Booking Holdings Inc. (BKNG) Q2 2012 Earnings Report, Transcript and Summary

Welcome to the Priceline Group’s Second 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’s speakers for this afternoon: Jeffery Boyd and Daniel Finnegan. Go ahead, gentlemen.

Thank you very much. Welcome to Priceline’s Second 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 second quarter of approximately $7.3 billion, up 27% year-over-year or about 36% on a local currency basis. Non-GAAP net income was $405 million or $7.85 per share, up 43% versus prior year. Second quarter results surpassed FactSet consensus estimates of $7.37 per share and our guidance for the quarter. Worldwide hotel room night reservations were 50.2 million for the quarter, up 39% year-over-year. Our international business recorded 44% gross bookings growth on a local currency basis, down from 58% in Q1. Growth rates were negatively impacted by declines in ADRs, further slowing of growth in Europe, particularly in the U.K. and Southern Europe where economic conditions seem weaker and a difficult comp with 79% local currency international bookings growth last year. Growth rates benefited from continued high growth rates in APAC and the Americas. International gross bookings also benefited generally from growth in hotel supply and strong results at Rentalcars.com. Booking.com’s platform now has over 235,000 hotels and other accommodations, up 52% over last year. With a relevantly larger concentration of its business in European countries experiencing weak economic conditions, decelerating growth in those markets has impacted overall growth rates. Nevertheless the absolute transaction in local currency growth rates in Europe and non-Euro markets for Q2 were in our view impressive and attested the vitality and potential of the business. That said, deteriorating overall economic trends and headline risks surrounding the Euro crisis do cause us to be guarded in our near-term outlook. We also announced today the Booking.com signed an agreement with…

Thanks, Jeff. I’ll discuss some of the highlights on operating results and cash flows for the quarter and then provide guidance for the third quarter of 2012. Growth rates mentioned in my remarks are in relation to the prior-year comparable period, unless otherwise indicated. Q2 gross bookings grew by 27% or 36% on a local currency basis led by our worldwide hotel reservation business. Hotel room nights booked grew by 39% in the second quarter, a deceleration compared to the 47% growth rate achieved in Q1. As I said when we gave guidance for Q2 back in May, we expected fairly significant deceleration in unit growth over the back half of the quarter, given the size of the business and a difficult year-over-year comp. We believe that weak economic conditions and sovereign debt concerns further contributed to the level of deceleration experience, particularly in our key European markets which represents about 60% of our total booked room nights. We saw a softer demand and ADR trends continue in Southern Europe and spread to certain other markets including the U.K. in the second quarter. Despite these challenges, our room nights booked grew in Q2 by over 30% in Europe and by over 50% for the rest of the world. We are proud of the results delivered for the quarter from a top line and bottom line perspective and believe that Q2 was another in a long stream of quarters where we grew our market share with booked room nights both in the U.S. and internationally. We believe that the strong growth rates in markets outside of Europe demonstrates the attractive long-term opportunity that these markets continued to shift the booking online and comprised an increasing share of our business. Average daily rates or ADRs, were down on a local currency basis…

Thank you. (Operator Instructions) Our first question comes from Stephen Ju of Credit Suisse. Your line is open. Stephen Ju – Credit Suisse: Good afternoon guys. So I think in the prepared remarks you mentioned, I guess macro headline driven weakness spreading through U.K. and certain other parts of Europe also, southern Europe. Do you think there is any Olympics related impact and there are people just staying home to watch the Olympics as opposed to traveling? And I am also trying to get some context around the guidance for currency neutral, gross bookings growth of 23% to 31%. I guess there is some pause that you’re seeing additional pretty steep volume deceleration of, I guess additional ballpark range of 13% to 21% if I’ll do my math correctly, coming off hotel room deceleration of about 8 percentage points. So I am just trying to figure out what you’re seeing in the channel that’s making to take off another I guess 5 to almost 13 percentage points of volume growth?

In terms of the Olympics, Stephen, we’ve said in previous quarters that we didn’t expect to see an impact in our numbers from the Olympics and I think that’s still true. These events that take place in one market across our broad diversified worldwide business don’t generally have impact that we can discern. To the extent that more people are traveling to London or not traveling to London, perhaps they are traveling somewhere else, so we don’t see anything there. In terms of the growth assumptions, we said that our forecast reflects the actual results we’ve seen to-date and we’re assuming fairly significant deceleration growth rates from here on – over concern about macroeconomic conditions and our worry that conditions will worsen particularly in Europe which is such a key market for us.

Thank you. (Operator Instructions) Due to the number of participants in queue we ask that you limit your time to one question. Our next question comes from Doug Anmuth of Deutsche Bank. Your line is open. Doug Anmuth – JPMorgan: Thanks. Doug Anmuth from JPMorgan. So just wanted to ask you – you talked obviously a lot about the macro pressures here that you saw in 2Q and that you expect to worsen in 3Q. But can you give us a sense of whether you’re seeing – what you’re seeing in Europe in particular from competitive pressures and I guess should we be thinking about this as primarily macro impact and FX impact or you’re using some competitive dynamics here which are getting tougher for you?

Doug, I think that we look at the markets where our results have weakened most substantially and those are the same markets where the economic headlines and reports on unemployment, GDP and headlines around sovereign debt seem to be at there worsen. So that’s really what drives us to attribute a portion of the deceleration in this business to economic conditions. And we also see occupancy and ADR trends that are supportive of the deceleration at least in part being tied to macroeconomic conditions. Now we’ve been guiding investors for a long time to look for deceleration in the business given the size of the business and given the very, very strong comps that we have in the last year and so we think that that’s something that the market should continue to expect all things being equal from an economic perspective. As far as we can tell as we look at the reported results that our competitors released and our own results, we continued in the second quarter to gain share against our competition in the major markets in which operate. I think that the competition has had a better result from the last couple of quarters and I think that’s due to good execution on their part and I think is demonstrative of the opportunity – the substantial opportunity we have in these marketplaces that you can have a couple of businesses of our size growing at impressive rates. Doug Anmuth – JPMorgan: Great, thanks Jeff.

Thank you. Our next question comes from Mark Mahaney of Citigroup. Your line is open. Mark Mahaney – Citigroup: Thanks. Two questions please, I think Jeff you referred there market share gains for the hotel business in the U.S. Could you be a little bit more specific or do you mean just against the total market of hotel room nights. And then you also mentioned mobile as being a challenge, it sounded like a bit of a change in tone from before, could you may be spell that out a little bit more, how is mobile monetization for a travel company – how do you see the challenge in that? Thank you.

Sure Mark. So with respect to U.S, market share, even though we don’t release total group U.S. North American hotel room nights, we obviously have those numbers and can look at them in comparison to what’s released by the competition and based on that information we believe we’re continuing to gain share in total group hotel room nights sold in North America. With respect to the second question, I referred in my remarks to the potential difficulty for a last minute traveler using a bid process where you may have to go through a couple of iterations to get a completed transaction. And that’s something that I think we believe to be the case notwithstanding the fact that the growth of our Name Your Own Price business in places like the Hotel Negotiator App has been great and it’s been quite successful in an absolute sense. We feel there is an opportunity not just in our opaque products but across the Board to introduce new products in the mobile channel, try to make them very easy for consumers to complete a commercial transaction. And Express Deals is one way where they can get the kind of savings that they are used to with the bidding process without having to go through that, especially if you’re dealing with a small screen and potentially a last minute transaction. Mark Mahaney – Citigroup: Thank you, Jeff.

Thank you. Our next question comes from Justin Post of Bank of America. Your line is open. Justin Post – Bank of America: Thanks. Jeff, a couple of things, firstly when you look at your ADR and I think there were plus 2% and they went to negative 1%. It seems like when you look at some of the industry data for Europe, it hasn’t decelerated like that or some of the other hotels what they are saying [ph]. Is it because people are doing a different type of mix on your platform or you see something may be a little different than the industry is? And the second, I saw the Ctrip deal, can you talk about the economics, if someone books a room on their platform, is that favorable to you, or can you give us any help with that, and do you have anything for that in your guidance? Thank you.

Sure Justin. So with respect to our reported and sort of guided ADR trends, our international businesses have a different mix of destinations and types of properties that then – and other businesses they are all unique, so you can’t look at what we report and compare it to Smith Travel or another industry and say they want to be exact with the same what we see is impacted by mix and that’s driven by combination type and it’s driven by geography. With respect to Ctrip, the terms of that transaction are not disclosed but you should assume that the transaction will result in a financial benefit to both of us and Ctrip, if reservations are made by Ctrip customers at Booking.com hotels around the world. And we have a 8-K that’s filed at the same time as we announced these other transactions that will say we don’t expect the results of the Ctrip transaction to be material and you should consider that it’s included in the guidance that Dan gave you this afternoon. Justin Post – Bank of America: Thank you.

Thank you. Our next question comes from Tom White of Macquarie. Your line is open. Tom White – Macquarie: Thanks for taking my question. I just wanted to confirm one thing I thought you guys said in the prepared remarks about unit growth rates by regions. Did I hear 30% in Europe and over 50% in the rest of the world? And if so, I guess as we look out over the next couple of quarters, you guys have talked about how the seasonality in your newer markets of Asia Pacific and LATAM is different than kind of your legacy markets of Europe and the U.S. And then 4Q and 1Q are seasonally bigger travel quarters for those newer regions. With that in mind, can we expect to see maybe some acceleration in your international business later this year and early next as these become a bigger part of the mix? Thanks.

Tom, we don’t guide beyond the current third quarter guidance that we gave so I can’t really comment on that. Your premise that there is – first quarter and fourth quarter better seasonality for the Asia Pacific businesses and the businesses in the Southern hemisphere is a correct premise, but that business that we – when we talk about outside of Europe for the global business that includes the United States as well which is a very big part of that other market and that has the typical northern hemisphere seasonality. Tom White – Macquarie: Okay, thanks. Could you just confirm that you said 30% hotel unit growth in Europe in the second quarter and over 50% for the rest of the world, did I hear that right?

That’s correct, Tom. Tom White – Macquarie: Thanks.

Thank you. Our next question comes from Michael Olson of Piper Jaffray. Your question please. Michael Olson – Piper Jaffray: Hi just a follow-up on that. So you mentioned Europe weakness, but for international bookings expectations outside of Europe, would you I guess just qualitatively would you characterize the macro headwinds in all the other international geographies as being kind of equally weak as Europe, not as weak as Europe or not really weak at all?

I think a fair way to answer that would be to say that we have seen decelerating growth trends in most of the markets in which we operate and again that’s consistent with the guidance that we’ve given that is the business gets larger, we expect generally to see growth trends decelerate. We pointed out these couple of markets in Europe because of the concentration of our business in those markets and because we believe the deterioration there has been more pronounced. Michael Olson – Piper Jaffray: Okay, thanks.

Thank you. Our next question comes from Michael Millman of Millman Associates. Your line is open. Michael Millman – Millman Research Associates: Thank you. You mentioned U.S. rental car. Could you talk a little bit about why do you think that prices have not risen despite fleets tightening and also is it the tertiary brands that are causing this reduction in price and affecting opaque market and do you know that tertiary companies taking share of the rental car business?

Michael, I will comment on share amongst the rental car suppliers but that is likely cause of some of these new entrants that are pricing at very aggressive levels and that’s putting pressure on retail prices overall in the market. Michael Millman – Millman Research Associates: Thank you.

You’re welcome.

Thank you. Our next question comes from Heath Terry from Goldman Sachs. Your question please. Heath Terry – Goldman Sachs: Great, thank you. You have for most of the last few quarters you have been talking about advertising de-leverage and this quarter, we actually saw at least within the online advertising segment a little bit of advertising leverage both on a year-over-year and quarter-over-quarter basis. To what extent was a decision made to trade-off bookings for EBITDA this quarter and to the extent that that’s a change in strategy from the willingness that you’ve had in previous quarters to accept that advertising de-leverage?

It’s no extent. It was a decision made to trade-off advertising dollars for EBITDA. That’s not the way we look at the business or I’ve ever looked at it. We try to drive as much business in all distribution channels subject to ROI requirements which have not changed in any way in terms of policy for quite a long time. We’re prepared to spend additional dollars to drive additional businesses as long as ROIs are acceptable and we’re also prepared to spend at a deficit in new markets, in a new distribution channels where we need to build up tenure or a knowledge base in order to make sure that we can be successful in those markets. So we’ve never driven the business to meet a short-term EBITDA goal and we will not do so. Heath Terry – Goldman Sachs: Great, thank you.

Thank you. Our next question comes from Herman Leung of Susquehanna. Your line is open. Herman Leung – Susquehanna: Great, thanks guys. Two quick questions, first, I guess can you talk about your marketing spend efficiencies across the different channels and if anything sort of stood out in terms of the returns on the marketing spend or was that just largely macro related? And then second question I have is regarding the Booking.com piece that is from North America, obviously shows up in your international bookings line. I was wondering if you can give us a sense of how that sort of grew during the second quarter timeframe? Thanks.

Herman on the first question, we don’t comment on our advertising by channel but I did say in my prepared remarks that fundamental advertising efficiency was good. So you can assume that we had good ROIs during the quarter in comparison to prior year. The overall advertising efficiency when you just look at online advertising as a percentage of gross profit was largely driven however by the deceleration in the business, particularly in the back half of the quarter so you have less gross bookings coming through. You’ve got the stronger growth rates at the beginning of the quarter and the prior quarter converting into gross profit this quarter. And so anytime you got deceleration in gross bookings typically the deceleration in gross profit lags that and so you get a benefit on that line item in terms of operating leverage. In terms of Booking.com in North America, we don’t disclose that stat but we’ve said for a while now and I’ll say it again that North America is one of the faster growing markets for Booking.com to continue to add properties and performed very well in the market and we’re very pleased with the progress that they’ve made. Herman Leung – Susquehanna: Great, thank you very much.

Thank you. Our next question comes from Kevin Kopelman of Cowen and Company. Your line is open. Kevin Kopelman – Cowen and Company: Hi, thanks a lot. You talked about some of the challenges on mobile for Name Your Own Price. Can you give us any color on what you’re seeing in mobile growth outside of Name Your Own Price?

As I mentioned in response to Mark’s question, we’ve seen very good results in mobile channels for all of our businesses with Name Your Own Price being no exception, where it’s our fastest growing distribution channel here in the United States by far. And so we are very happy with the results there. We want to make sure that we have an opportunity to put products and product customers that are compelling, whether they want to bid or not, Tonight-Only is a great product that allows customers to save on disclosed hotels. This is not opaque product. It’s pricing available only for tonight. We also offer retail which in many cases is what the consumer is looking for. So our aim is to promote the most attractive products to the widest group of consumers and Express Deals should fit nicely into that. We really view mobile as more than opportunity for the group rather than a challenge. We’ve got the best hotel inventory, both published-price and discounted of any OTA in the world. And a great opportunity with good execution to present that in a way that’s compelling to mobile users. So I don’t want you to misunderstand the opportunity that we have with Express Deals by thinking that mobile is somehow a challenge. We really view it as a great opportunity. Kevin Kopelman – Cowen and Company: Thanks.

Thank you. Our next question comes from Brian Nowak of Nomura. Your question please. Actually we go to our next question from Tracy Young of Evercore. Your line is open. Tracy Young – Evercore Partners: Hi, two questions, I am sorry if I missed this but did you gave guidance on ADRs U.S. versus international? And also just trying to get a sense of your guidance certainly other companies didn’t talked about deceleration that their seeing for Q3. Is your guidance based on what you’ve seen in July or what you expected to see for the quarter? Thanks.

Tracey, we said for ADRs that international was down 1% in Q2 and we’re assuming that trend will worsen in Q3. For our U.S. hotel service we’ve set it up about 4% for Q3. And I am sorry, what was your second question? Tracy Young – Evercore Partners: My question was in terms of the guidance.

All right. Tracy Young – Evercore Partners: Yes, sorry.

So our guidance reflects the actual results through the end of July and through the first week of August here. And then we are assuming that there will be fairly significant deceleration in unit growth throughout the remainder of the quarter based upon our concerns particularly in the European market which is about 60% of our business. Tracy Young – Evercore Partners: Okay, thank you.

You’re welcome.

Thank you. At this time, I’d like to turn the call back over to our speakers for any closing remarks.

Thank you all very much for participating in our call.

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