Expedia Group Inc (EXPE) — Q3 2015 Earnings Call Transcript

Thank you very much. Good afternoon, everybody, welcome to Expedia's financial results conference call for the third quarter ended September 30, 2015. Pleased to be joined on the call today by Dara Khosrowshahi, Expedia's CEO and President and Mark Okerstrom, our CFO and EVP Operations. The following discussion, including responses to your questions, reflects management's views as of today, October 29, 2015 only. We do not undertake any obligation to update or revise the 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 will find reconciliations of the 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. As a reminder, we sold our 62.4% ownership stake in eLong on May 22, 2015 which was previously a consolidated entity of Expedia, Inc. For GAAP accounting purposes the results of eLong are included in our results through the date of the sale. But in order to allow investors to compare our current results on a like-for-like basis with our historical results, our commentary in the earnings release and on this call is principally focused on our results excluding eLong which should be considered in addition to the GAAP results on a fully consolidated basis. Finally, unless otherwise stated all references to cost of revenue, selling and marketing expense, general and administrative expense and technology and content expense also 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 would like to turn the call over to Dara.

Thanks, Alan. The third quarter marked another robust period for Expedia, building on the strong outcomes from the first half of the year. This success is driven by our exceptional unit growth, with room night growth at 36%, air tickets rising by 31%, and car days increasing by 30% year-over-year. Excluding Orbitz, gross bookings climbed 18%, revenue was up 15%, and adjusted EBITDA grew by 17%, significantly exceeding our previous expectations. It is noteworthy that we achieved these results despite facing challenges such as foreign exchange fluctuations, revenue margin pressures, and deal expenses. Our teams are performing exceptionally well. I’d like to briefly address a few other important topics before turning it over to Mark. We successfully completed the Orbitz acquisition on September 17, and our teams have started integration planning to effectively merge these two leading travel companies. As mentioned earlier, Orbitz Worldwide is a complex global business, and extensive integration work is anticipated over the next nine months, with specific segments, like Orbitz Partner Network and Orbitz for Business, extending the timeline further. Nevertheless, we're off to a positive start, and our teams are diligently working to combine the companies efficiently, ensuring that our travelers and supplier partners remain our priority. We have decided to transition Orbitz.com and CheapTickets to the Brand Expedia platform and will explore synergies across the Orbitz brand portfolio. Mark will discuss the short-term financial expectations for the Orbitz business later. Our hotel supply continues to improve, having added 14,000 properties to our inventory this year, reflecting a 29% increase year-over-year. We are continually investing in personnel, processes, and technology throughout our supply operations, onboarding new hotels faster and of higher quality than ever before. We expect seasonal variations in property additions and anticipate that Q4 additions will surpass those in Q3, with aggressive long-term growth plans. I’m sure you have questions about the potential impacts from recent developments with the TripAdvisor instant booking product. If Priceline's involvement speeds up instant booking adoption globally, we foresee volume pressure in the TripAdvisor channel. Although this is not ideal, TripAdvisor has diminished in significance within our overall demand pool for some time. Additionally, as TripAdvisor is one of our lower-margin channels, its impact on profitability is likely to be limited. I also want to express our satisfaction with having Trivago as part of our brand family; we've made substantial investments in that brand, and you can expect this trend to continue. A critical aspect of our strategy is to strengthen our marketing and product initiatives related to our direct channels. I’d like to highlight three key areas today: loyalty, mobile, and attachment. We are making significant headway in customer loyalty and repeat behavior. The hotels.com rewards program recently surpassed 20 million members and continues to grow rapidly; in fact, it has become one of the fastest-growing marketing channels for that brand. Our Expedia Plus rewards program now includes over 12 million members and has launched in 27 countries this year, with two additional launches planned by year-end. Regarding mobile, mobile web is focused on acquiring new customers while our app is designed to convert those customers into loyal repeat users. We are seeing promising growth in both areas, especially in conversion rates, with our OTA brands reporting that 40% to 60% of traffic and 20% to 40% of transactions booked are happening on mobile. It's safe to say that mobile has evolved from a profit headwind into a crucial element of our core offerings with significant growth potential ahead. Moreover, we now have leading full-service OTA brands in our portfolio, including Brand Expedia, Travelocity, Hotwire, Wotif, Orbitz, CheapTickets, and eBookers, which translates to a large number of air shoppers. Currently, excluding Orbitz, we observe over 7.5 billion annual air searches, a figure that will likely grow, providing meaningful opportunities for upselling ancillary air products and fare offerings, as well as cross-selling into hotels, apartments, vacation rentals, rental cars, local tours, activities, insurance, and more. We believe we have just started to unlock the potential in this area, where we hold a significant advantage. Next, we plan to apply this same strategy to rail. We are actively developing a new rail product, which we aim to launch next year. The majority of our profits stem from our direct channels, and initiatives like these are pivotal to our current and future growth. It's been a fantastic year thus far, and I want to take a moment to thank our employees for their hard work and dedication. Their tremendous efforts are continuously enhancing our business capabilities. With that, I will now hand it over to Mark.

Thanks, Dara. One quick reminder before I get started. We sold our 62% stake in eLong on May 22 and financial results for that business are included in our GAAP results on a consolidated basis through that date. To aid in comparability and to focus on the parts of the business that are ongoing, our comments today focus on Expedia, Inc. results excluding eLong. The overall trajectory of the business remains strong with the third-quarter results broadly consistent with the trends we have seen throughout the year. Strength across our breadth of leading brands and across geographies continued with a rare exception. Our core OTA segment, Trivago and Egencia are all having solid years with strong execution and good financial results. Top-line growth was again driven by robust unit growth across all major geographies. Room night growth remained strong for all of our major brands relative to first-half growth rates, leading to global room night growth of 36% year-over-year, a slight acceleration from 35% last quarter. The inorganic impact from recent acquisitions added approximately 8 percentage points to global room night growth in Q3. Note that due to purchase accounting rules we don't recognize revenue or the related room night volume from acquisitions which was booked prior to the close date and therefore the impact on hotel revenue and room night growth from Orbitz was de minimis. Domestic room nights grew 25% in Q3 while international room nights were up 50%. Revenue per room night was down approximately 15% this quarter while ADRs were down 6%. These metrics are similar to those we've reported in Q2 and the factors influencing our room night economics are largely the same as they have been for a while. Foreign currency accounted for a little more than half of the decline in revenue per room night while deliberate reductions in hotel margins and, to a lesser extent, the impact of our loyalty programs and other incentives accounted for the rest. We continue to be happy to trade some of our unit economics to drive volume and global scale. Air revenue grew 19% on ticket growth of 31%, partially offset by a decline in revenue per ticket of 9%. We continue to see fast ticket growth from Brand Expedia on the back of the consolidation of the AirAsia Expedia joint venture and the benefit of innovating on the platform. In addition, Orbitz contributed 6 percentage points to air ticket growth this quarter. Excluding all inorganic impacts, air revenue would have grown 4% on ticket growth of 19%. Our advertising and media business which is made up of Trivago and our Media Solutions group continued growing nicely with Trivago growing standalone revenue 27% or approximately 49% currency neutral. Media Solutions also grew at a healthy rate and Orbitz contributed 2 percentage points to ad and media growth this quarter. We continue to drive to a P&L that reflects aggressive sales and marketing investment around the world to expand our global reach and drive long-term growth, while gaining scale and leverage in other key expense categories. Excluding the impact from Orbitz, the P&L we delivered in Q3 was consistent with this approach. Selling and marketing growing a bit faster than revenue, low cost of revenue, technology and content and G&A growing slower providing leverage. Importantly, our results for Q3 also include the layering in of the Orbitz standalone financials for the 14 days of the quarter that we owned the business. As we told you to expect on our Q2 call, the impact from Orbitz on adjusted EBITDA was indeed negative in Q3, primarily as a result of purchase accounting impacts which when taken with approximately $7 million of deal and integration costs, resulted in a negative impact of approximately $17 million in adjusted EBITDA for the quarter. At the top line Orbitz contributed $421 million of gross bookings and $19 million of revenue. Now I would like to cover our financial expectations for full-year 2015. I will give some color on our expectations both excluding the impact of the Orbitz transactions or on an apples-to-apples basis with prior guidance, as well as including the impact of Orbitz so you can fully understand the relevant impacts. Given performance to date and the trends we're seeing, we're now forecasting full-year consolidated adjusted EBITDA growth, excluding eLong, of 12% to 15%. On an apples-to-apples basis relative to prior guidance for Expedia excluding eLong and excluding all impacts of the Orbitz transaction in Q3 and Q4, we're forecasting full-year 2015 adjusted EBITDA growth to come in near the high-end of that range. On the other hand, including all impacts of Orbitz for both Q3 and Q4 which were not included in our prior guidance, we expect full-year adjusted EBITDA to be near the lower end of our range. In total we expect a full-year negative adjusted EBITDA impact from Orbitz of over $32 million with approximately $15 million coming in the fourth quarter. This includes integrated related costs as well as Orbitz operating results which, as mentioned, will be negatively impacted by purchase accounting rules. Although we plan to give you more color on our Q4 call regarding the likely impact of Orbitz for 2016, I'm able to share some additional perspective today. Based on the current trajectory of Orbitz on a standalone basis, we believe the business would have delivered full-year 2015 adjusted EBITDA of roughly $135 million which we think is likely lower than Street expectations. However, with the benefit of more detailed integration planning we have been able to do since the closing of the transaction, we now have a better view on synergy realization timelines as well as run rate synergy potential. Though there is still much work to do and details to iron out, what I can tell you is that we now believe that there is meaningful upside to the $75 million in run rate synergies that we projected at the time we announced the transaction. We expect these synergies to layer in slowly in the first half of the year, ramping to near run rate by the end of 2016. With that, let's move to Q&A. Operator, will you please remind participants how to queue up for questions?

I have two quick questions for Mark and one for Dara. Mark, how close are you to finishing the margin reductions on the hotel side? When do you think you'll reach the target you’re aiming for? Also, regarding the 36% growth in room nights, you mentioned that 8% came from acquisitions, compared to 35% last quarter. Can you provide an apples-to-apples comparison against last quarter, excluding acquisitions, to show what that growth rate would have been? Dara, big picture, I know the question is coming up about Airbnb. Can you discuss the impact it's having on your business, whether it's significant or not, and your thoughts on competing with them going forward? Thank you.

In terms of margin reductions we do expect them to continue through 2016. They will start to mitigate in the back part of the year. And then you have got some realization of that. So I think we will be well into 2017 before we see ourselves in a position where that is no longer a significant headwind for us. With respect to room night growth, I'd say listen, on an apples-to-apples basis organic around 28% really for both quarters this quarter and last quarter. So we really see really consistency in the strength of just the core business. Dara, do you want to take the Airbnb one?

Yes, regarding Airbnb, the results indicate that its impact on us is minimal at this point. We do not see any direct effects on our business. In fact, we believe Airbnb may be attracting a new segment of travelers, particularly millennials, by offering lower price points. Consumers tend to choose between rental options and hotels, and we believe our hotel offerings are strong, as reflected in our numbers. While Airbnb adds supply to the lodging market, it primarily addresses a specific portion of the population. We believe this will exert pricing pressure in markets with a significant amount of Airbnb listings. We have heard from our market managers that during peak periods, towns that would typically sell out are not doing so completely, which benefits us because we then have hotel inventory available when it was previously unavailable. Overall, the feedback from our team on the ground suggests that Airbnb is perceived positively rather than negatively. It's clearly a valuable option for certain consumers, and we plan to expand our rental offerings over time. Our primary focus is still on traditional hotel products, but we are also adding apartment-style options, which will gradually become a more significant part of our portfolio in the coming years.

Dara, a couple questions that might help us think about the next couple years. First, OTAs have been around for 15 years and yet you are growing domestic room nights 25%. Can you talk about the penetration of online bookings in the U.S. and then we'll think about international later, but two or three years into it? Priceline arguably was nine years into their purchases of some of the booking.com platforms, but how much more room do you have to improve conversion or other things with that tech platform? Or do you think you might be running out of room? Thank you.

Sure. When it comes to online travel agencies, anyone looking to travel or book travel is likely to consider them. We have reached a mainstream status, with online penetration rates around 40% to 50%. While it's reasonable to expect that this growth will slow down due to the law of large numbers, our brands are becoming increasingly relevant, our supply is improving, and our platforms are enhancing both speed and service. It appears that we are capturing market share from smaller competitors who lack the resources to invest in marketing, technology, customer service, and loyalty programs like we can. At this stage, it's not just about increasing online penetration; it's also about us gaining share from various other players. Remember, we currently represent only a small single-digit percentage of total room nights in the U.S., indicating that we have significant growth potential, and our teams are performing exceptionally well to achieve this. Regarding our technology platform, we monitor our win rate closely, conducting thousands of tests based on numerous hypotheses from our product teams. We assess win rates against neutral or loss rates and evaluate the average size of wins on a percentage basis compared to our baseline. Our win rate and the average size of wins remain quite impressive, and conversion continues to provide a positive influence. While we suspect there may be a peak performance point, we have not yet encountered it. The increase in supply and the improvement in the quality of our offerings, particularly the number of hotels available, are creating a new positive trend that we hadn’t seen in recent years. Therefore, conversion is influenced not only by our product and technology but also significantly by the efforts of our supply team. Additionally, I want to highlight our tech platform's user experience focus. Initially, it prioritized the consumer's website experience. Now, it's expanding to enhance the experience for hoteliers, with improved tools providing them with valuable data. Our hotel partners can access information about viewership and bookings for their hotels through various platforms, including websites and apps. The advantages of our tech platform extend far beyond just the consumer experience, and we believe we're at the beginning of unlocking its full potential, especially in areas that may not receive much attention yet hold great value.

I have two questions. One is related to Priceline's decision to participate in the Google hotel product. How do you see your participation changing with that? Additionally, how do you see Priceline's involvement evolving with Trivago? My second question is about China. Are you noticing any changes in demand for outbound travel from China?

Sure, as far as the instant book product goes, we have worked with Google very closely on their hotel product, various parts of their hotel product. And I think we talked about previously that it was our intention to test and learn with Google on the book on Google feature. We thought the branding, the clarity that they sent to consumers was right on. So it is our intent to test and learn with them and we will let the data and what our consumers tell us essentially drive the long-term decision there. As far as Priceline's participation on Trivago, it is unknown. Trivago is now pretty aggressively testing out a product that looks like Instant Book. We think that there is a lot more clarity again on where the consumer is booking their travel. Trivago is simply trying to optimize that path versus let's say gather consumer data to upsell them other stuff. So they are very, very focused on just optimizing that consumer experience in that moment. The test is happening in Germany and so far we like what we see. And many of Expedia brands are participating and I think the Trivago team is excited about rolling out that product. We will see if Priceline participates or not.

And specifically on that 90% of their traffic on desktop in Germany is live with the product, 50% app. And they are looking forward, based on the encouraging results they have seen, to starting to roll this out to English-speaking countries over the course of next year. So very promising. I will take your China outbound question. Listen, I'd say no major change for us. It is hard with a country that big which is growing travel so fast, for us to perceive different movements either way. Again, we're participating in China both through our Expedia affiliate network business that powers a lot of the leading players in China with our international hotel inventory, also through hotels.com, also through Egencia and Trivago is putting its toe in the water I would say in China. And we're looking forward to implementing the broader commercial relationship that we have with Ctrip through the back part of this year and the beginning part of next year. And so we do think, at least for us anyway, China outbound remains a very big opportunity and we continue to like what we see there.

You have mentioned before there are kind of two stages of leverage as you step through an acquisition integration. One is getting the brand onto the common platform. And then two comes as the data starts to flow and you can learn and optimize. So, just curious on the second point with recently completed integrations where are we? And then with the Orbitz integration it sounds like the optimization timeline is consistent with these prior endeavors. You get it on the platform and then the optimization comes over the course of one to two quarters. Is that the right way to think about it?

Yes, I think you have broadly got it right. The two that we're nearing the end of that process with are of course Travelocity where we did the tech integration really through last year and we started the marketing integration that you speak of this year. We're probably three quarters of the way through the process with Travelocity right now and we like what we see. That is a brand that has continued to be a growth brand, lapping over everything. So very encouraging. Wotif is probably a quarter through. It is on the platform, we're training the marketing models. They've just launched a brand-new brand campaign in Australia which we're pretty excited about, it is one of their biggest ever and that is really aimed at returning that iconic brand to iconic status. And I think, listen, those are good parallels for Orbitz generally. That said, as Dara said in his prepared remarks, Orbitz is a bigger business. Orbitz is a more global business. Even if you look at Orbitz and CheapTickets, I mean these are businesses that have been, I would say compared with Wotif or compared with a Travelocity, a little bit closer to optimization already. And so, I think for the Orbitz business, even though the playbook is the same, the caveat is that we could see, when we flip it over to the platform, actually a moment where conversion might degrade and we actually have a little bit more of an optimization period to go through. So I think that is the caveat that we really don't know the answer to yet, but aside from that I think it is a very similar playbook.

And I think the other thing to add with Orbitz is that whereas with some of the other brands Travelocity and Wotif, we put them on our platform and that was it, there are some very interesting things and technologies and processes that the Orbitz teams have developed. We love their loyalty program, so that is a feature that we will look to build on our platforms, but it is their idea, their conception, etc. And there are technologies that they have built around air search, around connectivity with various providers. Those are, again, super interesting technologies that they have built. The talent there is really good. So, I think while Orbitz will move on to the Expedia platform, we're going to look for Orbitz to improve the Expedia platform as well.

You talked a little bit about attach rates for air. I was just wondering have you guys seen sort of similar inflation in CPCs for air queries like we have seen in hotel over the past 12 to 18 months, be it from maybe the air carriers and consolidation in that space? Or is air query still just a cheaper way for you guys to get traffic and hopefully cross-sell it? And then just maybe an update on Trivago profitability. Can you kind of give us a sense of your view on long-term margins for that business and maybe a timeline for when you might be able to scale back the investment there a bit? Thanks.

Sure. As far as air queries go, in general air CPCs tend to be lower than hotel CPCs and air revenue per unit tends to be significantly lower than hotel revenue per unit. We have not to date aggressively participated in variable channels in air because of the revenue and profitability per unit that air has had historically. We think that we're in a position now to participate more aggressively in some of these variable channels. And the growth rates that we see in those variable channels are very significant, but off small bases. So, air tends to be much more of a direct business, so the attach revenue tends to be higher-margin revenue so to speak. But we're very much looking forward to participating more aggressively in variable channels on the air side. There are some variable channels such as meta in the U.S. on the air side where we can't participate based on some of the kind of deals, agreements that the meta channels have with some of our air partners. So, while I think there is growth in the variable channel for air, it is not going to quite look like what we see in the hotel product, but it is nice upside versus where we're now.

And then Tom, just on Trivago, listen, I think what we look for in terms of the long-term profitability or what we look at when looking at long-term profitability is what we see in their major mature markets, markets like Germany, the UK, France, Italy. And what we see there is a margin structure that quite frankly looks a lot like TripAdvisor essentially, it is a big media business that is growing nicely with attractive margins. The phase we're in right now however continues to be that we're able to take those profits and put them into new opportunities. The story continues to be told in the U.S., Canada and Australia. The growth rates in the U.S. continue to be very impressive and U.S. awareness is now up to one in every second American has actually heard of Trivago coming from a point of obscurity in 2012. So we're really still in that investment mode. We do think that the U.S. market will start to mature probably into next year, but then we look at some of the other markets where they have entered recently. I mean Japan, for example, we're seeing revenue actually quadruple year-over-year, fivefold in Brazil, in the Middle East it is sevenfold in some places. So there still continues to be pockets of real great opportunity for Trivago and we continue to be very willing to invest in that. But again, the thing to keep in mind here is that we do have the model where we can actually see what long-term profitability looks like. We're just in a mode right now where we just have too many attractive investment opportunities to drop that to the bottom line.

We could very easily turn that business into a profit business and it is really about the incremental opportunity that we have for our next investment dollar. And at this point Trivago has been very strategic for us.

A bigger picture question again coming back to marketing channels. Appreciate the color on trip and book on Google, but how should we be thinking about the relative ROI you are seeing today across your marketing channels? How are you thinking about how that might develop in the coming years or what that might mean for marketing leverage in the business? Thanks, Dara.

Sure. In general, our ROI in the various channels has been fairly consistent this year versus last year. The amount that we can bid in certain geographies such as Europe has gone down on a CPC basis because of foreign exchange. But our efficiencies, sometimes they will go up, sometimes they will go down based on the bidding dynamics of the auction on a local basis. But when we look at our overall efficiency this year versus last year in the larger channels and Google and trip and Trivago and some of the social channels, the efficiencies haven't changed much. What we do look for is channels that are significantly new customer acquisition channels and then our capability on moving those new customers into repeat customers through our direct channels. The more we're able to convert those customers the higher kind of toll we're willing to pay for those new customers. And it has been a formula that has been going on for a while and it is pretty comfortable. So I would say right now things are pretty stable. The only, I would say, notable new factor is that the mobile channels for us are beginning to become more affordable so to speak. We had to, call it two, three years ago, when we were bidding into mobile, we had to go in at substantial loss in order to build up volume, in order to test and learn, in order to gather data so that we could optimize our product. Those losses now have been significantly mitigated. And while we're still in investment mode on mobile, it is a nice story on a year-over-year basis for us.

I want to revisit the topic of Instant Book. It appears that some recent participants, including hotels and OTAs, are gaining more control over their branding, messaging, and possibly customer service than we initially anticipated. I'm trying to understand why this might not be suitable for you and whether there are any dynamics that could change that in the future. Additionally, could you elaborate on the synergies with Orbitz, specifically highlighting the key sources of potential upside compared to your original expectations? Thank you.

On the Instant Book basis, we believe that the trend of participants gaining more control over their brand, leading to a better customer experience and eliminating confusion about their bookings, is a positive development. TripAdvisor remains a key channel for us, and we are continually engaging in discussions with them. Our decision regarding Instant Book will be informed by how we perceive its treatment. Currently, we are not involved, but we see this as a long-term opportunity, and we intend to keep that option available. There is no reason to dismiss it at this time, and we will continue to evaluate it. Despite some short-term challenges that have affected us, our growth rates are very strong, which we believe positions us well for the long term.

And then, Doug, just on Orbitz synergies, one of the big pivotal decisions that we made recently which opens up incremental opportunities was the decision to put Orbitz.com and CheapTickets.com on the Brand Expedia platform and that opens up a bunch of opportunities that go beyond what we said on the call initially which was really access to our global hotel footprint, access to our technology platform potentially and reduction of some corporate costs. And really what has opened up now is that once Orbitz and CheapTickets are on the Brand Expedia platform, not only do they get access and get to ride on the test and learn machine that Dara has spoken about frequently around all the testing we do and the product getting better and better. But they instantly get access to our global footprint of not only just global hotels but air, car, vacation packages, activities, etc. So the product envelope gets widened. The other pieces of this though are that as we have dug into the business we have seen that they did have and they spoke about it, fraud and chargeback problems. That is something that we can help them with instantly as part of the program. We do have a global customer operations team which has truly global scale and has huge amounts of efficiency benefits. They will immediately go onto that. And then the cherry on top of all of this, as Dara said, is that they do have some great technology around some of the air technology they have built, some of their loyalty technology that we use to make our overall product better as well. So those are all of the things that add up. Of course we don't know the exact amount yet, we're not ready to update the exact amount. What we do know is those things add up to what we think is some meaningful upside.

Sticking with the Orbitz and synergy topic, could you provide an overview? I believe you mentioned that Orbitz would have achieved $135 million in standalone EBITDA if it had remained independent. This suggests potential for a swift resolution to their fraud challenges. How much of that improvement will depend on the platform transition, and how much can be addressed prior to it? Additionally, could you give us a general idea of the expected synergies, perhaps using the $75 million as a baseline or your updated forecasts? Specifically, how much will derive from revenue enhancements like improved hotel and air terms, and how much will come from operating expense reductions? There seems to be significant non-marketing operating costs that could potentially be eliminated. What specific areas should we focus on?

Sure. I will share some information now, and during our Q4 call, we will provide more details as there is still much for us to review. Regarding the $135 million, I believe the Orbitz team has made significant progress in addressing the fraud issues they have encountered, and we believe we can provide additional support beyond that. They have managed to reduce many of the losses, but we believe we can achieve that while maintaining conversion benefits that might be affected when certain measures are implemented to combat fraud. As for the allocation of firm revenue versus cost synergies, we are not ready to disclose extensive details at this time as we continue to analyze the situation. There are obviously costs associated with being a public company and some overlapping teams, but we are not delving too deep into specifics right now. However, I can say that while we see a cost reduction opportunity that will show synergies on paper for the deal case, there also exists a substantial recruiting opportunity for us. We have about 1,000 open positions at Expedia within our operating budget. We recognize the talent at Orbitz and aim to integrate those individuals into as many of those roles as possible. We anticipate gaining meaningful technology and product capabilities along with the Orbitz teams based in Chicago, which we believe represents an advantageous situation for everyone involved.

I guess one just sort of housekeeping question. Are there plans either through an 8-K or some other disclosure to cover the Orbitz results for the part of the quarter that wasn't included in your results? And then looking at the gross differential between bookings and revenues and I know you guys have touched on this a couple of different ways, is there a path that you could see that would lead to those numbers converging over time? Largely thinking is there a way that as the business stabilizes you start to see revenue growth that looks more like your bookings growth?

Sure, Heath. So I will take that. We're not going to provide at this point information around the part of the quarter that was not part of our results. We will be putting in our investor presentation a page that lays out the impact of Orbitz on our results for the 14 days that they were part of it. And we will also outline the guidance update that I gave on this call. But we aren't going to provide anything beyond that at this point. There is some pro forma data in the Q that you can see tomorrow that can give you a little bit more color. In terms of growth differential between bookings and revenue, listen, the big driver there continues to be what we have been doing on the hotel side, it is reflected in our revenue per room night. A big chunk of that is foreign exchange but also just the deliberate margin reductions we're doing. So as I said to Mark on the kickoff question, I think we're really well into 2017 before we expect to see those pressures abate. And I think at that point you could expect to see those growth rates converge. And then I would also say the bigger that Trivago gets that can be a tailwind for it as well because of course they are not in gross bookings at all, they are just a net add to revenue.

I think revenue mix between air and hotel and then revenue mix between media and hotel are also separate factors.

They will get better if our air volumes slow down which doesn't seem to be happening at this point.

Following up on some previous questions, does the acquisition have any impact on outbound in China? Additionally, have you noticed any pricing effects on inbound yet?

Michael, to be clear, what acquisition are you talking about?

I'm talking about Ctrip's acquisition or combination with another entity.

Okay, just want to be clear.

And secondly, can you talk maybe a little bit more detail regarding your growth in repeat customers is accelerating, not accelerating, maybe some numbers? And relatedly, are you seeing growth or accelerated growth in conversions as well? Thank you.

Sure. On China it is really too soon to tell as to how the Ctrip and Qunar transaction will affect how those respective businesses are run. Our admiration for the Ctrip team has only increased with that deal. We think it is strategically super, super smart. James and Jane and team are clearly executing not only well on the ground, but also strategically. And I think you also heard that the changes in the one-child policy that I think James supported for a long time. So that team is executing well on a number of fronts. We have a very strong relationship with Ctrip as part of the eLong deal with eLong. And also we have been doing business with Qunar as well for a long time on the outbound business. So we think that our outbound volumes will continue with them, it is just too hard to tell at this point as to whether the deal that was announced will have any effect on those volumes. We don't think so, but you never know until you know. As far as inbound volume goes I would say the same thing, there is plenty of inbound volume going to China as well. We haven't seen any material change since the announcement, but it really is early at this point. As far as the growth in repeat customers, we don't disclose a bunch of data there, but I would certainly confirm that the growth rate of our repeat customers, if we look at it this year versus where we were three, four years ago, is much more healthy than it had been. And it is a natural factor in that we're bringing in more new customers from the variable channels and so there is a mathematical factor in that a certain percentage of them turn into repeat customers. And the activity that we have in our core product, loyalty, etc., is also improving our repeat rates which is a very nice contributor to call it the core profit engine of the Company. So the trends that we see there are certainly good trends and it is something that we're much more focused on now than where we were call it three, four years ago. Three, four years ago it was about product conversion, reaching into variable channels. Now it is not only those machines but also increasing our supply base and then increasing our repeat customer base as well. And then I think you asked a question on conversion as well. Conversion continues to be a positive factor. We don't disclose how positive one way or the other, but it continues to be a nice tailwind for the business.

Can you disclose relative how positive, is it accelerating positive?

It is good. That is all we will disclose.

Can you just give us an overall update on your tours business and how the latest TV campaign has been doing? And then another big picture question, can you just touch on your overall vacation rental strategy?

Yes, we're very excited about our tours business. It is growing rapidly at triple-digit rates, and the team has worked hard to improve the product, which is now comprehensive. The product is available on mobile and featured on TV. We revamped and launched this product based on a new tech platform this year, and the team has been aggressively optimizing it. The results show this effort is paying off. We believe we are at the beginning of a long journey of improvement for our tours product, and the team is really motivated right now. Regarding our vacation rental strategy, we consider it an important product, but our primary focus is on our core hotel offerings at this time. As we've demonstrated this year, we are accelerating the intake of new hotel inventory. Moving forward, especially into next year, we plan to start adding more vacation rental options because we recognize that it is a type of lodging that customers are interested in, and we want to provide that to them.

Dara, I would like to hear your thoughts on rate parity requirements. In some European countries, including France, there have been discussions about whether hotels can offer lower prices than Expedia or Venere. How do you handle that competition? Additionally, regarding your 50% growth in international room nights, is there a specific factor driving that growth? Are you concentrating on a particular region, or is it simply a result of improved overall execution? Thank you.

Sure. Regarding rate parity, we are satisfied with our position and have decided not to enforce the rate parity provisions in our contracts. Overall, we feel positive about our relations with EU regulators. Hotels have the option to list their offerings in our marketplace for free; it operates on-demand, allowing them to participate or not as they choose. Our partners have noticed that the quality of inventory they enter into the marketplace correlates directly with their performance, and they have complete freedom in this regard. Hotels are primarily looking for volume, and there is a beneficial self-reinforcing trend happening, evident from our increasing volumes. Our relationships with hotel partners have generally improved, and the quality of inventory has actually increased since these issues emerged. We truly aim to support our suppliers and operate on-demand, and as our partners engage more with our marketplace, it's becoming a space they want to be a part of, which is further enhanced by our price reductions.

And then Ron, on the hotel room night growth, I would just remind you that the impact of the Brand Expedia Asia joint venture consolidation and Wotif are both tailwinds to this metric on an inorganic basis. That said, we're seeing pretty broad organic strength in a bunch of places, Eastern Europe is strong, Africa is strong, Japan, South Korea, Taiwan, Indonesia. I mean, these are all places that have growth rates that are high-double-digits, in some cases triple-digits. So, it is a mix of things. But just keep in mind the acquisitions do bolster that number.

I think one interesting note on our international room night growth is that we're seeing an increase in international-to-international destination and especially call it travel closer to home. I'd say we're a great platform for international travelers, but our APAC-to-APAC, our Europe-to-Europe business, our in-country business is the strongest segment of our business on a room night basis. On an ADR basis that actually puts a little pressure on our ADRs which is as you start to move into business that is less international and more domestic you tend to move into categories that are lower ADR. So we think that this long-term, this shift in demand and supply is going to be a long-term room night positive but we will put some pressure on our ADRs. But we think overall that is a more healthy marketplace.

So, in looking at the Trivago revenue and also the inter-segment elimination, it seems as though over the last year reliance on Trivago has increased quite a lot in terms of the Expedia portion. First, are we correct to think about it that way? And second, as you look at Priceline's entrance into instant book can you say how or if it changes the calculus at all for you in terms of thinking about joining them maybe more broadly as just meta platforms become more end-to-end? How does the dynamic change in terms of reliance as far as OTAs on meta? If you could maybe sort of look out a few years that would be very helpful. Thank you.

Sure, Ken. So on Trivago, the Expedia brands and really sort of all the big brands in Trivago are generally gaining share. It is an analogous situation to what you see in the broader industry. I would say though particularly one of the things that drives Expedia's share gains in Trivago is the fact that they are expanding into markets where we're exceptionally strong, markets like the U.S., Canada, Australia for example. And so, that just plays naturally into our strengths. But again, beyond that, our performance in Trivago is dictated by the strength of our platform, the conversion benefits we're driving as well as the capabilities of our teams and the full teams across those functions are doing pretty darn well. Data, do you want to take the second question? Yes. As far as Instant Book goes, listen, Priceline is our largest competitor. They are a very strong competitor. As you know, they are awfully smart. So we look at everything that they do with a great degree of interest and we would be stupid to act otherwise. So we will take a look at how they participate in Instant Book and it will certainly enter into our calculus. I just can't tell you what the answer is going to be. I believe this industry is seeing a convergence of various players and experiences, which has led to a shift where clear distinctions between them are fading. Reviews have become a significant aspect of our platform, influencing our conversion rates. Previously, reviews were primarily associated with TripAdvisor, but now they are integral to both our offerings and theirs. While TripAdvisor is becoming more involved in the booking process, we've also been experimenting with meta-like products in the OTA space. With a recent new hire mentioning the intense competition in our industry, it highlights how we often overlook that perspective when immersed in it. Many of these experiences are blending together, and although the outcome is uncertain, our focus remains on enhancing customer and partner satisfaction. So far, our efforts seem to be effective, as do those of TripAdvisor and Priceline. The market is highly fragmented, and while the experiences are converging, the final outcome remains unclear. Our goal is straightforward: to keep our consumers and partners satisfied.

Could you just touch on how you are thinking about the rail opportunity and what you are working on with the new rail product that you mentioned? Thanks.

The product hasn't been launched yet, and as you know, we have a test-and-learn approach. Rail is a critical transport option for consumers globally, especially in Europe and the APAC regions. We hope it will gain importance in the U.S., but it doesn't play as significant a role there. This product is essential and has generally been under-invested in by online travel agencies due to its limited profitability. However, as we enhance our platforms and understand consumer travel patterns better, we anticipate many upsell opportunities. Increasing our interactions with travelers is expected to boost loyalty, particularly on mobile, which is advantageous for us. While we’re uncertain about the exact path ahead, we believe this aligns with our ongoing theme that air travel provides valuable insights into consumer destinations, creating delight for our users. Rail, a commonly utilized service, has the potential to expand significantly over the next three to five years. We're starting small, but we are initiating the process now.

I have a couple of questions. First, regarding Trivago, it seems like the numbers dropped from about 37% last quarter to around 27%. Is there a specific reason for this change, or is it just due to the rule of large numbers? Secondly, concerning Orbitz, they have generally performed weaker in international markets and on the hotel side. Are there plans to address this, or will being on the Expedia platform improve their performance in those areas? Thank you.

So Trivago, I would just say it is a little bit of a law of large numbers. I mean the U.S. is now their largest market. They are well deep into clean comps into the U.S., so that is a big factor. And remember, foreign currency is just a big headwind on this business. They are a euro denominated business and foreign currency neutral 49% year-over-year growth. So we're still pretty happy with that. If that's a slowdown, we're okay with that. On Orbitz, yes, they are traditionally weaker international hotel, etc. and also product mix. Definitely that is something we can help them with. Having access to our global footprint of now over 270,000 hotels around the world, having access to our international air and car and soon rail content can only help the Orbitz business. I think as Dara mentioned, we've become pretty darn good at attaching hotel to air tickets. And one of the great things about Orbitz is they have just got a ton of air traffic. So we think that is a good opportunity which should help them on the hotel side as well.

We definitely noticed an improvement and a change in product mix with Travelocity when they joined our platform. We anticipate a similar change with Orbitz, although overall, Orbitz may have a stronger focus on hotels than Travelocity did. Therefore, we might not see as much growth, but we experienced it with Travelocity, and we are hopeful to see it with Orbitz too.

Great. Thanks, everybody, for joining the call today. Dara, do you have any closing comments?

Yes, just a big thank you to our employees for another great quarter and to our investors. You should know that this is a team that is not satisfied with where we're. We always want to do more, we will always want to do better. We want to give better service to our customers and we're not done by a long shot. It is not a bunch of people here who are sitting comfortably in their seats. So we're looking forward to further travels with you. Thank you.