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

All right. So I think we'll get started. Thanks, everyone, for being here. My name is Kevin Kopelman. I cover hotels and online travel for Cowen. We're very excited today to have Peter Kern with us, CEO of Expedia Group. Thank you so much for being here.

Of course. Happy to be here. Thanks for having us.

And we'll kick it off with Expedia with Peter going through some new slides here.

Appreciate it. Thanks. And just to set the stage. I don't normally like to do slides, but I thought since this was our first in-person conference, since we've all gotten out of COVID, it would be maybe helpful to reset the table of what we've been going through for the last couple of years and why. And I hope this answers a lot of core questions, and then we can have time do some more. And I know there's some breakouts. So -- it's our usual disclosure issues. So I just wanted to lay out the framework of the problem. I'm going to go through these pretty quick, so we have time for questions. But -- as all of you probably know, Expedia grew to be the largest OTA in the world over time, including through a lot of acquisitions. And one of the things that people didn't always know was that created a lot of complexity and a lot of inefficiencies. So we had a lot of redundancies. We -- it slowed down product innovation because we had multiple stacks doing all the same things. It created inefficient cost structure. Many of you have asked us about that over the years why our margin's different than other people's margins, et cetera. And the war was all fought on the performance marketing, and that was the whole discussion. And that's the only place we really had to compete, and we ended up with an overreliance and an inefficient reliance on it. This is what that looks like in practice. Basically, every brand had its own technology, its own stack, its own approach to marketing. Again, not every brand, there were a few that were consolidated, but the big ones, including some of our smaller businesses, Egencia, our B2B business, had its own technology and its own stack. There were very little efficiencies we got out of the bottom and out of the scale we had. So imagine competing brands, multiple different loyalty programs on different loyalty stacks with different reward systems, tons of different checkout experiences. So whenever you innovate on one checkout, no, the benefit only went to a tiny subset of your customer base instead of to everybody, multiple CRMs, everything was multiples of everything. And ultimately, the thing which should be our superpower, which was the incredible ton of data we have on travel, we couldn't easily share between the brands and we couldn't easily use it. So we committed after we got kind of figured all this out and in the early days of COVID that we had to transform the company in order to win. And that involved 4 core ideas, which was: to simplify the business; streamline our cost structure; build a single tech platform, which is the biggest part of this endeavor; and then unify branding and marketing across the whole group so that we had one uniform place where all the strategies of how to build brands, how to bought -- how to find customers and for what could all be done in one place. So taking the first one, what did this look like? Well, we sold off or shuttered a bunch of businesses that were frankly distracting to us. And even Egencia, which is a great business that is now part of Amex GBT, was a B2B business with a totally different set of customers, front-end needs, different issues. And it was distracting to the overall business. We needed to be able to move quickly, relatively to re-platform the company, and this was an outlier. So we wanted to put it where it could succeed the most, with a partner who was 100% dedicated to that category. We also shifted from short-term transactional focus to long-term value. So anything that created a bad customer experience, either through a partner or through ourselves, we wanted to try to eliminate. So we had some low value partners, who we thought were not giving great experience to customers. We cut them off. We had some unprofitable channels where we over e-mailed or we overcouponed, and it was driving bad customer experience. We don't want to be in the buy every transaction even if it's a bad transaction, give a bad customer experience and never see them again. There's no lifetime value in it. It's not economically strong. So again, we eliminated those things, and we're still doing it. We're eliminating third-party packages that don't provide great service. So in a world of people who I know are concerned about what's the number of room nights and everything else, we have actively eyes open, said, "there is business we don't want to have because it doesn't create long-term value with the customer. " It doesn't create sticky experiences. And it just creates problems for everybody. And then similarly, for a long time, there have been discussions about geography. And I want to be clear that in certain geographies where we were not doing very well, including some of the geographies that are most valuable to some of our -- to our biggest competitor, we have pulled back, because basically, we were just burning money. We were competing. We were not being very successful, and we did not have a strategy to win. So we have pulled back to fewer markets and more focus with the clear objective that we will find a winning strategy with the benefit of some of the other things I'm going to talk about today, including new products that do new things. And we will use that strategy to go on the offensive in these markets. But just to continue burning money to go sideways and lose money in a market and retain share in transactions, just so we can tell you we did that, it's not a good business strategy. We did not believe in it. So we pulled out of that. And again, similarly, we've moved money out of our lesser brands to focus on our biggest brands so that we're not essentially diluting the impact of the money across 25 things. We can concentrate it in fewer things and be more impactful. Second piece, we've talked a lot about this many quarters. But we cut a lot of costs, started to put things together, reorganized the company in the right way and take costs out of the system. Some of this is in variable places, card process and cloud, customer support where we've had huge technological innovation to take money out of customer support. And then on the fixed cost side, across basically everything, including headcount most notably, but real estate, cloud optimization, et cetera. And there's more opportunity, and I'll get into it. As we build our technology platform out, that, again, when you get into this, when you get this multi-silo into one stack, you get immense efficiency in how you build things, how quickly you can innovate, everything, which brings us to the platform. So again, we are bringing this all into something we call Open World. If you have an hour and nothing to do, you should watch our video from our partner conference in Las Vegas. It's an excellent sort of synthesis of all the strategies we are bringing to bear on the industry. But the big thing here is we had to rebuild our stacks into one stack. But we did it in a way and are doing it in a way where instead of being one monolithic stack that serves our business, we are building it into microservices, all API-based so that each piece can be used by our partners, and I'll get to why this is important in a minute. But it allows us to really expand our B2B footprint in a really exciting way. It's one of the most exciting things going on in the business. But also allows us to move quickly to innovate for our own business, so that each piece is innovating itself and it don't have all these co-dependencies through a big monolithic stack, which is not uncommon to us, but it's the way we should have been built and are now building. So last piece, brands. Sorry, I know I'm going fast, but I want to leave time for Kevin to ask a few questions. We've focused a lot more of our energy on being a house of brands instead of brands competing with itself. So this is about how do we bring customers together. The majority of our customers don't shop multiple brands. They will shop one and not another. But there's huge opportunity, imagine a Vrbo customer, who needs to book a flight or Expedia customer who needs to book a rental home. These are big opportunities for us. And we believe in concentrating our energy on fewer brands and concentrating it on making all the brands work together, and so we've combined our brand marketing into one in-house capability. And we've combined performance marketing so that our teams are not only building to bring in the right traffic at the right economics, but with a multi-brand view on that instead of just I'm going after hotels.com people and I'm going after Expedia people, et cetera. And then the last piece, which we'll roll out beginning of next year most likely, is one key. And that is our single loyalty platform. So imagine we had 5 different loyalty platforms I mentioned before. That's 5, sorry, 5. And all of them were on their own stacks and all of them work differently. We will now have one loyalty program that spans much further to all our brands essentially and allows somebody who is, let's say, renting a Vrbo and earning rewards to use those on Expedia to book a car, a plane, an activity, and of course, vice versa and around the whole family of capabilities. So it's a huge opportunity, we believe, to make the whole house of brands sticky and give customers the benefit of the fact that we do all these things instead of having them come into these silos. Which brings me to the point -- I hate circles and virtuous circles, but this one is important. So I let the team build it, which is as we build the platform in a new way, with speed, with efficiency, with the capability to test across all our customer base instead of in these little silos, we will get much more velocity through our platform. We will drive more direct traffic with higher conversion. This, of course, has been the fight that's been going on for years. But even more importantly, we'll build stickiness, higher loyalty and lifetime value. The game has been thought about short-term conversion. But really, the game should be, and I'm sure you all look at lots of businesses like this, where it's all about lifetime value and how you're investing in the right customers with high LTV so that you can drive the long-term healthy growth of your business. That has not been how our industry has worked. It will be how we work. And with that, you, of course, get improved unit economics, which you can then push back into buying better traffic more profitably. And you add that to the efficient cost structure where we continue to take out costs on the underlying business. You leverage that all to buy more better travelers. And you reaccelerate growth and buy back the travelers you want. And I will say, because I know this gets debated, travelers have been traded amongst all the OTAs and everybody for years and years. Travelers are fickle. They go wherever they want. There haven't been great products that are sticky, that keep people coming back, that keep people in your loyalty framework, et cetera. We mean to change that. We don't just want the business to be who's a better -- who's better at arbitraging Google traffic? That is a little piece of the bigger puzzle. It has been most of the puzzle for a long time. We want to change that. And the only way to change that is better products that are stickier to bring people back, to give customers real innovation. So I'll just point out here, and again, watch our video, it's worth it. But here's a quick look at some of the things we introduced at our EXPLORE conference in Vegas. And I'll just pick one to talk about here, if you look at the price tracking and prediction. So this is a new capability that allows you not only to search a flight, New York to L.A., but then track it so that as the price changes over time, because customers very often have fear of booking because they're afraid it's the wrong time, it's going to get cheaper or is it still going to be there, something else is going to come around. So they wait. They don't know. They have a lot of stress over this. So we've introduced price tracking. And where we have sufficient data, we have predictions. So we can show you historically, this is what the price is done on that flight from here to the day of flight. And that might mean you want to pull the trigger today, it might mean you want to wait a little and track it. But we give you confidence to track it. Now this is a real innovation. Not about conversion, right? Not about that we get somebody in with the fewest clicks through to buy something. But actually giving the customer something really powerful to help them engage, do discovery and make good choices for them and take stress out of the system. And that is a lot of what we are moving towards. But the most important thing to take away is as these things get introduced, these capabilities and features, they're getting introduced on the Expedia platform, which everything is moving on to. And so all of these capabilities can be available to any of our customers across any of our brands across any of our devices so that we don't have this issue of, oh, "Expedia invented something cool, but hotels invented something else cool and Vrbo did some." Like -- again, flights is pretty unique to only a few of our brands. But the idea is that with one stack, you get the velocity of being able to introduce effective features and capabilities to everybody. And you can test it across the entire universe instead of testing it through these narrow pockets of travelers. So finally, this was a thing -- this was the big reveal at our EXPLORE conference as much as anything, which was, I don't know if people realize that, you can go do the math, which is why we're sharing it today. But we had about $16 billion of gross bookings in our B2B business in 2019. It is a big business, the biggest in the category. We've been very successful powering rewards programs, bank rewards programs, third-parties that do all kinds of things, offline travel agents, a big pool of partners. And it's been a great business, and it's grown very well through the years. But it was all done on top of this stack I've been talking about in these multiple stacks. And so as a result, it was really hard to iterate on, only really worked at scale with big enterprise partners because we had to do a lot of bespoke integration, et cetera. But as we build to the new and we build it into micro services with APIs, again, we massively expand the number of people we can touch with these capabilities. So imagine any hotel who wants to rent the car, any airline who wants to sell a hotel room, or anybody knew coming into the ecosystem, an influencer, anybody who has a following, Kevin's favorite beach vacations with 100 followers, if he wants to try to monetize that and can say, hey, "this is my favorite trip to Miami, stay at these 2 hotels and do this." And someone wants to book that, we can get to the point where no code, he can be in that business and be going. And we want to expand that universe to include anybody. But we have a huge universe of existing partners, hotels, airlines, Vrbo owners, et cetera, that we can already help. And beyond just selling more things, we can give them access to capabilities. So if you can use our payment stack or you can use our service stack or you can use our fraud stack, and you can save money and be more efficient in your own business, which goes for the biggest airlines, to the smallest hotel chains, then you can put more money back into the system, back into your customer experience. And we all can share the benefit. So it really changes the addressable market for our B2B business in new ways. And frankly, don't try to model it because some of it is going to turn into like SaaS business, where it's expert, transaction, et cetera. So don't try to model it. But a bunch of it's going to turn into classic B2B volume like GBV, where it's -- we're sharing in the profit of that GBV. That's going to be a lot of it. So there's a lot of ways we'll express that, but it's a really big change. And it's all on the back of rebuilding our tech platform for our sales first and then making it available in this way to the market, which brings us finally to just a recap of our progression. We started with deciding we had to do it, deciding we had to simplify the company, take costs out, reorganize significantly, hire new talent, focus on being a tech-first company, which we've been able to hire terrific talent. And we had great talent inside that we've unleashed as part of this. And all of that's been to our betterment. '22 and '23 are really about the delivery. It takes time sadly. I used to get asked the question, what's your biggest fear of COVID? And I think people like, "oh, it will last forever. We'll never get out of it." And I always said that we wouldn't get the work done we're trying to do before COVID was over. And in fact, depending on how you feel about COVID, we're all here. If COVID is over, we're not as far along as I wish we were. But that's the nature of big technical transformations. They don't go fast. They take time. And COVID, we can't control, and we certainly don't want it to go longer. So we've done a lot. But this year into next year is a big time for technical delivery across many things. And as you saw from the feature rollout, many things are happening. In fact, we've moved a bunch of our hotels.com traffic onto our Expedia stack now front-end stack. We've moved a lot of the back end together. We've created a single checkout that we're moving everything to, but migrations take time, and we will get there over the course of this year and then to next year. And of course, it's a progression that never ends. You keep getting better. But the big work is here for the next 6 to 12 months and probably beyond. But it will start to deliver in a meaningful way in '23 and beyond, and that's what we're excited about. We'll start to get the scale benefits we've been looking for. We'll get that more direct traffic, higher conversion we've been looking for. We believe the loyalty rollout along with better product will drive better engagement, and ultimately, higher lifetime value. And then again, we'll be able to invest that all in redriving accelerated growth of the customer base. And then underneath all of that, our B2B business will continue to accelerate as we deliver these new products to the marketplace. And that's really what we've been doing. And I'll just end with, I know there's been a lot of thinking -- a lot of debate, et cetera, about room nights, about whether we're getting marketing leverage. Let me just say 2 things or 3 things. One, we're working on new disclosure so that we can get some more metrics out in the future that will help you understand how we're trying to run the business because we understand that our old disclosure may not cover everything. I'm not going to do it at the Cowen conference, apologies. But we're going to wait until next quarter. Hopefully, we have a few additional things to help you understand what we're doing. But I will say, our unit economics have already improved, partly by eliminating bad business and partly because we're focused on profitability per transaction. And our profitability per transaction is up significantly. And equally, the way we look at it, we have gotten the marketing leverage, which is our spend versus the profit we have bought out of the market. We have gotten real marketing leverage. It is there. How much of it we want to keep and take to the bottom line versus reinvest in high lifetime value going forward? Yet to be determined. But just for the avoidance of doubt, we have gotten significant marketing leverage. And so far, we brought it to the bottom line. In the future, we hope to have many reasons to go spending on higher long-term growth. So I just wanted to be clear about those, and we will endeavor to do better in the second quarter.

Great. Great. All right, Peter, thanks for that. I think it's a great overview of the strategy and a lot of stuff you guys have been working on.

Did I get it on schedule? I think I did.

Yes, yes.

So from there, I want to just zoom in for a moment on kind of current trends to kick off the Q&A. Can you address some of the concerns we're hearing about market share? Just given if you look -- I think, really be focused on room nights, it's trailing -- probably trailing the hotel industry, depending exactly what you're looking at. So could you address what are the key drivers there? How do you see market share playing out? I think you touched on it...

Yes. I mean much of it is incorporated there, right? So there's a few things. First of all, mix plays a huge role, right? Depending on where business is coming back, different companies in the game benefit differently. Early in COVID when the U.S. came back faster than anything, we were a big beneficiary. More recently, EMEA has been coming back. We are less strong in EMEA. So somebody else will have the core benefit of that bump. When Asia comes back, that will be different. When business comes back, that will be different. So -- and all of those things are coming back but at different paces. So you get anomalies in the process. There's also much less long-haul international travel. Even though international has come back and some people have talked about intra EMEA, country to country. Going from France to Germany is not the same as going from France to the U.S. or to Singapore. And we have historically been strong in long-haul international, particularly in Europe, where we are noteworthy, less strong than we are in North America. So when that mix of business changes, it's different. And we've talked about it before. I'll just say it for effect, is all room nights are not created the same. 2- and 3-star room nights were considerably accelerated during COVID because many people are driving to places more often than they were flying in place. Cities, as you know, were further down. We happen to be really strong in cities, not so strong in 2- and 3-star hotels, stronger at the higher. But if I could have 3.5 stars and above all to myself and we gave 2- and 3-star to everybody else, they might have more room nights, but we'd make way more money. So I'm not saying that's what we're doing. I'm just saying, well, all room nights are not created equal. So that's a big part of it. And then as I said, we walked away from business in Europe in bad places, and particularly in Southern Europe, where we just weren't making money and we were just burning money. We did not have a winning strategy there. And from my perspective, you don't keep banging your face against the wall in the same place doing the same things. You regroup. You figure out how to win. And then you go back into the market. And have we given up some business there, some transactions? For sure, we have. But we did it with our eyes open, and we're comfortable with it. So a bunch of things we are doing for the long-term good may marginally impact transactions along the way. But the biggest part of the difference is people are seeing have way more to do with mix, and of course, to do with noise in the numbers. So some of our competitors don't always mention that they bought things that impact their numbers. We didn't pro forma our April numbers for some of the things we did. So that's why I say we're trying to do a little better on the disclosure front. But certainly, in our strongest markets, while there has been some modest change in the share point, it's principally for the reasons I described, which is we're just walking away from some bad business that we're happy to give up right now. And again, super important, none of this is structural. We have traded customers for years. In fact, we used to be pretty dominant in Europe long ago. And the other guys came up with a sharper way to win in Google, and we gave up business slowly. But there's nothing structural about that. There's nothing sticky about their product. Frankly, there's not enough sticky about our product even though we have all these loyalty capabilities. We are building towards a sticky repeat business where we keep more customers, and so we can buy more customers and be more efficient in the market. So what I would say is, yes, we have eyes wide open. We've given up a little business. The market has more often driven it by share and other things. And we are building to a winning strategy post all this noise of COVID and everything else where we can win everyone. That's what we're doing.

Okay. I want to touch on the macro travel environment. How would you characterize it? What are you seeing in May? And are you seeing any impact on your customers from inflation and economic concerns?

Yes. I've been asked it a lot. I'm not going to give my numbers. But so far, we have not -- and we've been looking. We have not seen any real reaction from the market to inflation. I think, look, inflation has been happening for a while. It didn't just happen 2 weeks ago. It's been happening for a while, particularly in travel, right? We've seen ADRs go way up. We've seen the airlines constrain how many flights they have. And then if you flew here, you saw how full the planes are. They don't have as much airlift in international -- long-haul international yet. There's -- so prices have been pushed over a car. Rental prices are through the roof. And through all that, consumers have been fine with it. And that remains as far as we can tell true. Now those of you who are macroeconomists, people overspend massively on hard goods during COVID, underspent travel and experiences massively during COVID. And we all expected that there'd be a reversion, and the travel would claw back and over-earn its share. And there was tons of savings, as we know during COVID. So right now, it certainly appears that the demand for travel is strong. I said quarters ago, that summer -- we expected summer would be gangbusters. Nothing to indicate otherwise yet. Now I don't know if the Fed's got to hold the inflation or not yet. I've heard both sides of that argument. Hard to say long, long term. But based on all those background conditions, and we have not seen the customer really react to "CNBC" noise of inflation. We all look at it a lot more than most consumers see it. Now gas is up. Home prices are up. We'll see. But...

Do you have any visibility? Like we hear great things about summer. Do you any visibility to past summer, what...

Yes. It's not like -- again, from our view, there's nothing to indicate summer or beyond summer is worse. There's no like, "Oh, summer is great, and then it falls off of cliff for something." Everything up until now in large swaths of the world, again, there are geographic differences, there's line of business differences, business travel is still different, et cetera. But again, everyone's been counting out business travel. Business travel has been coming back. And historically, business travel fills up the post summer travel. And we'll see where business travel is. We'll see what consumers do with back to work and hybrid work. And all of those questions remain. But there is nothing in the numbers, again, that we've seen that suggest there is like this looming who had changed in November. There's nothing there to suggest that. Now again, we're not fully booked for Christmas yet, right? Like there's a lot of bookings yet to come and things can change, but there's nothing yet in the numbers that we've seen.

Yes. Let's talk about Vrbo. How do you get to the next leg of growth in Vrbo? It's done well during the pandemic. Where do you go from here? And how should we be thinking about that?

So I think there are several prongs to it. And it's not as simple as just how do we outcompete Airbnb for a customer. First of all, we're not going to do a lot of things they do, right? We're not going to be as big in cities as they are. We're not going to rent small rooms. We're not going to rent a shared apartment. We're not going to do that. We focus on what we're good at, which is whole home and that experience. And if you've seen our marketing, like that, we're all in on that whole thing, spending time with your people and all that. Secondly, we have our B2B business. And frankly, Vrbo is piped through to a tiny, tiny fraction of it in a very inefficient way. And we have that huge opportunity. I mean, think of all the rewards programs we help power like Amex and Chase and others that we can power -- that we can push through even places like big hotel chains that are starting to rent homes to their rewards members. We have the opportunity to pipe through, again, through our B2B business, all of this capability. So we have a way to drive our business that is quite, I think, unique in the industry. And thirdly, we're going to go get more homes. We're going to keep marketing. We've had a huge step function change in awareness around Vrbo during COVID. And we're going to lean into that strength, and we're going to keep pushing. Now again, mix is important, right? The world is mixing back to cities. Good for our hotel business, not so good for our Vrbo business because Airbnb is better in cities. And I said all through COVID like, when cities come back, it's going to look like they got a win and a big inflection. But it's just because they are mixed towards cities because that's their historical business, good for them. We don't compete very much in those places. Business is so strong in the properties we have in those places and growing, but it's a different business mix. So in vacation places, in beach resorts and mountain towns, et cetera, the places we're strong, we continue to do very well. And we're focused on being good at that. And over time, we may migrate to some more cities and do some things. But we're not going to come right at them. It's going to be a different business model. And we believe we can continue to add lots of supply, that there's plenty of demand even beyond our capabilities in some places as we've talked about. And we keep pushing to get as much of that as we can. It's the right kind of supply for our marketplaces.

Okay. Great. With that, we're out of time. So we'll wrap it up. Thank you so much, Peter, for being here.

Pleasure. Thank you. Appreciate it.

Thanks, thanks. Thanks, everybody.