Good day, everyone, and welcome to the Expedia Group Q2 2023 Financial Results Teleconference. My name is Colby, and I'll be the operator for today's call. [Operator Instructions] For opening remarks, I will turn the call over to SVP Corporate Development Strategy and Investor Relations, Harshit Vaish. Please go ahead.

Welcome to Expedia Group Q2 2023 Earnings Call. I'm pleased to be joined on today's call by our CEO Peter Kern and our CFO Julie Whalan. As a reminder, our commentary today will include references to certain non-GAAP measures. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in our earnings release, and unless otherwise stated, any reference to expenses excludes stock-based compensation. We will also be making forward-looking statements during the call, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions, which are subject to risks and uncertainties that are difficult to predict. Actual results could materially differ due to factors discussed during this call, and in our most recent forms, 10-K, 10-Q, and other filings with the SEC. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. Our earnings release, SEC filings, and the replay of today's call can be found on our Investor Relations website at ir.expediagroup.com and with that, let me turn the call over to Peter.

Thanks, Harshit, and good morning, and thank you all for joining us today. Our travel demands remain robust, and we are pleased to see our continued execution result in solid performance for the second quarter. As gratifying as those results are, I am even more excited with the progress on our platform transformation journey, having just launched one key in the U.S., and continuing to be on schedule of our verbal migration. We are particularly pleased that we were able to meet our second quarter financial goals while electing to move some marketing spend from Q2 to Q3, where we believe it can be better spent in support of the launch of one key and our accelerated growth in the back half of the year. Industry trends have remained broadly consistent with the first quarter. And North America and Europe has remained stable with stronger growth in APAC and Latin America. Travelers worldwide continue to favor shorter stays in urban locations versus longer trips in sun and ski destinations. As far as pricing, both hotel and vacation rental ADRs are holding up year-over-year, while international cross-border airfares are stable. U.S. domestic airfares have seen some declines as capacity increases. Rental car rates continue to decline as inventories normalized from compressed levels last year, resulting in more attractive prices for consumers and more transactions. Overall the data continues to show that travel remains a top priority for consumers. As I explained before, our B2C strategy is to build products, features, and customer propositions that attract and help us retain valuable customers, and to move those customers into loyalty membership and app usage to amplify their value. These travelers drive higher profits per transaction and higher repeat rates, ultimately leading to higher lifetime value. In addition, as these customers have a higher…

Thanks, Peter, and hello, everyone. Our second quarter results with record revenue and EBITDA demonstrate that our strategic initiatives are working and that we have a significant opportunity for long-term growth and profitability. And it is this ongoing strength in the business that enabled us to deliver another quarter of accelerated levels of share repurchases, resulting in approximately $1.2 billion repurchased year-to-date, our largest buyback to date. Before I jump into more of the details, I wanted to remind you that going forward, all financial comparisons will be on a year-over-year basis. It is also important to note that our second quarter 2023 growth rates, as compared to 2022, were impacted by FX headwinds of approximately 40 basis points to gross bookings, 170 basis points to revenue, and 530 basis points to EBITDA. We also saw an approximate 80 basis point headwind to the EBITDA margin. Now, as far as our performance this quarter, let's begin with our gross booking trends. Global gross bookings of $27.3 billion were up 5% versus last year, and in line with our mid-single-digit top-line guide. Growth was driven by lodging gross bookings, which were up 7%, and were the highest second quarter on record. The strength continues to be driven by our hotel business, which achieved record gross bookings primarily from strength in our B2B business, as well as in brand Expedia, which saw a 15% increase year-over-year. This was partially offset by our Vrbo business, which was impacted by the shift in consumer demand toward urban markets and shorter lengths of stays, as well as the impact from Vrbo's tech platform migration that we mentioned on last quarter's earnings call. However, given the size and strong growth of our hotel business, we were pleased that we were able to deliver record lodging bookings…

[Operator Instructions] Your first question comes from the line of Eric Sheridan from Goldman Sachs. Your line is open.

Thanks so much for taking the question. Two if I could. In terms of forward booking trends, I understood on the commentary broadly about the summer, but the industries obviously had some tailwinds from elements of longer booking dynamics as we've come out of the pandemic. Are we seeing more normalized behavior with respect to forward booking, or is there anything to call out either in consumer behavioral geography in the forward booking trend that you'd want to highlight? And then in terms of thinking about the exit philosophy for Vrbo, is there a way to quantify elements of what One Key mix and easier comps might mean in terms of reacceleration at Vrbo at the end of the year? Thanks so much.

Sure. Thanks, Eric. I'll take a crack at both of those. I'd say broadly, yes, I mean, what we're seeing is a relative, what I would call a relative normalization of seasonal trends and booking trends. There's obviously some dynamics around what is opening or more newly opened, and what has been open for a while, as we've seen, for example, this summer with lots of travelers going to Europe, where maybe they didn't go last summer, Asia opening up, and more travelers going there. Of course, parts of Asia like China still don't have full airlift out of China. So there's still differences. But I think broadly in terms of the effect of like COVID, last year we had COVID first quarter, and then the second quarter was a huge quarter because things opened up after Omicron. That's kind of normalized out, and I think in terms of booking windows, booking trends, they're moving around a little bit, but by and large, they're normalizing to what I would call generally pre-pandemic patterns. So I think that's the main thing. In terms of geo, again Asia will open up more. There will be more travel there. We're seeing APAC and LATAM growing faster because of those things opening more recently. So that's certainly a trend. But again, I think that normalizes once it's been opened, call it a year or so. And then as far as Vrbo goes, very hard to quantify. And obviously, the switch, the sort of consumer switch from Vrbo or vacation rentals generally to more hotel started happening in the back half of last year and earlier this year. So that's sort of a macro trend as far, so we'll be lapping some of that now as we get into the back half of the year.…

Great, thank you.

Your next question comes from a line of Lee Horowitz from Deutsche Bank. Your line is open.

Great, thanks. So you talked about some of your marketing spend getting pushed from the second quarter to the third quarter in order to support the One Key loss. Can you maybe help us better understand how this may have impacted the bookings and nights in the second quarter relative to your expectations, and then maybe relatedly, can you talk a bit about how you think lodging share pays throughout the second quarter and what your expectations are for share as you move through the balance of the year and you drive that extended growth across a number of your properties?

Hi, it's Julie. I'll take the first one. Yes, I mean, obviously, I'm sure there was some impact to the second quarter as a result of our decision to shift the marketing. At the end of the day, our top line was hitting our expectations and obviously what we had told the street about mid-single digits, and so we thought the right choice of action was to take that spend and to get the best return to tie it nicely with our One Key launch and also to set us up for the back cap. So we made the decision to take that money and push it into the third quarter. But sure, could we have spent more and maybe gotten some incremental nights and bookings in the second quarter? Sure, but we thought this was a better path to take.

And then I think the share point plays into that. We feel like we've been holding share in our core markets. We've been gaining some of our outside North American markets, outside U.S. markets in a number of places. So again, as Julie said, it's all sort of placed in together, which is we're trying to, of course, drive the best return on our investments. We thought there was better return when we had the extra hook of One Key. We felt like we were holding in places and we could have spent the money to drive some more bookings into Q2, but we felt like the return was better, literally waiting weeks, many weeks to push it into July when we were launching with One Key. So it's a small movement in the scheme of things. Of course, it moves around margins a little bit and it moves around. Yes, it moves some bookings from maybe Q2 into Q3. And yes, it moves some even though maybe into Q2 instead of Q3. But in the scheme of things, we're trying to spend that money as efficiently as we can. We launched One Key as soon as we could basically and it would have been nice to obviously launch it sooner, but this is when we could get it out the door and we think that there's better returns attached to that hook and getting customers in, getting them engaged in One Key, getting those return dynamics and direct dynamics where we want them. So that's why in the scheme of things, not huge dollars or anything, but we moved a little money and sure, that cost us a little bit of [GBV] and revenue in Q2 and will mean a little bit of extra spend in Q3.

Helpful. Thank you.

Your next question comes from Kevin Kopelman from TD Cowen. Your line is open.

Great. Thank you. As you think about the acceleration that you're looking for in the third quarter, the issue is being focused in U.S. and B2C given the One Key launch or is it going to be more broad-based?

I think it's a number of things. As I mentioned, Kevin, we are seeing good growth as we push back into some of our foreign markets where we saw opportunity and that's been going reasonably well. In the scheme of things, obviously, U.S. being so big for us to accelerate broadly, we also need the U.S. to accelerate, so that's a combination of a number of things which are, yes, One Key starting to kick in, but Q3 is early days, right? One Key is a loyalty program designed to incent return, certainly attractive in terms of make your first purchase and get value, but I don't think we're not expecting massive impact in Q3 from One Key. We're just seeing good acceleration in the market. Q2 comps were tough because of last year, and as Julie alluded to, some of the strange insurance dynamics and other things normalize out in the Q3 as we lap that and Q4. The acceleration is really just a continuation of, we see strong demand. We built this base of consumers that we continue to build on that are repeating more and having behaviors we like a lot more, and that just keeps building, and One Key enhances it, and that's really the core of it, but it's not just in the U.S. The growth is also outside the U.S., but I will say a lot of the acceleration certainly is coming from B2C as opposed to more acceleration in B2C.

Great, thank you. And then could you just touch on the CapEx expectations for the rest of the year and drivers there? Thanks.

Yes, I mean, we've seen CapEx come up even in the last quarter, and we had expected this. We are putting more into capitalized labor in order to hit our strategic initiatives this year. Obviously, there's a lot of transformation that we have still been pushing through this year, i.e., One Key launch and the verbal migration and things like that, and so literally this is just a function of higher capitalized labor to complete out these projects, and as we go forward, we don't expect it to be as much in these elevated levels as we will, and we'll start to get the return from these projects that we're putting in place.

Great, thanks, Julie.

Your next question comes from the line of Justin Post from BOA. Your line is open. Your next question comes from the line of Mark Mahaney from Evercore ISI. Your line is open.

Okay, let's see, I want to ask two questions. One, the travel bot or the ChatGPT experience that you have on the site, what have you seen so far in terms of, I think there's enormous potential here. I just don't know how long that takes and whether there's just a ton of tweaking that needs to happen in order to really get it right. How do you feel? What have you seen so far in terms of engagement? Has it kind of led to increased conversion rates, and if not, maybe it's way too early, what's a reasonable expectation for when you could actually see that. And then the other thing is on One Key, now that you're rolling it out, can you set up an expectation for when you think we'll see kind of the impact that has, I know it's just recently launched, but is that something you take one quarter or is it one full year before you really can tell how successful that's been in terms of a deeper engagement and maybe attracting newer users? Thank you.

Yes, thanks Mark. So on ChatGPT, I agree with you. It's interesting. It has a ton of promise. It is early days. We've been studying it. I won't say it's moved the numbers in any way that you could see. And the customers who like to engage with it like to engage with it, lots of customers don't need it or don't choose to. I think the future though lies much more in a better integration, which will come as more large language models come out. And we figure out how to embrace them with our own data. Right now they kind of live separately and you can do a bunch of discovery with the tool and then save things and come investigate with us. Over time, there will be ways, I think, where we're not sharing your personal data with chatGPT, but where we can combine their capabilities with our data and use that to serve you better. So this is going to be an evolution of experience. That's why I mentioned we've been learning, we've been studying where customers get stuck, what they can't seem to do. Some of them don't exactly know how to engage or start a conversation. So there's a lot of work, not just by us, but by the industry around the large language models on prompts and other ways to get customers through it more easily. And I think all of those pieces will add up to more impact, but the impact now is basically the minimum, since you wouldn't see it in the numbers. As for One Key, I think that's more of a gradual build. Obviously, there's a couple of different things you're looking for. There's the appeal of having a strong, broad, flexible, best-in-class rewards program to attract customers and…

Okay. Thank you very much, Peter.

You bet.

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

Great. Thank you. Sorry about the drop-off. Could you talk about the customer and the B2C customers? It seems like you're trying to improve that quality base, and maybe the street doesn't see it in the numbers yet. What gives you confidence there? Are you seeing higher repeat rates? You said you had some leverage in the quarter. Was that timing, or is there some real improvement you're seeing on the B2C side on marketing leverage? And then one question on One Key. Starting to see some discounts on the site, do you think that allows you to better compete against booking? And who's funding those? Thanks a lot.

Maybe I'll take those in reverse order. Take the sort of factual ones first. So yes, one of the pieces, not that relevant necessarily for the investment community, but that is important for the consumers, because we've expanded our member discounts as part of this One Key launch, so that where we used to have one level, basically, of member discounts, we now have, blue, silver, gold levels, and there are more discounts for higher tiered members, and that is part of the value proposition that we give to our consumers. Those are funded by our supply partners. It's a way for them to get to better and better higher value travelers, and that is an important added feature that we launched with, and we will be expanding over time. So that is certainly, booking has had tiered discounting from some of their supply partners, and that is a feature we have not had before, so I think, yes, that is a good competitive way. I will say that we also think we have those discounts on more valuable hotels that are worth more value to our customers who are more valuable. So, which goes to your first question, which is, yes, we have confidence that we are building a pool of more valuable customers, in the large part because we are getting them into more valuable states, so as we get them into membership, as we get them into app, and we follow how those cohorts perform, we know those cohorts perform for lots of good and thoughtful reasons, much better. So a member, of course, sees the member discounts, the loyalty rewards, and so forth, and app member does even more typically and comes back more directly, all good things. So as we build up those pools, and our blend of total consumers and total transacting consumers is blended towards these pools that have higher peak rates, higher LTV, et cetera, we are essentially building a bank of more value that is left to play out in the future. So that is why we do have confidence in what we are doing there. Obviously, we have done it particularly well as I talked about before in Expedia US, now we are doing it in more countries, now we are working on doing it with Hcom, and then expanding that to more countries, now we will be able to do it in Vrbo as well. So that is why we say we have a lot of runway left here, but we can see it happening where we have intent, where we have spent according to that, where we have driven the product, moved more customers into membership, and signed up into the app. Every step in that journey creates more value for us.

Great, thank you.

Your next question comes from the line of Lloyd Walmsley from UBS. Your line is open.

Thanks. Anything you can share in terms of just early feedback, going back to One Key on maybe cross shopping, and then, changes in conversion rates at Vrbo, now that you have loyalty, anything interesting there, and then as part of that, anything in terms of cross currents from Hcom customers, given they are getting eluded there as part of One Key, would love some help understanding that.

Sure. I think the first one, the short answer is, it is too early. I mean, we have converted more than $70 million, don't have today's count, but over 70 million consumers into the One Key program. These are existing members, and also new members that have joined in the last few weeks. We've had lots of new members join in Vrbo. We've been able to activate, a customer who may be using Vrbo and may have been a customer of one of the other brands a long time ago, but now they're in a program where they'll see the benefit in the other brands. So we've done a lot of, sort of, the core work of getting customers aligned, getting their accounts right, getting their accounts consolidated if they had reports in different places, which was complicated. So we've made huge progress. It's too early to say that, there's not enough signal yet to say, well, people are, doing acting, behaving differently and doing lots of different things. And even in Vrbo, there's a lot of cross currents and a lot of the time is launching One Key. And a lot of our Vrbo customers, even though they're getting a great benefit, they're, they're having to understand, like, wait a minute, there's a membership program. What is it? Do I sign up to it? So there's the usual issues of launching something new and a product experience that people are accustomed to, but we've seen a lot of great response and, millions of sign-ups and I wouldn't say necessarily massively incremental in terms of the velocity, but just a lot of people engaging with it and signing up. And then as far as HGMP goes, yes, we have, there is a little bit of noise from our heaviest users…

Thank you.

Your next question comes from the line of Naved Khan from B. Riley Securities. Your line is open.

Yes, hi. Thank you. Just a couple of questions. Peter, I think you, I heard you say you might have gained share in some of the international markets and I'm a little intrigued what may be driving that. Any kind of commentary there would be helpful. And then I will follow up.

Yes, I think it's really just intent on our part, as we reacted to COVID and we started rebuilding things, in a number of markets in the rest of the world, we back down spend a little bit and we got a little more conservative as we wanted to build our new mousetrap, as it were. And I think now that we have greater confidence in all the things I've talked about, be it membership, the value of app downloads, and so forth, we've been driving back into a number of international markets where we think there are good returns and we've been seeing nice returns. Now, these are modest changes in the scheme of things. There's nothing dramatic happening, but we're just seeing, what I call low hanging fruit and opportunity for us to move back into some of these markets in a smarter way. So, again, not a huge story there, just that, we feel good about share in the U.S., we feel good about what we're seeing, early signs as we push back into these international markets. So, on share , we're feeling reasonably good with more on this.

Understood. Yes. The follow up I had is just around advertising and we are hearing some commentary from other players about maybe some increased competition, maybe in Europe or other markets. I'm curious if you're seeing anything there or anything to say about Google's new ad format. I think they recently introduced proper understanding of their main search.

Yes. I think on the last part, you're talking about vacation rentals. Is that what you're talking about?

No, it's still, there's hotels, but I think this introduced a new format into the main search.

Yes. I mean, I would say, look, we're working with them and working in the auctions around the world all the time. I don't think we've seen anything particularly different in terms of inflation or not in the auctions. I mean, the auctions have been inflating over the last several years. And of course, they're highly competitive, particularly amongst the biggest of us. But no, I don't think we've seen anything that's of any concern, et cetera, over what's happening in terms of pricing in those markets. And of course, we are trying every day to find better opportunities, higher long-term return opportunities to invest our advertising dollars, be it in app downloads or other kinds of environments, shall I say, that encourage those behaviors, as opposed to just Google auctions. So I think we're probably not alone in that, but that's been a core part of our strategy as we've tried to get away from simply trying to buy transactions and getting much more focused on what consumers we buy, getting them into the right state in the app, and so forth. So that's an ongoing journey for us, but that's the direction that journey will keep going on forever.

Got it. Thank you, Peter.

Thank you.

Your next question comes from the line of John Colantuoni from Jeffries. Your line is open. Your next question comes from the line of Jed Kelly from Oppenheimer & Co. Your line is open.

Great. Thanks for taking my question. Just two, if I may. Just one, just the airlines that recently called out weaker domestic trends. Is there anything where there's just softening underlying demand or is that the pattern shifts that you kind of mentioned earlier? And then just thinking about your back half brand spend. Can you just talk about the efficiencies you plan to get on being able to market all your brands under one loyalty program versus marketing them all separately? And are you going to continue to market each of your key brands separately? Thanks.

Sure. So I think, yes, as far as the airlines go, I mean, we have seen, you've never heard that pricing is softened a little bit in domestic air in North America. There's a little bit more supply. And yes, there's been high demand for international. So I think it's been mostly a shifting of patterns. It's not total consumable dollars. Obviously, in every industry, not everybody participates the same way. Some are more domestically focused. Others have bigger international exposure. But in terms of consumer demand, I'd say it's broadly been steady and good, and there hasn't been -- there are places that fall and other places that rise. But overall, the consumer has been acting healthy and strong. So I don't think there's anything to see there other than moving, moving geographical trends and consumer trends in terms of what they're looking for. As far as brand spend, and again this isn't, I wouldn't get focused on the word brand spend, as we conventionally think about it, it is spend against our business, which could be brand spend, it could be performance marketing, it could be a lot of things. When we say we wanted it to support the One Key launch, it's not in the sense of like we needed money to buy TV spots, it's in the sense of we thought our money with the hook of One Key out the door would be more efficient as we drove consumption, be it through Google auctions or be it through digital advertising of various kinds or television. So that's what we were talking about. As far as how we're going to spend, we have a campaign out now that's very focused on One Key as a concept and the three of them coming together. But our intent is, at least for now, to keep marketing each brand, they will then, they will all have a touch point to One Key and make clear that they are, sibling brands and part of one big umbrella loyalty program, but they will each have their own brand identity in terms of what their consumer proposition is and how they deliver it to the consumer.

Thank you.

Your next question comes from the line of John Colantuoni from Jefferies. Your line is open.

Great. Thanks for taking my question. Sorry about the drop earlier. I want to talk a little bit about the One Key rollout. Can you help us understand what's changing from a loyalty perspective across each of the individual brands and how we should think about the sort of collective impact to take rate from these loyalty changes and perhaps some sort of other potential merchandising changes related to the rollout. And can you also help sort of talk a little bit more about the puts and takes of the acceleration in bookings growth? Next quarter, there's, the bites or slowdown in the system marketing spend and maybe some pull forward in the last quarter into Q1 from Q2. But I'm also curious if you've started to see an inflection point in some of the smaller brands where, they've gotten small enough to not have as material an impact on the overall business. Thanks.

A lot of good questions there. I would say starting with One Key, basically I think the simplest way to think about it is One Key is closest in what it offers to what the Expedia program was, the brand Expedia program was historically in that you earn points, the points are worth money, you can spend the money. Some things have changed. I mentioned the member discounts. You now have silver and gold member discounts. There's added benefits for those silver, gold, platinum members that they get. But it's most similar, so that's, I would say, the least change in the sense that you could already use that currency across many products and things. You couldn't really use, you couldn't use it in Vrbo, but that was the one missing piece. So maybe the way to think about that is you've added Vrbo to the pot and those consumers can now benefit when they want to rent a vacation rental. Hotel.com, many of you are familiar, had a very rich program for the super user. If you book 10 rooms, you get a night free, and that was a very valuable benefit for a super user, but the vast majority of users didn't get a benefit because they never stayed enough nights. So we're trying to make that program much more attractive to all users while still keeping it very attractive to the super user for all the points I went into a moment ago as to why they would find incremental value there. And again, you could only use that on hotel product. Now you can use it on anything. And that's a lot more flexible, a lot more vast, and you can do a lot more with it. And then, of course, Vrbo had nothing. Now Vrbo…

Very helpful. Thank you.

Our final question comes from a line of Deepak Mathivanan from Wolf Research. Your line is open.

Great. Thanks for taking the questions. Julie, can you help us with the full year guide on margin expansion? We're almost into the peak travel season and you said that for 3Q, margin should be flat here on here. But anyway, you can frame for us what the full year margins can reach to. And then kind of related to that, how should we think about the headwind from fixed cost growth? You obviously have a little bit of a duplicative cost right now with all the replatforming efforts. Is there a timeline when we can expect this to somewhat sort of start to show leverage and maybe you can deploy them for other projects? Thanks so much.

Sure. On the margin side, the EBITDA side, obviously this quarter's leverage certainly helps on the full year. We did guide to next quarter being more in line with last year. And that is, as you mentioned, the shift from the marketing spend that we have. But for all the things that Peter just alluded to, the strength of the business in the back half, particularly in the fourth quarter, we expect to see strong margin expansion in the fourth quarter that will help us on the year. So we're going to be operating top line, which will leverage the entire P&L, including marketing leverage in the fourth quarter that we think will drive that expansion. From a headwind from a fixed cost perspective, certainly we are going to be aggressive as we move out of this year and come out of the transformation phase to finding efficiencies across the P&L. As we've said, we have got redundant systems for very good reasons and migration, but it's time that we'll be starting to deprecate those systems and pulling costs out of the P&L, and whether that's cloud costs, licensing and maintenance, repurposing some of the product and tech staff to now go on the offense and go after optimization and innovation instead of migration. There's a lot of opportunity to really dig through the cost and pull that out as we move forward, but that's probably more of a 2024 going forward focus. But certainly with all that optimization as well, we should be able to leverage the P&L next year. So super excited about that.

Got it. Thank you.

Yes, I think that was the final question. So thank you all. Have a good Thursday. Appreciate your time. Take care.

That concludes today's call. You may now disconnect your lines. Have a nice day.