Booking Holdings Inc (BKNG) 2015 Q1 法說會逐字稿

Welcome to The Priceline Group's first-quarter 2015 conference call.

The Priceline Group 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 and 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 or expectations, and similar expressions reflecting something other than historical fact are intended to identify forward-looking statements.

For a list of factors that could cause The Group'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 The Group's earnings press release, as well as The Group's most recent filings with the Securities and Exchange Commission.

Unless required by law, The Priceline Group undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

A copy of the Group's earnings press release, together with an accompanying financial and statistical supplement, is available in the For Investor sections of The Priceline Group's website, www.PricelineGroup.com.

And now I'd like to introduce The Priceline Group's speakers for this afternoon, Darren Huston and Daniel Finnegan.

Go ahead, gentlemen.

Okay.

Thank you very much, and welcome to The Priceline Group's first-quarter conference call.

Thank you for joining us before the markets open this morning in New York.

I'm here in Amsterdam with Priceline Group CFO, Dan Finnegan.

The Group reported consolidated gross bookings for the fourth quarter (Sic) of approximately $13.8 billion, up 12% year-over-year, or about 26% on a local currency basis.

Room nights exceeded 100 million for the first time during a quarter, while growth accelerated slightly to 25%.

Non-GAAP earnings per share was $8.12, up 4% versus prior year, surpassing FactSet consensus estimates of $7.72 per share, and our guidance for the quarter.

Our US dollar-denominated growth rates were substantially impacted by the stronger dollar.

Our international business recorded 29% gross bookings growth on a local currency basis, up from 27% last quarter.

Gross bookings benefited from growth in hotel supply at Booking.com, which now has over 640,000 hotels and other accommodations in over 200 countries and territories, up 40% over last year.

We are continuing to ramp new property acquisition, including individually-owned vacation rentals, with new on-boarding tools that allow owners to list their property quickly and easily on our websites.

Vacation rentals nearly doubled year-over-year to 275,000 instantly bookable and confirmable properties, including villas, chalets, apartments, aparthotels, and other self-catered products.

Two important innovations were also launched at Booking.com in the first quarter.

Booking Now, our mobile phone app for spontaneous bookers, and Booking Suite, our partner-facing software services platform.

Both launches were executed well, and early results are encouraging.

Each of these growth extensions represent innovation beachheads that will be further expanded upon in the coming weeks, months and quarters.

International results also benefited from Agoda.com and RentalCars.com, both of which accelerated in the quarter.

KAYAK and OpenTable continued to pursue the international opportunity, and while much work has been done, and both businesses are growing, there is still a lot of potential ahead of us.

KAYAK is focused on product innovation and brand building, and has made some solid business progress, particularly in Europe.

OpenTable has now more or less completed its technical replatforming, to a more modern, cloud-based architecture.

We are now executing plans to optimize the product and roll it out globally.

Against these plans, we will take the determined but test and learn approach over the coming quarters, as we have with all our businesses.

Demand for OpenTable solutions from both restaurants and customers remains very strong.

Priceline.com's domestic growth continued to be hampered by the shrinking opaque business.

Priceline.com's retail business remains healthy, including acceleration in retail hotels, and a new management team there is poised to rejuvenate and maximize the potential of the Priceline.com brand.

We also acquired Rocketmiles in the first quarter, an innovative hotel booking platform for frequent fliers, based in Chicago.

Rocketmiles is being managed independently as part of our Priceline Ventures portfolio.

Mobile's uninterrupted growth in share of our business continues.

From Booking.com's Booking Now app for spontaneous or last minute bookers, to Priceline.com's iWatch app, to our Pay with OpenTable mobile payments app, to KAYAK's mobile itinerary management tools, innovation and execution on mobile is in our DNA, and critical to the Group's continued success.

Across the Group, our customers completed over 100 million reservations from their smartphones in the last 12 months, and that number continues to grow very rapidly.

We believe The Group's business performed well in the first quarter, and we're pleased with the progress in growing and improving their platforms.

Our fundamental growth momentum, as measured by units and in constant currency, remains strong.

We again delivered strong organic performance on both the top and bottom line, providing substantial earnings to reinvest in profitable growth and share buybacks, while maintaining attractive operating margins.

We repurchased $309 million of our common stock during the quarter, and have a remaining authorization of $2.8 billion remaining for future quarters.

I believe as strongly as ever that our formula of out-innovating the competition, smart and sustainable organic growth, and earning versus buying our customers' loyalty through best-in-class consumer experiences, end-to-end, and across devices, is the winning long-term formula.

I commend my colleagues around the world for their focus and execution.

I will now turn over to Dan for a more detailed summary of our financials.

Thanks, Darren.

I'll discuss some of the highlights in operating results and cash flows for the quarter, and then provide guidance for the second quarter of 2015.

As we highlighted when we gave guidance for Q1 in February, our US-dollar reported results are impacted more dramatically by extreme currency volatility than most companies, because about 90% of our full-year 2014 gross bookings and operating income were generated by our international brands.

Our two most impactful currencies, the Euro and the British pound, were weaker by about 18% and 9% respectively for Q1, as compared to the prior year.

The Euro was also about 2% weaker compared to the rate assumed in our Q1 guidance.

The strong US dollar means our gross bookings, gross profit, operating expenses, adjusted EBITDA, and non-GAAP net income mathematically translated to significantly fewer dollars than they would have at last year's exchange rates for Q1, Q2, and the remainder of the year.

Since our expenses are denominated in foreign currencies on a basis similar to our revenues, they will also translate into fewer dollars.

Therefore, our operating margins are not significantly impacted by currency fluctuations, and we believe that the impact of currency on our bottom line is generally similar to the top line impact.

However, due to our normal business seasonality, the bottom line currency impact is somewhat less pronounced in Q1 than the top line impact.

Although the stronger dollar has a significant negative impact on our growth expressed in dollars, the fundamental performance of our business is still evident in our unit growth rates, and our growth rates expressed in constant currency for gross bookings, international gross bookings, and gross profit.

Q1 was a strong quarter for Priceline Group.

Accelerating unit growth, paired with less margin pressure than forecasted, resulted in of overperformance compared to consensus at both the top and bottom line.

Room night growth was strong relative to Q4 across all our key regions.

Room nights booked grew by 25% in the first quarter, accelerating slightly compared to the 24% growth rate for Q4.

Rental car days grew by 18% in Q1, also accelerating compared to Q4 growth of 16%.

Average daily rates for accommodations, or ADRs for Q1 2015, were up on a constant currency basis by about 2% for the consolidated Group.

Q1 gross bookings grew by about 26% on a constant currency basis, and by about 12% in US dollars, compared to prior year.

International gross bookings grew by about 29% on a constant currency basis, and by about 14% in US dollars.

Gross bookings for our Priceline.com brand business in the US grew by 2%.

Similar to recent quarters, the results are a mix of solid growth in retail room nights and rental car days, offset by declines in Name Your Own Price services which continue to be challenged by a lack of discounted rates.

Gross profit for the quarter was $1.7 billion and grew by about 32% on a constant currency basis, and by 19% in US dollars compared to prior year.

Our international operations generated gross profit of $1.4 billion, which grew by about 30% on a constant currency basis and by 16% in US dollars compared to prior year.

Gross profit for our US operations, including OpenTable's US business, amounted to $277 million, which represented 38% growth versus prior year.

OpenTable generated worldwide revenue in Q1 of about $61 million.

Non-GAAP operating income amounted to 31.1% of non-GAAP gross profit for Q1, which is 448 BPs lower than last year.

As I said when we gave guidance for the quarter, we are investing in OpEx to add people, offices, and IT capacity, to build up the capability of the business to handle future growth.

Q1 also reflects deleverage from the inclusion of OpEx for OpenTable and our Booking Suite of hotel marketing services.

Online advertising also had deleverage due to lower ROIs and gross bookings acceleration that benefits revenue in Q2 and Q3, when Easter and summer travel takes place.

Investments in OpEx and advertising typically have a more pronounced impact on profitability in Q1, when we earned a lower percentage of our annual gross profit due to the normal seasonality of our business.

Operating margins did come in better than our guidance, however, due mainly to lower than forecasted non-advertising OpEx.

Adjusted EBITDA for Q1 amounted to $532 million, which exceeded the top end of our guidance range of $510 million, and represents 4% growth versus prior year.

Non-GAAP net income grew by 3% including interest expense from our recent bond offerings, and non-GAAP EPS grew by 4%.

In terms of cash flow, we generated approximately $209 million of cash from operations during first-quarter 2015, which is about 18% above last year.

We invested $31 million in CapEx and repurchased 251,000 shares of our common stock for $309 million in Q1.

We expect to execute the remainder of our $3 billion common stock buyback program going forward, to return capital to shareholders at a pace that makes sense relative to available cash in the US, and potential other uses for such capital.

We completed two successful financing transactions in Q1 at attractive interest rates.

We raised EUR1 billion for our US parent Company by offering a 12-year bond in Europe at a 1.8% interest rate.

We also raised $500 million by issuing a 10-year bond in the US investment grade market with a 3.65% interest rate.

Our cash and investments amounted to $9.6 billion at March 31, 2015, with about $2.5 billion of that balance in the US.

Now, for Q2 guidance.

The travel market continues to be fundamentally healthy from an occupancy and ADR perspective, broadly and in Europe.

We are pleased with the resilient unit growth that our business has delivered historically, and is inherent in our Q2 forecast.

Our guidance assumes that our growth rates will decelerate for the quarter due to the size of our business.

Our Q2 forecast assumes foreign exchange rates of $1.12 per Euro and $1.51 per British pound for the remainder of the quarter, which would result in average exchange rates that would be weaker by about 19% for the Euro and about 11% for the British pound, as compared to the prior year.

As a result, our gross bookings, gross profit, operating expenses, adjusted EBITDA and non-GAAP net income will mathematically translate into significantly fewer dollars than they would have at last year's exchange rates for Q2, and the remainder of the year.

Barring further deterioration in exchange rates, we believe that Q2 represents our toughest year-over-year currency comp for 2015.

For Q2 guidance, we are forecasting total gross bookings to grow by 15% to 22% on a constant currency basis, and by 0% to 7% in US dollars, with US gross bookings growing by about 0% to 5%.

We expect international gross bookings to grow by 17% to 24% on a constant currency basis, and by 0% to 7% in US dollars.

Our Q2 forecast assumes that local currency ADRs for the consolidated Group will be up by less than 2%, compared to the prior year period.

We expect Q2 revenue to grow year-over-year by approximately 0% to 7%, and gross profit to grow by 17% to 24% on a local currency basis, and by 1% to 8% in US dollars.

We expect the declines in our Name Your Own Price service will continue to negatively impact revenue growth rates in Q2.

We expect about 550 BPs of deleverage in non-GAAP operating margins compared to prior year, expressed as non-GAAP operating income as a percentage of gross profit.

Q2 forecast reflects the impact of investing in OpEx to add people, offices, and IT capacity to build up the capability of the business to handle future growth.

Q2 also reflects OpEx for OpenTable and our Booking Suite hotel marketing services.

While we are not giving earnings guidance beyond Q2, we do expect pressure on operating margins from non-advertising OpEx to significantly diminish over the back half of the year, as we lap the OpenTable acquisition and the launch of our Booking Suite initiative.

Our Q2 advertising forecast assumes lower online ad ROIs and increased investment in offline advertising, including rolling out campaigns in new markets.

Our approach to advertising spend is consistent with our past approach.

We invest in a manner that we believe is sustainable over the long term, with the goal of building our brands with consumers.

We then strive to win the loyalty of our customers by giving them the most choices and the best booking experience across all devices they use to search and book.

This approach has resulted in a nice balance between top and bottom line growth, and loyal customers that over time are increasingly coming to us directly, rather than through paid channels.

Our adjusted EBITDA is expected to range between $715 million and $765 million, which at the midpoint is a decrease of 9% versus prior year.

As I mentioned a moment ago, we estimate the currency impact on EBITDA growth is similar to the impact that we are forecasting for gross profit.

Adjusted EBITDA growth is also impacted by deleverage in operating margins just discussed.

Our non-GAAP EPS forecast includes an estimated cash income tax rate of approximately 15%, comprised of international income taxes and alternative minimum tax and state income taxes in the US.

The non-GAAP EPS forecast also reflects the dilutive impact of a full quarter of interest expense from the bond offerings we did in Q1, without any assumed share repurchases we may make using the proceeds.

We are targeting non-GAAP fully diluted EPS of approximately $10.95 to $11.75 per share, which at the midpoint is a decrease of 9% versus prior year.

Our non-GAAP EPS guidance assumes a fully diluted share count of 52.8 million shares, based upon yesterday's closing stock price.

We forecast GAAP EPS between $8.85 and $9.65 per share for Q2.

The difference between our GAAP and non-GAAP results is driven by non-GAAP adjustments that are detailed in our earnings release.

Consistent with past practice, we have hedge contracts in place to substantially shield our second-quarter EBITDA and net earnings from any further fluctuation in the Euro and British pound versus the dollar between now and the end of the quarter.

The hedges do not offset the impact of translation on our gross bookings, revenue, gross profit, or operating income.

They also do not hedge us against fluctuations in other currencies, and do not hedge our earnings beyond the second quarter.

Although we remain concerned about economic conditions in general, our forecast does not assume any further deterioration in macroeconomic conditions.

We will now take your questions.

(Operator Instructions)

Our first question is from Justin Post with Merrill Lynch.

You may begin.

Thank you.

When we look at your bookings guidance for 2Q, it looks pretty healthy and consistent with Q1.

But it does seem like gross profit is decelerating ex-FX.

Can you just talk about the dynamics there?

As you look at the marketing deleverage, are you seeing really pressure on ROI, or what's really driving that?

Is it mix?

Mix of businesses?

Or what's really driving that?

Thank you.

Dan, do you want to take that?

Hey, Justin.

In terms of gross profit, we're seeing very healthy performance there.

The impact of OpenTable is a little bit more significant in Q1, the inorganic impact, just given the normal seasonality of our travel businesses.

And in terms of the online advertising forecast, ROIs are the key driver there.

We don't go into all the building blocks behind what are putting the pressure on the ROIs, but it's a story we've been telling you now for a couple of years, and we saw it in Q1, and we're forecasting it to continue in Q2.

Thank you.

Thank you.

Our next question comes from Mark Mahaney of RBC Capital Markets.

You may begin.

Darren, I think you mentioned that Agoda bookings showed acceleration.

Could you give any more color on what's happening there, and also talk about the China outbound market, and the extent that's building up in materiality?

Thank you.

So why don't I -- thanks, Mark.

So first of all, the way I think about Agoda is more broadly how things are going in Asia.

And as you know, we have two big brands in Asia, Agoda and Booking.com.

And together, we have a really strong business.

Agoda has traditionally been a business of Southeast Asian bookers, but it's really expanded nicely to include a lot of north Asian bookers and Oceania.

At the same time, Booking.com, which started the European business, has had a lot of success expanding into Asia.

Really, the real strength of the two brands is in Asians moving around Asia.

You have a lot of movement right now between China and Japan, Taiwan and Japan, Korea and Japan.

There's a lot of movement also, Australia going to Southeast Asia, Southeast Asians also going to north Asia.

We participate then in a lot of the movement within Asia, and both brands continue to grow and have a lot of success.

China, specifically, is an amazing market.

You know we have our relationship with Ctrip.

We are constantly meeting with the teams.

I just got back from China, I met with James and Jane, and it's turning out to be a great partnership.

Our outbound business with them is up quite significantly year-over-year.

That said, we have more work to do still.

We haven't on-boarded Ctrip's inventory as fast as I had hoped.

There were a lot of issues we're working through.

We're also exploring the need to ramp up our over efforts in China to bring on inventory.

And also, Ctrip is not our only relationship in China.

We've got a lot of deep partnerships with various other sources of demand, so we're very bullish.

I believe The Group is really leading in independent travel outbound from China.

Most Chinese do still travel in packages, but over time that's going to change, and I think we're in a really nice position in that specific market, which is going to be likely in the next 5 to 10 years the largest outbound market in the world, and we're making sure that we're serving it as well as we can.

Thank you, Dan.

Thank you.

Our next question is from Tom White with Macquarie.

You may begin.

Thanks for taking my question.

Dan, can you maybe just clarify a bit about some of your comments around FX impact on EBITDA in 1Q?

It sounds like maybe it was less impacted due to FX.

I'm just curious, does that sort of reverse or how does that play into the Q2 guidance?

Quickly, on the European competitive landscape, one of your competitors is seemingly making concessions on their take rates, hotel take rates in Europe, to get more competitive.

Are you seeing any sign that's impacting your ability to, I guess, get share of rooms for given properties?

And maybe comment on how badly maybe your international hotel partners, do they need additional sources of distribution, generally?

Thanks.

Dan, why don't you take the first one?

I'll take the second one.

Sure.

Tom, on that first question, we give you a specific calculation for the impact of currency on the top line, both for gross bookings and gross profit.

It's easy for us to precisely calculate -- maybe not easy, but we can precisely calculate that, because we know the currencies that all of those bookings and gross profit are generated in.

It's a little bit more difficult at the bottom line, because particularly online advertising, we're making various assumption as to the currencies that some of the keywords would pertain to.

What we determined based upon our estimates is that generally the impact at the bottom line is similar to what we're quantifying for you at the top line.

In Q1, the impact is not as dramatic, because just seasonally less of our earnings are denominated in Euros in Q1.

So it's about 14 percentage points at the gross profit line.

You can assume it's something less than that at the EBITDA line.

Okay.

And Tom, on your question on competition in Europe, we haven't seen any specific impact.

We really set the low bar on take rates, and as we continue to grow in Europe, I'm sure there's a lot of pressure on our competitors.

It's hard to take commission that's start with a 2 in Europe when we're -- everything we have starts with a 1, but we're really the ones setting the standard, and I think there's probably -- competitors have to match that if they're going to ultimately get access to availability.

We've always believed that any hotel, any partner should have various sources of demand.

We don't cover every customer base in the world, et cetera, so we would encourage them to use channel managers, have all the sources of demand that they can find.

Of course, we want to fill our fair market share of those rooms.

So I don't see anything specifically that's coming from that, rather than just probably a long overdue balancing, rebalancing of the market as it relates to take rates of our business here.

I just got out of the market in Europe.

It's very healthy, and our position, I feel very good about.

Great.

Thank you.

Thank you.

Our next question is from Stephen Ju with Credit Suisse.

You may begin.

Thanks.

Darren, from a unit growth and units sold perspective, rental car days you still have paced to the growth of your hotel room nights sold, but more recently that has slowed.

Seems like that should be a less online penetrated sector in travel, so the growth rate should be higher as a result.

Can you help us reconcile what may be going on?

Is the supply a lot more constrained, or is online penetration a lot higher than we think?

Thanks.

Thanks, Steven.

I don't think I would take either one of those conclusions, because in both cases, even though I believe we're likely the leaders in rental car bookings in the world online, among independent parties, and certainly the same on hotel room nights, in neither one are we such a big player that it reflects either one market maturing faster than the other.

It's largely our own execution.

I'm actually really proud of the acceleration we're now seeing in rental cars.

In particular, our RentalCars.com business, as we've talked about before.

It used to be a very opaque model, and last summer we went through a transition to make it much more retail.

So adding reviews, adding brands, that was a lot of work but we feel really good how we've come out of that transition, and really improved their direct business, their loyalty.

Much more of, let's call it a Booking.com approach to rental cars and we're quite excited about the momentum.

But I don't think the market specifically -- neither one of them are we reaching any kind of feeling on potential, and really it's how fast and how hard can we execute to get to the ultimate potential of the business.

Just one other point on that, Stephen.

Our retail unit growth for rental car days is much healthier than the consolidated growth rate that we quote.

Name Your Own Price rental cars are down year-over-year, because of lack of availability of discounted prices.

So the growth rate for retail is more similar to what you're seeing with the hotel business.

Thank you very much.

Thank you.

Our next question is from Eric Sheridan with UBS.

You may begin.

Thanks so much for taking the question.

Maybe one big picture topic for Darren.

Given your continued comments around marketing deleverage, and appreciated the color around direct versus paid, how do you think longer term about directing more of your business to the direct channel versus the variable channel, and how might you accomplish that, and how might mobile fit into that, as you evolve over the next couple of years?

Thanks.

Thanks, Eric.

At the very highest level, our business is becoming more direct, and that's also allowing us to lean into paid channels more.

What we like is the combination of online marketing, as well as our offline marketing, is helping to build our brands, and we always judge things on the basis of earning positive ROI in the transaction.

So if I can get positive ROI on the transaction and there's enough opportunity to do that, we're going to lean into it.

It's like fishing, you bring the fish in, and then you actually have to work with the customer to make them loyal over the long term.

That rhythm in our entire business is working very well.

Obviously, the more direct business you have, at some point there's an end game, where you are completely direct, but that obviously dramatically improves the marketing economics.

But we're not at that time, and we're still very much having to search out more and more customers to bring onto the platform.

So that's one area.

I don't know, Dan, if you want to make a comment as well, on marketing?

No, I'd say the same thing.

It's likely that some business forever will come to us through paid channels.

So many people just use Google as their entry point to the Internet, and with meta search players and Trip Advisor just having very strong brands too, some customers will always prefer to start there.

We like the trends that we see in terms of people continuing to increasingly come to us directly.

Your second part of your question was on mobile.

Obviously, there's a lot of talk -- if you get somebody on a mobile app, that in theory is the panacea, because then their entry point to the Internet is always through you, and that's a very valuable customer, but to get people onto your mobile apps itself is marketing spend.

Also there's a large chunk of business that still happens through mobile web, and we're a big partner of, and particularly Google's but other search engines and meta engines.

I feel really good about how our mobile web product performs.

I don't think there's a place specifically in our business.

We're not a high frequency thing, like a Facebook or a Twitter.

Our business is never going to end up being 100% app, and is always going to be a nice balance between web and app.

I should say a couple exceptions to that in the portfolio.

OpenTable is very heavy app, because of the nature of a restaurant reservation.

Actually KAYAK is very heavy app, because people are always checking flight schedules.

It's a much more frequent occurrence than actually going out and booking a hotel room or renting a rental car.

And that's why mobile web, by the way, performs a lot like desktop web.

It's a different product you're buying, but you're holding it to similar ROI standards, and spending as well.

Thanks.

Thank you.

Our next question is from Naved Khan of Cantor Fitzgerald.

You may begin.

Can you talk a little bit about the vacation rental business, and how meaningful of a conduit is it to the acceleration in room nights?

Okay, Naved.

We're really very happy with the progress there.

As I mentioned, we're in now over 275,000 properties.

I always like to remind people, the way we count properties, I would count an aparthotel as a property, or a block of apartments.

We actually have over 1 million rentable units.

We actually have a very competitive supply, relative to others in the market.

Our vacation rental business, we don't have a number to announce, we talked about maybe each year we'll talk about that.

But I will say it's growing faster than our core business.

It is a product that's very demanded by our customer base, and we feel like our tools and our various rhythms are getting better and better at ingesting this kind of stock.

We have a lot of innovations now we're working on to get to the single owner, single property market, which is a whole new market that we haven't, as to date, been addressing as well.

Most of our vacation rental homes are through property management companies, but there's a large segment of the market where the homeowner actually manages their home.

So really excited about it.

It seems to -- our customers seem to want the product, which obviously is important.

To balance out the supply and the demand side and we're going to continue to push there and innovate in the coming months and quarters.

Thank you.

Thank you.

Our next question is from Mike Olson with Piper Jaffray.

You may begin.

You mentioned Priceline brand domestically is facing some headwinds right now, especially in the opaque business which makes sense, but you have you some new management of that brand to try to revitalize growth.

Can you talk more specifically about how the Booking.com brand is doing in the US, and how the initiative to grow that brand domestically is maybe comparing to your expectations at this point?

Okay, Mike.

So we don't release specific numbers, but generally speaking, if you dig around and you ask the average US hotel, they would generally say we're the fastest growing of the players.

We're growing off of a smaller base.

We're trying all sorts of things in the US.

For us, it's a big growth market, because we're just -- we're starting, we under-index in the US, and it seems like it takes time, but the market is also sticking with the American customer base.

So we're excited.

It's a super high priority on my list.

The Booking.com model works particularly well in really small countries that don't speak English, and people who move around countries.

And for us, we generally under-index in really large countries where people don't leave the country.

And that's where our growth -- one of the angle of our growth potential.

That's why we focus so hard on China, Japan, United States, even Germany, to really work on getting that domestic booker base as well.

So far, so good, but like everything in this business, it's a lot of hard work and a lot of small steps, and we continue to invest and push forward in the US market.

Thank you.

Thank you.

Our next question is from Douglas Anmuth with JPMorgan.

You may begin.

Thanks for taking the question.

Dan, can you talk a little bit more about the spending and the profit guidance for 2Q, and you obviously pointed out the lower ROI for advertising, as you have for several years now.

But is there a difference in the marketing strategy in this 2Q versus in the past, and how do we think pout how much impact here is coming from OpenTable and Booking Suite spend?

And I know of course you're not guiding for the rest of the year, but can you just comment on how you're thinking about that more in the back half?

Thanks.

Sure, Doug.

So spending for Q2, starting off with other OpEx, non-advertising, you get a sense from what you see in Q1 for what you can expect in Q2, and then pressure should subside, as we move beyond that and we lap the OpenTable acquisition.

In terms of advertising, no change in our approach.

I actually said that in our prepared remarks.

We've been very consistent all the way through.

One thing that is different in this quarter is that there was more of a ramp in offline spend.

So some markets that we've introduced recently, France for one, Germany, which we launched in the back half of last year, so now we're spending in Q2 this year against no spend last year, and we'll be looking to roll out into additional markets as well, which you'll see as we proceed through the quarter.

So that's having more pressure on Q2 margins than it did on Q1.

Okay.

Thanks, Dan.

Thank you.

Our next question is from Ross Sandler with Deutsche Bank.

You may begin.

Just two questions.

One, sticking with the marketing, on the offline campaign, can you talk about the impact that this is having on the overall business?

I guess how many countries you're in right now, and are you seeing any improved efficacy with your online in the countries where you had the TV going for some period of time?

And then the second question is around the newer hotel software business.

Buuteeq plus the other pieces.

So can you just talk about the strategy around this area?

Is the goal to improve the transaction side of the business, or could this get built up to be a meaningful standalone business within the Group?

Thanks.

Okay, Ross.

So first of all, the offline, again this is just a Booking.com statement.

The markets we're in now are US, Canada, Australia, the UK, Germany and France.

And the way we think about it is, obviously we have a lot of micro data.

So we're trying everything we can to measure the effectiveness of running an ad on this channel, versus that channel.

We built a great team that can optimize the way we spend our advertising, relative to the bookings we get from that advertising.

Then when you go to the macro level, the goal is to hit a return on advertising standard that adds both our online spend and our offline spend.

Of course, what you want to do is have a higher return on that total spend, after you begin spending offline, than you did when you only spent online.

You always get a combination of more and more of your business coming direct, but also an improvement in your online spend, because people might click on your ad because they you saw you on television when they might not have clicked on your ad, because they're like, who are these guys?

So we've been measuring that.

Usually takes some months to figure out that you're into a positive ROA territory, and with almost every market so far, we've proven that we can get to positive ROA.

Maybe not always in 12 months, but we can ultimately get to positive ROA, and that's what encourages us.

It doesn't mean we can spend offline today and tomorrow our ROA is higher than it was before, because it doesn't happen that fast.

That's the big challenge with offline marketing.

But more or less, we now have enough experience to know that macro metric is getting to where we want to do it, and that's why we continue to lean into markets.

And ultimately the ROA improves because of the clicking, but again, we're getting more and more direct business.

Booking Suite, so the play there, there's two sides to it.

One is building a SaaS business.

This is a software business, and we think because we already have a sales force in place, which is the toughest thing in a SaaS business is distribution, that's where all the costs go.

But we have a sales force in place, so we can have specialists in our sales force and we can go out and talk to many, many hotels everywhere in the world, and have a set of specialists help with that.

But we also already have a lot of the hotel content.

We have the availability.

We have a booking engine.

So we can build a hotel site very fast, with almost no variable cost.

That's why the Booking Suite product is basically free, the base product, and then we earn money off the transaction, and we've done all of our modeling that will be a good material business for the Group.

I don't see it likely ever being bigger than our core transaction booking business, but it's a sizable business on its own.

The other side of the reason of doing Booking Suite is helping our partners become more capable with technology, and the more capable they are with technology and keeping their calendars up-to-date and keeping their pricing right, the more able they are to plug into our platform.

And a third thing, but it really is the third, is we can do all of this and save our partners money, and they can then trust us more as a Company, that we do more than just building transaction.

We actually make it easier to rent a property.

That's another benefit.

So it's really three-fold.

But we're not just doing this to be nice.

It's a real business, and we expect in, let's call it the medium to longer term, to have a pretty substantial impact on our overall business.

Great.

Thank you.

Our next question comes from Ron Josey of JMP Securities.

You may begin.

Thanks for taking the question.

I wanted to ask on the pricing parity clauses, I think the agreement this quarter with the EU.

Feels like hotels now have somewhat more control on inventory availability while requiring the same price.

I'm just wondering what's changed, and what the potential impact could be.

A quick follow-up on Ross' question around Booking Suite.

I know you said it launched this quarter, and the medium long-term could be bigger.

Where are you in sort of -- it launched but what does that mean?

Are the sales force selling it?

That would be helpful.

Thank you.

Okay, Ron.

So first on the parity clause, we're pleased with the outcome.

We wouldn't have proposed it otherwise.

For us, parity is not a construct of the online industry, it's actually the whole travel industry.

Like if you had to go to a site that sold a Delta airline ticket and it was always $10 more, it's hard to be in business.

Apple has the same thing.

If you go buy a Mac at an Apple Store, and you go to a third-party distributor and it's $10 more, there won't be any third party distributors.

Parity is a very important construct that levels the playing field, and allows us to really reach our primary objective.

Our primary objective is to always make sure our customers get the best price.

We can't be in business if our customers feel like they're playing more using any of our assets.

So we worked through this compromise, I think it was well understood by the authorities that there's a free riding problem in our business like ours.

If our suppliers who basically load the prices onto our system then load higher prices on our system and lower prices on their system.

But more importantly, regardless of whether there's parity or not, if a hotel is on our system and the prices are too high it won't convert, and if it doesn't convert, it won't show up because there's a ranking mechanism anyway that always makes sure that the best product moves to the top.

And our best partners have the best product have a very strong incentive to give our customers good value, because our customers won't buy things that aren't good value.

So there's already a really strong reinforcing element.

I don't see this as having any significant impact on our business.

But it's a moving target.

There's always new discussions and things, but the way that our business runs and the reason customers use our product, they want to have confidence that we're getting the best pricing, and this agreement doesn't at all affect our rights or ability to make sure that they get the best price, and that's what's important.

And then on the Booking Suite topic, we don't release right now how many sites we're putting out.

Maybe in a few quarters we'll give everyone an insight into that, but it's off to a very strong start.

So it's promising.

The team in Seattle, which was Buuteeq, is our back end team, and we now have salespeople out in the field.

They're really a second tier sales force.

They're not in every office but they're there in when a warm lead happens, it get handed off to somebody who really knows the depth of what they're talking about.

We're in the bigger countries, but in the smaller countries we're just getting to that.

Our teams are just getting trained up on that, so it's sort of a rolling motion.

But early signs are very, very positive.

And the demand for the product is extremely strong, which is a good feeling, because it shows our partners trust us, and they recognize that this value proposition is really outstanding for people who have a website in the accommodation arena.

Thank you very much.

Thank you.

Of your next question is from Heath Terry with Goldman Sachs.

You may begin.

Great.

Darren, I was hoping you could give us a bit of an update on how your thinking has evolved about the lifetime value of mobile app customers.

I know in the questions you've answered, before you've generally talked about CPA as the primary value that you're driving towards, driving your ROI towards.

Wondering if, as you've learned more about the way mobile customers act on apps, and have a better understanding of sort of cross-platform attribution, if the way that you're thinking about mobile app acquisition or customer acquisition, relative to that LTV, has changed?

Okay, Heath.

Thanks.

Yes, what we find, at least in our business, and this is now more a Booking.com, Agoda, rental car statement.

I'll put aside KAYAK and OpenTable because of the aforementioned, they're primarily on app, and they get the really high repeat frequency type customer, which is a different set of behaviors.

But in our business, our most loyal customers, it's a bit of a circular arc because our most loyal customers are the ones that carry the app, and our most loyal customers are the ones that bounce over all the screen.

So the app for them is not just a booking experience.

It's the thing that they carry their reservation in.

We now have travel guides, so the travel guide is in the app.

When they check into a hotel, immediately it says, are you happy or sad?

So all of these things come with the app, and help our most loyal customers that are often the people who booked with us already many times, continue to repeat with us.

So it would be a stretch to say that everyone who uses the app is a more loyal customer, because the input to that generally is the more loyal.

But we do find generally now going away from app and talking about mobile more generally, the move, the biggest thing that's changing in our business is the move from a single screen world, where you only did one thing with us, which was make a booking, to a multi-screen world, where you have an end-to-end experience, from looking to booking to enjoying your trip on the ground, is giving us more and more loyalty.

People realize there's lots of reasons to use our products, but when we can actually make the whole experience better, people see that, wow, this is just a better way to do things.

And it's hard to make that multi-screen experience all tie together, and we are certainly not complete with that work.

But it's a huge differentiator, and for a big player like us we have the assets and the resources to invest to make that seamless, and for you to be able to do that anywhere you travel in the world.

This isn't easy work, by the way, because all of these softwares don't naturally speak with one another, and you've got to get the right cloud-based architecture where your account can sit in the cloud, and no matter from you're on the app or the Booking Now or you're on an Apple watch, or you're on the website, that your account immediately gets tied together.

That's work the team has done and I think does reward the bigger players who can really plumb that new end-to-end multi-screen digital experience for our customers.

So I'm excited.

For e-commerce players, mobile is a real positive.

When you're in the media business, mobile has this extra tradeoff, that it's harder to convert something through media on a smaller screen.

That's obviously, you're seeing that trade-off between those who own the transaction those who don't.

Great.

Great.

Thank you very much.

Thank you.

Our next question is from Kevin Kopelman with Cowen & Company.

You may begin.

Could you talk broadly about how you're thinking about margins in the vacation rental business, compared to hotel booking, and is there any difference in how you approach ROA for that business?

Thanks.

Okay.

Well, Kevin, yes, we -- so first of all, you start out with hotels, and then below hotels, there's a whole collection of things that you could call self-catered products.

First just commenting on B&B's and apartments and things like that, we see that the commission levels and the take rates in that space are equivalent to the hotel space.

We don't feel any extra pressure.

Again, that's all with the lens that we have a very low bar as it is, around the world, compared to most of our competition.

But we don't feel pressure to go lower.

When you get into the single vacation home space, we still have generally signed up, without having to dilute our take rate much.

We have a little bit more pressure there, because the average vacation home owner, it's a marketplace with a lot of friction, and a lot of uncertainty.

We're the first and only transaction engine that works -- that's instantly verifiable, so that property has actually a calendar that works.

There's no back and forth with the consumer, like once the consumer buys, then they have to pay.

There's a lot of work still yet to be done, and a lot of these players are used to marketing themselves through a classified ad, or on an Internet website, and they're expecting phone calls, or maybe it's some of them might be on AirBNB and there's different economics in that, that I would say, let's say that the story's still out in the vacation home market, but we've at least to date been able to approach it in a similar way.

The other argument of vacation homes is the length of stay is a lot longer.

The ADR is potentially higher, and therefore, they would argue the take rate percentage should be lower, but that the absolute take rate is actually very healthy relative to the booking.

Long answer to the question.

I don't feel a lot of pressure, but in the vacation home, single owner market we of course will compete as aggressively as we need to, and be smart about the economics.

Okay.

Thank you very much.

Thank you.

Our next question comes from Brian Nowak with Morgan Stanley.

The first one, just to go back to the gross profit guidance in 2Q, and what we saw in the first quarter, it looks like constant currency gross profit per room night, if I back out OpenTable, was about up 1% year on year versus 4% last year.

Is that geo mix from Agoda, or is there something else going on that we should make sure we consider in our 2Q modeling?

And then a higher-level one, as you talk about strategies that drive more direct business, any thoughts about offering a broader loyalty program for Booking.com or how do you think about loyalty programming at this point?

Dan, why don't you take the first one, and I'll take the second one?

Sure.

So Brian, gross profit relative to room nights, the room nights are on an as-booked basis and the gross profit is on a stay basis.

So you've got a little bit of a mismatch there.

We had a strong quarter with accelerating growth, and to a not insignificant degree, those checkouts are going to occur in Q2 around Easter, and then Q3 around summer.

And the other factor is, as I mentioned before, OpenTable has a more dramatic inorganic benefit to Q1, because the travel businesses are seasonally smaller in that quarter, and so that's gross profit that's in our numbers, with no room nights associated with it.

And Brian, on loyalty programs generally, so we do have a couple in the Group.

Agoda has a loyalty program, although we're slowly phasing that out.

OpenTable has a points loyalty program.

This is in the more traditional earn points, earn nights, get things free.

Booking.com specifically, we believe that kind of mechanism for the really infrequent traveler can be as much of a turn-off as a turn-on, because they may only do two bookings a year.

They may be wanting to do one booking, and they maybe do it quite infrequently, and for them, what they want is just a great experience.

So we focus -- to drive loyalty, we focus very much on the product, and getting them amazing pricing.

When you go to a destination, it's not about what this hotel costs, it's about what does the selection and assortment allow me to buy, and our users love the fact that they can find that place that directly matches what they need, at a great value.

And that's what's driven our loyalty over time, has really been product experience.

That said, Brian, I can tell you haven't booked five times on Booking, because if you do within a year we have a program called Genius that we offer in more of a surprise and delight fashion to our most frequent guests, and that allows them access to other closed user group rates that are supplied by our hotel partners.

Our hotel partners are really interested in our most frequent guests.

It improves their conversion and therefore improves their placement on our front end to all customers.

And that's something we've had in the market now going on a couple years, and has been really successful.

That's been our approach to date.

It's not that we won't change that.

We're always questioning these things.

Rocketmiles we bought, is a really interesting small Company in Chicago that uses airline miles.

We're interested in it because it's a real fast-growing very unique business, but we're obviously now bringing in some people with some deep expertise within Rocketmiles, many of who came from the airline frequent flyer miles business.

We'll see if we learn anything from that, that might impact our thinking differently in the future.

Brian, one follow-up to your first question which is what you might have been getting at.

No substantial change in our take rates in Q1 or Q2 forecast.

Okay.

Thanks.

Thank you.

Our last question will be from with Manish Hemrajani with Oppenheimer.

You may begin.

Thanks for taking my question.

As you look at room night growth up 25% year-over-year, how much of that growth has been driven by new properties, let's say properties that have been on the platform for less than a year?

And how much of the growth has been driven by older properties?

Okay, Manish.

I'll take that.

We don't divulge that specifically, but at the higher level, I have shared this before, that if you were a property on Booking.com five years ago, on average, every year, we've given you more bookings.

So if you're a brand-new property you come on, and that's always been our goal, is to have enough demand so that all of our existing properties don't feel like we're taking business away from them, but they continue to get more, and we can always feed our new properties.

When you look at our property growth, that 40% we talked about, the properties are getting smaller and smaller on average.

It's not that we aren't signing up big hotels, big resorts, but on average, that's getting smaller.

Our unit growth in terms of bookable properties is not growing at the pace of our business, which therefore, allows us to continue to keep our property partners happy, is the way to think about it.

And then can you comment on the recent consolidation in the space, and what should we expect your response to be, especially in markets where you're under-indexed versus the global travel market share?

Yes, as I said on the last call, we think the consolidation clarifies competition.

It's not the strategy we're following.

And we continue to stay focused on what we're good at, and I -- even if the three players are now one player, we have the same strategy in the United States we've always had.

It hasn't changed our product, it hasn't changed our value proposition and we continue to push forward, and I would say quite successfully.

By the way, I say that, not saying the other strategy is bad.

It's just different than what we've been doing, and the space that we occupy is very large.

This has been said many times.

But it's either $1 trillion or $1.3 trillion.

Even if you add our largest competitor with us, we still make up less than 10% of the opportunity.

So it's not like we're running against each other every day.

It's more our segment of the business, which is online travel, largely independent travelers, people who leverage the Internet, has a nice tailwind behind it, and we're making sure that we do our best to capture as much of that as possible.

Thank you.

Thank you.

This concludes the question-and-answer session.

I would now like to turn the call back over to Darren Huston for closing remarks.

Thank you for all joining us and wanted to -- I know a lot of our employees and others join this call as well.

I want to thank everyone for a lot of super hard work in Q1, and we're looking forward to a really strong Q2.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and have a wonderful day.