This train on time and the train on the tracks. We're gonna get started. I know a lot of people are getting settled into the room, but it's my pleasure to introduce Ewout Steenbergen, CFO of Booking Holdings. Ewout, thank you so much for being part of the conference.
Thanks, Eric.
Okay, so I think to level set, maybe let's take a step back before we get into all the granular details of what's going on in the business. You've been in the role now for around six months. Talk a little bit about what attracted you to Booking Holdings when you took the role, and what some of your key insights and learnings have been over the last couple of quarters.
Sure, well, first of all, so I came from S&P Global, where I was for seven and a half years. Great company, high quality name, but I was really looking personally for a new challenge, some new personal development, and when I got the phone call last year to join Booking Holdings, I thought, "This is going to be a really fascinating opportunity." Of course, another high quality name, so trading one high quality name for another, but what I thought was particularly interesting with Booking Holdings was really fast-moving, very dynamic, very market-oriented, very entrepreneurial, very quick in terms of new business development. I like the culture. It's very low ego, low politics. It's very deep, hard, fact-based discussions around what is the right thing to do for the company and to make decisions on that basis.
And a company that has done so well, but it still has so much more opportunity to further develop and grow in the, in the future. So there are so many of those opportunities that we probably will touch on over the next half hour or so. So yeah, already being the market leader and having such a strong market position, but I don't think in any formal way we're thinking about ourselves that that means: Oh, yes, our growth is basically market average. I think we can really grow above market average over the next period, and I can touch on that later on. But what I also thought was really interesting was the company is almost understated, and therefore underappreciated in a couple of areas, and to help to change that perception over time will make a huge impact. So, let me give an example of-
Yeah
... of that. There's still this, I think, a little bit outdated perception out there that is a company that's largely dependent on Google to attract business. We are attracting direct B2C business to us now at a low 60% level. Low 60% of the business from a B2C basis comes directly to us. That's a huge game changer compared to the past. Let me give you another example. It's not so known in the US because our position in the US is relatively more modest compared to Europe and Asia. But from a alternative accommodations perspective, we're two-thirds of the size of the largest player, the most well-known player in that industry. And when we said that in our Q1 earnings call, a lot of people said: "Oh, wow! Didn't realize that." Two-thirds, and that is only in alternative.
So we have all this core business and hotels, et cetera, and all the other verticals on top of it. Third example of that is Asia. I mean, everyone is looking at Asia, the big growth opportunity, where GDP growth will be the largest over the next couple of decades. We have, in our portfolio, the largest online travel platform in Asia, outside of mainland China, called Agoda, with very strong market position and a very high growth that it is delivering. So there's many of those, what attracted me, because these are all opportunities that are underappreciated, and we can build on that and make the company even more successful in the future.
Okay, we're gonna get to all of that. There was a ton in there that I wanna mine through the limited time we have together. Probably coming out of the last set of results, the biggest question we're getting from investors is just: How would you characterize the demand environment? You're probably the second biggest theme to AI in this conference is consumer demand so far. But maybe refresh us on what your key messaging was on the current demand environment when you came out of the earnings report just a couple weeks ago.
Sure. So the key message is, the market is normalizing.
Yep.
But that's always what was expected. The period of double-digit growth, revenge travel after the pandemic, it's probably not going to happen again, but it is still very healthy growth, growth above GDP, and we're going to do better than the general market growth. So slower than before, but still very healthy, very constructive. We're not seeing any negative impact from a consumer sentiment perspective, a consumer strength perspective. We don't see really a down trade in any form or way. So overall, we say it's really still a healthy demand environment for travel. People like to spend on travel. At some point, yeah, maybe not spend on luxury consumer goods. It's... Do you really need that next handbag or car or something like that?
But experience the world and having a positive product, and people like to spend money on experiences more and more in the future, and we are taking advantage of it. Also, I want to point out that we're seeing actually the market relatively stable from April through to July... and that's a positive. So we're not on a gliding path, and every month, we see something that is slightly coming down. It actually was relatively stable from April through July. So that was another positive indicator that overall, we are quite constructive about the outlook for the industry. So my main message is, don't worry about it. There's not anything negative here. It's actually really positive and constructive, and I think that's how you should look at the outlook for the company over the next few quarters.
Okay, maybe just one or two follow-ups, and then I want to get into some of the bigger picture. Geographies, anything you're seeing different globally in terms of travel demand as we go into this normalization period? Are there different parts of the world that may be acting different than others?
Yeah. Asia is staying very strong. It's maybe the region that came out as the last of all the regions out of the pandemic situation. So there's still a little bit of Asia coming back. But also in many markets in Asia, people are now getting to income levels that they can travel for the first time. You see, for example, in India, the number of aircraft that the large carriers there have ordered. So Asia will see a lot of positive, strong demand, and we expect that to continue. We saw a mild moderation of that normalization in Europe, but again, that has very much stabilized.
So culturally, Europeans like to travel. They have a lot of holidays. This is something that is on top of their priority list, so that is a positive and being really strongly embedded in Europe. That is definitely helping us. U.S. is probably the region where the growth is still positive, but was at the lowest level. But for us, it's a market where we are relatively under-penetrated. I think we are punching below our weight. Our market share is relatively the lowest in the U.S., so we are actually gaining relative to the market in the U.S.
Okay. And last one. You know, when you think about the evolution of the booking window or the types of inventory you sell as a platform, are there things investors should be keeping in mind that can impact things like ADRs or take rates over the medium term? Against this broader normalizing landscape, you know, elements of the business model that people should just be keeping in mind of ways in which this could all settle out.
Yeah. First, first on rates. ADRs were stable in the Q2, taking out geo mix and FX. Geo mix had a slightly negative impact because faster growth in Asia, where the absolute levels of rates are a little bit lower, but otherwise, it was stable. Another indication that the travel market is not falling off the cliff, because rates are stable. In flights, it's different because flight rates went up a lot the last two years. Now they are coming back. That's less economically important for us, but ADRs are more important, and they are holding up in quite a nice way. You also asked about take rate.
Take rate, booking window-
Yeah
... how some of that all sort of impacts it.
I think take rate, we're looking at it, that it is expected to be more or less stable from what you have seen in the past. Two underlying dynamics: Growth in flights is very high, where the take rate is a little lower.
Yeah.
That has a negative impact. But on the other hand, we're expanding our payments business and fintech business, so that helps actually from a revenue growth perspective. So two are offsetting, so expect take rate more or less to be stable over the next period.
Okay, great. You referenced in the first question about what attracted you to the company. You talked a little bit about alternative accommodations. You know, Glenn and the team have talked about it on pretty much most earnings calls over the last couple of years. Can you talk a little bit about what's driving the success for the company in alternative accommodations and how the team thinks about what some of the key strategic investments that have to be made to continue maintaining that success in alternative accommodations?
So I think what is a differentiator for us here is when a traveler is coming to us on our platform, you get all forms of accommodations in the proposition at the same time. So you have a family, as an example, with two young children. They're maybe looking at a hotel with a family room or two connected rooms. But at the same time, they get an apartment in their listing of possibilities with two bedrooms, or they get a home that would accommodate their family, and they can pick and choose ultimately what fits the best and what they like the best, and also from a rate perspective, of course. So the fact that we are integrating all of the different types of accommodations on our platform, and we are completely agnostic.
It doesn't matter ultimately, what the traveler books, whatever fits their circumstances the best, and I think that's a real differentiator because that ultimately drives a lot of business, but also familiarity, because maybe in Europe and in Asia, people are very much familiar with the fact that we offer alternative accommodations. In the US, less, so more that people see that, realize that, start to book it, that becomes more attractive for the alternative accommodation owner, that they want to be on our platform, so it becomes a self-stimulating mechanism, ultimately, over time. Maybe one last thing I want to say about this is, we have been growing faster than the last largest player in alternative accommodation now, 12 out of the last 13 quarters. 12 out of the last 13 quarters.
So this is one of those things that I personally still think where we need to do a better job to explain that, because that other company gets so much appreciation for their growth and growth outlook, but actually we are growing much faster in that space than they have been doing almost continuously for the last multiple years. So big opportunity, I think, again, and I think that will really help in terms of the growth expectation of the company and what the market is expecting in the future.
Maybe just one follow-up there. You talked a little bit about the flywheel effect as you show people more inventory, and then people want to list their supply. Is there anything you think that's a top priority for you guys in terms of growing supply, in terms of density, acquisition, so you have more and more supply? Because if you think about the history of the company, it was sort of built on having a very large moat around supply and scale of supply. How do you think about supply in the alternative accommodation-
Yeah
-space?
I would say supply, we're already at par-
Mm-hmm
... in Europe and in Asia, and in absolute business volumes, we are at par. U.S. is an opportunity area for us. So it's growing, but again, familiarity, product improvements, easy process for accommodation owners to sign up and to become part of our platform, that will go up over time in the U.S. So we will see that business growing ultimately in the U.S., also to the same kind of level. So U.S., still a little under-penetrated from a supply perspective, but the expectation is that that will correct itself over time.
Okay, I want to come back to talking about Connected Trip. You alluded to it in your first answer. You know, when you think about where the company wants to go with Connected Trip over the long term, what do you guys see as some of the key pieces of execution that have to be successfully navigated to continue to scale Connected Trip? And how should investors think about air as a mix or dynamic of driving more Connected Trip?
Yeah. Maybe first to start with a couple of numbers. So Connected Trips is now high single-digit % of our total bookings. And what we call a Connected Trip is the same traveler that, for the same trip in a period of three days, makes multiple bookings across multiple verticals. That's what we call a Connected Trip. And that has gone up year over year by 45%. So Connected Trip, in other words, is not a conceptual kind of idea anymore. This is now real, and it is growing, and it becomes a real meaningful part of the overall business we are doing. You are absolutely right that flight is an important element to it, because often travelers start with a flight and then look at an accommodation.
Sometimes it's the other way around, but now also cars, rental cars are part of it, activities, and in the end, in the future, also restaurant reservations, and so on. So we have many of those pieces together. It's very important that we can connect it all. Generative AI will be a very important element to it as well, because I very much believe personalization is going to be really important here. And the last element is payments, because we're speaking a lot about payments, and that's not only because it's economically attractive for us, but payments is basically underpinning also the Connected Trip, because we want to be able to make sure that if someone is checking out and wants to do a booking across multiple verticals, there's just one payment process in the end.
You don't want to pay for all of these activities separately. So strategically, payments is a very important element of the overall underpinning infrastructure of Connected Trip. But it's real. It's really the question of how quickly can we just really connect all of these elements and make it a part of our total proposition. I give you an example. As you know, we own OpenTable.
Yeah.
But we have still not connected that in the Connected Trip, so I see that as an opportunity. It's just we have so many things to do, and we have so many areas to go after, so it's really a matter of priorities at the end.
Okay. Speaking of areas of priorities, another big theme of this conference is generative AI. Maybe start with talking generally about the company's view about AI and how it might structurally impact the travel industry. I think there's been a wide-ranging debate over the years about that, and a pendulum swing of how good or bad for the travel industry it might be. Then maybe the second part of the question will be talking a little bit about what you guys as a team are building internally and externally around AI as a platform.
Yeah. Well, I’m not saying anything that no one already knows, that GenAI is going to be transformative for the world, for any company, and including also our company and the and industry. The company has already done a lot with AI, more traditional AI, in the past. So think about all the performance marketing optimization, running the continuously all these algorithms of: Where should we spend the dollars? How do we make sure that we achieve the right returns and the right probabilities in terms of outcomes from spending the dollars in performance marketing? And it’s continuous, of course, a feedback loop in terms of the actual results and further optimizing this. And these platforms, in terms of performance marketing, are changing all the time, so you’re continuously really working on that.
So in other words, it's not something that is completely new for the company. Now, generative AI offers completely new opportunities in two areas. One is, of course, internal processes and efficiencies, and the other is more on the commercial side. I am personally the most excited about the commercial side for what it can do for our proposition, because this is ideal from a connected trip perspective.... And we have all the data of travelers from the past, so that is our differentiating factor.
We know, Eric, where you like to travel, what kind of hotel you want to stay, if it is a modern, contemporary hotel or a boutique one, or a more traditional one, and then more in the countryside, and what kind of airlines or what times during the day you would like to travel, and if you like a taxi or a rental car. So we can, based on what we know from you in the past, really tailor our proposition that is convenient for you because it takes you a lot of time if you want to really combine a whole travel yourself and find all the pieces. And then you like that experience, we know more about you, and we can even do it better next time. So-
Sure.
I think the data is going to be a big differentiator, and we're sitting on the best, richest data set, given the skill we have as a company. And of course, I think the more personalization and the inspirational side of travel, that can really help. That's on the front office side. But realistically, that takes a little bit more time, I think, when that is developed at a scale that will have a real impact on a day-to-day basis. But we'll experiment and learn more, and we are investing already with the AI Trip Planner at Booking.com or Penny with Priceline, and many other areas. But I think you probably see it showing up in our financial results earlier, more on the internal processes perspective.
Think about the benefit this will have on customer service, on the whole tech development area, and many, many other areas. We will, during the next couple of earnings calls, speak more concretely about this. We deliberately didn't say so much during the Q2, because at some point we said: Let's not talk conceptual about GenAI. The next time we talk about it, we need to give concrete examples. This is what we have done, and this is how many hours we have saved or dollars we have saved, and to be a little bit more specific. But we have hundreds of experiments and proof of concepts across the company, so I'm actually really encouraged how everyone is adopting it.
Okay. Well, I can tell you that investors very much want use cases and examples of AI, delivering yield, so that will probably be very well received. I'll say that. Let's take it beyond what we've talked about so far and come back to a topic you talked about earlier: direct bookings, loyalty. You gave some stats of where the business is today. Talk a little bit about where you want that to continue to evolve in terms of the mix of the business that's coming direct to you, and how some of the programs you've put in place on the loyalty side sort of feed into the momentum around direct bookings.
Yeah. So direct bookings for us is strategically really important. And it's really great to be beyond the inflection point in some markets where people say: You know what? I go directly to Booking because I have the app on my phone. This is how I book it. It's very easy. My credit card is there. It's easy to book, it's easy to cancel, it's all in one place. I know they give me a fair deal. And that is just being at that point, that you're not being compared to other platforms anymore because they know, they trust you, and we deal with that in the most responsible way. That's really great. It's sometimes I get the question of: So is there an optimal point? How far would you like to bring the direct business as a percentage? It's a really hard question because we also like the performance marketing channels, because performance marketing channels deliver new customers to us.
Yes.
We would like to continue to get new customers to us, really get them the first experience, and over time, really be able to transform them to become more direct customers. We could get much higher percentage of direct customers tomorrow by really minimizing our investment and spend in performance marketing, but obviously, that's not a very wise way to run the company, so we're not doing that. As long as we hit minimum ROIs and we get new customers to us in financially and attractive way, we will continue to do that. It's really that mix that we're looking for and optimizing that mix, but it's definitely a very important development for the company.
Yeah, I want to come back to that mix in a minute, but just sticking with this question of loyalty before turning to marketing mix. When you think about what you've built with the Genius loyalty program, can you talk a little bit about how you guys see that fitting into the broader competitive landscape, and what are some of the differentiators around Genius that you would highlight?
Yeah, Genius, for us, is not a standalone mechanism.
Yeah.
It is an element in multiple steps that we think are ultimately that flywheel, how to get customers to us, stay with us, and book directly with us. So to go a little bit deeper on that: so if we have a customer that says, "I use the mobile app, I'm booking directly with you, I'm booking more across multiple verticals. Hey, great! I now can see my flights there as well. That's easy. I book my flights with you. I'm coming back more often than in the past, therefore, I'm moving up from a Genius and loyalty perspective. Therefore, I get better deals and, more attractive deals, and therefore, staying in that whole system," all these elements are interconnected... and are stimulating each other.
So we're not looking at Genius as a standalone mechanism. Yeah, we see a large part of Genius, higher Genius tier members booking more with us, and therefore staying longer with us, but it is an element of all these pieces that are coming together and are all correlated in the end to each other. So very, very important, ultimately, how to look at that more holistically.
Understood. Okay. You talked a little bit about mix, and this is probably one of the key questions we get from investors a lot, which is: looking longer term at a company like Booking, what's the right mix of performance marketing, brand marketing, merchandising? You know, when you think about the relative ROI or what a certain dollar gives you, when you think across those different avenues of stimulant for growth in the business, how do you think about relative ROIs or solving for some sort of right mix of that over the longer term?
Yeah. You're right. Ultimately, what you're trying to do is to optimize on merchandising, plus brand marketing, plus performance marketing, and other elements together. And that optimizing can be very different by country or by region. For example, in Asia, there is less focus on brand marketing and more on merchandising. That's really important in Asia. And then, as I said before, these platforms are changing all the time, so it's not a static situation. You're also changing and dynamically adjusting based on how our platforms, how they are ultimately changing over time. For example, Google has made many changes this year to PPC and PPA, and obviously, we are reacting on it.
I, I'm very proud, and I didn't realize that coming from the outside, the level of science and expertise we have within the company in dealing with this optimization. I think it's an absolute differentiating factor, and that we therefore can be so effective around optimizing ROIs, getting more marketing leverage, and actually getting more from our merchandising spend, because merchandising is, this year, more or less stable over total growth bookings, but the percentage of growth bookings that's coming direct to us is going up, so actually, even that ratio compared to direct growth bookings is actually improving. Maybe one last thing to say, because we are really excited about this: social media, because we are now seeing that the effectiveness of social media platforms in terms of performance marketing spend have suddenly seen kind of a leapfrog change. Why?
Because we see that the effectiveness of spend on those platforms suddenly leads to much higher ROIs. That's probably to do with their investments in AI and being able to target customers in a much more effective way. So we are expanding our relationship with them, and we have been working with them for many years, and it was difficult to really make it effective, and the returns were too low. But based on all that investments, all these experiments, all those learnings, working with their teams, we're now in a situation to say, "Okay, now it becomes really attractive," and we are expanding on this in quite a meaningful way. So it's exciting because it's another, other channel, another forum, and we're really on the forefront of that.
Okay. I wanna close this part out, maybe talking a little bit about margins. You guys have actually been on a bit of a journey where fixed cost investments have been running at a more elevated rate, and I think another question we get a lot from investors is how to think about return on capital and return on investment longer term, and what that means for structural margins. You know, since you've joined, I've noticed there's been a little bit of a nuanced message around fixed costs in the medium to long term, and how do you think about sort of striking the right balance between fixed costs in the long term, but delivering on structural margins for investors?
Yeah. A couple of thoughts on this. First, if you look at the growth of fixed costs compared to five years ago, if you take twenty nineteen as a baseline, it has grown much faster than revenues, and that was deliberate because the company was investing in so many new capabilities around flights, around other verticals, payments, many different areas. So we now have built up that infrastructure. We have built up those capabilities, and we're entering a new phase where we should be able to run much higher volumes over the infrastructure that we have in place. The next incremental traveler that comes to us, we should be able to see much higher incremental margins coming out of it. That is one, a very important message that we're also talking about a lot internally, that we are able to achieve it.
Because any healthy company, obviously, is seeing its top line grow faster than its fixed OpEx line. So we will really make sure that that trend will change in the future. So that is one. The second is, at the same time, we also need to invest in growth initiatives. You don't want to starve an organization, particularly with all these growth initiatives that we have been talking about over the last half hour. So we want to really make sure that we earmark our scarce resources in a way that we deliberately invest in growth initiatives, and be able to monitor that and track it in a transparent way, and be able to communicate to our shareholders to say, "Okay, we are putting so much behind this initiative. This is where you see it show up.
This is how you can track this over time," so that you know that our expense growth, if you will see it in the future, is really going to top line initiatives, and that you can monitor that over time, and that there is transparency around it. But at the same time, that we also still should be able to expand our margins, both on marketing leverage and fixed OpEx leverage at the same time.
Okay, great. The company's been returning a lot of capital to shareholders over the last couple of years. Predates your joining the organization, but it continues. Talk a little bit about the balance of capital allocation that you and the company feel that you wanna strike between some of these longer term investments you wanna make in growth initiatives, returning capital, and maybe even M&A as a potential use of capital over the medium to long term.
Yeah, I would say the company is in a very fortunate position that we don't need to make very explicit choices, because it's so profitable and we generate so much free cash flow. We can do all the things at the same time. From a priority perspective, investing in future growth is always the most attractive. Organically investing in future growth, so we'll continue to do that and to drive ultimately, therefore, a positive outcome for the company, but then there will also be very active return of capital to our shareholders. We initiated a dividend earlier this year.
We're very active from a buyback perspective, and I think the expectation should be that that will continue, and continue in a meaningful way for our shareholders. So the overall formula of strong market position, healthy margins, strong economics, growing faster than the market, dropping off of free cash flow, return of capital, and growing our EPS even faster than net, net income, that is a very repeatable model, and that should be expected to continue in the future as well.
Okay, we have about two minutes left, before we have to break. Look out over the next couple of years. You know, you've been with the organization for six months. Looking out over the next three to five years, what are you most excited about, and how is that aligned against the priorities of Booking as a company, looking out over the next couple of years?
Yeah, I'm excited about all the things that we actually talked about, Eric, over the last half hour, because I can see us in three to five years being in a position where that connected trip is really there, generative AI has a really an impact. Our Asian position continues to evolve in a very strong way. Alternative accommodations, US position, we're getting really to the levels where we want to be, and be that company that is really growing above market in a healthy way and delivering very good economics for the company. I think we have all the pieces. I don't kind of think about anything in the company today and say, "The pieces are not there." It's very much about executing, very much about investing in all of these areas in the right way, but also, of course, delivering strong financials and the margin expansion.
Okay. I think we're gonna leave it there. Please join me in thanking Booking and the team for being part of the conference this year.
Thank you so much.