Booking Holdings Inc. (BKNG) Earnings

Management highlights

### Core Strategic Priorities - Connected Trip Vision: Aims to reduce fragmentation in travel booking by integrating multiple travel verticals into a single seamless end-to-end experience. Connected trip transactions grow meaningfully faster than overall transaction growth, and multi-vertical bookers have higher repeat visit rates. The Genius Loyalty Program is a core enabler: Level 2 and 3 Genius members now represent over 30% of active customers and account for 50% of total room nights, both up YoY, with higher advance booking, retention, and direct booking rates than non-Genius users. - Geographic Expansion: The U.S. remains a key long-term growth opportunity: U.S. room nights grew high single digits in Q2, with continued growth in direct channel engagement across verticals, with ongoing disciplined investment in product, supply, brand, marketing, and technology. In Asia, the combined global reach of Booking.com and local expertise of Agoda supports continued investment in localized products, payments, and distribution, with healthy underlying domestic demand despite competitive dynamics and indirect Middle East conflict impacts. ### AI Integration Progress - Management is pursuing a two-pronged AI strategy: partnering with leading external AI platforms to ensure Booking Holdings brands are properly positioned for AI-led discovery, while building native AI capabilities across internal and customer-facing platforms to drive direct engagement. - Early native AI deployments include: Booking.com's new AI-powered destination discovery experience (combining flight prices, user reviews, and AI-generated travel insights for early trip planning), Priceline's next-generation agentic AI travel assistant Penny, and a new visual review browsing tool. Initial testing of Penny's integrated checkout shows improved traveler engagement and better business outcomes. - AI is also deployed to improve partner value: AI-powered guest messaging helps accommodation partners respond to inquiries faster and more consistently, reducing operational friction. Internally, AI has scaled to voice support for most eligible inbound customer calls, driving a double-digit YoY decrease in customer service cost per booking while maintaining high customer satisfaction, and accelerating software development and improving developer productivity. ### Operational Efficiency & Capital Allocation - The company's transformation program increased expected annual run-rate cost savings from $550 million to $650 million, with the incremental $100 million in savings primarily expected to be realized in 2027, with $30 million in transformation costs incurred in Q2. - Q2 free cash flow was $3.6 billion, and the company returned a record $4.1 billion to shareholders, including $3.7 billion in share repurchases. For the first half of 2026, $7.4 billion in shares have been repurchased at an average price of $173 per share. The company maintains a disciplined capital framework prioritizing high-return growth investment, shareholder capital returns, and a strong balance sheet, ending Q2 with $17.7 billion in cash and investments.

Guidance

- **Third Quarter 2026 Guidance**: Management expects room night growth of 3% to 5% YoY, with 4% to 6% YoY growth for gross bookings, revenue, and adjusted EBITDA. Guidance assumes persistent indirect Middle East conflict impacts (elevated flight prices, reduced long-haul capacity, softer long-haul demand) through Q3, with continued modest pressure on inbound Middle East travel and largely normalized demand from Middle East bookers. FX is expected to reduce reported USD growth rates by ~1 percentage point for both gross bookings and revenue. - **Full Year 2026 Guidance**: Management expects high single-digit YoY growth for gross bookings, revenue, and adjusted EBITDA, and low to mid-teens YoY growth for adjusted EPS. Full year gross bookings guidance was lowered from prior expectations primarily due to slower flight ticket growth, while the accommodation outlook remains largely unchanged. FX is expected to add ~1.5 percentage points to full year reported gross bookings growth and ~1 percentage point to full year reported revenue growth.

Segment performance

Overall Q2 2026 results exceeded the high end of guidance across all key metrics: total room nights grew 5% year-over-year (YoY), total gross bookings increased 9% YoY (8% constant currency), revenue grew 8% YoY (7% constant currency), adjusted EBITDA reached $2.6 billion (9% YoY growth), and adjusted EPS hit $2.54 (15% YoY growth). By region/segment: - **Accommodation Room Nights**: Global domestic room nights grew high single digits, while international room nights grew slightly due to pressure on long-haul travel from Middle East conflict impacts. Europe grew mid single digits (domestic up high single digits); Asia grew mid single digits (domestic up low double digits); the U.S. grew high single digits driven by domestic demand; Rest of World grew mid single digits, improving from a first quarter low single-digit decline. - **Alternative Accommodation (Booking.com)**: Grew 4% YoY, representing 37% of Booking.com's total room nights, flat YoY. - **Other Travel Verticals**: Attraction tickets grew double digits YoY; flight tickets grew 4% YoY, outpacing broader market growth despite capacity and pricing pressure from the Middle East conflict. - **Connected Trip**: Transactions grew low double digits YoY, more than twice the rate of Booking.com's total transaction growth, and represented a low double-digit percentage of Booking.com's total transactions. - **Merchant Model**: Total merchant gross bookings represented 73% of total gross bookings, up 4 percentage points YoY, enabled by the Mergent Payments platform.

Risks & headwinds

- Geopolitical risk: The ongoing Middle East conflict creates direct and indirect near-term travel demand volatility, including pressure on long-haul international travel, reduced airline capacity on key routes, elevated flight prices, disruption to major Middle East transit corridors, and higher overall travel costs. The conflict has weighed on flight growth more significantly than accommodation, and contributed to elevated March cancellations that reduced Q2 revenue. - Macroeconomic uncertainty: Global macroeconomic developments tied to the Middle East conflict continue to create unpredictable demand dynamics, leading to near-term volatility in travel booking and trip patterns. - Search traffic shifts: Recent changes to Google search result display, including the addition of AI overviews, have created modest pressure on organic SEO traffic, a small but existing component of the company's overall room night volume. - Competitive risk: Large technology and AI players are developing new agentic travel and e-commerce booking offerings that could shift traffic distribution away from traditional online travel agencies.

Analyst Q&A

• Q: Has AI improved top-line metrics like conversion or book-to-look rates for Priceline's Penny, and how much traffic currently comes from large language models?

  A: Early data shows higher customer satisfaction for Penny users, and generative AI enables far more granular personalization than older machine learning models, which management expects will ultimately improve transaction conversion and problem resolution. Currently, LLM-sourced traffic accounts for significantly less than 1% of total room nights, with no material change in volume over recent quarters. Booking Holdings participates in OpenAI's CPC test program for channel diversification, but prioritizes building direct customer engagement via native AI tools on its own platforms.

• Q: Why did flight growth decelerate relative to room night growth, and does this signal issues for the Connected Trip strategy?

  A: Flight deceleration is entirely driven by exogenous factors: global airline capacity constraints and elevated ticket prices stemming from Middle East conflict impacts, which hit Asia particularly hard due to its reliance on Strait of Hormuz transit. Even with these headwinds, Booking Holdings' 4% flight ticket growth still outperforms the broader global airline industry. Accommodation, which drives the majority of the company's economics, remained largely resilient, and Connected Trip transactions still grew low double digits even with the airline headwinds, so the long-term strategy remains on track.

• Q: What is the current status of testing for Booking.com's new AI-powered discovery experience, and what is the estimated Middle East conflict impact for Q3?

  A: The AI discovery experience is in very early testing, so no meaningful performance data is available yet; initial internal reviews are positive, with the tool streamlining the trip inspiration-to-booking workflow, but full deployment will depend on customer usage data. The Middle East conflict impact was larger in Q2 than Q1 (as impacts extended through April and May) but began normalizing in June, and normalization has continued into July. Management expects a smaller overall impact in Q3 than Q2, but assumes indirect capacity and price impacts will persist through the end of the quarter. Full year guidance remains in line with original constant currency expectations despite seven months of conflict impacts, demonstrating underlying demand resilience.

• Q: Has recent SEO pressure come from AI search shifts, and could AI search be diverting traffic directly to hotels?

  A: Recent changes to Google's search display, including the addition of AI overviews, have created modest SEO pressure, but SEO has always been a small component of overall room nights. The company's overall direct mix has remained stable in the mid-60% range, with absolute direct traffic growing alongside total business growth, driven by increasing mobile app adoption (app mix now stands at high 50% of room nights, up from mid-50% a year ago). There is no clear evidence that AI search is diverting meaningful volume directly to hotels, as most discovery activity does not translate directly to direct hotel bookings, and Booking Holdings' overall growth rates remain strong.

• Q: How has AI changed the pace of product innovation at Booking Holdings, and what is the ROI of internal AI investments?

  A: AI has meaningfully accelerated the pace of product development and experimentation across the entire software development lifecycle, and the company is already seeing positive ROI on AI investments today. AI costs (tokens, model licenses) remain a low single-digit portion of overall technology spend. Management uses a cost-aware routing model that assigns simpler tasks to cheaper models and complex tasks to more expensive models, and has measured meaningful declines in AI and total technology cost per merge request, improving overall engineering efficiency.