Expedia Group, Inc.

Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Expedia Group third quarter 2020 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I'll now turn the call over to Michael Sano, Vice President, Investor Relations, and Treasurer.

Thanks, Christine. Good afternoon, and welcome to Expedia Group's Financial Results Conference Call for the third quarter ended September 30, 2020. I'm pleased to be joined on the call today by our CEO, Peter Kern, and CFO, Eric Hart. The following discussion, including responses to your questions, reflects management's views as of today, November 4th, 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 our 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. 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. And with that, I'll turn the call over to Peter.

Thank you, Michael, and good afternoon, everybody. I hope you are well. We appreciate we are not the most newsworthy thing going on right now in the country, but thank you for spending a little time with us, and hopefully we can help give you some more color on our quarter. I'll start by saying, as I've said before, that travel generally performs in this period as everyone has expected, and in general, closings, openings, worries over the pandemic have the exact influence you expect. But we were pleased to see in the third quarter that with stabilizing travel trends and significant improvements on our cost structure, we were able to post markedly improved performance. um i'm going to get into some of the internal workings including the margin expansion on that which actually eric will cover in his remarks but first i just want to make two comments on the recent trends in travel uh what we saw over the third quarter was basically a stabilization as i said uh july was down in uh lodging rose bookings net of cancellations this was function of two things you may recall there was a slight increase uh in in uh covid cases being reported then and that had some impacts on travel along with burbo for us which had a very very strong uh june and and that strength uh subsided a bit it still was strong uh in july so july Again, lodging gross bookings out of cancellations was off about 65%, and in the months that ensued, that got to the low to mid 50% range down. So a reasonable improvement, a steady improvement, and that obviously helped with our third quarter results. Vrbo continued to be quite strong, as I said. coming off that June high, which was a lot of pent-up demand. But the third quarter was strong. We were up year over year, which for any travel business, of course, is terrific in the world we're living in. And we think it bodes well, both because we brought in a lot of new customers, and we believe those customers will have long-term value for us, and it's helping to land the Vrbo brand and making people more familiar with it. On the hotel side, North America, actually has been pretty steady and improving since July, but Europe for us and in general has been a little rockier. Cases were rising in the ensuing months, and of course in the last week or two we've seen lots of changes, and I'll get into that in a minute. So North America was generally positive through the period in conventional lodging, and Europe was slightly subsiding over that period. Air continues to lag lodging. Obviously, international air is very injured at the moment, but I think generally air has been improving. We've seen that across domestic air, and we think that people are getting more comfortable with the safety protocols and understanding the safety of flying, and we think that's good news. And obviously, the airline's all reported, and they have higher hopes subject to this third wave, of course, for the holiday season. The last couple of weeks, which we're all acutely watching, again, have had the impact that I would suggest that pretty much most of us would expect, which is to say Europe has been acutely hurt by it. But North America has remained pretty strong. It's down, but still showing relative strength compared to Europe, obviously. in our case that's a little beneficial given our mix of business towards north america but nothing can be known yet about how these trends will continue and of course if there are more closures if there are closures in the u.s in any way or if there are other lockdowns in europe that will have an impact on the overall business i want to talk a minute about market share because you may have observed In some cases, market share has been shifting around in weird ways during COVID, and for us, certainly that is true. There's a few things to note here. One is, obviously, alternative accommodations have been quite strong, not just for us, but for others. Obviously, that's been great news for Vrbo, and we've been a big beneficiary of that, but that has shifted lodging share significantly across geographies. We've also seen that there's a lot of unique use cases during the pandemic, much more not only domestic and not only secondary and tertiary market travel, but very purpose-driven travel, going to visit family, needing to do specific work, needing to go to one of these small markets. There's much less discovery going on in price shopping, and there seems to be more direct bookings in these smaller market independent hotels as people are calling to make sure they're open, make sure they're safety protocols, et cetera, are happening. And conversely, the places where we typically have the most share of strength, like big urban markets, international travel, international package travel, et cetera, have obviously been among the most impacted. So we have seen some share shift in that. And I want to reiterate, and I've said it before, that we have combined our performance marketing teams during this period, and we are doing a lot of plumbing work to retool our and we calibrate all the algorithms and everything we do so that we can optimize for multi-brand instead of brand against brand there's a lot of work going on it is significant effort but during this period while we do that and while there is so much uncertainty in the market we clearly have a bias towards profitability which you've probably seen in our numbers And the bias towards caution, given that cancellation rates and other things are very volatile and very hard to predict. So we are not chasing share that might be unprofitable or the brick wall we might run into. With closures and COVID cancellations, we're trying to be very prudent here while we rebuild everything on the theory that we will be at our end state by the time COVID is over or more precisely travel trends come back to more normal levels and we believe as i said before that once that plumbing is rebuilt and once we're ready for multi-brand that we will be able to not only maintain the growth share at similar or better profitability as we have had before moving on to what we are doing internally Again, I won't belabor this, but we're focused on several areas, one of which I've talked about before, but that is our brands and how we join those groups together. We're focused on brand differentiation, clearly showing and demonstrating what those value propositions are to the market and how they differ from one another. making choices about which brands we market where geographically and how we lean into all the marketing channels for different brands. And there's a lot of work going on for the coming out of COVID and through COVID brand marketing side. We're obviously leaning heavily into Vrbo. We think it's having a moment. All the research shows that it has gained share and it has gained awareness. And there's some very positive things going on with that brand. But we are also looking out and we'll start to leg in. We're obviously being cautious given the last couple of weeks news, but we will leg into our other brand marketing, including hotels.com. And Expedia just signed a long-term sponsorship with Liverpool, the soccer team in the U.K., that we think will be important to landing that brand and pushing it in the UK and EMEA particularly. And there's a brand new raft of creative coming out on the back end of the virus. So a lot of work going in there to be really clear on what we're doing, where we're doing it, and how we're investing behind each brand. We're also heavily interested and excited about the opportunity the b2b side and helping our supply partners we've talked before about our expedia partner services business we are a leader in this space and we feel very good about our opportunity here in fact we believe we can we can grow share here during covert as we help our b2b partners come out faster and and help more partners over time we have expanded our partnership on the on the supply side which Marriott in terms of their wholesale distribution partnership, and we are extending that partnership, similar partnerships for optimized distribution with other chain partners. And we think that's going to be a great opportunity to help our supply partners and also build our B2B business. So a lot of exciting things going on there, including extending a lot of the technological advances we've made on our platform, things we've talked about before, like our voice, our conversation platform, which we had externalized to some of our B2B partners. And now we've done that with our advertising platform, media services, MISO, we call it. So there's a number of places we've been able to take advantage of the improvements technologically in our B2B business. So lots more to go there. And finally, and perhaps most importantly, uh the underpinning technical platforming architecture that we have talked about that work continues it is big structural foundational work uh it is part of what helps us on the efficiency side we've had great wins on the cloud and licensing areas which we've talked about before but there's a thousand small wins across the across the business uh i'm getting out of the business of talking about little ones here and there and so they're really noticeable and impactful but the whole idea of putting that platform together, re-architecting it for the future was so that we could be agile, make these improvements that were wins across much more of the business, not just the brands, but the B2B businesses. And we're starting to unlock those things and obviously a lot more work to do here, but we're doing as much as we can as fast as we can while we suffer through COVID. And with that, I will turn it over to Eric, except to say, that we obviously can't control what's going on out there in the travel market or in the scientific community. We are hoping for all the same things you are in terms of vaccine and other treatments that will help us get through this. We do believe that people have been up until this recent wave getting increasingly comfortable with the idea of traveling. This will obviously have an impact this recent wave, but it will remain bumpy and unpredictable, and we can't control that. In the meantime, our teams are highly focused internally, and I'll just say I want to thank our teams that have done tremendous work in a very unpleasant environment. And really done a lot to help our customers, help our suppliers, help the company do better. And also, importantly, done some very hard work around how we manage our human resources and how we structure our organization. And unfortunately, we've had to make some significant changes. moves on people which is of course the worst work we do but uh the teams have done a terrific job and uh and i'm very optimistic about the work they're doing for the future and with that i will turn it over to eric thanks peter and thanks everyone for joining as well uh while we continue to see significant year-over-year declines in our business in the third quarter

Taking into account the impact of COVID is having on travel, our financial performance was better than we expected with over $300 million in adjusted EBITDA and reaching essentially cash flow neutral in September for the first time since February. As you know, and I've discussed in previous quarters, we are keenly focused on driving margin expansion, which largely falls within three buckets, resetting the fixed cost base, reducing variable cost of revenue, and increasing marketing efficiency. I'm going to touch on each of those individually. So first, on fixed cost basis, as you'll recall, we started the year targeting $300 to $500 million in annualized savings, and we were tracking ahead of that amount as of our last call. Since then, we've identified additional headcount reductions in certain areas and incremental opportunities across the P&L to drive efficiency in areas like real estate and software and licensing. We are now targeting $700 to $750 million in annualized run rate savings compared to our 2019 exit rate, and we've already actioned over $550 million. As you project this forward, please keep in mind we'll have annual increases in the remaining cost base and also make targeted investments in some areas. But overall, we've made great progress on fixed costs, and longer term, our platform operating model will position us to scale the business far more efficiently going forward. On variable cost of revenue, there are three primary areas we're targeting. First is on our payments platform. We're lowering our transaction fees and improving economics on our virtual cards that we use for merchant payments. Second is we're extending the conversations platform to handle more customer calls through self-service and virtual agents to lower our customer service costs. And we're reducing our variable portion of cloud spend with the optimization efforts we've already executed and will continue to do so. Given the variable costs or volume base, these savings will not be fully evident until we return to normalized operating levels. We still have work to do in these areas, but I wanted to give some context that if we overlay what we believe we can achieve on these initiatives on our 2019 business level, they would collectively deliver savings of over $200 million, which is incremental to the $700 to $750 million fixed cost savings that I mentioned previously. The third area of margin improvement is around marketing efficiency. As we've discussed, we expect a combination of operating at higher ROIs, the benefits of lower variable costs, and optimization across our brands to result in lower direct marketing expense as a percent of revenue over time. Turning to our Q3 results, the impact from COVID-19 continued to distort some areas of our P&L, but the bookings improvement that started in the middle of Q2 led particularly by Vrbo, and the progress on cost initiatives led to the improved profitability in the quarter. ADRs in our lodging business increased 8% due to solid ADR growth at Vrbo and a mixed shift of Vrbo, which carries significantly higher ADRs than hotels. Hotel ADRs declined double digits, but improved sequentially from Q2. Revenue per room night grew 14% in the quarter, also boosted by the next shift to Vrbo. In addition, with Vrbo's shift to merchant of record over the past year, we now recognize transaction fees as revenue, which added to the growth in revenue per room night. Do keep in mind that the fees recognized as revenue are largely offset by merchant expenses and cost of revenue. And lastly, on take rate, the product mix shift from air to lodging, as well as the incremental merchant-related revenue at Vrbo contributed to the elevated 17% revenue take rate in the quarter. Moving on to cost, the progress we've made on the margin expansion initiatives I've mentioned are becoming evident in our P&L. On our overhead costs, which include indirect selling and marketing, tech and content, and G&A collectively declined 29%. Excluding Trivago, about two-thirds of the overhead savings stem from our fixed cost savings initiative with the balance from temporary cost savings related to the current environment. On cost of revenue, they declined 32%. Two items impacted the year-over-year comparison. The first is incremental transaction costs related to Vrbo's shift to merchant of record, which are highest in Q3 due to Vrbo's seasonality. And then second, they were offset partially by a benefit from the disposal of bodybuilding.com. Excluding these two factors, cost of revenue was down 40% year-over-year, and as we noted, we expect deleverage on cost of revenue until booking volumes return closer to normalized levels. On direct marketing, we continue to see leverage on direct marketing expenses. We are prudently increasing activity in brand marketing campaigns and in performance marketing options where we see demand, but intend to remain disciplined and lean toward profitability. On our segment results, our retail segment performed significantly better than B2B. Retail benefited from growth at Virgo in a quarter and the higher mix of business in North America, which has seen stronger recovery than Europe. Meanwhile, the slower recovery in corporate travel impacting the Gen-CIA is a drag on the B2B segment. On cash flow and balance sheet, a reported free cash flow was nearly negative $1 billion U.S. in Q3. This driver was approximately 670 million working capital impact from Vrbo's merchant bookings, mainly due to a seasonal decline in Vrbo's deferred merchant bookings given the increased stays over the summer. But as we've noted, Vrbo's merchant bookings largely flows through restricted cash. If you exclude the working capital impact from Vrbo merchant bookings, pre-cash flow was approximately negative $325 million, as the seasonal working capital impact from the decline in deferred merchant bookings plus other cash items such as CapEx and interest more than offset our adjusted EBITDA in Q3. On deferred merchant bookings, they declined a total of $1.4 billion in Q3 to $3.2 billion or $2.5 billion excluding deferred loyalty. Vrbo was the biggest contributor to the decline as it ended Q2 with a relatively higher balance and the seasonality of its stayed room nights is even more related to Q3 than the rest of our business. In addition, booking windows have been significantly shorter than usual, which reduces our outstanding deferred booking balance. On our capital structure, as we noted last quarter in July, we opportunistically raised $1.25 billion in debt. Subsequently, we repaid the $750 million notes that matured in August, and used the funds raised in July to repay $1.25 billion of our outstanding revolver draw to reduce interest expense. We currently have $650 million drawn on our revolver. At the end of the third quarter, unrestricted cash and short-term investments totaled $4.4 billion, excluding the capital markets activity I just mentioned. Cash declined roughly $325 million, similar to our free cash flow, excluding the Vrbo merchant activity. And total cash was essentially flat in September for the first time in February. In addition, amounts held in restricted cash and other non-cash balance sheet assets covered nearly 60% of our deferred merchant booking balance, excluding deferred loyalty. Looking ahead to Q4 adjusted EBITDA, as you can imagine, it's a very difficult environment in which to forecast or predict the business, and also will result in a wider range of outcomes. With our current trading volumes and what we're seeing in the business, we do expect Q4 adjusted EBITDA to be negative. There are two primary factors that are contributing to it. One is Q4 is seasonally a quarter with lower revenue and profit, so it's just lower relative to our cost basis. And then number two, given the recovery in lodging bookings has essentially plateaued relative to the recovery over the summer months, we currently expect the revenue decline to be in a similar range as it was in Q3. In closing, this remains a tough environment for our business. and we're going to be dealing with the COVID impact for the foreseeable future. As Peter mentioned, we have clear priorities that our teams are making great progress on, and we're confident the actions we're taking now will benefit us through the recovery and over the long term. Operator, we're ready to take our first question.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Lloyd Wansley from Deutsche Bank. Your line is open.

Thanks. Two, if I can. First, just wanted to make sure I understood you correctly earlier. I think you said the core fixed cost savings target is now $7,750, but then you said you've been able to reduce variable costs, if I heard you right, which overlaid on 2019, for example, would be an additional $200 in savings. So approaching a billion dollars on kind of a normalized basis. So the question is just did I catch that right? And does it feel like you're getting to the kind of edges of the scope of savings there given the magnitudes we're talking about? And then the second one would just be as you work to bring all the marketing data from separate brands into kind of a consolidated – you know, the consolidated kind of new data storage for marketing. Is it early enough that you are in enough that you can see some early learnings, or is it too soon to say in any sense for the timing on when you guys will be in a place where you feel good about that transition? Thanks.

Peter, do you want me to take the first? Yeah, I'll take the first, you take the second. So on the first, yes, you did here correct me. So the 700, 750 is on the fixed cost basis. It's in relation to the three to 500 million that we spoke of earlier in the year. Of the 7 to 750, we've actioned 550 million of that. So we are feeling like we are making good progress against it. We, of course, continue to leave no stone unturned. And, you know, just as we continue to work through it, we get more costs that we've identified. We get confidence in those that we get better line of sight in. And then also, obviously, we've actioned a fairly large percentage of it. So, yes, it's the $700, $750 on a fixed cost basis, and then the incremental $200 on the variable cost of sales, which then approaches, to your math, approximately $1 billion in savings. Now, you mentioned it, but I just want to reiterate it as well. That is on the 2019 exit rate, if you will, so that those numbers presume that we're back in a range of That is approximately at the 2019 levels. And then lastly, there will be some offsets that over time, you can imagine inflation on contracts or increases in headcount costs, et cetera. So there will be some offsets, but we feel pretty confident in the numbers that we're going after and the teams are doing a great job. And I guess there was the last part of your question just around, are we reaching the edge of it? And I would say, you know, we're still flipping over rocks. But it's diminishing returns to a certain extent. So I would say the range that was shared with you is sort of the probability adjust score we think that we'll get.

Yeah, and Lloyd, I'll just jump in on the other question. I would say the answer is no, we haven't. It's not wired together yet in a way that we can see the early wins. I think we are. You know, getting closer, but it's not simply a matter of taking three different groups and putting them together. I've mentioned on previous calls that we've been also consolidating all our data and, you know, 17 data lakes into hopefully one soon. And all of these things, you know, are kind of linked together. So there's a lot of great work going on. I think we are getting closer and I'm excited about what we're going to be able to see when we can see the granular level of detail on profitability by customers, by CEOs, by everything, which we haven't had the granularity we'd like. And that has made us, I would say, a blunter instrument than we'd like to be. And we believe there's significant good guys from getting us all wired together. And that, again, is why we're willing to make a short-term trade to us to do that important work to get that done. But we haven't seen any early returns yet, and it will be a little while still.

Okay. Okay, thanks. Impressive. Impressive job on the cost side, guys. Thanks.

Action to achieve those numbers. So I just want to make sure as you're building those, And there's the lens of we need the volume to come back to see, particularly on the variable cost side.

And we are still some time to get to the 750. And the same thing on the cost of revenue.

All right. Yeah, that's helpful. Thank you.

Mead Khan from Tourist Securities. Your line is open.

Yeah, thanks a lot. Just a couple... Variable cost savings, and you named three areas. If I had to think about the... How would you stack them up or number them? And then I had a question on the gross booking side. So you talked about plateauing in October versus Q3.

Is that overall? There's three components.

There's the conversation platform, the cut-off savings, the credit card, and the variable. And I would effectively put them in that order to a certain extent, but I think the One that has the largest opportunity for us is on the conversation platform. We are historically primarily a phone-based contact center type of conversations with customers and with our supply partners as well. And with the technology that we've developed, we have the ability to move a lot of those either to self-service or virtual agent. And on the virtual agent side, you're able to get more, service more customers, if you will, per agent. And so both of those add leverage to the system. And we've really started the rollout into that. We've gotten good NPS scores. Rolling it out, making sure that we have more and more use cases. We get it embedded into the right flows, into the site, into the mobile apps as well. And variable cloud as well are meaningful. But I would say that those two are a distant second, if you will, after the conversation platform opportunity.

Yeah, and then I guess, Eric, you can follow on, and I'll do cover commentary.

Yeah, on the volume side, this recovery is going to be a series of many stories. And so, you know, if you take hotel, for instance, and I could say that that's been flat.

wave three that's occurring right now and something that we're looking at very closely. But as we say, it's plateaued. It's actually many stories underneath. And I think we're going to see the same world in one versus the other. And that's the performing.

Our numbers also include bookings from our B2B partners, in terms of our exposure. I would say thinking of it as a whole is probably the simplest way. Two weeks is probably good news, but there have been times when it's been something else. And, you know, we wish we had more China business since domestic China is doing it. quite well relative to the rest of the world.

Got it. Thank you, Peter. Thank you, Eric. Thank you.

Your next question comes from the line of Mark Mahaney from RBC. Your line is open.

Two questions, please. You mentioned market share, but in North America, do you see any evidence of material market share shifts amongst the different providers, Airbnb, Booking, Expedia? Secondly, You mentioned those three areas of cost efficiency, the fix, the variable, and then you talked about performance marketing. Could you just drill down a little bit more on performance marketing? I know you've had some pretty bold, robust plans for bringing performance marketing efficiencies forward. And then all of a sudden we had COVID. Is it clear to you that you've got enough evidence that there are newfound efficiencies in performance marketing? Is that still TBD to when we get real robust recovery in travel conditions? Just spend a little bit more time, please, on performance marketing efficiencies. Thanks a lot.

Sorry, Peter, are you there? Did we lose you? Oh, sorry, sorry, sorry. Your button was on. I'll jump in. I was saying I'll take the second one first, and then you can remind me of the first one. I would say on the performance marketing side, you are correct. We've talked historically about, you know, bringing more efficiency out of it, you know, getting our return on marketing better, more precise, et cetera. The problem was, I think that was to some extent wishful thinking because we did not have all the data, all the tooling, and all the approaches synchronized, if you will. We let our brands compete. That has some impact. The synergies that, you know, never were quantified but certainly existed. We did not have the benefit of all the data because each brand had its own data and on and on and on. So I am positively optimistic that when we have all the data flows right and we have all the algorithms rewritten for that, and when we have the tooling right, there should be significant upside for us in actually getting, bringing out that return that you've heard about over these many years. I think that is what is required, and it is real, and we will get to it. We have to do it, obviously. We haven't done it yet. But to otherwise... sort of mess around with the idea of taking one brand higher or lower doing this. It was a very blunt set of instruments. And I think, candidly, it was optimistic to think we could do a lot better. We certainly could have rung more profit at the expense of share. We certainly made some trades for share over profit historically. And we certainly might make trades like that in certain geos for certain reasons over time. But I think more broadly, the opportunity to just perform better is really unlocked by stringing all of this work together and really making it powerful. So I'm a total believer in it, and I think it will happen, but we haven't done it yet, so we have to do it. And then, sorry, Mark, your first question? I apologize.

Yeah, do you think that there's clear signs of any market? You brought up market share. Have there been any signs of market share shifts in North America?

Yeah, I think, well, definitely. You've seen alternatives get an outsized share relative to where it was. And we have been beneficiaries of some of that. Airbnb have been beneficiaries of some of that. um so you know the more concentrated you are towards the things you know the use cases that are working well uh i think you're gonna get share benefits um the more broadly i think you know share has moved around for a lot of little reasons and you know you're dealing with low volumes so um you know i look at markets where where share points move around, and then you look at the dollars related to it, and they're tiny, and you say, okay, it doesn't really matter. It could just be a bad weekend or a good weekend. But I think nothing we're seeing is portending to anything for the future for a long-term effect. I don't think there is anything that suggests anyone's winning or losing in a way that will give them long-term benefit. uh i think you know for us with verbo we believe it's really good for the brand and people are getting a lot of exposure to that use case and people are seeing how nice that vacation can be i don't think that means that people never go back to hotels but i think it helps us relative to airbnb so that's good for us um And I think beyond that, you know, we don't expect anything going on in any single geo or overall is really a long-term effect, which is partly why we're not overly exercised if, you know, we're not perfectly tuned as a machine on the performance marketing side because none of this is, you know, with levels down 50, 60, whatever, plus percent in certain markets, it's hard to think that any of that is sustainable. or meaningful for the long term. So that's been our approach.

Okay. Thank you very much.

Yep. Your next question comes from the line of Eric Sheridan from UBS. Your line is open.

Thanks for taking the question. Maybe two, if I can, following up on some of the topics talked about so far. On Vrbo, with the success you're seeing in terms of the demand and the new customers that are coming into the platform, is there anything to call out in terms of your go-to-market strategy, your marketing strategy that you might think portend for sort of longer-term, better returns on marketing standard margin structure in Vrbo as a business? And then on your brand strategy and sort of the realignment of the marketing platform, are you also at the same time thinking through whether you need to be in the same number of brands or have the same scope of brands on a multi-year view towards an eye of like managing a mix of sort of growth versus profitability?

Thanks, guys. Sure. So let me do Verbo first. Yes. Well, a few things. One, there's a lot of good work that's been going on over the last several months on Vrbo and its margins in terms of, Eric mentioned, what we've mentioned in the past, bringing it onto our payments platform. That's been good for us, saved us money with a third-party provider, allowed us to use the power of Expedia's payment platform, which itself is getting stronger every day and more efficient. So those kinds of benefits are there. work being done on the consumer process, on the fees and other things where we think we're under market. So I think we've had opportunity and we've found opportunity to expand our margins at Vrbo. But to your bigger question, we definitely think that we did not land verbal rebranding as strongly as we wanted to that there is opportunity now uh given that so many people are using it and the use case is so attractive right now and that we are concentrated in whole home which is like the most attractive part of the alternative market right now that uh we intend to and are are already pushing into a much more aggressive plot to broadly push the brand. We've turned the brand over in a few more markets in Europe just a few weeks ago, and we will keep pushing. But, yes, there's an opportunity there, and we think that is a place we want to be more bold, even in a down market, and we will continue to be pushing into that. To your second question about how many brands we have, yes, we have a lot. uh we certainly won't keep any we don't think make sense but right now we think the number of brands creates opportunity as long as we have segmented them and thought about them geographically etc to their greatest effect so my big push has been uh if we have a brand frankly that maybe none of you have heard of uh like what if in australia uh that is our strongest brand for the moment in Australia, then we need to concentrate on building that brand and not worry about whether it's Expedia or Hotels.com or anything else. Likewise, Vrbo has a different brand, a different company acquired in Australia that we're not going to change that brand because it's a strong local brand and we should push into that. We have historically had this record of, okay, we have an existing brand or we bought a brand. We're also going to push Expedia into that market. We're also going to push Hotels. And that kind of, I would say, took away the value of multi-brand because it didn't allow us to optimize for each one. So that's why we're doing the segmentation work. That's why we're trying to figure out what the proposition is for each brand. Some brands, admittedly, you know, we have historically run for more profit, whereas others we have pushed. We are looking at that whole panoply of options and driving the best result by country, by brand that we can. And that may mean we close some brands in some countries. That may mean potentially we close some brands full stop, but we have no intention right now to do that. But we are looking at the whole thing and trying to optimize for it all. But we think in general, having more gives us the opportunity to do more if we do it smartly.

Your next question comes from the line of Deepak Massavani from Barclays. Your line is open.

Great. Hey, guys, thanks for taking the question. Just a couple ones on Verbo. So first, can you talk about where you are currently in terms of, you know, merchandising Verbo's alternative accommodations inventory on Expedia and Hotels.com? Is that something that you're seeing, you know, benefits from currently? This is like, oh, this is a perfect time to kind of channel a Verbo inventory at a higher level into your other strong brands since consumers are, you know, looking for that type of inventory. And then second question related to it, how do you feel about the inventory levels on Virgo, you know, particularly given the strong demand that's there for alternative accommodations? Are there any markets where there is, you know, inventory pressure on Virgo at this time? Thanks.

Sure. So a couple things there. I would say on the latter part, No. We've seen some pressure over the summer, a little bit in a few markets, but we haven't generally seen literally no inventory. There's a few spots, but in summer, recall, was everybody heading headlong into the only alternative they were comfortable doing, so there was a really acute demand spike there. We do think there's more opportunity, there's certainly more opportunity, and I think we will... I think we will continue to try to grow our inventory. The question is, you know, and obviously anywhere we see demand, we will want to drive inventory. The question longer term is, you know, we have historically had a deficit in particularly in cities and those kinds of use cases. And that, you know, is a bigger strategic question for us. It's a place where Airbnb obviously has made great hay, although it hasn't helped them during COVID. Likewise, Bookings has done a nice job with city-based inventory and, to your point, a more integrated experience. And so sort of moving on to that question, the product is not great when it comes to surfacing vacation rental opportunities or alternative accommodations through our main OTA brands. We've been slow to get there, and it's not where we want it to be. It's definitely an opportunity, but we have found that there is a little bit of a conflict from the standpoint of people don't generally go to our alternative go to our ota brands for alternative accommodations not what they think of so even though it's there and present it hasn't performed perhaps the way you or i might think it would so i think we've got a combination of work we need to do on that front which is we can definitely make significant improvements in the product and how the how the content will surface how people see alternative accommodations and where they see it and and etc But also, we need to lean into it, and we need to market, particularly in places where our big OTAs have good reach and brand recognition and Vrbo does not. It may well be more sensible for us to lean into, you know, get a vacation home on Expedia as opposed to trying to introduce cold to Vrbo brand. So we are looking at all that. I would say, you know, dual work streams where we're trying to materially improve the product experience with alternative accommodations on the main OTAs. And then, you know, how do we market that and how do we test to push that into those markets? And I just say that while that seems like that would be job one and we'd be all after it because of the appeal of alternative right now, You have to keep in mind that we are re-architecting literally our entire technical infrastructure and platform, and some of these things have to, you know, sort of get prioritized. And it's in the works, but it's not the only thing we're working on.

Got it. No, that's helpful. Thanks so much. Yep. Thank you.

Your next question comes from the line of Justin Post from Bank of America. Your line is open.

Great. Thank you. My first question on hotel supply, are you seeing any inroads there or good deals on Expedia that you might not otherwise get? Any reason for consumers to come directly to Expedia versus other sites? And then secondly, thanks for the verbal update. I know you said it grew in 3Q. I'm assuming that's bookings and revenues. Can you give us a year-to-date update on Verbo? Thank you.

Eric, you want to try to answer this one?

I'm not sure we can. We have not shared or disclosed on the Virgo of the year. I would say we are healthily up for the year. We clearly had the spike in June just given the summer compression where people felt comfortable traveling. in Q3, let's call it, at more reasonable levels than June. But both revenue and gross bookings were up year on year, and I think you can extrapolate that to the start of the year as well.

Got it. And then on hotel supply?

Yeah, on the hotel supply side, we have, obviously, among the most competitive hotel supply in the world. There's not a lot of... discounting that is unique to the most well the hotels are discounting but i don't think they're discounting unique to us And I think, you know, what we provide, what Expedia provides, obviously, beyond just very good value, is a bunch of ways to find what you want, a bunch of ways to book multi-product, a way to do everything in one place. So, you know, there are a lot of offerings with HCOM, with L.com, you get, you know, you get very robust rewards. So there's other offerings that are differentiating for us on the brand side, including where we're trying to go with the product. to get much better personalization, help you make good value choices, et cetera. So I would say that is where we have to push our business. The differentiated hotel supply, even when we can get it, is usually not sustainable. It's not like something that is consistent. But we do want our hotels to be in a better position to optimize our platform. So we are doing an inverse, which is trying to give them better data uh so that they can be much more effective at pricing and moving the inventory they want to move on our platform so if that sweeps or or uh certain kinds of rooms or whatever like we want to be feeding them the inbound information so they can understand the market understand where there's opportunity to price up or down to gain to gain, you know, both rooms, et cetera. So that's where we're pushing, and we think that's going to make us a much more valuable partner for the suppliers. But I don't think it's going to be about did you get, you know, a $5 better deal than the next person. I think it's really going to be about how you can help them build their business. Great. Thank you.

Yep. Your next question comes from the line of Kevin Koppelman from Cohen. Your line is open.

Thanks a lot. I just had a quick follow-up on Vrbo. If you could comment on the seasonality patterns there that you're seeing in the Q4 and the current environment. Are you seeing any change there, any kind of continued shift into Vrbo, even as we get outside of what is typically their peak season? Thanks.

Yeah, I can take that one, Peter. Go ahead. Sorry, go ahead. No, no, go ahead.

Thanks for the question. Verbo is, I mentioned earlier, is much more seasonal than the rest of our business. So it's concentrated in the summer months, even more so given North America, given summer. So we would naturally expect to see it come down into Q3 and into Q4. And that is what we're seeing. It continues to be at healthy rates and continues to be a product that I think consumers are And the environment that we're in in particular I find compelling to be able to continue to travel. So you can think about the normal travel seasonality of booking in the early part of the year to stay in the middle part of the year and then less activity in the latter part of the year, just magnified in Vrbo relative to the rest of travel. Oh, go ahead.

I was just going to add that that is an area we believe there's opportunity in a lot of the advertising and marketing we've been doing with Verbo have to do with sort of staycations, if you will, in North America where kids may not be going to school, people may not be going to work, sort of take your life somewhere else. We think there is opportunity to break some patterns while this is going on, but that's just a COVID-centric issue.

Got it. And then Longer term, I think on a like-for-like basis, Vrbo's take rate has been a little bit lower than traditionally you would get with hotel. How do you see that playing out longer term in terms of revenue take rate?

Yeah, I'm happy to take that one. Thanks for the question again. There is a gap between us and Airbnb in particular, and it's something that we do feel that it gives us a bit of an advantage with consumers, but it is something that we are looking at. It is something that we test. We do think there are opportunities to increase monetization over time. But I would say there continues to be a gap. We are actively looking at that. We are actively testing it. And I do think that there is upside in our monetization over time. Thank you.

Your next question comes from the line of Jed Kelly from Oppenheimer.

Your line is open. Just on VRBO, just circling back, I mean, can you talk about, you know, the supply into the winter travel season? It seems like that's going to be premium supply and how you think you're there. And then just to follow up on virtual agent, I mean, what's your confidence level in virtual agent as travel volumes start to normalize? Like, can that, you know, just around handling of, you know, normalized volumes?

Yeah, so... Just on the Vrbo supply, I think we are well-equipped and well-equitted. I think, you know, we think they have lots of good value, high value inventory show up in lots of places people want to go in the winter. Do that for Thanksgiving, Christmas, et cetera. And we think there's an opportunity that those trips will be longer in duration than they typically are, given school holidays, et cetera, around the U.S. in particular. But We don't feel like we're deficient on the inventory side. That does not mean we don't have opportunity, and it doesn't mean we have parity everywhere on everything. But we think we have plenty of inventory to power a very robust, you know, winter season if the demand is there. So we're not worried about that. And, sorry, the second part was?

Cop it all around virtually, Joe. Yeah.

Yeah, the virtual agent. So I would say to you a couple of things. One, despite the fact that our volumes are down, given COVID, given cancellation rates, given all the issues that travelers have, I wouldn't necessarily assume that our servicing volume is proportionally down because we've had, you know, there's been a lot of traveler issues going on in the world that have created huge relative spikes in traffic. So we've been testing the conversation platform into all kinds of use cases, and we will ultimately have it in virtually everything we do, including our dealings with supply partners and other things. So it is being rolled out broadly. As Eric said, the NPS scores have been strong on it. People generally like to deal with the machine if they can and just get it over with and not have to talk to a person. It's not true universally, but that seems to be true for most people. We feel very good about it. So it's scaling up. It's a platform tool. It's the kind of tool we want to have in our company, across the company, that we have a platform technology that needs to be taught and taught different use cases and applied consistently. So we have high confidence in its ability to continue to roll out and handle as much traffic as comes in.

So no issues there. Thank you. Yep.

We will now take our final question. Lee Horowitz from Ethical ISI. Your line is open.

Great. Thanks so much for the question. Just one, if I could. Peter, you'd mentioned some of your North American suppliers seeing greater direct bookings, perhaps as people shop less. I'm wondering if you can comment at all on your mix of direct bookings through the quarter, how that may be trending, what you're seeing through this crisis, and perhaps your view on how sustainable those trends may be beyond COVID. Thanks so much.

Yeah, surely. I would say that what we've seen is, you know, mix-wise, we've mixed towards a lot more direct traffic. Bookings are up considerably. Direct is up considerably. But I would caution anyone from taking too much from that because we have been less aggressive in the performance market. It's a little bit of, you know, shelf blending, if you will, down to a mix that is more free, which, of course, has helped all our margins and helped us post the numbers we posted last quarter. But that is inherently in part because we have taken our foot off the gas in certain areas in terms of performance marketing and unprofitable performance marketing. So I think, again, as we blend back into normalcy, uh assuming we will be more proficient and have these tools we've discussed about on the performance marketing side etc uh my sincere hope is we can you know we can grow more share uh through those performance channels at attractive levels unattractive profitability and i believe that will will happen and if that's true of course we'll mix our way back to a more historical balance But the trends have been very good. It's a credit to our brand loyalty or brand's loyalty, I guess. And Apt has been very strong. And of course, we are putting lots of energy into improving the products for all those things and making them stickier because While it has gratefully not been a topic today, we do want to have more direct traffic, avoid the performance marketing pools as much as we can, and create recurring business. So that remains a core goal of us.

Hey, Peter, before we end, I just wanted to clean up one quick comment I made earlier.