Expedia Group, Inc. (EXPE) Earnings Call Transcript & Summary

Good morning, good afternoon, good evening everyone. Welcome again to day 1 of our 2021 Morgan Stanley TMT Conference. We are thrilled to have today Peter Kern from Expedia to sort of talk through a lot of the dynamics going on in the online travel industry and everything exciting at Expedia. Before we get started, I do have to read the important disclosures. Zoom or physical, I've got to read them. For important disclosures, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Some of the statements that Expedia will make today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-making (sic) [ forward-looking ] statements that Expedia makes are based on assumptions as of today. Expedia undertakes no obligation to update them. Please refer to Expedia's Form 10-K for a discussion of the risk factors that may affect actual results. We are thrilled today to have Peter Kern with us, the CEO of Expedia. You have years of experience in tech, in corporate. You've been at Expedia for quite some time, and your role has really grown over the course of the last year. So we're really thrilled to have you here today. Thanks, Peter.

Thanks for having me, Brian. Happy to be here.

So yes, there's -- it's been quite a year. Starting a new job is always a new challenge. And I think for you in particular, when I just think about everything that's gone on from a macro perspective within travel and from a micro perspective at Expedia, you've been very, very busy. And so I kind of want to start the conversation with a discussion of sort of your perspective, your daily role, your responsibilities, how has that changed now versus, call it, 1 year ago?

Yes. Well, it's been an interesting year, for sure, and it started in earnest kind of around now, particularly with COVID kicking in. And I would say that at first, it was a lot of bailing water, figuring out what we were going to do, raising capital, calming the troops, figuring out our response for customers and suppliers and just getting on firm footing, and that took a little bit. But we were quickly then on to where do we want to go from there. And in many ways, I've said this before, but COVID, obviously, a blight on humanity and a curse, but -- and of course, on travel. But I think it was sort of a blessing as a new CEO with a lot to get done and really needing to rally the troops to believe and change and a different future, et cetera, that we could really get after it with the urgency of COVID, with the emergency of COVID, and frankly, with the overhang of COVID. Because the numbers and everything were going to be crazy for a while, travel was going to be greatly reduced. And as you've heard me mention before on earnings calls, et cetera, we've been keenly focused on reorienting the technology base of the company, reorganizing the company, frankly, and how the people are organized, changing the culture, all of those things. And there's something really nice about not having to then go worry about, oh, quarterly earnings are coming and people are expecting XYZ. You could just say, everything is bad, don't worry about it. Let's just go fast and get everything done. So that was really a blessing for me in many ways in terms of changing the culture, moving us quickly through some stuff. And I think it's given us pace, it's given us speed. We have a lot to do. We still have a lot to do. But that -- I think that's what my first year has been like, looking under the hood, seeing what was there, seeing what needed to change, getting after it and just being unapologetic and getting after it and not worrying about what happened.

Yes. No, that's a great perspective. No, I think you described it well, really getting under the hood and just being unapologetic. You definitely sounded that way on the public conference calls. So as you sit here today, we are in March 2021, what aspects of the story do you think are still most misunderstood by people sitting externally around Wall Street as far as what you've done and what could be done yet?

Yes. Well, I mean, obviously, we haven't seen the output of anything we've done really, because all the work has been sort of under the hood. And until the volumes come back, other than some concrete things we talk about on cost savings and variable cost opportunities, which again, you may not see all -- you certainly won't see all of until the volumes come back. I think what probably is misunderstood is kind of 2 sides of the same coin, which I think people don't understand how hamstrung we were by our old approach and our old technology. And we kind of did really well in spite of ourselves, in spite of making it hard on ourselves. And so I think when we get our technology platform right, and I'm not saying it's perfect today, but we continue to make progress, the unlocks that come from that, I think, are really significant across our direct-to-consumer business, our B2B business, which we think has great opportunity. So I think it's kind of the 2 sides of those coins. I think I've been asked a million times about why are your margins worse than the other guys, et cetera, et cetera. And I think everyone thinks it's caught up in some business strategy or something. And frankly, a lot of it just has to do with the underlying machinery and how competitive we can be, how fast and agile we can be. And so I believe when we get that right -- and it's not an easy process, that you've been doing this a long time, re-platforming technology companies is an arduous process. But when you get it right, it can really speed things up and unlock a lot. So...

Yes, and that's helpful. I think when -- since you've taken on the role, and to your point, you've spoken about a number of key strategies and initiatives from a tech reorg, a brand reorg, creating more urgency and focus for the company, improving the overall product and merchandising. There's been a lot of things that you've been really focused on in creating healthier growth as well. So I guess as you look into '21, and hopefully, travel starts to recover, maybe talk to us about, of those areas, where is there still sort of the most low-hanging fruit or areas for improvement to kind of further optimize the business?

Yes. That's a lot of ground. I mean I think -- honestly, I think there's a lot of low-hanging fruit across the board. Now some of it's harder to conceptualize. So when I talk about the tech platform, and it's about speed and it's about experimentation and it's about better consumer process and stickier apps and all those things, that's all -- we've all heard about that in a million situations. Doing it, improving it is hard work. So that's, I think, understood, and we know it's hard, and we're working on it. I think simpler, maybe less technology-dependent is what we're doing on the brands, what we're doing around merchandising. Now there is technology locked up in there. So we've merged all our performance marketing. And there's a lot of technical work going on to make that function right to create the ultimate multi-brand algorithms that will drive our business. All of that is hard data science. But we're moving across that. And there are simpler versions of that, which is just better brand differentiation, using our brands more as a portfolio of weapons as opposed to a bunch of bigly aligned brands that sort of do the same thing using our geographical strategy more tactically, how we spend, where we spend, being able -- you've heard on our last earnings call, we pulled out some VR meta. That's something we think has value to us, where we can put the resource somewhere else up funnel, probably in brand marketing. So there's a lot of good work. That's more sort of classic business tactical work that can go on there and I think a lot of opportunity. And then you talked about merchandising, again, that starts to get into technical side. Our CRM platform, we're doing a lot there. But it goes to the stickiness of our apps. It goes to our ability to connect with you more regularly, and that's working through the whole chain. So I think there's honestly a lot there. It's just -- some is easier to conceptualize and some we're building, and we've got to see and make it work and we've got to test our way into it.

Yes. No, that's helpful. I wanted to ask you one sort of a big picture macro question, because it's sort of interesting. When you look at what's happened over the course of last year, across a lot of different digital categories, whether it's e-commerce, real estate, online video, social networking, grocery, consumer behavior has changed and it's become digital faster. Now one of the things that we're trying to sort of figure out or monitor is are we going to see a similar dynamic in travel? Because it still looks like only about half of leisure travel is booked online as a couple of years ago. Are you seeing any early signs of new people you've never seen before come to the platform and start to book as a pull-forward data point?

Well, I think we're seeing that in alternative accommodations, right? We're seeing a lot of people try alternative that didn't before, whether those were people who were natively digital or were -- used to call a travel agent, find a home to rent, it's hard to say. But they're new to us, and they're new to the use case, I would say. And that's a big opportunity, obviously, for Vrbo and our alternative business. But I think it's a little different, because this is just me speculating as a human. We all had to figure out online banking or order everything online, but we weren't traveling. So we didn't have this need of like, oh, my God, I can't reach a travel agent, because they're hiding somewhere. And I need to travel 17 times in 2020. So how am I going to do it? So we actually had the inverse, which is people went quiet. They didn't have to adopt anything, because they weren't actually traveling. And so they were sitting on the sidelines. So I don't think, other than -- if me or someone older than me who learns to online bank and then they're like, oh, maybe I'll try online travel too, I think that may be a knock-on effect, but I don't see it as a big reaction. I think we've got to continue to drive it. And we can make it a lot better and easier for most people, and we have a lot of new products and service capabilities that will do that. And we'll increasingly make people more comfortable. But there are still parts of travel than I look under a rock and I go, how is that still only 10% online adopted. Like that's insane, but they exist. So we just have to keep at it.

Yes. Yes. That's part of the connected trip that we're going to talk about. But I do want to ask one more or tactical one. Your fourth quarter '20 commentary was interesting. You just talked about sort of the slope of the improvement, down high 50s, overall bookings trends in December, getting a little better in January to down 40s. I guess a couple of questions for you. Any update at all on what you're seeing, what you saw throughout February? And then I thought your commentary was interesting about sort of the summer. So maybe what are you seeing from a forward summer bookings trends that perhaps give us early signs of the post-recovery world?

Yes. Sorry, I've got my phone in the background. It will ring for 2 or 3. We've all got our Zoom lives to cope with. The -- yes, I would say the trends basically continue out of the new year. And I've often said that travel is not surprising in this period. Everyone is like, what are you seeing, what are you doing. It all comes out to be kind of, I use the analogy of putting 5 paints together every morning, and it always comes out brown. It's like they change, you can change the colors, but it's always brown. And that's kind of what we've seen. Now our brown is a little better, as I mentioned, since the new year, and that seems to be continuing. But I think you see what you expect. We still have countries in EMEA that are shut down entirely. Now they're starting to talk about how they open like in the U.K. And immediately, you start to see people start to look and you see people start to book. They start to book out further. They start to think about summer. I think I mentioned on the earnings call that we're seeing the Christmas holidays, bookings were up over this time last year. Now it's very small right now for the end of the year, but on a relative basis, it's up. I think this summer, we've seen really good strength in alternatives. And that tells you something about what's happening, which is people trust that use case. They've already been willing to do it. So they're still willing to do it. Yes, we're seeing it in other categories. But still, it is weak compared to what it would have been 2 years ago. So it's coming along. I think it's really a consumer confidence question. And as more people watch the morning news and go, oh, wait, now we have the J&J vaccine or now I'll be able -- Fauci says I can get it by, whatever, March, April, May and whatever they're saying in other countries. And people starting in the U.K., they have a really robust plan, and people start to get confident. And then they start to make those choices and say, I don't want to get stuck with nowhere to go in August. And that's what happened.

Yes. No, as someone that's already booked on a 2021 trip, I am cautiously optimistic part of that camp as well. So can't we start traveling? You talked earlier about sort of the low penetration in some of the areas of travel. And maybe this has to do with the completed trip and kind of the complete trip you've talked a little bit about. Sounds like you have a new ad campaign coming to sort of really bring apart all of the unique offerings you have across multiple items, et cetera. The company has been focused on this in the past. So maybe talk to us about what you see for areas of improvement to really try to make that pitch more impactful this time and really capitalize on that opportunity?

Yes, sure. I think it's really 3 parts for us, which is there's the tip of the spear, which is how we're getting that message across. And I think for us, I said -- I made the point about trips, but this is not new for us, right? We've been the most complete OTA for decades. And we've had some ad campaigns where you could see planning a boat or a hotel or whatever. It wasn't like we didn't try to tell people. But we've never, in my opinion at least, fully landed that message that like, why would you go to these places where you have to comparison, shop 3 different hotels or 7 different airlines or whatever when you can solve everything in one place. So I think there's an element of that. And when I said we're doing that, it's not so much about that's a new idea. It's really more about concretely going after the people who want to -- who are busy planning full trips. Now many people just book a hotel for whatever or a plane to go home or whatever from college. But many others, and they're very high-value customers, book complete trips. And so we're focused on them, because we think we can serve them better than anybody else. But we also have to make that real on the product. So we're doing a lot more from the app on down in terms of how you can book a trip, how you package things together. There's opportunities, obviously, to get discounts and create value with packages, but there's also just the ease of doing it, having your itinerary on in one place, having alerts that help you know about things that change and go with you along the way. So it's really kind of the -- it's how we tell you about it, what that booking experience is like, and then it's what happens after that booking experience as we try to stay with you and make ourselves valuable to you along the journey. And that's really what we're focused on.

We'll be watching for that.

Me too.

The supplier relationship dynamics are always fascinating in this industry. In my mind, I would make the -- I have made the argument that your value to your hotel suppliers is pretty high right now, given the state of business travel, and you're over-indexed on leisure. And so I guess, I wanted to ask you just sort of about the state of the relationships and the discussion you're having with your OTA -- with hotel partnerships, just to make sure that they're going to benefit, just as you are, from the overall travel recovery?

Yes. So we -- I mean, first of all, let me say my experience since getting in has been very cordial, very good. I've had great conversations with many of the CEOs across the industry that I've interacted with. We all kind of feel like we're in it together, the shared misery, if you will. But I think our relationships are very good. I think everyone I've talked to from big chains to smaller hoteliers certainly value what we do. There's not a lot of fighting over the last penny as much as there is, like, what do we all do to make it better. We've introduced some programs early on in COVID to try to help some of the smaller hoteliers, get them back up and going, give them advertising tools to help them get noticed again and revive the effort. And that's happening kind of across the board. But I think more broadly, we're all recognizing that none of us is going to get rich trying to fight over the last penny, that really the goal should be how do we drive this better, how do we drive the consumer experience better, how do we work together. We've introduced what we call optimized distribution to try to clean up the wholesale market, which Marriott pioneered with us, but others are coming in, and it's been quite productive and I think good for the environment. And I hope, ultimately, other hoteliers will see the value in that and come along as well. And there's more we can do together. I think I talked about it early on, but we have so much data. We're so strong in payments and other things. We have a lot of ways we could service. We can help our hotel partners, our air partners, et cetera, just to be better, more efficient, make more out of their business. And I think that's something we have great ambition for down the road. So I think it's going to become, hopefully, a much more symbiotic relationship where it's not just fighting over the nickel on the table, but it's really about, okay, we'll split the nickel, but here's what we can do to help you take cost out of XYZ, here's what we can do to help you monetize your consumers better. We can stop fighting over consumers. There's a lot of good things we can do.

Got it. That's very helpful. The other side of the business, the alternative accommodations piece, it's sort of a -- it's like a tale of 2 cities when you look at how sort of the -- how some of these stocks trade, in my mind. You have a stock market saying there's a one alternative accommodation player who has high repeat rates, brand loyalty, high direct traffic. And it's almost being traded as if it's like a platform. It's a much higher multiple than what we see online travel agencies where the stock market says, these are sort of lead-gen companies, very cash flow generative, they don't warrant platform multiples. So the question for you, as you sort of look into '21 and '22, what are the 1 or 2 key strategic areas you're focused on to drive more repeat business, direct traffic and really become more of a platform?

Yes. Well, I think, look, we all have our advantages, and people find that platform company you're referring to pretty sexy these days. And certainly, they've done amazing things and have great brand loyalty, and they have benefits we don't have. We have lots of benefits they don't have. We can sell -- like that use case just doesn't always appeal to everybody. And this notion, and I've heard my friend who runs that company, talk about it that no one is going back to hotels or everyone is going to be living differently. I'm just not a believer in that. I might be wrong. But -- so I think we have to take advantage of what we're good at. Now as you say, we've been good at driving traffic, we can be better, but we've been good at it. And what we have to be better at, clearly, is keeping customers and keeping them coming back and giving them reasons to come back. And that's why I think it's so critical. And we have to turn kind of what has been a little bit of an anchor for us, which is this multi-brand, what do we do about all these brands, et cetera, into a weapon, from my perspective, which is every brand can stand for something different. Some can be about service. Others can be about loyalty. Others can be about lowest price or cash back, however you want to think about that. So that we can actually target different consumer groups in different ways as opposed to this one broad brush that is meant to cover everybody. Because I guarantee you, their platform idea, while quite appealing, does not appeal to everybody in every use case and more often than not does not. And we'd rather have that as one of our options with 12 other options so that no matter how you want to travel, we've got you covered. I mean I think that's just long term a better prospect. Now I think they're a great company. I think we're a great company. We'll all be fine.

Yes. I think one of the investor debates around alternative accommodations is around supply, where I think some investors, who are concerned about alternative accommodations, say there's going to be a supply constraint. And ultimately, when you bump into ceilings on supply, when there's no unique inventory left in Nashville for your guys' weekend, you're going to choose a hotel. I guess a couple of questions, one, do you agree with that logic? Is supply the constraint in alternative accommodations? And if so, two, what strategies does Vrbo have in place to make sure it's going after the right supply for the platform?

Yes. I mean I think too, in a sense, you have to say, sure, supply is a constraint. So if we don't have supply in X country, then we're not going to get travelers from Y country that go there for the summer and stay in homes, right? So for sure, there is notional constraint from supply. Now -- and this year, possibly for the first time in a long time that I'm aware of, we will probably run into more constraints and so will they in certain constricted areas where there's just so much demand and just not enough homes, period. Like it's not even a question of who will rent them. They just don't exist in the numbers that people are willing to go there. If everybody who went to France last year decided to go to the Alabama Coast, like there just aren't enough homes, right? Like it doesn't work. So the -- there are constraints like that. And I think they're real, and we're working, obviously, on our most constrained areas to find more inventory, do that. The broader question of, will we compete with our friends in more markets and will we compete more aggressively in cities, then that's a longer strategic question. But for sure, that is supply-dependent. But you don't go after that supply unless you have a demand-driving strategy that goes with it. You don't just lay it up and say, hey, we've got Shanghai, who wants to -- like you've got to have a plan to drive demand for that or you're just spending a lot of money signing up supply that doesn't go anywhere. But I'll go back to your earlier question, which is I'm not -- the earlier part of your sentence, which is I'm not sure when you go on your guys' weekend to Nashville, you don't want to be at the hotel pool where all the people are and the music is on and the bar is and whatever. So again, there's going to be demand for all those things. I think we will continue to grow supply, we believe in that. But we're trying to be much more thoughtful about not just the statement that we'll grow supply and it will lift all boats, but rather we're going to be tactical, grow supply where we want to grow demand and drive channels that go end-to-end so that you don't have this empty -- you don't have these empty galleries of driving supply, or likewise, the empty galleries are driving demand where there's no supply.

And you have both. So if I'm trying to find a place to stay in Nashville, I can go to some of the core brands of Expedia and see the alternative accommodations as well as the hotels. I know that's been sort of a multiyear focus. So talk to us about sort of where are you now in that integration of alternative accommodations under the core. And what are sort of some of the areas where you're still looking to improve the velocity there?

Yes. It's -- we've made progress. And we -- I could tell you little stats about this brand now has 100% of its traffic available to the alternative product. But I'm kind of trying to get out of the business of this brand did this and this brand did that and those little moves. What I will say is, we're not as far as we should be. We've owned Vrbo for, I think, 5 years. You would have thought we'd have gotten there by now. It is a complicated technical problem, and we've worked our way through much of it. But there are knock-on things where, okay, you've wired it in, but now have you optimized how people can search, have you found the right patterns for how people want to search if they're searching a hotel versus searching alternative and how those things play together. Our different competitors approach that differently. We've got to find what we think our best approach is. And then a lot of places out there in the world don't even think of our OTAs as places to get alternative accommodations. So our best brand in Germany might be brand Expedia. But if we've never advertised that you can get alternative accommodations and we're just assuming people are just going to stumble on it and go, oh, look, I was looking for a hotel, but here's an apartment in Málaga or something, like that could happen, but that's not exactly a way to build the business. So we've got to get it to where the product and the sorting and all those things really work in a really elegant way together that drive a consumer experience and then get all the back-end, the service is different, the needs are often different of what you need when you rent a home or an apartment versus what you need when you go to a hotel. So we've got to get it all seamless, and it's not there yet. So I think we're making real progress. It is a key agenda item for us. And when we get it, not only will we unlock it for ourselves, but keep in mind, we're also going to unlock it for our B2B partners. And there's a lot of customers out there in the rewards programs and other things who might very well want an alternative accommodation, I'm sure they do, but we haven't made it easy for them to get.

Got it. A couple of more here. First one is just sort of the cost reductions and where we go from here from a profitability perspective. You've taken out significant costs from the structure since you've gotten there, $700 million, $750 million of overhead, a couple of hundred million in variable costs. So I guess the question is, as we head into a recovery, talk to us about sort of the level of reinvestment of those savings. Do you think it's necessary to ensure you're really capitalizing on the opportunity? And then how do you think about sort of the long-term operating margin structure in '22, '23, et cetera?

We haven't been super-prescriptive about what we think the number is going to be, but -- other than the cost savings we've talked about. Again, volumes are hard to tell, and we've tried to avoid getting in the game of -- '22 is going to be exactly like '19 or any of that, because who the hell knows. But -- and then we can't control any of it. But we do think we're broadly obviously going to take close to $1 billion out. So that's no small thing and changes our margins considerably. I think we have more opportunity to increasingly be more efficient. But as you say, we will put some of that back into -- and I think what we will put that back into is really raising our game from a technical standpoint, just broadly competing to be a Tier 1 technical company, which I think -- we've had great engineering talent, but I don't think we've aspired to be really at that level before. And we're really driving that accountability through the whole company, product tech, marketing, everything. And I think on the marketing side, as I've mentioned, I think we can be much more precise. I think we can drive better returns there. Whether that's more volume for the same investment or whether that's more margin on the same volume, we'll have to figure out what we think the right tact is there. But we feel good that there's opportunity in a lot of places. So I would say we're not out predicting like, hey, margins are just going to inexorably grow to some number. We will certainly be willing to invest in our growth and our long term health. And again, we may drive a quite different business long term than some of our competitors. Our B2B business, which does have slightly different dynamics in it, is a big opportunity for us. And that may have different economics, but it may have great profitability opportunity long term. So you may see a different blend over time, and we just have to see where we grow.

Yes. It's going be a lot more analytical along the way as well. Last one I had for you is just on capital returns. It's sort of interesting. We're a long way from a recovery. But when you think about Internet companies that actually return capital, you guys are sort of in rarefied air historically, I mean, having dividends, having buybacks, et cetera. So maybe just talk to us about philosophically how the management team and the Board, the priorities of capital allocation after we recover between investing, ensuring you continue to return capital and then M&A?

Yes. Well, I'd like to think, in this process over the last year, we've come to see that we have bigger, better opportunities in front of us than we maybe thought before. So obviously, there's nothing more important than building long-term value into the company. Now we do intend to reduce our debt load. We had to -- we took on a lot of capital to ensure our future. We do want to get back to investment-grade. That's key among our goals. We certainly -- I would say, the bias of the Board, our Chairman and myself, et cetera, is not -- has not changed in terms of wanting to return capital when that is the best opportunity to drive value to our shareholders. That being said, I'd like to believe that in uncovering all the new opportunities that we're going to by rebuilding ourselves, by advancing some of the things we've already talked about, our best investment opportunities may well be into growth in the business. So I can't say what the balance will be or whether we'll have exactly the same posture. But we certainly appreciate and respect and believe in the idea of driving shareholder returns through whatever means makes sense, including returning capital. And if that's the best opportunities to do that, we will certainly do that. But I believe we're going to have a lot of growth in front of us that we maybe didn't realize we had before. And hopefully, that will also eat up some of our investment.

Great. That is super-helpful. Peter, thank you for your time. Thank you for everyone who joined in. Hopefully, next year, we will all be traveling to San Francisco for the 2022 edition. So thank you so much, Peter. It's great spending time with you. It's great spending some time with you.

Likewise, Brian. Thanks for having me. And I hope very much we will all be in San Francisco next year. We'll have plenty of rooms for everybody, so.

That's right. Thank you.

Take care. Thanks.