Expedia Group, Inc. (NASDAQ:EXPE) Q2 2023 Earnings Call Transcript

Expedia Group, Inc. (NASDAQ:EXPE) Q2 2023 Earnings Call Transcript August 3, 2023

Expedia Group, Inc. beats earnings expectations. Reported EPS is $2.89, expectations were $2.32.

Operator: Good day, everyone, and welcome to the Expedia Group Q2 2023 Financial Results Teleconference. My name is Colby, and I’ll be the operator for today’s call. [Operator Instructions] For opening remarks, I will turn the call over to SVP Corporate Development Strategy and Investor Relations, Harshit Vaish. Please go ahead.

Harshit Vaish: Welcome to Expedia Group Q2 2023 Earnings Call. I’m pleased to be joined on today’s call by our CEO Peter Kern and our CFO Julie Whalan. As a reminder, our commentary today will include references to certain non-GAAP measures. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in our earnings release, and unless otherwise stated, any reference to expenses excludes stock-based compensation. We will also be making forward-looking statements during the call, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions, which are subject to risks and uncertainties that are difficult to predict.

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Actual results could materially differ due to factors discussed during this call, and in our most recent forms, 10-K, 10-Q, and other filings with the SEC. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. Our earnings release, SEC filings, and the replay of today’s call can be found on our Investor Relations website at ir.expediagroup.com and with that, let me turn the call over to Peter.

Peter Kern: Thanks, Harshit, and good morning, and thank you all for joining us today. Our travel demands remain robust, and we are pleased to see our continued execution result in solid performance for the second quarter. As gratifying as those results are, I am even more excited with the progress on our platform transformation journey, having just launched one key in the U.S., and continuing to be on schedule of our verbal migration. We are particularly pleased that we were able to meet our second quarter financial goals while electing to move some marketing spend from Q2 to Q3, where we believe it can be better spent in support of the launch of one key and our accelerated growth in the back half of the year. Industry trends have remained broadly consistent with the first quarter.

And North America and Europe has remained stable with stronger growth in APAC and Latin America. Travelers worldwide continue to favor shorter stays in urban locations versus longer trips in sun and ski destinations. As far as pricing, both hotel and vacation rental ADRs are holding up year-over-year, while international cross-border airfares are stable. U.S. domestic airfares have seen some declines as capacity increases. Rental car rates continue to decline as inventories normalized from compressed levels last year, resulting in more attractive prices for consumers and more transactions. Overall the data continues to show that travel remains a top priority for consumers. As I explained before, our B2C strategy is to build products, features, and customer propositions that attract and help us retain valuable customers, and to move those customers into loyalty membership and app usage to amplify their value.

These travelers drive higher profits per transaction and higher repeat rates, ultimately leading to higher lifetime value. In addition, as these customers have a higher propensity to come to us through direct channels, this helps us drive future leverage in sales and marketing. As a combination of all these factors, these travelers have a much higher return on investment and ultimately drive more profitable and faster growth as they stack up over time. As we continue to move from a purely transaction, room-night-focused world to one in which we focus on customers and lifetime value, we have been able to build a bigger, more valuable base of these high ROI travelers. Our focus on acquiring and retaining loyalty members and app users to drive this strategy continues to show good results.

This quarter active loyalty members continue to hit new highs and were up 15% year-over-year in our core brands, and the percentage of bookings coming through our apps was up 300 basis points sequentially versus the first quarter. We know that members with the app have the best economics, which is why we have been so focused on growing this segment of customers. In our Expedia brand in the U.S., I am pleased to say that we have seen this cohort of customers increase roughly 135% versus 2019. As we roll out our strategy across all our brands and all our markets, there remains a significant opportunity to accelerate further. A couple of weeks ago, we took another major step forward with the launch of One Key in the U.S. This is the most flexible travel rewards program in the industry, with our core brands unified under one loyalty program offering our customers the ability to earn and use One Key Cash, a simple common currency, across our vast breadth of flights, hotels, vacation rentals, car rentals, cruises, and activities.

In addition to the breadth of this program, this marks the first time any major vacation rental marketplace will have loyalty, which is a significant differentiator against our competition. It’s early days, but as we have seen historically, our loyalty members are much more productive, and with this now best-in-class program spanning our biggest brands, we expect to drive many more customers into the program and substantially increase our base of loyal travelers. Overall, our B2C business is finally nearing the end of its major changes, and piece by piece getting the benefit of new capabilities and greater agility that comes from a unified stack. With One Key out the door, our last major tech lift is the verbal migration to our main platform.

We have already moved 100% of our verbal U.S. web traffic to the platform and our on-track to complete the migration during the fourth quarter. As we’ve explained before, we expect some modest headwinds to conversion as we transition, but ultimately the payoff is well worth it with better conversion, increased feature velocity, and ultimately better performance from verbal overall. Our single-tech strategy is designed to give all of our brands the benefit of our entire suite of product features, including our latest advancements in AI and machine learning, to personalize and enhance the customer experience. On the topic of AI, earlier this year, we launched conversational trip planning, powered by ChatGPT and the Expedia iOS app. And last month, we launched it on the Expedia Android app.

We have been learning from consumer interactions and are adding a number of new features to help consumers on their journey of discovery. Travelers can now start a new conversation by choosing from suggested prompts, and soon they will be able to return to a conversation at any time and even respond throughout a conversation by simply choosing a suggested response, all of which is designed to bring them one step closer to booking their desired trip. Along the growth and progress we’ve seen with our brands, we continue to see tremendous momentum in our B2B business, which grew revenue 32% year-over-year in the second quarter. Our B2B business has greater exposure outside the U.S. and has benefited by continued opening of markets around the world.

The engine for our B2B business is fueled by the same technology, supply, and service that serve our own brands. And as we have advanced in all areas over the last several years, this has only added to the velocity of our B2B business. We believe we have the most successful and differentiated B business in the travel world with a large addressable segment still available to penetrate further. And our wins in the marketplace continue to demonstrate that point. In the second quarter, we announced a new partnership with MasterCard, where our tech will power MasterCard’s global network of issuers so that their customers can spend their loyalty points on great travel experiences. And in another huge development for this segment, we’ve teamed up with Wal-Mart, where we are now powering their first-ever travel benefit for Wal-Mart Plus members through our white-label template solution.

We also continue to expand our tech delivery to our existing partners, not only through our core TravelOS products, but through our expanding offering of solutions. After recently commercializing our fraud prevention capability, I am happy to announce that our Revenue Performance API is now in pilot with one of the largest hotel management companies. As our tech continues to advance, driven by our industry-leading AI capabilities and the acceleration of our single-and-platform strategy, there is much more opportunity to gain [lot of share] with our existing partners and to scale further with new partners. So overall, I’m very pleased with the momentum we now have in our accelerating product improvements as we move towards the second half of ’23 and beyond.

Over the last few years, we have taken on many difficult challenges in order to transform not only our tech, but our entire strategy. As we begin to emerge from this period of massive change, it is clear that we are building the best offerings for travelers, a better marketplace for our partners, and overall a better company. It is great to see so much finally come into fruition, and our entire organization is excited about the future. And with that, let me hand it over to Julie.

Julie Whalen: Thanks, Peter, and hello, everyone. Our second quarter results with record revenue and EBITDA demonstrate that our strategic initiatives are working and that we have a significant opportunity for long-term growth and profitability. And it is this ongoing strength in the business that enabled us to deliver another quarter of accelerated levels of share repurchases, resulting in approximately $1.2 billion repurchased year-to-date, our largest buyback to date. Before I jump into more of the details, I wanted to remind you that going forward, all financial comparisons will be on a year-over-year basis. It is also important to note that our second quarter 2023 growth rates, as compared to 2022, were impacted by FX headwinds of approximately 40 basis points to gross bookings, 170 basis points to revenue, and 530 basis points to EBITDA.

We also saw an approximate 80 basis point headwind to the EBITDA margin. Now, as far as our performance this quarter, let’s begin with our gross booking trends. Global gross bookings of $27.3 billion were up 5% versus last year, and in line with our mid-single-digit top-line guide. Growth was driven by lodging gross bookings, which were up 7%, and were the highest second quarter on record. The strength continues to be driven by our hotel business, which achieved record gross bookings primarily from strength in our B2B business, as well as in brand Expedia, which saw a 15% increase year-over-year. This was partially offset by our Vrbo business, which was impacted by the shift in consumer demand toward urban markets and shorter lengths of stays, as well as the impact from Vrbo’s tech platform migration that we mentioned on last quarter’s earnings call.

However, given the size and strong growth of our hotel business, we were pleased that we were able to deliver record lodging bookings in total. Moving to the key financial metrics in the P&L, starting with total revenue. Revenue of $3.4 billion was up 6% versus last year, in line with our mid-single-digit top-line guide, and was the highest second quarter on record. Revenue growth was primarily driven by the continued strength across our lodging business, which grew 12%. This was partially offset by softness we have been seeing in insurance and car, two categories that have been impacted by some industry-wide changes post-pandemic. For insurance, we are seeing lower attach rates as consumers appetite for insurance normalizes. And for car, we are continuing to see rates decline as supply has increased.

Total revenue margin increased 10 basis points to approximately 12.3%, versus last year primarily due to an increased mix shift to lodging revenue, which has higher revenue margins. Cost of sales was $403 million for the quarter, which is lower than last year by $13 million, or 3%, with approximately 110 basis points of leverage as a percentage of revenue versus the second quarter of 2022, driven by ongoing efficiencies across our customer support and other operations. Our customer support operations continue to benefit from the various automation initiatives we have implemented over the past couple of years, and we will continue to find more efficiencies in such areas as the cloud and license and maintenance costs when we finalize our migration to one platform and eliminate redundant systems accordingly.

Direct sales and marketing expense in the second quarter was $1.6 billion, which was up 2% versus the second quarter of 2022. The primary driver of this year-over-year increase was related to an increase in commissions in our B2B business to support its strong growth of over 32%. As we’ve noted in the past, commissions paid to our B2B partners fall into our direct sales and marketing line, and overall are more expensive as a percentage of revenue than our B2C business. Whereas they are generally paid on a state basis and to a contractually agreed upon percentage, the returns are more guaranteed and immediate. This increase in B2B direct marketing costs was mostly offset by marketing efficiencies in our B2C business this quarter, and resulted in marketing leverage as a percentage of gross bookings as compared to the second quarter of 2022.

These B2C marketing efficiencies resulted from the benefits we are seeing from our continued investments in loyalty and app members, as well as our decision to move some of our planned spend from the second quarter to the third quarter to tie it more closely with the one key launch and to support our accelerated growth in the back half. While marketing will fluctuate quarter to quarter, we were pleased to see this marketing leverage. Overhead expenses were $627 million, an increase of $77 million versus last year, or 14%. While we remain disciplined on our overall cost structure, as we have said, over the past year we have continued to invest in talent across our product and technology teams to support our strategic initiatives, and we are pleased we were able to more readily fill these positions given the surplus of top tier tech talent in the market.

We also saw higher salary expense associated with our annual compensation increases this year, which went into effect during the second quarter, and was the primary driver of the overhead increase from the first quarter. As we finish our technology work in the coming quarters and look to redeploy resources and to deprecate systems next year, we expect to realize cost efficiencies going forward. Despite this overhead pressure, we were pleased to see that with another quarter of strong revenue and overall expense disciplines, including our decision to shift some marketing spend, we delivered record second quarter EBITDA of $747 million, which was up 15% with an EBITDA margin of 22.2%, expanding approximately 190 basis points versus the second quarter of 2022.

Our free cash flow remains strong at $3.8 billion year-to-date. The year-to-year decline is primarily associated with changes in working capital from the timing of payments. Last year, as the business emerged from Omicron, we saw meaningful increases in some of the working capital drivers like payables, which has since normalized this year. We remain pleased with an ongoing robust cash flow levels, and we expect them to remain strong on the year. On the balance sheet, we ended the quarter with strong liquidity of $8.8 billion, driven by our unrestricted cash balance of $6.3 billion, and our undrawn revolving line of credit of $2.5 billion, which provides us with ample access to cash to operate the business. From a debt perspective, our debt level remains at approximately $6.3 billion, but with our expanding EBITDA, our gross leverage ratio has come down from the first quarter to 2.6 times.

We have started to make progress towards our target gross leverage ratio two times, and expect to make continued progress in the coming quarters through EBITDA growth and potentially some debt repayments. As far as capital allocation, given our strong free cash flow levels and a stock price that we believe remains undervalued, we have been buying back our stock on an accelerated basis to maximize our return of capital shareholders. As a result, we bought back approximately $1.2 billion year-to-date, or nearly 12 million shares, our largest level of repurchases to date. We continue to believe that our stock price remains undervalued and does not reflect our confidence in the expected long-term performance of the business. Therefore, considering our ongoing strong liquidity and free cash flow, we expect to continue buying back our stock opportunistically throughout the remainder of 2023.

Looking ahead, we are reiterating our full-year outlook of double-digit top-line growth with margin expansion. As it relates to the third quarter, we expect year-to-year gross bookings growth to accelerate to high single digits. This acceleration is driven by Brand Expedia and Hcom, partially offset by Vrbo, which continues to face short-term headwinds from its migration. While we expect revenue growth to be lower than gross bookings growth, driven by the prior quarters reduced Vrbo bookings converting to stays, and therefore revenue in the third quarter, which is historically our highest revenue quarter for Vrbo, we expect revenue growth to see modest sequential acceleration. We expect EBITDA margins to stay relatively in line with last year.

While we expect to see continued cost of sales leverage, as previously mentioned, we will be investing in marketing to support the One Key launch and to set us up for a strong back half. Overall, we expect fourth quarter will see a more meaningful acceleration in both top line and bottom line growth as Vrbo finishes its migration, the One Key impact starts to kick in, and the growing base of app members drives more production, all of which gives us confidence to reiterate our full year outlook. In closing, we finish the front half of 2023 on a strong note with record second quarter revenue and EBITDA. We are pleased to see the continued momentum, even while we continue to transform the business and navigate associated headwinds. Our accelerating product improvements give us confidence that we are on the right path and that there is a huge opportunity in front of us to drive long-term profitable growth and to maximize shareholder returns.

And with that, I would now like to open the call for questions. Thank you.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Eric Sheridan from Goldman Sachs. Your line is open.

Eric Sheridan: Thanks so much for taking the question. Two if I could. In terms of forward booking trends, I understood on the commentary broadly about the summer, but the industries obviously had some tailwinds from elements of longer booking dynamics as we’ve come out of the pandemic. Are we seeing more normalized behavior with respect to forward booking, or is there anything to call out either in consumer behavioral geography in the forward booking trend that you’d want to highlight? And then in terms of thinking about the exit philosophy for Vrbo, is there a way to quantify elements of what One Key mix and easier comps might mean in terms of reacceleration at Vrbo at the end of the year? Thanks so much.

Peter Kern: Sure. Thanks, Eric. I’ll take a crack at both of those. I’d say broadly, yes, I mean, what we’re seeing is a relative, what I would call a relative normalization of seasonal trends and booking trends. There’s obviously some dynamics around what is opening or more newly opened, and what has been open for a while, as we’ve seen, for example, this summer with lots of travelers going to Europe, where maybe they didn’t go last summer, Asia opening up, and more travelers going there. Of course, parts of Asia like China still don’t have full airlift out of China. So there’s still differences. But I think broadly in terms of the effect of like COVID, last year we had COVID first quarter, and then the second quarter was a huge quarter because things opened up after Omicron.

That’s kind of normalized out, and I think in terms of booking windows, booking trends, they’re moving around a little bit, but by and large, they’re normalizing to what I would call generally pre-pandemic patterns. So I think that’s the main thing. In terms of geo, again Asia will open up more. There will be more travel there. We’re seeing APAC and LATAM growing faster because of those things opening more recently. So that’s certainly a trend. But again, I think that normalizes once it’s been opened, call it a year or so. And then as far as Vrbo goes, very hard to quantify. And obviously, the switch, the sort of consumer switch from Vrbo or vacation rentals generally to more hotel started happening in the back half of last year and earlier this year.

So that’s sort of a macro trend as far, so we’ll be lapping some of that now as we get into the back half of the year. But as far as our journey goes, yes, One Key we think is a big opportunity for us it’s the first time that Vrbo customers will have loyalty. It’s a chance to get them involved in our whole universe of products so we can bring them into the other products. Obviously now, Expedia members, hotels.com members can use their points on Vrbo. So we think that becomes a very attractive reason to use Vrbo. So we definitely think One Key will drive a lot of cross shopping between the products. Hard to quantify yet, but that’s a core belief in what we are trying to do with One Key. And then as far as the migration goes, as we’ve talked about, you’re changing the product, you’re moving it across, the last piece will be moving the app, which is very binary, so you tend to do it at the end.

That’s still coming, but we’re excited about what the product will be able to do. We’re excited about having all the products on one stack and being able to innovate across all of it together. And as we’ve talked about for a long time, that will eventually lead us to be able to sell much more easily Vrbo products across all brands, across our B2B products, etc. So we don’t have a number for you, but I think broadly, I think we’re going to lap the macro trends of shift from vacation rental to hotels later this year, and then, the migration stuff will still be around for a few more months, bu we’re excited about being past it and the opportunities that presents.

Eric Sheridan: Great, thank you.

Operator: Your next question comes from a line of Lee Horowitz from Deutsche Bank. Your line is open.

Lee Horowitz : Great, thanks. So you talked about some of your marketing spend getting pushed from the second quarter to the third quarter in order to support the One Key loss. Can you maybe help us better understand how this may have impacted the bookings and nights in the second quarter relative to your expectations, and then maybe relatedly, can you talk a bit about how you think lodging share pays throughout the second quarter and what your expectations are for share as you move through the balance of the year and you drive that extended growth across a number of your properties?

Julie Whalen: Hi, it’s Julie. I’ll take the first one. Yes, I mean, obviously, I’m sure there was some impact to the second quarter as a result of our decision to shift the marketing. At the end of the day, our top line was hitting our expectations and obviously what we had told the street about mid-single digits, and so we thought the right choice of action was to take that spend and to get the best return to tie it nicely with our One Key launch and also to set us up for the back cap. So we made the decision to take that money and push it into the third quarter. But sure, could we have spent more and maybe gotten some incremental nights and bookings in the second quarter? Sure, but we thought this was a better path to take.