Expedia Group Inc (EXPE) — Q1 2016 Earnings Call Transcript

Thank you and good afternoon, everybody. Welcome to Expedia's financial results conference call for the first quarter ended March 31, 2016. 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, April 28, 2016 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 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. 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. 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 2015. With that I would like to turn the call over to Dara.

Thanks, Alan. We are off to a solid start in 2016, with our financial performance coming in a bit better than expected pretty much across the board. This was underscored by continued strong momentum in unit growth with global room nights up 37%, air tickets up 52%, car days up 48% and advertising and media revenue growing 44%. Results were strong in Q1 across all of our major brands, resulting in organic room night growth of 24%, consistent with last quarter despite about 500 basis points harder comp. Brand Expedia and Hotels.com each saw healthy room night growth across all regions with Hotels.com accelerating in Q1 versus Q4. Expedia Affiliate Network delivered room night growth above 30% for the fourth consecutive quarter, continuing to gain share versus our competition. And Egencia transaction growth accelerated in Q1 compared to Q4, although we saw signs of corporate travel spend tightening in the form of lower average booking values per transaction. Going forward through 2016, we expect overall room night growth to moderate due to harder comps and law of large numbers largely offset by decrease in headwinds on revenue per room night. The Orbitz integration is going well with Orbitz.com and CheapTickets now on the Brand Expedia platform. We are particularly pleased with hotel conversion and room night production on both websites, which are benefiting from the upgrade of technology platform along with the depth and breadth of our hotel inventory. We have completed the move of hotel club traffic and customers over the Hotels.com and we expect the eBooker’s migration to be complete this summer. Integration efforts for Orbitz for Business and Orbitz Partner Network are on track that will take us through 2016 and beyond in certain cases. Today we announced some significant changes at HomeAway as we continue to accelerate the transition of our platform from advertising to transactions. In the U.S., we’re moving to a single and simple subscription model of $349 annual for listings that are online bookable and $409 for those that aren’t. This will allow us to begin to optimize the sort and the properties consumers see by matching their unique travel preferences with the right listings while driving booking volume for owners and manager communities. With booked transactional revenue up 170% year-over-year in the quarter, we took the opportunity to more than double our direct marketing investment in order to drive more traffic to our sites and partners, while also offsetting some weakness that we’re seeing in Google SEO volumes for some of our brands. These model changes and marketing increases along with investments in product and technology talent will pave the way for an improved strategic and operational footprint in the category that is becoming more and more popular with travelers all around the world. We are also seeing encouraging volume trends in the alternative lodging category for Brand Expedia and Hotels.com, which bodes well for a future state when we fully interweave supply and demand across all product categories within our global lodging marketplaces. Lastly, Trivago is off to a terrific start in 2016 with standalone revenue of 176 million, up 48% year-over-year. Trivago’s core European markets grew revenue 33% on a euro-denominated basis and acceleration from 20% we saw in 2015. While the top-line for the rest of the world grew 69%. The team continues to refine and improve its marketing methods and products in a way that not only benefits advertisers but should also improve Trivago monetization margins over the long term. Now I will turn it over to Mark on the financials.

Thanks Dara. We were pleased with the results for this quarter that were a bit better than we expected. We saw solid execution across the board and also benefited from some timing differences. Easter shifted into the first quarter this year and we also deferred some marketing spend planned for Q1 into Q2. Together, we estimate these factors shifted just over $20 million of adjusted EBITDA into the first quarter from the second quarter. Organic unit growth rates across our core brands were again healthy and on a consolidated basis, the addition of Orbitz and HomeAway along with the final quarter of inorganic contribution from the consolidation of the AirAsia/Expedia joint venture boosted total growth rates. In total, excluding eLong, adjusted EBITDA was up 31% year-over-year in Q1. Orbitz and HomeAway together contributed 35 percentage points or $44 million of growth. In line with the usual seasonality of our business, adjusted EBITDA for the rest of Expedia, Inc. was down 4% collectively as our brands, but marketing spend we incurred other variable costs to drive bookings ahead of the heavy travel season and for which revenue will be recognized in future quarters. The anticipated acceleration in the growth rate of technology and content expense did not materialize and was also a factor impacting the bottom-line growth rate. In terms of product line performance, hotel revenue growth of 25% was driven by room night growth of 37% partially offset by decrease in revenue for room night of nearly 9%. Acquisitions added 13 percentage points of room night growth resulting in an organic growth consistent with last quarter. The gap between an ADR decline of just over 3% and the decrease in revenue per room night was about 540 basis points and consistent with that in the fourth quarter. Ongoing reductions to our contracted hotel commission rates around the world, which are aimed at expanding the breadth of our global lodging inventory and the impact of our fast-growing and successful loyalty programs continued to be the main drivers here. We continue to see solid performance in both our air and car products as well. Air revenue grew 54% year-over-year and 52% volume growth. Car revenue was up 39% and 48% growth in car days partially offset by a 6% decline in revenue per day. Orbitz added about 34% percentage points and 27 percentage points to air and car volume growth respectively. Added media revenue was up 44% year-over-year in Q1 driven by strong performance at Trivago and good growth from our media solutions group. Orbitz added about 4 percentage points of total ad and media revenue growth. The overall shape of our P&L this quarter was generally consistent with the ongoing goal of using leverage in key expense categories to fund aggressive selling and marketing investments around the world. As I mentioned earlier, technology and content expense wasn’t exception in Q1 for a quite bit faster than recent trends on an organic basis, this faster rate of organic growth was driven by Trivago or e-commerce platform group and Brand Expedia along with increased data center costs. Note that we continue to incur additional costs in our core business to support the integration of new Orbitz brands. Additionally, we were pleased to be able to fill a number of open technology roles in the core business with talented teams from Orbitz as they rolled off their Orbitz duties. This is a great outcome from a strategic and operational standpoint, but did accelerate overall hiring into Q1, which otherwise would have occurred on a more measured basis throughout the year. Note that all of these is within our previously communicated expectations throughout 2016 would likely play out and we expect to see these elevated levels of tech and content expense growth through Q3 with growth in the fourth quarter moderating. Against the backdrop of a strong start to the year, I don’t want to remind you that we continue to strike a balance between delivering healthy near-term profit while also investing to position the business for continued medium and long-term growth. In that regard, when we see outperformance or windfalls either from our organic business or from acquisitions, we have a bias to reinvest at least a portion of that back into the business. This is part of the reason that we do not guide to or place undue emphasis on one specific quarter’s performance and this quarter is no exception. Turning to our financial expectations for 2016, we are reiterating the guidance we gave to you on our Q4 call. On a consolidated basis including all of the businesses we own today and excluding eLong, we continue to expect full-year adjusted EBITDA to grow in the range of 35% to 45% year-over-year, included in that growth we continue to expect that Orbitz and HomeAway combined will deliver adjusted EBITDA of $270 million to $325 million. I would also like to remind you about the relative shape of our year. Despite a strong Q1 we do expect the vast majority of our adjusted EBITDA dollar growth will come in the back half of the year. And I would remind folks that certain tailwinds in Q1, such as the Easter shift will be headwinds for Q2. As such I would encourage you to take close look at quarterly phasing with our Q1 beat largely unchanged first half guidance and completely unchanged full-year guidance in mind. The usual seasonality of the organic business will be amplified by recent acquisitions with integration and transition investments for both Orbitz and HomeAway in the first half of the year, expected to make way for synergy realization in the second half. Finally in terms of capital allocation, we are pleased to have repurchased 2.9 million shares for $312 million so far this year. We will continue to balance capital allocation between M&A, share repurchases and our dividend.

Thanks Mark. Just a few closing comments to frame where we are on the bigger picture before moving to Q&A. Over the past several years, we have positioned Expedia Inc. to be the most comprehensive travel distribution platform the world has ever seen. We have organically built on unrivaled geographic reach and awareness for our flagship brands Expedia and Hotels.com. We have invested billions of dollars in our technology platforms and established Expedia Inc. at the forefront of product and technology innovation in the travel industry. An advantage we will continue to press for years to come. Like many industry disruptors, we have not only invested to create offerings with superior price transparency, selection, ease of use, and value for our travelers, but we have also been systematically reducing the cost of distribution for our travel supply partners. Lastly, with the addition of Trivago, Travelocity, Orbitz, and most recently HomeAway, we have deployed capital to not only make ourselves strategically complete, but more important, to set up the opportunity for significant shareholder value creation over the coming years. Our teams are motivated, excited, and hungry, and if we do our jobs, I think you will be very happy shareholders. All of us here at Expedia are absolutely up for the challenge and the journey; we hope you are too. With that, let's move to Q&A. And operator, will you remind participants how to queue up?

Thanks. Hi, Dara, two questions please. First, on alternative accommodations, you mentioned that as a promising growth area. If you could talk a little bit about the operational challenges that Expedia has to overcome. Do you think about them more as inventory, marketing, user interface? Just talk about how you break through that morass to tap into what is a large market. And secondly, you made this comment about moving away from organic search. Is that a reasonable way to think about how you are thinking about marketing in the future? It seems like what Google has done is forced people away from it. It probably plays to some of your competencies. But just talk about the balance of organic versus paid search for your business going forward? Thank you.

As far as alternative accommodations and the challenges there go, we are trying to actually not think too many big thoughts here. The main activity is behind HomeAway, and the HomeAway team has incredible knowledge of the homeowners and managers and what they need, and it's built up incredible tools out there. We want to combine that knowledge with the kind of knowledge that we have on the Hotels.com and actually what travelers want. When you combine those two, you can create a pretty powerful platform. We've obviously done this on the Expedia and Hotels.com side so we know what has to happen and right now the HomeAway team is heads down and really building up the infrastructure that you need in order to build a global transactional travel platform and it's a bunch of technical work being done, design work being done—what we have done it before. The HomeAway opportunity is so attractive that a fair bit of talent from the Expedia teams have moved over to help out, and also because they see just enormous opportunities. So that really is just day-to-day execution on the HomeAway front. I think on the Hotels and Expedia front, once we get the HomeAway inventory—higher percentage of the HomeAway inventory online bookable, once we feed it into Hotels.com and Expedia and Orbitz and Travelocity in an integrated manner, all signs point to that inventory producing very well. We have been adding some apartment inventory mostly in urban centers and it is producing and it’s producing very well and it’s clearly kind of inventory category that our users want. As to your search question, we are seeing some moves I’d say broadly from Google; for example, they are adding a fourth paid search link, which has moved a higher proportion of traffic from free to paid. Unfortunately, we are a company that has built up some pretty strong capabilities on the paid search side. So we’re able to kind of bring in the volume anyway. It is probably a next headwind for us on the margin side, but this is a headwind that we’ve been living with for a number of years and it’s something we’re up for.

Two questions, maybe one for Dara. How has HomeAway gone since you’ve added the booking fee? How has that affected booking growth and what are you seeing there? I know you gave a metric on the call. And then maybe Mark, you could talk about the implied margin growth in your guidance for the year with a lot of EBITDA in the back half; either maybe talk about by brand or what really has to happen to make those EBITDA numbers work out? Maybe you could talk about the synergies and other things? Thank you.

Yes. I’ll start with the HomeAway. Listen, the results that we’ve seen, the early results of the booking fee, as you know, we launched a booking fee a bit earlier than we had anticipated. The early results have been excellent and transaction booking growth is up a very big 170% and that will be revenue that we recognize down the pike in Q2, Q3 based on a stay. So you don’t see that revenue coming yet, but we’re very, very optimistic — conversion in general has held up very well, actually better than we have planned. Listings growth is actually very healthy and certainly healthy compared to historical trends. We are taking a very significant portion of our services revenue and putting it either back to the customer. For example, with the guarantee, and we are putting in marketing money to make sure that we’re driving traffic growth on a global basis. So I’d say at this point, while there are certainly going to be some questions from homeowners in the community, et cetera, I think the HomeAway team is executing very, very well in the plan. We still have a long way to go, but so far, so good. Mark?

And then Justin on your question around, I think you’re really getting at why the backend loading and how aggressive is the ramp. Listen, we feel pretty good about it. I mean one of the reasons we feel pretty good about it is, it’s largely a cost story. We’ve got some pretty modest expectations on the top-line and the organic business comps are going to get harder there; we’re not expecting anything herculean. We’re going to see a ramp up at HomeAway with the traveler fee and that’s just going to build as the year goes on, we feel good about that, we already see progress. On Orbitz, we are getting that business onto the Expedia platform; we've already got Orbitz and CheapTickets on. The rest will come through most of this year with the laggards. Once we get those businesses on, we can start to shave off some of the excess costs that we have in the first part of the year. So that’s a cost story. I also just want to revisit some of the one-timers that we had in Q3 and then also particularly in Q4, if you recall, we had some very significant purchase accounting impacts from Orbitz and we had some purchase impact from HomeAway. Then in both cases, pretty significant deal and integration cost in Q3 and Q4 that just aren’t going to repeat themselves. So again, we feel pretty good about it. It’s a cost story and we think it’s very much achievable.