Expedia Group, Inc. (NASDAQ:EXPE) Q4 2022 Earnings Call Transcript

Expedia Group, Inc. (NASDAQ:EXPE) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good day, everyone, and welcome to the Expedia Group Q4 2022 Financial Results Teleconference. My name is Emily, and I’ll be the operator for today’s call. For opening remarks, I will turn the call over to Senior Vice President, Corporate Development, Strategy and Investor Relations, Harshit Vaish. Please go ahead.

Harshit Vaish: Good afternoon, and welcome to Expedia Group’s earnings call for the fourth quarter of 2022 that ended December 31. I’m pleased to be joined on the call today by our CEO, Peter Kern, and our CFO, Julie Whalen. The following discussion, including responses to your questions, reflects management’s view as of today, February 9, 2023 only. We do not undertake any obligation to update or revise this information. As always, some of the statements made on today’s call are forward-looking, typically preceded by words such as we plan, we expect, we believe, we anticipate, we are optimistic or confident that or similar statements. Please refer to today’s earnings release and the company’s filings with the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements.

You will find reconciliation of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release, which is posted on the company’s Investor Relations website at ir.expediagroup.com. And I encourage you to consistently visit our IR website for other important information. Unless otherwise stated, any reference to expenses excludes stock-based compensation. 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. This past year was an important one in our company’s journey. We did a ton of work and made great progress on many transformational initiatives, all while delivering record EBITDA. Q4 was yet another step in that journey, despite the impact to our P&L from the severe weather. Hurricane Ian in early October and the winter storms in late December drove up cancellations, causing bookings and revenue for the quarter to come in behind our expectations, despite demand otherwise accelerating through the quarter. The good news is that we have seen those booking trends come back much stronger in January post the disruptions. So, 2023 is off to a great start.

And we were really pleased that our investment over the last several years in service technology and capabilities allowed us to deliver best-in-class service through these difficult travel circumstance. As I’ve said many times before, when your strategy is centered around long term retention of valuable customers, every element of the work must deliver for the traveler. So big thanks to our service team for all their hard work, especially over the holidays. Now, as we launch into 2023, I’m particularly pleased with how our strategy of investing in and retaining high lifetime value members is showing accelerating improvement across our business. For the fourth quarter of 2022 versus 2019, our new customers that became loyalty members grew over 60%.

And we entered 2020 with a record number of active loyalty members, which is 10% higher than any prior year. And just as importantly, our quarterly active app users increased by approximately 40%. For us, these are the most important metrics to gauge the progress of our strategy. Just to remind you, our loyalty members each drive two times the gross profit on repeat business over an 18-month period as compared to non-members. And our app users each drive 2.5 times the gross profit on repeat business over the same period. When you combine these two and have a loyalty member who also uses the app, this drives the highest production of all, and that group represented the fastest growing customer cohort for us in 2022. But as strong as those numbers are, for our overall business, they’re even better in our Expedia brand in the US.

This is extremely important because Expedia US is the business where we’ve been able to make our fastest product and marketing improvements, and where we have the most complete set of capabilities to support our strategy. And the evidence is clear. In the fourth quarter of 22 versus 2019, Expedia US grew new customers that became loyalty members by over 300% and entered 2023 with nearly 70% more active loyalty members than any prior year, and almost 60% more active app users. Expedia US was able to deliver almost 20% revenue growth in 2022 as compared to 2019, and there’s still plenty of improvements yet to come. Of course, when you look at our all-up B2C numbers, the accelerating performance of Expedia US has been largely offset by our intentional deemphasis of some smaller non-core brands, our pullback in certain geographies where we did not have the right model, and of course, our much discussed technical migration, which required significant work, and like all migrations resulted in some short term friction.

But what I’m really excited about is that with the proof now very clear that our strategy is working, we will begin more aggressively rolling it out to our other brands and our non-US markets. After years of democratizing travel, we are now taking a leap forward to use cutting edge technology, a better marketplace, a broader rewards program, and best-in-class service to drive true customer benefit and loyalty. Because when you take care of customers and give them great experiences, they keep coming back. And that’s how you win. In support of this long term strategy, you will see us maintain a higher mix of marketing spend to channels that attract desirable long term customers, rather than just chasing short term transactions. Therefore, the parameters of when and who is worth marketing to and winning as a customer will be different.

We have clearly proven the value of attracting and retaining the right customers, and increasingly, our P&L will reflect that. We’re starting 2023 with the highest number of active loyalty members and app users for any year. And we will see further momentum in the business this year thanks to a much larger base of loyal customers. Of course, our confidence in our strategy is ultimately only possible because of the underlying technology that we have invested so much in over the last several years. This is what has enabled Expedia US to grow faster. And all of our brands and geographies begin to ride on that same tech stack, we will expand our ability to compete and win in more places. Work that created a drag on our business in 2022 like the migration of hotels.com to our core platform become big on lots for us in 2023.

As one example of this, we expect our test velocity around optimizing our sites to grow roughly fourfold with the same resources this year and more engineers and product team members are freed up post migration and our tests can be run across our entire base of core OTA traffic. In other words, we will have many more tests where the winners get deployed across a much larger base. And as we continue to invest further in product and technology and new features and capabilities to take online travel to the next level, these improvements increasingly impact more and more of our customers more rapidly worldwide. No travel player in the world has done more over the last few years to innovate around the shopping and service experience to improve the travel journey for the consumer.

And just to emphasize the point, all of our advances in technology, in product and in customer service not only benefit our direct customers, but continue to benefit our expanding base of B2B partners as well. Our B2B business is one of the largest in the world and continues to grow rapidly. The breadth and depth of our products are expanding as is our partner base, reinforcing the importance of our supply and our technology as the core operating system of the travel market. To that end, we added many new partners and grew significantly in 2022, despite agents still being greatly constrained. With the return of travel into and out of China in 2023 and a robust pipeline of new partners around the world, we anticipate significant growth and a great year for our B2B business.

So as we wrap up what was the most profitable year in our history, we begin what will be another exciting year of growth and the last in our major technical overhaul. This coming year, we will finish moving all of our brands on to one front-end stack. Vrbo, the last major brands to come across, has already been testing traffic on the new front end, and will make the final migration in the coming months. This last step will then allow us to launch our new One Key loyalty program, which will span all of our main brands. It will be the broadest, most flexible loyalty program in the world. And for the first time, give vacation home renters the benefits of a loyalty program. And importantly, it will complement our many partners loyalty programs as well.

So overall, I’m confident that with more technical tailwinds and headwinds this year, and with a proven strategy that we will be expanding on, we will once again drive strong financial growth while completing the last of our major changes. It has taken several years and a lot of hard work, investment and patience. But we’re extremely gratified about where we are and what we know we can deliver going forward. And I’m even more excited about moving the last big boulders of our plan across the line and driving greater acceleration in the future. And with that, let me hand it over to Julie.

Julie Whalen: Thanks, Peter. And hello, everyone. 2022 was a year of significant progress on our strategic growth initiatives. And our financial results are evidence that we are on the right path to deliver long term profitable growth. The accelerating success of our lodging business, particularly in our brand Expedia business in the US, which is the first of our brands to benefit from our transformative tech and marketing initiatives, enabled us to deliver total company record lodging bookings and revenue. And we did this while at the same time driving significant profitability with record EBITDA levels at over $2.3 billion and an EBITDA margin of over 20%. Our fourth quarter also benefited from continued strong lodging demand, but unfortunately was heavily impacted by Hurricane Ian in October, and the storms in the US during December.

Absent these weather related events, as well as FX headwinds, our results on both the top and bottom line would have been at record fourth quarter levels. As far as the details regarding our financial performance for the fourth quarter, similar to previous earnings calls, I will discuss our revenue related and adjusted EBITDA growth metrics this quarter both on a recorded and like-for-like basis. The like-for-like growth rates excludes the contribution from Egencia, Amex GBT and the non-lodging elements of our Chase relationship. As a reminder, on November 1, 2021, we completed the sale of Egencia and our EPS business entered into a 10 year lodging supply agreement with Amex GBT. It is also important to note that our fourth quarter 2022 growth rates as compared to 2019 were negatively impacted by FX headwinds of approximately 250 basis points to gross bookings, 400 basis points to revenue, and 800 basis points to adjusted EBITDA or 70 basis points to our adjusted EBITDA margin.

We believe these like-for-like numbers and the disclosure of the negative impact from FX headwinds are helpful in assessing the operational performance of our business. Please note that we will discontinue disclosing these like-for-like numbers next quarter, the first quarter of 2023, as we move away from comparing our financial performance to 2019 levels and move towards standard year-over-year comparisons. Now let’s move back to our performance this quarter, starting with our gross booking trends. Total gross bookings were down 12% on a reported basis and down 2% on a like-for-like basis versus the fourth quarter of 2019. Total gross bookings were impacted by a spike in cancellations and lost transactions related to the hurricane and the winter storms in the US, as previously mentioned.

If we further adjust for the approximately 250 basis points negative impact from FX during the quarter, our gross bookings would have been above 2019 levels. Growth was driven by total lodging gross bookings, which were the highest Q4 on record at plus 4% on a reported basis and plus 6% on a like-for-like basis versus Q4 2019. By month, lodging gross bookings on a reported basis were up 3% in October which was impacted by the hurricane, up 7% in November and up 2% In December, which was impacted by the winter storms in the US. Excluding the weather-related events, growth versus 2019 for each month in Q4 reached high-single digits that accelerated through the quarter. And in January, we saw a step change where our lodging gross bookings accelerated even further, growing over 20% versus 2019.

While it is still early in the quarter and 2023, we are pleased to see strong lodging demand continue, including total lodging bookings for stays expected to occur in the first half of 2023, continuing to meaningfully outpace 2019 and 2022 levels. Moving to the key financial metrics in the P&L, starting with total revenue. Revenue of $2.6 billion was down 5% on a reported basis and down 1% on a like-for-like basis versus Q4 2019, and includes the 400 basis point negative impact from FX, as well as the financial impact from the weather related events. Excluding these factors, our reported revenue would have been above 2019 levels. Total revenue margin also improved to 13% for the quarter, or up approximately 90 basis points versus Q4 2019 as we continue to benefit from a mix shift towards our higher margin lodging business, which as a percentage of the total has grown approximately 1,000 basis points over the same period.

Cost of sales was $408 million for the quarter, which is a cost reduction of $125 million or 24% and 380 basis points of leverage as a percentage of revenue versus 2019, driven by our divestitures and ongoing efficiencies primarily across our customer support operations. Our customer support operations continue to benefit from the various automation initiatives we have implemented over the past couple of years. And we expect that, going forward, with the further consolidation of our tech stack onto a single platform, we should be able to continue to drive efficiencies across our cloud and licensing and maintenance costs as we eliminate systems that are no longer necessary to support. Direct sales and marketing expense in the fourth quarter was $1.2 billion, which was up 20% versus 2019.

The primary drivers of this increase over 2019 were associated with both our B2B and B2C businesses. Our accelerating growth in our B2B business is driving an increase in commissions paid to our partners. And these commissions fall into our direct sales and marketing line. In our B2C business, we had increased marketing spend to support our accelerating growth during the quarter. Unfortunately, given the storm related cancellations and lost transactions and their impact to the top line at the end of the quarter, we did not fully realize the anticipated return of our marketing spend. In addition, we also have been strategically mixing towards longer term investments in our marketing spend, which, given the longer term return profile of the spend, is less closely correlated to demand within any given quarter.

As a result of these two factors, we saw this marketing spend deleverage versus Q4 2019. However, on the full year, we saw leverage in our total B2C spend versus 2019, inclusive of loyalty and discounting, that are contra revenue. And we expect to maintain this leverage for improvement going forward. Overhead expenses were $590 million, a cost reduction of $157 million in the fourth quarter of 2022 or 21% and 470 basis points of leverage as a percentage of revenue versus 2019. We continue to remain disciplined on our cost structure. And with the expected improvement from the consolidation of our tech stack and general growth initiatives, we believe we can continue to maintain this lower cost structure and drive long term leverage as we deliver accelerating top line growth.

Overhead expenses slightly increased from the third quarter, approximately $23 million, as we continue to invest in top talent across our product and technology teams to help accelerate our various platform initiatives in support of our growth strategies that will drive long term financial returns. Adjusted EBITDA was $449 million or down 6% versus for fourth quarter 2019 and was down 2% on a like-for-like basis, which includes the negative impact from the weather related events and FX headwinds. On a margin basis, we were relatively in line with 2019 despite absorbing these negative impacts. And absent these factors, our fourth quarter adjusted EBITDA grew in the mid-teens as compared to 2019. Free cash flow for the full year was strong at positive $2.8 billion, up approximately $1.2 billion, over 70% versus 2019.

The strength was driven by our record EBITDA levels on the year and an improved benefit from working capital as well as lower overall capital expenditures, as our spend is now primarily focused on our technology and product transformation. On the balance sheet, we ended the quarter with strong liquidity of $6.6 billion, driven by our unrestricted cash balance of $4.1 billion and our undrawn revolving line of credit of $2.5 billion, which provides us with ample access to cash to operate the business. This liquidity, combined with our strong free cash flow levels, enabled us to maximize our return of capital to shareholders during the quarter by further accelerating our share buybacks to approximately $350 million or 3.7 million shares in the fourth quarter.

This resulted in approximately $500 million and 5.2 million shares being repurchased since the end of September 2022. Even after these buybacks, we enter 2023 with ample levels of shares remaining under our existing authorization for future repurchases at approximately 18 million shares. And given our ongoing strong liquidity, our confidence in the business, and the fact that our stock remains undervalued and does not reflect our accelerating business performance, we plan to continue to buy back our stock opportunistically in 2023. In closing, I couldn’t be more excited about what lies ahead in 2023 and beyond. With accelerating demand trends and the proof points that our growth initiatives are working, combined with our strong financial position as we enter 2023 with ample liquidity and a higher margin profile business, all of this gives us the confidence in our ability to deliver double digit growth and expanding margins, as well as long term 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: . Our first question today comes from Eric Sheridan with Goldman Sachs.

Eric Sheridan: Maybe two, if I could. In terms of thinking about moving all of your brands and all of your geographies on to the technology stack as we go through 2023, are there some elements of either costs that still have to be absorbed by the business model that we should be keeping in mind in 2023? And once that transition is over, how should we be thinking about possible lift from a business momentum standpoint on the other side of that transition? And maybe one quick follow-up on B2B. I know, obviously, we’re not going to guide to the full year, but can you talk a little bit to some of the variables you’re seeing in the B2B business that are building momentum or things that we should be keeping front of mind as we think about what growth and volume you might build in the B2B business through 2023?

Peter Kern: I’ll start at the top. In terms of moving the businesses on to a single technology stack and front end stack, I think hotels.com is an instructive example, in the sense that last year we talked about this a few times. As we’re moving hcom across, we obviously did less to improve Hcom as a standalone entity, because all the engineers were working on moving it. So, you lose a little momentum as you’re moving something. And then there is typically an uplift period where you’ve got to optimize the new stack and the new product on the new stack to get back to where you were, and then get all the benefits beyond that. So there is typically, if you will, a lull that takes place as you move things and some friction that you have to absorb in the numbers.

So we did that with Hcom, as I mentioned. We’re now getting the benefit of much faster testing between all the OTA brands. Vrbo is the next one to move. It will suffer a little bit of the same things. But we think we can absorb that, as Julie said, and still show the growth we are planning for this year. And that unlocks, then, of course, being able to do One Key and other things. So there’s a lot of unlocks on the other side, but you do have to sort of weather a little friction to get across and we’ve weathered it in the last year’s numbers. We have a little left to weather this year. Again, we think will drive very good growth despite that. And, of course, when it’s behind us grow even faster. So, that’s what we’re really looking at. And then, on the other side of it, you get the benefit of testing faster, improving the products faster across everybody.

You get the benefit of One Key. And you also get the benefit of being able to then deprecate older stacks that have costs associated with them, engineers associated with them, etc. You can put all your resources on the most valuable thing. So, that’s the big thing we’ve got left to do. Those are the two big hitters we’re launching this year, but there’s lots of other work going on under the covers constantly, both in optimization and in cleaning up and consolidating other back end things in the stack. And then, on the B2B front, there’s a lot that’s gone into what’s growing, as I mentioned. We think Asia opening up will be good for us. We’ve had some big relationships there, including China where we haven’t gotten much output during COVID. That will help.