Glenn Fogel - President, CEO & Director David Goulden - EVP & CFO

Brian Fitzgerald - Jefferies Mark May - Citigroup Lloyd Walmsley - Deutsche Bank Mark Mahaney - RBC Capital Markets Justin Post - Bank of America Merrill Lynch Kevin Kopelman - Cowen and Company Douglas Anmuth - JPMorgan Chase & Co. Naved Khan - SunTrust Robinson Humphrey Brian Nowak - Morgan Stanley Heath Terry - Goldman Sachs Group Deepak Mathivanan - Barclays Bank Brad Erickson - Pacific Crest

Welcome to Booking Holdings Second Quarter 2018 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 morning, Glenn Fogel and David Goulden. Go ahead, gentlemen.

Good morning, and thank you for joining this morning's call. I want to start by apologizing for rescheduling the call from last evening to this morning. We needed the additional time to complete our checks on room nights and gross bookings. Now turning to our results for the quarter. I am pleased to report Booking Holdings performed well during the second quarter. Our revenue increased 20% year-over-year in U.S. dollars or about 16% on a constant currency basis. And adjusted EBITDA grew 35% year-over-year to approximately $1.3 billion. Our worldwide 191 million booked room nights was an increase of 12% year-over-year, exceeding the high end of our guidance range. Consolidated gross bookings were up 15% year-over-year in U.S. dollars or about 11% on a constant currency basis. While we are pleased with our financial results, we saw slower-than-expected room night growth towards the end of the quarter, which we believe is due in part to a greater-than-expected impact from the World Cup, in combination with some unusual weather in some of our core European markets which extended into the third quarter. David will provide further details on this in his remarks. Our performance marketing ROI optimization has continued to impact year-over-year growth rates, as has slower growth in some performance marketing channels. We have talked about this in the past about our desire to decrease our historical dependency on performance marketing channels and increase our direct business. At this time, we are pleased with the trends we are seeing in our traffic mix. Our direct channel, which represents approximately 50% of our total booked room nights, is not only one of our fastest-growing channels but also represents a significant source of new users to our platform. These are important metrics we use to evaluate the long-term health of our business, which you can see in our strong bottom line results. A year ago, I talked about the importance of measuring the effectiveness of our paid channels, and we will continually evaluate the efficiency of our performance marketing spend in paid channels. We said we would deploy capital in the channels that offer us attractive ROIs and provide the best user experience for our customers. Our strategy has not changed since then, and we remain open to leaning into channels that make themselves more attractive to us as an advertiser, work with us to improve the customer experience and help us build our brand. Regarding brand marketing. We have not been able to ramp the spend as quickly as we had hoped in the first half of the year. But we believe we are exercising appropriate prudence regarding new brand campaigns and channels. And we remain confident that over time, we will build a strong brand marketing effort, which, in the long term, will produce a beneficial impact and increase our direct business. Overall, we are executing on our long-term strategies that we outlined at the end of last year, which is to provide a more holistic travel experience for our customers in order to further drive loyalty and build a larger direct brand. Providing the most accommodation choice with the best customer value and experience is a key piece of this strategy, and I am pleased with our progress in building a leading alternative accommodations platform. As of June 30, Booking.com had a total of approximately 28.8 million reported listings, consisting of approximately 23.3 million reported listings in hotels, motels and resorts; and approximately 5.5 million reported listings in homes, apartments and other unique places to stay. Reported listings for our alternative accommodation category was up 23% year-over-year. And booked alternative accommodation room nights continues to grow faster than our consolidated growth rate, which shows that our focus on providing maximum choice for our customers is delivering results. Providing local experiences, in-stay services and ground transportation are also important components of our holistic travel vision. And we are in the early stages of building a robust local experience product through both organic investment in acquisitions such as FareHarbor, which we announced last quarter. While the volume of attractions and other travel-related services is still very small compared to the size of our accommodation business, we are happy to report that the foundational blocks are being laid. And we believe that in the long term, providing a frictionless booking and payment experience in this area will be a competitive advantage. As we have said in prior calls, the APAC region remains an important growth market for us, and we continue to make investments in this region. Agoda is growing faster than our consolidated growth rate. China remains a focus of ours, and we are building there organically as well as through strategic partnerships. The recently announced DiDi investment and strategic relationship is an example of this strategy. We are pleased about this partnership and potential to help both DiDi's and our customers travel in a more seamless way. Also during the quarter, we announced the acquisition of HotelsCombined, a leading hotel metasearch brand with a strong presence in several APAC markets. HotelsCombined will report into KAYAK and will further help us become the global market meta leader through increased scale, greater geographic breadth in the world's fastest-growing region and expanded hotel and affiliate services. We hope to close this transaction later this year. In summary, we produced a solid quarter with industry-leading cash flow and margins. We continue to invest in the business for the long term and remain focused on driving quality growth that we believe will make us a stronger and more competitive player in this enormous global travel market opportunity. I will now turn the call over to our CFO, David Goulden, for the detailed financial review.

Thank you, Glenn, and good morning. I'll discuss our operating results and cash flows for the second quarter, and then provide guidance for the third quarter of 2018. All growth rates are relative to the prior year comparable period, unless otherwise indicated. As we discussed last quarter, all year-over-year growth rates referenced in my remarks and Q3 guidance will compare the current year income statement under the new revenue accounting standard to the prior year under the previous accounting standard. Gross bookings and other metrics, like room night reservations, are not impacted by the new revenue accounting standard. Our non-GAAP financial results and forecast includes stock-based compensation and are reconciled to our GAAP results in our earnings release. Now on to our results for the quarter. In the second quarter, our strategy to optimize performance marketing ROIs drove significant improvement in our operating margins. The result was a third quarter in a row of expanding adjusted EBITDA margins and bottom line performance that substantially exceeded our guidance range and FactSet analyst estimates. Room nights booked in Q2 grew 12%, which beat the high end of our guidance range. Stayed room nights in Q2 grew faster than booked room nights. As I mentioned on the last call, we have factored some impact from the World Cup into our room night guidance for June. I also commented that the actual impact was difficult to predict. We observed that the impact during the World Cup period in late June, but also running into early July, was larger than we had estimated, in part due to many of our larger booking country's national teams making it deep into the tournament. We also believe that unusually warm and dry weather in Northern Europe during the World Cup period had a compounding impact on bookings. Post-World Cup, we've seen a pickup in bookings in Europe, although the unusual warm and dry weather in Northern Europe continues. Average daily rates for accommodations, or ADRs, were relatively flat for Q2 versus prior year on a constant currency basis, which was better than our forecast of down about 1%. Foreign exchange rates favorably impacted Q2 growth rates in U.S. dollars by about 400 basis points. However, given the strengthening of the U.S. dollar since our last guidance, exchange rates for the quarter were unfavorable by about 100 basis points from that time. Q2 gross bookings grew by 15%, expressed in U.S. dollars, and grew by about 11% on a constant currency basis, coming in about 2 percentage points above the high end of our guidance range. Consolidated revenue for the second quarter was $3.5 billion and grew by 20% in U.S. dollars and by about 16% on a constant currency basis. Future revenue include $40 million from the Momondo Group, an acquisition we closed in July 2017. Revenue for the second quarter of 2018 under the current revenue standard was about the same as it would have been reported under the previous revenue standard. Advertising and other revenue, which is mainly comprised of non-intercompany revenues from KAYAK and OpenTable, grew 34% in Q2 compared to the prior year, including revenue from Momondo. GAAP operating income grew by 37%, and GAAP operating margins increased by 432 basis points compared to Q2 of last year. GAAP net income amounted to $977 million or $20.13 per share, which grew by 40%. Our GAAP net income includes a $21.8 million benefit related to an unrealized gain on our equity investment in Ctrip, which is now recorded in the income statement rather than the balance sheet due to an accounting change that took effect in Q1. We excluded this unrealized gain from our non-GAAP results. Our GAAP tax rate for the quarter was 19.2%, which was a little better than forecasted. Adjusted EBITDA for Q2 amounted to $1.313 billion and grew by 35%. Adjusted EBITDA also excludes the previously mentioned Ctrip gain. Our adjusted EBITDA margin of 37% was substantially better than our forecast, due mainly to performance marketing efficiency, higher revenue in the quarter and lower-than-expected spending on brand marketing due to the factors that Glenn discussed, plus some timing, primarily in digital channels. As expected, non-marketing OpEx pressured year-over-year margins as we continue to invest in new markets and new capabilities, as Glenn described in his remarks. Our non-GAAP EPS was $20.67, up 36% versus the prior year. Non-GAAP net income reflects a non-GAAP tax charge of 19 point -- tax rate of 19.3% in Q2, which increased from the prior year due to the impacts of the U.S. Tax Act and the higher Innovation Box tax rates in the Netherlands. Our cash and investments amounted to $16.8 billion at quarter-end. In Q2, we generated $1.6 billion of operating cash flow, which grew by 35% compared to the prior year. Our free cash flow for the quarter was $1.5 billion, which is 35% higher than Q2 of '17. We returned about $1.2 billion during the second quarter to our shareholders through share buybacks. Since the start of the year, we reduced our fully diluted share count by approximately 2%. As of June 30, we had approximately $8.6 billion remaining of our share purchase reauthorization. We continue to be both programmatic and opportunistic with regard to our repurchases and, under stable business and market conditions, expect to complete this authorization within the remainder of the 2 to 3 year time period we talked about last quarter. Turning to Q3. 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 approach to guidance has not changed. Foreign exchange rates are expected to be an approximately 200 basis point headwind to year-over-year growth rates in Q3, which represents an approximately 300 basis points unfavorable change from where FX rates were at the end of April and approximately 200 basis points from the date of our last earnings call. We used a dollar to euro exchange rate of 1.17 when setting our Q3 guidance. We are forecasting booked room nights to grow by 69% and total gross bookings to grow by 3% to 6% in U.S. dollars and by 5% to 8% on a constant currency basis. Our Q3 forecast assumes that constant currency accommodation ADRs for the company will be about flat compared to prior year. We forecast Q3 revenue to grow by 6% to 9% in U.S. dollars and by 8% to 11% on a constant currency basis. Q3 adjusted EBITDA is expected to range between $2.3 billion and $2.36 billion, which represents 5% to 8% growth versus prior year. We forecast that adjusted EBITDA margin will be slightly lower than Q3 last year. Our Q3 forecast assumes that our ROI optimization efforts will continue to yield year-on-year performance marketing efficiency. However, we expect the year-over-year improvements to moderate as we begin to lap these optimization efforts, which started in the middle of Q3 last year. We expect the deleverage from our investments in brand marketing and non-marketing OpEx expenses will more than offset the leverage from performance marketing in the quarter. On the last call, we commented that deleverage from non-marketing OpEx and brand marketing will diminish in the second half as we lap investments we made last year. We expect this to continue to be the case for non-marketing OpEx. But due to the phasing of our brand spending, we expect deleverage in the second half of the year. We forecast GAAP EPS to be between $35.85 and $36.85 for Q3, which represents 4% to 7% growth versus prior year. Our EPS guidance assumes a fully diluted share count of about 48 million shares, which reflects a beneficial impact of our -- the common stock repurchases we made to date. Our GAAP EPS guidance for Q3 assumes a tax rate of approximately 21% compared to the prior tax rate of 17%. Our current year tax rate is higher than last year due to impacts of the U.S. Tax Act as well as the increased rate of Innovation Box Tax in the Netherlands. We're forecasting Q3 non-GAAP EPS of approximately $36.70 to $37.70, which represents 4% to 7% growth versus prior year. Our non-GAAP EPS forecast includes an estimated income tax rate of approximately 21%, which is higher than the prior year rate of 17%, due to the same reasons I just discussed for the GAAP rates. We have hedged contracts in place to substantially shield our third 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. With that, we'll now take your questions.

[Operator Instructions]. And our first question comes from Brian Nowak from Morgan Stanley.

I have two. The first one, on the performance marketing optimization. Just curious, as we think into the back half and into 2019, philosophically, are you still looking for further areas for ROI and performance optimization of business more efficient that we should expect to go into the back half and into next year? And then secondly, on Europe. Just kind of looking for any further color on the growth of your largest business in Europe as you're guiding to a single-digit overall room night growth. How should we think about the potential for European growth rate over the next, call it, 2 years or so, given how large the business is at this point?

Brian, it's Glenn. I'll give my comments on this first, then I'm going to give David a chance to give his opinion on all of this. So regarding optimization, and we've talked about this in the past, about our reasoning why we decided to optimize and what we're trying to do in terms of building out a much more powerful and, we think, very important to us brand and direct marketing approach. It's very hard to predict in these very dynamic pay-for-performance markets what's going to happen because there are so many influences that are coming in and particularly what your competitor is going to do. But what I want to point out is what I said in my prepared remarks, and it really comes down to what we said when we first started this almost a year ago. I think almost exactly a year ago, I said this. For those advertising platforms that are willing to work cooperatively with us so that together, we can build better business for both of us to create something that is a great customer experience, something that helps build our brand, something that again is not something that is sort of competitive but is cooperative, we're always willing to lean in and work with them. And we've been doing it with a number of them. Some are more cooperative than others. So in terms of the answer to that, it really depends also on how others are going to act. In regards to Europe, yes, we have a big business in Europe. But -- and it is our biggest geographical area. But I still want to point out, it's still a relatively small part of the overall travel business in Europe. And we have a lot of ramp left both in our core business, which I would consider to be our hotels in urban areas, but then there's even more opportunity in all the other areas, as we talked about building out NHA, which is a very fast site, non-hotel accommodation. It is a very fast-growing area. And then we've talked a bit about the holistic travel service that we want to provide. So I think there's still a lot of opportunity there. We are at different stages of development in all of it. But I do not believe that this is something where we are running out of ramp at all. And I'll turn it over to David.

Thanks, Glenn. No, I think I would just reinforce that as we've been looking into the market opportunity, even in our strongest markets, there's a lot of what I'll call white space. And it's an opportunity for us to grow, not only in the new areas, but also in the core hotel areas where we have obviously very strong shares in certain particular types of travel and less strong share in other travel. So we think there's a lot of growth opportunity over and above what the market growth rates are sitting in Europe. And going back to performance marketing optimization, I think Glenn again summarized it very well. These are dynamic marketplaces. Obviously, you saw we had very good results in the Q2 and much beyond what we guided to in terms of optimization, driving a number of the -- a large piece of our overachieve in Q2. I think we recognize that these are important channels. We continue to look for ways to optimize, but they're also growth channels for us as well. So there's always a balance. But as Glenn said, we -- it is a dynamic marketplace. It's a little bit difficult to predict. I think we are in a fairly good position in terms of our optimization right now in terms of the balance between growth and profitability. But there are always areas where we're experimenting constantly in these channels is probably the best way to summarize it.

And our next question comes from Mark May from Citi.

I know it's probably nitpicking, but just obvious question would be, if it's possible in any way to quantify the incremental impact that you think you had from World Cup that you weren't anticipating as well as some of the poor weather. Also, I think in the past, you said that weather tends to not be a focus as consumers tend to be pretty flexible. But why is that not necessarily the case this time around? And just on a follow-up, what, if any, impact are you seeing with Google's news and changes in the hotel search arena in terms of your share of overall travel traffic from that channel?

So Mark, let me take the first one and hand to Glenn for the second one. So pretty helpful to start by explaining what impact we have built into our Q2 guidance for World Cup. And as I mentioned on the last call, the main factors here, including what teams did, so I'll start off by saying we had a little less than 0.5 point built in to our guidance. What we saw was a combinatorial factor. We saw a lot of the teams are big booking countries, many of those are sitting in Northern Europe. Having an unusual weather period during the World Cup, in fact, I was in Holland a lot during that period of time, and you could just see the activity. And we believe the combination of those 2 things had a bigger factor than we expected. Hard to quantify because it's hypothetical, but certainly enough to mention and point out. We did notice that, again, as I said in my remarks, that at the end of the World Cup, because the World Cup obviously impacted the last two weeks in June, impacted the first 2 weeks in July, bear in mind that several larger booker countries made it all the way to the semifinals. And historically, we have found that when teams are doing well in the World Cup, there is an impact on bookings. You can see it during the game. You can also see it over a period of time as well. So it did roll into July. So we want to comment on that as well. And what we've commented after the end of World Cup, we saw a bounce back in bookings in Europe, but the weather is sufficiently noticeable to comment about it. We're going through a very unusual weather pattern in Europe right now. In the Northern countries, temperatures are in the 30s in terms of Celsius; and in Southern Europe, they're in the 40s, making it less pleasant than usual to want to go sit on a beach when it's 110 degrees. So I think others have commented upon that. We wanted to point it out. The World Cup had a factor in our Q3 guide. The ongoing weather has a bit of a factor as well. And we do see it in -- when we look at the numbers of people traveling from Northern Europe to Southern Europe, we see an impact. So we just wanted to call it out and explain this kind of built in to the way we're thinking about the business this quarter.

And regarding Google, I'd want to emphasize a couple of things. One, we have been working with Google for a very, very long time. Symbiotic relationship helps build both of our businesses in the travel vertical, and we're continuing to do that. And we are pleased with where our share is in Google in all their different products right now. And they continue to develop new products, new ways to reach out to their customers to provide their customers with a good experience. And we work with them and provide that travel service to our customers. And it's really worked well for us over the last more than a decade, and I think it's going to continue to work that way. Clearly, in certain parts of the world where travel growth is faster, Google has less of an ability to get customers. I, of course, speak to China right away. I mean, that's an area where, as of today, Google would not be a supplier of customers to us of any great state. So we are going to continue to work with them well. And I have confidence that we're going to have a good relation going forward, and we're always looking forward to the new things they're working on because that can help our business.

And our next question comes from Lloyd Walmsley from Deutsche Bank.

I have two, if I can. First, just asking a question in another way. Given your view that there's a lot of room left in the core markets and in your newer NHA markets, are you guys happy with the outlook for single-digit room night growth? Or is your base case that you can grow faster than that looking out over the next few years, given the runway left? And then second one, just kind of strategically, as you guys shift the focus beyond hotels, it seems like the different products are still a bit siloed. So I'm just wondering what the strategy is for integrating your experience. Is that effort being led by the Booking.com team? And what kind of product investments do you need to make here? Whether that's building out individual products, building an underlying platform and like, do you see risk at core hotel conversion as you develop this strategy of kind of a more holistic travel product? Just curious if you can share some thoughts there.

Sure. So it's Glenn speaking. Referring back to the growth area, you said, are we happy? I will just make the statement that I am never happy no matter how fast we're growing, I always want to do it faster. So let's just lay that down. I'm a competitive person, our teams are competitive, everybody in this organization is competitive, and we always want to win and do more no matter what level we're at. Now your question about, are we kind of in single digit, are we going to be in single digit? Part of our belief is that, and this is one David mentioned a little bit about, is optimization in choosing profit versus growth. And we want to do things in a smart way. And one can always buy more growth, and it depends on what cost. And is that long-term benefit to the franchise or not? Right now, we're at a stage where we're happy where we are and the way we're investing and the way we're getting the bottom line where we are. Clearly, we believe that building out this holistic travel system should provide a much better solution for customers around the world who want to travel. And we expect that competitive benefit to accrue to us. Now you'd make a point, though, on this holistic thing and having these siloed different companies in our organization, are we going to make changes there? Well, I would point out we're already doing that. And we made the thing earlier in the year of noting that our rental cars company, which wasn't more of an independent company, has now been put under the Booking.com umbrella to make sure that the customers are getting the most frictionless, seamless way to use ground transportation services. And it's more than just rental cars, it's all elements of ground transportation that we're building. So that's an example of what we're doing. And we're doing it in other areas, too, and I don't want to get into too much of the details, but we have Agoda and Priceline doing a lot of back-end work together. There's a lot of things happening under the hood to help build out this system. Now you're right to mention the point about what sort of risks does that bring on, and does that -- first, does that do anything that's going to put a risk to the hotel, the core hotel business? We're aware of that potential, and that's why we always want to guard against it and make sure we're doing things in the right way to do it with the right checks so that we don't end up doing anything that could influence the core business in a negative way. So I think we have it under control. I think we're doing it the right way. And I'm pleased where we're and the position of where we're going.

And our next question comes from Mark Mahaney from RBC Capital Markets.

I'll just ask about the advertising strategy, the kind of the toggle away from performance marketing towards brand advertising. And I think you'd said that you'd -- it sounds like you weren't able to spend as quickly as you wanted in brand advertising, so if you could explain that a little bit more. Is it that the pricing wasn't -- you couldn't find the right channels? The brand pricing, the ROI on that spend wasn't as favorable as you would have liked so you didn't spend that? Just explain a little bit more why the toggle over the brand advertising didn't occur as rapidly as you wanted. And maybe also bigger picture, when you think about this, the goal seems very clear, build up customer loyalty and that it should show up in better margins. But on the -- how are you going to judge yourself how successful this strategy is? Is there a room night goal -- growth goal you're looking for or bookings growth goal? I know you're trying to do both of those, margins and growth, but what's the growth objective you want to get out of switching the advertising over more towards brand advertising?

Mark, yes, the brand, and I wanted to call out that we did not spend as fast as we would have liked. And that's a function of something that we said at the very beginning when we talked about going towards a strategy that would be more direct, which would include building out a bigger brand effort. And I made it very clear at the beginning that we would do this in a prudent way. I used the word prudent. I think I've used the word prudent every time since then because that's how we're doing this. Our DNA is one of experimentation, test, see what the data shows us, and then if things are working, do more of it; if things aren't working, change around, figure out well, what should we adjust to and work on that. It's an iterative process. And there are many things that go in. It's what kind of creative do you have, what are the signals you're getting from that, what channels are you using in it? And of these new channels, relatively new, where it's not just brand on TV, it's all sorts of video, and how are your responses on that going? So over all these things, as we go through it, not that different than when we built out our pay-for-performance thing, is experimentation, results, rinse and repeat. And where we are right now, that's what we thought was the appropriate thing. And it makes no sense in my mind to spend excess money if you think you're not going to get a result out of it. So that's that one. In terms of what's the goal, though, I think the best way we can measure this really is at direct. When you see more and more direct business coming, that's showing your brand effort is working. And that's why I wanted to point out that approximately 50% of our bookings are coming direct, and it's growing. And we're getting new users in that channel. So that's what -- that's sort of like what I'm using as a thermometer, see, is the brand working or not.

And our next question comes from Justin Post from Bank of America Merrill Lynch.

A couple of things. First, on the market share, you haven't gained as much this year as in prior years. Has anything really changed in June or July? If we see the industry data that you're looking at, do you think you've held up your market share in the last couple of months? Any big changes there? And then, David, on your guidance, did you guide deceleration off of a slow start in July? Or was that off of kind of the more recent improved trends? And then maybe one housekeeping. Your take rates are much higher this quarter, and I'm assuming that's just because the booking growth slowed a bit in your marketing strategy. Was there any change to the underlying take rates in the hotel business?

Justin, thanks. I'll kind of take those in the order which you gave them. So market share, when we look at our share of the total rooms available in our portfolio, which is kind of what we can measure and manage, we see us continuing to gain share on a quarter-by-quarter or on a month-by-month basis, so we're kind of pleased with that number. Some people call that our sell-through rate. But when we look at that, we continue to gain share in what is an expanding portfolio. So we are pleased with that. In terms of the guidance arrangement -- and I want to stress our approach to guidance has not changed. And so that's an important point to take into account. When we gave the guidance, we looked at a number of factors. We did look at what we saw coming out of June and into July, which was obviously impacted by some of the comments I talked about on my earlier remarks. And I also pointed out that the guidance does continue to reflect a deceleration during the rest of the quarter, so potentially some opportunity there. So those are the factors that kind of went into that guidance number. Take rates, nothing particularly -- other than probably the impact of the book-to-stay ratio, you're probably seeing that slightly shortening windows, as we mentioned for the last couple of quarters, just as well as the timing of things in the Q2 quarter. But basically, it's the book-to-stay window, which would probably have the biggest impact upon what you're seeing in take rates.

And our next question comes from Kevin Kopelman from Cowen and Company.

Just a couple of questions. First, so just to clarify on previous comments, so you've seen some negative impact from weather. Can you quantify the impact from the Northern Europe heatwave? Or give us any sort of ballpark to what extent you think that's hurt growth? And then to be totally clear there, you've taken -- because that's kind of ongoing, you've taken that rate and slowed it down from there, so you're not assuming a pick-up on better weather. And then I have one more question.

Kevin, so let me pick the -- so yes, to be clear, hard to predict what's going to happen to the weather. I think if anybody knew that, we wouldn't be sitting here. We'd be doing something else. But yes, we've obviously had some impact that we did see in end of July. And we saw impacts of the weather pattern, and we saw impacts of the weather pattern in combination with the second half of the World Cup, and that was factored into our July actuals. So we have, as we normally do, taken an appropriate approach and guided some level of deceleration from that in our Q3 guide. So that's exactly kind of what's -- reiterating what I said in my prepared remarks. And what was your second part of the question?

Okay. Okay, understood on that part. And then just a question on the direct business. You said it accounts for about 50% of nights. And can you give us more information on how you're defining that? So specifically, are you adjusting out direct nights where users have been influenced by clicking on your online advertising in the prior 30-day period? And in addition, are you including SEO? Are you including brand SCM on branded keywords? And are you including mobile app traffic that may have been driven by advertising? Just so we can understand that metric that you disclosed a little bit better.

Sure. So the direct is basically, users come through non-paid channels, were not paid. So it will include SEO. It would not include brand searches or a brand PBC search. So to be very clear, we're taking a very narrow but I think appropriate definition of direct. I know others have maybe expanded and gone through a slightly broader view, but we're taking a pure view. Obviously, people have come -- from our advertising, that's all well and good. And a lot of that direct traffic, of course, is coming through a mobile with the app. It is an important piece of it, but specifically, where we've not paid for that user when they make a booking.

And our next question comes from Douglas Anmuth from JPMorgan.

I definitely appreciate the color on the World Cup and European weather. But just given the fact that the comp is certainly notably easier into 3Q, is there anything else that's impacting room nights and the FX-neutral bookings growth in the third quarter? So that's for David. And then, Glenn, just on China, can you talk a little bit more about the investments in DiDi and Meituan and your strategy here and how they tie operationally to your efforts in China? Should we view the value there more in the equity investments, in the stakes or in how they can help actually drive bookings business?

Yes, Doug, let me take the first part. I'll clarify -- I think by comp, you're talking about the performance marketing optimization comp. So let me just kind of clarify what's going on there. So as we've said, I'll kind of just walk you through the kind of logic here, so performance marketing optimization has obviously benefited our profitability, but over time, it's cost us some amount of growth. But I think we've also pointed out, we do not believe we lost much share across the performance marketing channels in aggregate. Obviously, our spending reduction reduced in -- resulted in reducing growth in those channels is absolute, but we do not believe we lost much share across them in total. And also, last quarter was only a partial quarter of optimization. So we've not really got a full overlap this time. So we don't expect to see significant uptick in growth in Q3 from lapping any change in share in those channels, a, because it wasn't a big change in share; and b, because it's only a partial compare.

And I'll take the -- I'll talk a little bit about the Chinese -- China strategy we have right now. And when we've talked about China, really, it's the locomotive of the growth in worldwide travel industry. In any side you'd look at, you see this huge growth opportunity there. I think I saw a stat that said less than 10% of Chinese citizens have a passport or traveling out of China. So that's a lot of growth potential, and we want to get a good share of that. Now on the flip side of that, though, China is a more difficult place to work for nonlocal players. That's absolutely a truism. So our strategy is to maximize our opportunity, is to both develop our own brand there, develop our own abilities within China and, at the same time, establish partnerships with companies that have great customer bases with people who are using the Internet to do things. So we mentioned DiDi, and you mentioned Meituan. You didn't mention Ctrip, which is also a big partner of ours. And just to spell this out, we have over $2 billion invested in Ctrip. We made an investment in Meituan in the $400 million, $450 million. We made a $500 million investment in DiDi. Now I'll repeat what I said when we made the announcement about DiDi, just to scope that one out a little bit. Really, 3 pillars there. The first thing, and we've talked about, is holistic travel system. And critical to that is ground transportation. And ground transportation in China is even more critical because people who are not Chinese do not rent cars and drive in China. So you got to come up with a way that people, our customers, when they get to China, how are they going to get around? That's an important thing. Doing this deal with DiDi is going to create this seamless, frictionless way that our customers go to one of our apps, the Booking.com app or to the Agoda app, and are able to get that ground transportation that's powered by DiDi. So that's going to be a thing of great advantage for our customers when we get that one up and running. The second part of that, and this is very important too, is help build our brand among the DiDi customer base. And DiDi, as part of this agreement, is going to help us do that through different types of marketing and different types of programs. And the third thing, as you pointed out, is yes, we want to get a good return on our investment, of course. And that's why we're doing it with each of them. Now with Meituan and Ctrip, they both have very, very powerful travel services within their companies. And we share inventory, and we provide them with outbound inventory so they can have their customers get outbound hotels. And we are working with them with inbound. When we have sent people in, they have Chinese hotels that perhaps we don't have or perhaps they would better price. That's the way we're cooperating in all these areas. And we believe that this is the smart way to try and take advantage of what is a great opportunity for us. And I'd say it's not easy, and some of the things are very early. We obviously don't have that DiDi-powered app up and running yet, but it's exciting to see what we can build and what's going to be the future.

And our next question comes from Naved Khan from SunTrust.

Just a couple. So Glenn, can you just maybe give us some more color on this direct traffic? And I think you mentioned that it's becoming the fastest-growing channel for new customer acquisition. Is there any positive impact on this direct traffic from the brand advertising purse that you have been doing for the last, at least, a year? And then I have a follow-up.

Well, it's difficult to suss out what the reason is if somebody comes to us direct. We hope that part of it is to spend on brand. Certainly, some of this is because of our great service. People have -- maybe they came first time through a paid click, used the service and loved it, and now they're coming to us direct. The point is that, by developing systems that are much better, it builds loyalty. And we can look at some of the people who are not in the travel business, and you can see some of the benefit they're getting. And I'll point immediately to, say, Amazon. People are not going to search engines to buy stuff off Amazon. They're going directly to Amazon because that service is a better service. So we believe that yes, we have to have brand marketing so people are aware of us, come to us. End of the day, though, you win in the long run by having all those best things, which is we always talk about best price, best availability, greatest selection, easiest of use, best customer service side and go on the litany of reasons you become the winner in the space. Those are the areas we're working out. And then you go on to the next things, the things that we're working on, things why we hired more people, why we have these data scientists, why we're doing all this stuff in machine learning, personalizing the service, making sure it's seamless and frictionless, coming up with a payment way that people -- the same way people in the U.S. are going to use Uber. What a convenient service. We want the travel experience to be like that, easy, frictionless, so it all fades into the background, and people are able to just to accomplish what our mission is, which is to help people experience the world. And your follow-up?

Yes, yes, on just the cloud efforts. Are you doing anything on the cloud? And anything on the AI machine learning front?

Well, of course, we're doing a lot of things on AI. We've hired a lot of people. We brought in companies. We bought a company called Evature out of Israel. It's very highly specialized in some natural language processing stuff. And we've done a lot of things to try and make sure that all technologies are being brought in as quickly as possible and utilized. Now I'm not going to get into specifics about cloud. Of course, we do some things at cloud. Some things are on our own data center stuff. And I'll leave it up to our extremely qualified and capable IT people to determine what's the best way to do it, what's the most efficient way to do it, what gives most flexibility and all of those things, but we're not going to call out anything in particular. And David, who actually comes from a technological background, I'm going to let him add to that.

Yes, I would characterize our cloud strategy as very much a hybrid cloud, which is a recognition of its value in both private clouds and public clouds and certain applications based upon volumes, capacity, performance, decent troughs, et cetera, are better sitting inside a private cloud and some are in a public cloud. And we're basically looking at that spectrum across a whole range of attribution capability, including things like natural language, machine learning, et cetera. So hybrid is the approach that we're taking, and I think that's the appropriate approach.

And our next question comes from Brian Fitzgerald from Jefferies.

A couple of quick ones. Maybe as a follow-up to Mark's questions about the brand spending. We appreciate the iterative testing that you're doing, that you seek to deploy this brand spend. Any impacts from GDPR you're seeing there? Post-GDPR, maybe not direct cost to you guys, but kind of an overall malaise or some slowness as the EU digital advertising ecosystem grappled with implementation there? And then, Glenn, how do you feel about your NHA inventory, the breadth and depth there, it sounds like it's growing nicely, and the penetration of -- and certainly bookability there?

Brian, so GDPR, and I didn't want to call this out because I don't think it's -- it's a short-term thing. Some of our brand spend was somewhat delayed a little bit, so don't put too much into this. But some of our platforms did have to halt in some of the work they were doing so they could develop more resources to making sure that they were ready for GDPR. So some of the things we were doing to gather, particularly in the testing and experimental things, had to be pushed off. But again, that's a short-term timing issue. And we're talking -- we play for the long run. So I'm not going to worry about, so it took a month or 2 months, whatever it was, that's not a big point. In terms of the NHA, 5.5 million listings. And am I happy? And I think I'll just stay consistent and say, I'm never happy. I always want more. We want more. But in specifics, and we talked about this before, we need to continue to develop certain categories in the NHA, where I really feel -- I'm even less happy in those areas. And we talked about the single-property owners. The people have, let's just, for example, say a house on the Outer Banks or they have a condo at Vale, and then expand that worldwide, and that's the area where I feel that we really need to make more effort in getting that, a. But then on top of that, it's a two-sided marketplace. We not only have to have the supply, we also have to make sure that customers around the world are aware that we have this great service. We think we do have a great service, and I've talked about this. The fact that when our customers come, they can see both the NHA stuff and they can see the core hotel stuff, and it's easier to compare and contrast them. We've talked about how the ease that people can pay because for us, you're not putting -- the customer doesn't have to pay a customer fee. For us, it's simple. It's never the customer fee at the end when you see, oh, here's a big charge at the end from the customer fee. And we talk about all the different things we can do to make this holistic, so it's not just the accommodation. That's what we're driving to. But specifically about NHA, there's a lot of inventory that we need to go out and get in. And then we need to -- particularly in the U.S. because when I talk to U.S. people, I know they're not as aware that we have this great product. If you go to Europe, it'd be a different story where people are aware of it. And this is what we're working on.

Our next question comes from Heath Terry from Goldman Sachs.

Just had a few I wanted to get a sense on. Glenn, I know we've spent a lot of time talking about brand marketing. But if we look at the first half, brand is still only about 1/10 of what you're spending on, on customer acquisition. Where do you see that settling out? With this emphasis, does that become half? Does it become the majority over time? What's the goal that you and your teams have for that? And then competitively, I'm kind of curious how you think about the benefit to your competitors as you pull back on marketing spend like this. I think it's notable that Expedia was able to maintain their growth rate and expand margins for the first time in several quarters as you and others in the space were pulling back on marketing. How do you think about what that does to sort of the long-term competitive balance in the space? And then, David, you mentioned that your approach to guidance hasn't changed. In the past, you guys have averaged about 300 basis points, above the high end of your guidance on bookings. Was that line specifically to suggest that what we've seen these last few quarters relative to your guidance is less of an indicator of how we should think about Q3?

On the brand question, clearly, it's a very difficult thing to try and come up with a long-term target. But it's not just because -- as we always say, it's very difficult to make predictions, especially about the future. Beyond that, much more important is the whole area of brand is changing so rapidly with new channels coming in, new ways to measure. So let's take, for example, let's take something like YouTube, for example, where, a few years ago, advertising at YouTube was not effective at all, and it was a smaller number, and now it's growing very rapidly. When I say growing, I'm not speaking for the travel business, I'm saying YouTube advertising in general. It's not -- anyway, one can measure the effectiveness. And then take that all different types of things, particularly in the social area. The fact is that it's hard to say it because the world is changing so rapidly, particularly in how one does brand advertising. I will just repeat what we've always said is, look, we're going to do it the way we do everything. We experiment, we test, and if it ends up being more and more effective, we're going to do a lot more of it. And I do believe in the long run that we are going to be able to use brand advertising to build out a larger direct business. But I'm not going to pin myself to -- and this is what the percent of our spend is going to be in year four. And what was your second one, by the way?

The competitive point, how -- Expedia and others.

Oh, yes. So what's interesting, of course, when the advertisers go to optimize, and there's less revenue now going to a particular or several advertising platforms, they then have less money to go out and try and get customers. So their growth then slows. So if their growth slows, even though all the advertisers may be in the same share and doing the same amount of share, they may not have the growth rate they had before because the core platform is not growing as rapidly as it used to do. So I think when we look back and we see the amount of spend being done by some of the advertising platforms in the past of very, very heavy weeks, that probably brought forward some people who may not have been as familiar with how to get travel online. And now perhaps those people who came on and now because they're slowing in terms of the amount of spend in that type of brand to bring customers to these advertising platforms, maybe that is an influence on the overall flow or amount of growth in that area. That would be the way I'd say it.

And then, Heath, to pick up your third point, I was going to say I'll avoid getting into the specific quantification. But what I'll just say is that the way the company has approached guidance over the last several years and quarters, I think is one that's been beneficial and appropriate. And we haven't changed that as I've come in and worked with the team, and we continue to factor in the same issues when we look at our guidance. And obviously, we leave ourselves some potential to do better.

Our next question comes from Deepak Mathivanan from Barclays.

Two questions. First, with the HotelsCombined acquisition and then Momondo previously, should we view these acquisitions as a strategy to sort of build out a portfolio of diverse smaller metasearch channels? Are there opportunities to continue this strategy? And then more broadly on performance, you know that you're willing to reinvest on certain performance channels, depending on the levels of branding that you get on them. Is it kind of safe to say that prices and ROIs on these channels are something that you're comfortable now at these levels?

I'll take one, and I'll let David take two on that. So we are pleased with the HotelsCombined deal. It hasn't closed yet. We expect it to close before the end of the year. And we did do Momondo, and that is -- and so you are correct, we have built out -- brought in some smaller players. And we believe the strategy is, one, scale matters in these areas. We bring in these meta companies that have a customer base, and perhaps they're doing certain things that we don't do as well or whatever. And we can then optimize in terms of the amount of people we need to run the entire organization. There's some synergies to be gotten. And so if we see more and they are at the right price because we're always conscious that you've got to get value for it, what can you achieve with it, we would always be interested in doing it. But I think we are reaching a level now where we are certainly bigger than we were before we got Momondo and when we bring in HotelsCombined, hopefully. And by the way, this strategy started a long time ago before we bought KAYAK, when KAYAK went out and got sidestepped. And that, I think, was the initial thing. Steve Hafner, our CEO there, is still with us, and he did that deal back then. I think his vision hasn't changed.

Yes. And then on the -- our performance channels. First of all, they're very important channels for us and also our customers. So we view them as a strategic part of the business. And as Glenn commented, our strategy in those channels hasn't changed. And we'll actually lean into the channels that make themselves more attractive to us as an advertiser. It will help us to build our customer experience and build our brand. And that's been a great relationship, and we expect it to continue. In terms of where we are versus a year ago, I'd say we are pleased with what we're now seeing in terms of ROIs on those channels. And as I mentioned, a decent balance between growth and profitability in terms of what we're getting from those channels. As Glenn said, we're never pleased, we're never satisfied. There's always opportunity to continue to improve. And I think we're at a place where we're now looking for incremental improvements and certainly looking at ROI and growth in those channels, those 2 things we're looking at very closely. So I'm pleased but not satisfied will summarize where we are today.

And our final question comes from Brad Erickson from Pacific Crest.

Just a couple of follow-ups. Can you talk about hotel inventory, just geographically where you're really focused on adding supply this year, if anywhere? And does that give you incremental opportunities to maybe spend on performance marketing later in the year as you get bigger in certain markets? And then second, just what does your direct booking retention rate look like today versus, say, I don't know, 2, 3 years ago?

So in terms of inventory, we don't spell out where we are trying to get more inventory. It was very nice some of our competitors in the past have done that, which have been great for us in terms of the road map where should we be looking at things. And I don't want to do the same thing for -- going the other way on this. I will say that our -- people are always out there trying to get more inventory because we do believe that's a great way to help build the business, and they are out there doing it. And we did point out the importance -- already, we've talked a little bit about how important it is to try and get certain parts of the non-hotel accommodation built up because we do think that is an area where we do need to continue to improve in that area. And I'll let David talk about the second one there.

Yes. I think in terms of retention rates, we're not going to give you a specific data point, but I'd say that we're certainly pleased with our Genius customer group in terms of how well that has developed and the level of retention in repeat booking we get out of those customers, which has continued to be a focus on the business. So we've seen not only is direct increasing and becoming now very close to half the business, but we do see, obviously, a much stronger retention rate, particularly in those customers who are part of our different closed-use programs. So that is a good trend for us, not only in terms of the growth as the mix of the business shifts towards more direct, but also, as Glenn said, building out this loyalty factor where we want people to be coming back to us as their preferred travel partner with a whole broad range of capabilities and travel experiences.

Okay. So I want to thank everybody again. I want to just reemphasize a couple of points. One is that we believe we're on the right track. We believe we are building the business the way we want to. We believe we have the right mix in terms of profit and growth right now. And we are pleased with our level and where we are at this stage of progress. I also want to thank all our employees around the world who have worked so hard. This is a very, very busy season for them right now, and I just want to reach out to them, and we appreciate greatly the amount of effort they are putting in there. And of course, we always want to thank our supplier partners and our customers who, without them, there'd be no reason for us to be here. So thank you, and see you in three months.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.