Booking Holdings Inc. (BKNG) Q1 2012 Earnings Report, Transcript and Summary

Welcome to the Priceline Group's First Quarter 2012 Conference Call. Priceline would like to remind everyone that this call may contain forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals and similar expressions reflecting something other than historical fact are intended to identify forward-looking statements. For a list of factors that could cause Priceline's actual results to differ materially from those described in the forward-looking statements, please refer to the Safe Harbor statements at the end of Priceline's earnings press release as well as Priceline's most recent filings with the Securities and Exchange Commission. Unless required by law, Priceline undertakes no obligations to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. A copy of Priceline's earnings press release, together with an accompanying financial and statistical supplement, is available in the investor relations section of Priceline's website located at www.priceline.com. And now I'd like to introduce the Priceline Group speakers for this afternoon: Jeff Boyd and Dan Finnegan. Go ahead, gentlemen.

Thank you. And welcome to Priceline's First Quarter Conference Call. I'm here with Priceline's CFO, Dan Finnegan. I will make some opening remarks, and Dan will give a detailed financial review. After the prepared portion, we will take questions. Priceline reported consolidated gross bookings for the first quarter of approximately $6.7 billion, up 44% year-over-year. Non-GAAP net income was $221 million or $4.28 per share, up 61% versus prior year. First quarter results surpassed FactSet consensus estimates of $3.95 (sic) [$3.97] per share and our guidance for the quarter. Worldwide hotel room night reservations were 45.9 million for the quarter, up 47% year-over-year. Our international business recorded 58% gross bookings growth on a local currency basis, down from 67% in Q4. Growth rates benefited generally from higher ADRs and continued high growth rates in APAC and the Americas. Growth rates were impacted by slowing growth in Southern European markets and a difficult comp as bookings growth accelerated in the first 2 quarters of last year. International gross bookings also benefited generally from growth in hotel supply and strong results at Rentalcars.com. Booking.com's platform now has over 210,000 hotels and other accommodations, up 55% over last year, and is building its brand in new markets by driving reservations to those destinations and growing demand in those regions for hotels around the world. Agoda continues to expand its network of hotels and is building APAC distribution as the business scales. They have a significant opportunity in the fast-growing APAC market and can also help APAC customers with their travel to other parts of the world. We believe the group's international hotel business is providing great value to its hotel partners. For Booking.com and Agoda, approximately 90% of booked room nights in 2011 went to independent and small group hotels and approximately 70%…

Thank you, Jeff. I'll discuss some of the highlights on operating results and cash flows for the quarter and then provide guidance for the second quarter of 2012. Growth rates mentioned in my remarks are in relation to the prior-year comparable period, unless otherwise indicated. Q1 gross bookings grew by 44% driven mainly by our worldwide hotel reservation business. Hotel room nights booked grew by 47% in the first quarter, a deceleration compared to the 53% growth rate achieved in Q4. Average daily rates, or ADRs, were up on a local currency basis by approximately 2% for our international hotel service and by over 5% for our U.S. hotel service for Q1 2012. These results were favorable to our guidance assumption for international ADRs and in line with forecasts for the U.S. FX rates for the first quarter for the euro and British pound were slightly unfavorable for the rates we assumed in our guidance at about 4% and 2%, respectively, unfavorable compared to the prior year. Our Q1 international gross bookings grew by 54%, and by 58% on a local currency basis, in both cases exceeding the top end of our guidance range. The guidance we gave on February 27 was based upon actual results through that date and, as we said on the call, an assumption that growth rates would decelerate as we proceeded through the remainder of the quarter. Hotel room night growth rates for our international business instead accelerated slightly throughout the remainder of the quarter. Performance was generally strong across all regions, and we believe that we increased our share of the hotel reservation market both in the U.S. and internationally during the quarter. We did see softer growth rates and ADR trends for certain Southern European countries. Rental car days booked were up by…

[Operator Instructions] Our first question comes from Ross Sandler of RBC Capital Markets.

Jeff, you mentioned that international room night growth accelerated in the first quarter, and I think you had a pretty tough comp in 1Q as well, yet you're calling for deceleration in Q2. So could you first just remind us what the [indiscernible] for Q2 tends to look like? And what is your thinking that -- do you see any reason to be a little bit more cautious or conservative on 2Q? And are you seeing the ADR weakness in Southern Europe moving into any other territories within Europe?

For Q1, Ross, what we said was that units decelerated overall, but from the point that we reported at year end and gave guidance for Q1, there was acceleration from that point forward through the end of the quarter. So overall, it was deceleration for the quarter. In terms of linearity on Q2, each month is progressively more significant than the last month and so the biggest part of the quarter, by far, is yet to come. Our forecast reflects the fact that, last year, it was a very strong performance with strong acceleration year-over-year and so we've reflected fairly significant deceleration for the back half this year as a result of that comp. In terms of regions in Europe, the only one that we've called out really as noticeable in terms of softness in growth rate and ADR trend is Southern Europe and only certain countries within southern Europe. Besides that, nothing that I would highlight is being way off trend.

Our next question comes from Mark Mahaney of Citigroup.

You made a comment also about -- that 90% of room nights booked at Booking.com and Agoda went to independent and small group hotels. Just to check the opposite: Do you feel like you're having any traction problems with chain hotels? I realize they're less important in the international market. Still, is there anything in that that's a negative in the sense of lack of traction with those larger hotels?

I don't think so, Mark. I think it would be fair to say that Booking.com has been doing business with the large multinational chains, particularly the ones headquartered in the United States for a shorter period of time than priceline.com has, or some of our competition. So there's still some building going on there. But Booking.com is doing well with the international chains. They very much like the international traveler demand, which was the other statistic that I mentioned, where 70% of the room night reservations were for travel in another country and Booking.com is a unique source for that kind of traffic.

And Jeff, real briefly, for that 70% for travel in another country, is it your sense that those are all incremental or very largely incremental to that small independent hotel?

I don't think that, given the size of the business, you could fairly represent that it's all incremental, but what I do believe is that, for most of these hotels, their source of demand for that kind of traffic would be an offline travel agent operating through a consolidator, which is a very, very expensive source of demand for a hotel.

Our next question comes from Stephen Ju of Crédit Suisse. Stephen Ju - Crédit Suisse AG, Research Division: So last quarter, it did not seem like you were too concerned, but as we get closer to the Olympics in London, are you seeing anything materially different from your hotel partners in terms of their costs and inventory allocation?

I think you have to keep in mind that the Olympics are for a short period of time and in one city. And our international hotel business is truly global and quite diversified, so that would temper the impact of even a short-term production and supply availability for the City of London during the Olympics. I think our teams have done a very good job of trying to manage for and build availability for our customers during the time period of the Olympics. And I think they're going to do a very good job of selling business during that time period. But given that it's one city and for a 2-week time period and the global nature of our business, I think that's really what was behind our earlier comments.

Our next question comes from Heath Terry of Goldman Sachs.

Great. Would be curious -- I guess, kind of 2 quick questions. So give us a sense on the impact that you're starting to see, if any, from mobile bookings, particularly where you've started new product offerings like the Booking.com Tonight platform. And then just specifically within China, we've seen a pretty significant increase that appears in the number of hotels listed in China on Booking.com. If you can give us a sense of what's driving that to the extent that you're beginning to see any meaningful traction domestically with -- for bookings in that market.

So with respect to mobile, Heath, certainly, the trend of traffic moving to mobile and an increase in mobile traffic as a percentage of our total traffic is continuing, and it's driven not only by the functionality that we're leasing into the marketplace, but just the proliferation of the devices and consumer adoption. So continues to be a fast-growing source of business, very -- we continue to be very excited about it. And all of our brands are devoting resources to try to capture that opportunity. We are finding our businesses generally performing well in mobile environments. Our applications are ranked well. We've got good traction in terms of downloads. A couple of our brands, Booking.com and priceline.com, have Tonight-Only kinds of offerings. And those are performing well, but I think it's fair to say that the demand for hotels goes beyond the inventory that's available for a Tonight-Only discount. So we're just making a lot of reservations for normal everyday savings on Booking.com. We're making a lot of reservations for opaque hotels on priceline.com where we have the broadest supply of deeply discounted inventory of any other player. And it's really a great opportunity to promote those kinds of products, doing well in the rental car space here in the United States. So we continue to be very excited about it. With respect to China, hotel counts for both Booking.com and Agoda are increasing, and we're devoting resources to increasing our hotel coverage in China. The principal sources of demand for those hotels remains the international traveler for both Booking.com and for Agoda, the international traveler in the APAC region. I think we're doing reasonably well selling international destinations to Chinese travelers because we have, at least in our view, some of the best product out there for them. The purely domestic traveler is something that's still -- is an opportunity that's -- we're not deeply penetrated in. We have some business. We're working on it. We'll continue to work on it, but that's not a big part of the business today.

Our next question comes from Tom White from Macquarie.

My question's on the hotel inventory in your newer regions. How close are you guys to having sort of comprehensive coverage in terms of your hotel networks in your emerging markets of Asia-Pacific and Latin America? And then on capital deployment, you guys bought a significant amount of stock back in the quarter, I think even $100 million beyond what you did concurrently with the convert. Could you maybe update us on your priorities for capital deployment, be it further buybacks, M&A or any other uses?

So with respect to hotel inventory and comprehensiveness, I think we've got a lot of properties that we need to sign up for Agoda and Booking.com, especially in new markets for those brands around the world. I noted in my prepared remarks that the hotel count -- hotel and other accommodation count for Booking.com was up over 50% year-over-year, and that gives an indication that we're still able to add additional properties. I've also said in the past that some of these properties are smaller hotels, other sources of accommodations. So there may be a point of diminishing return with respect to signing up. Some of these properties may not be as valuable as some of the earlier properties that we've signed up, but I think there's a lot of running room especially in the new markets. With respect to capital deployment, our approach to that has not changed. We remain opportunistic. We have an open authorization to repurchase additional common shares, if we should decide to do that. And we also remained active in looking at other businesses, as we have over the last 10 years, and are happy to have a fairly substantial amount of capital to do that if that becomes opportunistic, as well.

Our next question comes from Herman Leung of Susquehanna.

Two quick questions for you. First, I guess, when I look at the historical sales and marketing spend, it usually peaks as a percentage of revenue in the first quarter, historically. Wondering -- and you talked about a little bit of deleveraging in terms of marketing ROI. Wondering if you can give us a sense of the cadence of marketing spend as a percentage of revenue as we progress throughout the year. And then, second, I guess I think you mentioned this a bit on the earlier question on supply additions. Wondering -- I mean, at what point -- I mean, when you -- we see a lot more supply additions in certain particular countries, I guess, does that indicate higher demand from the hoteliers trying to bill more rooms or -- and tougher economic cycles on the European market side? Or can you kind of give us a little bit more color on how -- the inventory types that you're actually receiving from some of these suppliers?

So Dan, why don't you do the first one? I'll do the second.

So Herman, for our advertising spend, you have it right. So Q1 is typically a quarter where we have a fair amount of spend as people are shopping for spring and summer travel, and then a large amount of our revenue is recognized in later quarters when the checkouts or car drop-offs occur in Q2 and then, to a much larger degree still, in Q3. So that's the linearity with the spend in relation to revenue recognition.

And on the supply side, when our brands are going into a new market these days, many of the hotels are familiar with the company and the amount of demand, international demand in particular, that Booking.com and Agoda represent. And so many hotels reach out to us directly. Usually, when our folks show up to talk about a contract with a new hotel, they know who we are and they've got a pretty good understanding of what the opportunity is. With respect to sort of what are the issues with the hotels, it's also very important for us to build availability in existing hotels. As our business grows, it's necessary for us to have availability to satisfy the substantial demand we're bringing into the websites. So a big part of the task of our staff is to make sure that the hotels understand the kind of demand they can get from us and are providing availability so that we can satisfy that demand. And as you get into high season, that becomes of a paramount importance contrasted to getting the next new hotel in the front door.

Your next question comes from Michael Millman of Millman Research.

In the first quarter, Expedia said that their revenue per hotel was actually declined 6%. Just kind of wondering what yours was in the first quarter and how that, say, compared sequentially with the third and fourth quarters.

When you say revenue per hotel, Michael, are you saying per hotel that they have on their system or per room night?

Per room night, sorry.

I think what -- their commentary there was driven in part by their own margin situation. They may have hotel room nights that are being stayed in more recent quarters at a lower commission or perhaps on an agency model rather than a merchant model with a little bit lower revenue per room night for Expedia. And I think they also indicated that they were doing some discounting, particularly at the Hotwire brand. And so those 2 things would be particular to them and not necessarily applying to us.

Well, I think they also mentioned that the biggest growth was in low-revenue markets as well.

Well, we certainly see lower ADRs in some markets compared to others. And for example, some markets in Asia can have lower ADRs, so mix of business regionally can have an impact on your ADRs for sure.

So are you saying that Priceline did not see a decline in revenue per night in the first quarter and previous quarters?

We do not give the exact same statistic that Expedia does, but you can look at our international gross profit dollars, which are mostly hotels, and compare that to room nights and try to come up with your own triangulation. But that's not something that we specifically disclose at the Priceline Group.

Are you likely to do that in the future?

I would think, not.

Our next question comes from Aaron Kessler of Raymond James. Aaron M. Kessler - Raymond James & Associates, Inc., Research Division: A couple of questions. First, I think you -- in the past, you've mentioned that a lot hotels in Europe are using Booking.com as their exclusive booking platform. I'm just curious if that's still the case for a lot of hotels. And second, just mainly on the domestic guide, a little softer, 5% to 10%, is that just a tougher comp?

I don't think we've represented that a lot of hotels use Booking.com exclusively. And if they do so, it's not because there's any agreement to do so, it's because they've chosen to use their resources for something else rather than signing up another hotel provider. That's not a baked in part of the Booking.com strategy. And I'm sorry, your second? You went pretty fast there. Aaron M. Kessler - Raymond James & Associates, Inc., Research Division: Yes, sorry. So the domestic guide of 5% to 10%, does that just imply a tougher comp versus last year?

Well, we pointed out for Q1, Aaron, that retail airline tickets performed strongly, and so that drives a fairly sizable amount of gross booking dollars. And we're not forecasting the same level of strength for Q2. So somewhat of an impact on the gross bookings line but less of an impact on gross profit.

Our next question comes from Justin Post of Bank of America.

Jeff, maybe a bigger picture question on saturation with hotels. How's the pipeline for new hotels add looking? I will just start with your most mature market, Europe. Is there still a lot of opportunity for you to add hotels, or is it really just about bookings per hotel? And how much room do you still have there? And then I think you mentioned in the prepared remarks, traffic from paid channels is increasing. Does that concern you? Is that something that we might have to worry about margin pressure down the road?

Justin, so in terms of saturation with hotels, we've been adding properties even in places like the U.K., which is the most mature online travel market. Some of those properties are not hotels, they're B&Bs and vacation apartments and the like. So as I've mentioned previously, it's not the same as adding a hotel that's got 1,000 rooms in it or something, but it provides additional accommodations for customers and adds value to the platform. So we continue to find properties and accommodations to bring on to the website. As I mentioned in response to an earlier question, availability continues to be very important, but there's a lot of very big regions outside of Europe where we've got some substantial hotel staff for both Booking.com and Agoda signing up new hotels and new properties. So I do think that the growth that we've been able to demonstrate in the Booking.com hotel platform has been pretty impressive over the last year, at least in our opinion, despite having been at this in the European market for many, many years and successfully so. With respect to the increase in paid traffic, any online consumer-facing business would love for all of the customers to come directly to our website without going anywhere else first, and so we try very hard to build our strong brands and an outstanding user experience so that, if we have to pay for a customer once, we have a very good chance of getting them back directly. And our data shows we do a pretty good job of driving repeat business. Having said that, paid channels in the online world provide measurable and attractive way to access new customers and so we'd like to see the business grow in paid channels. And in fact, it's critical to the growth of our business around the world that we continue to do well in paid channels. If you look at the thing that's driving the biggest part of the mix that Dan mentioned, it's really the fact that the international business, which really is in online brands, or our all online brands, are going faster than the domestic business. And at the very highest level, that's something that we're very happy about because it's building franchise value and building our earnings.

Our next question comes from Mike Olson of Piper Jaffray.

Our checks are suggesting that you're just doing significantly more paid search marketing in emerging market versus primary [indiscernible] competitors. And given the critical first mover advantage in the auxiliary [ph] space, are you expecting to see kind of significantly more resources being pumped into those markets from your competitors? In other words, does it only get tougher from here in emerging markets? Or do you think those competitors are focused enough on domestic and Europe share gains that there's still runway for you to stay materially ahead?

So I think that the Asian markets, in particular, are very competitive today. Not only are our major competitors there and effectively so, there are a lot of local businesses that are our solid competitors too in the search marketplace. So we don't feel like we're operating in a market that doesn't have solid competition in it today. And based on the public pronouncements of Expedia in particular, I think they have been very aggressive in Asia over the last couple of years, and I would expect them to continue to be so. The critical element in all of this is that, in order for somebody to advertise, though, they have to have something to sell and they have to have a website and a consumer proposition that converts because you can spend all the money in the world but that's not a guarantee that the customer actually buys something when they get to your website. And I think that's the challenge that we all face when we go into a new market. But we've had pretty good success in building that organic growth, first, with the international traveler who wants to go to that new destination and then, over time, with the domestic traveler.

Our next question comes from Doug Anmuth of JPMorgan. Douglas Anmuth - JP Morgan Chase & Co, Research Division: So I wanted to ask about 2 things. First, can you just provide some more detail on the drivers of deleverage in 2Q and beyond, perhaps beyond the paid traffic, which you obviously just discussed? And then secondly, can you talk about Bookings.com in the U.S. and, in particular, about the impact, the lateral impact, that you're seeing there on the U.S. retail business?

Dan will do the first one and I'll do the second.

So Doug, for the second quarter guidance, we talked about very modest deleverage, so I wouldn't spend too much time on that. We've talked about the mix impact on online advertising impacting us. And I made a comment in my remarks about -- we're constantly concerned about if ROIs were to decline because of factors that are not entirely within our control: click costs increased or unit economics decreased, conversion rates decrease. That could have a potentially significant impact on our operating leverage. But besides that, the other factors are not quite as dramatic. We've had some ramp-up in personnel to make sure that we're able to handle the current size of the business and future expected growth. We've opened some new offices. We've invested in IT and we've had increased depreciation expense. So those are other items that contribute to pressure on operating margins. But our margins have been strong in prior reported quarters. And it's modest deleverage for Q2. So those are some things that we think about, particularly as it relates to online advertising, which is such a significant expense for us. And if facts change there, that could have an impact, going forward.

With respect to Booking.com, in the United States, Booking continues to build its hotel supply here. The project started off primarily as a way to provide inventory for the international traveler coming into the United States, and that's still a big part of the business for Booking.com. It's clearly serving some U.S. customers traveling within the United States these days. I think investors should keep in mind that those reservations are not included in how we define growth in the U.S. business. They're included in Booking.com's results, which are reflected in our international numbers. But we're satisfied with their progress, and they're going to keep building.

Our next question comes from Kevin Kopelman of Cowen and Company.

Can you give us any color on what you're seeing from the Google Hotel Finder platform so far? Is that a meaningful channel for you? And how are you thinking about it?

Hotel Finder, we participate in it and we've worked hard to provide a competitive offering for that particular product of Google. They are not driving substantial amounts of their general search traffic to Hotel Finder at this point in time. So while it's generating some business and that business is growing, it hasn't substantially replaced what's being provided through their normal text link search functionality.

Our next question comes from Brian Nowak of Nomura.

And I have 2 quick questions. The first one is just, can you talk a little bit more about the room night trends you saw in Europe throughout the quarter? And whether there was any deceleration in the larger European markets, the northern markets, or was it pretty steady? And then the second one, I was just kind of curious about trying to better understand the visibility that you have throughout the year right now. How far does the bookings window stretch into 2012 at this point? And whether you're seeing any signs of improvement, stability or weakness in the second half of the year.

Brian, in terms of room night trends in Europe, it's still a substantial part of our international business and our total worldwide business, and so the trends are following what you see in our total room night trends. So there is deceleration in Q1, and that is again largely due to the comp where we had very strong growth last year in Q1. In terms of visibility into the remainder of the year, our -- we've said in the past our bookings window is better expressed in weeks rather than months, so we have some visibility into this quarter and beyond, but it becomes more and more limited the farther out you advance.

Our next question comes from Tracy Young of Evercore.

Just, first question, and I'm sorry if I missed this, but what was the main reason -- it looks like your domestic revenues were flat with last year-ago quarter. And also you mentioned a change in consumer habits in terms of cancellations. Are you also seeing any difference in the length of time spent?

With respect to the main reason domestic revenues are flat is the Name Your Own Price business results, which are reported on a gross basis, had weaker results than the retail business, which is recorded on a net basis. So you saw our U.S. gross profit dollars are up, U.S. gross bookings are up, but revenue was flat because the Name Your Own Price business is a smaller part of the mix. And I'm sorry, Tracy, the second question?

Oh, just a follow-up on your comments about the consumer -- change in consumer habits. You mentioned that you're seeing more cancellations. Are you also seeing any change in the length of time spent per visitor?

I don't think we've given any color on length of stay. That's not something we have for you.

Our final question comes from Lloyd Walmsley of DB Americas.

Just wondering, you mentioned adding inventory in bed-and-breakfast and vacation rentals in the U.K., in particular. How do you guys think about that space and the trade-offs potentially in adding more inventory there versus hotels in terms of take rates and potential cannibalization? If you have concerns there at all, or not.

I don't think cannibalization is a significant concern. We have substantial hotel inventory for customers who want to stay in hotels. The other accommodations typically are attractive to people who are searching for other accommodations, and our marketing efforts would tend to be more focused on people who are looking for other accommodations. There may be some spillover, but our belief is that adding that inventory to the total mix has been additive. The efficiency may not be the same as adding a large hotel who's got a professional revenue manager, who's keeping the prices up to date. It may take a little bit more time and attention to make sure that the people who are running a smaller business can keep their inventory up to date and get their pricing right. But we believe it's additive to the business. And what we're most focused on, really, is our user experience, our guest experience, to make sure that they're -- they have a convenient and predictable booking experience and stay experience.

And you find that, that experience is of par on the department side?

Again, I think staying at a bed-and-breakfast is different than staying at a hotel. So if a customer is confused, you could have an issue there. But our sites have great disclosure on them and our business processes are designed to make sure that the process of making a reservation is smooth. And if we have an accommodation where we're getting a lot of complaints from customers, we would deal with it.

And gentlemen, this does conclude the question-and-answer portion of our call. Are there any closing remarks?

Thank you for participating in our call.

Ladies and gentlemen, this does conclude your program. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.