Booking Holdings Inc (BKNG) 2017 Q4 法說會逐字稿

Welcome to Booking Holdings, formerly The Priceline Group, Fourth Quarter 2017 Conference Call.

Booking Holdings 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 Booking Holdings' actual results to differ materially from those described in the forward-looking statements, please refer to the safe harbor statements at the end of Booking Holdings' earnings press release as well as Booking Holdings' most recent filings with the Securities and Exchange Commission.

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

A copy of Booking Holdings' earnings press release, together with an accompanying financial and statistical supplement, is available in the For Investors section of Booking Holdings' website, www.bookingholdings.com.

And now I'd like to introduce Booking Holdings' speakers for this afternoon: Glenn Fogel, Daniel Finnegan and David Goulden.

Go ahead, gentlemen.

Thank you, and welcome to Booking Holdings' fourth quarter conference call.

I am joined this afternoon by our CFO, Dan Finnegan, in what will be his final earnings call before retiring; and David Goulden, our soon-to-start CFO who I am pleased to welcome today, though his start date is March 1. David has an impressive background in financial and operational management at EMC and more recently as part of the Dell-EMC combined team.

I am looking forward to working with David and know he will play an important role in the continued success of our company.

David, welcome.

Thanks, Glenn.

I'm very excited to join the Booking Holdings team, and I look forward to working with you and Dan and the rest of the leadership team to first dig deep into business to understand it as well as all of you do and then to help drive its future success across all of its aspects.

Also, I look forward to meeting many of you on the call over the coming weeks and months.

Thank you, David.

I am pleased to report that Booking Holdings performed well in the fourth quarter, with worldwide accommodation reservations of 152 million room nights, which is up 17% year-over-year and exceeded the high end of our guidance range.

Consolidated gross bookings were up 19% year-over-year in U.S. dollars or about 14% on a constant currency basis.

Gross profit was up 22% year-over-year in U.S. dollars or about 17% on a constant currency basis and adjusted EBITDA increased 23% year-over-year to $1.1 billion.

I am particularly pleased with the results of our performance marketing optimization efforts during the quarter.

We raised ROIs across our pay channels, improving performance advertising efficiency while still delivering solid growth in bookings.

We were also successful in driving growth through our direct channel, which is important to the long-term health of our business.

And I want to specifically send out a thank you to our talented marketing teams who successfully navigated this difficult-to-predict marketplace, achieving better-than-expected results during the quarter.

As we've said in the past, our efforts to drive greater efficiency in this complex and dynamic marketplace will produce strategic and financial benefits, but we still expect to face continuing long-term pressure in this area.

Let me now briefly highlight a few points about our 2017 performance.

It was a good year for the company.

We grew our room nights by 21%, which represents over 116 million incremental room nights booked in the year.

Performance in our key regions around the world was strong, and we believe we achieved market share gains in some of our major geographies, such as the United States.

Moreover, we combined this top line growth with EBITDA growth of approximately 18% and non-GAAP EPS growth of 17%, which was strong performance, considering we began to undertake some important investments in the second half of the year.

We made good progress on many of our key initiatives for the year.

We expanded our marketplace, adding new supply and continue to be one of the world's largest accommodation platforms.

Booking.com added over 470,000 properties last year and ended the year with almost 1.6 million properties on its website and mobile app.

This supply diversity brings unsurpassed choice and selection for our customers with what we believe to be the best desktop and mobile tools and customer support in the industry.

We also made progress growing our alternative accommodation properties to approximately 1.2 million homes, apartments and other unique places to stay on Booking.com's platform, which represents a 53% year-over-year growth rate.

Booking.com has changed its property classifications into 2 categories: the first representing more traditional accommodations, including hotels, motels and resorts; and the second, encompassing alternative accommodations, including homes, apartments and other unique places to stay.

We believe this new classification is more consistent with those used by other industry participants and allows for a more direct comparison of our nonhotel supplies.

We began to accelerate investments to build an effective payments platform at Booking.com.

This initiative, in which we are in the very early stages and expect to continue to invest in throughout 2018, is important as we expand our merchant capabilities and give our property partners and customers more flexibility with respect to payment options.

We made investments building a better customer experience across many of our brands.

We believe these investments should improve the quality of our customer interaction as we look to support our customers across the entire journey.

We plan to continue to develop and use technology, such as AI, to drive efficiencies in this area.

While we are still in the early stages, we feel good about the integration of KAYAK and Momondo.

The teams are working well together, and we are seeing early evidence of the benefits of the combination.

We're excited to see what they can achieve in 2018 and beyond.

Turning to 2018.

I will spend a few minutes commenting on our key strategic priorities for the year, many of which I mentioned on our Q3 earnings call.

We expect to continue to aggressively expand our supply of homes, apartments and other unique places to stay.

To do this, we are investing in tools to help our supply partners more efficiently onboard their properties and more effectively manage their participation in our marketplace.

We know that our customers benefit by seeing the largest breadth of all types of accommodations.

And although we believe we are a global leader in the area of homes, apartments and other unique places to stay, we recognize that, in some geographies, our abilities in this area are not as well known as in other geographies.

And we are determined to make sure that customers in all geographies are aware of our excellent offers in this area.

Providing holistic, frictionless travel for our customers remains a long-term goal, and we are making investments this year to help us achieve this vision.

Providing an integrated ground transportation offering is a part of this holistic travel concept.

Rentalcars.com and Booking.com have recently started working together more closely to provide Bookings customers with an airport ground transportation offering.

We believe this is a first step to bring ground transportation offerings to Booking.com and leverage our scale across our brands to bring great services to our customers.

We're experimenting with providing in-destination experiences and currently have tests running in multiple markets.

Whether you want to visit a museum or book a tour, Booking.com wants its mobile app to eventually become the center of your entire travel experience.

It is extremely early days for us, but we are excited about the long-term potential in this area.

Finally, we will look to continue our optimization efforts in our pay channels with the goal of properly balancing ROI discipline and top line growth.

We continuously evaluate each channel and support those that deliver appropriate ROIs, treat our conversion-friendly product displays fairly and offer a superior consumer experience, with the overall goal of building our direct traffic over time.

If successful, these optimization efforts should produce benefits over the long run.

Also, brand marketing remains an important investment as we seek to not only increase our share of direct traffic, but also enhance our effectiveness in the pay channels.

We plan to continue to experiment with the right mix of marketing spend and geographic focus to achieve our long-term goals.

In terms of capital return, I am proud of our track record here.

We have returned about $6 billion of capital over the last 3 years, including over $1.8 billion in 2017.

We believe this demonstrates our commitment to returning excess capital to our shareholders.

Dan will discuss this in more detail, but the recent U.S. tax law change will enable us to access our international cash more efficiently.

Our Board of Directors recently approved an incremental $8 billion share repurchase authorization.

So we now have a total of $10 billion authorized for share repurchases.

We expect to execute repurchases by using a programmatic and opportunistic approach that reflects our increased access to our international cash and future cash flows.

Now I want to provide a few quick comments on our recent name change and the rationale for doing so.

The Priceline Group has evolved significantly since it was founded in 1997 as priceline.com, with a unique "name your own price" airline ticket service to become today a company with multiple travel brands.

Under the Priceline Group name, we became one of the world's leading providers of online travel and related services.

Today, our Amsterdam-based Booking.com brand has grown into a business of significant global scale, averaging over 1 million room nights booked per day.

Booking.com drives a significant majority of our company's total operating results.

We believe this name change better reflects the truly global operation that we have become today, more closely aligns our parent company name with our largest business and connects our collective brands, Booking.com, priceline.com, KAYAK, Agoda, Rentalcars.com and OpenTable, under a unified name.

Booking Holdings reflects our brand's shared purpose to book services, which further our mission to help people experience the world.

Today was the first day that our stock traded under the new ticker symbol, BKNG.

Finally, I want to say thank you to our outgoing CFO, Dan Finnegan.

It is hard to overstate the role Dan has played in his almost 14-year career here at the company.

Since he started with us in 2004, Dan's leadership and guidance had been an important part of the success we have witnessed during his time here.

I and everyone associated with Booking Holdings wish him well in his retirement.

With that, I will turn it over to you, Dan.

Thanks, Glenn.

Let me start by welcoming David onboard.

I'm happy we have found such a talented person to step into the role, and I look forward to us working together to achieve a smooth transition.

Now to the fourth quarter.

I'll discuss operating results and cash flows for the quarter and then provide guidance for the first quarter of 2018.

All growth rates referenced in my comments are relative to the prior year comparable period, unless otherwise indicated.

Our non-GAAP financial results and forecasts include stock-based compensation and are reconciled to our GAAP results in our earnings release.

In early November, when we gave guidance for Q4, we talked about a recent change we had made to optimize ROIs in our performance advertising channels.

The Booking.com team did a superb job of executing this strategy, delivering performance advertising efficiency and gross bookings growth that exceeded our forecast.

The strong gross bookings performance also benefited gross profit for the quarter.

The result was top and bottom line performance that substantially exceeded our guidance and FactSet analyst expectations.

Room nights booked in Q4 grew by 17%, decelerating modestly on a sequential basis despite a very difficult prior year comp and our ROI optimization strategy.

Rental car day reservations grew by 5%, consistent with the Q3 growth rate.

Average daily rates for accommodations, or ADRs, were down about 1% for Q4 versus prior year on a constant currency basis for the consolidated group, which was consistent with our forecast.

Foreign exchange rates favorably impacted growth rates expressed in U.S. dollars for our Q4 results as compared to prior year.

Q4 gross bookings grew by 19% expressed in U.S. dollars and grew by about 14% on a constant currency basis.

Consolidated gross profit for the fourth quarter was $2.8 billion and grew by 22% in U.S. dollars and by about 17% on a constant currency basis.

Gross profit includes $37 million from our acquisition of the Momondo Group, which we closed on July 24, 2017.

Our international-based operations generated a gross profit of approximately $2.4 billion, which grew by 23% in U.S. dollars and by about 17% on a constant currency basis.

Gross profit for our U.S.-based operations amounted to $337 million, which grew about 15% compared to the prior year, including the benefit of a $12 million accrual reversal based upon a favorable hotel occupancy tax litigation ruling.

Advertising and other revenue, which is mainly comprised of nonintercompany revenues for KAYAK and OpenTable, grew by 29% in Q4 compared to the prior year, including revenue from Momondo.

GAAP operating income grew by 25% and GAAP operating margins increased by 89 bps compared to Q4 last year.

Operating margin performance was substantially better than our forecast due mainly to gross profit growth and performance marketing efficiency that exceeded forecast.

Nonadvertising OpEx expenses pressured year-over-year margins but were favorable to forecast due to the phasing of expenses.

We increased our investment in brand advertising by 108% or $44 million in Q4 to build brand awareness and drive traffic directly to our websites.

Adjusted EBITDA for Q4 amounted to about $1.1 billion, which exceeded the top end of our guidance range of $910 million and grew by 23% versus prior year.

GAAP net loss amounted to $555 million or $11.41 per share, including $1.3 billion of provisional net income tax expense related to the Tax Cuts and Jobs Act, comprised of a $1.6 billion deemed repatriation tax on our accumulated international earnings, including state and local taxes and international withholding taxes, partly offset by a $217 million income tax benefit from revaluing our net deferred tax liabilities from 35% to the new statutory rate of 21%.

Non-GAAP fully diluted net income per share, which excludes the onetime tax expense impact from the U.S. Tax Act, was $16.86, up 19% versus the prior year, exceeding our guidance for the quarter and FactSet consensus of $14.12.

In terms of cash flow, full year 2017 operating cash flow amounted to $4.7 billion and grew by 17%.

We returned about $700 million during the fourth quarter and about $1.8 billion for the full year 2017 to our shareholders through share buybacks.

Since December 31 through yesterday, we have spent an additional $380 million to purchase about 200,000 shares.

We also intend to spend about $700 million in Q1 based upon yesterday's closing stock price to settle the conversion premium on our 1% convertible bonds that mature in March using cash, which beneficially impacts our fully diluted share count going forward.

2017 full year free cash flow amounted to almost $4.4 billion, growing by 18%.

About 35% of our full year gross profit converted to free cash flow, which is a function of attractive operating margins and capital efficiency for our business.

Our cash and investments amounted to $17.8 billion at year-end.

The Tax Act allows us to use this balance and future international cash flows in the U.S. with no additional U.S. federal tax expense due on repatriation beyond the onetime deemed repatriation tax that I just mentioned.

This deemed repatriation tax liability that we recorded in Q4 amounting to $1.3 billion, net of about $200 million of U.S. NOLs that we expect to utilize to reduce the tax due, is payable over 8 years and does not impact 2017 net cash flow from operations.

Before I get to guidance for Q1, I want to discuss a couple of new accounting pronouncements that will impact our financial statements for the first time in Q1 2018.

First, pursuant to the new revenue recognition standard, which took effect on January 1, we will now recognize substantially all our revenue at check-in rather than at checkout, as we had in the past.

We estimate that the net impact of the change in accounting standard for the full year will be immaterial.

However, the impacts on our quarterly revenue are expected to be more significant.

A meaningful amount of travel checks in during December and checks out in January, which means that, under the new accounting standard, this revenue will be recognized each year in Q4 rather than Q1, as it was under the previous accounting standard.

We have provided additional information in our earnings release to help you model the quarterly allocation of our 2018 revenue under the new revenue accounting.

Also to help with the transition, our financial statement footnotes in each quarter of 2018 will show what the revenue in 2018 would have been if it were recognized at checkout, as it was in 2017.

Gross bookings and other unit metrics, like room night reservations, are not impacted by the new revenue accounting.

Another impact of the new revenue accounting standard is that we will no longer report our "name your own price" revenue on a gross basis with a corresponding cost of revenue for the amount paid to the travel providers.

These amounts will be reported on a net basis in revenue, which is consistent with how we record our other travel revenue.

Another accounting change taking effect in Q1 requires that unrealized gains and losses on publicly traded equity investments, like our investment in Ctrip shares, will be recorded in the income statement rather than equity starting in Q1 2018.

We expect to exclude these unrealized gains and losses from our non-GAAP results because they are unpredictable and are not indicative of the core operating results of our business.

The guidance that I'm about to provide is based on the new revenue recognition accounting that I just mentioned, which is also the basis upon which our results for Q1 will be reported.

This basis is different than the previous revenue accounting basis, which we used for 2017 and upon which analyst forecasts were prepared.

Year-over-year growth rates are based upon comparison to our Q1 2017 results as reported last year under the previous accounting standard.

Revenue growth and margin performance is based upon comparison to prior year's Q1 gross profit due to the change from gross basis to net basis revenue reported in -- reporting in 2018 that I just mentioned.

Our guidance reflects our quarter-to-date actual results and assumes that our growth rates will decelerate over the remainder of the quarter, mainly due to the size of our business and consistent with long-term trends.

Our guidance also reflects a difficult prior year comp and the impact of our performance marketing optimization efforts.

We also expect that Easter falling on April 1 this year will negatively impact Q1 gross bookings and room night growth slightly as we receive cancellations leading up to Easter and people start traveling towards the end of March.

We estimate that Easter taking place earlier this year will benefit Q1 revenue, operating profit, EBITDA, net income and profit margins and will negatively impact those metrics in Q2, in both cases compared to the prior year.

We estimate that earlier Easter will shift about $90 million of revenue on a check-in basis from Q2 into Q1 this year.

Under the previous revenue accounting standard, we estimate that earlier Easter would shift about $30 million of revenue on a checkout basis from Q2 into Q1 this year.

Our Q1 forecast is based upon recent foreign exchange rates, which provide a nice tailwind to our growth rates expressed in U.S. dollars.

We're forecasting booked room nights to grow by 8% to 12% and total gross bookings to grow by 14.5% to 18.5% in U.S. dollars and by 6% to 10% on a constant currency basis.

Our Q1 forecast assumes that constant currency accommodation ADRs for the consolidated group will be down by about 1% compared to the prior year period.

We forecast Q1 revenue to grow by 17.5% to 21.5% in U.S. dollars and by 9% to 13% on a constant currency basis compared to gross profit in 2017.

GAAP operating income is expected to grow by 6% to 10% and GAAP operating margin is expected to be about 230 bps lower than prior year Q1.

Q1 adjusted EBITDA is expected to range between $680 million and $705 million, which, at the midpoint, is up about 9% versus prior year.

We forecast that adjusted EBITDA margin will be about 235 bps lower than prior year Q1.

Our Q1 forecast assumes that our ROI optimization efforts will yield year-over-year performance marketing efficiency.

The deleverage assumed in our forecast reflects the investments in brand advertising and nonadvertising operating expenses that Glenn just spoke about.

These investments have a more significant margin impact in Q1 and Q2, which are quarters in which we typically earn a smaller share of our annual profits due to the normal seasonality of our business.

Although we are not giving detailed guidance beyond Q1, we do expect deleverage in nonadvertising OpEx and brand advertising throughout 2018 but diminishing in the second half as we lap investments made last year.

We assume that operating margins will benefit from increased performance marketing efficiency until we anniversary the optimization efforts that started in Q3 last year.

We forecast GAAP EPS between $9.05 to $9.45 per share for Q1, which, at the midpoint, is up about 2% versus prior year.

Our EPS guidance assumes a fully diluted share count of about 49.2 million shares, which reflects the beneficial impact of the common stock repurchases we have made to date and settlement of our maturing convertible bonds and cash on March 15.

Our GAAP EPS guidance for Q1 assumes a tax rate of 20% compared to the prior year tax rate of 14%, which included nonrecurring discrete items that lowered the rate by about 2 percentage points.

The increase in the 2018 forecasted tax rates reflect our best estimate of our tax expense under the U.S. Tax Act, estimated state and local taxes on our international earnings and an increase in the Innovation Box Tax rate in the Netherlands from 5% to 7%.

Due to the relatively short amount of time since enactment of the U.S. Tax Act and the complexity involved in evaluating and applying its provisions, our estimates may change as we proceed through the quarter and the year and additional guidance is issued by the Treasury Department, the IRS, state tax authorities and other authorities.

We are forecasting Q1 non-GAAP fully diluted net income per share of approximately $10 to $10.40 per share, which, at the midpoint, is up about 3% versus prior year.

Our non-GAAP EPS forecast includes an estimated income tax rate of approximately 20%, which is higher than the prior year rate for the same reasons I've just discussed for the GAAP tax rate.

Our earnings release also includes detailed non-GAAP guidance for Q1 2018 under the previous revenue accounting standard, which is how our 2017 results were reported and analyst estimates have been prepared.

We estimate that revenue and adjusted EBITDA amounts in the guidance I just gave would be about $65 million to $70 million higher if revenue were recognized at checkout as it was prior to adoption of the new revenue accounting standard.

In summary, Q1 guidance under the previous revenue accounting standard for adjusted EBITDA would be $745 million to $770 million and non-GAAP EPS would be $11 to $11.40 per share, which compares to FactSet consensus of $10.35.

We have hedged contracts in place to substantially shield our first quarter EBITDA and net earnings from any further fluctuation in currencies versus the dollar between now and the end of the quarter, but the hedges do not protect our gross bookings, revenue or operating profit from the impact of foreign currency fluctuations.

Our forecast does not assume any significant change in macroeconomic conditions in general or in the travel market in particular.

We will now take your questions.

(Operator Instructions) Our first question comes from Eric Sheridan with UBS.

With the commentary around alternative accommodations, I wonder if we could get a better sense of what you think alternative accommodations might be as a percentage of the mix longer term in the business, what that might mean if there are acquisition of inventory or conversion benefits in the business over the mid and long term.

All right, Eric.

You came in and out a little bit, but I think I got your question.

We don't make a prediction going forward of what percentage the alternative accommodations will be of our business overall in the long run.

What I will say, though, this is an important area for us, and that's why we've talked about it over the last couple of quarters of making investments in there.

And we're going to continue to make investments going forward.

We recognize that we may not be the global leader in this yet, but we also believe that this is an important thing for our customers to have.

I've mentioned how I think that we do have a superior offering to our customers because we show both the alternative accommodation and the traditional accommodations on the same page.

So when a customer is searching for what they want, they see both right there.

They see the reviews right there.

They get to choose among whatever they want first.

And along with not only choosing it, it's instantly, instantly bookable.

That's a big thing for a lot of customers.

I've done it myself with some other services where you go back and forth, back and forth emailing and something -- then you find out the person doesn't really want to rent it to you.

It's a horrible experience.

So that's why we have all of our Booking.com alternative accommodations are 100% instantly bookable.

That's one.

The second thing is we do not charge the travelers fees.

I think that's also an annoying thing for a customer.

You go through -- you think the price is one thing, then you'll find, gee, this is a big service fee.

That also, to me, is not the proper way to go.

So I believe we have a superior offering.

I recognize we're not the global leader yet.

I recognize some geographies where perhaps we're not -- people aren't as aware of us as others is, but these are all areas that we're working hard to make sure that we do become a leader or the leader really.

Does that answer your question?

That's great.

Our next question comes from Lloyd Walmsley with Deutsche Bank.

Two, if I can.

First, just on the advertising leverage.

Can you kind of break down some of the key drivers there across proactive bid reductions, finding new ad channels, like social, increases in direct traffic or ad traffic or just efficiency gains around conversion and kind of how much some of those may have contributed?

And then, I guess, secondly, as you look at what Google's doing, sending more traffic down the funnel through hotel finder, can you just give us a sense for how that impacts ROIs on a same-session basis and then longer term how you feel about Google moving further down the funnel strategically?

Lloyd, so here's -- the thing is I have to be a little careful in giving that answer -- the answer to these questions because it's a little bit of a playbook in terms of what our competitors may react and what we're going to do.

But let me talk a little bit about the first, the advertising leverage on our pay-for-performance, Eric, (sic) [Lloyd], which is really what we are talking about.

We said in Q3 and here earlier about the fact that we want to optimize.

And we're talking about raising ROIs.

Now these are very dynamic marketplaces with a lot of different people participating in them with different strategic goals.

When we go out there and we raise ROIs, we're expecting to achieve a certain level of return and a certain level of growth.

It doesn't always end up that way.

And as I said, I am very, very pleased with how things did end up in the fourth quarter.

We cannot possibly know how it's going to go in the future because these are dynamic and we can have different results going forward.

But these really are highly driven by what our bid's going to be and what we expect to get back.

In addition, when we're doing that, it's not only what we're going to get back immediately, but we treat all our pay-for-performance channels with some different elements that we think are important.

And that is really not just the ROI, but how are we being displayed when we -- when somebody lands on one of our pages.

Is it a fair display or are we forced if we are going to get a good bid that's going to give a higher ranking to how -- change it to some of that -- the advertising platform wants us to do, basically putting on a penalty, so to speak, if our landing page doesn't match up with what the advertising platform wants us to be.

That's a negative, and we had to think about that one.

Then we also -- I just want to make sure that, overall, are people coming back to us or not?

And that's a factor that we keep in.

In regards to whether social played in at all, it really didn't.

And I think we can safely say that our direct numbers have been going up, too, which is certainly a factor in our increased overall leverage, which is a good thing.

Regarding Google and what they've been doing, we've been -- I've been in this business now 18 years, and we've been fairly close with Google since we bought Booking.com 2005.

So we've been dealing with Google for a very long time.

And they have made tremendous changes over this 13 years that I've been here.

They've always been trying to develop new ways to bring customers.

And we've had a very good relationship with them.

It's been very symbiotic.

And it's not only with Google, but it's also with our hotel partners, being able to provide customers to them at a more efficient way and a less costly way to them than it would be if they try to participate on their own in Google.

So it's been good for everybody.

We know that Google is going to continue to innovate new things, and we're going to have to continue to adapt to it.

I am confident because we've been successful in the past that we'll continue to be successful in the future.

And that's about the best we can predict about our future.

Good luck, Dan, to your retirement.

Thanks, Lloyd.

Our next question comes from Brian Nowak with Morgan Stanley.

I have 2. The first on the branded ad strategy.

You've been trying -- tweaking and trying to fix the strategy for a little while.

I guess, I'd be curious, can you give 1 to 2 tangible examples of how you've improved your branded ad strategy over the last 6 months?

It sounds like direct traffic is increasing.

Just what's improving on the branded side?

And the second one is on China.

I know you have the partnership with Ctrip.

There was some talk of potentially hiring people in China in the press.

Just be curious to hear about the China growth strategy over the course of 2018 and 2019.

Dan, you want to take the first one, and I'll talk about China?

Sure.

Our brand ad strategy, it's still in the pretty early stages, Lloyd -- Brian, sorry.

What I would say is a couple of things that we've done recently that I think are helping us and are important for the future is improving the tools and the processes that we use to measure the effectiveness of the advertising.

So it's never going to be perfect.

But at least, it's something that our teams can look at and try and get a sense for, is that advertising moving the needle?

Is it causing people to come to our website and then invest in ads that are working and don't invest in ads that aren't working?

So I think that's a positive.

We've rolled out in additional markets.

So I think that's a positive, too.

And the team continues to look to improve the effectiveness of that advertising.

Really excited about the benefit it can give us in terms of driving customers direct to our website, improving the awareness of our brand with those customers.

And so I'm hopeful that we'll be able to spend a lot more money there over time if the team feels comfortable that they're getting the reaction to the advertising that they want.

And Brian, can you tell me again regarding your question about China, I didn't quite get what you were saying about hiring people.

Could you repeat that, please?

Yes.

Just -- I'm trying to better understand the China kind of acquisition strategy.

I know you have the Ctrip partnership.

There's some speculation in the press about that you're hiring people to bring on your own inventory in China.

Just trying to understand the investment and the drivers of the China business the next couple of years.

Okay.

So let me clarify this a little bit when we talk about China in general, which we've spoken about several times in the past, we do believe that China is the locomotive of travel growth for some time to come.

We know how important that is.

And that's why we've been in China for a significant amount of time.

We have our own offices there.

We have a significant number of people there.

It's -- both Booking.com and Agoda are operating in China.

Our Rentalcars company has been going -- having relations with a number of different players in China to make sure to get Chinese customers.

So we know how important China is.

Regarding the strategy, it's really -- there are 3 areas of China that we've talked about where it's -- one thing that we are very good about is the outbound business because Chinese outbound travel is growing significantly.

We've got all those great properties around the world that the Chinese traveler wants to visit.

And we've got a great effective both mobile app and our desktop site that enables the Chinese customer to be able to go out, find what they want, get it at a great price.

And we also have 24/7 Mandarin customer service.

In fact, we have a large customer service operation in China.

So that's an important part.

Another thing that's very important is people want to go to China.

So we have a tremendous customer base, many of whom want to go visit China.

If they want to get at a place to stay in China, no different than anywhere else, they're going -- coming to our companies to do that.

That's great, too.

So we -- to get those properties, we have our own properties that we've contracted with ourselves in addition with partnership with people like Ctrip, for example, to get some inventory from them, too.

And then there's the domestic business, which is a very, very big travel business.

And I will admit we are not a big player there compared to some of the local players, but it's an important thing for us to continue to develop that.

So big market, big opportunity, and we're spending money and investing there.

Our next question comes from Douglas Anmuth with JPMorgan.

Our next question comes from Mark May with Citi.

Two, please.

Your -- the mix -- your marketing mix towards branding is still relatively low based on what you've learned in recent periods.

Where do you see that going in terms of percent of your overall marketing mix?

And how do you think about the payback period for the brand channels relative to the performance channels?

And then a separate question, if I could.

I think one of your competitors just talked about meaningfully stepping up their investment in building out supply in markets like Europe and APAC.

What, if any, impact do you see that having on your business?

So marketing, so brand marketing is a long-term play.

And we've made it very clear to everyone that we want to grow that part of our brand as a part of our marketing mix, but we're going to do it smartly, using a lot of the things that we learn in performance, which is being scientific about it.

And I think that, over time, people have been seeing some of the new tools that people have developed.

And particularly, when you're advertising brand online versus TV, where you have a better ability to see how the reaction is to those advertisers, that the whole area of brand marketing is going more scientific.

So more science, less art.

But art is still a very important part of that.

So we're going to continue to develop.

And you're right, it's not a huge part of the marketing mix yet, but we want to spend more.

But we're not going to spend it unless we think we're getting the results we want.

How long?

What's the payback?

I'm not going to define how -- the specific time, but we're going to continue to invest both in people, tools, coming up with good creative and making sure that we're getting the right return for it in the long run.

It is an important thing because we know that there's both the effect you get from people being aware of the brand now trying to come to us direct, but we also know it improves our pay-for-performance.

There's more effectiveness with the pay-for-performance when people still have that in top of mind, you're part of the selection set.

Regarding increased supply, everybody's always trying to increase supply around the world for all our players, all our competitors.

That's nothing new.

In fact, a long time ago, we didn't have so much supply.

We were a small player compared to our competitors.

But just getting supply is not the be all and end all to success.

It's just one small part of the formula that you need to execute.

And you have to execute all elements of this formula.

And just going out and getting supply, in my mind, is really not going to do much if you don't also execute on all the other elements.

So in regards to how I feel about other companies going out to get more supply, they've been getting a lot -- trying to get more supply for a very long time.

That's not something that's concerning me.

Our next question comes from Douglas Anmuth with JPMorgan.

This is Dae Lee on for Doug Anmuth.

Sorry for earlier, the call dropped.

Our question is on the higher-level macro travel environment.

Could you give us your latest thoughts on the overall travel environment right now?

(inaudible) Europe seems to be better from security issues that we've seen over the past few years.

So I'm just curious to see -- get your latest thoughts on the environment going into 2018.

Sure.

So travel is a function of global GDP.

And as the world's economies do well, travel grows faster.

And particularly when you have certain parts of the world where people could not afford to travel and things are going well there and people are moving into the income level where you can travel, one of the first thing they want to do is travel.

And that's an area where we are currently spending time, energy and effort to make sure that we're there as people are ready to travel.

So overall, the market is good.

We're a global player.

So some places are better than other places, but we have to look at the whole globe in terms of our business.

And I would say, overall, it's good.

Dan, is there anything specific, I don't know, you want to speak to?

No.

I agree with what you said.

The ADRs and occupancy rates continue to be strong.

We feel like the travel market is in good shape.

Currencies, I think the euro strengthening could help us with European travel to the U.S. And it certainly creates a nice positive impact on our results expressed in dollars.

Our next question comes from Mark Mahaney with RBC.

It's [Mark] on behalf of Mark.

Two long-term questions.

One has to do with direct traffic.

And when you think about booking as a business and the OTAs as a business for an activity that's frequent but not -- that's more several times a year rather than several times a month, how much traffic do you think actually could come, theoretically if you execute well, could actually in the future come directly to Priceline or to Booking and how much do you think you'll always have to rely on variety of third-party pay-for-performance channels?

And then the second question has to do with lodging inventory and how much you need to get over time.

You have a massive amount of this inventory, 1.6 million.

And I know, Glenn, you just said it's not the be all and end all or whatever.

But you're clearly devoting more resources every year to getting more traffic, more inventory.

What's the right amount to get in the future?

Is it always just more is good?

Or is there a limit to how much inventory you really need?

Thank you, [Mark].

Yes, those are tough questions.

I'd like to believe that, in the long run, that we create this holistic travel product that is so good and it enables people to always think when they're traveling that they want to come to us because of better, better service.

But I recognize, as you point out, not everybody travels often.

And perhaps, sometimes they will not be thinking of us top of mind, coming directly to us and maybe they're going to use search engines or other ways, third-party service.

So we're going to always have to do both, I believe.

And when we look at something like an Amazon and we just -- it's just wonderful for them, the way so many people -- they go directly to Amazon.

That's a great thing for us to aspire to be able to do.

I don't know if we'd ever get there or not, but I certainly know that the way to try and get there is always providing a better service, the best selection, the most breadth, the best prices, great customer service, getting rid of the friction.

And then God forbid, anything goes wrong, anything goes wrong, you fix it.

And those people then become loyal for life.

But I don't know when and how and I certainly can't predict what's the ultimate direct number going to be.

Regarding inventory, also a good way to start is more is better.

I agree with that.

We're nowhere near at the level where, one would start thinking do we have enough, particularly in some areas in that alternative accommodations.

We have a large number of alternative accommodations around the world.

But there are areas where I look, I know we are not complete at all, which is why we're spending additional money to get that additional inventory in it.

And I definitely think one of the things that we are going to be looking at over the long run is, what's the cost of that extra inventory?

Is that producing a good ROI?

It costs you to go get it?

And is that something that is actually giving us the right return or not?

I know that there are certain services that have a huge number of accommodations on their platforms.

And I have been told, I don't know it or not, but I've been told that a not insignificant number of that inventory has not only not been booked in the last 12 months.

It's never been booked.

Now so that was cost to go out somehow or not and was not an efficient use?

I don't know.

But that's something that we definitely will be thinking about going down the path of making sure that we're not going out and getting inventory just to have inventory.

And there has to be a good ROI in everything we do, including getting inventory.

Our next question comes from Justin Post with Bank of America Merrill Lynch.

When I look back at 2017, it was a year of tougher comps, very tough comps and obviously you made a big performance advertising shift obviously to probably help improve margins going forward.

Just wondering how much the comps and the change in marketing could be affecting your growth rate in Q1?

And 6% to 10% bookings growth is -- at constant FX, how do you think about that number as you go forward?

And is some of the performance investing you're doing now targeted at improving your growth rates in the upcoming summer booking season?

Justin, it's Dan.

I'd say you have it right.

The comps are tough for us.

We think that the comp in Q1 is still a tough one with 27% growth last year.

We were far more aggressive in the performance marketing channels than we are -- last year than we are currently with our performance marketing optimization efforts.

So that has a little bit of an impact together with the comp.

And then in addition, the timing of holidays can have an impact, particularly in Q1.

It always seems to be a volatile quarter, depending upon how the New Year falls and then Chinese New Year and Easter.

And as I said in the prepared remarks, we think that Easter falling on April 1 has a slightly negative impact to the quarter in terms of gross bookings and room night growth and a more significant negative impact to the remaining period in the quarter as customers make cancellations to the extent that their plans change coming up to the Easter holiday and then as we move towards the end of the month, when they're actually traveling and not booking.

The performance marketing advertisements that we're making today are certainly driving gross bookings that are going to check out in Q2 for Easter and in summertime.

And so it's driving growth in our revenue and our profit that's going to be reported for future quarters.

Glenn talked about our desire to try and win these customers over to be loyal customers over time.

And so we're hopeful that with the performance marketing dollars that we're allocating to channels that are -- have a better proven track record of driving customers to us that become loyal over time that, that will also benefit our growth rate in the future.

Great.

And Glenn, maybe one follow-up.

There's a question about industry saturation or penetration levels, just -- excluding business travel.

How do you feel about the industry and where online travel is today on a higher level?

I think it's important that we don't use the word online travel as much.

It's travel.

And people use lots of different ways to travel.

And people use their computer, desktop.

They use their mobile phones.

Sometimes, they make telephone calls.

Sometimes, they walk in.

Our belief is that we are a single -- high single-digit share of the overall travel industry.

Our goal is to have a much, much higher percentage of that overall industry.

And I believe that there's still huge, huge ramp left for us.

Our next question comes from Paul Bieber with Crédit Suisse.

Best of luck, Dan, with your retirement.

Just following up on Justin's question.

How should we interpret the 8% to 12% room night growth guidance given that you've just significantly outperformed in 4Q and we're around 2/3 of the way through 1Q?

Has anything changed with the overall demand environment over the last couple of months?

Or as you just discussed, this is mostly the Easter shift and the comp issue?

Yes.

There's nothing else that I'd point to.

The other thing that I mentioned is the performance marketing optimization efforts, that certainly has an impact.

And I think you make a good point there, too, Paul, that we are 2/3 of the way through the quarter, and so there is less room for volatility in the forecast relative to the actuals, just given the amount of time left.

But those are the principal things that we're seeing.

In terms of future growth, the comp does get easier as we move through the year and we start to lap the performance advertising optimization efforts.

Okay.

And just one quick follow-up.

What are your early learnings from your increased investment in TV advertising?

Well, our learning so far is that it's good to experiment.

Some things have been working well.

Some things we think, "Gee, that didn't work so well." But as I pointed out earlier, the numbers are relatively small.

And we're going to continue to experiment until we find the right creative, the right -- what channels you're going to use, which geographies.

There's so many things to do in trying to learn.

And we said this a couple of quarters ago, I believe, when we mentioned this is a new area for us, and we hired people to bring in.

And we're slowly beginning to learn about this.

We know that brand advertising, whether it be online brand advertising or TV advertising, we know it works for people.

We know it's effective.

We just need to come up with the right people, the right tools, the right creative.

And over the long run, there's no reason we shouldn't be one of the top successful companies in this area.

Our next question comes from Kevin Kopelman with Cowen.

Could you talk more -- I just had a question about vacation rentals.

Given recent competitive developments, can you share with us your view on providing hands-on inspections and photography for vacation rental listings, whether that's something that makes sense and is something Booking would be interested in doing?

I saw that by a competitor going in the future come out with that.

And I'll be completely open that I haven't examined this area very much so in terms of the costs of that, how much do the consumer want that, how much of the consumer already trust.

One of the great things about our Booking.com platform is people already trust us.

They know when they come to us they get that alternative accommodation.

They already feel confident that they're getting what is on the page.

It is as described, and they're going to get it.

And if it goes wrong, that we have that backup with that 24/7 customer service in 43 languages that will fix it for them.

So I don't know yet.

I heard about it, and it's something that we'll think about.

And we'll see what it may or may not be.

But that's about the best I can give today.

Okay.

And if I could just ask one more.

Can you give us any update on bookable rooms, what that looked like and how it's trending?

Right now we're just giving out that property count, that property number.

We may come down the road and refine it a little bit.

But I like just giving that property number for now with the reclassification.

Our next question comes from Heath Terry with Goldman Sachs.

Great.

I really appreciate the level of detail around the impact from the accounting changes and the holiday changes, extremely helpful.

Just maybe a couple of questions on the -- on trivago's call, they talked about independent hotels increasingly using the elimination of pricing parity in Europe as a way to sort of game the system and generate higher clicks, so sort of win the [bot] box on metasearch platforms.

Curious how you guys view that strategy and how widespread you feel like it is and whether or not it's growing the way they say it is, in your opinion.

And then we've also had a few relatively high-profile comments out of Airbnb over the last few weeks about their intentions towards the boutique hotels and the traction that they're seeing with their latest offering.

Curious -- obviously, too early to see any impact, but curious of how you view that from a competitive standpoint.

Dan, maybe you can take the first one, and I'll take that second one about Airbnb.

Sure.

So Heath, we haven't seen any significant increase in price parity issues with hotels.

This is sort of akin to the pricing that -- some of the chains were doing last year: lower price if you're a registered user and you come directly to the website.

And I think what they found there was that's a costly undertaking.

That means you're offering a lower price now to all of your customers, including the ones that were going to come to you directly and pay full price.

So I don't see that as being a winning move for independent hotels at the end of the day.

I wouldn't expect that they're going to offer better prices in trivago than they would on their own website.

And so we're not really seeing that in the marketplace.

I think trivago said it was a massive increase and a very small number.

So no further comment beyond that.

And regarding the announcement of one of our competitors that they're going to get into the boutique hotels on to their platform, we've been facing competition of all sorts for a long time.

And some of our biggest competitors have very, very large supply of all different types of accommodations.

I don't see that one company come in and say they're going to offer a certain number -- a small number of select hotel-type properties as a big issue.

Look, our goal here -- our DNA has always been, one, to concentrate a lot on what we're doing for the customer; be focused on our customers, not as much our competitors.

Come up with that best service, that best product, so that in the end, the customer wants to come to us.

So that's really where our focus is on, not as much that somebody else is going to hook up to a channel manager and have 10,000 or whatever unique whatever boutique hotels.

Look, competition in our industry is very, very hard.

It's been that way for a very long time.

And fortunately, our teams are good and we've been successful to date.

And I'm pleased with the past, and I hope we're able to continue to do so in the future.

Our last question is from Deepak Mathivanan with Barclays Capital.

I wanted to ask about the marketing strategy for alternative accommodations.

You have clearly now ramped supply aggressively over the last 2 years and have a pretty sizable base.

But if you look at demand generation, it seems like alternative accommodations still underindexes on many channels.

And looks like there's a lot of opportunity to acquire customers from alternative accommodations batch specifically, either by bidding on keywords specific to alternative accommodations or running TV campaigns around that.

The question is, what are the milestones to hit before we see more meaningful push on demand generation in the alternative accommodations world?

And when can we expect to see that?

Deepak, we've already been, I think, aggressively in performance marketing channels buying keywords that are more applicable to alternative accommodations.

So I see us there already.

Alternative accommodations are already a meaningful part of our business, growing faster than our overall growth rate, so accretive to our growth.

And that's one of the reasons why we've continued to add them at such a healthy clip is that we've got demand for them.

Our customers want them.

And so we're already making the efforts in that space.

I think where we have an opportunity in the future is with our brand advertising to get the message across to people that, you know what, if you love Airbnb and that type of property, well, take a look at Booking.com, too, because we've got a massive amount of those properties as well as the more traditional properties, as Glenn said, available to you in one search.

And then you can pick whichever property works best for you and your family.

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

Thank you.

I'm going to give the final word to Dan.

Dan, your final word.

Thanks, Glenn.

As we close my last earnings call as CFO, I'd like to thank analysts and investors for your insightful questions and interest in our company.

I also want to thank my colleagues all around the world for their hard work and skill to deliver another fantastic year in a string of many amazing years of growth and profitability.

It has been a wonderful experience being part of your team.

I wish you all the best, and I look forward to following your continued future success.

Thank you, Dan, and we all wish you the best.

And thank you, everybody, for participating in our call.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

Have a wonderful day.