Expedia Group, Inc.

Good day, and welcome to the Expedia Group Incorporated Quarter 1 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Sino, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to Expedia Group's Financial Results Conference Call. The first quarter ended March 31, 2020. I'm pleased to be joined on a call today by our Vice Chairman and CEO, Peter Kern, and our CFO, Eric Hart. The following discussion, including responses to your questions, reflects management's views as of today, May 20th, 2020 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 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 or actual results to differ materially from these forward-looking statements. You will find reconciliations 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 periodically visit our IR website for other important content, including today's earnings release. Unless otherwise stated, all references to cost of revenue, selling and marketing expense, general and administrative expense, and technology and content expense exclude stock-based compensation. and all comparisons on this call will be against our results for the comparable period of 2019. Please note that depreciation expense is now reported in a separate line item, and prior periods have been restated to reflect this change. Starting in the first quarter, we have updated our segment reporting to reflect our platform operating model and align our reporting with customer segments. Our new segments are retail, which includes our consumer-facing brands, B2B, which includes Expedia Partner Solutions and Agencia, Trivago, and Corporate. Services provided by our technology platform and supply organizations are primarily allocated to the retail and B2B segments. Please see the 8K we issued earlier this week for restated segment data for the prior two years. And with that, let me turn the call over to Peter.

Thanks very much Michael and good afternoon everyone. I hope you are all safe wherever you are and your families and loved ones are likewise. Let me start by saying this is our first virtual earnings call, so if we have any technical difficulties, apologies in advance and likewise apologies that our chairman will not be joining us. Eric and I will do our best to be as informative and transparent, but we may not be quite as quote worthy, so hope you can. Live with that. As for Eric and I, we are doing our first formal call today. And I want to first say that the company is lucky to have Eric in the seat as CFO. He's been with the company for quite a long time in a number of roles and has been a great partner for Barry and I as we set off on this journey late last year in trying to simplify and reorganize the company to be as effective as possible. And we're lucky to have him. And as for me, First of all, I'm grateful to the board for their support for putting me in the role. I am really excited about the opportunities ahead of us. I'm not crazy. I know this seems like an odd time to take on running a travel company, but the opportunities I saw as Barry and I dug into the business are just tremendous, and I think great things are ahead for us, and looking forward to telling you some more about that. First off, I'd like to talk about COVID and our response to it. It goes without saying that as a company and as human beings, we are obviously keenly aware of the health and societal impact of the virus. And of course, that is the most important thing going on in the world. But the human side goes beyond that because many of our partners, people in the lodging business and the travel industry are suffering mightily. And in addition to the health issues, we've got a lot of partners and friends with issues of their business survival, their jobs, et cetera, and we have been trying to do whatever we can to help however many people we can. Our primary focus initially was, of course, on the health of our people and on our customers and our supply partners. We did everything we could to try to make that as easy on everyone as possible, though, of course, it was not easy on anybody. We saw enormous cancellation levels come in, as did the entire travel industry. We had customers stranded. We had supply partners who had all kinds of issues with cancellations and policy issues, and we were scrambling like everybody else. But our teams did tremendous work, I would say, on a number of fronts, not least of all trying to help the customers. I would just point out we had levels of cancellations that were many multiples of our highest cancellation levels on any day ever experienced, and at the same time, At certain points, because of government closures and the inability for our teams to get to the office and our service people to get to the phone centers, we had as low as 30% of our available call center capabilities. So it was a real struggle, but our teams on the technology side did a great job of helping to solve that and quickly put in place a number of cancellation tools, self-cancel tools. We deployed our voice platform more widely and really helped a lot of people, took the burden off of our customer service representatives and, frankly, installed in a very short time a lot of great work that will pay huge dividends down the road for us. We've also been working closely with our supply partners, and I would commend them all in working through a terrible, difficult time with us in trying to smooth the customer experience, make the policies work in an almost, you know, in a really unheard of time when no one knew exactly what to do. We were not perfect. We certainly learned a lot from this. I don't think any company could have been prepared for this. And it is frustrating that we could not make every customer perfectly happy or service everybody at the speeds we wanted. But I think we learned a lot, and we will be in much, much better shape for the future. And as I say, we will reap a lot of benefit from what was done. And finally, our other sort of immediate response to the virus was to raise additional capital. You all saw our announcement last month. We raised close to $4 billion of incremental capital, which we believe gives us ample resource to survive whatever might come from the virus. I'm not going to belabor the first quarter. I know you've seen the numbers. Suffice it to say that the first couple months were looking pretty good. We were feeling quite good about the business. From a performance standpoint, we were installing a new cost plan to take out significant costs. And then the virus became quite real for us as it started to shut down the globe, and we, of course, suffered like everybody else as those shutdowns sort of dominoed through the globe. But as it spread, you know, the numbers started to become less and less meaningful, and really the response was the only thing that mattered. And so I would encourage you not to get terribly caught up in the noise of the first quarter. only that we were in a good spot before it happened. The virus has been painful. We'll talk a little bit about how much damage it did and where the trough was, but I'd encourage you not to focus too much on those numbers. On the plus side, we had begun, as we mentioned in our last conversation at the end of last year, to make changes to simplify the company. We had done a large reorg of our tech capabilities and created a platform to serve both our consumer and business to business facing enterprises. And that work has been terrific. Our teams have done a great job. We are already starting to see significant benefit from that. And that's not just on the bottom line on cost savings, but that's also just in capabilities. Our data teams have done remarkable work. And again, all of those things will be hugely powerful on the other side of this virus. We were ahead of the game because we also, as I mentioned, in February, began installing our plan to save on the cost side. You'll remember that this was a plan that went across the waterfront. It was people, real estate, licenses, you name it. We were looking at every part of the business. And at the time, we had scoped that at about a $300 million to $500 million annualized savings. And all I would say about that is that since the virus hit, It obviously created even more urgency and focus in the organization. And I would say our ambition has increased significantly and our speed has increased significantly. And let me just head off questions for later. We are not going to put a new number on it. We are focused on going as fast as we can and taking out as much as we can wherever excess exists. But we are not going to re-scope that number for you this quarter. And when we know more, you will know more about the scale of that opportunity. We also began pushing the organization to drive change as fast as it could. What we saw was, as everyone has seen, that our volumes have been significantly impacted, and we have had a history of being quite careful about changing technology, pushing technology changes through, as one would expect with very high volumes and very high throughput all the time. But since we've had these lower levels of throughput, we felt a unique opportunity to try to push through significant technology change and things that might have taken months and months or years to push through and put them on an agenda to push them through much more quickly. So the company is just way more focused on changing, changing quickly, and getting to the other side of a lot of what has been thorny technology issues as rapidly as we can. We also last week announced that we were reorganizing our retail group. This is the next stage in our simplification. It's a big step for us. You all know that we have operated as brands for a long time. And beginning last week, we are operating as one retail-facing organization. We will have a marketing group that is focused entirely on marketing the whole suite of brands in the most effective way possible all over the globe. And we have a product and tech group on retail, which is focused entirely on building the best products, the best consumer interfaces, and the best tools for our consumers that can be marketed down through the retail group. So we've taken down those boundaries. Again, we think there's efficiency there, but as much as there may be efficiency, we think there's this huge opportunity to have the product teams working together to build the best products, deploying them as widely as possible across our consumer-facing fronts. And we think that our marketing teams will have a great opportunity to stop competing with each other and start optimizing for the group of brands instead of for a single brand against another. You'll note, as Michael said, that we've changed our segment reporting to reflect that our real view of things today is that there's a consumer-facing retail business, there's a B2B-facing business, and then there's the platform and the corporate organization that serves all of that. And I will say, for the record, we believe that all of those revenues and all of those pockets of demand are equally valuable. We think both businesses fill in gaps in the market, and we think that we can reach the most demand possible by having those big chunks of business and retail and B2B to find all the demand all over the globe. On the marketing point, I just want to amplify, you've heard a lot of conversation about direct customer relationships. It's a nice thing to say. We believe in it. But this is more than just an emphasis point. This is about building better products, doing better brand and direct marketing, better merchandising, which has not been a great strength of ours, and in general using the data we have, which, again, had never been pulled together as a company and has only been together for the last few months, to power our ability to do all of those things, to understand our customer better, to serve them better, to serve up choices for them better, everything. So we believe we have huge opportunities on that front, And we equally believe that we've been overly reliant, and you've heard this before, on performance marketing. We've not been disciplined about it. We've chased unhealthy growth over the years. And Google and other performance marketing channels have tried to disintermediate us. And we've made some not terribly smart choices along the way. We believe that this reset of the virus will give us an opportunity. I mean, we've been talking about this for a while. but as we wade back into the marketplace to be much more disciplined, to only chase real growth, real valuable growth, healthy growth, and not be stuck chasing performance marketing and entering into diseconomic auctions. So we intend to be much better about that. We intend to keep those customers longer. We intend to serve them better and keep those direct relationships going strong. And finally, I'm sure you're all interested in the recent business trends. Like some of the other companies in our space, you've probably heard that late March into April was the trough of the business. That is true for us. We saw gross bookings, new lodging bookings down about 85% year on year, which of course was terrible, and cancellations were extremely high. Since then, I'm pleased to say, though I would not get overly excited about it, that we've seen nice growth coming into May. And essentially what we've seen is both growing out, you know, green shoots in the areas you would expect, places where movement has become possible, where people can now start to think about their summer holidays, et cetera. We see that very quickly when that happens. And cancellations have settled down. They're still at elevated levels, but they have stabilized. So the combination of those things has May looking considerably better than the trough. We're not making any predictions. We, of course, cannot control the virus, so we are merely adapting to it as it comes and trying to be smart about where the business is, what we can do to help the business along in places where it exists, and be smart again about how we attract the demand that is out there. I'd say it's important to keep in mind that Because we have a global footprint and because we are essentially in every line of travel business that's significant, we get demand wherever it lives. So I know there's been a lot of questions about international versus domestic, local, regional, et cetera. The truth is we have a way to capture whatever demand is out there, wherever it exists in the world, and whether it is local, regional, domestic, or international, we have a way to participate. I would say we're well hedged against however it comes back. And what we're seeing clearly is what you've been hearing, that local, regional, domestic is certainly coming back stronger sooner. And I would just point out a bright spot for us has been Vrbo, where we have seen really markedly better performance. And that clearly seems to be around people who have been stuck in their city dwellings or wherever, and are looking forward to being able to get away from those cities to someplace for a vacation with their families this summer. And we're pleased to see the demand. It's clear that the Vrbo focus on the whole home experience is a real advantage over the competition right now. Vrbo is not a Not big in cities. It's not big in rooms in other homes and those kinds of things. It is really a four-wall, whole-home experience. And we've seen some really nice signal out of that vacation rental business. So with that, I would pass it over to Eric and say, you know, thank you for your time. Again, don't get too focused on the quarterly numbers. I don't think they're meaningful. We are entirely internally focused right now. trying to do the most good we can to both navigate the situation, help our customers, help our partners reignite their businesses, and, you know, and most importantly, from our perspective, get our business right and our product right and our offerings right. So when we come out of this, as trite as it is, we will be stronger and better than we were before. So with that, Eric.