Booking Holdings Inc. (NASDAQ:BKNG) Goldman Sachs 2023 Communacopia & Technology Conference September 6, 2023 4:05 PM ET

Company Participants

David Goulden - Chief Financial Officer

Conference Call Participants

Eric Sheridan - Goldman Sachs

Eric Sheridan

Okay. I think we're going to get going with the next session here. So, it's my pleasure to introduce David Goulden, CFO of Booking Holdings. David, thanks so much for being part of the conference.

David Goulden

My pleasure. Good to talk to you, Eric. Thanks.

Question-and-Answer Session

Q - Eric Sheridan

Okay. So, I think just starting with the current environment, I know we're going to get into a lot of big-picture questions as well. But you guys talked very specifically in the last earnings call about what you're seeing from a demand environment standpoint. It's obviously been a very strong travel summer season that we just wrapped up in the last week or so, as everyone is coming off their summer vacations and starting in with this conference this week. But just revisit some of the comments you made on the last earnings call, just to level set what you guys are actually seeing from the demand environment for travel overall.

David Goulden

Yes. Thanks, Eric. As you say, we're seeing a strong environment. What we said is that, in July, we saw year-over-year growth in demand of 20% on room nights. That was up from 9% in Q2. But perhaps the easiest way to compare is with 2019 because obviously, you get COVID compares when you go back to last year. So, we said that in Q2 we saw our room nights up 26% versus 2019, so, well ahead of the marketplace. And that stayed strong at about the same rate into July. So, we're seeing a strong environment out there right now.

Eric Sheridan

Got it. Okay. Understood. One of the biggest topics or debates out there among investors on travel is just how to think longer term, less short term, about ADRs. Obviously, there's been a lot of inflation in the broader travel industry in the last couple of years due to that pent-up demand. How are you guys as a company aligning, thinking about nights and ADRs and the elements or components of growth over the long term?

David Goulden

Yes. I mean, obviously, those go hand in hand, right? Because the two combined kind of give us the [ph] TTC growth algo. So, I think a couple of things about the ADRs. First of all, they're very strong compared to 2019. If you go back to the last quarter, up about 30% compared to 2019, but that is four years of compounding, right? People sometimes real hype it, we're comparing with a period that's four years ago. And there's also been a fair amount of inflationary pressure, in particularly our hotel alternative accommodation base. I mean they've seen -- they see utility bills go up, they've seen labor costs rise, et cetera. So that's been -- when you speak to them, that's been a big driver of the ADR increases.

Also, what you've seen is that we haven't seen consumers change their buying behavior because of that. They're not trading down. They're not doing short length of stay. So, the market has basically absorbed it quite well. Hard to understand exactly where it's going to go. But as I mentioned, the property owners have seen underlying expense increases been driving these changes. And going forward, we talked about this quarter, for example, in Q3, we expect ADRs to be flat on a year-on-year basis. So, we're not seeing them go up as much as they did, but they're certainly holding.

And if you look at the inflation environment, it hasn't gone away, right? So, when we look into 2024, people's underlying cost base is still going to be a little behind it was in 2023. So difficult to be certain, but there are some factors that seem to support the increase that we've been seeing.

Eric Sheridan

Understood. And there was other interesting things coming out of these last earnings call with respect to geographies. You're obviously seeing a lot of growth and still a rebound environment in Asia. Can you discern out some of what you're seeing as you go around the world, you obviously have the most global footprint of any of the names we look at in travel. So just curious what you might be seeing across different geographies.

David Goulden

Yes. So, if you have -- look at Q2, we talked about we were up 26 points of room night growth versus 2019. And actually, interestingly enough, all our regions have recovered to roughly the same level. And obviously, that's been a gradual situation, with the U.S. recovering first, then Europe, then Asia coming back, but Asia came back quickly. We may get on to market share when come back to later, but obviously, that's higher than the market has grown. So, when you kind of look at what we guided for the rest of the year, it implies basically a low double-digit room night growth rate for the second half of 2023 on a year-on-year basis.

We didn't give any specific geo color about our future outlook, but we can imagine that based on what we've seen about Asia, Asia will continue to kind of lead the way in the back half of the year relative to overall growth.

Eric Sheridan

Got it. And maybe just one follow-up there with respect to Asia. Anything to call out with either cross-border of Asia into rest of the world versus intra-Asia travel as different components of growth there?

David Goulden

Yes. So, on a global basis, we said that in Q2, for the first time, our overall international mix, right, compared to the local mix, it actually got back to where it was in 2019, which is over half of the room night bookings. Asia International is still lagging. So, Asia's recovery like other markets has been the local domestic market first, and it's lagging, and not surprisingly, this kind of long haul lags the short haul and then it tends to recover in phases. So, there's still opportunity there for further growth in Asia.

Eric Sheridan

Understood. Contrasted with pretty much every American friend I know who went to Europe this summer.

David Goulden

Yes. Europe is a busy place right now.

Eric Sheridan

Exactly. You talked about the concept of market share by geos, and away from some of the short-term dynamics but just zooming out, you guys have gained share in North America in the last couple of years. But more importantly, how do you think about the market share dynamic globally and what you're trying to solve for in terms of the off-line to online switch elements of market share vis-a-vis competitors? And how should we think about market share dynamics globally?

David Goulden

Yes. Market share is an interesting topic because, as you know, market data in the travel space is tough to come by, so we can triangulate across different sources. I think the first thing I'd say is go back to one of my prior points. When you think of the second quarter, we're up 26-ish points of growth in room nights in every geography around the world. So, they're all about the same. That's way ahead of market recovery. So, it's fair to say that we've gained share in every one of our major geos coming out of the pandemic. So that's good.

Obviously, a lot of focus has been on the U.S., where we've made a ton of progress. And in July, we were over 30% up versus 2019. I don't think there's any one particular driver. There’re multiple things that we've been doing to kind of drive that. We've improved our products, they're very different from where they were in 2019. Our apps are much stronger, and we've lent into marketing and merchandising, and merchandising muscle we've really built over the last few years on the back of our payment’s platform.

We continue to build our relationships with our suppliers, both in the hotel, alternative, and other verticals. It's kind of blocking, tackling, but it's all led to, I think, a significant increase compared to where we were just a few years ago.

Eric Sheridan

Okay. And then last one on sort of the demand side or the unit economics of the business right now. Thinking through take rate. How do you guys think about stimulating demand via take rate, trying to grow supply via take rate? The elements of take rate as a measure of driving strength in the business, and what some of the variables or puts and takes for take rate are that we should be keeping in mind in the years ahead.

David Goulden

Yes. So obviously, there's many puts and takes, Eric, as you say, going into take rate. I think the first thing to start off is that our underlying take rate on our accommodations business, which is kind of a core central business, has not changed. And it's basically where it was in 2019. Now then on top of that, there are other variables come into place. If we merchandise, that impacts take rates. But we're still getting -- that's basically us contributing into the pricing equation. If we add new revenue streams like payments, those add to take rates, right, because they get revenue without having a corresponding booking.

Our take rates, we think there's -- whilst there's puts and takes, we don't think there's a lot of change moving forward from where we are right now. There are some of the positives that I've talked about. There are some of the negatives in terms of things like flight mix, as that grows, that impacts take rates. We did talk about the fact that this year we would gain -- regain some of the take rate impact we've lost last year with timing, it would be a positive. And because the business has grown faster than we thought we were going to, and the booking window, how it was extended, that benefit might also extend a little bit into 2024. That's a bit more tactical.

But longer term, there's not -- the puts and takes on take rates are pretty much easing out, not a massive change from where we are right now.

Eric Sheridan

Okay. Maybe switching to more sort of longer-term initiatives and how the product set within the platform continues to evolve and turning to alternative accommodations. You and Glenn have both made comments about how that business continues to grow and scale and grow in inventory over the last couple of years. Level set for us what you're willing to share in terms of the state of your alternative accommodations today and how its element of mix shift has changed for you in the last couple of years.

David Goulden

Sure. So alternative accommodation is a very big business for us. And in total, if you think in the last quarter, 34% room nights were in that sector. That's a very, very big business. And that's basically 200 basis points higher than it was in Q2 of last year. So, it continues to grow a little faster than the average in the business. We expect that to continue going forward.

We have been driving that in a couple of different areas. Obviously, having supply is important. And now we're up to a global listing, about $7 million at the end of the second quarter. That's about 8% higher than it was a year ago. So, we've been adding to that inventory. We've also been adding sequentially. So, you kind of look at the sequential increases from Q1 to Q2, they're also quite decent. Biggest increase was in Europe because that's our biggest business. But the U.S. was the second biggest piece from a sequential increase. I'll come back to that in just a second.

I'd say where we focus the most, we always focus upon our business globally because it is a big global business for us. But where we know we still have some development to do is in the U.S. marketplace, where we've essentially only been in the alternative segment for a few years, whereas in other parts of the business, we've been in there for much longer. And we believe that we're gaining traction. We're actually working very closely with our supply partners, ask them what they need from us to help us be more competitive in that marketplace. And if you think of the enhancements that we've done to the products recently, I'll give you four, they've all really been driven by requests from our supply partners to kind of help us help them in this space. So, I'll give you four we rolled out recently.

One is an enhancement to our payment system for the alternative partners. So, it's easier for them to manage multiple properties on the one platform and reconcile and get the payments more frequently. Second is partner liability insurance. We didn't have that before. We do now. That's important to many of our partners. We can completely simplify the damage policy, where we used to go out to the customer, ask them for the damage payment. But now we don't. We go -- we basically self-insure that and go after the customers, if there's a problem, simplifying that whole process.

Last but not least, we were fundamentally against this, but we had enough pressure from the partners, say, look, certain of our partners really want to have a request to book functionality. They don't want to have the ordinary booking even with all the filters that we put in place. They want request to book, and eventually, we acquiesced, we listened to them, and we said, "Okay, you're right, we're wrong. We'll roll that out." And that's also helping us with securing extra inventory. So, four kind of good concrete examples of where we've really responded to what we heard from the marketplace to make us more competitive. And that's helped us as we kind of lent into that sector.

We're still focused upon principally the more professionally managed partners where we can basically, with one partnership, get multiple properties. But we're also kind of moving to the lower end of that segment as well, the smaller professional companies or partners that maybe only handle a handful of partners. Again, our platform is quite attractive for them, too.

Eric Sheridan

Got it. When you think about aligning competitive differentiation and platform strength that you guys have as a company against the opportunity in alternative accommodations, how should we be thinking about what you can bring as a platform to that individual category yourself?

David Goulden

I mean, we bring many things. So, as you mentioned, we're a very global platform. So, partners like the fact they can work with this and they can source customers they could never get to themselves, particularly if they're a regional player in the alternative space. But then they also like the fact that they're plugged into something where their customers can get more than just the accommodation. They can get the flight, they can get insurance. They can get rental cars, they can get attraction. So, they kind of tie themselves into an ecosystem where their product also becomes better because it's part of something that is more scoped for them as partners.

Eric Sheridan

Understood. When you think about -- you talked about some of the product changes that are lowering friction and unlocking the availability of supply. I think that's really interesting to think about those changes. How also do you think about broader investments in the alternative accommodation space to drive supply growth? How high a priority is that for you? How should we think about the investments that still need to be made to continue to scale that business?

David Goulden

Yes. So, we have teams focused upon that. We have large partner services teams in all of our geographies. And increasingly, as the alternative segment grows, more of that -- more of those teams get focused upon those opportunities. So, I'd say we have a fair amount of investment in that space right now. We augment that with campaigns and programs to encourage people to come on the platform and try it, because just like our customers, we always say the best way to get a customer to stay with you is actually -- to stay with you is to get them to experience the platform in the first place. Well, the same applies for partners as well.

So, I'd say we -- and you can see that from our supply acquisition growth. So, I think we have a fair amount of investment in that space right now. And nothing huge in terms of incremental, more of a reallocation into the places where we're putting more focus.

Eric Sheridan

Okay. You guys have talked a lot about building the connected trip as one of your initiatives over the medium to long term. Can you talk a little bit about how you guys see the product roadmap evolving and some of the investments that you've made already and some of the ones that are still ahead of you to sort of realize the promise of connected trip broadly as a platform?

David Goulden

Yes. So, let's step back a little bit because it's important to understand what problem we're trying solve, Eric. So, we believe the connected trip is something that can solve what today is still a very complicated, fragmented, and frustrating way to book travel. So, while a site like ours can maybe handle a piece of the trip for you and do it very, very well, you're still left at your own mercy to go off and put the rest of it together, pay for it in multiple places. If anything goes wrong, heaven help you, you're dying for dollars trying to fix the problem yourself.

And we believe that the connected trip, which is enabled by technology, can solve more of that problem for you. Of course, as you mentioned, it's a long-term vision, but we believe that planning, booking, and experiencing travel to be more personal and more enjoyable is a great way to provide value for our customers and our partners. And the nice thing about this is it's something that you'll see incremental improvements and enhancements over time. It's not as if one day you wake up and you switch it on the trip. It gets built out over time. We're building out our verticals whether it be flights, attractions, rental cars, et cetera, putting underneath the payment platform, tying it all together doing more personalization. So, you mentioned kind of where the investments are or where the unlocks are. And I would point you to a few things.

So, building out those non-accommodation verticals is important because you want to have a connected trip where you can experience it in all the places around the world, not just in some core markets in Europe. I've talked about connecting those more seamlessly through the booking experience and also being able to personalize the whole experience. So, when you search for something, we don't give you a listing of 1,000 travel hotels, but we're giving you the five that may be most suitable for type of search that you're looking for based upon the family, the vacation where it is you want to go, et cetera.

So, I do think the air will become an important piece of it. I saw a news; extra vertical is growing quickly. And we really want to make sure that that is available to more customers in more places. So that can be part of the overall trip.

Eric Sheridan

So maybe just one quick follow-up there. How should we be thinking about the investments that have already been made in there versus investments that still might be ahead? Or thought of it another way, how much higher could air become as a percentage of the mix longer term when you think about -- if connected trip as a concept is played out to its end conclusion, how to think about some of the mix dynamic?

David Goulden

I mean NOI [ph] is growing rapidly. We're talking about Booking.com. NOI is growing rapidly, is still a relatively small piece of the overall business, and has the potential to become much, much larger. We're pleased with how quickly we are growing the business, but we've only been doing air in Booking for two years to three years, scaling very rapidly now in many, many countries around the world, but can be multiple times the size it is right now, just fulfilling the potential within the existing customer base, and we can grow beyond that.

Eric Sheridan

Got it. Okay. Sticking with air for a minute, there's press reports out there that the European Commission is going to look to potentially block your acquisition of eTraveli. Any updates on that acquisition, your broader approach to it, and what the commission might be planning on doing?

David Goulden

Yes. So, we've not heard anything formal from the EC, but we've read the same speculation in the press that I'm sure a lot of you have read. So, I just make three points. First, we remain very committed to flights, and we've extended our partnership with eTraveli through at least the end of 2028. So, we'll work with them and continue to kind of build out the flight offering at Booking.com over several years.

Secondly, if that speculation is confirmed, we would strongly disagree with that decision. We believe it would be fundamentally flawed on both factual and legal grounds. And third, if that is the decision from the EC, we would intend to appeal it to the European courts.

Eric Sheridan

Got it. Okay. So that's pretty clear in terms of the pathway going forward. Pivoting away from air. Generative AI is a topic that you and Glenn have talked a fair bit about on the last couple of earnings calls. It's obviously a topic that's pretty front of mind for all technology investors right now. How do you think big picture about the technology impacting the travel industry specifically? And then for Booking, how should we be thinking about AI as a mechanism for the consumer-facing versus elements of internal in the organization as a way to drive potential efficiencies?

David Goulden

Yes, I think the AI can affect all of those. So first of all, it's important to realize that we've been building AI into our products for at least a decade, and we have many engineering teams around the world are working on these technologies. So generative AI is a step forward, but AI itself is something that we've really based too -- based the business on for a long period of time.

There are all sorts of applications for gen AI and AI in total. I think when it comes to customer-facing, we can really help personalization. We can make the product experience better. We've already started experimenting. We have the AI booking assistant at Booking.com, and we have a product called Penny, which is another chat, AI-powered tool at Priceline. And we've got customers using those, interacting with them, converting into bookings from them. So, it's not just kicking the tires. Actually, using these to help them with their booking experience.

Early days, but we're getting data from those to understand where we could take that technology further. Internally, I think AI helps -- has all sorts of opportunities for the business. I think the biggest areas we've been looking at is developer productivity, but also back office functions as well, finance, G&A, customer service are all areas where that technology can be applied over time.

And then the other thing we've been talking about and people been looking at is how does it impact the paid side of the business? So, what's the opportunity in search? Because obviously, a number of our search partners are also investing in gen AI. And I'm sure, over time, the search experience will change because they want to monetize search. We're a big customer of theirs. They'll look to make search more attractive, will look to get people like us to spend more money with them to buy search. So, I think we've done very well as a business over time, adapting to changes in search and how we can basically take advantage of those in many cases. So, I think it's going to impact many parts of the business. So, I think much more opportunity than concern for our business.

Eric Sheridan

Understood. Okay. And still wait and see on a lot of the early beta tests and some of the things that you put out into the market. Yes, understood. Maybe we can pivot to talking about direct bookings and building loyalty with the customer base. So, each quarter, you've sort of talked more about getting mobile-first bookings, direct bookings. You built the loyalty program inside the company now, and we've come up on at least the one-year anniversary and beyond of that loyalty program. What are some of the key learnings as you've tried to build more direct traffic and a more loyal user base into your platform over the last 12 months, 18 months?

David Goulden

Yes. So, I think first thing is that being customer-centric is really what drives loyalty. So, people can be loyal if they like the product, and if it solves problems for them. So, you can add programs and things on top of that. But fundamentally, if your product isn't good, you're not solving a customer problem, you're not going to get much loyalty. So that's not lost upon us and we think about that every single day. That's why people are loyal to a brand. And that's what we're building here.

And as we build out more towards the connected trip, that's what's going to help us build our direct mix. So, loyalty comes in various shapes and forms. Obviously, our most frequent customers, the ones that uses more often, are more loyal and they're also more direct. So, we talk about averages in the business a lot, right? We talk about our direct mix being on average above 50, we talk about the usage being on average at 48 points of use. But the more loyal customers, the ones who use us more frequently, are running much higher than those numbers.

So, a lot of what we're trying to do in this business and really has been from the get-go is to expand the base of customers, think of it as a pyramid, expand the size of the pyramid, the base of customers, through bringing new customers in and then move them up the loyalty curve. So, as they become more loyal, they're usually more frequently -- you get a higher share of wallet from them, you get a higher direct mix. And that's what a lot of the business that we are focused upon is really aiming to do.

And you just go back to the strategy and talk about the connected trip, well, that's something we're really aiming out our more loyal customers who want to really get value from their relationship. It's unlikely that somebody who comes on our site for the first time ever is going to buy a full connected trip. But they might. But it's much more likely that somebody who uses two times or three times and understands what we can do, want us to do more and will lean in to something like that to solve a bigger piece of that problem.

Eric Sheridan

Got it. When you think about the Genius loyalty program that you have launched, any learnings you can share in terms of what that has meant for behavior on the platform, consumer traffic? And how do you think about identifying or using data to move people into the loyalty program over time and target them? I like the way you think about it there with the idea of a pyramid and moving people up the pyramid. How do you think about continuing to sort of move the customer funnel in that direction over the long term?

David Goulden

Yes. So actually, you mentioned that Genius has only been around for maybe a year or two. It's actually been around for a long time. We just didn't market it. So, it's perhaps the world's least marketed loyalty program most recently, but we're changing that.

So, we did a couple of things with Genius to make it more applicable to more customers. So back in 2021, we expanded the Genius program such that you previously had to have booked and stayed twice to become a Genius member. And we expanded it to anybody who has a logged-on account. So, you don't have to make a booking. As long as you're a logged-on customer, you now start to get the Genius benefits, which include discounts, upgrades, et cetera.

And then we also, at the other end, last year in 2022, expanded -- created a new category called Genius Level three, which is people who booked and stayed more than 15 times in two years. That's a pretty big cohort. So that's a lot of people doing a lot of bookings. And they get better discounts, better pricing, and they get things like enhanced customer service lines, et cetera.

So, Genius an important part of the loyalty program. And we see it evolving. In fact, we see it evolving in line with the strategy of the business. So, at the moment, a lot of the Genius is aimed at the accommodations business. But now you start to see things like getting Genius discounts on car rentals in a similar way as you do on accommodations.

And then as a program, we've also talked about the fact that, over the last few years, we've enhanced our spend on our marketing to also include merchandising. Well, today, a lot of the merchandising spend is aimed at the accommodations business, generally pricing-oriented things. But over time, we want to reorient more of that towards the Genius customer base and encouraging them to do more things with us. So again, encouraging them to take multiple products at the same time, buy multiple things from us, and morph it as well.

So, the Genius program is actually one of the fundamental ways that we get people, say, in the funnel and up the funnel. And we have the program kind of aligned with people who are less users, mid-frequent users and high-frequent users, and that's how the program has evolved.

Eric Sheridan

Understood. And you teased out something there with thinking about merchandising, but then also marketing spend. And obviously, within marketing, there's also elements of brand building, and you guys have done a lot of brand building in the last couple of years versus more direct response to performance marketing. How do you think about the evolution of the marketing mix? And what have you learned as you expanded into more merchandising, expended some effort around building more brand awareness and brand loyalty, and what that might mean for marketing returns or marketing mix in the long term?

David Goulden

Sure. So, let me try to unpack that. So -- we -- one of the things that's led us to the share gains that we talked about, as we came from COVID, is I think we've been much more encouraged or able or willing to kind of lean into that marketing spend. So traditionally, that lean-in would have basically been more performance marketing than it has been, but we've been able to spend more on brand. You see a big part of our U.S. activities as being brand.

You wouldn't have seen Booking.com sponsoring the Super Bowl a couple of years ago. For the last couple of years, we've been involved with Super Bowl adverts, Major League Baseball, et cetera. So really upping our game on the brand side, as well as leaning into our traditional pay channels, and then complementing that with this merchandising capability we really didn't have pre-COVID to any extent and now is a big part of the equation. So, the marketing mix has become richer in terms of the things that we can use and the levers we can use to kind of grow the business.

And of course, they're complementary. They're not exactly the same, but we look at them in one bucket of spend because essentially that's what we're spending upon customer acquisition and customer development. And if you look at what we're spending this year on marketing and merchandising combined, it's still high -- it's much higher than it was in 2019, although less than we thought it would be at the start of the year. So, we've been able to gain some efficiencies during the year.

So last quarter, for example, we were able to spend basically 50 basis points less on marketing than we did a year ago. That's impressive. Now it won't happen that way every single quarter, but that's a big improvement. That's from a combination of our direct mix increasing and is also looking to now try and refine some of those ROIs. Now we've been spending more aggressively in terms of fine-tuning those and bringing them so the spend envelope is a little tighter.

So, going forward, I think that marketing spend clearly is one of the biggest spend areas in the business. We've demonstrated, and I think we can use it to grow the business and gain share. And we've also now got more capabilities within marketing to decide how much we spend where. Of course, it's become a much more complicated equation because it used to be just how much do I spend on performance marketing in Country A. Now it's a much more nuanced conversation in terms of which of those levers are used in which country, in which geo, in which markets in alternative, versus hotels in different verticals and by different customer cohorts.

Eric Sheridan

Okay. Maybe taking that marketing answer and moving it into broader margins. If we reversed a couple of years, the message going into COVID or pre-COVID was flights, connected trip, local payments. There were a lot of investment initiatives that were aimed towards revenue dollar growth and less about optimizing margins pre-COVID. We've been through COVID. Now you've got elements of the marketing mix you're looking at today. How should investors think about the building blocks of structural margins for the business? I know you're not guiding to anything medium to long term, but just what are the key variables that could be elements of outperforming or coming in in-line on margins if we think about it over the next couple of years?

David Goulden

Sure. So first of all, let's step back. I think because 2019 is actually, Eric, a good point to start again. So, our commitments, without getting into a long-term model, is to say, look, we believe that coming out of COVID with the investments we've made in the business, with the new capabilities we have in the business, which are numerous, we can grow top line and bottom line faster than we did pre-COVID. Now to put that into context and just to take currency out of it, to go to constant currency growth rates, that was 8% on revenue and 15% on non-GAAP earnings per share. So that's the kind of threshold we set ourselves for being higher than that post-COVID.

Now within that, in order to be able to do that, there has to be some movement in the EBITDA margin, because you can't generate 15% earnings per share unless you're moving the EBITDA margins in the right direction. So, we have obviously done a good job the last couple of years as COVID has moved forward, expanding our margins. We're going to be about 200 basis points more this year than we were last year. Some of that, obviously, is from the timing effect of unwinding.

But going forward, we believe that we can continue to move margins up modestly from where we are right now. And the two drivers are going to be back to the where we were prior -- our direct mix. The more that goes up, we can get more marketing efficiencies just from us, and starting to get some leverage on the fixed cost, the more fixed costs, we've been investing heavily in the last few years. Obviously, as we build out all those capabilities, they don't come without people. People is the most expensive part of our fixed cost structure. And we said that next year's growth rate will be significantly lower than it was this year in terms of, whether we get the leverage or not exactly, we'll update that in February. But directionally, that growth will start slowing down.

So, between the increases to margin from direct mix and marketing efficiency and then for fixed costs, those are the variables. Now we're not trying to get back to the 40-ish percent EBITDA margins we were in 2019. That would be mathematically impossible with a big payments business. We didn't have back then a big flight business, we didn't have back then. But we can still move forward from where we are right now, and very importantly, get above that minimum envelope I talked about in terms of what the growth rate would be.

Eric Sheridan

Understood. I know we only have a few minutes left. You guys have made some really big commitments of returning capital to shareholders. Can you just remind us a little bit on free cash flow generation, returning of capital? How do you guys think about broader capital allocation within the company?

David Goulden

Yes. So, before we end up, just remind everybody, the first priority is to invest in the business, right? Number one. It could be organic, it could be inorganic, it could be both. After investing in the business and making sure we're doing that, then obviously, we get to returning excess cash invested over time, and through share repurchases as our method for doing that.

To help people understand what that would equate to, think about how we can use the balance sheet as well as the income statement a little bit to fund towards that. We're going to target a gross debt leverage ratio of about 2.0, which is where we are right now. But on a net leverage basis, we've historically run the business with negative net leverage, i.e., positive net cash. And we plan to move that gradually to a positive net leverage position, targeting about 1x over the next few years. So, there's money, obviously, from the balance sheet to fund repurchases as well.

So, when you consider our leverage ratio targets, the strong investment-grade rating, the outlook for the business, we expect our annual return of capital to shareholders over the next few years to be at least free cash flow. Then to turn that into kind of where we are in terms of our authorization right now, we started the year with a $24 billion authorization for repurchases. We now have $19 billion, which we expect to return to shareholders over the next three plus years.

Eric Sheridan

Got it. Understood. So, in the last minute or two we have, we've talked about a lot of topics of where the company is going product initiatives, margins, return of capital, allocating capital into the business. How would you characterize the conversation you and Glenn have about the priorities for the business in the year ahead and aligning that against how you think the broader travel landscape is going to evolve in the year ahead?

David Goulden

Sure. So, let me break that into two pieces. First of all, travel, right, where we think travel is going to go. Now my comment here is not based upon any new market data points or information, but when we think about next year, we're hoping that it will be a continuation of what we see in this year. This year, we've definitely seen consumer preference towards services, and travel highly within services and experiences. And it's possible that the additional travel opportunities that the post-COVID flexible work policies are going to offer will also continue to fuel demand. If you think about it, very, very few companies have gone back to five days a week in the office. And if you're not in the office five days a week, you have more opportunities potentially to travel.

And when we look at bookings, we actually talked this about a fair amount, whether it's a one-year or a three-year or five-year outlook, it's really continuing to build on the things we've talked about for the last two years or three years, that come together towards something, that something is the connected trip. But if you think about the progress we've made, payments, the progress we made in the app, alternative, new verticals, merchandising, AI, U.S., direct mix. These are all things we've moved the needle substantially, and they're all important elements of the connected trip. So, whether it's a one-year or three-year or five-year, it's basically the same story. It's just how far down that journey are you.

Eric Sheridan

Well, this was great. Thank you, David. Please join me in thanking David and the whole Booking team for being part of the conference this year.

David Goulden

Thank you.