Expedia Group, Inc. (NASDAQ:EXPE) Q3 2023 Earnings Call Transcript

Expedia Group, Inc. (NASDAQ:EXPE) Q3 2023 Earnings Call Transcript November 2, 2023

Expedia Group, Inc. beats earnings expectations. Reported EPS is $5.41, expectations were $5.13.

Operator: Good day, everyone, and welcome to the Expedia Group Q3 2023 Financial Results Teleconference. My name is Lauren, and I’ll be your 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: Good afternoon, and welcome to Expedia Group’s Third Quarter 2023 Earnings Call. I’m pleased to be joined on today’s call by our CEO, Peter Kern, and our CFO, Julie Whalen. As a reminder, our commentary today will include references to certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in our earnings release. And unless otherwise stated, any reference expenses exclude 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.

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 a 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: Thank you, Harshit, and good afternoon, and thank you all for joining us today. Our third quarter results came in ahead of our expectations with record revenue and EBITDA. This was particularly gratifying considering the fires in Maui, which had a disproportionate impact on our Vrbo business and put pressure on the top line overall. Travel demand otherwise remained solid with broad trends consistent over the last few months. North America and Europe demand remained stable with more pronounced growth in APAC and Latin America. Prices also remained stable by and large. Hotel and Vrbo ADRs are holding up in each region, but mix effects are leading to a slight year-over-year decline in overall lodging ADRs. Conversely, we have seen some modest price pressure in air and car.

We are also keeping a close eye on the escalating violence in the Middle East, which appeared to have some impact on global travel in early October. More relevant to our specific performance, I’m happy to share that we’ve just completed the final leg of our verbal migration onto our single front-end stack with the conclusion of our global launch of the new Vrbo app this past Monday in the U.S. This marks the last of our major migrations associated with our multiyear transformation. It has been a long, complex journey, but well worth the effort as we are now in a position to accelerate into the future without the drag of transformation work that forced us to go backwards in order to go forward. We are now in a position to dramatically increase our test and learn capacity and feature release velocity while also providing a scalable and efficient base to operate upon.

We continue to utilize our industry-leading AI and ML capabilities to radically improve all aspects of our traveler experience. And with the launch of One Key and our increasing ability to understand the long-term value of our travelers, we can now begin to drive faster, more profitable growth. Moving on to the key pillars of our performance, starting with our category-leading B2B business, which remains on track for a strong year with Q3 revenue growing 26% versus last year. We’re winning new deals, increasing wallet share with existing partners and launching new products and features to support our growth. Demand from China, in particular, continues to pick up with Q3 bookings from China Partners up over 150% year-on-year. We anticipate continued strength from B2B going forward, driven by our continuing push into the addressable market along with the advantages that our platform improvements will bring to the B2B business, whether in core technology, the application of AI and machine learning or in service and payments.

As we unify stacks, this will also further enhance the capabilities on offer for our B2B partners. But as pleased as I am with the continued growth of our B2B business, I’m even happier to see our B2C business picking up momentum with year-over-year revenue growth in Q3, accelerating over 400 basis points sequentially. This is what we’ve all been working so hard for us. So it’s very gratifying to see these results beginning to improve. Another major milestone for us was the U.S. launch in July of One Key, our new loyalty program. One Key unifies our major brands, expediahotels.com and Vrbo, allowing our members to earn and burn one simple currency, One Key cash across our vast marketplace. As I’ve mentioned before, getting dividends from a program like this will take some time given the frequency with which most consumers travel.

That said, we are very happy with the early results and traction One Key had with our members. We have already migrated over 82 million members to the program. And with the addition of Vrbo to the mix, we have seen 34% growth in new members over last year. We have already seen many members using One Key cash across brands, including on Vrbo and have been pleased that Hotels.com members have not been unduly impacted and have already been using One Key cash to shop for other products on Expedia. Overall, these promising results have given us solid learnings that will be useful as we launch One Key in other countries next year. And with the Vrbo migration complete, we can now more fully lean into the core differentiation that One Key gives Vrbo in the vacation rental space.

One Key, along with our ongoing efforts to more generally attract higher lifetime value customers, is accelerating our mix of loyalty members, app users and app members. And the percentage of bookings coming through our apps continues to grow and was up approximately 300 basis points sequentially in the third quarter, which ultimately contributed to our year-over-year marketing leverage in our B2C business for the third quarter. We have also been releasing exciting products and features that remove more and more friction from the planning and booking process. In September, we announced our fall release showcasing a series of new features and products squarely aimed at solving complex traveler problems and enhancing engagement. In case you missed it, I’ll give you a few of the highlights.

We have simplified group travel planning, providing for the first time one place for friends and family to collaborate on a group trip to see one another selections and add saved options across air lodging, car rentals and activities, significantly using the group planning process and creating a better, more successful trip for everyone. Products like these not only enhance the consumer experience but allow us to utilize a consumer’s own network of friends and family to expand our reach. We’ve also launched tools to aid research into a given destination. Hotel prices, weather, best times to visit, crowd levels and even generative AI-powered tools to determine the best neighborhoods to stay, given the traveler one place to research where and when to stay in their dream location.

We now also leverage generative AI to scrape reviews to answer traveler questions about amenities and property details. So no more sorting through hundreds of reviews to find out how strong the WiFi is, quality of the pool or whether you’re going to like the breakfast. We also launched the first project of its kind, EG Labs, which allows interested customers to test our AI-powered beta products, allowing them to play a hand in how we shape the future of travel. I could literally go on and on, but the takeaway is no one in travel is innovating faster than us. And with so much important platform work behind us and with our leading capabilities and machine learning and AI, we will out innovate in the space for many years to come. We have literally worked for years and given up many short-term opportunities to get to this place, and I don’t believe anyone is in a better spot technologically, which is not only exciting for our existing business but sets us up to go back on offense in many more markets next year.

In closing, I’m pleased to see our solid execution in Q3 and through 2023 so far. While the geographic mix of business distorts global growth rates, we believe that we have held or grown hotel gross booking share in virtually all of our key markets and with Vrbo finally completing its migration and the key differentiator of One Key, we expect our vacation rental share to improve going forward. In addition, we are finalizing our plans for ’24, where we expect to drive faster and more profitable growth. Our high-level strategy is not going to change, best product, best loyalty program, best marketplace and best service. But instead of spending most of the year doing surgery on our own business, we will be focused on growth, innovation and efficiency.

I’m excited for 2024 and beyond and for what we will bring to our travelers, partners and shareholders. And with that, let me hand it over to Julie.

Julie Whalen: Thanks, Peter, and hello, everyone. Our third quarter results reflect a meaningful acceleration in the business with revenue reaching a record $3.9 billion with year-over-year growth accelerating approximately 300 basis points sequentially from the second quarter to 9% and with earnings accelerating even further to an almost 31% EBITDA margin, over 110 basis points of expansion versus last year, both of which beat expectations. It is clear our transformation strategy and growth initiatives are playing out. and we anticipate this momentum to continue into the fourth quarter. This is why we have continued buying back our stock at an accelerated level, have announced a new $5 billion share repurchase authorization and are confident to reiterate our full year guidance of double-digit top line growth with margin expansion.

Now on to our results for the quarter. Total gross bookings of $25.7 billion were up 7% versus last year, a sequential acceleration in growth from last quarter. Overall, lodging gross bookings grew 8% and were the highest third quarter on record. And this acceleration would have been even higher, but for our Vrbo business given our hotel business grew at a much higher pace at 14%. Our Vrbo business was particularly impacted by the recent Maui fires as well as the brand’s short-term migration to our single front-end stack and the continued softness from the demand shift towards more urban areas. Despite this impact, we saw our B2C business accelerate from the second quarter, primarily from continued strength in hotel. And our B2B business saw continued strength and outperformance consistent with what we have been seeing all year.

Moving to the key financial metrics in the P&L, starting with total revenue. Revenue of $3.9 billion was the highest on record and grew 9% versus last year. Revenue growth was primarily driven by the continued performance of lodging, which grew 12%, driven by our hotel business. We also saw our B2C year-over-year revenue growth to accelerate over 400 basis points sequentially versus the second quarter. This growth was partially offset by the softness we have been seeing in our insurance and car businesses, which, as we discussed last quarter, have been impacted by some industry-wide changes post the pandemic. Both insurance and car have become less of a drag to growth this quarter, and we expect that trajectory to continue for the rest of the year as we start to comp these declines in the fourth quarter.

Total revenue margin increased by approximately 20 basis points versus last year, primarily driven by the continued mix to higher lodging revenue, which have higher margins. Cost of sales was $409 million for the quarter, which is lower than last year by $42 million or 10%, with approximately 210 basis points of leverage as a percentage of revenue versus the third quarter of 2022, driven by the ongoing efficiencies we have seen all year. And while we will start to comp some of these benefits during 2024, we expect to continue to drive efficiencies as we eliminate redundant systems and reduce key costs in such areas as cloud, licenses and maintenance. Direct sales and marketing expense in the third quarter was $1.7 billion, which was up 11% versus the third quarter of 2022 due to an increase in commissions in our B2B business to support strong revenue growth of 26%.

Again, commissions paid to our B2B partners are in our direct sales and marketing line and overall are more expensive as a percentage of revenue than our B2C business. But as they are generally paid on a stated basis and to a contractually agreed-upon percentage, the returns are more guaranteed and immediate. Our B2C business saw marketing leverage again this quarter as a percentage of gross bookings. These B2C marketing efficiencies resulted from the incremental benefits we are seeing from our continued investments in loyalty and app members, and we expect this positive trend to continue as higher loyalty and app members result in higher direct and repeat traffic that is more efficient. Overhead expenses were $617 million, an increase of $48 million versus last year or 9% and in line with revenue growth.

As we have said, this increase is a result of our year-over-year investment in talent across our product and technology teams to support our strategic initiatives. And as we finish our technology work this year and look to deprecate systems and redeploy resources in 2024, we expect to realize cost efficiencies going forward. With this strong revenue performance and expense control, with expenses overall growing lower than revenue, we delivered record EBITDA of $1.2 billion, which was up 13% with an EBITDA margin of almost 31%, expanding over 110 basis points year-over-year. Our free cash flow remains strong at $2.3 billion year-to-date. Similar to the last quarter, the year-over-year decline is primarily associated with timing changes within working capital.

Last year, as the business emerged from the pandemic, we saw meaningful year-over-year increases in our deferred merchant bookings balances, which has since normalized this year. We remain pleased with our ongoing robust cash flow levels from record EBITDA levels, and we expect them to remain strong going forward. On the balance sheet, we ended the quarter with strong liquidity of $7.6 billion, driven by our unrestricted cash balance of $5.1 billion and our undrawn revolving line of credit of $2.5 billion, which provides us with plenty of cash to operate the business. From a debt perspective, our debt level remains at approximately $6.3 billion with an average cost of capital at only 3.7%. And with our expanding EBITDA, our gross leverage ratio has come down to 2.4x.

As a result, we have continued to make progress towards our target gross leverage ratio of 2x and expect to make further progress in the coming quarters through EBITDA growth and potentially some early debt repayment. From a capital allocation perspective, we have been buying back our stock at record levels. We continue to believe that our stock price remains undervalued and does not reflect our expected long-term performance of the business. And given our liquidity and strong free cash flow levels, we believe buying back our stock on an accelerated basis is the best use of our capital to maximize shareholder returns. As a result, we bought back approximately $1.8 billion year-to-date or approximately 17 million shares, our largest level of repurchases to-date, offsetting not only our COVID era dilution, but in fact, getting us to our lowest share count since 2015.

And given our confidence in the long-term outlook of our company and the cash-generating power of our business, as well as our commitment to maximizing returns for our shareholders, we have announced a new $5 billion share repurchase authorization, and we expect to continue buying back our stock opportunistically going forward. So in closing, we are pleased to see the continued momentum in the business, delivering our best ever quarter. We have been able to deliver upon what we said we were going to do amid a significant period of transformation and corresponding uncertainty. Looking ahead, we are reiterating our full year outlook of double-digit top-line growth with margin expansion. As for the fourth quarter, based on the uncertain geopolitical environment and its potential impact on travel, we expect gross bookings growth to be relatively in line with third quarter levels, with modest sequential acceleration in year-over-year revenue and EBITDA growth versus the third quarter.

Overall, our execution and results this year give us the 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. We look forward to updating you next quarter on our plans for 2024. 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] Our first question comes from Eric Sheridan from Goldman Sachs. Eric, please go ahead.

Eric Sheridan: Maybe two, if I can. In terms of Vrbo and the migration, how should we be thinking about post-migration and elements of growth and how Vrbo will be tied deeper into One Key as a stimulant for growth on that brand as we look out beyond 2023 and into 2024. And with respect to the new buyback authorization, any guardrails either aligned against annualized free cash flow or targets around liquidity about how you might deploy that $5 billion in the years ahead. Thanks so much.

Peter Kern: Thanks, Eric. I’ll take the first one and maybe let Julie answer the question on buybacks. As far as Vrbo goes, obviously, as I said, we just literally finished the app migration, and people haven’t even updated all their apps yet. So it will take a little time for us to be fully across, but we’re talking about weeks. And then I think it’s a build from there. You have to remember that going through the migration was actually a negative process. It was conversion negative for us to come across, switch the stacks then optimize the stacks and improve them. So we’re in the process now of having everything across and working on the improvement part and inflecting past where we were previously. So one, the product will improve from here.

We won’t have the drag of the conversion drags we’ve had during this past year, while we were migrating. And then, there are many things to drive growth in the future, we believe, obviously, we believe greatly in One Key. It’s a key differentiator in the VR space. It allows all our members across Expedia and HCOM, which are many more in number of humans to have the option of using their One Key cash on Vrbo instead of on a different VR platform or for other products. It’s a way to pull out more customers into Vrbo. It’s a way to make Vrbo decidedly better as a value proposition than its competition. And I think there’s a number of other things we are doing. I mentioned on our last call, we will work to incorporate much more of the multiunit vacation rental properties, we actually have on our OTA brands that don’t live on Vrbo yet that we will be moving.

So there’s many parts to our growth plan in Vrbo, but I think we’re excited now. We had to get across this work so that we could again start optimizing, really push One Key fully and take advantage of some of these other pieces we’ve been waiting on to finish the migration so that we could then move this inventory and do other the things that open up growth opportunities. So we feel good about how Vrbo’s positioned. Obviously, this was a tough year of migration, but a lot of optimism for what we can do in the coming years with it.

Julie Whalen: And then as far as the $5 billion buyback authorization, we don’t per se have any set guardrails, although I would say that generally speaking, we look to what our free cash flow levels are in the year. and obviously make a decision then where our stock price is and where we believe the valuation of the company is and what our long-term outlook is, make a call as to how much then pivots to buybacks. But at the same time, we’ve also got excess cash and so if we wanted to be even more aggressive on what is per se, the free cash flow plan for the year, we could do that as well. So the short answer is it really depends, but we have a lot of flexibility there and we intend to buy back our stock opportunistically.

Operator: Our next question comes from Lee Horowitz from Deutsche Bank. Lee, please go ahead.

Lee Horowitz: Peter, you talked about your business next year driving faster and more profitable growth yet, which presumably underwrite some top-line reacceleration yet you’re a bit more cautious on the fourth quarter given some geopolitical concerns. I guess what gives you the confidence in sort of that accelerated outlook into 2024 despite the geopolitical concerns you guys highlighted as well as others in the market perhaps going out some incremental macro headwinds building for the travel industry.

Peter Kern: Yes. Thanks, Lee. Look, I’m not opining as a world leader on the likelihood of geopolitical acceleration potentially in ’24. I certainly hope not for all our sakes. What we’re seeing now, as we referred to, there was some short-term movement in early October that appeared to be from what was going on in the Middle East. That doesn’t appear to be an ongoing thing, but there was some noise. So we are mindful of the potential volatility from that. But I would say we’re more ambitious and more excited because, frankly, even the fourth quarter is just barely beginning to get the benefit like when I talk about Vrbo being past the migration like it was like 2 days ago. So fourth quarter, we’re in the middle of the fourth quarter.

So getting a lot out of that now in the next 8 weeks is a lot harder than what we have ambition for next year. And if you take that across everything and you take that across One Key still being in relatively early days, and so forth. We’re still like this is a big snowball we’re pushing and it’s starting to turn, but it’s going to turn faster and faster. So we have more ambition about our own ability to drive it next year and our own opportunity there. Obviously, there could be macro things that make it harder or easier on all of us. But we think relative to our competition, relative to where we’ve been, we’re just going to be in a much better place. So that is what gives us ambition, it’s not that we think the world will all come down and all wars will go away and everyone will have piece.

It’s that we think we’re just going to be in a materially better spot as we’re further along this journey.

Lee Horowitz: Got it. And then maybe one follow-up on that. You talked about sort of leading into some international markets perhaps next year. I guess now with all of the tech migration behind you, are there any gating factors as it relates to the timing of when you may put some investment dollars to work there, or how should we just sort of think about the phasing of sort of those broader global ambitions that you guys have into 2024?

Peter Kern: Yes. I think technologically, there aren’t a lot of gating items. I mentioned that we’ve only rolled One Key to the U.S. So rolling One Key along with leaning in more energy into certain places will be part of the strategy. But again, not a gating issue, but that has to happen and there is some technical work to getting that launched in other countries. It’s not a big lift, it’s just something that will come as we roll out. But more importantly, I’d say it’s a balance. We believe we’re equipped now. We believe we have the tools to compete better than we ever have. We believe we have a winning product. And as we all know, you’ve got to market back into these countries. I mentioned the better understanding of customers, which customers we want, how we get the right customers, how we find the highest lifetime value customers, things like that.

It’s really just about doing it in an orderly process. We’re not going to just carpet bond in the world. We’re going to go selectively after the most valuable markets to us where we have the most right to win, and we’re going to keep chipping away at it. But we’re excited to go back on offense in the rest of the world.

Operator: Our next question comes from Kevin Kopelman from Cowen. Kevin, please go ahead.

Jacob Hendricks: Hi. This is Jacob in for Kevin. So wondering if you can provide color on regional performance quarter-to-date? And also, what are the cost levers that you expect to see from the tech market ratio as we look at points before.