Expedia Group Q2 2024 Earnings Call Transcript

Yeah. I mean, for Vrbo, obviously, it's hard to make that call right now because we're staring at this July trends. But certainly, our expectation is to drive that business to growth and get it back to where it used to be. And so as we said, we saw substantial acceleration as they move from the beginning of the year. So basically, as we ended the quarter with some modest growth. But now we're in this moment in July, where it's a little bit hard to read the business. But certainly, long term, that is our expectation.

As far as the advertising business, I mean, that business is on fire. We have got a lot of opportunity with that business to continue to drive its growth. I mean, if I think if you look back, it's been at least in the high 20s for a while now, and we don't have any reason to believe that that's going to significantly change going forward.

And I would just add that on the advertising business, when the market gets soft, actually, you could imagine that some of our supply partners will want to spend more in advertising where they know that the travel demand is going to be. So as we're looking at how the market evolves, obviously, I think our teams will be looking at how can we help our supply partners in getting those on. Our next question comes from Eric Sheridan with Goldman Sachs. Your line is open, please go ahead.

Thanks for the question, Eric. In terms of the consumer business, as I stepped in, I think I had always appreciated the work that we had done on the platform that was going to allow us to accelerate innovation across the Board. So for example, in the second quarter, we were able to release flexible date search in all three of our big brands at the same time. And we wouldn't have been able to do that had we not done the platform work.

That being said, when we did the work to move Vrbo and Hotels.com onto our common front end, we did give up some of the things that made those brands a bit more unique. On Vrbo, collaboration was a big -- it was sort of something that was used a lot in Vrbo. And when we migrated it, the good thing was we got the trip planning collaboration onto Brand Expedia, but we lost some of the functionality in Vrbo. Now the good news is we've added a bunch of it back and there's still work to be done. But it just meant that we went through a period of time and the migration where we move back.

Similarly, with Hotels.com, when we move to One Key, we sort of downplayed an advantage that Hotels.com had, it had a really big differentiator and its loyalty program. So the good news is that both of those brands have great brand awareness, have people who love to come back to them. But I've just realized it's going to take work to get them back to where we want. And so, as I think about sort of the months and the quarters ahead, it's how do we take all the capabilities that we've built in the platform across the board on a horizontal basis, and sort of figure out what needs to be configured or built differently for Vrbo and Hotel.com. But overall, I feel good about that. It's just -- it's going to take some time to get there.

And I would also add for Hotels.com, it will benefit as we go back into international. Hotels.com is a brand that's got great brand recognition in places like the Nordics and elsewhere. And what we've seen in these early days of leaning back into some of those international markets is that we're seeing good results. In terms of the B2B business and what's maybe misunderstood or underappreciated, funny, when I took on the business about 10 years ago, I remember thinking, what are the moats around it, what's differentiated around it. And what I sort of have concluded over the years is it's a combination of things. You have to have really great supply, and we have great lodging supply. We're doing a lot of work to get B2B-specific lodging supply. You have to have great technology, an excellent sales team, super partner relationships and be very hungry and aggressive and be open to a lot of partnerships. So I just -- I guess the way I think of it is there is a massive travel industry what is at $2.3 trillion. Our own brands have a small part of it. And so, with the B2B business, we could really look to what is all the innovation we have in our company that can help power all of the other travel players out there.

Thanks for the question, Eric. Our next question comes from Lee Horowitz with Deutsche Bank. Your line is open, please go ahead.

Okay. Thanks for the question, Lee. Julie, do you want to take the first one and then I'll take the second.

Sure. So from a leverage perspective, obviously, we have been able to do a really great job with cost of sales, where costs have actually been down year-over-year, much less leveraging. And while over time, that will start to moderate because obviously, that can't go on in perpetuity. We still expect to drive incredible leverage on that line. We've got a lot of opportunities to continue to drive efficiencies there across our merchant fees and our operations, whether it's AI and technology and all sorts of things that we're looking at to further drive efficiencies there. At the same time, you can see, although this quarter is a little bit of anomaly, we did have overhead that was down to last year as well. And so, we're still -- we did several cost actions as we announced earlier in the year, and so we're benefiting from those. That's helping that line drive leverage to help the total P&L.

And certainly, we are very focused on looking at every line in the P&L to see what the opportunity is and how we can go after it so we can take that money either deliver it to the bottom or to reinvest it in the business. We did say this year, however, that as you alluded to, we are making the investments in marketing, in Vrbo and international markets because we want to reinvigorate those businesses. And clearly, by what we saw in the second quarter, it works. So it's important that we continue to do that and keep that momentum going. And so as we've guided to and as we said, this year, we don't expect much leverage. But longer term, we're certainly not guiding to 25% at this time.

But longer term, we absolutely expect to have margin leverage going forward because all of the things that we're investing in and driving towards to bring in more direct traffic should enable us to get more leverage on the marketing line in addition to all the good work we're doing on cost of sales and overhead. And if I think I've said before, if you could see the Brand Expedia P&L, who is the least disrupted brand, it's doing just that. And we've got strong top of line growth and we've got strong marketing leverage. And so, it's something that we're working towards with the other brands to get there over time.

And then on the second question on B2B and B2C. So I would say, in the geography, there are certain geographies in which our B2C brands aren't very present. And so it's obvious that anything we're doing in B2B there is going to be incremental. But it's true that there are many geographies in which we have both businesses and consumers go to many different places for travel. Of course, I think any travel company would love to have consumers only come to them. But consumers sometimes will shop for personal travel on their favorite OTA, hopefully, one of ours, they might have business travel where they're using their corporate travel bookings rule. They may be in an airline program and have loyalty points and want to spend those points. And so, we see the opportunity to power the technology and inventory in every one of those cases. And is actually a big value driver that we bring to our supply partners because we make it easier for them to reach demand not only through us but also through our B2B partners. And fundamentally, I think that it just forces our own B2C brands to be even more competitive and to up our game.

Thanks. Our next question comes from Trevor Young with Barclays. Your line is open, please go ahead.

Julie, do you want to take the first one? I'll take the second.

Yeah, sure. In the second quarter, we basically saw comps accelerating, and that's because, as we've said, the main acceleration driver was Vrbo. And so we basically came from a low, so to speak, at the beginning of the year and accelerated by quarter and was the main driver to drive the full acceleration of the business. So we saw accelerating comps in Q2 and then like I said, in July, there's just a lot going on that's hard to understand with precision. And so we saw sort of this noise in the P&L in our business. And really, when you look at it from a geo perspective, to answer your question, it's a lot in U.S. that we're seeing. We're seeing a couple of other areas, but mostly it's U.S. focused.

In terms of the replatforming, as I said earlier, it's really unlocked a lot of capabilities that we didn't have before. One of them, for example, is our testing platform. Already this year, we've done more tests on Vrbo than we did all of last year. So our test velocity has really gone up. Because of the platform migrations, we've been able to put something like One Key in place where we have a view of a customer across all of our brands. We, as I said, we're able to release the ability to do flexible date shopping in the second quarter across all of our brands.

So there are a number of, I would say, e-commerce basics that we're able to roll out across all of our brands without having to do the work multiple times. Now going forward, what we're digging into is where are their configurations or maybe even some brand-specific features that we need to build on top because it's true that the last few years, so much of our capacity went to sort of rebuilding some of the foundations and to migrations.

Thanks, Trevor. Our next question comes from Connor Cunningham with Melius Research. Your line is open, please go ahead.

Yeah. So on B2B, yes, we've seen a little bit of deceleration. And as you alluded to, of course, we're still at 20%. So it's still really a strong business. And we alluded to the fact that as global demand normalizes, that -- that business would see some of that growth come down as it also normalizes. So that's not to unusual for us to see. Obviously, in the July period that we've alluded to, they also are impacted by a lot of the dynamics that I mentioned as far as what's going on in July. And so, they can have a little bit more of an impact than what was sort of just the global normalization, but we're really excited about that business. Ariane spoke about it. There's just so much opportunity there. And given our leadership position and all the opportunities we see going forward, it should continue to drive strong growth. It's just that we've got this moment right now, where we're seeing some of this macro impacting it. But the underlying health of the business is incredibly strong.

As far as the booking windows, it's interesting, we have been seeing for a while now in our B2C hotel business that the windows have actually been expanding slightly year-over-year. But as we entered July, they actually or during the month of July, they actually shortened just a little, not a lot, but just a little bit in that month. And that's the first time we've seen that in a while. On the Vrbo side, they've been shortening for a while, and they're kind of just doing a similar thing. So there wasn't anything material that changed in July, but we did see a little bit of that in the hotel side of things.

And maybe I'll just add a little bit on the first part on B2B. As Julie said, B2B is a much more geographically diverse business than our consumer business. And so over the last few quarters, it's really benefited from a lot of the travel demand, in particular, in Asia. And so the deceleration we've seen a couple -- for the last couple of quarters, which still was a very strong growth, was coming from the normalization of that growth, in particular, in Asia. Now as Julie said, as we headed into July, we saw some slowdown, and that was more with the U.S. part of the business.

Yeah, thank you.

Yeah. I mean, fortunately, we haven't -- we don't guide to that level by the line item. And obviously, all of that has been assumed in the numbers that we have presented here for the full year. But certainly, everything I mentioned impacts the lodging business. So there will be an impact to that on all those metrics for the lodging business, but we're not providing guidance on those right now.

Yeah. The majority of that has been action. There were some that we took action on in Q1, some that we took action on Q2 and so that's why you're seeing the favorability in overhead because you're getting the full quarter of the Q1 action and then you're getting the additional Q2 action that's coming through. There's a little bit that's left on that, but not significant. But of course, it doesn't mean we're stopped looking at every single line and where we can find efficiencies elsewhere. It's just on that particular cost action that we mentioned, we're almost through it.

Yeah.

Sorry, you said -- can you repeat the first part of the question?

Yes, yes, we are. In particular, stage, [Indecipherable]?

Yeah. No, we're definitely seeing a reduction in nuts. I mean it's not just a booking window play, if that's what you're talking about or just an ADR play. There's definitely, as we said, there's been some softening in travel demand, which is impacting the transactions side of it. But it's a combo, right? I mean there's certainly -- all those other factors are also true. As far as your B2C advertising expense question, I mean, obviously, that's what our plans are been assumed in the guidance that we gave, and we said that we are guiding to on the year EBITDA margins to be relatively in line with last year. So we're managing to that, while still investing in Vrbo and international markets. And so certainly, we will be looking at advertising, seeing what makes sense relative to the top line and the variable costs associated with that depending on where that top line goes. But that what we're managing to is the full year EBITDA margins relatively in line with last year.

And I would just -- remind me, I mean, as Julie said, obviously, looking very closely at what are the macro trends, what are the demand trends, where do we want to spend in marketing and advertising. And we look at marketing, promotions and pricing and loyalty all sort of in the same bucket to then say, which of these is going to be most effective given the environment. And then even within marketing, are we going to put money more into performance or into social or into other channels. And now I spent a lot of time with our marketing team just looking at where we're getting the best returns, where we're leaning in, where do we need to pull back and the like.

Yeah. So we -- I mean, one of the things we've been doing in the last bit of time is really interrogating every dollar of our marketing spend. And for example, looking at nonworking versus working marketing spend, understanding the returns on each because we -- especially if we're going into an environment that is a bit more volatile. It's just so important that every dollar we understand the returns when we're investing more in international and Vrbo, we need to be making up for efficiency elsewhere.

Thanks. Our next question comes from Ken Gawrelski with Wells Fargo. Your line is open, please go ahead.

Thanks for the question. Let me start with the first one. You're right. We talked about the Travel Media Network at Explorer, and we're really excited about the opportunity to grow advertising and to bring value to our advertisers. Today, a lot of our advertising business happens on the shopping and booking moments of the travel funnel. So when someone's in the search results or when they're in the booking process, there's not as much sort of when they're in the dreaming and very upper funnel, and there isn't as much, for example, in post booking. So we think that there's an opportunity there. We also think that there's an opportunity to expand in the number of partners who are using our advertising tools. So whether it's the sponsored listings and having more hotels or airlines using sponsored listings, or new products that we can bring to destination management organizations. We think that there's a lot of growth and opportunity there as well.

I'd also call out that we're doing some interesting work on providing more tools to these advertisers. So making it easier for them to sort of self-serve on some of our advertising products, self-serve on sort of getting -- letting us do more of the targeting for them, we're about to introduce some video into our ads, which we think will make those perform better. So I would just say for the long term, we think there's a lot of opportunity here. On the question about One Key and expansions in the U.K., I don't think it's going to have a material impact at the company level. Certainly, you learned from the One Key rollout in the U.S. on how to treat the sort of higher value of Hotels.com customers who might feel like they're getting a sort of down step in their value, and we're using that in the U.K., but I think at a company level, it's not material.

Thanks.

Yeah. Okay. Thanks for the question. In terms of whether the Hotels.com 10 for 1 will remain the same outside of the U.S. and the U.K. The answer is yes. It's a simple program for now, it's remaining that way as we work to figure out what would the path forward be. For our supply partners, our hotels, for example, it's completely transparent to them, they participate in member deals where they provide different levels of discount for different tiers of members and we actually translate that into our Hotels.com rewards program. So if I'm a hotel, I'm able to reach those Hotels.com rewards members, whether they're in a country that has the existing 10 for 1 stamps or weather there in the U.S.

In terms of B2B, actually, One Key is not rolled out to the B2B business. That's a business where we're providing inventory and technology, but a lot of our partners have their own loyalty program. You may be thinking about -- we've talked about rolling out One Key to our advertising partners and allowing them to use some of their advertising dollars to accelerate One Key earn for their hotels. And that, again, won't really make a difference. They can do that in the U.S. and the U.K. It won't be something that we can do outside of that. But again, this is why we are going to take the time to think about what is the value proposition for our loyalty programs in countries where we only have one big brand at scale.

Yeah, thanks for the question.

Yeah. As far as the first question on the 3Q outlook, we have not sort of baked in any upside or something in September. We've looked at obviously run our various scenarios and what the information that we have based on what's happening in July and ran that out as to where we think the quarter will land. Certainly, it's also you have to take into consideration for revenue at least what happened in prior quarters because then the states come to fruition in the third quarter. So we already have some of that data, and that's just going to play out. But certainly, based on all the new data in July, we've just run our scenarios and let it play out for Q3 accordingly, but there wasn't any sort of step-up in September that we assumed. As far as the pricing actions, yes, we had made a call, you probably remember from last quarter that we had done some pricing actions towards the end that then we're going to be coming in this quarter, we did see that come in. And we only do those pricing actions if we get the returns. And so certainly, they are driving conversion for us. And so, as we have been doing, we're going to continue with that, going forward as it is a good returning marketing lever for us.

So on the first one -- so thanks for the questions. On the first one, I'm not going to share details about the pipeline. What I will say is we're thoughtful about which deals we want to bid for. I think often when you have an B2B team, it's as important which deals you decide not to bid for as which ones you decide to bid for. And we have a super experienced team, a great business development team that's being thoughtful about where do we want to play and where do we yard.

I'd also say that growth can come from finding new partners but growth also comes from our existing partners. So sometimes you might have a partner that we're powering three of their points of sale and then they decide that they're going to expand into another couple of countries and it's incumbent on our team to make sure that we're the ones powering them as they're growing their business. So when you think about the B2B business, it's not just what's sort of the pipeline of new business, it's also what are all the actions we're doing in our existing partners in order to either win share or to just grow along with them.

As far as the Vrbo marketing strategy, certainly, we learned from last year that you don't want to pull back too much on the marketing spend because Q1 -- sorry, as you're entering in Q1 is a really big time for Vrbo. So that's part of the reason why we're even guiding in Q3 to pressure on EBITDA because we want to continue investing in Vrbo for that very reason because we're investing for the longer term. And so, we would continue to invest in Vrbo. I mean, obviously, it depends if there's some massive level of softness that all things are off the table. But we're not expecting that, but it's not how we've been guided -- guiding. And so our expectation is we continue to invest in to Vrbo, and that's assumed, obviously, within our margin guidance on the year to be relatively in line with last year.

Thank you.

Yeah. Thanks, Ron, for the question. As you said, I mean, Brand Expedia has been a great highlight for us. And it's also what gives me confidence because it was the least disruptive of all of our brands, and it's the brand that's gotten all of our innovation going into it. We've also, over a number of years, really built up the brand value there. We spent quite a bit in marketing over time, and now we're seeing leverage with it because we have a great app installed base, strong repeat, a great member base and the value proposition on Brand Expedia to shopping and booking multi-item trips, whether it's directly through the package path or buying a flight and then later coming back and buying a hotel at a discounted rate, is really strong for travelers. So I would just say, in general, we feel good about it. It's still to my liking to U.S. focused. I mean, as is our whole consumer business, we'd like to see more growth internationally. But as you say, Expedia is really a highlight. So thank you for the question.

Okay. Well, so I just want to thank you all again for joining us. Julie and I appreciate the questions. And I just want to leave you with the thought that, we know the environment is becoming more volatile. But regardless, we believe we have a lot of opportunity ahead. We have great consumer brands that travelers love, a differentiated B2B business, diverse supply at the strongest it's ever been and a really powerful tech platform. So as we look to the future, we're going to use these assets to drive profitable growth. Thank you all. [Operator Closing Remarks]