Expedia Group, Inc.

You will find reconciliation 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 consistently visit our IR website for other important information. Unless otherwise stated, any reference to expenses excludes stock-based compensation. And with that, let me turn the call over to Peter.

Thank you, Harsha. Good afternoon, everyone, and thanks for joining us today. Before we get started with the update on the quarter, I'd like to formally welcome our new CFO, Julie Whalen, to her first earnings call. I'm excited to add Julie to our leadership team. During her 10 years as CFO at Williams-Sonoma, she helped drive significant growth in the business and in shareholder returns. I've also worked alongside Julie on our board since 2019, and she has chaired our audit committee since 2020, so she comes with a great sense of our strategic priorities and what we're trying to achieve. I look forward to the expertise she can bring to our financial org and across our entire company. Now moving into the quarter, we were very pleased with our record-breaking performance in the third quarter. We delivered our highest-ever quarterly revenue in adjusted EBITDA, the latter exceeding $1 billion for the first time in our history. We also delivered record third quarter, lodging gross bookings. Despite some macroeconomic uncertainty and some short-term impact from Hurricane Ian, travel demand has remained strong and ADRs remain substantially elevated relative to pre-pandemic levels. This quarter, we also further delevered our balance sheet, which put us in a position to resume buying back our stock, which we continue to believe is highly undervalued. Going forward, we expect to continue to reduce leverage and return capital to our shareholders. Now, moving to the B2C side of our business. As we've discussed before, our goal is and unmatched membership benefits to drive more engagement with our customers and ultimately higher lifetime value from those customers. And the two biggest drivers of lifetime value are improving loyalty membership and app usage. I'm proud to announce that in Q3, we reached an all-time high in active loyalty members, surpassing 2019 levels in August. New Expedia customers that became loyalty members in the quarter grew by And the rollout of our unified loyalty program, OneKey, is on track for next year, which will be a big catalyst for continued membership growth. Our app downloads continue to be strong as well. But even more important than downloads, app usage is at an all-time high, with quarterly active app users increasing nearly 40% versus 2019. And in the quarter, we continue to see almost two-thirds of all gross bookings result from direct traffic. We are also continuing to see leverage versus 2019 when we compare our all-up marketing spend against booked gross profit. And as a reminder, this spend includes direct marketing, but also discounting and loyalty spend, which are recorded as contra revenues. In terms of our marketing mix, we've been shifting towards longer-term channels, including app downloads and other methods to capture traveler intent outside of classic performance channels. These longer-term marketing investments, including loyalty and brand, are helping us build a larger base of long-term, high-value customers. But as important as marketing is, we are ultimately marketing a product, and the product has to be great. So most of our energy is going into product innovation to build the best customer experience we can with the most customer benefits to drive loyalty and consumer love. Among our recent successes, we have introduced exciting new product features, including price tracking, trip boards, and smart shopping. all of which are designed to engage customers, to inform customers, and to ensure they are finding the right product at the right time at the right price. So just to remind you, our flight price tracking feature, which we launched earlier this year, has been a great engagement tool. Since launch, we have seen exceptionally high notification open rates, which demonstrate the value that our customers see in this tool. This feature is currently live on our app in the U.S. and is on track for global rollout in the first quarter of 2023. In Q3, we launched trip boards on brand Expedia, where users can save their favorite lodging and activities and share and collaborate on trip details. This feature not only increased conversion, but has helped us expand our base of customers through sharing with family and friends. In the first two months since its broader launch, we saw Tripboard users have twice the repeat visit rate, they were twice as likely to purchase multiple products, and most importantly, they transacted at four times the conversion rate versus non-users. And as for Smart Shopping, which is a tool that really helps travelers comparing and choosing between available rooms for a given property, we began leveraging machine learning recommendations to better match our customers with the right products and options. This has led to better consumer outcomes, more premium product sales for our partners, and ultimately higher value transactions for us. In addition to these new features, during Q3 we finished the migration of the Hotels.com front end onto the Expedia platform, which allowed us to accelerate our optimization programs across our entire conventional lodging portfolio. While we were just getting started, the ability to test and deploy faster across one platform is already driving higher customer conversion, better customer experience, and improved sign-ups to our loyalty program. So overall, we've seen a great reception from customers on these new features and benefits, and for us, it has led to increased engagement, better conversion, and higher revenue per customer. I'm really excited about the success we have seen so far, and we have a bunch of new features in the pipeline and a terrific opportunity to roll out all of these features worldwide. Moving on to the B2B front, we remain bullish on this massive opportunity and excited about our expanding role in the travel ecosystem. Everything we are doing on the main technology stack for our B2C products will have benefits that inure to the B2B business, as well as a ton of work we are doing specific to the B2B business that will lead to new products, new partners, and new revenue streams. In the third quarter, B2B continued to demonstrate success with growth across our key product lines as we won wallet share with many of our existing partners driven by our expanded capabilities and improved product offerings. As excited as we are about the momentum in our existing business, we continue to build, pilot, and deploy new products and services for our open-world platform. This quarter, we signed the first pilot partner for our best-in-class fraud prevention product, and next year we plan to continue to deliver more new commercial products and services. I'm really excited about what's on our roadmap for B2B and the reception we've been getting from the industry. So to sum it all up, we delivered another record quarter of results, rolled out more product features and member benefits, and continue to add significantly to our member base and our app usage, all of which will be great for our future performance and build the base that we are looking for to grow in the future. So all in all, we're feeling really good about our progress, not least of all because of the phenomenal team of people we've assembled to drive all of our acceleration. And with that, I will pass it off to one of our newest

Thanks, Peter, and hello, everyone. I'm excited to be here and to be a part of the team. As you may or may not know, I've been on the board here since 2019, so I've had the opportunity to develop a great deal of respect and admiration for the leadership team and the growth strategies the company is executing against. And I know there is significant opportunity for growth and profitability ahead of us. And I look forward to helping the company to deliver against these growth initiatives and to maximize shareholder returns. As it relates specifically to the third quarter, we are pleased to see the continued momentum in our business. resulting in revenue and profitability to levels we haven't seen before, which clearly speaks to the early success we are seeing with our initiatives to drive long-term profitable growth. As far as the details regarding our financial performance for the quarter, similar to previous earnings calls, I will discuss our revenue-related and adjusted EBITDA growth metrics, both on a recorded and like-for-like basis. The like-for-like growth rates exclude the contribution from Agencia, Amex GBT, and the non-lodging elements of our Chase relationship. And as a reminder, on November 1st, 2021, we completed the sale of Agencia and our EPS business entered into a 10-year lodging supply agreement with Amex GVT. We believe these like-for-like numbers are helpful in assessing the performance of our business. It is also important to note that our third quarter growth rates as compared to 2019 were negatively impacted by FX headwinds of approximately 200 basis points to gross bookings and revenue and 300 basis points to adjusted EBITDA. Moving on to the gross booking trends in the quarter, total gross bookings were down 11% on a reported basis and down 2% on a like-for-like basis versus the third quarter of 2019. Total gross bookings for the quarter were impacted primarily by the industry-wide slowdown we saw in early July. However, since early July, we saw trends meaningfully improve, primarily driven by lodging bookings growth, our largest line of business, with continued ADR strength. Total lodging gross bookings, which were the highest Q3 on record, grew 5% on a reported basis and grew 7% on a like-for-like basis versus Q3 2019. The cadence throughout the quarter was consistent with the trends in total gross bookings. Lodging gross bookings on a reported basis was down 1% in July, and the rest of the quarter rebounded to up 9% in August and up 6% in September, which was impacted by Hurricane Ian. October was also impacted by the hurricane, but was still up approximately 5%. If not for the hurricane, both September and October would have been relatively in line with August. Overall, we are pleased to see strong demand expand into the fourth quarter as consumers continue to prioritize travel spend over other discretionary spending. And while it is still early in the quarter, we are seeing total lodging bookings for stays expected to occur in the balance of the year and into 2023 continuing to outpace 2019 levels. Moving to the key financial metrics in the P&L, starting with total revenue, revenue of 3.6 billion was up 2% on a reported basis and up 5% on a like-for-like basis versus Q3 2019. It was great to see another quarter positive and sequentially improving revenue growth. Our revenue margin also improved to 15% for the quarter, or up approximately 190 basis points versus Q3 2019. This revenue strength resulted from a mixed shift towards our lodging business, including our higher ADR VRBO business. Cost of sales in the third quarter was $451 million, which was down 17% versus 2019, driven by cost reductions primarily resulting from our divestiture of Agencia and from ongoing efficiencies across our customer support operations, resulting from the automation initiatives we have been implementing over the past couple of years. Direct sales and marketing expense in the third quarter was $1.5 billion, which was up 8% versus 2019, which includes spend with a longer-term return profile to drive more profitable future growth. As a reminder, we are focused on acquiring high lifetime value customers. As a result, we are allocating more marketing dollars on channels that have a longer-term return profile, such as brand awareness, loyalty, and paid app installs, which, as Peter mentioned, are already beginning to drive growth in loyalty members and app usage. Our sales and marketing expense is also impacted by an increase in commissions paid to our partners, which is a direct reflection of the accelerating growth we continue to see in our core B2B business. Overhead expenses were $569 million, down $144 million, or 20% versus the third quarter of 2019. We continue to remain disciplined in our cost structure and are always looking for ways to drive more efficiency. Overhead expenses slightly increased from the second quarter, approximately $19 million, or 3%, primarily associated with our ongoing focus on investing in top talent across our product and technology teams to help accelerate our various platform initiatives, which we believe will ultimately drive future top-line growth and margin expansion. These results, with another quarter of strong revenue and expense discipline, allowed us to deliver our highest quarter of profitability on record. Adjusted EBITDA grew 18% versus third quarter 2019 and grew 20% on a like-for-like basis to $1.1 billion. The adjusted EBITDA margin was nearly 30%, an expansion of approximately 420 basis points over the third quarter in 2019 on a reported basis. Free cash flow was negative $1.2 billion in the third quarter and over $200 million improvement over prior year due to higher EBITDA levels. As a reminder, the third quarter is a negative free cash flow quarter due to the seasonality of the business. Year-to-date, our free cash flow remains strong at a positive $3.1 billion, more than double where we were year-to-date in 2019. On the balance sheet, we ended the quarter with strong liquidity of $7.1 billion from both our unrestricted cash and our undrawn revolving line of credit, which provides us with ample access to cash to operate the business. This quarter, we continue to focus on de-levering our balance sheet, improving our leverage ratios, and solidifying our investment grade rating. As a result, in September, we redeemed an additional $500 million of our senior notes as part of a tender offer, resulting in a total repayment of debt and preferred equity of $3.4 billion over the last 18 months. These balance sheet actions, along with our significant growth in adjusted EBITDA, has enabled us the additional flexibility to begin returning capital to shareholders again. As such, we repurchased approximately 200 million or 2 million shares through October and have approximately 21 million shares remaining under our existing authorization for future repurchases. As we move forward, given our strong liquidity, our confidence in the business, and the fact our stock continues to be highly undervalued, We expect to further deliver the balance sheet and continue returning capital to shareholders in the form of share buybacks. In summary, our third quarter results demonstrate some of the early wins we are starting to see in the transformation of the business and the success of our strategic growth initiatives. These early wins give us confidence that there's a huge opportunity in front of us to drive long-term profitable growth and to maximize shareholder value. And I couldn't be more thrilled to be a part of this company and this leadership team as we unlock this significant opportunity for growth together. And I look forward to getting to know all of you in the travel investment community soon. And with that, I would now like to open the call for questions. Thank you.