Booking Holdings Inc. (NASDAQ: BKNG) Q4 2020 earnings call dated Feb. 24, 2021
Glenn D. Fogel — Chief Executive Officer and President
David I. Goulden — Executive Vice President and Chief Financial Officer
Lloyd Walmsley — Deutsche Bank — Analyst
Justin Post — Bank of America Merrill Lynch — Analyst
Kevin Kopelman — Cowen and Company — Analyst
Eric Sheridan — UBS — Analyst
Douglas Anmuth — J.P. Morgan — Analyst
Naved Khan — Truist Securities — Analyst
Stephen Ju — Credit Suisse — Analyst
Mario Lu — Barclays — Analyst
Jason Bazinet — Citigroup — Analyst
Welcome to Booking Holdings’ Fourth Quarter 2020 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 would like to introduce Booking Holdings’ speakers for this afternoon, Glenn Fogel and David Goulden. Go ahead, gentlemen.
Glenn D. Fogel — Chief Executive Officer and President
Thank you, and welcome to Booking Holdings’ fourth quarter conference call. I’m joined this afternoon by our CFO, David Goulden. Despite a travel environment that continues to be very challenging, we closed out 2020 by delivering fourth quarter results that were a bit better than the expectations we talked about on our last earnings call. David will provide the details on the fourth quarter results in his remarks. For my time, I will first briefly reflect on our execution during the extremely difficult year of 2020. Then I will share our thoughts and strategic priorities for 2021 and beyond. Without a doubt 2020 presented the biggest disruption to modern global travel the world has ever seen and our results for full year 2020 were down substantially from 2019.
However travelers still book 355 million room nights through our platforms during 2020 and we remain profitable by generating approximately $880 million in adjusted EBITDA. Delivering these results during this unprecedented and unpredictable year is a credit to our team’s relentless efforts to provide the best value and service to our traveler customers and to our supply partners while all the time remaining incredibly focused on operating efficiently. When we spoke to you on our earnings call in May of 2020, we outlined a series of plans that would help us navigate through the COVID-19 crisis. First, we said we would stabilize the business from the immediate shock of the crisis. Second, we said we would optimize the business for the expected decrease in travel demand over the next few years.
And third, we said we would position the business to be able to capture travel demand when it returns. Based on our accomplishments in 2020, I can confidently say that we executed well against these plans. In the beginning of the crisis, we successfully stabilized the business by taking several immediate steps including: quickly closing offices and smoothly transitioning to a distributed work environment to protect the health and safety of our employees, which was and continues to be a top priority; working closely with travelers and supply partners to process the unprecedented level of travel changes and cancellations, and bolstering liquidity and preserving cash by holding stock buybacks cutting non-essential costs and raising over $4 billion in capital through a debt offering. And we began the process and have almost entirely completed our work to optimize the business for the decrease in travel demand through the restructuring actions we have taken at each of our brands across the company.
As a result of these actions, our 2020 year end headcount decreased approximately 23% versus 2019 primarily in volume-related position. We expect these reductions to result in annualized cost savings of about $370 million in personnel expenses with about $110 million of savings recognized in 2020. All our work is never done in terms of finding opportunities for cost efficiencies. We believe the headcount reductions needed to optimize the business for the current demand environment are now generally behind us. Finally, we believe we have positioned the business well for when travel demand returns. We continue to make progress against our key strategic priorities during 2020 and this progress has continued as we have moved into 2021.
We remain active in performance marketing channels and are being agile and adapting our approach to this very uncertain environment, and we will leverage our learnings from the past year to continue to capture demand in these performance channels at appropriate ROIs. In addition, our marketing team has been working hard to develop campaigns and messaging that we will deploy when we believe the time is right to encourage people to travel once again and use our services. As we think ahead about 2021 there is considerable uncertainty regarding the exact shape and timing of the recovery for travel. The rate of recovery will depend heavily on the rate of new COVID-19 cases, including new potentially more transmissible and more dangerous variants and on the timing of effective and broad-based vaccine distribution, which we believe will be a key step in helping people feel safe to travel again.
We are tracking early signs of encouraging summer booking trends in Western Europe, primarily the UK and Germany, relative to what we are seeing globally. Although in each case, gross booking levels are still below where we were at the same point in time in 2019. While seeing green shoots of a summer booking season positive, it’s uncertain whether these trends will continue and whether we will see this summer booking strength expand into other countries and regions, and of course whether these advanced will turn into stayed room nights, or will be canceled. What would be most helpful will be continued government action around the world to accelerate vaccine distribution while providing direct and indirect support to the entire travel and hospitality industry.
Additionally, international travel remains extremely depressed and recovery will not be possible until government restrictions on international travel are lifted or modified to travelers who can show they are safe travelers are allowed to travel freely. As you know, our International business has been a great advantage for us historically and we expect it will be in the future, but we anticipate this to be a longer recovery. We know that people have a very strong desire to travel. We saw this first hand in 2020 when we witnessed a strong improvement in our booking trends from the lows of April through the peak summer travel season, driven in part by pent-up demand, as people came out of lockdowns. The travel that was booked last year was much more domestic-oriented than in prior years as many people adapted to the restricted travel environment and still found a way to take a trip.
With many travel restrictions now in place around the world we believe there is once again a high level of pent-up demand for travel, but when this demand will be fully unlocked is of course difficult to predict and it will depend on vaccination rates and other factors. While the trending of the pickup in travel demand is beyond our control we are focused on things we can control, primarily better positioning our business by continuing to invest and execute against our key strategic priorities including expanding the payment platform at Booking.com, building out our Connected Trip capabilities and growing our market share in the United States. Our integrated payment platform at Booking.com provides payment options favored by both travelers and our supplier partners across hotels, alternative accommodations, cars, flight and attractions.
It is strategically important as it enables merchandising capabilities that we haven’t had access to historically at Booking.com but we expect to utilize selectively in the future to help drive growth. In addition, this payment platform is foundational for enabling our Connected Trip strategy. We continue to make progress expanding the payment platform with approximately 22% of Booking.com’s gross bookings in 2020 processed on the platform. This was up from approximately 15% in 2019 and was less than 4% back in 2017. So this is a dramatic shift in our large-scale business. We are optimistic about recent improvements in our Booking.com U.S. payment platform, which will enable increased utilization of payments in this critical market.
We expect to see a higher percentage of Booking.com’s gross bookings processed on the payment platform in 2021 as compared to 2020 and expect these increases to continue beyond 2021. Our Connected Trip vision is a multi-parted offering including accommodations, flights, ground transportation and attractions in dining connected by our seamless payment network and ultimately supported by personalized intelligence to provide a frictionless experience for our bookers, all the way from the initial booking to experiencing their trip. We are building towards this vision, because we believe that Connected Trip will drive increased loyalty and frequency and will enhance the growth of our accommodation business to additional customer acquisition and merchandising opportunities.
Developing a robust flight product at Booking.com remains an important strategic component of the Connected Trip as it gives us the ability to engage with flight bookers early in their travel journey and allows us an opportunity to cross-sell our accommodation and other products to those bookers. In the coming years we expect flights will represent an increasing mix of our overall business, which will help drive incremental revenue and EBITDA dollars. As mentioned in the past growing our share of the U.S. travel market remains a key strategic priority for our company as the U.S. is one of the largest travel markets in the world and we have historically under indexed there. We are taking several steps to increase our competitiveness in the U.S. market and are focused on making sure we are offering great value to our customers, improving our payments platform to enable bundling and merchandising opportunities, increasing overall consumer awareness of our Booking.com to marketing and expanding our alternative accommodation supply.
While we have built a large and competitive alternative accommodations business globally we believe we have a significant opportunity for improvement in the United States, which will involved product improvements, supply acquisition and raising consumer awareness of this type of inventory on Booking.com. The key to invest and execute against these three strategic priorities as one is capturing demand as travel recovers will be our focus in 2021. We believe successful implementation of these priorities is key to achieve higher growth rates, increasing market share and eventually building a larger business with higher earnings than we had prior to COVID. We expect this larger business to have a higher mix of merchant transactions and non-accommodation products, both of which will negatively impact our EBITDA margin rates.
But we expect to continue to lead the travel industry in this metric. Finally, I want to address the European Commission’s initial proposal from the Digital Marketing Act and Digital Services Act released in December. The European Commission has proposed regulations and to keeping markets fair and open, which is an ambition that we support. However, at the present time it is not known for certain what the ultimate rules will be, how they might be applied, or what the impact will be on us and other market participants. We are engaged with State service to work towards regulations to tackle the legitimate problems of the large gatekeepers in the digital community of which we believe we are not one. We will update you in the area during future calls.
In conclusion, there are still tough days ahead of us and everyone in the travel industry. COVID case counts remain high and the wider global distribution of vaccines is still too slow. However, I am more confident than ever in our long-term future and we will at some point see a strong recovery in travel demand. I firmly believe that our company is very well-positioned to capture this demand as it comes back. In the meantime, we will focus on what we can control, namely investing in our business and executing against our strategic priorities to ensure we exit this crisis on a strong footage, which will enable us to build a larger and faster growing business for the long run.
I’ll now turn the call over to our CFO, David Goulden.
David I. Goulden — Executive Vice President and Chief Financial Officer
Thank you, Glenn and good afternoon. I’ll review our operating results for the fourth quarter, provide some color on the trends we’ve seen so far in the first quarter and then discuss our expectations for 2021 and our longer-term operating model. To avoid the comparison to the initial spread the pandemic in 2020 all growth rates for 2020 and 2021 are relative to comparable period in 2019 unless otherwise indicated. Information regarding reconciliation of non-GAAP results to GAAP results can be found in our earnings release.
Now, onto the results for the fourth quarter; on the November earnings call, we discussed the trends we saw throughout the third quarter and into early November, including the year-on-year decline in reported room nights worsening from about 43% in the third quarter to about 58% in October and then further deteriorating to about 70% over the seven-day leading up to our November earnings call driven by rising COVID case counts and many European countries and governments beginning to respond with imposition of travel restrictions. As a reminder, reported room nights include the impact of cancellations.
The worsening trends we saw in early November, improved a little resulting in our reported room nights declining 60% for the full quarter. November proved to be the low point for the quarter. The decline in room night growth rates versus Q3 were driven by Europe where growth rate declined quite considerably. Looking across the other regions North America were similar to Q3 and Asia and the rest of world both improved compared to Q3. North America was the strongest region in Q4 with significantly lower year-on-year earlier decline in room nights than the other regions. Mobile bookings, particularly through our apps continued to gain share in the fourth quarter and represented over two-thirds of our total room nights in Q4 and about two-thirds of 2020.
We also continue to see growth in 50% of our total room nights come to us through the direct channel. Domestic room nights represented about 85% of our reported room nights in Q4, up significantly versus 2019, which was just below 50%. Our cancellation rates continue to be up year-over-year in the fourth quarter and also increased versus Q3. We continue to monitor other changes in Booking.com customer booking behavior. The mix of customers booking alternative accommodations in Q4 were slightly lower than Q4 2019, while the full-year was up slightly versus 2019. The slight decline in the overall mix of alternative accommodations in Q4 was due to the underperformance of the European region, which is where we have our highest mix of alternative accommodations. The mix of alternative accommodations continued to increase year-over-year within Europe in Q4.
Booking.com’s alternative accommodations represented about 30% of its reported room nights for the full year 2020. The booking with the contracted versus 2019 in the fourth quarter are about the same rate as we saw in the third quarter as customers continue to focus mainly on the short-term travel needs. Gross bookings declined 65% in Q4, which is a great decline in reported room nights, due to the average daily rates for accommodations decreasing about 15% year-over-year on a constant currency basis. Consolidated revenue for the fourth quarter of $1.2 billion and decreased 63% year-over-year. As we expected, revenue in the quarter was less negatively impact than gross bookings due to the fact that revenue benefited from check-ins in Q4 from bookings received in the relatively strong third quarter.
Our full year revenue was also significantly less impacted than our gross bookings driven by the differences in the timing between fees and revenue, which is recognized as check-in primarily related to 2019 bookings that checked in, in Q1 2020. As a result of the declining [Phonetic] factors, our full year revenue as a percentage of gross bookings was 19.2%, which is significantly higher than the 15.6% in 2019 and 2018. If our revenue as a percentage of gross bookings in 2020 been in line with 2019 revenue would have been more than $1 billion lower for the full year. The difference between 15.6% and 19.2% is almost entirely explained by this timing difference. The 63% reduction in revenue resulted in adjusted EBITDA loss of $38 million in the fourth quarter.
While we significantly reduced our variable expense lines like marketing, sales and other, our more fixed expenses decreased to a lesser extent in Q4. As Glenn mentioned, we’ve almost entirely completed our restructuring actions, reduced personnel expenses to align our cost structure with the new demand environments. The savings recognized in our personnel expense line related to these actions was about $70 million in Q4 and about $110 million for the full year. We recorded charges of $74 million and $149 million related to these actions in the restructuring and other exit cost line for Q4 and the full year respectively. Marketing expense, which is a highly variable expense line decreased 61% year-over-year as we saw a significant reduction in demand in the paid channels.
In addition, we substantially reduced our brand marketing spend in response to the diminished travel demand environments. Sales and other expenses decreased 45% year-over-year primarily due to a reduction in expenses associated with payments transactions, partially offset by a mix shift in customer service to outsourced call centers. Personnel expenses decreased 13% year-over-year primarily due to restructuring actions I mentioned previously. G&A expenses decreased 36% year-over-year, largely driven by reduced discretionary expense in such areas as T&E, lower indirect taxes and lower office expenses due to employees working remotely. Information technology expenses were up 1% year-over-year in the fourth quarter due to investments in software license fees related to cyber security and privacy software.
Finally, we’ve broken out restructuring charges separately in operating expenses in the P&L, and I note that these restructuring charges are included in our non-GAAP results. We recorded a non-GAAP net loss of $23 million in the quarter. Our full-year non-GAAP tax rate of 42% was meaningfully higher than our 2019 tax rate of 19% due to the greater impact of non-tax deductible expenses on a lower base of earnings as well as the geographical distribution of earnings and losses. Our Q4 non-GAAP tax rate was driven by change in our full year tax provision following better than expected pre-tax results in the fourth quarter. On a GAAP basis, we had an operating loss of $153 million in Q4. We recorded a GAAP net loss of $165 million in the quarter as the benefit from an unrealized $553 million pre-tax gain on our equity investments, primarily related to our investment in Meituan was offset by income tax expenses of $410 million, $98 million of interest expense and $61 million of FX remeasurement losses on our eurobond.
We excluded the unrealized gains and the remeasurement losses from our non-GAAP results. The $410 million of income tax expenses is primarily due to the discrete tax expense related to the Meituan unrealized gain and the change in our full year tax provision, following better than expected results in the fourth quarter. Our full year GAAP tax rate of 90% was meaningfully higher than our 2019 tax rate of 18% due to the reasons mentioned from non-GAAP tax rate with the non-deductible goodwill impairment charge, driving an additional significant impact. Now onto our cash and liquidity position, our Q4 ending cash and investment balance decreased to $14.8 billion from our September ending balance of $14.9 billion due to an operating cash outflow largely offset by the unrealized gains on our long-term investments.
We had a $557 million operating cash outflow in the quarter driven primarily by changes in working capital, which represented a use of cash of about $400 million in the quarter as well as a net loss recorded in the quarter. The change in working capital driven by seasonal effects were amplified by the slowdown in bookings from Q3. We will continue to focus on maintaining a strong liquidity position given the high level of uncertainty created by the COVID pandemic and consistent with our comments last quarter, we’ve halted repurchases of our stock and will not initiate repurchase until we have better visibility into the shape and timing of a recovery. Now on to our thoughts for the first quarter and to remind you we’ll make comparisons with 2019 unless otherwise indicated. There continues to be considerable uncertainty about the shape and timing of the recovery for travel, which means we’re unable to provide detailed guidance at this time.
January room night declines were slightly worse in Q4, driven by the increasing spread of COVID-19, including the new strains with associated additional travel restrictions. However, [Indecipherable] middle of January, we saw an improvement in room night declines driven by domestic travel bookings in most part of the world and we’ve seen this improvement continue into February. In recent weeks, some regions have improved back to positive domestic room night growth. While difficult to predict with accuracy, if the domestic room night trends continued to improve, Q1 room night declines could be a few percentage points better than Q4. To give you a snapshot of what we’re seeing recently room night declines of last 7 days were about 50%,
In Q1, the overall booking window is contracted versus 2019, although to a lesser extent that we saw in the fourth quarter. In Western Europe in January, we saw an expansion of the booking window versus 2019 and we’ve seen this expansion continue into February as the share of further out bookings including those for summer travel has increased. As Glenn noted in Western Europe, particularly in the UK and Germany we have recently seen stronger summer booking trends relative to what we’re seeing globally and in these countries gross bookings for the summer period are 25% of where they were at the same time in 2019. These stronger booking trends in Western Europe are currently being offset by weaker near-term booking trends in the region due to extensive travel restrictions and we remind you that the significant majority of the summer bookings are cancellable.
We’re also encouraged to see that some countries are making notable progress in vaccinations including Israel, UAE, and the UK. We are confident that when vaccination are broadly available and when travel restrictions are lifted people will return to travel. We saw this happen recently in Israel where vaccination rates are the highest in the world and after the national lockdown within Israel was eased on February 7th, we quickly saw domestic bookings return to solid double-digit growth versus the same period in 2019. Turning to the income statement, as I said we expect Q1 room nights declines could be a few percentage points better than Q4. We expect Q1 gross bookings to decline a few percentage points more than room nights due to continued pressure on local currency ADRs.
We expect Q1 revenue to decline slightly more than gross bookings assuming bookings continue to improve for the rest of the quarter. We expect marketing expense in Q1 will decline at the same level as gross bookings. We expect sales and other expenses in Q1 will be similar to what they were in Q4 on a dollar basis with some variability based upon where Q1 volumes land. We expect personnel expenses in Q1 where we saw higher than they were in Q4 on a dollar basis, primarily due to increased SBC expenses and seasonal increase in benefit costs, partially offset by a higher amount of savings in Q1 related to the restructuring actions we’ve taken. We expect that almost a full run rate from our personnel restructurings will be realized in Q1.
We expect G&A expenses in Q1 will be about the same as it were in Q4 on a dollar basis. We expect that IT expenses will be higher than they were in Q4 on a dollar basis, primarily due to increased investments in security, data privacy and some operational system enhancements. We currently estimate the remaining restructuring charge related to actions of Booking.com will be about $40 million and we expect to record more than half of these remaining charges in the first quarter. About half of the $40 million related to personnel related actions and the other half relates to real estate. Given what we just explained and to remind you that Q1 is our seasonally lowest revenue quarter, we expect to report a greater EBITDA loss in Q1 than in Q4.
For full year 2021, I want to briefly walk you through some factors that we expect will impact our top line operating margins for the year. We expect the environment of travel to improve during 2021 but the shape and timing of that recovery remains uncertain. We expect occupancy rates to remain below where they were pre-COVID putting continued negative pressure on ADRs, which will result in our gross bookings being lower than our room nights. As I alluded earlier, our revenue was less negatively impacted than our gross bookings in 2020 due to timing factors, which benefited our 2020 revenue by more $1 billion. The opposite dynamic will happen when we experience an acceleration in bookings, which will lead to our gross bookings recovering faster than revenue.
Said another way, if we see this acceleration in 2021 there’ll be more bookings made in 2021 that will check-in in 2022 than there were bookings made in 2020 that checked in, in 2021. This timing factor could have a meaningfully negative impact on our revenue as a percentage of gross bookings. But exactly how meaningful this impact will be depends upon how quickly our room nights and gross bookings accelerate in 2021. Due to these differences and the timing of bookings versus check-in we also expect deleverage in our marketing expenses in 2021 as we incur the majority of our marketing expenses at the time of booking. The most significant expense items in sales and other are payment processing costs and outsourced customer service expenses.
We expect sales and other to be lower in 2021 than in 2019. The reduction will be smaller than the reduction in revenue. A few comments to help you think about our less variable expenses to 2021 and how they’ll most likely compare with 2019. We expect G&A to be down double digits versus 2019 driven by T&E, office and occupancy expenses with some variability from GST taxes if new ones are enacted during the year. Personnel expenses are likely to be quite similar to 2019 on a dollar basis. To help you understand this better, there are a few factors that contribute towards this. Our personnel expense run rate immediately before COVID hit was about $200 million higher than 2019 actual personnel expenses. Less than half of this was the annualization of people expense we added during 2019. And the rest was from people expense added to the business in the first quarter of 2020.
Our restructuring actions will reduce headcount expenses by approximately $370 million. So an impact of these two together will be to reduce personnel expenses by $170 million versus 2019. As we continue to invest in the business, we expect 2021 year-end headcount to be a little higher than at the end of 2020 with a mix shift towards product and technical positions. This will add about $100 million in personnel expenses in 2021. And finally SBC is expected to be higher than 2019 due to due to a few factors including the modification of some stock awards in Q1 2021 on the issuance of stock options in 2020.
Finally, IT expenses in 2021 will be higher than in 2019 due to investments in security, privacy and operational system enhancements as reported to our Connected Trip strategy. As we think beyond 2021, we’re looking forward to being a larger business with more diverse offerings and with more earnings that we had prior to COVID. We will also focus on the potential for higher growth and market share. We continue to believe it will be years and not quarters before travel returns to pre-COVID-19 levels. And when considering the shape of the business at that time, I’d like to draw your attention to two factors. The first is a mix shift within the business. The continued growth of payments and the growth of flights and other connected verticals will add revenue and EBITDA but at much lower margin rates than traditional accommodations.
Payments will add to revenue with offsetting expenses in sales and other plus some additional personnel and other expenses. Flights and other connected verticals will add to bookings and revenue but at lower take rates on accommodations and will also require added personnel and other expenses as these business scales. The second is personnel. The restructuring actions we took in 2020 were mainly in volume related functions, including customer service and credit collection. This means that as volumes grow beyond the levels we expect in 2021, we’ll need to add expenses back to business. As we mentioned before we look to do this in cost efficient ways but the work will come back.
We think it’s important to include these consideration when thinking about the future shape of the business. As Glenn said, we expect to continue to have industry-leading EBITDA margin rates, albeit most likely at levels below those in 2019. In conclusion, we remain focused on what we can control, and continue to execute against our strategic priorities. We’re now more confident than ever that through these actions we’ll emerge from this crisis in a stronger position.
We’ll now take your questions. And Grace, I’ll turn it over to you to open the line for questions.
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