Expedia Group, Inc. (EXPE) Q2 2018 Earnings Call July 26, 2018

Good day, and welcome to the Expedia Group Q2 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Senno, Vice President of Investor Relations.

Good afternoon and welcome to Expedia Group's financial results conference call for the second quarter ended June 30, 2018. I'm pleased to be joined on the call today by Mark Okerstrom, Expedia Group's CEO and President; and Alan Pickerill, our CFO. The following discussion, including responses to your questions, reflects management's views as of today, July 26, 2018 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, 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 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 depreciation expense and all comparisons on this call will be against our results for the comparable period of 2017. One additional item to note, starting last quarter, we are presenting financial results both for Expedia Group in total and excluding trivago in order to provide increased transparency on the underlying performance of our transactional businesses. You'll find reconciliations for non-GAAP measures excluding trivago in our earnings release. Finally, a reconciliation of adjusted EBITDA guidance to the closest corresponding GAAP measure is not provided because we are unable to predict the ultimate outcome of certain significant items without unreasonable efforts. These items include, but are not limited to, foreign-exchange, returns on investment, spending and acquisition-related or restructuring expenses. As such, the items that are excluded from our non-GAAP guidance are uncertain, depend on various factors and could have a material impact on the GAAP results for the guidance period. And with that, let me turn the call over to Mark.

Thanks, Michael. As we sit here halfway through the year, I am pleased with our progress thus far. We've delivered solid financial results while continuing to push forward on several critical initiatives aligned with the three strategic themes I outlined late last year, becoming more locally relevant on a global basis, becoming more customer-centric, and speeding up the pace of execution and innovation. And although it's still early days in our transformation, I am pleased to say that we are making great strides along our new path. Looking forward, though our industry remains highly dynamic, we are increasingly confident in our execution capabilities and are optimistic about the opportunities they can unlock for us in this $1.6 trillion market. Turning to the second quarter, gross bookings increased 13%, revenue grew 11% and adjusted EBITDA was up a very healthy 18%. Overall room nights grew 12% year-over-year and smoothing of the impact from the shift in Easter timing, first half total lodging stayed room nights grew 14%. HomeAway continued to deliver strong results, increasing stayed room nights 35% in the first half of 2018. All told, we have great momentum heading into the back half of the year. Our brand teams are making good progress in better optimizing direct marketing spend and that was evident in the balance between healthy room night growth and profitability in the second quarter. We plan to keep leveraging our data-driven approach to marketing optimization, while at the same time continue to aggressively drive our global expansion agenda. As we strive to become more locally relevant on a global basis, we continue to build momentum on the property acquisition front, adding over 60,000 new properties to our global lodging portfolio in the quarter, excluding HomeAway listings. That number includes a further acceleration in the pace of…

Thanks, Mark. We, again, posted healthy top-line trends in the second quarter with lodging revenue, including both hotel and HomeAway up 14% on stayed room night growth of 12%. As we expected, total lodging room night growth decelerated from the first quarter, primarily due to a headwind from the shift in Easter timing and difficult year-over-year comparisons, which were, in part, driven by more aggressive marketing spend in last year's quarter. Excluding HomeAway, revenue per room night increased 1%, compared to average daily rate growth of approximately 5%. That gap was over 100-basis-points smaller than last quarter and we expect that to continue to narrow slightly in the second half of the year. HomeAway grew both gross bookings and stayed room nights 33% in the quarter, with revenue increasing 32%. Transaction revenue growth remained robust at over 60% and accounted for over 80% of HomeAway's revenue for the first time in the second quarter. Subscription revenue declined 25%, roughly in line with our expectations for the year. HomeAway showed nice leverage on overall costs and posted very strong adjusted EBITDA in the quarter, almost doubling year-over-year to $78 million. In addition to lapping some of last year's hiring increases, the cost leverage was primarily related to slower growth and marketing expenses than recent quarters. After building out our performance marketing function last year, we continue to refine and improve our capabilities and gain more data-driven insights. With a fully-functioning marketing platform and team now in place, we are also better able to optimize our spend to appropriately balance top-line growth and profitability, which we did nicely in Q2. I would note that as we continue to refine our performance marketing capabilities at HomeAway and comp against the ramp-up in marketing investments over the last year, we do anticipate some continued…

Certainly. And we'll take our first question from Justin Post from Bank of America Merrill Lynch. Justin Post - Bank of America/Merrill Lynch: Great. Thank you for taking my questions. I have two. First, on marketing spend, is the industry getting more efficient? And is that helping your overall returns on marketing? How are the ROIs going? And how do you feel about that right now? And then, second, HomeAway, it looks like bookings did decelerate. You called that out. How are you choosing between spending on marketing to try to drive that bookings growth versus driving profitability? Thank you.

Great. Thanks, Justin. In terms of marketing efficiency, listen, there has been no secret that some of the large players in the industry, ourselves included, have been pulling back, and I think cooling off some of the auction heat that may have been taking place previously. I would also say that just from an Expedia Group perspective, the level of sophistication that we've got now in terms of really applying to modern data science techniques, leveraging a lot of the capabilities that we've got by moving a lot of our data infrastructure up into the cloud, has just allowed us to be a lot smarter in the way that not only that we're bidding for traffic, but also in the way that we're able to really understand what traffic is incremental. So I think it's a combination of a couple of things. I think also that we're in an industry where the real big brands, the brands that consumers care about and have got experience with, are starting to mean something. And I think that, as a result, can lead to more traffic shifting over to direct-branded channels, whether they're through apps or whether as a result of branded marketing. In terms of HomeAway, listen, I wouldn't read too much in the slowdown in gross bookings or Alan's guidance that we would expect some deceleration. I think, largely, it's a comps issue and we're trying to maintain a balanced approach. And I would just put your attention to the long-term opportunity. As a reminder, the phase one of HomeAway that we're in right now is really about transitioning the business from an offline listings business to an eCommerce business. We have not been focused on international expansion. We have not been focused on acquiring new listings, although we have acquired hundreds of thousands since the acquisition. And since last quarter, we had 100,000 new listings sign up with us, that's really going after that. And phase two is really about that. It's about international expansion. It's about property acquisition. It's about moving into the urban opportunity. And that's all ahead of us. So we feel very comfortable with trajectory of HomeAway and really what you see here is just the team tuning its muscles around making the right trade-offs here in phase one. Justin Post - Bank of America/Merrill Lynch: Great. Thanks, Mark.

You're welcome. Next question, please.

Moving on, we'll take our next question from Eric Sheridan from UBS.

Thanks so much for taking the question. Maybe two, if I can. Alan, for you, calling out there on the cloud. I want to understand, investors ask us all the time sort of how we should think about cloud spending versus benefits from cloud migration playing out as we move through this year and into next year. Is there any framing you can give around the way investors should think about that? And, Mark, a good solid commentary on the pace of investing in inventory. How should investors be thinking about the investments in inventory leading to either higher marketing efficiency, better conversion, faster growth in terms of room nights? What should we be watching for, for how that plays out over the next sort of 12 months to 18 months? Thanks, guys.

Yeah. Sure. Eric, thanks. I would say on the cloud side, I mean, we've talked a little bit about some of these data points already. If you look at our data center CapEx spend in 2016, it was about $180 million. It went down to about $50 million in 2017, and that's the actual decline. We are, obviously, avoiding additional CapEx as well. I've talked to you in the past about the fact that before we had made the decision to migrate to the cloud, we were on the cusp of having to make decisions around building out additional data centers. That's all been taken off the table and avoided as is. And so, we are already seeing, I think, pretty good trade-offs in avoided CapEx relative to what we're spending for compute in the cloud. On top of that, there's just a ton of operational benefits associated with it. The speed is much better, latency reduced, the ability to deploy code very quickly, the ability to test algorithms and roll out algorithms is much better in the cloud. The disaster recovery is much, much better with cloud, where if you have a – we already had a situation where we had a brownout on Brand Expedia, we were able to roll it out into the cloud, seamlessly roll it back once the issue had been resolved. So there's a ton of operational benefits as well, but we like it both from a total cash flow over time perspective. And then, from a product perspective, we think it's a no-brainer.

Great. And then, I'll take the one on inventory. There's basically a two-leg benefit here that you see. Step one is as you acquire the new properties, you're entering new auctions and performance marketing channels. Generally, what you see in that phase is you see an acceleration in room night growth for the markets that you're going after. The second phase in it, however, is once you start to get better density of properties, you do see higher repeat rates. You do see more customer loyalty. And with that, comes, generally, higher conversion rates and better marketing efficiency. We're not expecting to see that second phase in a particularly noticeable manner here in year one. It is something that in years two and three we would expect to see particularly in, of course, our priority markets that we're focused on this year.

Thanks so much.

You're welcome. Next question, please.

Moving on, we'll take our next question from Brian Nowak from Morgan Stanley. Brian Nowak - Morgan Stanley & Co. LLC: Great. Thanks for taking my question, guys. I have two. Just going back to the supply initiative, I wanted to talk a little about sort of the incremental investment from here. You talked about sort of pushing into your target market and seeing good early results. Can you just talk us through a little bit sort of the – what you think about incremental investment in the supply initiative as you go into 2019? And then sort of the similar question around Away, and Away profitability is very strong in the quarter. Mark, you talked a little bit about kind of phase two. How should we think about the timing of when you decide to push into phase two and start investing more in HomeAway?

Great. Thanks, Brian. In terms of incremental investment in the supply initiative, I would just say that the way that we're operating based upon the results we've seen so far is really the new normal. As opposed to taking a more distributed approach to our supply acquisition and a more metered approach, I would just say the expectation from here on in is we will take a more concentrated approach, not only to just supply acquisition but this whole thing is under the umbrella of this concept of locally relevant on a global basis. So on our wave-one markets, the big push here is around acquiring supply, because we do believe that we had a reasonably large gap versus the next competitor in these markets. But as we look out into future waves, in some cases, it's not going to be a supply centric. In some cases, it's going to be a more concerted effort and maybe not incremental resources, but a concentration of resources into things like translation, payment types, content, et cetera. So, as we look out into 2019, we're going to be looking through the back part of this year around what are going to be our priority markets, where are we going to invest, and based upon those decisions, it'll dictate where in terms of focus areas – in terms of functional focus areas the investments will go, whether it's again property acquisition or one of these other levers. The good news, though, is that of course we've already got a pretty significant investment sitting here in our 2018 base, and so this one-time big step-up, even if we do another significant investment next year is going against what will be at that point easier comps. And secondly, with the step-up, again, the big benefit, as I responded to Eric, is really in the second year. And so the expectation is that we'll start to see some of the benefits of our big push this year flow through in the second year, and that will, in effect, start to fund some of the investments that we'll be making in future waves. In terms of HomeAway and timing, listen, I think we're going to do what I think we've done historically, which is try to strike the right balance. That's what we are doing here in 2018 and I think we'll see as things go through we haven't done our 2019 planning yet, and again the HomeAway team is very focused on getting phase one here nailed and they're doing a great job, by the way, and then as we move through the back part of this year, we'll start to think about what comes next and what parts of phase two do we really start getting serious about in 2019. Brian Nowak - Morgan Stanley & Co. LLC: Great. Thanks.

You're welcome, next question, please.

Our next question will come from Mark Mahaney from RBC Capital Markets.

Great, thanks. I think, Mark, you mentioned that room night growth accelerated in some of the priority markets. Can you tell us what learnings you're getting from those markets that you could apply to the non-priority markets to get room night growth to accelerate there, or why is room night growth – what did you do to get room night growth accelerated in those markets? Was that just the lodging procurement? And then that HomeAway EBITDA margin you had in the quarter, that looked pretty positive, is there something that tells you that you want to sustain it at that level? I know you're bouncing as you just talked about growth and profitability there, but do you feel like you've reached, after a lot of investment, a new level there that you could work up from there? Thank you.

Great. Thanks, Mark. I'll take number one and turn number two over to our trustee, CFO. In terms of room night growth acceleration, listen, we talk a lot about the supply acquisition side of this, but of course in these markets, we're also making sure that we've got content right, payment types right, et cetera., it is really the whole package. The investment, though, is in these markets pretty concentrated into supply. But, of course, we're also just trying to build just much more significant cross-platform operational rigor so that we can shrink the time from a time when a property gets added to the time that it's live on the site and the time that it's actually marketed in metasearch and search engine marketing channels. So it's really a whole host of things that we're doing. This is built, by the way, on the back of years of hard work in terms of getting our supply acquisition machine into shape, getting our customer experience into shape, being multi-currency, multi-language, building great landing page development capabilities, and of course developing much better online marketing capabilities. And really what we're doing now is just executing across the board on an end-to-end basis, all of those discrete basis, functions in a much more coordinated and, I'd say, operationally rigorous way.

Yeah. And then, Mark, on HomeAway, I think, first of all, I would just remind you it's a hyper seasonal business, so I wouldn't necessarily look at the margin in one quarter and kind of use that as a proxy for ongoing margins. The vast, the big chunk of adjusted EBITDA that they will earn will come in Q3, which results in some fluctuation, seasonal fluctuations in margins throughout the year. I don't think we're set yet on exactly what the normalized margin ought to be for HomeAway. I think we're happy with the margin they delivered in 2017, we're happy with what we expect that to look like in 2018. We think that the opportunity is such that we can grow the top line at healthy rates. Use some of that to invest in the business, deliver healthy profits and profit growth, but some of that's going to depend on specific decisions that we make as we move forward. As Mark mentioned, as we get through the 2019 planning, we'll look at some of these initiatives and make some decisions about what the right investment levels are. We have talked historically about how we think there is probably no reason that a business like HomeAway couldn't deliver EBITDA margins that look something like the EBITDA margins that you see at a hotel-only OTA, but I wouldn't put a pin in that. That's a directional aspiration and we'll see how things pan out over time. But we – to be honest, we don't spend a ton of time tearing it apart because we're confident that we will deliver healthy margins for HomeAway.

Yeah. And I would just add, too, that, again, we're not focused particularly strongly on margins. We're really looking to drive adjusted EBITDA, free cash flow, and adjusted EPS growth for a long period of time and we're really trying to strike the best balance to get a sustained growth rate to be deliverable over the long-term.

Okay. Thanks, Mark. Thanks, Alan.

You're welcome. Next question, please.

Moving on, we'll take our next question from Deepak Mathivanan from Barclays.

Hey, guys. Thanks for taking the questions. Two questions. First, as you guys optimize the performance marketing channels over the last several quarters, have you noticed any meaningful changes in the booking window or whether it's expansion or contraction? And how does that play into the stayed room night growth during the last couple of quarters? And then the second question, Alan, were there any FX impact on the guidance? I know the U.S. dollar significantly reversed course. I was wondering if the guidance would've been better if not for the U.S. dollar appreciation. Thanks.

So, Deepak, just on the booking window piece, we do see some ebbs and flows, less so associated with our performance marketing movements and actually more so just in terms of the mix of our business. And there's a couple of mix factors that move it around. I think, first of all, HomeAway generally has a longer book to stay window. They're generally looking at larger homes, and even when they're not larger homes, they're taking bookings into places that don't have 20 rooms or don't have 100 rooms, they simply have one. So people are more likely to book that further in advance so that they make sure that they get the place that they want to stay. So as the mix of our lodging room nights between HomeAway and the core lodging business ebbs and flows, you could see a lengthening of the window, particularly at certain parts of the year. The second thing is that as we push more into the domestic markets in a number of these countries like the priority markets that we're in right now, it does open up the opportunity for local travel to happen on a much more significant basis of our overall mix. And in many cases, local travel is more last minute booking. It's weekend trips, for example, where you're driving somewhere or you're taking a short flight as opposed to the overall mix of our business that has traditionally skewed a little bit more to the international side. So just a couple of things to keep in mind. Again, we're not seeing anything super significant right now, but, over time, we can imagine these types of things take hold. Alan, do you want to take the FX one?

Sure, yeah. Deepak, so on FX, yeah, I mean, I think you're right to point it out. The fact is that FX has been a helper in the first part of the year here, although the dollar has strengthened more recently. And so the amount that we estimate it to help us for full year 2018 has come down relative to when we guided earlier this year. It's one of many factors considered as we put the full forecast together, but you're right to point out directionally, that it has become less of a tailwind than we thought. And at current rates, it looks like it kind of crosses over here kind of July-August timeframe, and becomes kind of neutral to a slight headwind in the back half of the year.

Great. Thanks so much.

Next question, please.

Moving on, we'll take our next question from Kevin Kopelman from Cowen & Company. Kevin Kopelman - Cowen & Co. LLC: Great. Thanks a lot. So you had a pretty substantial 400 basis points headwind to the core hotel revenue from lower revenue take rates. Can you call out the key factors driving that headwind? And it looks like it's going to improve a little bit in the back half, but how do you see it over the longer-term? Thanks.

Yeah, so as I said my prepared remarks, the gap between – in the hotel business itself, or the business – I should say the business excluding HomeAway, the gap between ADRs and revenue per room night was still there. It was a narrower gap than we had last quarter, although the comp got a little bit easier. I mean, we've said essentially we are seeing that gap in the 200 to 400-basis-point range. As a reminder, the factors that contribute there are when we have taken – historically, when we have taken changes to our margins and annualizing those changes as we add new properties in new markets and we add them at the revised lower rates, that can blend the mix down as well, although that we look at as being new business. So still all gravy. The loyalty programs are an impact, a weight on revenue per room night. We think of it largely as a marketing channel, but the accounting rules require us to show it as contra revenue, so that has been there as the loyalty programs have grown. A few other factors play in there. FX can play in. Expedia-funded discounts and coupons, refunds and cancellations, those things all play into it as well. Ultimately, for this year, we're comfortable in the 200 basis point to 400 basis point range. And then, as we move forward into 2019 and beyond, we'll kind of reassess the factors that are contributing there. The one thing I should say is that we do get questions from time to time about whether just an ongoing push by hotel chains to try to get lower commission rates or economics will play into this. We're not looking at it like that. We reset our commission rates purposely over the course of the last number of years. We think we're currently at very fair rates and giving good value for the economics that we get. And so, we don't see that as something that will pressure those rates going forward. Kevin Kopelman - Cowen & Co. LLC: That's great. Thanks so much, Alan.

Next question, please?

Next, we'll hear from Lloyd Walmsley from Deutsche Bank.

Thanks. I have two on the add-on program. It looks really interesting and very differentiated. So just starting with the first one, it's probably early, but what are you seeing in terms of just early uptake there? Are you seeing a lift in attach rate on hotel? And do you have a sense for how much of that is incremental versus just a shift in how people are booking? And then, I guess, the second one on the same topic would be as you run these programs, we understand they're mostly net rate programs, but wondering if that's a drag on take rates at all or unit economics, and maybe give us a sense of what percentage of hotel partners are participating in that program. Thanks.

Thanks, Lloyd. Listen, it's early, but early indications are very solid. We're seeing higher customer attach rates and essentially higher room night growth than otherwise we would have seen. So we think that it is at least in part incremental, but it's really hard for us to get conclusive on that. What we do know, which is what you called out, it's a highly-differentiated product. It blends two wonderful things about brand Expedia, which is the convenience of having everything all in one place, so if you change plans where things move around, you've got one, quote, travel agent to deal with and they can solve all your problems. And, secondly, it does result in overall lower cost of travel, which, of course, travelers absolutely, absolutely love. In terms of take rates, we don't see this as a significant driver of deteriorating unit economics. We're not going to get into the specifics of how all of this works. I would just say that we've had a very successful package product for a very long period of time, and this is an alteration on the traditional package. In terms of hotel participation, listen, one of the things that hotels, lodging partners generally love about the Expedia Group platform is that it is incredibly targetable. And this gives our hotels the ability, to in a very specifically-fenced way, to target customers not out in the open but to target customers that we know are going to a certain place with a special deal. And so, the hotels that participate, which is the vast majority of them, I think are finding it to be a great program, just like they have our traditional package program. Generally, when hotels get booked with a flight or something else, you get lower cancelation rates, you get longer lengths of stay, and that's generally a great thing for our hotel partners. So, again, it's very early. We like it because it's differentiated both on the customer side of the platform and on the partner side of the platform and it delivers great value to both of them. So we're optimistic about what it can do for us.

Thank you.

You're welcome. Next question, please.

Moving on, we'll take our next question from Jed Kelly from Oppenheimer. Jed Kelly - Oppenheimer & Co., Inc.: Great, thanks for taking my questions. The HomeAway transaction commissions that continue to improve, are you starting to see a higher mix of paid-per listings and, if so, is that being driven more by individual owners or professional property managers? And then I guess on the comment in the release that travelers on HomeAway grew over 40% year-to-year, is there any way to unpack that on how many of that growth was driven by members with new profiles?

Yes, we'll try to be helpful, Jed, I don't think we're going to get to the level of detail that you're looking for. I think, on the listings, it's fair to say that we are seeing – in terms of actual listings, we're seeing an ongoing shift from subscription to pay-per booking that's been going on for a while. I think I mentioned last quarter, it remains true now that in spite of that we still do have a disproportionate SKU of bookings to the subscription products, and that is to be expected as we – or listings as we move through this transition. And so that's kind of ongoing. I don't have the data on – and I'm not sure we would share it, either, on how many of the members were members with new profiles. I don't know, Mark, if you would...

Well, I would just say that we continue to believe that on both sides of the platform we're getting, obviously you can see it, we're getting many more hosts sign up to the platform based upon our traffic growth and our transaction growth. We think we're getting significantly stronger traveler growth as well. Jed Kelly - Oppenheimer & Co., Inc.: And then I guess just to follow-up on the property manager comment on the outside growth or the SKU, I mean, how much of that is being driven by property managers, say, with over thousands of bookings on HomeAway – thousands of listings on HomeAway?

Yeah, I don't think we want to get into that level of detail. Yeah, I mean, I would just say that, generally, the large property managers are the ones that are generally more likely and were some of the earlier adopters to online bookability and to essentially commission-based pay-per booking listings with the individual owners, particularly have large homes, generally preferring or sticking around for the longest time on the subscription model. But it really is a pretty dynamic environment right now with the changes that HomeAway is making to their marketplace, the incentives are constantly shifting, and the performance that property owners and property managers can get from being in the pay-per performance model are increasing over time, and so we expect to continue to see a continued shift across essentially all host categories. Jed Kelly - Oppenheimer & Co., Inc.: Thank you.

You're welcome. Next question, please.

Moving on, we'll take our next question from Naved Khan from SunTrust.

Yeah, thanks a lot. Just a couple. So was there any impact from the World Cup or GDPR on the room nights? And as we think about the back half, what's the right way to think about room night growth given that the first half was maybe a bit noisy? And then I had a follow-up.

Yeah, so we've talked about this in the past. I mean, when you have big events like this, it could be the Olympics, it could be the World Cup, sometimes it's natural disasters, there are changes in travel patterns. We do think when you have an event as large as the World Cup, you do see a situation where a decent percentage of the population is preoccupied with that event and so you may see overall booking slow a bit during a certain period of time, but usually we would expect that to come back in the form of pent-up demand, and ultimately, we don't think it has anything to do with kind of the longer-term trajectory of the business or anything we're doing strategically. And I should say, too, when you have the event in a particular region or country, in this case, Russia, you do see a pickup in travel into that location as well. As far as thinking about room night growth in the back half of the year, we're not going to get into the specifics. I would say there are a couple of things to consider. One of them is that we will continue with this effort to optimize marketing spend. Now I want to be clear that the effort there, first and foremost, is to root out marketing spend that we can test for and decide is not incremental. And if we're right, then when we don't make that spend, a decent portion of that volume still comes to us. Because by definition what we're trying to do is take out spend for room nights we would've gotten anyway. We probably do lose a little bit around the edges though, around the margins. So we think that could have an impact on room night growth. In terms of the contribution from priority markets, I think Mark mentioned earlier, first and foremost, we're going to look for the result of room night growth in total and for domestic travel in our priority markets and just monitor how that's impacting those markets. At what point it gets big enough to move the needle on the whole business, we're not entirely sure, but we're not counting on a big impact in the back half of the year. And then the last factor I would probably throw out there is just, as a reminder, we had some tough storms in the back half of 2017. That negative impact was more skewed towards EBITDA than it was room night growth because what happens in those storms is you end up with a lot of cancellations and refunds you're giving customers for room nights that you booked and you actually had in the system. So bigger impact on profits than it had on the room night growth, but could provide a minor tailwind in the back half of the year.

Okay. That's very helpful. And then just a quick follow-up. So, I guess, can you give us some additional color on the move to Progressive Web App for Brand Expedia just on the hotel side? How much of the traffic was on this PWA previously and what are the benefits that you may have seen?

Sure. So we've now essentially got the whole hotel piece or at least hotel shopping for Brand Expedia on the Progressive Web App in terms of mobile. And we are really ramping it up through the first – actually really throughout the quarter. And really the benefits, the biggest benefits we see are largely in respect to just the speed. So particularly, in places outside of the U.S. where we had latency issues, speed is significantly faster. And then it really is just, it's a coding framework which allows us to really start to get closer to giving app-like experiences in mobile web experiences. And so that's harder for us to measure now, but it is something we expect will give us benefits over a long time to come. And we are now building more functionality and will be building more of the other lines of business and more of our applications onto the PWA app as well. So we can expect that to give more benefits for us as we move through this year and into 2019.

Great, thanks a lot.

You're welcome. Next question, please.

Moving on, we'll take our next question from Peter Stabler from Wells Fargo securities.

Thanks for taking the question. A couple on brand, if I could. Mark, in the past you've talked about the power of the Expedia brands and the percent of traffic and bookings that come to you directly. Just wondering if you're able to offer a little color on how that might vary across the family on the core brands versus the regional brands versus HomeAway and VRBO and whether you're seeing any impact in the market from the increased brand marketing efforts of some your close competitors. And then just a quick follow-up on the cloud. You spoke earlier about the operational benefits. Is there any way to offer us any sort of quantification on improvement you might expect in terms of conversion, whether it's five bps here, 10 bps there, or any sort of quantification that could help us understand these operational benefits? Thank you very much.

Yeah, you're welcome. So in terms of the power of the Expedia brands, again, the brands in our portfolio, we think, are really amongst, if not, the world-leading brands in travel, many of them, such as Expedia, Hotels.com, have literally had billions of dollars of brand spend, spent to build up customer loyalty in addition to just giving customers great experiences over the long history of those brands. There is variations across the family and a lot of the variation really comes down to how aggressively we're pushing international expansion, because in the more mature markets, where you've got a fully locally-relevant product, you really generally have a significantly larger portion of your business that comes to you directly. So think about Brand Expedia U.S., Hotels.com U.S., Orbitz U.S., Travelocity U.S., are really getting the lion's share of their business through direct and branded channels, such as direct type-in or the mobile applications, or e-mail, et cetera. But as you move further away from your more mature markets and you get into markets, which you are sort of in a growth phase for or new markets, the percentage of direct branded traffic goes down and really the game is to build locally-relevant products in each of these markets. And when you do that, really start to push more of that traffic to come to you via branded channels and more direct. I'd say in terms of competitor activity, it is not a major change. I mean, we have seen, over the course of the last particularly five or six years, various players come in and out of television advertising. If you take the U.S., for example, you saw over the course of the last five years trivago come in very significantly, essentially backed by us. You saw Orbitz and Travelocity…

Thanks for the color, Mark.

Yeah. You're welcome. Next question, please.

Certainly. And, again, to remind everyone that we ask you to please limit yourself to one question. Moving on, we'll go with Douglas Anmuth from JPMorgan.

Thanks for taking the question. Mark, I know you talked how the marketing landscape has cooled just the auction market kind of coming down on performance. Do you think this is the new normal, going forward? And recognizing that you're focused on optimizing efficiency, has this also created some opportunities, though, for you as well? Thanks.

Well, it's hard to say in the travel industry whether anything is the new normal. It's always dynamic. It's always been dynamic. I think the one thing, of course, that has created opportunities for us is just our increased capabilities that we have in terms of just bidding more effectively, measuring incrementality with more precision, again, largely driven by the data-driven approach and really massive data sets that we're being able to manipulate and compute up into the cloud environment. And I think that's something that is the new normal. I think the question is, of course, with all of this is you can build competitive advantage, but to sustain it you've got to keep moving. So we're not standing still, we're going to continue to evolve our capabilities in this area. And assuming we do that, I think we can hold this as the new normal. But again, what happens in the overall competitive environment and what happens in these auctions, it's really hard for us to tell at this point.

Thank you.

You're welcome. Next question, please?

Moving on, we'll take our next question from Heath Terry from Goldman Sachs. Heath Terry - Goldman Sachs & Co. LLC: Great, thank you very much. This is maybe a little bit along the same lines as Doug's question, but to the extent that we've seen your competitors pulling back on their marketing spend, there's generally been a more negative impact to bookings growth for them here this quarter, bookings growth were essentially flat and you guys still saw a pretty significant improvement in sales and marketing efficiencies. So is there something different about the strategy that you're using or the way that you're thinking about this in terms of how you're benefiting from this sort of system-wide reset in ROI targets? And then just if you could maybe update us on any progress that you're making in terms of your work with hotels on leveraging their direct booking pricing models as potentially something that's either having an impact on the business one way or the other or something that you guys could potentially incorporate into some of your channels over time?

Thanks, Heath. It's hard for us to compare what we're doing to what are competitor's doing because, unfortunately, for us, we don't know what they're doing. But I can tell you a little bit about what we're doing and why we may be in a different spot. I think, first of all, when you think about hot advertising auctions, it's generally in auctions where you've got a couple of players who have comparable products, if you will, and they start to bid against each other and that can create situations where you sort of destroy industry economics. I think there could have been some of that happening in markets where both us and our larger competitor and maybe some other players, we're both relatively strong. We're trying to find, of course, these auctions and situations where that type of activity isn't incremental to us and where, hey, the customer were to come back to us together. But the good news, bad news story for us is that there are very few markets where that's the case. I mean, we have not built locally-relevant product offerings in that many markets yet around the world. If you look at the total number of hotel and alternative accommodations properties out there, there's millions of them. We talked about us having, this quarter, 750,000. So we've got a whole bunch of, what I would call, just global expansion to do outside of our core mature markets so that as we pull back or find marketing spend, which is not incremental because we've already got such powerful brands in a lot of these markets and customers are going to come to us anyways, we are able to pull that back, not have a significant impact to bookings. But at the same time be able to…

You're welcome. Next question, please?

And we'll take our final question from Mike Olson from Piper Jaffray. Michael J. Olson - Piper Jaffray & Co.: Hey. Good afternoon. You talked about the priority markets for new inventory. What are those markets where you're adding and saw acceleration? I guess, I could take a guess, but if you could say more specifically. And then, looking beyond alternative accommodations, what's your appetite for other booking products, like tourist attractions, et cetera, that maybe just there's too much fish to fry in hotel and alternative accommodations to bother with that at this point?

Well, Mike, I can't tell you my secrets, so I won't tell you. But I bet you, you've got a pretty good guess. In any event, we're happy with the progress there. I would just tell you that there are important markets out there. It's the beginning. It's the wave one. We'll be doing other markets around the world in future years. So for competitive reasons, I'm not going to call out exactly what they are. In terms of appetite for other products beyond hotel alternative accommodations, listen, it's a voracious appetite. I mean, we have been the ones that have been building and investing this multi-product platform for years. This year, we'll spend approaching $1 billion just on the P&L and our tech platform investments. It's what we do. And in doing that, we built the world's travel platform, and yet we're still early days in terms of building real liquid marketplaces across all the lines of business. Yes, we are investing right now and making sure that we've got a locally relevant product in the hotel and alternative accommodations marketplace in priority countries, and we're going to move that around the world. But sure to follow, we're making sure that we do that as well in those priority markets across air, car, activities, cruise and we love the cruise business. I think we're just at the very early, early stages. So we've gone through a multi-year investment cycle. I think we're uniquely positioned to build incredible marketplaces not only in standalone basis, but also increase the sophistication within which we can cross-sell and create network effects across all of these different product categories. And I think if you look out over the course of the next two to five years, that's going to be an increased focus for us. It's something that our customers love and you can see a piece of it already with add-on advantage. It's also something that our partners love as well. Michael J. Olson - Piper Jaffray & Co.: Thank you.

You're welcome.

And at this time, I'd like to turn the conference back over to Mark Okerstrom for any additional or closing remarks.

Great. Thanks. Well, firstly, I just want to thank everyone for listening in today. Secondly, I just really want to thank the entire Expedia Group team. In a very short time, we have made some very significant changes in the way that we operate at Expedia Group, and I am more impressed than ever with our incredible employees around the world. I know I speak for all of them when I say that we are so excited about the enormous opportunities in front of us. With that, I'll turn it back over to the operator.

And at this time, that will conclude today's conference. We do thank you for your participation, and you may now disconnect.