Welcome to Booking Holdings First Quarter 2023 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 not 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 undertake 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 afternoon, Glenn Fogel and David Goulden. Go ahead, gentlemen.

Thank you and welcome to Booking Holdings' first quarter conference call. I'm joined this afternoon by our CFO, David Goulden. I am pleased to report that in the first quarter, we reached all-time quarterly highs for both room nights of 274 million and gross bookings of 39.4 billion, achieving year-over-year growth rates of 38% and 44%, respectively. On a constant currency basis, first quarter gross bookings growth was even stronger at 52% year-over-year. Both room night and gross bookings came in ahead of our previous expectations, driven by the continued strength in leisure travel demand and a lengthening booking window, particularly in Europe and the U.S. The room night and gross bookings outperformance versus our expectations was driven by bookings that will stay in future periods, which is when the revenue will be recognized. As a result of this timing difference, revenue was approximately in line with our expectations, while adjusted EBITDA was a bit below, reflecting additional marketing expenses associated with the future stays. When we look at room night growth versus 2019, we have seen a slight increase in April compared with what we saw in the first quarter. Though on a year-over-year basis, growth has decelerated since April last year, which saw an accelerating travel recovery, making the comparison more difficult. Overall, we remain encouraged by the strength and resiliency of travel demand so far this year, which speaks to consumers' strong desires to travel. We currently see very strong growth in bookings received for travel during our peak summer period in quarter 3. Though we note, these bookings represent a modest percentage of what will likely be booked for total summer travel, and most of these bookings are cancelable. While travel booking trends have remained robust, we recognize that there is uncertainty regarding the path of the global economy. However, we believe we are well positioned to navigate any potential near-term economic uncertainty, given our highly variable expense structure, solid operating results, substantial liquidity, and strong free cash flow. This allows us to focus on what's important for the long term, which means making necessary investments to strengthen and grow our business while remaining cost-conscious and implementing initiatives across the business to drive cost efficiency. We continue to make progress on our key strategic priorities, including our long-term Connected Trip vision. The Connected Trip is our long-term vision to make booking and experiencing travel easier, more personal, and more enjoyable while delivering better value to our traveler customers and supplier partners. Our payments platform at Booking.com ties into our Connected Trip vision, as payments help deliver a more seamless and frictionless booking experience for our travelers. Though still small today, we are seeing an increase in the mix of transactions connected to another book travel component in a trip. We believe continuing to build on this progress will improve the booking experience for more of our customers, which we believe will help drive increasing customer engagement with our platform. We continue to focus on further developing our flight offering on Booking.com, which provides consumers with another place to book an air ticket. Booking.com's live offering was an important part of our total Q1 73% year-over-year increase in air tickets, an acceleration from the year-over-year growth in Q4 of 61%. We will continue this important work to provide travelers with the best possible flight booking experience. Though AI has received significant attention recently, we began our investments in AI years ago. We believe then and we continue to believe now that we can build a more compelling and differentiated offering if we can leverage AI technology to deliver a more personalized booking experience, a connected trip that would be more responsive to a booker's needs and help manage different aspects of their trips. We believe we are well positioned in this area, given that we have been using AI extensively for years to optimize interactions with our customers, who are both travelers and partners. This goes from personalizing interactions and recommendations to machine translation in over 40 languages and dialects, to analyzing content, images provided by customers and partners, to optimizing value for our customers, and many more. Over the years, we have built a strong team of AI experts across the company and we keep current with the latest AI research through Booking.com's collaborations with universities. This enables us to quickly react, adapt, and learn how our traveler customers and supplier partners can benefit from new developments in the field. We are always looking for new ways to make customer interaction smoother and richer, realizing our ambition to make it easier for everyone to experience the world and to deliver our Connected Trip vision. Much of the recent attention has been on large language models or LLM, which provide a multitude of interesting possibilities for improving all areas of travel searching, booking, and experiencing. Two interesting possibilities are interactive itinerary building and answering travelers' questions. Though there are current challenges, given that current LLMs sometimes produce inaccurate outputs. Nevertheless, we are excited to be exploring how we can make use of these technologies for the benefit of our customers. Some of our brands, like KAYAK and OpenTable, are experimenting with generative AI plug-ins, while others are building ways to integrate the technology into their own offerings. It is, as we all know, very early days, but I am confident in our company's ability to benefit from these developments and improve our products for our customers, given our experience in AI, our travel-related data, and our human and financial capital, our strategic priorities, including the Connected Trip vision and to improve the experience for our customers and drive more value and benefits to them. But it's important to note that when we think about customers, we have two equally important customer groups to consider: our supply partners and our travelers. For our supply partners, we strive to be a valuable partner for all accommodation types on our platform, from traditional hotels to vacation rentals on the beach, to everything in between. We believe we can add value to these partners across the spectrum of accommodation types by delivering incremental demand and developing products and features to help support their businesses. In the area of alternative accommodations, we are seeing encouraging progress at Booking.com, with alternative accommodation room nights in the first quarter increasing about 45% year-over-year, representing about 33% of Booking.com's total room nights, which is 2 percentage points higher than in Q1 2022. In the U.S., our mix of alternative accommodation room nights, while still low relative to our global mix, has increased meaningfully in the first quarter, reaching the highest level ever, and was also our absolute highest room nights in U.S. alternative accommodations ever. We are seeing continued momentum in terms of supply growth, both globally and in the U.S. for alternative accommodations, with global listings reaching about 6.7 million by the end of the first quarter, which is about 2% higher than year-end 2022. We have seen great traction with the adoption of our enhanced payment solution for alternative accommodation partners in the U.S. We believe rolling out this solution, along with other product enhancements last year, including partner liability insurance and an enhanced damage policy, is helping to bring more professional supply online to our platform. In addition, we are seeing our alternative accommodation properties across our major regions achieving improvements in productivity and our new partners receiving their first booking on our platform earlier. We aim to build on this progress by continuing to improve the product offerings for our supply partners and travelers, particularly in the U.S. For our travelers, we remain focused on building a better experience that leads to increased loyalty, frequency, spend, and direct relationships over time. Our mix of customers booking directly on our platforms in the first quarter continued to increase and reached the highest first quarter level ever. We see a very high level of direct bookings from the mobile app, which is an important platform as it allows us more opportunities to engage directly with travelers. Just over 45% of our room nights were booked through our apps in the first quarter, which is a few percentage points higher than in Q1 2022. We will continue our efforts to enhance the app experience to build on the recent success we are seeing here. Another way that we build a better experience and deliver value to our travelers is through our Genius loyalty program at Booking.com. Simplicity is a core principle of Genius, where our travelers get the benefits from the program right away. Over time, we've enhanced these benefits, including the creation of a top-tier level of Genius, and we will continue to find ways to deliver incremental value to our travelers through this program. Finally, we published our 2022 sustainability report last month, providing an update on the progress we have made against the goals laid out in our climate action plan. We are proud of the emissions reductions achieved and ambitious targets set for our business. But as I said before, we believe our greatest influence on sustainable travel is through making it easier for travelers to find and book sustainable options. We're addressing this opportunity through our work with our travel sustainable badge program, which now includes over 400,000 properties that can highlight their sustainable practices to customers on Booking.com and that program has been expanded to Priceline, Agoda, and KAYAK. In conclusion, I am encouraged by the continued strength of travel demand we are seeing so far this year, as well as our team's execution against our key strategic priorities. We remain focused on delivering a better offering and experience for our customers, both our supply partners and our travelers alike. We are as confident as ever in the long-term growth of travel and in the opportunities ahead for our company. I will now turn the call over to our CFO, David Goulden.

Thank you, Glenn, and good afternoon. I'll review our first-quarter results as well as our thoughts for Q2 and the year. All growth rates for 2023 are year-over-year, unless stated otherwise. We will reference comparable periods in 2019 where it’s helpful. Information regarding the reconciliation of non-GAAP results to GAAP results is available in our earnings release. We will post our prepared remarks to the Booking Holdings Investor Relations website after the call. Before diving into Q1 details, I want to remind you that our business is seasonal. Q1 is usually a strong booking quarter, with marketing expenses incurred in Q1 for bookings recognized in future quarters. Historically, Q1 has been our smaller revenue and adjusted EBITDA quarter, which means adjusted EBITDA can be sensitive to the level of bookings in the quarter. With more payments at Booking.com, Q1 is also becoming a strong cash flow quarter due to high booking levels. Now, let’s go over our Q1 numbers. We were encouraged to see a year-over-year room night growth of 38% in Q1, surpassing our expectations. In Q1, Asia was up 100%, while Europe and the rest of the world grew more than 30%. The U.S. continued to show growth, up in high single digits compared to the previous year. Our total room nights grew from 10% in Q4 to 26% in Q1 versus 2019. In the first quarter, the U.S. was up more than 30%, and other regions saw about 25% growth compared to 2019. Our booking windows at Booking.com expanded versus 2019 for the first time since the pandemic began, driven by Europe and the U.S. The booking window in Q1 was longer than we expected due to strong summer travel bookings, many of which are cancelable. Mobile apps accounted for over 45% of our total room nights in Q1, consistent with the fourth quarter of 2022. We continue to see an increasing share of our total room nights coming through the direct channel, which increased as a percentage of our room nights compared to Q1 2022. The international share of our total room nights in Q1 was around 53%, the highest quarterly mix since 2019, but still a couple of percentage points below Q1 2019. Our cancellation rates in Q1 were lower than in both Q1 2022 and Q1 2019. For alternative accommodations on Booking.com, our Q1 room night growth rate was about 45% year-over-year, with the global mix of alternative accommodation room nights at about 33%, up from around 31% in Q1 2022. We are pleased with our progress in North America for alternative accommodations, where growth in Q1 was significantly stronger than the global average. Q1 gross bookings rose 44% year-over-year, or 52% on a constant currency basis. The 44% increase in gross bookings exceeded the 38% room night increase due to 9% higher accommodation constant currency ADRs and a boost from strong flight booking growth, partially offset by an 8 percentage points negative impact from FX movements. Accommodation constant currency ADRs were adversely affected by about 5 percentage points due to regional mix, with Asia room nights growing the fastest and the U.S. the slowest. Excluding regional mix, constant currency ADRs were up about 14 percentage points year-over-year due to rate increases across all regions. Despite higher ADRs in Q1, we did not notice any shifts in the mix of hotel star ratings being booked or changes in length of stay that might suggest consumers are downgrading. We are monitoring these dynamics closely. Airline tickets booked in Q1 saw a 73% year-over-year increase, driven by the continued expansion of Booking.com's flight offerings. Revenue in Q1 rose 40% year-on-year or about 47% on a constant currency basis. Although we had a stronger-than-expected Q1 in terms of room nights and gross bookings, the outperformance was driven by bookings that will be recognized in future quarters, and as a result, we did not benefit from these incremental bookings in Q1 revenue. The lower-than-expected take rate in Q1 was completely due to timing effects, while our underlying accommodation take rates remained in line with 2019 levels. Marketing expense, which is highly variable, increased 32% year-over-year. However, marketing expense as a percentage of gross bookings was about 30 basis points lower than in Q1 2022 due to better ROIs in our paid channels and a higher direct business mix. When combining marketing and merchandising as a percentage of gross bookings in Q1, this was about 20 basis points lower than last year, which was better than we anticipated. This was due to higher ROIs in our paid channels and the timing of merchandising spend tied to revenues. Sales and other expenses as a percentage of gross bookings increased by about 15 basis points year-over-year, which was better than we expected. About 45% of Booking.com's gross bookings were processed through our payments platform in Q1, up from about 34% in Q1 2022. Our fixed expenses overall increased by 25% year-on-year, higher than anticipated due to several factors affecting personnel and indirect taxes. This growth excludes 39 million in accruals related to potential indirect tax settlements recorded in G&A. We are managing our fixed expenses very carefully. Adjusted EBITDA for the quarter was $586 million, an 89% year-over-year increase and would have been up 111% on a constant currency basis. Adjusted EBITDA was lower than expected, influenced by marketing expenses related to the higher-than-expected gross bookings set for future quarters. February and March bookings exceeded our prior guidance expectations, negatively impacting our take rate more than anticipated for the quarter. If we analyze marketing and merchandising as a percentage of gross bookings in Q1 to account for timing differences, this was lower than our expectations and also lower than Q1 2022 and Q1 2019. Non-GAAP net income was $440 million, resulting in non-GAAP earnings per share of $11.60, which is up 197% year-over-year. Our average share count in Q1 was 8% below Q1 2022 and 16% below Q1 2019. On a GAAP basis, net income for the quarter was $266 million. Please remember that every profit metric we mentioned this quarter includes the negative impact of stock-based compensation expense, which we consider a real cost of doing business. We continue to manage SBC carefully, and it remains a minimal percentage of our operating cash flow. Now, regarding our cash and liquidity position, our Q1 ending cash and investment balance stood at $15.3 billion, slightly up from $15.2 billion at the end of Q4. Our operating cash flow for the quarter reached $2.9 billion, rising 70% year-over-year, and our free cash flow was $2.8 billion, up 77% year-over-year. The cash flow generated in the quarter benefitted from a $2.3 billion change in working capital due to an increase in our deferred merchant booking balance, as well as the $586 million in adjusted EBITDA. The $2.8 billion in free cash flow was mainly offset by about $2 billion in share repurchase during Q1 and around $500 million for debt maturing in March. Moving on to our expectations for Q2 2023, we continued to see strong demand in April, with room night growth versus 2019 slightly higher than the 26% growth in Q1, with similar rates across all major regions. The booking window at Booking.com in April remains long, similar to 2019. Year-on-year, April room night growth was in the mid-teens, slightly lower than in Q1, due to a tougher comparison from the prior year. Last year, Q1 room nights were 9% below 2019, while April saw a 10% increase. April 2022 marked our first month of growth compared to 2019 since the pandemic began. For the second quarter, we expect room night growth to be up in the mid-single digits year-over-year. Remember, Q1 last year was affected by Omicron, leading to a strong recovery in Q2, making Q2 2022 our highest growth quarter versus 2019, particularly in May and June, which were our strongest months last year. We anticipate future room night growth in 2023 to exceed 20% when considering some moderation in growth from Q1 and expectations for summer bookings. We expect Q2 gross bookings to grow about 4 points faster than room nights year-over-year, aided by continued growth in flight bookings and slightly higher constant currency ADRs. For Q2, we expect revenue as a percentage of gross bookings to be approximately 120 basis points higher than last year due to decreased timing impacts and increased revenue from payments, partially offset by a rise in merchandising investment and a higher flight mix. If booking trends exceed expectations, we may see less of an increase in our take rate, especially given the high percentage of these bookings moving to future quarters, which could also result in higher-than-expected marketing expenses for the quarter. We anticipate Q2 marketing expenses as a percentage of gross bookings to be lower than last year due to an increase in direct mix. Combined marketing and merchandising as a percentage of gross bookings in Q2 should be about in line with last year. We expect Q2 sales and other expenses as a percentage of gross bookings to increase by about 40 basis points compared to last year, mainly due to a higher merchant gross booking mix and greater third-party call center costs linked to our partnership with Majorelle. We expect our fixed expenses in Q2 to rise about 25% year-over-year, driven by increased personnel and related costs, indirect taxes, and IT expenses. Taking all this into account, we forecast future adjusted EBITDA to be around 35% higher than last year. Regarding our outlook for the year, we will not be updating our prior full-year comments at this moment. Our strong bookings in the first four months of the year indicate potential for some upside, but we want to observe how the upcoming months unfold before considering any updates. We continue to expect our adjusted EBITDA margin to expand by a couple of percentage points compared to 2022. In closing, we are pleased with our Q1 results and the strong growth in bookings for the summer. We'll now move to Q&A. Rob, could you please open the lines?

Your first question comes from Justin Post from Bank of America.

I guess two things. First, when you look at ROI in the marketing channels, how do you feel about that going into the summer? Are you seeing some advantages based on changes from some of your competitors? And then secondly, as you think about your overall use of cash, any reason why you can't just put buybacks to work for the next five years? Are there anything we should be thinking about on the debt side?

Well, Justin, why don't I take the second, and then I'll let David talk specifically about ROIs and marketing and thoughts on that going forward. So I think we've been fairly clear in the past about how we view the company and how we believe our free cash flow should be used. And the first thing we always want to see is how can we invest that money appropriately in the company, build out services in ways that we can make the way we work with our partners and our traveler customers better to help build this franchise. That's the first thing absolutely important. And after that, we say, well, if we can't build it organically, is there something outside the company we think that could add value or make things better for both, again, our traveler customers and our partner customers? And the last thing is, okay, if we don't see a good use of that, then we should return that capital to our shareholders, which is what we laid out last quarter, we laid out our buyback program, where we had $4 million left in the previous authorization, $20 billion in the next one, that made $24 billion total. And then we said that over the next four years, we expect to be able to complete the full authorization. And I believe we've given out some numbers about our buyback now. And I am thrilled with the way we're doing this. But for the long term, five years, this is what we laid out. Things can always change, but that's the way we've laid it out. And I'll leave it up to David in terms of ROIs, anything you're seeing differently about the summer.

It's difficult to forecast ROIs so far in advance. However, we did observe some positive ROI trends in the first quarter compared to our expectations, which were influenced by our booking profile. We received more summer bookings in the first quarter than anticipated. The ROIs in paid channels exceeded expectations due to three main factors: higher average daily rates, a lower cancellation rate, and longer average stays. This was linked to the expansion of the booking window, which closely aligned with the positive ROI performance we experienced during that time. I want to emphasize that these channels are highly competitive, with many participants, and there aren't any significant changes in competitive dynamics to report.

Your next question comes from the line of Mark Mahaney from Evercore.

I just want to ask about the Asia Pacific travel and China travel. Are you already seeing the impact of China outbound travel? And then within Asia Pacific, it sounds like that's the strongest region. Are there any particular markets that are performing well for you?

Mark, sorry about that. Let me take that part two ways because I know last time, I believe you asked about China outbound too, if I recall correctly. And so China is not a significant part at all of our very strong Asia growth in the first quarter. And I want to make it clear that China is still not anywhere near where it was in 2019 and outbound. It is coming back in terms of the overall market returning, but there's still shortages of lift there. It is getting better than it was in January when there was a mid-teens number of available airlift out of China outbound coming back. I'll be honest with you; we are seeing more growth, obviously, in other parts of Asia. We're very pleased with the very strong growth we're seeing. I don't believe that we're going to break down individual countries, but I do see that this is an area of growth for us that I'm very pleased about.

Our next question comes from the line of Lloyd Walmsley from UBS.

Two, if I can. First, just going back to the higher marketing ROI. Like how much of that is you all proactively managing to higher targets versus just the competitive market? Maybe softening up in marketing channels, and like do you think this is durable? And do you think we should think of this as a reflection of normalizing consumer demand? And then the second one is just anything you're seeing in terms of price consciousness among consumers either trading down at all or taking shorter trips to compensate for higher ADRs. Anything you'd call out there in any of your big markets.

Let me take the second one because I do look at that very carefully to see if there are any smoke signals coming out of the market giving us any indication of changes. I have not seen any decline in the star ratings that people are going for, nor are we seeing a decrease in the length of stays, either one of which could indicate consumers are trading down. We have not seen that yet. And I think we made the remark about the booking window has gone out further indicating confidence; I believe that's one hypothesis I want to point out, which suggests that people are concerned there’s not going to be enough availability or could consider that prices are going to continue to rise, and they will lock it in now. That's another way to think about it, but none of those hypotheses indicate weakness at all. And in terms of I think your first question, I'll leave it to David.

In terms of marketing and merchandising, we still expect to focus on this area because we see an opportunity for recovery in the travel market. Our growth rates compared to the market reflect that we're making progress. We previously stated that our marketing and merchandising investment would be similar as a percentage of gross bookings to what it was in 2022, and that remains our expectation. In 2022, we increased our investment relative to gross bookings compared to 2019, and that approach continues. We aim to maintain this strategy to capture market share in a recovering environment. The improvement we witnessed in Q1 was related to our booking profile and an extended booking window, leading to more summer bookings with higher transaction values than anticipated for Q1, which contributed to better returns on investment. We intend to sustain our focus on the industry, and for Q2 and the full year, we plan to keep our marketing and merchandising investment consistent with what we did in 2022.

Your next question comes from the line of Brian Nowak from Morgan Stanley.

I have two. The first one is on the direct mix of traffic, the percentage of the business that is direct. You've made a lot of progress on that over the last year or so, a couple of years, Glenn. If you break it down by region, where have you made the most progress in increasing the percentage of the business that's direct? And how should we think about how high that is? And what are the regions where you have the most runway to drive that percentage of the business that's direct up longer? And then, the second one on your forecasting. You guys have a lot of data, and you're very good at forecasting. It seems like demand really came through better than you thought throughout the quarter. Which regions drove that outsized demand versus your forecasting?

So we don't break down the direct mix by region at all. But I can repeat things I've said in the past about how important the direct mix is to long-term increase the value of the franchise because of things we talk about with our connected trip. They're getting people in through the app mainly, having them understand all the different things we'll be able to offer to them, and giving them a real personalized experience that will make them want to always come back to us. The more we learn about them, the more they come back to us; it's a flywheel effect happening there. Again, I won't break it down by region, but my goal is to have every region have as many people as possible using the app and coming directly. That's the first thing. In terms of how we varied against our forecast, I don't know how much. David, why don't you get into that?

You can see that we did significantly better on the top line, and I would say it was fairly balanced across all regions. The increase in bookings was mainly seen in the U.S. and Europe due to the expansion of the booking window, leading to a higher share of summer bookings than we anticipated in Q1. Asia also performed well and exceeded our expectations, although we didn't experience the same booking window effect there. While I won't single out any specific region, I will mention the differences we observed across the regions that led to our overachievement.

Our next question comes from the line of Doug Anmuth from JPMorgan.

Glenn, I just wanted to revisit on AI. Can you just talk about some of the advantages that Booking would have in leveraging generative AI versus what other external or potentially new travel services might provide? And do you feel the need to protect the data on your platform to keep it from being used for training broadly across many large language models?

Thank you, Doug, for your interesting questions. I'll start by discussing AI generally and then focus on generative AI. AI has been crucial to our business for many years, helping us improve how we present information to consumers, significantly increasing their chances of conversion. We utilize advanced machine learning models in various areas of our business that have contributed to our current success. Generative AI, particularly large language models, is another area we are exploring, and with any major technological shift, questions arise about its potential disruption to established players like us. I feel confident in our position due to our past work in AI, our talented team, our invested resources, and our collaborations with universities. We expect to greatly benefit from this new technology in various ways, including enhancing our developers' productivity, which should yield positive results in the near future. We also envision new ways for people to interact with us, similar to a human travel agent but more automated and effective. Regarding your question about data protection, it is critical for us to ensure our data isn't misused. Our legal team, development staff, and others are closely examining how large language models might have utilized our data and the implications of potential regulations in this area. This remains an open question, and we are very interested in its outcomes.

Your next question comes from the line of Kevin Kopelman from TD Cowen.

Yes, my first question is about ADRs, which is a significant area of interest. Given the strong performance in Q1, could you explain how ADRs have generally trended compared to the last call?

Yes. We shared some data during the call, and ADRs are still showing positive trends. They have increased year-on-year and across all regions. We aren't observing any slowdown in ADRs. We have examined factors related to your question, but there is no indication of a decline in ADRs in any region on a year-on-year basis. We expect ADRs to continue to remain very strong.

Great. And then, one other question. Could you talk a little bit about the dynamics in the U.S. market? What are you seeing in the U.S. that's causing your growth to be a little bit slower there? And how do you feel about your market share in the U.S.?

We believe our U.S. business is still growing very strongly compared to 2019. While we have noticed that growth relative to 2019 has slightly decreased, we maintain that our business remains significantly larger than it was before and continues to grow at a healthy rate compared to 2019. Therefore, we are not overly concerned about this.

And I would just add, in my conversations with our partners, some of our biggest partners and with their senior management, the critical thing for me is, are we providing them with what they need? Are we providing incremental business to them that helps them do better in their business? And do you feel that we are valuable to what you need? And I only heard positive things from all the people that I speak to in regards to where we are today versus where we were in the past. And it's a much more complementary relationship, and I believe that will help us in the future to continue to build on that.

Your next question comes from the line of Lee Horowitz from Deutsche Bank.

Great. Maybe sticking with some of the comments around direct. You guys continue to post impressive direct booking results and app growth. Maybe looking beyond this year, how does this price of execution within the direct channel inform the way you see margin progression beyond 2023? And then, maybe one on vacation rentals. You continue to indicate that you guys seem to be picking up some share in the U.S. vacation rental market, an area where you've been perhaps underrepresented. I guess what do you owe maybe some of the improvements you're seeing within the U.S. VR industry? And then looking forward, what are the things you think you need to continue to do in order to scale up that business in line with some of your competitors?

I will begin by discussing our approach to vacation rentals, which I prefer to call alternative accommodations, as neither term is particularly customer-friendly. I'll cover this topic and then let David address the direct business and its potential implications for margins in the future. As I mentioned in my prepared remarks, we're focusing on growing the alternative accommodations segment in the U.S., and it's important to acknowledge that we've historically underperformed in this area compared to our success in other regions, particularly Europe. To improve, we're ensuring we offer excellent service to property owners. For example, we're now providing liability insurance and similar options. We are also testing a request-to-book feature, catering to property owners who prefer it over automatic bookings. Awareness of our product is crucial; many people, including those in New York City, might not associate us with vacation rentals. It's essential to increase our supply and inform customers that we offer this option. This is fundamental business practice: get your offerings out there, make them appealing, and ensure people know about them. I'm pleased to report that we've made progress in the U.S., with our share of alternative accommodations reaching an all-time high within our overall mix, alongside an increase in the number of alternative accommodation room night bookings. I recognize the need to maintain this momentum, as we know customers appreciate this product and see growth opportunities in this area. David, would you like to add anything regarding the direct-only aspect?

Sure. Direct mix obviously is very tied to our strategy. Our strategy is to build a better product, provide better service for our customers and partners, and get those customers to come back to us more frequently and more directly after we've acquired them in the first place to which shall we bring them into the portfolio the first time around. So it really does tie to executing against our strategy; and lots of things that we do, many things that we do contribute to that better product. I could talk about alternative accommodation, I can talk about payments, we can talk about adding flights; all these things just create a better service for our customer, and therefore, we're more likely to get them back directly. So it's very much tied to our strategy. It is also tied to your financial model because we made the comment last quarter in February that we're obviously not targeting pre-COVID margin levels because of the mix shift in the business for some of these new areas that we're now focused on, but we do expect to be able to grow our EBITDA margin above the levels we're at in 2023, with the biggest driver being a continued increase in our direct mix. We'd also expect to be able to do better from a leverage of our more fixed costs going forward. And those themselves would kind of more than offset the pressure from the mix of lower-margin businesses as they grow within our portfolio. So continuing to improve our direct mix is very important for both the strategy and the financial model and will be the major source to be able to provide some margin expansion beyond where we are this year.

Your next question comes from the line of John Colantuoni from Jefferies.

Hoping you could update us on your strategy in the U.S. market. You've had a lot of success gaining share in recent years, but I'm curious if you could update us on your learning so far about the return on investments and how that's informing your aspirations to continue pursuing that opportunity as aggressively as you have been? And second, you sort of characterized investing ahead of the travel recovery to gain share throughout 2021 and 2022. I'm curious if that's your strategy in the Asia Pacific region as that market recovers, and if you have any early reads on returns on that investment.

I'm very pleased with how our strategy has been unfolding in the U.S., as we've gained market share. As David noted, our business is larger now than it was in 2019, and we are seeing solid growth. We are making significant strides in achieving our goal of improving our market position. While we typically do not break out return on investments by region, we are mindful of spending wisely to ensure we receive a good return. Having previously worked in China, I understand the importance of maximizing the value of our expenditures, and we are doing that. Moving forward, we need to maintain our strategic approach to continue on this path. Similarly, in Asia, we aim to be proactive as travel resumes; it's crucial to be prepared and ready when travelers are ready to begin their journeys. We're pleased with our growth in Asia during the first quarter and hope to see this trend continue.

Your next question comes from the line of Deepak Mathivanan from Wolfe Research.

Great. This is Zach standing in for Deepak. First, regarding fixed costs, it appears that the first half is tracking above the 20% growth rate discussed last quarter. Additionally, the transition from the first to the second quarter shows some sequential improvement. I would like to hear your thoughts on how to consider fixed cost growth possibly moving into the second half of the year and into next year. Secondly, about the buybacks, I believe the first quarter exceeded our expectations. I'm curious about how we should assess the buyback strategy for the remainder of the year. Is the first quarter a reliable indicator for what to expect going forward?

David, you're the owner of the P&L there, looking at how you want to take on the cost.

Yes. Regarding costs, we previously mentioned being at 25% in both the first and second quarters. This will naturally exert some pressure on our full-year guidance. Generally speaking, we haven't updated our guidance for the full year; there will likely be some variations at the line item level, but we won't provide an updated breakdown today. However, I can reaffirm that we are aiming for a margin expansion of a few points compared to 2022. Looking ahead, we expect our fixed costs to increase more slowly next year than they are this year, and that expectation remains unchanged.

Regarding buybacks, I think we laid it out a little bit. You know what our plan is. You know what we're doing. I'm not sure there's any more color I can give, and we're pleased with where we are.

And your next question comes from the line of Jed Kelly from Oppenheimer.

This is Josh on for Jed. Just wondering if you can maybe speak to how recent improvements in payments are resonating with U.S. property managers and their opportunity to increase share?

Payments is a crucial aspect of our business. I've mentioned before how it connects everything together and simplifies the process for both customers and partners. The increase in the volume of business processed through payments suggests that it is functioning well and being embraced. Customers, including both travelers and partners, have the option to use payments, and the rising adoption indicates its usefulness. I believe that, over time, this will be very beneficial as we continue to develop the connected trip.

And your next question comes from the line of Stephen Ju from Credit Suisse.

So Glenn and David, your merchant booking dollars are now equal to your agency dollars. I’m curious about how much of this is due to the increase in air travel compared to consumers actively making choices regarding their lodging selections, particularly in terms of alternative accommodations. Additionally, the increase in deferred merchant bookings should enhance your free cash flow generation. Does this affect your capital allocation plans at all?

On the second question, no, the capital allocation plan that we talked about last quarter, that Glenn summarized earlier, anticipated that we would be continuing to increase our merchant mix. So on that piece, there is no change. In terms of where the merchant increase is coming from, just to remind us all, it's really coming from a mix shift inside of Booking.com where we are moving from what used to be almost entirely an agency model now to a much more balanced model. That is the biggest change, primarily in accommodations. That's still, by far, the biggest part of the business, although our flights grow, it's having an impact. But what's really driving the changes that you're seeing is the increase in merchant mix across our accommodations business, our Booking.com.

Your next question comes from the line of James Lee from Mizuho.

Can you provide an updated outlook on ADRs? Previously, you mentioned that you expected them to remain roughly flat in constant currency for fiscal year 2023. Also, David, could you discuss some of the factors affecting your expectations for the take rate in 2020?

We expect our average daily rates for the second quarter to show a slight increase compared to the same quarter last year. While I mentioned earlier that we're not revising every single aspect of our full-year guidance, if current trends remain stable, there could be some upside in our ADRs compared to what we projected in the last call. There will be various factors affecting our overall guidance, but we are not specifically updating it beyond what we are discussing for Q2. We'll need to see how things unfold, but based on our performance in Q1 and our expectations for Q2, the trends appear positive.

And your next question comes from the line of Richard Clarke from Bernstein.

Just the first question was what is the ability for you to continue to get discounts from your hotels? I know the Genius discounts tend to be hotel-funded. And in this travel environment, are they more or less likely to give those? And is that influencing your level of merchandising at all? And could that change if the travel environment altered towards the back half.

Richard, it's clear that when hotels are performing well, they might feel less inclined to explore other distribution methods and prefer direct bookings. They are always assessing the return on their investments. With our Genius program, we focus on being precise in our approach to help them recognize how we can generate additional demand that they might not access otherwise. We collaborate to ensure that our offering is valuable to them. As I mentioned before, our sales team engages with hoteliers to discuss the Genius program, sometimes conveying that it may not be the best investment for their specific needs and suggesting they reconsider how, when, or even if to utilize it. Our focus is on building enduring partnerships rather than simply pushing for discounts. This process is data-driven and involves machine learning to collaboratively identify strategies that enhance their business. As travel continues to improve, hotels may naturally seek out alternate or more cost-effective methods, which might reduce reliance on our services, but I don't foresee this dramatically altering our business operations in the future. I believe our role will grow increasingly central as we find new ways to deliver value to travelers and collaborate with hotel partners in mutually beneficial ways that advantage all parties involved: travelers, hotels, and us.

Okay, that makes perfect sense. I have a technical question. You mentioned that you have $19 billion in merchant bookings for the quarter and that you've observed longer booking windows, yet your deferred merchant bookings are only $4.5 billion. I'm trying to understand the difference between the $19 billion and the $4.5 billion.

Richard, you're confusing me on this one.

Richard, let's discuss this further offline so we can better understand your question and provide you with the answers you need. If anyone else has insights to share, we can follow up with them as well. John will reach out to you soon.

And there are no further questions at this time. Mr. Glenn Fogel, I turn the call back over to you.

Thank you. So as always, I want to thank our partners, our customers, our dedicated employees, and our shareholders. We appreciate your support as we continue to build on the long-term vision for our company. Thank you, everyone, and good night.

This concludes today's conference call. Thank you for your participation. You may now disconnect.