Expedia Group Inc (EXPE) — Q1 2015 Earnings Call Transcript

Thank you very much. Good afternoon, everybody, and welcome to Expedia Inc.'s financial results conference call for the first quarter ended March 31, 2015. I'm pleased to be joined on the call today by Dara Khosrowshahi, Expedia's CEO and President; and Mark Okerstrom, our CFO and EVP of Operations. The following discussion, including responses to your questions, reflects management's views as of today, April 30, 2015, 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 press 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'll find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release, which is posted on the company's IR website at ir.expediainc.com. I encourage you to periodically visit our Investor Relations site for important content, including today's earnings release and an updated investor deck. Finally, unless otherwise stated, all references to cost of revenue, selling and marketing expense, general and administrative expense, 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 2014. With that, I'll hand the call over to Dara.

Thanks, Alan. Expedia's off to a strong start this year, and we continue to be confident in our ability to deliver another year of solid results in a healthy travel environment. Aside from the worsening impact of foreign exchange translation on our results, our expectations for what we can deliver this year haven't changed. I'm particularly happy with our unit growth this quarter: global room nights up 32%, air tickets up 18%, and car rental days up over 35%, all representing share gains in the overall travel market. The major brands in our core OTA segment are executing well and delivering good results. Revenue growth in the first quarter was driven by organic growth of Brand Expedia, Hotels.com, and EAN as well as nice contributions from Travelocity and Wotif. I'm also pleased that the pace of hotel acquisition has accelerated in 2015. Excluding eLong inventory, we added almost 14,000 hotels in the first quarter, which represents a pace of acquisition more than twice as fast as the fourth quarter of last year. We expect to continue to grow our marketing management team and significantly increase our rate of innovation and supplier technology to drive ongoing acceleration of hotel property additions. The migration of the Wotif site onto the Expedia platform is substantially complete, a process that has taken less than 6 months end-to-end. We had many employees give up late nights with their friends and family to make this happen, and we're thankful to all of the contributing Expedia Inc. employees, especially our new colleagues on the Wotif team for their efforts. Wotif is not yet a meaningful contributor to the bottom line due to negative foreign exchange trends, purchase accounting adjustments, and elimination of certain consumer booking fees. However, we're pleased to have broadened Australian consumers' access to our global inventory. We're seeing early positive conversion trends as a result of our integration programs and expect the business to contribute more to profitability as we move through 2015 and into next year. We've also welcomed the Travelocity marketing teams into our business and are making good progress on migrating tools and approaches. In the near term, we plan to ramp up selling and marketing spend to build momentum for this brand, which is likely to put some pressure on adjusted EBITDA contribution from Travelocity this year. We are seeing double-digit transaction growth year-over-year and are pleased to see the strength of the Travelocity brand in action. Now I'm sure you're all interested in an update on the announced Orbitz transaction. The DOJ made a second request, and we're cooperating with them to make sure they have the information they need to enable them to complete their review by the end of the year. We believe the global travel market is huge and competition is fierce and that the transaction will benefit both competition and consumers. Beyond that, we don't have any additional information to share at this time. Trivago continued to see very strong growth, generating stand-alone revenue of $119 million in the first quarter and $449 million on a trailing 12-month basis. We continue to aggressively invest profits from more developed markets to drive brand recognition and global expansion in newer markets. Of particular note, Trivago continues to gain in size and strength in the U.S., which now represents their largest market in terms of revenue generated. As a result of the increased investments that we made, as we mentioned last quarter, eLong drove an acceleration on year-over-year room night growth in the first quarter compared to the growth rate in Q4 2014. Efforts in mobile and supply additions are bearing fruit with mobile growing triple digits overall and representing more than 65% of eLong brand room nights for the quarter. We're very supportive of the eLong management team, are pleased to see our investments start to bear fruit, and remain confident that we can create real shareholder value through this asset. Lastly, Egencia saw very good year-over-year unit growth this quarter, essentially consistent with the pace of growth in Q4 and with strength in both the U.S. and Europe. Our new product introductions, such as our iPad app, have been met with enthusiasm by our existing and potential clients. Egencia continues to win new clients at an impressive rate on the back of its industry-leading technology, and we remain confident in its ability to continue to make share gains in the large and attractively managed corporate travel segment. Note that Egencia has a big European business and thus, is disproportionately impacted by foreign exchange headwinds. You can see that impact reflected in their reported gross bookings and revenue growth. In closing, while we're pleased with our early momentum, the year is young, and as usual, we have plenty of challenges to navigate. We're clear about our strategy and are fully in execution mode. With that, I'll hand it over to Mark.

Thanks, Dara. Overall themes for Q1 performance are very similar to what we saw in the fourth quarter. Once again, we saw strong performance from our core OTA segment, Trivago and Egencia, offset by negative foreign exchange trends and ongoing headwinds on unit economics. As expected, the eLong team continued investing aggressively in China, which did put pressure on the consolidated adjusted EBITDA. Top line growth was again driven by solid unit growth across all major geographies. Room night growth accelerated for all of our major brands relative to Q4 growth rates, leading to global room night growth of 32% year-over-year. Domestic room nights grew 23% in Q1, while international room nights were up 41%. We did get a 4 percentage point tailwind to global room night growth from the inorganic impact of Wotif and the consolidation of the AirAsia joint venture. Note that we also comped over the rollout of the Travelocity commercial agreement during the first quarter, so Q2 will be our first clean comp for that business. Revenue per room night was down 13.6% this quarter, while ADRs were down 2.5%. Roughly half of the decline in revenue per room night this quarter was driven by the negative impact of foreign currency. The other half included the impacts of the deliberate reductions in hotel margins to accelerate our global build-out of hotel room inventory and availability as well as efforts to drive consumer engagement and repeat business through our loyalty programs and other incentives. These are very consistent with the factors we have discussed in the past. Air revenue grew 9% on ticket growth of 18%, partially offset by a decline in revenue per ticket of 7%. Ticket volume growth decelerated this quarter as we comped over the rollout of the Travelocity commercial deal in Q1 of last year. This headwind was partially offset by a 2 percentage point tailwind from the consolidation of the AirAsia joint venture. On a normalized basis, air ticket growth, excluding Travelocity and AirAsia, accelerated nicely in the first quarter. Revenue per ticket was down as a result of foreign currency headwind, geographic mix, and the renewal of certain airline deals in 2014. Our advertising and media business, which is made up of Trivago and our Media Solutions group has become quite large and is growing fast. On a trailing 12-month basis, we generated over $0.5 billion of net advertising and media revenue, up 35% year-over-year. For the quarter, advertising and media revenue grew 23% net of intercompany amounts. We also continued to see healthy contributions from our car and insurance products. On the expense side, excluding eLong, we saw expense leverage across cost of revenue, selling and marketing, people cost and technology and content expense. Direct selling and marketing expense grew faster than revenue as expected. As was the case for Q4, general and administrative expenses also grew faster than revenue due primarily to about $8 million of due diligence and other deals costs, without which, the growth would have been more in line with previous quarters and leveraging nicely. The net result in the quarter was adjusted EBITDA growth of 25%, excluding eLong, and a decline of 5% year-over-year, including eLong. Note that adjusted earnings per share was negatively impacted this quarter by an unfavorable effective tax rate. As we mentioned on the last call, due to eLong losses for which we are not recording a tax benefit, we are forecasting an elevated effective tax rate for the full year. Specifically, assuming eLong losses continue at this quarter's level or higher, we expect the tax rate to be in the mid-30% range for the full year. For illustrative purposes, had we applied that rate to this quarter's results, adjusted EPS would have improved by approximately $0.08 per share. In terms of financial expectations for full year 2015, as Dara mentioned, with the exception of foreign currency trends working against us, we're happy with our year-to-date performance and remain optimistic about the year. As such, we are maintaining our adjusted EBITDA guidance for Expedia, excluding eLong, in line with our prior guidance range of 10% to 15%. Note that since the date of our Q4 call, we estimate that foreign exchange trends have worked against us by another approximately 200 basis points of full year adjusted EBITDA growth. And as such, we are a bit more cautious about where we will finish in this range. With respect to the shape of the year, again, specifically for Expedia, excluding eLong, I would like to reiterate that we expect the vast majority of our adjusted EBITDA dollar growth to come in the back half of the year. As we move into the balance of the year, we are expecting a deceleration in revenue growth on headwinds from lapping the Travelocity implementation, which are only partially offset by tailwinds from recent acquisitions. And our organic revenue growth rate remains subject to the unit economic pressures, which we have discussed. On the expense side, we continue to expect elevated technology and content expense growth as we digest recent acquisitions and invest behind further fortifying our core technology and infrastructure stack. In the second quarter, specifically, we'll have added pressure on adjusted EBITDA growth as we ramp selling and marketing expense to drive summer season revenue, a good portion of which will not be recognized until Q3 and beyond. Moving away from guidance for Expedia, excluding eLong, to focus specifically on guidance for eLong stand-alone. eLong's adjusted EBITDA loss of $33 million in Q1 is indicative of the size and scale of the competitive efforts and investments required in that market. We expect the quarterly losses for eLong to be as large, if not larger than the first quarter loss on a go-forward basis. eLong is a well-capitalized, publicly listed company with a distinct public market valuation, and we continue to encourage analysts and investors to model, analyze, and report on eLong separately and to value our eLong position on a stand-alone basis. With that, let's move to Q&A. Operator, will you please remind participants how to queue up for questions?

It looks like EBITDA for Expedia excluding eLong came in better than you guided a quarter ago. So just wondering, do you feel better about your organic trends? Or were there any onetime benefits in this quarter? And then secondly, certainly, your room nights accelerated. Can you maybe help us a little bit on the factors that will drive EBITDA between the core growth, the Travelocity, AirAsia, and Wotif? Just kind of walk us through how those will be pluses and minuses this year.

Sure. So in the first quarter, we did have good strength in the core business. It was a little bit better than our expectations. But as a reminder, Q1 is a super small quarter. We don't manage the business by quarter, and thus from quarter to quarter, we can have the shift of some ad spend. And certainly, that happened in the first quarter. With respect to factors that will drive core EBITDA excluding eLong on a go-forward basis, really, the big driver there is strength in the core OTA business. This business lives or dies by the strength of Brand Expedia and Hotels.com, EAN, and really, that's the big driver. I mean, we will get some help from Travelocity and Wotif, but as Dara mentioned in his remarks, we don't expect Wotif, for example, to be a big driver or a driver really until the back half of the year. And with our plans for ramping up sales and marketing to build momentum at Travelocity, in addition to the momentum they've already got, we do expect again that benefit to largely come in the back half of the year as well.

I guess, if I look at the take rate in your core OTA segment, it looks like the declines on a year-over-year basis sort of moderated a bit in the first quarter. Can you maybe talk a little bit about how we should think about that over the next year or 2? And then just a follow-up. EBITDA at Trivago, it looks like there was a nice little EBITDA profit in the first quarter. Has that business kind of scaled to a size where we can expect positive EBITDA in the first couple of quarters of the year? If I recall, typically, they've generated the bulk of their EBITDA later in the year.

Yes. So in the core OTA segment, we did see the model work, and again, we're not really managing this business to adjusted EBITDA margins. That's not the goal. But we did see those margins level out quite nicely, and really, that's just the model and the target P&L working, control on fixed costs and driving as much marketing contribution as we can through that part of the business. I would just caution everyone again that a quarter does not a business make. It's a highly seasonal business, and I think, particularly in Q1, it's hard to draw any conclusions. In terms of Trivago, we did have a nice profit in Q1. A few things driving that. One is the business continues to perform very well, both in its core European markets but also in the U.S. The performance, at least on the revenue line, did exceed expectations a bit in the first quarter. And there's also, with Trivago, as you can imagine given the amount of advertising spend that they do, they can also be heavily influenced from quarter to quarter by the timing of that spend. And there was a bit of timing-related goodness, if you will, in the first quarter as well.

Tom, this is Dara. In reference to your question as well, if you're asking about revenue margin and the comps Q1 versus Q1, remember that last year we were just ramping up Travelocity. So we were having bookings come in, and revenue was being recognized in Q2. This year, we had bookings from Q4 staying in Q1. So we didn't have that negative revenue margin factor working this year. So it's really more of a comps issue than any other fundamental issue one way or the other.

You said you've largely completed the migration of Wotif onto Expedia's platform. Was the cadence there as expected? I know you said you worked really hard at getting it done. And then can we extrapolate analogous timelines for integration, Travelocity systems and tools? And would Orbitz look the same if and when that occurs?

Sure. As far as Wotif goes, it was, I'd say, a little bit better than expected. I think the team performed very well and really worked hard to get it done, and kudos to them. Note that we moved over Wotif.com, but elements of the business, such as lastminute.com.au, Asia Web Direct, that haven't been fully migrated yet. So there is still some work ahead of us, although that work is also on a good track. As far as Travelocity goes, the Travelocity migration in general is by no means simple, but it is simpler in that the site has already been migrated. Now what we're doing is really wiring up the marketing systems data, etc., so that the Travelocity team can work with the same analytical and marketing toolsets that we have available to our other brands. That work is moving along nicely and should be largely complete within the month. As far as Orbitz goes, no real update one way or the other. Obviously, we're in the middle of the DOJ process, so the amount of information we have and plans, etc. are not fully fleshed out. I would also remind you that the Orbitz business is a considerably more complicated business. There are a lot of different business lines, Orbitz for Business, etc., so it's a more complex business. And we think that some of the capabilities that the Orbitz business and team have are pretty impressive. And so I think that it's going to be really taking the best of breed and combining some of what they do really well with some of what we do really well. So I think that one will probably be a longer process, and it deserves to be a longer process. But first, we have to get there with the DOJ.

I have two questions. Mark, you mentioned seeing eLong leverage in sales and marketing. Can you provide some context around that and whether we should expect to see similar leverage in sales and marketing for eLong in the future? Also, Dara, could you discuss the effect of foreign exchange on bookings? Specifically, with these currency fluctuations, are we seeing the same level of demand but a shift where European travelers are choosing Greece instead of Manhattan? Are the dollars still there, or are you witnessing a real impact on transactional demand, such as a reduction in vacation package spending?

Mark, specifically, what I was referencing was sales and marketing people. Sales and marketing in total is deleveraging, and direct sales and marketing specifically is deleveraging. And I would actually say, in terms of sales and marketing people, it's not something that we are expecting nor planning to leverage on particularly this year. One of the large components of that line item is our hotel market management team, and we are ramping up that team pretty aggressively and also lapping over some ramp-up last year. Dara, do you want to take the other one?

Yes. As far as the transactional impacts go, we are definitely seeing a very nice acceleration of U.S. volumes to international markets. That is, those numbers were quite positive and continue to accelerate, so Q1 was a very strong quarter for Americans taking advantage of the strong dollar and exploring the world so to speak. And as far as international mix goes, we absolutely do see a higher mix of Europeans taking vacations in Europe. Our beach market package business, for example, is up quite significantly, and we're seeing the same thing with our Asian consumers. In general, we are seeing a mix shift to more local hotels, lower-star hotels, which are typically kind of more domestic-type travelers. Length of stay comes down a little bit. But in general, those trends are, I'd say, positive for us because we are starting to penetrate into the domestic and regional travel market where I would say we are relatively under-penetrated. The biggest negative factor that we see, obviously, with international bookings is a translation effect. And that's just the negative on revenue, and it's a negative on earnings. And it's something that so far we've been able to overcome, but it will be a challenge for us.

Can you talk a little bit about Hotwire and how that business is performing? And then second question on mobile. Can you provide some incremental insight into either bookings growth there or installed base in terms of apps that you have out there?

Sure. As far as Hotwire goes, I think there are no significant trends to call out there. The business continues to be challenged. Traffic trends are, in general, looking better and more positive. Revenue per transaction is challenged, especially on the hotel side, where we have had to take out some margin dollars in order to give consumers the kind of discounts that they expect in a strong market. We are seeing that we have moved over the Hotwire air path onto the Brand Expedia platform, and we are testing out the Brand Expedia retail hotel platform on Hotwire. We're seeing some early positive signs there, so that makes us hopeful. And we are launching a new ad campaign for Hotwire in Q2. It will be an EBITDA headwind, but we are quite positive about the ad campaign and expect it to introduce more consumers to the Hotwire brand, which we think fundamentally is still a good brand and a good product. So we're hopeful, but at this point, the business is still on a negative trend from a profitability basis, obviously, made up by some of our other brands. As far as mobile goes, I'd say no necessarily incremental insight one way or the other. The teams are executing. They continue to execute. Mobile app installs are on a nice trend for all of the brands. In general, mobile web for us now is growing at very significant levels, and we are expanding our mobile product as well. For example, the car rental product is now available on the Expedia mobile app. Hotwire continues to improve its car rental product on the app as well. So the app has turned into a really important channel for us, but it's more business than usual than anything. And of course, we are all excited about the Apple Watch, etc. We've got our presence there as far as apps go, and we'll be tracking that and hopefully, talking a bit more about that as we gather more data.

And just a quick follow-up. With regard to the investment in Decolar in Latin America, how does it affect your presence in that geography on a stand-alone basis?

Well, it's not going to have any impact on us on a stand-alone basis. The Hotels.com team, as far as our owned and operated brand, has the strongest presence in South America, Brand Expedia gone in a few years ago. And Decolar and Despegar are having a stake in a set of very, very strong brands, the strongest brands in what's a very large marketplace. It's a $100-plus billion marketplace. The LatAm marketplace, obviously, going through some near-term difficulties, but we think long term, it'll be strategic. The investment was about lining ourselves up with a great management team and a great brand.

Yes. I think the only thing I would add to that is that Decolar and Despegar do have a great and growing supply base in Latin America, and we do expect at some point here over the next year or so to start sharing inventory more actively and potentially getting access to that inventory. And I think that could definitely help our stand-alone prospects in the region as well as help Despegar, big win-win.

And of course, we are powering Despegar, the Despegar hotel business in the Americas and internationally, and we think that volume will be a welcome addition to our hotel partners, especially, for example, in markets like New York and Miami.

Two things. First, just the room nights growth accelerating, so obviously, healthy here. Can you just talk a little bit more about how much loyalty programs are driving that and then also, to the extent that you continue to use lower hotel margins as well? And then secondly, Mark, could you just clarify on the 2Q sales and marketing spend, is there anything else that's different here than what you typically do during this busy quarter beyond the pickup in Travelocity spend?

Thanks for the question, Doug. The loyalty programs, particularly the Hotels.com loyalty program, is a big factor and a growing factor in terms of the volume of business that they're getting from that program. That obviously shows up as a contra revenue line item, and you can kind of back into some rough, rough numbers based on some of our disclosures in terms of impact on revenue per room night. And so that's a great piece of business, however. It's business that generally involves high-spending, loyal customers who come through more direct channels, and ultimately, when we look through to the bottom line, we would say we definitely want more of that business as opposed to less of that business. In terms of our hotel margins, listen, there's certainly going to be an impact of lower hotel margins on room night growth. Of course, we have no idea what in fact that impact is. But as a reminder, we are lowering our hotel margins to essentially just be competitive with the local market conditions, and that encourages new hotels to sign up with us and our existing hotels to give us more attractive inventory because they view us as a more attractive channel to distribute through. And in return, that just gives our customers much better product essentially and opens up different marketing channels for us. So there's definitely a connection there. It's hard to draw it completely. With respect to 2Q sales and marketing spend, as I mentioned, there was some timing shift between Q1 and Q2, a little bit of trivago and a number of other brands as well. Travelocity is going to be a factor. Wotif may also be a factor in the quarter. And then, of course, you do definitely have to be ordinary issue of in a growing and particularly accelerating business you have a mismatch between sales and marketing spend and revenue, and it can create some mismatches in profit from quarter to quarter.

So, two maybe. One on the property additions. Wanted to understand a little bit better, maybe some color on what drove the acceleration in property additions across all of your brands and how you're thinking about that from a global landscape going out over the next sort of 1 to 2 years. And second, maybe on the marketing side, coming at it from a different angle. The ROIs you're seeing from your marketing dollars today, maybe how you see those evolving by channel, where you might be pushing in or maybe pulling some marketing spend back as you see those ROIs evolve not only across channel but maybe even across regions.

Sure. As far as property additions go, listen, this is part of the formula that we have been setting up. We knew that there will be an upfront cost to hiring the headcount, training the headcount, and the field sales force, and to some extent, we bore those costs last year. And now you're seeing a combination of those market managers being trained up and effective. We have improved and invested in our technology so that we can onboard hotels faster when we sign them up and also linking that onboarding to our marketing channels, especially our variable marketing channels so that we can produce for the hotels that we signed up even more quickly after a sign-up. So the acceleration was expected, and this is something that we continue to expect to see for the balance of the year. And as you know, there are thousands and thousands more hotels that we can wire up on a global basis, so we think that this is just the beginning of a multi-year journey. As far as marketing ROIs go, I would say that there haven't been significant shifts one way or the other as far as overall ROIs. We continue to, on variable channels, bid on the various channels based on the expected revenue from those channels. Foreign exchange trends in U.S. dollars have, in general, taken down the amount that we can bid, let's say, for foreign demand because average revenue per transaction is coming down in U.S. dollar terms. But from an efficiency standpoint, we are just as aggressive as we have been in the past. I'd say that some of the channel shift that we had seen in the past over the 2, 3 years of the variable channels growing as a percentage of our direct channels, some of that channel shift is slowing down a bit. Our variable channels continue to grow quickly, but our brand channels, Mark made the comment on loyalty previously, the repeat part of our business is growing faster now than it was growing 2, 3 years ago. So the mix shift that we talked to you previously is probably easing up a bit. That's not necessarily good or bad news because we always want to be able to allocate as much marketing money as we can efficiently to the variable channels. But it certainly is good to see the direct channels growing faster than they have been historically, and hopefully, it'll keep going.

It wouldn't be an Expedia quarter if I didn't ask the organic growth question, so I'll just make it a tradition here. So it seems like there's 4 things impacting the growth for Expedia excluding eLong. There's Wotif, the second part of Travelocity, the acquired portion, AirAsia and then the negative $5 million from the restructuring. So do I have those all right? And then, can you just walk us through the contribution to EBITDA, if at all, from those 4 in the quarter? That's all.

Yes. Thanks for the consistency and the question, Ross. The inorganic impact from acquisition this quarter was actually slightly negative. We had purchase accounting adjustments where we were unable to recognize prebooked merchant revenue essentially that we required, and that happened at Wotif, Travelocity as well as AirAsia. I would then sort of lump into that the $8 million of deal costs, and it puts it solidly into the negative. So the story that you saw in Q1 was indeed an organic story, and as we said in the prepared remarks and Dara mentioned subsequently, again, we don't expect there to be a significant tailwind on profitability, if you will, from Wotif and Travelocity really until we move through the back part of Q2 and into the back part of this year. Our story this year, despite the headlines on acquisitions, is very much an organic story.

And Q2 will have some more purchase accounting as well, so Q2 won't be a 'clean quarter.' And the second half, you'll see the EBITDA come through more cleanly.

I wanted to ask a broader question, particularly to Dara, regarding Expedia's overall core strategy considering the investments in the U.S. and Asia with Wotif and AirAsia, as well as in Latin America with Decolar and Despegar. I'm curious about whether you believe anything else is necessary, perhaps trivago in Europe. Do you think more is needed in Europe, or are you currently focused on execution now that you have ample supply?

Yes, I think there is no requirement at this moment. We are very satisfied with our brand portfolio. Our core brands, such as Expedia, Hotels.com, Trivago, and Egencia, have a global reach, and we intend to operate worldwide with these brands. We are also enhancing these core brands with more localized ones. For instance, Travelocity will primarily serve the U.S. market, while Wotif will cater to Australia, and so on. Our strategy is established, and we will remain open to acquisition opportunities. We aim to expand in the corporate travel sector, which we are enhancing organically with Egencia, while also keeping an eye on potential acquisitions in that area. We believe it's a promising segment and have a strong team and advanced technology. Overall, we are very content with our portfolio, and Mark and his corporate development team will continue to explore opportunities and act when they arise.

So following up on some related questions about your accelerated new hotels. Can you talk about to what extent you have, I guess, a fear of a middle man being squeezed? And to what extent do you have a fear of Amazon and Google and then maybe others getting involved?

Yes. Listen, you always fear, to some extent, when you have entities like Amazon and Google somewhat involved in the business that you're in. You'd be stupid not to worry about it. That said, Google has been in the travel business for a long time, and they have been a partner of ours for a long time. They certainly have market power, and the European entities are talking to them about that market power. And that's something that should be addressed. But we are a middleman that adds value or a middle person that adds value. The hotel business is incredibly fragmented. We are making global demand available to these hoteliers through our marketing channels. We think on the technology side, we can add very significant value as far as building great consumer experiences. And at this point, we are seeing our transactional growth and unit growth accelerating, so from my standpoint, we are a middle person who is getting more valuable and certainly not getting squeezed. Now that said, as we scale and as the Internet becomes more ubiquitous, we do have to drive our cost of operations down, and so you are seeing that in our revenue margins. It is tough to execute, and it is tough financially. But we've done it for a number of years, and the team understands the task at hand. And the lower we drive those margins, the harder we make it for third parties to get into our business. Fat pigs get slaughtered. And I think that we're in pretty darn good shape, and we're going to get in better shape on a go-forward basis.

And to touch on something, maybe the competition on the car rental. To what extent in the U.S. is the opaque business gone? I mean, companies keep talking about not offering up any opaque. And to what extent can you offset that with non-opaque reservations? And to what extent are you seeing your car availability now?

Yes. I think that to say that the opaque business is gone would be a giant exaggeration. But specific to the car rental business, the percentage of bookings that are opaque, as a percentage of our overall bookings, are down on a year-on-year basis. We are seeing an offset to that on the retail side. Our revenue per transaction on retail in general in car is lower than opaque, so that does provide a bit of a revenue headwind. But we're making the adjustments. And end-to-end, we are about marketing products to our consumers however they want to consume that product. Sometimes, it'll be opaque during certain cycles. Sometimes, it'll be retail, and we're making the adjustments that we need to.

Could you provide an update on your thoughts regarding vacation rentals? Do you believe that vacation rentals are a significant market for Expedia? If so, how are you approaching this?

Sure. I believe vacation rentals are a significant market and an important product in many areas. Whether it's crucial for Expedia to be involved remains to be seen. We have a solid partnership with HomeAway and are excited about expanding their inventory internationally, particularly in Europe, where these rentals are more popular. We are continuing to experiment and learn with this offering, hoping to discover a successful strategy that increases our volume in vacation rentals. Currently, we are still in the testing phase and haven’t fully identified a successful approach yet. While it is growing, it's not yet a major focus in our portfolio, and we aim for it to become more significant in the future.

In some of the industry data released over the past few months, and even in the last couple of days, there are signs of strength in ADRs in Europe. I'm curious to know how this is directly impacting your business. As you examine the drivers within your business, do you think this trend is primarily due to Europeans staying local, or is it influenced by inbound traffic from the U.S. or Asia taking advantage of the currency? Any insights you could share would be appreciated.

Yes, happy to, Heath. Listen, generally, I'd say that strength in ADRs is a great thing for our business. Now as it relates to Europe right now, of course, for us, being a U.S. reported issuer, it's well offset by the FX impact in terms of our results. But I think there are a few things that are possibly driving that. We certainly are seeing, as Dara mentioned, more traffic going from the U.S. into European destinations. We are also seeing more Europeans staying in Europe but then also staying in their local country. So you've essentially got everyone descending on Europe, and I think that's just creating, obviously, more demand for the product.

I'd also add that from an Egencia standpoint, we're seeing the European business spend actually pretty healthy. I think the weak euro is definitely a nice element for European business spend. And again, from a translation basis, as Mark said, it doesn't look so good, but you talk to the Egencia local team and other than, for example, Norway, which is being hit by the oil prices, they feel very, very good and the business is doing quite well.

Are you observing a decrease in travel to the U.S. or any impact on the U.S. side of the business, given that Europeans seem to be staying local more and Americans are benefiting from a lower currency?

The European volumes to the U.S. are positive, but they're growing slower than U.S. volumes into Europe and even U.S. volumes into the U.S. Now, and that's a key for us, which is U.S. to U.S. even is pretty strong. The U.S. consumer feels pretty good. Obviously, our businesses are gaining share. U.S. to Europe is going very well. Europe to U.S. is losing share but still positive.

The first one, I guess, just to go back on the strong room night growth. You said accelerating across all 4 brands, and then you mentioned loyalty. Any other factors you would call out that's driving that acceleration? Are you seeing conversion change? Any other things you'd call out to drive the acceleration? And then the second one, just on the lowering of the hotel margins to be more competitive. Can you just talk us through a little bit the strategy kind of process there? Is it a situation where you were previously priced above the local player and now you're coming in line with them? Are you undercutting the local player? Just kind of run us through the strategy there.

Yes. As far as the room night growth and acceleration goes, the key here is that there's no magic bullet. It is the combination of a number of different activities going across the business and essentially everybody doing their jobs well. If you really want to simplify the core of room night growth, it's dependent on 3 factors: how much traffic are you bringing in; how are you converting that traffic; and really, what your repeat rate is. And our traffic growth for the businesses is healthy and in general, has been either generally healthy and/or improving. Conversion has continues to increase both for Hotels.com and Expedia, and that is a better website, in general more repeat customers and stronger supply, including the new hotels that we're adding on a local basis. So conversion is positive. And then repeat rate, in general, is positive as well as a higher percentage of our bookings come from repeat customers. We're essentially going out, acquiring new customers, converting them to repeat customers through either their experience, which is a good experience or through loyalty programs. And then you rinse and repeat. And you use those profits to go out and acquire new customers. So it is all of those factors coming together to combine for a healthy room night. Q1 was certainly a number that we're happy with, and hopefully, we can keep our room night growth growing at healthy rates on a go-forward basis. As far as the hotel margins go, in general, we were at higher levels than our competition, especially in Europe and some of the Asia-Pacific markets, and we've moved our margins to be more competitive with some of the local players there. And as we've moved the margins to be more competitive, the hoteliers, the local hoteliers are talking to us, and obviously, they know our brands. They see the amount of demand that we're bringing into the country. They see the amount of foreign travelers that we can bring in, and as a result, the sales calls are more successful, a higher percentage of the time than they were. And we have more feet on the street. So it was, again, an investment that we had to make, an upfront investment. We had to make a bet that the volume will come, and so far, the bet is working out well. But we have a lot of execution to go forward to keep making it work.

I have a couple of questions. First, regarding your company eliminations, I noticed it was 39% for Trivago this quarter compared to about 29% last year. Can you discuss that increase? Are you reallocating marketing spend from other channels to Trivago? Secondly, if possible, could you clarify the international organic FX-neutral bookings growth?

Yes, Aaron, thank you for the question. The growth in market share for the Expedia brands and Trivago is due to several factors. The main factor is the execution by our businesses, which allows them to perform better in various channels. If you examine multiple channels, including Trivago, you will see that our major brands are improving and gaining share. Another contributing factor is our ongoing expansion of the hotel base, as adding more properties helps drive traffic to these listings in meta-search channels. Additionally, Trivago has been actively expanding in the U.S., which is now their largest market by revenue, as mentioned by Dara. This aligns well with our strengths, as we have strong brands and supply in the U.S. Regarding the impact of foreign exchange on international gross bookings, it accounts for about 15 percentage points, and we will not provide a breakdown of organic versus inorganic at this moment.

Great. Thanks, everybody, for joining us on the call today. A replay of the call should be available shortly on the IR site. Dara, any closing thoughts?

No, just thank you very much to all the Expedia Inc. employees who made the first quarter happen, and we're looking forward to hosting you next quarter.