BKNG
#Thanks, <UNK>
I'll discuss operating results and cash flows for the quarter and then provide guidance for the fourth quarter of 2017. All growth rates referenced in my comments are relative to the prior-year comparable period unless otherwise indicated
I highlight that our non-GAAP financial results and forecasts include stock-based compensation and do not reflect a reduction to income tax expense related to available NOLs
The reconciliation between our GAAP and non-GAAP results is detailed in our earnings release
Room nights booked in Q3 grew by 19%
We were pleased to exceed the top end of our guidance range and experience relatively modest sequential deceleration in growth despite a very difficult prior-year comp and taking steps midway through the quarter to improve the efficiency of our performance marketing channels
Rental car day reservations grew by 5% compared to 12% growth in Q2. Average daily rates for accommodations, or ADRs, were down about 1% for Q3 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 Q3 results as compared to prior year
Q3 gross bookings grew by 18%, expressed in U.S
dollars, and grew by about 16% on a constant-currency basis compared to prior year
Gross profit for the quarter for Priceline Group was $4.4 billion and grew by 22% in U.S
dollars and by about 19% on a constant-currency basis compared to prior year
Gross profit includes $33 million from our acquisition of the Momondo Group, which we closed on July 24. Our international operations generated gross profit of approximately $4 billion, which grew by 23% in U.S
dollars and by about 20% on a constant-currency basis compared to prior year
Gross profit for our U.S
operations amounted to $372 million, which grew about 11% compared to the prior year
Advertising and other revenue, which is mainly comprised of non-intercompany revenues for KAYAK and OpenTable, grew by 27% in Q3 compared to the prior year, including revenue from Momondo
GAAP operating income grew by 152% and GAAP operating margins increased by 2,483 bps compared to Q3 last year
Our Q3 2016 GAAP results include a $941 million non-cash goodwill impairment charge
Operating margin performance was better than our forecast due mainly to gross profit growth and performance marketing efficiency that exceeded forecast
We increased our investment in brand advertising by 55% in Q3 to build brand awareness and drive traffic directly to our websites
Adjusted EBITDA for Q3 amounted to $2.19 billion, which exceeded the top end of our guidance range of $2.13 billion and grew by 18% versus prior year
GAAP net income and fully diluted EPS both increased by 240%, with growth impacted by the goodwill impairment charge in Q3 2016. Non-GAAP fully diluted net income per share was $35.22, up 19% versus the prior year, exceeding our guidance for the quarter and FactSet consensus of $34.26. In terms of cash flow, we generated $1.9 billion of cash from operations during third quarter 2017, which is an increase of about 24%
In July, we paid about $556 million of our international cash to close the Momondo acquisition
During the third quarter, we returned $586 million to our stockholders through share buybacks
Since September 30 through Friday, we have spent an additional $166 million to purchase 87,000 shares
Year-to-date free cash flow amounted to almost $3.3 billion, growing by 20% compared to the prior year
About 34% of our gross profit converts to free cash flow, which is a function of attractive profit margins and capital efficiency for our business
Our cash and investments amounted to $18.4 billion at quarter close, with about $2.5 billion of that balance in the U.S
Now for Q4 guidance, our guidance assumes that our growth rates will decelerate mainly due to the size of our business and consistent with long-term trends
Our guidance also reflects an exceptionally difficult prior-year comparable because our 31% room night growth in the fourth quarter last year was the highest we had achieved in several years
<UNK> just discussed steps we are taking to optimize the efficiency of our performance advertising spend, which we forecast will have a modestly negative impact on top line growth for the coming quarters
Our Q4 forecast is based upon recent foreign exchange rates, which favorably impact our growth rates expressed in U.S
dollars
We have hedge contracts in place to substantially shield our fourth quarter EBITDA net earnings from any further fluctuation in currencies versus the dollar between now and the end of the quarter, but the hedges did not protect our gross bookings, gross profit or our operating profit from the impact of foreign currency fluctuations
We are forecasting booked room nights to grow by 8% to 13% and total gross bookings to grow by 9.5% to 14.5% in U.S
dollars and by 5.5% to 10.5% on a constant-currency basis
Our Q4 forecast assumes the constant-currency accommodation ADRs for the consolidated group will be down by about 1% compared to the prior-year period
We forecast Q4 gross profit to grow by 10.5% to 15.5% in U.S
dollars and by 6% to 11% on a constant-currency basis
GAAP operating margins, expressed as operating income as a percentage of gross profit, are expected to be about 340 bps lower than prior year Q4. Q4 adjusted EBITDA is expected to range between $870 million and $910 million, which at the midpoint, is up about 2% versus prior year
We forecasted adjusted EBITDA as a percentage of gross profit will be about 350 bps lower than prior year Q4. Our Q4 forecast reflects an assumed improvement in year-over-year performance marketing efficiency
The deleverage assumed in our forecast reflects the investments in brand advertising and non-advertising operating expenses that <UNK> just spoke about
The investments in brand advertising and non-advertising operating expenses have a more significant margin impact in Q4 and Q1, which are quarters in which we earn a smaller share of our annual profits due to the normal seasonality of our business
We forecast GAAP EPS between $12.60 to $13.20 per share for Q4, which at the midpoint is down by about 4% versus prior year
Our EPS guidance assumes a fully diluted share count of about 49.7 million shares, which reflects the beneficial impact of common stock repurchases we've made to-date, offset by additional equivalent shares related to our convertible bonds due to the increase in our stock price
Our GAAP EPS guidance assumes a tax rate of 17% compared to the prior-year tax rate of 12%, which was beneficially impacted by non-recurring discrete items
We are forecasting Q4 non-GAAP fully diluted net income per share of approximately $13.40 to $14.00 per share, which at the midpoint is down by about 4% versus prior year
Our non-GAAP EPS forecast includes an estimated income tax rate of approximately 18%, which is higher than the prior year rate for the same reasons I just discussed for the GAAP tax rate
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
Question-and-Answer Session
The couple of things I called out in the prepared remarks, <UNK>, were, in particular, the comp that we had to prior year, where we had really high growth rates and the steps that we're taking in performance marketing to optimize ROIs
So I think that that will be with us for the coming quarters until we lap it
But I wouldn't call it structural
And fundamentally, the travel market feels healthy
You see the results reported by the big hotel chains and our competitors
It feels pretty strong to us
The things that have driven our growth in the past, rapidly adding properties to the platform, that continues
And I'm confident that our teams will continue to execute very effectively in adding properties going forward, continuing to improve the experience for our customers on our platforms, which drives better conversion and loyalty over time, and then also continue to effectively advertise our brands to bring new customers to the franchise going forward
So nothing structural from our perspective
Okay, <UNK>
This is Dan
I'll take that one
So, yeah, we said that as we proceeded through the quarter, we experimented with ways to better optimize our performance marketing spend
And I'd say, relative to our guidance that probably had a modest negative impact on top line growth and had a favorable impact on our performance marketing efficiency and bottom line profitability
That said, we're still pretty pleased with the growth that our teams were able to deliver with the marketing mix that they employed
And so we like the results that we saw in Q3.
You're welcome
I'd just say that over time, driving customers to come to us directly should have a nice beneficial impact on overall advertising efficiency
We'll reach some point in time where we're in the markets we want to be with brand advertising and we're spending the level of spend we think that's right to get the reach and frequency that we want
And so we should be able to have good leverage in the longer term once we get to that optimal level of spend
You're welcome
<UNK>, in terms of the U.S
trend over the last several quarters, we're very pleased with the performance of Booking
com in the U.S
We believe booking is growing its share in the U.S
, posting very healthy growth rates over the last several quarters
So that's for the U.S
We've seen improving performance for the Priceline
com business, which is a nice plus, too, as that's a U.S
And then, in terms of brand trends, our forecasts are done the way we do it every quarter, which is look at the actual results we've seen thus far in the quarter and trend off of that generally assuming that we'll see some deceleration as we proceed through the remainder of the quarter, given the size of the business and the long-term trends
So we didn't build in anything specific related to the advertising spend that's planned for the quarter
Our experience has been as we've done many years of TV advertising for Priceline and for KAYAK, and we've been active in TV advertising for Booking
com since 2013, it's a slower build – a slower return on investment typically for that spend
We are doing a better job and improving our capability to measure effectiveness of the advertising, but that doesn't mean it's positive ROI day one
So we think it's going to be the right thing to do for the long term
But in the short term, it's probably going to pressure margins and not deliver the same kind of pop to top line growth the way intent-based advertising would
You're welcome
As <UNK> said in the prepared remarks, it's more just – it's been an ongoing trend for us that we've seen pressure on ROIs, deteriorating margins in our performance marketing spend
And so it was re-evaluating that and looking for ways to start to arrest that trend and even move – starting in a more positive direction
So I'd say nothing specific
Our conversion continues to generally improve on our websites as our teams experiment to continue to see improve the experience for our users
And so nothing there that really drove it
And I'm sorry, was there a second question?
You're welcome
And in terms of penetration, <UNK>, we've made the comment before that we've got a mid-single-digit share of the properties that are available on our website
That's a broad statement of all the properties
But we've been very pleased with our vacation rental business
It's been a fast-growing business for us, growing faster than our consolidated growth rate
So you can assume that the performance there is good and that the penetration opportunity also exists there
You're welcome
Regarding the size of the vacation rental business, we haven't disclosed those stats
You can see the growth in the property count
And you can assume that we wouldn't be doing that if that wasn't growing fast for us
We've said that it's growing faster than the consolidated growth rate
So it's an important – it's a meaningful part of our business, but we aren't going to disclose exactly how big it is today
You're welcome
And when you talk merchant commissions, <UNK>, I assume that you're just looking merchant gross profit divided by merchant gross booking
That's a function of timing, really
The fundamental take rates are stable, but we've got decelerating top line growth, meaning gross bookings growth have the benefit of checkout still occurring from prior faster-growing quarters, and so that's what you're seeing there
You're welcome
I agree
There's nothing that was called out in the chain reports for the quarter that would lead me to believe that anything has changed significantly there
And I'm with <UNK>, I think the growth that we posted and the growth that we're guiding to is spectacular relative to the fundamental growth of the market
The new alternative accommodation business is somewhat less profitable from a partner services perspective
So there are less rooms for property, a lot of properties still to go and gather, and then, typically, requiring a little bit more help in working with our service because they're less sophisticated than the hotel properties that we had initially worked with
From a customer service perspective, too, a little bit more hands-on touch with customers given the unique nature of these properties
That said, the profitability of our vacation rental business is still very impressive, growing fast
We're making investments now, partly in the teams that are facing properties and facing our customers, to make sure we can stay up with the growth
But we're also making significant investments on the IT side
So we're adding teams of people under our booking home umbrella, and they're focused on improving the experience with property owners, including individual property owners that are putting their apartment or home up for rent, to make it a more intuitive experience, easier for them to self-signup and improve efficiency that way
And then, also on the customer service side, improve the experience on the website, there's a number of reasons why people contact our customer service teams asking questions
And as we see what's driving those contacts, looking to improve the amount of information that's available for the customer to serve themselves on the website, answer that question before they ask it
<UNK> talked about the use of machine learning
Hopefully, we can bring that to bear also to just automate some of these processes
So I don't know that it will ever be as profitable as our core hotel business from the perspective of partner services or customer service
But I think there is the opportunity to improve the profitability there and to see better trends over time as the business scales
In terms of exclusivity, that's not something we typically strive for
We want to win our partners' loyalty by bringing them demand at a reasonable price rather than some sort of contractual block-out of other demand platforms
Then in metasearch, <UNK>, we're really pleased with the performance of our KAYAK business
It's growing nicely
It's one of the bigger players out there on meta side
And I'd say, it's – if you want to talk market share of profits, it's right near the top of the list
So very profitable business, growing
I think run very responsibly by Steve Hafner and his team
And we're excited about the prospects of bringing Momondo and KAYAK together and sharing best practices from brand to brand and having the teams work together to make both brands stronger in the future
You're welcome
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