. Maybe building on some of the questions from earlier in the call. Glenn, if you look out past 2019 and probably more qualitatively than quantitatively, when you look at the different buckets of investments you're trying to make and you're thinking about some of the yield and the momentum around those investments, what's sort of the medium to longer-term thinking about the investments where, while it might be early to think multiyear, you'd rather lean in and you're seeing better than expected returns? And investors should think of those as areas that are going to continue to be a neutral-to-rising area of focus for incremental investments, and how you think about balancing sort of margins versus the revenue yield that comes from those investments on a multiyear view? Thanks so much.

Yes. We always try and maintain a good balance. In any investment we make, we're always looking at what's the return? How fast? And is it something that we should spend more or less on and continue to modify as we go throughout? As you get further out trying to make what you think you're going to end up spending in terms of things, it's very hard to know now, but I do want to give confidence to our investors that our historical record of always being careful with our funds and using it appropriately is something that should give them comfort. That being said, we know that there is a bit of a race for this connected trip. We know that our competitors are trying to build something very similar. We know that people who are very large suppliers talk about being able to bring other services with them too, and you look at people who may not be considered to be classic competitors of ours but are very, very big in the travel space, are also talking about putting these things together. Given that, if we see the opportunity to increase spend, if we're getting the return that we like, we may accelerate, but these are things we'll see down the road.

Great. Thanks. Just looking at the guidance for Q3, there's about a 300 basis point delta between your guidance for gross bookings and your guidance for room night growth. And we've seen that sort of widening over the last few quarters. Just curious if you can give us a sense of sort of what's behind that? Is it a question of mix? Is it a question of access to specific types of inventory within hotels? Any sort of insight that you could share with us on what's driving that?

Sure. This is David. Let me provide an answer to your question. The main reason for the difference in Q3 is ADRs, which were down 150 basis points in Q2 and are projected to decrease by 250 basis points in Q3. Although the underlying trends are similar, Q3 has the added challenge of comparing to a year ago when we experienced an unusual increase in ADRs, rising over 1% year-on-year. The key issue is understanding what is influencing those ADRs in Q2, which have been consistently rolling into Q3, not factoring in the lapping effects. There are three main factors affecting these ADRs. First, there's local rate and pricing pressure, along with geographic mix factors where countries with lower ADRs are growing faster than those with higher ADRs globally. Additionally, we are encountering rate pressure, especially for visitors to the U.S., where the dollar has strengthened against the euro in key markets like New York and Miami. European travelers continue to vacation in these areas, but they might be opting for lower star-rated hotels due to the euro's decreased purchasing power in the U.S. These elements are significantly contributing to the 1.5% we observed in Q2, along with the lapping effect in Q3 that accounts for the difference we've discussed.

And sorry, I mean if we look at the industry data, ADRs have generally been increasing. And so is this something that you feel like is unique to bookings customer base and just the mix of customers that you have given your heavy European exposure? Or is there something else that's sort of different between the third-party industry numbers that we all see and what you're seeing in your business?

Yes, we have some geographical mix factors to consider, with a significant portion of our bookings coming from Europe due to our global reach and strong presence there. The weakening euro has impacted these factors, especially for travelers from Europe coming to the U.S. or regions like Asia, where their currencies are more aligned with or have strengthened against the U.S. dollar. The trends we observed in Q2 reflect this underlying situation. If the currency situation changes favorably, we may see improvement. That's our current perspective.

Great. Thanks for taking my questions. Just on the earlier comments on wanting to grow faster in the U.S. region, is that more of a supply issue or trying to penetrate more relationships with property managers? Just how do you view the strategy? And then, on digital advertising, I realize it's harder to extract rental growth in Google, but how do you view your social strategy, particularly with Instagram giving some of the location advertising it's offering? And how do you view your social strategy?

In the U.S., we see a significant opportunity to improve our presence, as we are currently underindexed. We recognize the necessity to perform better and capture more of the market share. This involves various aspects of our operations, not just in alternative accommodations, which is just a small segment. It includes improving merchandising and offering effective payment solutions for U.S. customers. There's a lot of potential for growth in these areas, which is exciting for us. Regarding social media, it's interesting because traditional demand generation methods are not effective in certain regions; for instance, Google is not available in China. Therefore, we need alternative strategies, and social media has become an increasingly popular platform for travel decision-making. We engage with key players in social media such as Instagram, Facebook, Snap, and even Twitter, continually seeking the most efficient ways to drive customers to our website with a strong return on investment. However, I must admit that the returns from social media are currently not as effective, and scaling it is more challenging compared to our established channels like Google. Nonetheless, we are committed to improving our efforts in this area and collaborating with various companies, as we believe social media will play a crucial role in generating demand in the future.

Thanks for taking my questions. On the room night growth outperformance in 2Q, can you guys be maybe a little bit more specific as to which regions that you guys are seeing strength and why? And also, Glenn, you can comment about this; China outbound travel, what kind of trends are you seeing, especially given the tension between U.S. and China at this point? Thanks.

James, this is David. Let me address the first question. We have a clear understanding of where we exceeded our expectations in Q2, particularly in Europe. The unusual combination of unfavorable weather patterns and the World Cup last year significantly affected the region. While some other countries that are heavily focused on football also performed well in June, the main impact was in Europe. Our expectations for Europe in both Q1 and Q2 were lower, yet the region has outperformed these expectations in both quarters. We are aware that the macro environment in Europe remains cautious, and we are all seeing the same headlines and economic outlooks coming from the region. Nonetheless, we are pleased with our results in Europe for both Q1 and Q2 compared to our expectations. Hopefully, that addresses your first question, and I will hand it over to Glenn to discuss China outbound travel.

Yes. China outbound, interesting situation. I assume you're aware that 2018, for example, was the first time that China to U.S. was an actual decline, not an increase in terms of total number of Chinese travelers coming to the U.S. Our business definitely is impacted by these type of events, such as U.S.-China trade disputes, and then you see things happening on TV in Hong Kong. You read about things happening in terms of people going from China to Taiwan, from mainland to Taiwan, and there are certain restrictions being put in place there. So all sorts of different things that are impacting the outbound business. Our point, though, is China is a great opportunity for the long run. There's, in the long run, going to be a lot more Chinese travelers outbound, so it's important that one doesn't just pull back because of any sort of short-term blip. We have approximately 1,000 people in China working to make sure we're providing great service to the Chinese travelers. And we'll continue to do what is appropriate to build our Chinese business because we do believe that this will be a long-term benefit to our company.

Thanks for taking the question. Just going back to the connected trip. I can appreciate not giving any specific date, but building this out, is this a few years? Several years? Somewhere in between? And then I think you mentioned earlier in the call that there might be a period where you might choose to maybe accelerate spend or performance spending. So is it reasonable that there might be a period where that happens? Thank you.

Well, I think I'll just cover the second part where the way you said it is correct. We may, and it will depend entirely on what we're seeing in terms of performance ROIs and how fast things are being developed. In terms of your first question, I'm not sure if you'll appreciate the answer, but it is the truth, and that this is a little bit like bridge painting. You're never done. You're never done. You're always going to come with new things to do better. And that's actually the nature of all type of technological services. And you look at anything that has been created, it's never completely done. You're always trying to improve, and that's what the connected trip will always be. That being said, I do believe in the not-so-distant future, we'll start seeing some real benefits from what we're doing. And that will be something that we'll be able to bring to you with some more concrete data. Okay. I want to thank everyone. Once again, I'm going to tell you how pleased we are about our solid Q2 results. And we remain excited about our future as we execute our long-term growth plans. So thank you very much for joining. And with that, I'm going to turn it back to the operator.