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