BKNG
#Thanks, <UNK>
I'll discuss operating results and cash flows for the quarter and then provide guidance for the second quarter of 2017. All growth rates referenced in my comments are relative to the prior-year comparable period unless otherwise indicated
I highlight that as we have discussed for several quarters now, the non-GAAP figures for our Q1 results and Q2 forecast includes 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
2017 is off to a strong start
Room nights booked in Q1 grew by 27% despite a challenging prior year growth comp
We estimate that the shift of Easter into Q2 had a slightly beneficial impact on Q1 gross bookings growth with an offsetting negative impact to Q2 gross bookings growth which I will discuss further in a moment
The Q1 impact is offset by Q1 prior-year's extra day for leap year
Performance was strong across each of our key geographic regions, and we believe we grew our market share in the U.S
and internationally through outstanding organic execution by our brands
Rental car day growth also accelerated to 15% in Q1 compared to 14% in Q4. Average daily rates for accommodations or ADRs were up about 1% for Q1 versus prior year on a constant currency basis for the consolidated group which was consistent with our forecast
Foreign exchange rates unfavorably impacted growth rates expressed in U.S
dollars for our Q1 results as compared to the prior year
Q1 gross bookings grew by 24% expressed in U.S
dollars and grew by about 27% on a constant currency basis compared to prior year
Gross profit for the quarter for The Priceline Group was $2.3 billion and grew by 16% in U.S
dollars and by about 17% on a constant currency basis compared to the prior year
Gross profit as a percentage of gross bookings for Q1 is 84 bps lower than prior year Q1. The decrease is due largely to booked-versus-stay time lag, impacted by Easter shifting to Q2 this year and an expanding booking window
Other contributing factors to the variance are discounted closed user group rates and business mix
The shift of Easter from Q1 last year to Q2 this year also negatively impacts Q1 gross profit, operating profit, EBITDA, net income, and profit margins, and will benefit those metrics in Q2, in both cases compared to the prior year
Our international operations generated gross profit of $2 billion which grew by 17% in U.S
dollars and by about 19% on a constant currency basis compared to prior year
Gross profit for our U.S
operations amounted to $315 million which grew about 6% compared to the prior year
Advertising and other revenue, which is mainly comprised of non-intercompany revenues for KAYAK and OpenTable, grew by 8% in Q1 compared to the prior year
Margin performance was better than our forecast due to gross profit growth and advertising efficiency that exceeded our forecast
The timing of investments in non-ad OpEx was also favorable to forecast
GAAP operating income grew by 1% and GAAP operating margins decreased by 341 bps compared to Q1 last year, due mainly to performance advertising
Performance advertising deleverage was impacted mainly by the timing of bookings versus stays that I just discussed and strong growth in performance advertising channels
Adjusted EBITDA for Q1 amounted to $635 million which exceeded the top end of our guidance range of $580 million and grew by 4% versus prior year
GAAP net income and fully diluted EPS both increased by 22%
Non-GAAP net income per share was $9.88, up 7% versus the prior year, exceeding our guidance for the quarter and FactSet consensus of $8.82. Our non-GAAP tax rate of about 16% was favorable to our forecasted rate of 19%, mainly due to nonrecurring discrete tax adjustments in the quarter
In terms of cash flow, we generated $381 million of cash from operations during first quarter 2017 which is an increase of about 10%
We made a pre-payment of income taxes in the Netherlands in Q1 to earn a pre-payment discount, which negatively impacts operating cash flow for Q1 but will benefit subsequent quarters when the taxes would've otherwise been due
During the quarter, we returned $212 million to our shareholders through share buybacks
In March, we raised €1 billion of cash for our U.S
parent company by offering a five-year bond in Europe at a 0.8% interest rate
Our cash and investments amounted to $15.5 billion at March 31, 2017, with about $2.3 billion of that balance in the U.S
Now for Q2 guidance
We are forecasting booked room nights to grow by 16% to 21% and total gross bookings to grow by 12% to 17% in U.S
dollars and by 15% to 20% on a constant currency basis
Our Q2 forecast assumes that constant currency accommodation ADRs for the consolidated group will be up by about 1% compared to the prior-year period
As mentioned a moment ago, seasonal factors added to growth in Q1 and are forecasted to pressure growth in Q2. We are comfortable with the combined forecasted growth rate for the first half of the year, which we believe is reflective of generally healthy macro travel trends and implies a continuation of market share gains evident in our reported Q1 results
We forecast gross profit to grow by 14% to 19% in U.S
dollars and by 17% to 22% on a constant currency basis
GAAP operating margins expressed as operating income as a percentage of gross profit are expected to be lower than prior-year Q2 by about 140 bps
Our Q2 forecast assumes year-over-year pressure on performance marketing ROIs and that paid channel growth will continue to be strong
Our forecast also reflects brand advertising and non-advertising expenses as we invest towards high travel season and innovation to drive future growth
Q2 adjusted EBITDA is expected to range between $860 million and $905 million, which at the midpoint is up 9% versus prior year
EBITDA growth and margins are impacted by the factors I just discussed for GAAP operating profit
We forecast GAAP EPS between $12.55 to $13.25 per share for Q2, which, at the midpoint, is up by about 11% versus prior year
Our EPS guidance includes interest expense on our recent bond issuance and assumes a fully diluted share count of 50.1 million shares, which reflects the beneficial impact of the common stock repurchases we have made to-date, offset by additional equivalent shares related to our convertible bonds due to the increase in our stock price
We are forecasting Q2 non-GAAP fully diluted EPS of approximately $13.30 to $14 per share which at the midpoint is up by about 8% versus prior year
Our forecasted non-GAAP income tax rate is about 18% for Q2 and the full year
Our Q2 forecast is based upon recent foreign exchange rates and assumes that our growth rates in U.S
dollars will be negatively impacted by foreign exchange rate fluctuations
Consistent with past practice, we have hedge contracts in place to substantially shield our second quarter EBITDA and net earnings from any further fluctuation in the Euro, British pound, and various other currencies versus the dollar between now and the end of the quarter
Our forecast does not assume any significant change or macroeconomic conditions in general, or in the travel market in particular
As <UNK> just mentioned, I have decided that now in my 14th year with the company, the time is right to start working towards my retirement
Equally importantly I think the time is also right for the company
We are in great hands with <UNK> and our brand CEOs running the business
Our brand CFOs and my headquarters finance team are world class and will keep doing great work as we transition to a new Priceline Group CFO
I will stay with the company as long as necessary to help recruit my successor and to ensure a smooth transition
I thank all my colleagues around the world for their incredible accomplishments over these many years
It has been a dream come true to be part of such a wonderful team
And we will now take your questions
Question-and-Answer Session
And as far as share in the U.S
, <UNK> <UNK>, we look at the market – we attempt to size the market based upon the properties that we have on our extranet
So there's over 1.2 million properties on Booking
com today
We know the number of rooms that are in those properties, and so we look at that as a proxy for the market
That includes vacation rentals
So in our room nights booked also include vacation rentals
So we see them as basically interchangeable with hotels and other types of properties as places where people want to stay when they travel and we want to give them the maximum number of choices
So looking at it that way, we can see our growth in total, we still have a relatively low share of the worldwide market single digits
And we can also see our growth for the U.S
market relative to the market's growth and relative to what other players have reported, including our biggest other online travel competitor
And we feel that we're gaining share based upon those metrics
You're welcome
Thanks, <UNK>
Well, first of all, for the guidance
No change in approach
Same approach that we've used every quarter
It's a little bit different, in that there's volatility in the early part of the quarter here because of the shift of Easter, and so that makes things a little bit more difficult
I'd say that the market remains healthy
We see occupancy in ADRs are strong
The seasonal impact has certainly negatively impacted growth for Q2. We think the booking window expansion that we have been talking about for a couple of years now is probably all else being equal moving some bookings that would have been made in the past in Q2 into Q1, and even into Q4 as people are booking early
If you look at the midpoint of our room-night guide for Q2 together with our actual results for Q1, it would imply a 23% growth rate, which would compare – it takes the seasonality out of it, with the shift of the hotel or booking window, a shift of Easter timing or booking window
So that 23% growth would compare to a 27% growth for the first half of last year, which we're comfortable with that
We think that's very solid performance
We expect the business to decelerate structurally given the size of it and the long-term trends that we have seen over many years
The growth may decelerate more in certain quarters
We have accelerated in certain quarters
But overall, for the long-term, our growth has been very resilient
It's been a pleasant surprise
The growth drivers that drive – have driven our growth in the past are still there, so the secular shift from offline to online continues
We still have a single-digit share of a very big market, so there's a lot of opportunity to continue to add properties and to continue to penetrate the properties we have more deeply
Our teams are adding properties at a very healthy rate, as <UNK> talked about, and we're working every day to continuously improve conversion on our websites
And then we have maintained a very consistent approach to advertising: no change in our approach, no change in competitive position that we can detect
So we continue to invest in reasonable ROIs to drive a healthy mix of top line growth and profitability
The 8% growth in guidance for EBITDA is a function of that top line growth that we talked about and then just the margin pressure that we're guiding to in the quarter, which is less than what we've seen over many of the last quarters where we've guided, and the drivers are pretty much every line item
So we are assuming that there will be more ROI pressure in Q2, but what I said last quarter, that overall we think for the first half of this year the margin pressure from performance marketing will be less than what we experienced in the back half of last year, I stay with that statement
I still feel comfortable with that
And then we're also investing in brand advertising as we're in peak booking season getting ready for peak travel season, and we're investing in OpEx for our brands, customer service people, property people to continue to sign new properties and continue our growth in the future
And then IT people that are working on innovative projects and just keeping up with the growth in the business
Thanks, <UNK>
Regarding the expanding booking window, I would attribute that more to people continuing to repeat with our business, becoming familiar with the model, with strong occupancy rates and rising ADRs, looking to book farther in advance and feeling comfortable doing that because they know we have a very flexible model and if their plans change later they're able to change their booking
So I think that's the more fundamental driver there
That I would expect to continue
If there were some significant change in macro or maybe people felt less comfortable about whether or not they were going to travel economically or the ADRs were dropping, maybe they would change their behavior
But it would still be a free option to make a booking and then if prices drop you can change your booking later
So I think that's what's driving that
And then ad efficiency was pretty solid in Q1. It's a mix of what's going on at all of our brands
So we have some brands like KAYAK and agoda leaning a little bit more heavily into brand advertising or discounting to drive demand to their websites
There's still underlying ROI pressure, in general, and it's the trend we've seen for many years now
I would expect to see that going forward too, <UNK>, until we don't see it for an extended period of time
I would just build that into the forecast
It's what we have built into our forecast for Q2. And so that's what's built in there
I wouldn't – there's nothing that I have seen that would lead me to believe that there's a sustainable ability for ROIs to improve year-over-year
You're welcome
I see a little less margin pressure than what you're talking about for Q2, <UNK>, unless you're adjusting for Easter timing
But then there would be less pressure in Q1. So, yeah, I'm seeing more like 150 bps for GAAP operating margins
It's always a balance between top line growth and bottom line growth
We try to strike a balance
From time to time, we see opportunities to invest in brand advertising
We think that's a good thing to do for our business for the long-term
There are OpEx investments that we've come across in the past, things like investing in mobile which have been critical to the success of the business
If you go back to 2012, we were a business that was generating room night reservations of 200 million and over the last 12 months we're more like 600 million room nights
So I think those investments have paid off and we're going to try to make start investments for the future
We're always looking to manage those expenses as closely as we can and with a fast-growing business we generally expect that we can make the investments that we need to make and not have pressure on margins from non-ad OpEx
But from time to time where we see the opportunity, we won't let short-term margin objectives do something that might be detrimental to the long-term growth of the business
And then performance advertising leverage, <UNK>, it's all the factors you mentioned
So it's what's happening with external players, what we're doing internally, again trying to strike a balance between top line growth and bottom line growth
So we're pushing into channels where we think we can do that efficiently
There's also the manner in which the auction is run by the advertiser, and we're balancing all of those to try and strike a good balance
What I answered earlier to somebody else's question, I wouldn't forecast that there's going to be leverage in performance marketing
I would have to see that for a number of quarters and have some reason to expect it to continue before I would build that into a forecast
While we have had quarters here and there where the leverage story on performance marketing has been better, in general now for many years, all the way back to 2012, it's been a source of margin pressure
And I've seen it as a source of margin pressure in other players in our space too
In fact, to a greater degree on their margins than what we've experienced with ours
So I feel comfortable that we are continuing to expand our lead in a very competitive marketplace, and performance marketing has been the most important tool that we have used to try and drive traffic to our website over our history and build our brands
We're improving our capabilities with brand advertising, and we look to deploy money there too where we think we can get a reasonable return
Even if it's over a longer period of time because there's typically a lag there between when you spend and then the benefit that you get by having more brand awareness and having people potentially come to you directly, which would improve the performance advertising metrics
And maybe even just cause them to search for our brand or a higher propensity to click on our brand when they search in other paid channels
So I think there's opportunities for us from time to time to invest a little bit more heavily in brand advertising and that would help, but I wouldn't forecast performance advertising leverage until we see that happening
And, <UNK>, your assumption was correct on the agency take rate
So you're looking at agency gross profit divided by agency gross bookings
That's down because of the Easter shift
The fundamental take rates are very, very stable
<UNK> <UNK> - Credit Suisse Securities (USA) LLC Okay
You're welcome
And, <UNK>, we feel like the broader macro trends are positive, particularly in the travel market
We see occupancy rates are strong, ADRs are up, the reported results of other players in the space I think we're very strong
So it feels to us like the macro is healthy
As far as it relates to the trend thus far in the quarter, it's a little bit clouded by the shift in Easter
So when there's a holiday like that where people are traveling, what we'll typically see is an uptick in cancellations going into the holiday for people whose plans have changed, and then while people are traveling, they're not making bookings, and so that impacts our gross bookings growth
So I'd say the broad macro is positive
It's a little bit difficult to read because of the impact of the shift in timing for Easter into Q2.
You're welcome
<UNK>, we're not seeing any significant impact on the booking window from the growth in vacation rentals on our site
And maybe that's based upon the way we're presenting them, very integrated into our search results, and so people are still searching the way they would search
<UNK>be there are some on-the-margin people that are coming in specifically looking for vacation rentals and they're booking a little bit earlier
But we think that the expansion in the booking window is more driven by growth in repeat users and direct traffic than the addition of vacation rental properties
Well, strong euro
Times have changed when – now the $1.09/€1 is a strong euro
We're used to the good old days of $1.30. So I see nothing to call out there, <UNK>
It's been relatively stable for the last year or so
It's kind of been in that like $1.05 to $1.10 range
So nothing that I would call out regarding change in travel behavior from the euro
And I'm sorry, what was your second question?
Sequential G&A, I mean, the key drivers in there would be office-related expenses, so rent and related occupancy expenses and personnel related expenses, travel, and so forth
It would just be investments that we're making in those areas as we're adding head count and being ready for growth in the future
And I would expect that that would be an area in particular, <UNK>, where we would have leverage for the most part going forward
So for whatever reason, if it's in Q1, it could surely just be from the Easter shift
You're welcome
Well, we don't have a Q3 forecast for you, <UNK>
So, I won't say whether the weighting will increase, because that could give you a read on the bottom line
But it will continue to be by far our biggest profitability quarter of the year given just the normal seasonality of the business with the great preponderance of travel happening in Q3 for high-season summer travel
I'll just add from last year, we couldn't notice anything discernible in our results when they were talking about issues with their website, so
Nothing that we could detect
