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The Science of Hitting
The Science of Hitting
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Booking Holdings: Early Signs of Recovery

A look at the online travel agency's second quarter results

August 13, 2020 | About:

Booking Holdings (BKNG) recently reported results for the second quarter of fiscal 2020.

Considering the negative impact of the pandemic on global travel, it was an unsurprisingly difficult quarter for the company, with gross travel bookings, room nights booked and revenues all declining by more than 80% year-over-year. The significant decline in business volumes led to a non-GAAP loss of $443 million in the quarter (a loss of roughly $11 per share), compared to non-GAAP net income of $1 billion in the year ago period (roughly $24 per share). For what it's worth, this is the first time in nearly 20 years that Booking has reported an adjusted Ebitda loss.

While there's still a long way to go, with CEO Glenn Fogel saying that it will likely take years, not quarters, before the travel market returns to pre-pandemic levels, we're starting to see some notable improvements in business volumes. As an example, newly booked room nights (which excludes the impact of cancellations) were down by roughly 85% at the lows in April, which led to a nearly 70% decline for the quarter. On the other hand, newly booked room nights were "only" down 50% in June and improved again in July to a year-over-year decline of 35%.

As noted on the call, the improvement in July was led by slight year-over-year growth for domestic travel (meaning a U.S. consumer traveling within the U.S. or an Italian customer traveling within Italy). On the other hand, International travel continues to struggle (down by roughly 60% from July 2019). As a result, intra-country travel accounted for 70% of new bookings in the second quarter compared to 45% of bookings in the year ago period.

While this change naturally reflects the impact of restrictions on International travel in many countries around the world, I also think it points to early signs of recovery: as people feel safe to travel again, they'll first do so by making trips close to home. Over time, as their comfort level rises, the circle around their home will start to expand; eventually, they'll be willing to fly to a neighboring state for a few days. In the long run, this progression will lead people to become comfortable with the activities that were common before the pandemic, such as global travel.

But again, as Fogel noted, this could take years. For that reason, Booking is in a position where they need to make meaningful changes to their cost structure (beyond the natural drop-off in variable expenses like performance marketing spend). At the KAYAK, OpenTable and Agoda brands, the company has already reduced its workforce by more than 20%. In addition, the company is planning on taking similar actions at Booking.com in the coming months - they are consulting with employee representatives and working through local labor regulations.

While Booking will continue to face challenges in the months and quarters ahead, they do so from a position of financial strength. At quarter's end, the company held $13.4 billion in cash and investments on its balance sheet compared to $11.5 billion in total debt. For now, the company's sole focus is cash preservation. Share repurchases were suspended in the first quarter.

Conclusion

While this has clearly been a tough period for any company with exposure to travel, I'm encouraged by what I saw this quarter. As Fogel discussed in an interview with Bloomberg, this crisis could even present some interesting opportunities for the company:

"For us, we do a lot more leisure than business… this is going to help us a bit because there will be more supply, and when there's more supply than demand, a distributor like us benefits...

As the shift from business to leisure continues for a long time, we will be in a better position with our supply partners because we're able to provide them with what they need, which is heads in beds."

Combined with a strong balance sheet that will enable them to weather any short-term volume pressures, I believe Booking is well positioned to play offense when green shoots appear in the coming months.

As Chief Financial Officer David Goulden noted on the call, "we are still in the early days of a fragile recovery that will likely be uneven for some time to come." For investors who are willing to accept short-term uncertainty, I believe this is a high-quality business offered at a fair price. Booking remains well-positioned to benefit from structural mix shift towards OTA's, as well as the continued long-term growth of global travel. Their single-digit share of the market is likely to increase meaningfully over the next 5-10 years. For that reason, I have no plans to reduce my position in the company.

Disclosure: Long BKNG [Booking Holdings]

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About the author:

The Science of Hitting
I desire to own high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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