Booking Holdings Inc (BKNG) 2015 Q2 法說會逐字稿

Welcome to The Priceline Group's second-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, 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 Investors section of The Priceline Group's website, www.PricelineGroup.com.

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

Go ahead, gentlemen.

Thank you very much and welcome to The Priceline Group's second-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's CFO, Dan Finnegan.

The Group reported consolidated gross bookings for the second quarter of approximately $15 billion, up about 26% on a constant currency basis, or about 11% year over year in US dollars.

Our customers booked accommodation reservations for 113 million room nights in the quarter, up 26% year over year, reflecting slight acceleration for the second consecutive quarter.

Non-GAAP earnings per share were $12.45, down slightly versus prior year, surpassing FactSet consensus estimates of $11.85 per share and our guidance for the quarter.

Our US dollar denominated growth rates were again impacted substantially by the strong dollar.

Our international business recorded 30% gross bookings growth on a constant currency basis, up from 29% last quarter.

Booking.com continues to benefit from further penetration of its existing partner relationships, as well as growth in its accommodation supply.

Booking.com's platform now has about 707,000 hotels and other accommodations in 220 countries and territories, up 35% over last year, including 313,000 instantly bookable vacation rental properties.

Vacation rental properties grew 62% year over year, and now represent 1.7 million rentable units within these properties.

In the last 12 months, about 50 million room nights for vacation rental properties were booked on Booking.com and Villas.com, up 39% year over year.

This quarter, we began experimenting with self-onboarding of individually-owned vacation rental properties, subject of course to a set of quality checks on our side and the ability of the property to be instantly bookable.

We already have an encouraging pipeline of vacation rental properties to activate via this channel.

And we are hopeful that this functionality will help us scale our property acquisitions even further.

BookingSuite, our partner-facing software services platform, is off to an impressive start, and continues to exceed our expectations, with strong demand and streamlined execution by our teams.

We also added to our BookingSuite offering in Q2 with the acquisition of PriceMatch, a simple cloud-based tool that uses big data to help our partners improve their properties' production through enhanced revenue management.

International results also benefited from Agoda.com and RentalCars.com.

Agoda delivered a solid quarter, consistent with Q1, with special attention to the collection of private sale deals for its logged-in customers.

Strong momentum continued at RentalCars.com, which accelerated for the fourth quarter in a row, furthering its lead as the world's largest dedicated site for multi-supplier rental car reservations.

Priceline.com continues to be a tale of two cities, with strong retail performance offset by a shrinking but still large Name Your Own Price business.

The Priceline.com management team is making targeted investments as part of its plan to drive innovation into its business and to solidify its position as the best site for travel deals in North America.

There's a new level of energy at the Company, and we expect great things in the coming quarters.

KAYAK delivered an exceptional bottom-line performance in the quarter, which exceeded our expectations, while OpenTable continued to produce double-digit domestic diner growth.

After some amount of work to transition its underlying B2B and B2C infrastructure, it's on track to begin launching new international markets later this year.

We took some steps in the quarter to further expand our growth in Latin America.

Booking.com launched a TV advertising campaign in Brazil, while the Group invested $60 million in a minority stake in Hotel Urbano, one of Brazil's largest and fastest-growing online travel companies.

Our investment includes an exclusive commercial partnership, whereby we will provide Hotel Urbano customers access to accommodations outside of Latin America.

Finally, and importantly, it is worth commenting on mobile.

It is difficult to overstate the importance of this trend.

Today as a group, about one of three bookings of hotels, rental cars, and restaurants happens on a mobile device.

At current run rates, this will be more than half of our business in only two to three years.

On a Sunday just a week back, we completed 300,000 transactions gross of cancellations on mobile at Booking.com for the first time.

All of our brands are investing heavily in making our products relevant to consumers across all their screens in a connected fashion and in ways that are industry-leading.

Since the end of Q1, we repurchased about $1.35 billion of our common stock, and have an authorization of $1.4 billion remaining for future quarters.

The Group performed well in the second quarter, on both the top and bottom lines.

We'll continue Booking.com's successful foray into brand advertising in certain international markets, and invest aggressively in online variable channels to profitably build our book of business for the seasonally-strong third quarter.

We remain committed to striking the right balance between top-line growth and bottom-line profitability.

And you will see, in particular, more stability in non-advertising OpEx percentage in the second half, as we anniversary the OpenTable and BookingSuite investments.

We believe we are making the smart and sustainable investments today that will extend our lead as the world's largest online travel business for years to come, while also delivering healthy returns for our shareholders today.

I want to thank our employees around the world for their hard work and dedication.

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

Thanks, Darren.

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

We've talked the last couple of quarters about how significantly our US dollar reported results are impacted by extreme currency volatility because about 90% of our gross bookings and operating income are generated by our international brands.

Our two most impactful currencies, the euro and the British pound, were weaker by about 19% and 9%, respectively, for Q2, as compared to the prior year.

Many other important currencies in which we transact were also significantly weaker versus the US dollar in Q2 relative to last year.

The strong US dollar means our gross bookings, gross profit, operating expenses, adjusted EBITDA, and non-GAAP net income mathematically translate into significantly fewer dollars than they would have at last year's exchange rates for Q2, Q3 and the remainder of the year.

Since our expenses are denominated in foreign currencies on a basis similar to our revenues, they 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.

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 constant currency growth rates for gross bookings, international gross bookings, and gross profit.

The Priceline Group performed well for all of these key metrics in Q2.

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

Room night growth was strong in Q2 across all our key regions.

Room nights booked grew by 26% in the second quarter, accelerating slightly compared to the 25% growth rate for Q1.

Rental car days grew by 20% in Q2, also accelerating compared to Q1 growth of 18%.

Average daily rates for accommodations, or ADRs, for Q2 2015 were up on a constant currency basis by about 2% for the consolidated Group.

ADR trends expressed in US dollars would obviously look significantly worse, based upon the currency dynamics I just discussed.

While we were in the midst of this period of extreme currency volatility, our growth expressed in constant currency gives a truer picture of our fundamental business performance.

It is more in line with what you would expect, based upon our strong unit growth, and constant currency ADR growth.

Specifically, our Q2 gross bookings grew by about 26% on a constant currency basis, but by only about 11% expressed in US dollars compared to prior year, due to the stronger dollar.

Similarly, international gross bookings grew by about 30% on a constant currency basis and by only about 12% expressed in US dollars.

Gross bookings for our US business grew by 1%.

Similar to recent quarters, the US results are a mix of growth in retail room nights and rental car days, offset by declines in Name Your Own Price services.

In addition, lower airfares impacted retail air gross bookings growth, but have no impact on gross profit.

Gross profit for the quarter was $2.1 billion, and grew by about 26% on a constant currency basis, and by 11% in US dollars compared to prior year.

Our international operations generated gross profit of $1.8 billion, which grew by about 26% on a constant currency basis and by 8% in US dollars compared to prior year.

Gross profit for our US operations, including OpenTable's US business, amounted to $303 million, which represented 32% growth versus prior year.

OpenTable generated worldwide revenue in Q2 of about $62 million.

Non-GAAP operating income amounted to 37.3% of gross profit for Q2, which is 469 bps lower than last year.

Online advertising grew faster than gross profit due to lower ROIs, and gross bookings acceleration that partly benefits revenue in Q3, when summer travel takes place.

In addition, as we've highlighted over recent quarters, we are investing in OpEx to add people, offices and IT capacity, to build up the capability of our core travel business to handle future growth.

Q2 also reflects the leverage from the inclusion of OpEx for our OpenTable and our booking suite of hotel marketing services, which are currently in investment mode as we invest to plant seeds for future growth.

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

Adjusted EBITDA for Q2 amounted to $805 million, which exceeded the top end of our guidance range of $765 million, and represents a 1% decrease versus prior-year, reflecting the significant foreign currency translation impact of the stronger US dollar.

Non-GAAP net income decreased by 2%, and non-GAAP EPS decreased by 1%, including interest expense from our recent bond offerings and the beneficial impact of lower share count from stock repurchases.

In terms of cash flow, we generated approximately $702 million of cash from operations during second quarter 2015, which is about 2% above last year, and is also impacted by unfavorable foreign exchange rate translation.

We invested $53 million in CapEx, and repurchased 720,000 shares of our common stock for $849 million in Q2.

Thus far in Q3, we have purchased an additional 436,000 shares for $500 million.

We expect to execute the remaining $1.4 billion of our $3 billion common stock buyback authorization at a pace that makes sense based upon the price at which our stock is trading, available cash in the US, and potential other uses for such capital.

Our cash and investments amounted to $9.6 billion at June 30, 2015, with about $1.9 billion of that balance in the US.

During Q2, we entered into a new $2 billion revolving credit facility to replace our existing facility which was expiring next year.

The facility has a five-year term and provides us with significant additional financial flexibility at a reasonable cost.

Now for Q3 guidance.

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

Our room night growth has been remarkably resilient, ranging between 24% to 27% over the last four quarters.

Our guidance reflects another strong quarter of growth, but assumes that our growth rates will decelerate, mainly due to the size of our business and consistent with long-term trends.

Our Q3 forecast assumes foreign exchange rates of $1.09 per euro and $1.56 per British pound for the remainder of the quarter, which would result in average exchange rates that would be weaker by about 18% for the euro and about 7% for the British pound as compared to the prior year.

I highlight that the euro exchange rate is worse than the $1.12 that prevailed when we last reported, and most analysts updated their forecasts.

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 Q3 and the remainder of the year.

Barring further deterioration in exchange rates, we believe that year-over-year currency comps will become less challenging after Q3.

For Q3 guidance, we are forecasting total gross bookings to grow by 13% to 20% on a constant currency basis, and by minus 1% to positive 6% in US dollars, with US gross bookings about flat with prior year.

We expect international gross bookings to grow by 16% to 23% on a constant currency basis and by 0% to 7% in US dollars.

Our Q3 forecast assumes that constant currency ADRs for the consolidated Group will be up by less than 2% compared to the prior-year period.

We expect Q3 revenue to grow year over year by approximately 1% to 8%.

We expect gross profit to grow by 19% to 26% on a constant currency basis and by 3% to 10% in US dollars.

We expect the declines in our Name Your Own Price services will continue to negatively impact revenue growth rates in Q3.

We expect about 160 bps of deleverage in non-GAAP operating margins compared to prior year, expressed as non-GAAP operating income as a percentage of gross profit, which is a nice improvement from the margin pressure we have seen the last couple of quarters.

The deleverage is mainly attributable to assumed continued pressure for online advertising ROIs, but to a lesser extent than we saw in Q2.

As we indicated on the last couple of earnings calls, margin pressure from non-advertising OpEx diminishes significantly in Q3.

And we expect that trend to improve further in Q4.

Over the longer term, we expect that our non-advertising OpEx will generally grow more slowly than our gross profit and be a source of operating leverage.

Our forecast implies a 52% operating margin for Q3.

The strong operating margins for our Business relative to our competitors positions us well to succeed over the long term in a very competitive market.

Our adjusted EBITDA is expected to range between $1.425 billion and $1.525 billion which, at the midpoint, is an increase of 3% versus prior year.

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

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.

We are targeting non-GAAP fully-diluted EPS of approximately $22.95 to $24.45 per share, which at the midpoint is an increase of 7% versus prior year.

Our non-GAAP EPS guidance assumes a fully diluted share count of 51.6 million shares based upon yesterday's closing stock price, and reflects the beneficial impact of about $1.7 billion of share repurchases we have made thus far this year.

We forecast GAAP EPS between $20.84 and $22.34 per share for Q3.

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 third-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 third quarter.

Our forecast does not assume any significant change in macroeconomic conditions.

One housekeeping matter.

Darren mentioned that Booking.com's platform now has over 707,000 hotels and other accommodations, including 313,000 vacation rental properties.

In September, we intend to adjust our methodology for reporting property counts to include properties that are contracted with Booking.com but are not currently available to be booked on our site.

For example, we will now include properties in our count that are temporarily unavailable on our site because we filled all the rooms allotted to us, or the property is closed seasonally or for renovations.

Under the new methodology, we would have reported about 767,000 properties, including about 353,000 vacation rentals.

Our prior-year property count on a consistent basis is about 549,000 properties, including about 206,000 vacation rentals.

We believe this change will remove volatility from our property count reporting, and will reflect a more consistent count of our total active partner relationships throughout the year.

This is a small but important adjustment, as we continue to add more and more long tail and sometimes seasonal business.

We will now take your questions.

(Operator Instructions)

Our first question is from Eric Sheridan with UBS.

You may begin.

Thanks for taking the questions.

Darren, appreciated the color on mobile and how big it's becoming inside the business.

Wanted to know what you were learning as mobile became bigger in terms of where money is best spent on the marketing budget to earn sufficient ROIs in mobile, how that might develop longer term?

And also Booking.com was mentioned on Facebook's earnings call as a new partner.

You've talked about social media in the past and what that might mean as a marketing channel for Priceline.

Wanted to know if we can get some updated thoughts there?

Thanks.

Thanks, Eric.

So I think it's important on mobile to -- obviously there's web-based mobile and there's app-based mobile.

And web based mobile still largely and traditionally is through Google and other search engines, and I have to give Google a lot of credit.

That's working better and better for us, where web-based mobile is a highly converting, big base of transactions for us.

It ends up in the hotel space, transactions are relatively infrequent, so a pretty significant percentage happen on web based, particularly customers we've never seen before.

Our app-based customers tend to be our more loyal customers, and the place that we build those is mostly from our own property sites.

We do go out and buy app downloads, although app downloads don't tend to be very economic because they often get downloaded and then not ultimately used, at least in that space.

This is basically the world of accommodations.

It's very different for KAYAK and OpenTable, primarily because both those businesses are a much higher-frequency business.

They're very heavily skewed to app, and the whole business of getting people to use the KAYAK app to check for flights, or OpenTable to book restaurants is another dynamic, and both of those businesses focus heavier in confined economics and actually getting downloads and building lifetime value to customers that are app-based.

And those app-based downloads, there's a little bit of that comes from Google, but a lot has come from new places like Facebook and other partners.

On Facebook specifically, we generate most of our demand from basically search or travel.

And travel includes everything from TripAdvisor down to EasyJet, and airlines and trains and other things.

So we've always dreamed of a time where we could access demand from any of these big horizontal audiences.

Facebook's obviously one, Twitter's another.

You can think of WeChat, or any of these other things existing.

Or even the big portals, Yahoo, MSN as places, but we've always struggled.

And I was quite skeptical but I have to give Facebook a ton of credit.

We're finally getting some good business out of Facebook.

Most of it is remarketing or remessaging.

We've now talked with senior management at Facebook about how do we get intent out of their network, and that's an area that both us and them are focused on.

And the degree to which we can crack the code on intent would make Facebook a real serious source of demand for us as a business, and obviously as a performance marketer, that would be a big deal for Facebook as well.

I'm excited the progress we're making.

They're investing a lot of time and energy into it, which I appreciate, and hopefully by cracking another source of demand, it allows us to also diversify where we spend our money to find hotel customers.

Thanks a lot.

Thank you.

Our next question is from Mike Olson with Piper Jaffray.

You may begin.

Good morning.

So you mentioned strong continued growth in vacation rentals, and you're clearly putting some effort into that space.

How would you describe just in general your strategy there, and how your partnership with HomeAway fits into that.

Overall, what kind of reception are you seeing from travelers on them seeing vacation rental inventory, and has there been any reaction from your hotel partners?

Thanks, Mike.

First of all, we started out as being a hotel-only site, but it's been some years now that we've built out other forms of multi-room accommodations and even in our old -- in the old Booking.com model, even said online hotel reservations was our sub tag.

But starting even four or five years ago, we started adding B&B's, we even have tree houses and igloos and stationary boats and basically other things that you could book.

So for us, we went from being the world's largest online hotel player to now being the world's largest player in online accommodations, so moving into vacation rentals is a very natural thing for us.

It's kind of going down the pyramid, and ultimately getting into this self-catered product.

And for us, we're building it out in an instantly bookable, verifiable way, which is very different than what, say, a HomeAway or an AirBNB is doing.

We have also focused a lot on making sure the customer experience didn't have all the friction.

If you can think of booking a vacation home and having to put down a deposit and having multiple e-mail exchanges, and not really knowing you've got the property, not really having the trust.

We're doing it in much more of a pure e-commerce way, just trying to create it ultimately like booking a hotel.

Through that strategy, we've had to obviously take a lot of friction out of the industry and change the way that players think about that, and it's a lot of work, because for a vacation rental owner you've got to maintain additional calendar, you can't over book people.

When you say the place is available at a certain price, it has to sell at that price.

Slowly, we're seeing the ice start to crack a little bit, and starting to see real momentum.

This is great news for vacation rental owners, because this market has a lot of demand, and a lot of people really think of vacation rentals as an upgrade.

Like if you've got a family or you're a group, and you're going to Barcelona instead of getting like four hotel rooms, you can get a vacation home on the beach, and you can make your own meals instead of going out to restaurants every night, so this is a very important addition to our business, but there's a lot more work to do.

We do have some cooperation with HomeAway but it's not near the extent of maybe some of our competitors, and we're still talking there.

We have a fairly high bar.

We don't do on-request bookings.

And for us, it has to be truly instant.

It can't be -- I'll let you know in 24 hours.

That doesn't count as instant, and that's been part of the issue, is just keeping a very high bar and keeping our product very pure, so that it fits with our traditional booker base.

And so far, so good.

And we're only going to do more of it.

It wasn't really a jump into a segment, it was more of an evolution down the accommodation pyramid, into the bottom of the pyramid.

There's literally millions and millions of single-owner property around the world, both in cities, on beaches, at ski resorts, et cetera.

So that's the story there.

Thanks very much.

Thank you.

Our next question comes from Ken Sena with Evercore ISI.

You may begin.

The bookings and the units seemed quite strong, but the revenue margin declined 6% or so over -- versus the prior year.

Maybe you can just elaborate a bit more on that pressure, give us a sense maybe how much of it is related to the mix as far as the vacation rental expansion, versus maybe some of the competitive factors that you're seeing.

And also you mentioned that Google's performing better, but any thoughts that you can provide us on the current booking functionality, how you see that progressing?

Thanks.

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

Ken, in terms of take rate, what you see in Q2 is an acceleration in the business, so very strong gross bookings momentum with a portion of those stays in the revenue taking place in Q3.

So if you look at our Q3 forecast, you'll see a reversal of that trend, where now the take rate is going up.

So the gross profit growing faster than the gross bookings.

So that's a timing issue.

Our take rate, our fundamental take rate on our transactions, is very stable.

Thank you.

And then your question on Google, specifically on booking functionality, what -- did you want to repeat that?

Just, you mentioned that Google's performing better.

If you could maybe just specify, is that just in terms of the traditional keyword buys or are you getting more traction in terms of working through the listing ads, and do you have any thoughts as they try to roll out booking, functionality, is that something you would be interested in, or other?

Generally, our relationship with Google is very strong.

They have some of their own challenges.

It's an amazing business, but it's become less of a percent of our business over time.

So we've been working with them across our entire business, of course, always first focused on core search.

What are the other things we can do to innovate, to get more out of core search, and we've seen some benefit, particularly in mobile web where we worked together to try to get more out of mobile web, and that's been, I think, very successful.

We're also working with the YouTube team and we're also doing a lot of work in retargeting.

So Google sees us as one of their biggest advertisers in the world, and we're very technically performance-driven people, so we work closely together to try to get more out of all the various Google engines.

Very specifically, Hotel Price Ads is Google's price product.

We don't love it, because we would rather buy blue links.

We don't need all the extra listings, but we do understand and we have worked a lot with the HPA team to make that a better product.

I think when it started out, there were a lot of savings and things shown on HPA that just weren't real savings.

Generally in meta, there's a lot of challenges with showing customers things that are savings, when a large majority of the time they're not.

It's exchange rates.

People don't put taxes on, et cetera.

It's not the prettiest space.

So we have worked hard with them to improve that product.

And then recently, as you mentioned, they've launched an instant book product.

It's still very early on.

We don't love instant book products either, because we have a really good process of taking cold customers and turning them into paying customers.

So anyone who creates a path that ends up becoming a lower common denominator, that's not good for us, because we think we have one of the best booking paths.

We have an agency model.

We don't even need the credit card in many cases, to do bookings, but we're working also with Google on that.

Not standing away from it, saying, hey is there a way to make this work for our businesses as well as what you're trying to achieve?

It's always been a close, open collaboration, but as I always say, we're going to put our money where it's strategic.

We're going to watch this really closely, and we have lots of options on where to spend our money.

We look to continue to create more options to find hotel demand in the future.

Thank you.

Thank you.

Our next question comes from Michael Millman with Millman Research.

You may begin.

Thank you.

The other night, Expedia indicated that the bulk of their profit comes from repeat customers.

Could you talk about to what extent profits come from repeat customers?

Yes.

You have to go across our brands, but we never reveal the exact percentages, but we have a very healthy repeat business.

And I would say across all of our brands, every single brand, the repeat business every year gets stronger and stronger.

A lot of that is related to the new multi-screen environment.

A lot of that is related to, we do a lot more business with signed-in accounts.

In the early days when it was a single screen, you would do transactional business, and every time you booked a hotel or a flight, you'd have to re-enter all your information.

Once you have an account, we can store your credit card securely.

We can store your name, and it leads to one click booking.

As we've gone to more of a multi-screen environment, that advantage for an account holder goes up dramatically.

If you've ever tried to book an airline ticket on a mobile phone and not have an account, you'll know what I'm talking about.

It's not a pleasant experience.

Once you have an account we can fill out the forms and we can facilitate that, and then you can take your confirmation that maybe you booked on your tablet and you can show up at the rental counter with the confirmation on your phone.

These are all positives that have driven to more increased repeat business and loyalty among our customers.

Then our challenge becomes really and has been, how do we bring more customers into the franchise?

And that's what we use paid marketing for.

Generally speaking, our direct business continues to increase, which is a reflection generally of repeat business.

With new customers, Michael, we're running in paid channels at positive ROIs, so they're profitable too.

I don't know to what extent maybe other players take a lifetime value approach, and perhaps are losing money on the new customers, with the hope of making money over time.

That's not the case for us.

Would you say repeat customer profitability is well over 50% of your business profitability?

We wouldn't comment on that.

Okay.

Thank you.

Thank you.

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

You may begin.

Thanks.

I was going to ask two geographic questions.

You called out Latin America a little bit more.

Just some more color on how big that -- how material that region is for you?

Maybe a little bit more explanation of the investment in Hotel Urbano?

And then any comments on -- you didn't mention the China outbound market, anything you want to point out as to how well that's doing, the path to materiality there?

Thank you.

Yes, thanks, Mark.

Well, let me give, maybe, just a little bit of top line geo commentary.

So first of all, in the second quarter, Europe has been very strong.

The Euro zone and Southern Europe with little bit of the ripple of the Grexit, and the coming back of Greece.

But generally, Europe has been very solid this year.

US is strong for US travelers, and China inbound, but generally almost everyone else is going a little less than the US, because of the currency effect.

China outbound continues to be very strong for us, growing at very fast rates.

Japan inbound, Taiwan inbound, very strong.

Korea inbound, not so strong, because of MERS.

Not something that gets talked a lot about in the United States, but was a real overhang for us.

On the other hand, we had positive comps.

Southeast Asia was a much calmer place in Q2 than it was last Q2.

If you remember the Malaysian air crisis, the coup in Thailand, the burning of factories in Vietnam, there are all sorts of things going on, but that's been a positive from a comp basis.

So that's some quarterly commentary geographically.

Specifically, strategically, Latin America, we entered Latin America specifically with the Booking.com brand a number of years ago, starting in Argentina, moving to Brazil.

I would say this is a year where we have really had a breakthrough in Latin America.

We launched our TV ads in Brazil, but really despite the fact that Latin America is not in the greatest economic health right now, and the two big engines, which are Argentina and most specifically Brazil, have all kinds of issues.

This has been a year where we've really gotten great traction in the market, maybe past the tipping point.

We have offices now across the region, and that's a real positive.

I think if you go to Latin America now, our aged brand awareness is quite high.

Hotel Urbano specifically, this is a -- it's actually a site that gets a tremendous amount of traffic, but still is a bit challenged in converting that traffic, but has a great management team.

We've always been excited about the volume of audience that they have, largely built through social channels.

You can think of this as kind of a mini Ctrip investment.

We made an investment in the company, but it was really also to unlock the commercial opportunity.

We're like, well, if we're going to help these guys win, let's participate a little bit in that upside.

But the commercial opportunity is -- I wouldn't say it's a make or break for Latin America, but it's a good-sized piece of business that will help bring Latin American outbound travelers to the rest of the world.

I think it also is a reflection of the strength of our portfolio.

It's so global that these match-ups just make so much sense, because the product converts well.

It's a great product.

It's all translated, and we can take an audience like this, help Hotel Urbano monetize it, but also create a great commercial opportunity for us as well.

Thank you, Darren.

Thank you.

Our next question comes from Heath Terry with Goldman Sachs.

You may begin.

Great.

Thanks.

Darren, you have talked in the past about your willingness to go down the ROI funnel a little bit further on the advertising side, willingness to take dollars for $0.90 versus requiring $0.70, I think, is the way you have put it in the past.

How much of that willingness is what's driving the 25% or 26% FX-neutral growth that you're seeing here, clearly well above where the overall market's growing?

I should probably be -- thanks, Heath.

I should probably be clear, and Dan mentioned this as well.

We don't lose money on the transaction level.

So on our paid advertising, we have a pretty high bar.

I understand that.

So we don't really -- so I think what you're saying is we might go down and spend $0.90 to get $1, and therefore make $0.10.

Right.

That's really our push on the paid advertising side.

The thing that we go out a little bit on a limb in is our brand marketing.

We now know that we can get a pretty good return on our brand marketing, but it may not happen immediately.

We've shown that over time in the markets we've been in for a while, that we can get a better return on our advertising when you add the brand marketing to our performance marketing, than the return we got on our performance marketing alone.

And we've done a bunch to build just a whole bunch of data-driven tools to help us with our media mix.

And that's helped us be smarter and data-driven about where and how we spend our brand marketing dollars.

So we're building over whatever now has been a couple of years, some more and more confidence in our ability to appropriately spend our brand marketing dollars, which obviously is a big growth potential for the Company.

Booking.com is not a household name.

You go to America, you mention OpenTable and KAYAK and Priceline before you'd mention Booking.

And the ability for us to build the brand and have great performance marketing is still a growth potential that's out ahead of us, and we've been working hard to methodically attack that.

I would say our growth is truly sustainable growth, because the paid marketing that we're spending is earning us profit, and all the direct business we're coming is earning us, of course, even more profit.

I don't feel like, as opposed to some geographies, we have positive unit economics on every single transaction, and we've looked to improve that.

Any incremental that we're making in marketing generally comes with positive EBITDA.

And we're always trying to get as far as we can to generate positive EBITDA and cash flow for our customers, without worrying about the percentage of our P&L that gets taken up by marketing, and that's been our general philosophy.

Some people may say well, if you're that far, why don't you go a little bit further?

And that's always the balance that we're striking on what business we bring in, and do we really truly understand the economics, but always trying to be positive on a transaction by transaction basis.

Got it.

Thank you.

Hope that helps.

Thank you.

Thank you.

Our next question comes from Justin Post with Merrill Lynch.

You may begin.

Thank you.

Two questions related to marketing.

I think you said ROIs are improving in 3Q.

Is that a result of all the brand spending, or are there some technology conversion changes that are helping you?

And then secondly, a lot of commentary out there about instant book on TripAdvisor and Google.

Any commentary on your exposure to those channels, and what your thoughts are?

Especially with Google maybe taking direct bookings over the next year, how you think about that affecting Priceline?

Thank you.

Thanks, Justin.

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

I'll take the second one.

Justin, just to be clear, ROIs were still down year-over-year but not to the same extent as they were in Q2.

And then just due to the normal seasonality, with more checkouts taking place in Q3, we get a benefit there from the economics as well, relative to the acceleration that occurs in Q2.

We're not going to go into the drivers specifically for you, what's happening in the ROIs, because of the sensitive competitive nature.

But Darren talked about the benefits, the offline advertising is driving in online definitely helps reinforce our brand and make it better known, which helps click-through rates and helps drive people searching for the brand.

And then every day, we've got hundreds of people that are running experiments to improve conversion on our website, so that's just a constant battle, that our people are very talented and do a great job with.

But beyond that, I just don't want to comment on the specific drivers.

And then on your question on instant book, it's a pretty tricky equation.

Always the question is, is your advertiser trying to be an OTA?

And at the most extreme, being an OTA is really hard work, like three-quarters of our people are in customer service.

They're in the field.

They're working property by property on pricing and on availability, and it's a business you have to do at scale.

And most of our media partners make a lot of money off of us.

On Trip Advisor, we spend more than $1 million a day.

We have to find a place to spend our money, and we of course don't want to spend it with somebody who's planning on being an OTA.

I don't believe that's really what Trip Advisor is trying to do, but we have to make sure that whatever business we participate in is good business, and it's business that we can ultimately pay for that will repeat on our platform.

So that's why there's a lot of discussion in this area.

There's not a big rainbow for anyone that's in the media business on the other side, because they get most of the economics of the transaction anyway.

It's not like suddenly there's a whole bunch more money there.

In fact, all there is, is just a lot more cost.

I could show you my inbox someday of some of the escalations I get of the dirty ocean in Cabo because the person wants a refund, or the flying ants.

The OTA business sounds very sexy, but in fact, there's a lot of manual work.

And that's why there's only a few players who do this work, and do it at scale.

By the way, I'd throw Ctrip in there as well.

That's why they do it so well.

They've got over 10,000 customer service agents who deal with this stuff every day.

So we're being good partners.

We're leaning in.

I frankly think that instant book paths ultimately will prove to be cannibalistic.

They may help a little bit on mobile, but that's all to be soon, so we're trying to be positive partners in the process, and trying to make sure if that's the way our advertising partners are going, that we can design a path that is a good auction for us, and where we can get good business off of it.

Thank you.

Thank you.

Our next question comes from Ron Josey with JMP Securities.

You may begin.

I wanted to follow up on some prior questions around marketing, and Darren, I think you said specifically, I think a third of traffic is mobile.

Could see that getting to 50% over time.

And as you see the mix between online and offline working together, wanted to understand a little bit more how you think about how brand advertising evolves over time, and when you think you can start bringing that back as the brand awareness goes up?

Thank you.

Yes.

I think that's -- it's an excellent question.

When you ultimately do a transaction on mobile, there's a question of what other screens does the customer engage with you on?

How do they get to know the brand?

And then there's an issue of course of can you -- do you have the force through your brand?

By having a stronger brand, do you get more loyal customers who then therefore are more app-based mobile versus web-based mobile?

To me at the highest level, I think of mobile as a huge positive for a Company like ours.

For many of our partners, it's tough enough to build a great website.

To actually have a multi-screen experience that works with an account is a very difficult thing to do, so that's why I think net it's as positive.

I don't think it necessarily drives a lot of incremental business for us, a little bit maybe more last minute, but it's really a shifting in the way that people engage with digital assets.

I'm sure marketing mix will change relative to mobile.

I've talked previously that more and more of our business is coming direct, it's a bit of a chicken and egg.

Some of that may be because our mobile business tends to be more direct than our PC-based web business.

But again, I think it's all one customer, and it's all related to the fact that people are living multi-screen lifestyles versus single screen lifestyles, which I think is a net benefit to us.

And ultimately, I think also leads to more direct account-driven traffic versus purely off of the web transactional traffic.

The last thing I would say, and you certainly see this in China, the impact of mobile, and how Ctrip buys their demand.

We learned so much from that relationship and always appreciate all the time I get with James and Jane, but it's amazing how they just buy traffic differently.

There are whole marketplaces for apps in the China that exist that don't exist in the Western world, and how they have built that up is quite fascinating and amazing, and I think there's a lot of lessons for us to learn, as this environment changes.

But yes, today, again, as I said before, most of our app downloads are from our owned properties, which means we would have had to find that guest some other way.

In the past, the more and more of them that use apps in a sticky way, obviously, that's great business for us because it's always coming direct by definition, and is very profitable.

Thank you.

Thank you.

Our next question comes from Lloyd Walmsley with Deutsche Bank.

You may begin.

Thanks.

Last August, you gave us some disclosure around the trailing 12-month vacation rental bookings.

Wondering if you could update that number, or maybe whether we should just use the 39% room night growth that you gave on that $4 billion base number?

And then, I guess, as a follow-up, curious if you can just give us some color on how different you see demand for that space.

So for example, are a lot of people coming specifically to look for VR properties from marketing campaigns, and keywords driven specifically to VR, or is a lot of that also people looking also at hotels?

And trying to get a sense for how different that growth trajectory can be, without cannibalizing the core.

So any color you could give there would be great.

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

So Lloyd, the reason we gave you growth rate and room nights is because of the impact of currency on that metric, as well.

So it wasn't useful really, to give it to you in US dollars.

So I would recommend that you use those two data points we gave you in your model, to try and understand the size of that business.

In terms of the vacation rentals, incremental or not, our general belief is, first of all, it's one customer, and either a customer is just a consumer or they're a business person and a consumer, and they take a number of trips every year.

And every trip has a different rationale, and if somebody is a hotel booker on three of their trips, they may be on a trip with their family and become a vacation rental booker.

We want to be able to provide all of those instances and all of those scenarios through Booking.com, so they become comfortable with that, rather than in the past, it's all, I need a hotel, I go to Booking, and if I need a vacation rental, I go to Company X, Y or Z.

The markets have traditionally been very different because the nature of the markets were very different, but more and more over time, I think we're partly shaping that, and I believe that's ultimately going to be the outcome.

The markets get a little bit mixed, because the person says, hey, I'm going to Barcelona, or I'm going to Rio de Janeiro, and I need to find a place to stay.

It's a very common question to ask, where am I going to stay?

Relative to that scenario, we want to provide them an option.

And that option, by having more optionality in that, you can drive incrementality, because the person may not find quite the right thing on a site that has a more narrow set of options, but on our broad set of options, maybe they have a certain price range and a certain thing they're looking for, we'll be able to satisfy that.

Or in a market like San Francisco and New York, if ADRs and hotels are really high, maybe a business person ends up in an apartment.

Or if you've got a big event on, like the World Cup or the Olympics, where everything gets sold out, having all of this incremental supply offers more beds that people can sleep in.

I think about it today, if today the market is very different between the vacation rental buyer and the hotel buyer, over time, that will only coalesce to become a more similar market, because all it is, is human beings looking for a place to stay.

And I think that's generally the case that we're seeing on our site.

Certainly, vacation rental stays are generally bigger groups, they're generally a longer length of stay, slightly higher ADR, relatively good take rate.

There's all of these fundamentals that reflect the market of today.

I do believe that those things will continue to change, and I think just like B&Bs used to be a very different things than hotels, I think over time, accommodations will become more similar than less similar, because it's the same customer.

Thanks.

That's helpful color.

Appreciate it.

Thank you.

Our next question is from Douglas Anmuth with JPMorgan.

You may begin.

Great.

Thanks for taking the question.

Dan, I was hoping you could just provide some more color on that commentary on the non-marketing OpEx in the back half.

Is this purely just a function of lapping OpenTable and BookingSuite or is there anything else going on there?

And then also, could you comment on the take rate environment, what you're seeing, particularly in Europe now?

Thanks.

Sure, Doug.

In terms of take rates, I mentioned before, our take rates are very stable.

If you look at our margin picture in general, the different ways that our margins are impacted, take rate stable, also in terms of revenue.

We are not aggressively discounting out of our margins, so stable there.

In terms of take rate, just with what we believe to be one of the lowest cost distribution alternatives for our accommodation partners, we feel like that's stable for the long run.

And then in terms of advertising, we talked about offline advertising over the long run, we should see stable to margin leverage there.

As we end up spending in the markets we want to spend, at the levels we want to spend.

We could see pressure from time to time as we enter a new market, or we increase our spending in a market, but over the long run, we should have leverage there.

The online advertising is a big variable, it's very hard to predict.

But the OpEx is much more under our control, and we've had a good track record there over many years.

So we feel comfortable that over the long term, we could have operating leverage in that line item.

For Q3 and Q4, it is largely that we're lapping the acquisition of OpenTable and the acquisitions we made in the BookingSuite area, but as we've seen from time to time in the past, we have some lumpiness in the investments that we make in the core business.

So in the early part of the year, we typically ramp up our customer service teams, our hotel teams to get ready for peak travel season, and then we see leverage in that line item.

Over the long run, I think we'll continue to see leverage there.

Okay.

Great.

Thanks for the color.

Thank you.

Our last question is from Kevin Kopelman with Cowen and Company.

You may begin.

Could you just give us an update on the rate parity landscape in Europe, given the changes to your agreements with hoteliers there?

Thanks.

Yes, thanks, Kevin.

So at the highest level, I think for those who follow this, we worked with the competition authorities in France, Sweden, and Italy, came to an agreement on what we call a narrow MFN, which basically allows us to keep parity with the hotel's website, and Expedia's also agreed to that.

We've had a number of countries come out formally, Austria, Denmark, agree to this.

Many others informally have dropped their cases against us.

We've got one challenge in France, a lot have come out banning parity, which we weren't consulted on or anything, but will come into effect.

We of course will follow the law.

But I think the basic bottom line to understand in this whole discussion, we will never charge our customers more.

You can't say -- we will never charge our customers more.

We will adjust to whatever environment it is, and we'll make sure that we get the best pricing for our customer.

And in some cases, we have so much innovation we could do to make sure our customers don't get shown prices that are uncompetitive, and that's -- I don't believe the new law in France is good for consumers.

I don't think it's good for the French tourism.

I don't think it's good for small properties in France.

I actually think it's quite negative, but it is what it is.

And we will adjust our model and our business in France is really strong, both from a booker standpoint as well as bookings coming into France.

It doesn't concern me too much, other than just a lot of time invested in this whole area, and I strongly believe -- parity was an invention of the hotel industry, itself.

I strongly believe it's a good way that all travel should be sold, on a basis where customers don't spend too much time searching, and that they decide which channel from an agnostic standpoint that they want to buy through.

But we're more than ready to compete under any set of standards, and hope that the narrow MSN will be accepted more broadly across Europe.

Thanks, Darren.

Thank you.

Okay.

I guess that's it.

Thank you all for joining our conference call, and we look forward to speaking to you next quarter.

Ladies and gentlemen, this concludes today's conference.

Thanks for your participation, and have a wonderful day.