Expedia Group Inc (EXPE) — Q4 2018 Earnings Call Transcript

Good afternoon, and welcome to Expedia Group's financial results conference call for the fourth quarter and full-year ended December 31, 2018. I am pleased to be joined on the call today by Mark Okerstrom, Expedia Group's CEO and President, and Alan Pickerill, our CFO. The following discussion, including responses to your questions, reflects management's views as of today, February 7, 2018 only. We do not undertake any obligation to update or revise this information. As always, some of the statements made on today's call are forward-looking, typically preceded by words such as we expect, we believe, we anticipate, we are optimistic that, or similar statements. Please refer to today's earnings release and the Company's filings with the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements. You will find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release, which is posted on the Company's Investor Relations website at ir.expediagroup.com. I encourage you to periodically visit our IR website for other important content including today's earnings release. Unless otherwise stated, all references to cost of revenue, selling and marketing expense, general and administrative expense, and technology and content expense exclude stock-based compensation and depreciation expense. And all comparisons on this call will be against our results for the comparable period of 2017. Finally, a reconciliation of adjusted EBITDA guidance to the closest corresponding GAAP measure is not provided because we are unable to predict the ultimate outcome of certain significant items without unreasonable efforts. These items include but are not limited to foreign exchange, returns on investment spending, and acquisition-related or restructuring expenses. As such, the items that are excluded from our non-GAAP guidance are uncertain, depend on various factors, and could have a material impact on GAAP results for the guidance period. And with that, let me turn the call over to Mark.

Thanks, Michael. We were pleased with our overall financial performance for 2018. Not only did we deliver excellent financial results that exceeded our expectations, but we also moved into execution mode on the transformational strategy that we laid out at the beginning of the year. As part of that strategy, we articulated three key themes: Being locally relevant on a global basis; being customer-centric; and speeding up the pace of execution and innovation across our platform. We enter 2019 with solid operational and financial momentum and an organization more focused and aligned than ever before. I'm truly excited about the opportunities ahead as we have only just begun, harnessing the true power and potential of our platform. For 2018, full-year gross bookings grew 13%, reaching nearly $100 billion. We increased stayed room nights 13% and revenue was up 12%. Our solid execution on marketing optimization led to even faster profit growth with adjusted EBITDA increasing 15% and adjusted earnings per share up 35%. We delivered these results while at the same time making strategic investments in several key initiatives including our cloud migration and accelerated pace of supply acquisition. On that note, our team added approximately 200,000 new properties to our core lodging platform in 2018, roughly double the amount added in 2017. We ended the year with over 1 million total properties including over 370,000 HomeAway listings now integrated into our core platform. We continue to make solid progress in our priority markets. While we still have more work to do both on the supply and product side to be truly locally relevant for customers in these markets, we saw positive signs as we moved through the year. We expect to build on that momentum as we head into 2019. And we remain confident that as we drive deeper supply coverage, deliver a more locally relevant product and layer in brand and other marketing efforts to increase awareness, we can accelerate both top-line and bottom-line growth in these markets over a multiyear period. This focused market approach is now our standard international expansion strategy, and we plan to continue investing in the normal course of business. HomeAway posted healthy financial results for the full year with revenue increasing 29% and adjusted EBITDA up a robust 43%. Total online bookable listings increased 24% in 2018 to over 1.8 million, including over 1 million in instantly bookable listings, which we think will provide a nice boost to conversion over time. Given the attractive growth prospects, we plan to keep investing significantly in this business in 2019. That includes additional performance in brand marketing for HomeAway and VRBO as well as laying the groundwork to pursue the significant urban and international opportunities that we believe can unlock the next leg of growth for the business. We remain focused on positioning HomeAway and Expedia Group to capitalize on the significant long-term opportunity in the alternative accommodation space. And we believe we have a long runway of healthy top and bottom-line growth ahead. Egencia delivered solid results in 2018, growing gross bookings 14%, revenues 16%, and adjusted EBITDA 13%. The sales team continues to sign new business at a healthy pace, and we're investing in customer service and product to further differentiate Egencia’s offering. We're optimistic we can continue to take share in the managed corporate travel space while delivering attractive profit growth over the long term. trivago is making nice progress on adjusting its strategic focus, posting strong profits for the second consecutive quarter. The team is executing well on the shift to better balance revenue and profit growth. And as outlined on the call yesterday, we expect trivago to carry its operating momentum into 2019. Overall, our team achieved a lot in 2018, making solid progress on our transformation while delivering excellent results. I'm impressed with the high level of execution we exhibited across the Company, and I'm optimistic we can carry that into 2019 and beyond. The travel market is as competitive and dynamic as ever, but the opportunity is large. And we're confident that by continuing to execute our strategy, we can deliver exceptional products and services to our customers and create value for our partners, resulting in share gains, healthy growth, and attractive returns for our shareholders for a long time to come. With that, I'll turn it over to Alan.

Thanks, Mark. We finished the year with another strong quarter, growing gross bookings 11%, revenue 10%, and adjusted EBITDA 17%. Total lodging revenue grew 10% on stayed room night growth of 11%. Across our Core OTA segment, growth in both lodging revenue and stayed room nights were essentially in line with Q3 as we continued to execute on appropriately balancing healthy, quality, top-line growth with profitability. When analyzing room night growth, keep in mind that our focused international strategy involves building supply depth in key markets by pushing into secondary and tertiary destinations. As a result, we're adding smaller properties than we historically have, and alternative accommodations are growing portion of our overall property mix. We expect that pattern to continue going forward and therefore expect room night growth to be less correlated with property growth than in the past. Based on what we've seen, we believe the increasing depth and breadth of our supply will drive better conversion and higher customer repeat rates, leading to improved marketing efficiency over time. At HomeAway, gross bookings growth moderated to 15%. The deceleration was primarily due to slower international trends, headwinds in SEO, and ADR growth continuing to normalize. HomeAway's revenue and stayed room nights each increased 20%. Total advertising and media revenue increased 9% for the quarter. Our Media Solutions business continued to perform well, growing 28% in Q4, partially offset by declines at trivago. Air revenue grew 18% with tickets sold increasing 10% and revenue per ticket up 7%. We saw solid contributions from Brand Expedia and Egencia, as well as some benefit from Expedia Partner Solutions’ new partnership with Chase Ultimate Rewards. Similar to the prior few quarters, air revenue also included a modest benefit from the reclassification of distribution fees from contra-revenue to cost of revenue. As a reminder, this change is neutral to profitability, and Q4 is the last quarter it impacts our results. We continued to drive leverage in the overall P&L, delivering over 100 basis points of year-over-year adjusted EBITDA margin expansion in Q4. In the quarter, cost of revenue grew slightly slower than revenue. That includes continued impact from our cloud migration and the accounting change related to the reclassification of air distribution fees, which combined, contributed over 300 basis points to cost of revenue growth. Total selling and marketing and direct selling and marketing expenses each increased 7%. Leverage on direct expenses was largely driven by the ongoing marketing rationalization efforts at trivago. Excluding trivago, direct selling and marketing expenses grew 14%. That was faster than the past few quarters due to increased spending at HomeAway and higher brand marketing investments across some of our Core OTA brands. Indirect selling and marketing growth decelerated in Q4 as we started to comp against the hiring ramp to support our supply initiative. Technology and content costs continued to deleverage. Although growth came in a bit lower than expected at 16%. General and administrative expense growth further decelerated from the past few quarters, increasing 8%. We also continued to leverage below the line in Q4 with depreciation expense up only 2% and net interest expense down year-over-year, while our adjusted tax rate came in at 24%. Those factors along with a lower share count, led to strong adjusted earnings per share growth of 49%. We expect adjusted EPS to grow faster than adjusted EBITDA again in 2019 as we continue to see leverage on our below the line items. Excluding CapEx investments for our new headquarters, free cash flow grew 7% in 2018 to $1.3 billion. That came on top of 46% growth in free cash flow, excluding headquarters in 2017. The shift in timing of a couple of significant payments benefitted 2017 and negatively impacted 2018. Normalized for that timing shift, growth would have been more balanced across the two years and faster than adjusted EBITDA growth each year. Our business continues to generate attractive free cash flow, and we see an opportunity to improve our free cash flow conversion in the coming years. In terms of capital deployment, we returned nearly $1.1 billion of capital to our shareholders in 2018, primarily through share repurchases, along with our quarterly dividend. In total, we bought back 7.7 million shares for $903 million, our highest amount in any year since 2007. In addition, we deployed $186 million on acquisitions and strategic investments. Going forward, we intend to continue prudently balancing opportunistic M&A with returning capital to shareholders. Turning to our financial expectations for 2019. We expect total adjusted EBITDA growth of 10% to 15%. We expect the seasonality of our adjusted EBITDA growth to follow a similar pattern to 2018 with pressure on adjusted EBITDA in Q1 and the large majority of growth coming in the balance of the year. One factor to keep in mind is that Easter fully shifts into Q2 this year, creating a drag on consolidated first quarter stayed room nights’ revenue and profit. In addition, as a reminder, we invest in selling and marketing to drive bookings ahead of the busy travel season with lodging revenue recognized at the time of the stay, which peaks in summer months. This trend will continue to be even more pronounced at HomeAway due to its longer booking windows, and we expect that to result in an increase in losses in Q1 for HomeAway this year, compared to last. For the full-year at HomeAway, as Mark mentioned, we intend to continue investing back into the business, including brand and performance marketing to position HomeAway to capitalize on the significant long-term opportunity we see in alternative accommodations. We expect the increased investment levels to result in slower adjusted EBITDA growth for HomeAway in 2019 with the returns coming over time. Turning to our expense expectations for 2019. We expect more significant deleverage in cost of sales compared to 2018. The key drivers are the increased investment in cloud, customer operations costs related to new details at Expedia Partner Solutions, and HomeAway's shift to become the merchant of record on more of its transactions. We also forecast tech and content expenses to deleverage due to higher cloud cost as well as continued investments in product enhancements and platform initiatives across the Company. In total, we currently expect cloud expenses to increase from $141 million in 2018 to around $250 million in 2019. Excluding cloud expenses, adjusted EBITDA growth would be approximately 400 basis points higher. We project total selling and marketing expense to leverage again in 2019, mainly reflecting the cost rationalization efforts at trivago, which will have a bigger impact on the first half of the year. Excluding trivago, we will lap the marketing optimization benefits we recognized in 2018 as we move through the year. Overall, we intend to maintain a balanced approach, strategically investing in both performance and brand marketing where we see opportunities to drive good returns over time while continuing to look for areas to optimize spend. Meanwhile, we expect solid leverage on the general and administrative costs line. Looking below the line, while we continue to receive additional guidance related to the U.S. tax reform, we currently expect our adjusted tax rate to be in the low 20% range. Overall, I'm pleased with our performance in 2018 and believe we're entering 2019 with good momentum, leaving us well-positioned to deliver solid growth this year and for years to come. With that, operator, we're ready to take our first question.

Thanks. Mark, you mentioned three factors contributing to the slowdown in gross bookings. Could you elaborate on those? One of them was lower international trends. Additionally, I appreciate the slides you provide, particularly the one highlighting the significant market opportunity. It's notable how small your market share is in EMEA, Asia Pacific, and Latin America compared to what you've achieved in North America. Can you discuss how you plan to increase your market share in those regions? I know it's broad, but it's an interesting takeaway from those slides. Thank you.

Thanks, Mark. I’ll have Alan answer the first one; I'll take the second part.

Yes. So, as far as HomeAway's gross booking trends are concerned, I think the first thing I would just talk about is just level setting on kind of what's happened with that business over the last three years. And when we bought the business, just remember that 100% of their business was essentially offline gross bookings. And so, we've gone through this transformation at HomeAway, turning it into a true travel e-commerce player and pulling gross bookings online. And so, obviously, when you do that, you're going to have a tailwind associated with a book of business that previously had been booked offline that's now being booked online. And that transformation has been quite successful, gotten us up to about $11.5 billion of online gross bookings for HomeAway in 2018 and shown pretty strong and healthy growth over that period. We did see some deceleration in 2018 as we went through the quarters, and I mentioned that as far as Q4's results are concerned. I would just point out a few factors there. One is that the international business, we did some things last year that did pull gross bookings online. And we're comping over those things that we did, while at the same time, having international not be extreme focus for the team. International will be more of a next leg of growth for us along with urban. And so, that's gone from something that did create a bit of a tailwind to something that's now not contributing that much growth to HomeAway's overall gross bookings. The second factor is we do have SEO headwinds. And what I would say there is we stood up a proper search engine marketing team in the past years. They have done quite well and are driving significant growth and healthy growth in gross bookings. But, at the same time, HomeAway is going through a period where they've got pressure on their SEO trends. And that's creating a headwind for them. This is something that all travel businesses have had to endure. I would say HomeAway is coming through that at a later date than some of the other ones because of the transition of their business, but it is creating a headwind. The last thing I would just say is that the ADR contribution, historically we had some periods where ADRs were a bigger contributor to gross bookings growth. That's because we had some larger properties coming online first and those were coming on at high ADRs and so it was driving a nice tailwind there. We still are seeing growth in ADRs but it's moderated and not quite as big of a contributor. But overall, I would just say that we're looking for HomeAway to be a good healthy grower over a long period of time. We're very happy with the transition that we've been through in the last three years. We think the market that the business is in is large and growing. And we've not even done anything really significant in the urban, we've not done anything very big in international. And we think those things will provide kind of the next phase of growth for HomeAway.

And then, Mark, in terms of our approach to international, it's really encapsulated in this first pillar of the three-part transformational strategy we laid out at the beginning of the year, which is the concept of being locally relevant on a global basis. We've been able to build up an incredibly strong position in the U.S. and in Canada and few other markets around the world, largely because we've delivered an incredible service, a service where everyone knows Expedia, Hotels.com, Orbitz, Travelocity are places where they can come, where they have all of the inventory in terms of lodging choices, increasingly alternative accommodations in the case of Expedia, cruising, car, activities, flights. You can find them all at one place. There is great content. It's in your local language. You can use your payment types. You pay us now or you can pay us later. And then, if something goes wrong, we'll help you sort it out. And that's just an incredible customer experience. So, for the U.S. customer, for the Canadian customer, we're truly locally relevant. Outside of those countries and again a few others, we haven't concentrated on building incredible products. We’ve been, up until 15 months ago, going with really much more of a land-grab strategy where we were expanding simultaneously in 30 to 60 countries around the world, depending on what brand you're looking at. And even though we would have got there over a long period of time, it would have taken us a long period of time. So, the approach now is really this focused strategy. We’ve talked about the Wave One markets. And it's a focused strategy, making sure that we have incredibly easy-to-use websites that have great descriptions and photos, all translated into local tone and voice, promotional offers that talk about things that are locally relevant in a similar way that we do in the U.S. We've got all of the lodging and other inventory available on our sites. We've got local payment types. And then, we layer on good marketing with locally relevant messages, both in performance marketing and brand channels. And that's the recipe for success. And we have seen, again, very encouraging results in our Wave One push. It's a multiyear journey when we prioritize these markets. But, now, based on the historic data that led us to pursue this strategy, based upon the results that we've seen so far with the progress in 2018, this is now business as usual. And we're just incredibly optimistic that that $1.7 trillion travel opportunity, based upon where we can go geographically, where we can go by segment across leisure, corporate, offline travel agencies, powering airlines, et cetera, we're very comfortable that all of that to us looks very addressable.

Maybe two, if I can. Following up on there. As you continue to sort of ramp marketing investments behind the opportunity you see, can you talk about maybe some of the experiences you've had about shifting in and out of different channels on the marketing side, definitely leaning in more on branded and direct, what that does for ROI for the platform of the medium to long-term? That's number one. And then, number two, wanted to understand maybe some of the background or rationale behind the proposed or negotiation that's going on between yourselves and Liberty Media, just so we can put that in the context of broader capital allocation? Thanks, guys.

In terms of marketing investment, we've discussed our marketing rationalization approach and our efforts in 2018. We've become more adept at distinguishing between truly incremental marketing and merely shifting bookings from one channel to another. We're also delving deeper into our marketing strategies, not just in performance marketing but also in areas like television and digital video. This has helped us understand better where to allocate our marketing funds. We've noticed, particularly in the U.S., where our products are very strong and our mobile applications are outstanding, that customers find us even when we are less aggressive in certain performance marketing areas. They either download our app through various placements or book directly on it if they already have the app. We've highlighted in our investor presentation that app transaction growth on Hotels.com and Brand Expedia rose 50% year-over-year in 2018. In markets where our product is excellent and locally relevant, customers can easily find us, allowing for more efficiency in our marketing spending. Going forward, our strategy is to develop a great product in our focus markets and continue employing the same strategy. We'll maintain performance marketing at prudent levels to support growth, and as our product reaches a best-in-class status, we'll incorporate more brand spending. Regarding Liberty, we filed an 8-K, and I would refer you to that for more details, as there isn't much more we can discuss at this time. Next question, please?

Can you give us an update on the ad ROI environment? And also on room nights trends, as you comp against the ad spend rationalization last year, are you expecting to see nights accelerate? And then, lastly, how will Easter impact the room nights in the first and second quarter? Thanks.

Sure. So, I'll take the first couple and then I’ll have Alan talk to you about Easter. So, in terms of ROI, I'd say nothing remarkable for us. I mean, we have been again quite focused on optimization. And what that does is allows you to drive essentially better ROIs. As you mentioned, there are some situations where we were driving room nights that were in some cases unprofitable, because we were dealing with averages. And in those cases, some of those room nights go away, and they get dispersed to the broader market. That has been a headwind on our room night growth in 2018. Trivago itself has been a headwind on our room night growth, certainly third quarter and fourth quarter as well it was a headwind. In terms of whether that's going to result in acceleration, it's really hard for us to guide you on room nights, because obviously we have a dynamic market. We just know that we've got to a very clear strategy and focus, and we hope to deliver very healthy room night growth and top line and bottom line over the long time to come. Alan, do you want to talk about Easter?

Yes, Kevin, last year we discussed the impact of Easter moving partly into the first quarter, which we estimated to be around a 150 basis-point benefit to that quarter. We expect a similar effect this year. It’s worth noting that the impact tends to be greater in the first quarter due to its smaller total room nights, while the effect on the second quarter is slightly less because it has a larger volume. That's the general range to consider.

Thank you. Going back to last year, it seemed like pretty conservative EBITDA guidance and you exceeded that. So, congrats on that. Just wondering about this year's guide. It seems more aggressive with marketing leverage. And just wondering if you've added any cushion in there for potential Google changes or potential actions by your competitors after a lot of people really did pull back last year? And then, secondly, on the international bookings, I think you exited the year 11%. Maybe just give us some progress update on some of the new international markets, and if you're seeing traction there, and if there is the change that could accelerate? Thank you.

Thanks. Justin. This is Alan. So, as far as guidance, I don't want to add too much color. I'd say just as regards how 2018 developed, some of the things that turned out in our favor relative to our expectations coming into the year were trivago, certainly their full year performance compared to where we thought they were at the beginning of the year is quite improved. Cloud’s turned out to be a little bit lower than we have originally anticipated. We did have solid execution across the Core OTA business, so that helped. Mark spoke just a few minutes ago about the benefit that we saw from some of this marketing optimization provided some good tailwind. And we also just undertook to make sure that we had good fixed cost control and overhead control. So, all of those helped and kind of explain the difference between where we started the year and our expectations and how we delivered. In terms of the guidance going forward, I would say, we feel comfortable with the 10% to 15% range. Some of the main factors in there are, of course, trivago, trivago's performance. They guided on their own. So, you can take a look at the contribution they're expecting to provide. We do have a headwind associated with the increased investment in cloud spend. But, we're expecting good solid contribution across the core business. And I can't really get into like whether there were things in there factored in for specific marketing channels or anything like that. But, those are some of the main factors to think about.

In terms of international growth, we expect to see a larger contribution to our lodging revenue in 2019 from the new properties added in 2018 as we ramp them up. Whether this will lead to acceleration in those markets is uncertain. In many international markets, we rely heavily on performance marketing channels, such as trivago and other metasearch platforms. As seen with trivago, there have been instances where qualified referrals have declined year-over-year, presenting a headwind that disproportionately affects those markets' growth. However, the underlying fundamentals remain strong, and without those impacts, we anticipate these markets will significantly improve their contribution in 2019 compared to 2018.

I had a question about in the slides, you talked about the headquarters and the CapEx spend 425 to $475 million in ‘19. Can you just talk about to what degree is that incremental versus ‘18 CapEx? And then, just had a question really about the macro outlook in Europe. I know others have asked about international, but some of the traditional tour operators, like Thomas Cook for example are calling for a tougher growth outlook. You haven’t mentioned macro conditions in Europe and the expectations for ‘19. So, any more color on the environment would be helpful there. Thank you.

So, I’ll just give you some additional data points on the headquarters. Cumulatively for the retrofit and the additional build through the end of 2018, we had said just under $300 million, about $190 million of that was in 2018. So that will go up to, as you mentioned, a range of 425 to 475 million in ‘19; and then a range of 135 to 185 million in 2020; total projects in the neighborhood of $900 million plus or minus.

And then, in terms of the macro environment in Europe. I’d say, there's a ton of uncertainty there. Certainly, we watched and heard Thomas Cook's results and some of their commentary, Bank of England has taken their growth outlook down; I think Germany has expressed similar concerns. We have seen a drop off in UK flight bookings, both outbound as well as inbound. We expected uncertainty around Brexit and just overall uncertainty in Europe. So. I think, we are cautious on Europe. The great thing with our business though is that first of all, we're very global business. And so, we're broadly diversified across all of these movements. Generally, people do continue to still travel in economic downturns. They often just take shorter trips, they stay closer to home, they do often trim their budgets. But,. if you look at how that has actually played out for us over history and particularly, if you look at 2008, 2009, one of the world's largest global financial crises ever. We actually had some of our strongest core profit growth in across those years. And ultimately, what we see is, essentially we’ve got more unused capacity with our suppliers, based our discounting into our channels, consumers get great deals. And maybe they change their travel patterns but ultimately they still take their trips. So, we're somewhat countercyclical. But, I think, again, the travel market exited 2018 in a very stable and healthy state, near record highs, and occupancy, air tickets growing, ADRs still going up. I think as we sit here right now, particularly as we look at Europe, there is a little bit more uncertainty in the air.

Thanks. Two if I can. First, just can you guys perhaps give us an update on what percent of your business is direct versus acquired? I think it was about two thirds direct at the Analyst Day you guys held in 2016. So, wondering if you can just give us an update there. And then, I guess, as you look to HomeAway and investment, how do you think about balancing marketing investment and the core business kind of ski and beach, whole home versus urban and international? It sounds like you're starting to think more about those markets, but it seems like there may be more competition there. So, how do you think about the Company's competitive advantage as you look to expand into those markets?

Yes. Lloyd, this is Alan. On your first question, you're right. We did in an investor deck, investor presentation, gave that roughly two-thirds presentation. And we were essentially, just for those that maybe haven't seen it, we were essentially indicating that roughly two-thirds of the business comes from direct/proprietary channels, including things like email, loyalty programs, branded SEM, direct type-in as examples. We don't have an update for you on that today. We continue to look for good balance in growing new customer acquisition through some of the paid search channels, such as Google and other metasearch players, while at the same time providing great products and services, so that those customers will repeat. And then, as we’ve spoken about earlier, having a good mix of brand marketing, so that we can drive direct traffic. So, no update on the specific numbers for today, but we look for growth in both.

I would like to add that, as expected, we have two opposing factors at play while we optimize our marketing spending. We are increasingly directing more of our traffic to our proprietary channels, which is evident from the apps we previously mentioned. Conversely, as we expand into international markets where we are less established, we are aggressively investing in performance marketing channels, which impacts our overall strategy differently. In the U.S. and our core markets where we are well-known, we see strong bookings through direct proprietary channels. In international markets, while performance is improving, it's not at the same level, and our strategy is to align those markets to resemble our U.S. operations. We closely monitor metrics such as repeat customer usage, the ratio of new to existing customers, and customer acquisition costs. Overall, we are optimistic about the trends we observe. Regarding HomeAway, we are committed to maintaining balance. The HomeAway team has demonstrated discipline in their approach. The key resort and beach markets remain crucial, and HomeAway excels in those areas. We will continue to support and invest in these markets, which are performing well. This allows us to reinvest profits from that segment into urban and international opportunities, achieving a proper balance. Furthermore, part of HomeAway's expansion strategy includes bringing new properties onto the platform. We market these properties not only to VRBO and HomeAway customers but also leverage Expedia and Hotels.com's established urban demand and growing international presence. They have support and resources from the Expedia Group to aid in this endeavor.

A couple for me. How should we think about the growth in ADR versus revenue per night? I think in the past you’ve talked about disparity of maybe 200 to 400 basis points. And then, if I just look at the international room night growth, there is a deceleration there. What drove that and how should we reconcile that with the focus market and the growth in those markets?

Yes. Regarding the growth of revenue per room night compared to ADRs, we have discussed a typical difference of 200 to 400 basis points, which has been consistent for some time. We were pleased to see that this quarter the gap narrowed. There isn't a significant underlying factor affecting this; it's mainly due to our overall margins and geographic distribution. Foreign exchange impacts, our loyalty program, and couponing and refunds also play a role. We are glad to see it narrow this quarter, but there hasn't been a major shift in the overall narrative. In terms of the slowdown in international room night growth, I want to highlight two factors. First, with HomeAway, we observed a decrease in the growth rate of international bookings as the year progressed, which affected room night growth. Last year, we worked towards moving many bookings online and underwent platform migrations that also had an impact. Secondly, trivago is a crucial channel for us internationally, and their recent reset, along with a year-over-year decline in their qualified referrals, has posed a challenge for our room night growth. This became a headwind in Q3 and continued to be a more pronounced issue in Q4. We anticipate this trend will also persist in the first half of 2019. The positive aspect is that we have been able to capture some growth through other channels, but this situation is generally a net negative for us.

Thanks for taking my questions. I have two. Understanding you've been investing in the sales force for Wave One sort of increasing the supply in the new markets, could you just sort of talk to us about sort of the incremental step up in the sales force investments as we go into 2019 to really capitalize on the next wave of markets? How we think about the dollar investment in headcount there? And the second one, just thoughts philosophically about ways to reaccelerate HomeAway overall growth. How do you think about essentially reducing consumer take rates or sort of making it more competitive and a more compelling offering for consumers to drive faster growth at HomeAway?

Hey Brian, it's Alan. I'll take the first question and Mark can handle the HomeAway question. Yes, we discussed last year about the investment needed for our Wave One to increase the supply. The supply gap in those markets was significant and required a considerable investment. We mentioned it would be in the $50 million range for that initial push. At that time, we believed it was appropriate to share the details. Now, as Mark mentioned earlier, we've moved into a more typical business mode. We do have some additional wave markets to focus on in 2019, and we've been able to account for the necessary investments within the guidance we've provided. Therefore, we are not inclined to specify what the exact investment will be this year.

And then, in terms of reaccelerating HomeAway growth, it's really the playbook that we've laid out. Urban is a big opportunity for them. International is largely an untapped opportunity. They’ve just really got the bulk of the international product now on the new platform, which we talked about last quarter. And they're working on optimizing those and honing their performance marketing capabilities in international markets. But, importantly now that they've got the business replatform in addition to just entering into new, call it categories or new segments, urban and international. They are very focused on front-end customer innovation, developing much better user experiences and planning tools. I think, you'll see increased pace of that type of innovation roll out here as we move through 2019. And they're also working on making sure that they reach customers and that investments that they're making in marketing are investments that really build the strength of some of the incredible brands that they've got in the portfolio. So, I think you'll see a little bit more of that and more to come on that in 2019.

Great. Thanks so much. One on HomeAway. With the HomeAway business, you've taken a very measured pace toward listing inventory on Expedia. With over 1 million instantly bookable properties on the site now, how are you thinking about stepping up that integration and optimizing conversion? And then, philosophically, is the consumer fee still the right approach for that business or are you open to considering other avenues? Thanks.

Thank you, Justin. With a million instantly bookable properties, our opportunity for integration is growing. You'll see us accelerate our efforts as we progress through 2019. Our aim is to assist customers in choosing between traditional and alternative accommodations while improving the search and navigation experience. The teams have been making significant progress in this area. While 370,000 properties seem substantial, it's relatively small compared to the millions available, including those on HomeAway. We're gathering valuable insights on how to effectively market whole homes, which differs from traditional lodging. We're prioritizing this as we move forward with both our full line OTA businesses and Hotels.com throughout 2019. We're pleased with the progress so far. Having this inventory significantly boosts conversion; more selection is undoubtedly beneficial, but we need to find the best way to present it. Regarding monetization, we have multiple methods in place including supplier pay commissions, low consumer fees for credit card transactions, and subscription models combined with consumer fees. We're testing these strategies to determine which are most effective for our customers and various types of suppliers, whether they manage properties or own them. We anticipate continuing to refine our approach. At this time, we don't have a definitive answer, but we believe our current strategy, which offers a range of options tailored to meet the needs of both customers and suppliers, is on the right track.

You guys achieved good leverage in performance marketing last year through your own optimization efforts. Obviously, some of that is going to moderate in 2019. But, at what point can we expect similar step-up benefit in the future, or looking ahead, is it going to be more of continuous iteration? And then, second question on the cloud spend. What should we expect the cadence to be this year? When do we have most of the assets fully migrated and the growth and expansion be in line with maybe revenue growth?

Yes, Deepak. This is Alan. Regarding marketing leverage, we anticipate gaining leverage from Trivago in 2019. However, as we compare to the significant optimizations made to our core business, those will present challenging comparisons. Therefore, we do not expect to see the same level of leverage in 2019. The core business is actively seeking opportunities to optimize further and to identify areas of non-incremental or highly inefficient spending. While there are opportunities, we do not expect the same level of tailwind in 2019 as we experienced in 2018. Concerning cloud spending in 2019, I prefer not to provide a detailed quarterly breakdown. We will be continuing on a somewhat routine path, scaling up as we have a substantial amount of our shopping and booking traffic for the lodging segment in the cloud. We are progressing with additional components in air travel and other business lines to integrate into the cloud, which will continue to grow throughout the year. If our plans go accordingly, we will have a significant share of our compute in the cloud by the end of 2019, although more will need to move in 2020. By 2020, we may not reach a fully normalized rate but will be approaching it. I believe that by 2021, we’ll see the annualization of the increase in 2020, bringing us much closer to that normalized rate and aligned with the business growth. I should also mention that we are being very careful and disciplined with our cloud rollout. We test things thoroughly, scaling them up and down to ensure a seamless customer experience without disruption. Additionally, in 2018, we made efforts to improve our efficiency in deploying to the cloud. This includes avoiding duplicate instances in the cloud and ensuring we only utilize compute resources when necessary. I believe we have made significant progress in this area and established a much better process than at the start of the year.

Okay. Thank you. So, stepping back a little bit, Mark. You just announced that you have a million properties on site with call it 630,000 hotels or so. So, from a selection perspective, you're probably where your competitor was about two years ago. And, I think at that point, they were throughputting what seems like two times the amount of room nights that you are now. So, it seems like your booking dollar should be much higher. So, can you talk about how cloud marketing and other products will all kind of tie together for you to raise the purchase velocity among the users that you have now? Thanks.

Yes, I agree with you. It should be significantly larger, and that is definitely the goal. Supply is just one aspect of it; it’s also about the overall product experience and how effectively we reach customers. This approach is tailored to be locally relevant on a global scale. We're pleased with our current penetration in our hotel base and are monitoring this closely as we add new properties. We're also encouraged by the increased penetration we're seeing in these new properties as we ramp them up. However, this process requires some time, especially in seasonal European destinations where loyal customers might not return for a year. This aligns with the travel cycle, and it will take a bit of time. Nonetheless, we are very pleased with the progress and believe there is significant opportunity, which relates back to Mark's question at the start of this call, showing that our strategy is effective.

How much more do the macro indicators factor into your guide, or how much do you build a cushion into your EBITDA guide for natural factors? And then, just on scaling HomeAway in the urban and more international destinations. Do you ever think about signing up exclusive relationships with property managers to get their inventory?

Hey, Jed. It's Alan, I'll take the first one. It's challenging to be very specific there. Overall, we don't see ourselves as forecasters of ultimate macro outcomes. We obviously pay close attention to them, as you all do as well. As Mark mentioned earlier, we've recently gone through a period where the macro environment looked quite good. The hotel and airline industries have been showing positive numbers throughout 2018. However, there are ongoing discussions about Brexit and its impacts, along with weather effects and trade tensions, which are really tough for us to assess. We provide a range of 10% to 15% for flexibility, but if things went significantly off course, predicting that would be difficult for us.

I want to emphasize that we have a highly variable cost structure. If our top-line performance declines, we have several discretionary spending areas that we can adjust. Reflecting on our experiences from 2008-2009, our business has proven to be very resilient and adaptable. Regarding exclusivity, we have not favored it at the property, building, or property manager level. This approach is because hard assets with utilization factors often do not yield favorable economic results and can hinder our platform from maintaining impartiality toward our partners. We believe in providing the best products to our customers without the constraints of exclusivity. While exclusivity can be advantageous in specific scenarios, particularly when we can create substantial demand, it is not central to our strategy. Instead, we focus on offering unique benefits, like upgrades or special amenities that enhance the customer experience, which allows us to deliver similar advantages as exclusivity without compromising our neutrality. Ultimately, while we consider exclusivity, it is not a fundamental aspect of our strategy.

Great. Thank you. Well, I just want to thank everyone for listening today. And a big thanks to all of the Expedia Group employees around the world, tons of hard work and great progress in 2018. I know you are as well, but I'm super excited about what we can do together in 2019 and beyond. Thank you.