Expedia Group Inc (EXPE) — Q1 2019 Earnings Call Transcript

Good afternoon, and welcome to Expedia Group's financial results conference call for the first quarter ended March 31, 2019. I'm 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, May 2, 2019 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 or confident 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, and 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 excludes stock-based compensation and depreciation expense. And all comparisons on this call will be against our results for the comparable period of 2018. 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 and 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. In addition, please note that starting this quarter, we have renamed the HomeAway reporting segment to Vrbo. Finally, on April 15, Expedia Group entered into a definitive agreement to acquire Liberty Expedia Holdings in an all-stock transaction, which remains subject to approval by Liberty Expedia stockholders. With regard to the deal, we refer you to the Form S-4 filing made with the SEC yesterday. Note, we do not plan to take any questions related to this topic on today's call. Please refer to the information in the S-4 and the 8-K filings. And with that, let me turn the call over to Mark.

Thanks, Michael. We're pleased to come out of the gate strong in 2019 with robust profit growth and solid momentum. Now into the second year of our transformation, teams across Expedia Group are more aligned and collaborating more than ever as we execute against our key strategic themes, being customer-centric, being locally relevant on a global basis, and speeding up the pace of innovation and execution. With these strategic themes serving as the foundation, Q1 saw a continuation of the operating momentum we built through 2018 in our core OTA segment. Q1 core OTA room night growth was healthy and, adjusted for the Easter impact, was a bit faster than we saw in Q4. We have a playbook in place and execution is continuously improving. Focused geographic expansion supported by rapid customer and partner-centric user innovation, locally relevant content, broad inventory assortment at excellent prices, and disciplined data-driven marketing and investments add up to a formula that we believe can deliver sustained share gains and balanced growth for a long time to come. We remain pleased with our supply acquisition efforts, a key part of our playbook. Our elevated pace of new property acquisition continued in Q1 and we are on track to add a healthy number of new properties in 2019. We ended the first quarter with over 1.1 million properties on our core lodging platform, including approximately 460,000 integrated Vrbo listings as we continue to make progress unlocking the potential of our alternative accommodations inventory on our core OTA brands. As you have likely noticed, we refreshed the brand positioning of Vrbo. With high consumer awareness and brand loyalty, Vrbo is our strongest alternative accommodation brand and accounts for a majority of our U.S. business in the space. Vrbo will now be Expedia Group's primary global alternative accommodation brand and we intend to expand Vrbo to international markets in phases. We spent the last several quarters laying the groundwork for this shift. Although we are confident in our direction, our streamlining of brands and platforms has put increased near-term pressure on SEO trends, which has contributed to the deceleration we have seen in Vrbo's gross bookings growth. Despite this near-term slowdown, consolidating the bulk of our efforts behind the Vrbo brand globally and operating on a unified, world-class e-commerce platform will allow us to maximize our potential in alternative accommodations in the coming years. In addition to the refreshed brand, we launched several new product features, including Trip Boards, a customer-centric collaboration tool for family and friends traveling in groups. We also re-launched the mobile app to enhance the overall customer experience. We still have a lot of work to do, but these branding changes and new product features are all aimed at strengthening our competitive positioning over the long term. And we are optimistic that we can deliver healthy growth and remain a global leader in alternative accommodations for many years to come. Egencia posted solid double-digit room night growth in the first quarter, although FX had a pronounced negative impact on gross bookings and revenue given Egencia's significant international mix. This strong room night growth reflects benefits from our supply acquisition efforts and enhancements in Egencia's product experience that are driving an encouraging increase in our hotel attach rate. Continued innovation at Egencia, combined with a robust customer pipeline, give us confidence that we will continue to gain share in the corporate travel market. Trivago continues to execute well on their marketing optimization efforts, delivering strong profits for the third consecutive quarter. As Trivago discussed on its call yesterday, with its marketplace approaching stabilization and as they fully lap last year's changes and the team's plan to lean back into certain marketing channels, we expect them to return to revenue growth in the back half of the year and to deliver on their profit expectations in 2019. All in, we're pleased with our Q1 results and happy with the progress we're making against our key strategic themes. The opportunity ahead of us is large and our potential enormous. While we still have a lot of work ahead, we're carrying excellent operating momentum which we intend to build on as we move through 2019 and beyond. With that, I'll turn it over to Alan.

Thank you, Mark. Our 42% growth in adjusted EBITDA puts us on a good path early in the year. Excluding close to 300 basis points of negative FX to each, gross bookings grew 11% and revenue increased 7%. As expected, trends at Trivago and the Easter shift negatively impacted revenue in the quarter. We expect revenue growth to accelerate in Q2 and remain healthy as we move through the year. Stayed room nights grew 9% in Q1 while FX drove ADR declines, resulting in total lodging revenue growth of 7%. In our core OTA segment, in addition to the healthy room night trends Mark noted, we also delivered solid adjusted EBITDA growth, especially notable given our usual first-quarter seasonality. Our balanced approach to marketing, along with a benefit from strong performance in our direct proprietary channels, is contributing to the solid top and bottom-line trends over the past year, and our core OTA business is on track for another strong year in 2019. Vrbo bookings increased 5%. As Mark mentioned, the platform consolidation and brand streamlining related to making Vrbo our primary global alternative accommodation brand contributed to continued SEO headwinds. That, along with tough comps in performance marketing channels, were the primary drivers of the deceleration from Q4. We expect the slower gross bookings growth trends to persist in the near term as we work through these changes and lap the elevated performance marketing comps. We have good visibility on what we need to do to optimize our SEO profile on our new platform and expect Vrbo's gross bookings trends to improve later this year. Revenue at Vrbo grew 14% in the quarter with transaction revenue up approximately 25% and subscription revenue down 10%. As expected, adjusted EBITDA came in at negative $40 million given a seasonally light top-line and higher marketing investments in Q1. We plan to invest behind the Vrbo brand globally in 2019 as we position the business to drive strong growth over the long term. Total advertising and media revenue decreased 6% for the quarter, including approximately 500 basis points of negative foreign currency impact. Strong 23% growth from our media solutions business was more than offset by the declines at Trivago. Air revenue was up 3% in Q1 with tickets sold increasing 11%, partly offset by a 7% decline in revenue per ticket. New partnerships at Expedia Partner Solutions and solid performance of Brand Expedia drove the strong volume increases. The decline in revenue per ticket relates to the negative foreign currency impact, a shift in product mix and a reclassification of certain fees to other revenue. On the expense side, we executed well on managing overhead costs in Q1 and saw a modest benefit from FX. While we anticipate adjusted expense growth will be above these levels going forward, we do expect to execute on the same formula, driving solid leverage on our fixed costs and strategically investing in marketing in order to deliver attractive profit growth. Cost of revenue grew faster than revenue, as is our expectation for the full year. Increased customer service costs at Expedia Partner Solutions and higher cloud expenses accounted for the majority of the increase. We forecast cloud expense growth to accelerate as we move through the year given the comps to last year and continued progress on our migration. Our full-year estimate for around $250 million in total cloud spend is unchanged. Total selling and marketing expenses increased just 1% in the quarter. Trivago drove the leverage in direct selling and marketing and also contributed to a decline in indirect costs. Excluding Trivago, direct selling and marketing increased 11% due to higher spending at Vrbo and brand investments in our Core OTA brands. Indirect selling and marketing expenses, excluding Trivago, were down 1%, reflecting a benefit from foreign currency and comping over last year's supply acquisition investments. Technology and content costs grew 6%. We expect technology and content expense growth to pick up over the next few quarters and we continue to anticipate deleverage for the full year as cloud cost growth accelerates and we invest in product and platform enhancements. General and administrative costs declined 4% overall and were down 2%, excluding Trivago. We are tightly managing our general and administrative expenses and seeing nice operational efficiency. It's also worth noting that we benefited from a couple of nonrecurring items that impacted year-over-year comparisons. We expect modest general and administrative expense growth in the next few quarters and remain on track to deliver solid leverage in 2019. In general, we are taking a more disciplined approach to overhead expenses, which is comprised of the indirect selling and marketing, tech and content, and general and administrative expense lines. Collectively, overhead was essentially flat in Q1, reflecting our focus on closely managing these costs. I noted a few factors that will result in overhead growth in the next few quarters, such as higher cloud spend and product and platform investments, but we do intend to remain disciplined on fixed costs to make sure we deliver leverage on overhead this year and going forward as we scale the business. Moving down the income statement. Depreciation expense increased 6% while interest expense was down year over year. Those factors, along with our strong adjusted EBITDA growth, led to a 41% improvement in Q1 adjusted EPS. Last month, we were pleased to announce the deal to acquire Liberty Expedia Holdings which, in addition to simplifying our corporate structure and governance, will enable us to reduce our share count by 3.1 million shares. We see this as an efficient and attractive outcome that aligns with our goal of reducing our share count over time. Overall, though it's still early in the year, we're off to a good start in 2019 and continue to expect adjusted EBITDA growth of 10% to 15% for the full year. We expect a combination of improving revenue trends, efficient strategic marketing investments, and a disciplined approach to fixed cost to drive that growth. And we are confident that executing that same formula while progressing on our key strategic initiatives will leave us well-positioned to deliver sustainable top and bottom line growth into the future. Operator, we're ready for our first question.

I'll ask two. First, with Vrbo decelerating, how do you think you're doing in the category? Do you think the category has really decelerated and that's part of it? Or is it really company-specific issues? And then secondly, a lot of questions out there about your hotel take rates with some of the bigger hotel deals. It looks like they were stable at 9% room night growth and 9% revenue growth ex FX, but could you talk about that? And do you expect any impact on your take rates in the back half?

Listen, with respect to Vrbo, not V-R-B-O, Vrbo's deceleration, yes, listen, I think it's largely company-specific factors. If you take a look at the place where we are actually focusing our effort, which is the Vrbo brand in the U.S., that business was up nicely double digits and growing healthily. And really, what's causing the deceleration is a combination of the brand streamlining we've been doing, the re-platforming we've been doing, as well as just more difficult comps. So the underlying fundamentals of the business we think remain strong. 2019 is going to be one of these years though until we get the SEO trends moving in the right direction from pulling some of these replatforming moves and we can really start investing much more aggressively on the urban opportunity, on the international opportunity, that we might just see some moderated growth rates here for a number of quarters and until we move to the back part of the year. With respect to hotel take rates, listen, we have been very clear that with respect to, particularly our large global chains, that we were done resetting our compensation rates. That is, in fact, the case. And I would just say that the overall dialogue with our global chain partners has just become significantly more constructive over the course of the last couple of years. I think that we have all recognized that we all play a unique role in this ecosystem. It turns out this Internet thing is here to stay and the big global marketplaces and platforms, of which Expedia Group and travel is kind of one of the biggest ones, we're here to stay. And we have a lot of value to create, but also our partners who deliver incredible customer services and unique products, they have a lot of value to bring, too. And so the dialogue has shifted away from us versus you and how do we redivide this pie toward how do we actually expand the pie? How do we actually create new sources of value and both participate in that in a way that is accretive to both of us? We're super pleased with the way that that has gone with virtually all of our global chains. We're very pleased with the Marriott arrangement that we made. I think they are, too. And I'm hopeful that this is a sign of things to come across all of our global partnerships across all of our product categories.

I have two questions. First, could you provide an update on the geographic regions, especially considering the concerns raised last quarter regarding Europe and the U.K.? Second, you mentioned revenue improvements in the latter half of the year. Is this solely linked to the Easter timing issue in Q2, or are there other factors that could lead to an acceleration in revenue growth as we move into the second half of the year? Please outline those reasons.

Sure. I'll take first one and then Alan will take the second one. On Europe, we did call out on our Q4 call that we were seeing some weakness in outbound U.K. travel and inbound U.K. travel. That really was something that was a theme for the quarter. I think as April unfolded, it was really hard to tell with the Easter timing. Certainly, as the Brexit date has been extended out, there are, anecdotally, reports of better economic activity in the U.K. and we're hopeful that will translate into better trends, but it was a factor in the quarter. With respect to the rest of Europe, I would say, generally, it looks stable to us. There's always puts and takes from time to time, but it generally looks good. And I think we're going to get a good read here in May and June as we move into the high season, how things are generally looking out, but so far, so good.

Yes. And Mark, on the reasons to think about revenue trends in the back half of the year, there's a couple of things that are very applicable to Q1 and the first half, and those include the impact of foreign currency. That becomes less of a headwind as we move through the year. Obviously, Easter is only a first half phenomenon. Trivago, as they said and as we believe to be the case, they'll be on more normalized footing in terms of their revenue in the back half of the year. And so we expect to see easing impact on our revenue and obviously even some growth. The other thing I'd say is just that the core OTA business is performing quite well. We're pleased with the trajectory there. We do continue to do a lot of work around adding inventory and making sure that we're locally relevant. And we think that's going to continue to have impact on the business and we're optimistic about that as well. So I mean, I think those are some of the factors.

Maybe a couple, just following up on Justin's with Vrbo. When we think about the marketing investments you made starting in '17 through '18 and now, are you starting to see a yield or return on those investments? Or is the rebranding of the platform now and unifying it under one brand going to sort of hide or mask those improvements? And how should we think about those getting pushed out? And then secondarily, it sounds like your expectation now is that business will stay relatively moderate through this year and recovering until the very end. When you strip out some of the headwinds you're seeing in the business, what do you think the underlying market and your business are growing ex the headwinds you're facing so investors have a better sense of what we're trying to track back to in terms of a comp against the headwinds we see now?

Sure. The marketing investments we made in 2017 and 2018 focused on two main areas. First, we enhanced our performance marketing as we shifted from a listings model to a transactional model, which allowed us to build top-notch capabilities. We're happy with the results, but entering the first quarter, we started to see a slowdown as we lapped the initial push, although it remains a growth source. The second area involved concentrating our brand investments on the Vrbo brand, which showed strong returns. In fact, the success of these investments contributed to our decision to prioritize Vrbo as our global brand. We ran a television campaign with similar creative for both Vrbo and HomeAway, and Vrbo outperformed HomeAway significantly. This, along with global consumer research, led us to choose the Vrbo brand, which is now showing solid double-digit growth. This reflects both our marketing efforts and the improvements in the consumer experience within the Vrbo division. Overall, the steps we've taken to de-emphasize certain brands and streamline platforms are hiding the underlying strength of the core Vrbo brand. In terms of steady state, this is a highly popular and growing category, outpacing the overall industry. We believe that Vrbo is positioned to grow gross bookings at much higher rates than we currently see. It might take some time to clear the current challenges as we progress through the year, but we view this as a growth category not just for Vrbo, but also as we integrate more inventory into our core OTA brands. We see this as an attractive opportunity for the long term.

Just a couple. I guess, on the Vrbo side, as you sort of consolidated the HomeAway and Vrbo just under Vrbo and lead with that, how do you address consumer retention and loyalty, those who might have been coming directly to HomeAway and now you're out, I guess, in a bigger fashion with Vrbo? And then secondarily, maybe on just the core OTA, how should we think about this gap between ADR versus revenue per night over the next one to two years?

Naved, on the customer retention question, our intention right now is not to shut down HomeAway, but rather just to focus a lot of our marketing and other innovative efforts on Vrbo. So the expectation is that the loyal customers of the HomeAway brand, of which there are many, will continue to enjoy that brand, but on margin, we'll take the bulk of the new customers against the Vrbo brand here in the U.S. and globally. And then, of course, as we get into this, we will probably look at ways where potentially we can incent customers, whether or not it's from HomeAway to Vrbo but certainly with respect to some of the other regional brands in international markets, really start to introduce them to the Vrbo brand in a way that is nonthreatening and gradually move them over.

Yes. Naved, on the revenue per room night versus ADRs, I think the factors there are, as we've discussed before, loyalty is one. And loyalty costs are recorded as a contra revenue. And as long as our loyalty channel is growing faster than the rest of the business, that will be a net difference between revenue per room night and ADRs ongoing. FX is a component too, but we don't read too much about that because it would come out in, over time, in the wash. There are other factors in there that ebb and flow, things around customer refunds if there's particularly inclement weather. Again, those are things that tend to ebb and flow over time. In terms of the core margins, I think the only things I'd mention is just that in terms of our global chain, contracted margins, we feel like we are where we need to be and we're providing value for the rates that are being charged. We are constructive, as Mark mentioned earlier, with our partners and try to look for ways that we can add value there, but we don't expect big changes in our contracted rates with our global chain partners. In there too, there could be some mix factors over time. If we're growing in particular countries where the economics are different than they are for the rest of the business, that could have an impact as well, but that, again, should be generally around the edges. We've talked about a gap in the 200 to 400 basis point range. It's been a little bit narrower than that these last couple of quarters, but there's nothing really changed significantly in our thinking about that gap and how to think about it.

Yes. I would like to add that we have a few programs gaining significant traction that could enhance our overall monetization and benefit our partners. One of these is the Accelerator program, which is becoming more sophisticated in providing our partners with tools to achieve higher placements in the sort order, thus driving more incremental volume as and when they need it. We are pleased to see increased traction in this area. Additionally, our TravelAds product, which appears in ad and media, is also experiencing strong traction, reflected in our advertising and media revenue. Overall, we feel confident about our margin trajectory. There will be various factors influencing this, but we believe we are in a good position.

Alan, you mentioned a more disciplined approach in expenses. I'm just curious if you could give us a sense of kind of where you're seeing the greatest efficiency this year maybe where you didn't have that last year. And for Mark, just a follow-up on Mahaney's question on Europe. In the quarter, was Europe worse than what you had expected? Or did it decelerate from what you saw in the fourth quarter? I'm just curious, the trajectory that Europe is on from your perspective.

Yes, Brent. Regarding your first question, there are a few key points to highlight. We are focused on being strategic about our hiring by carefully considering where and why we bring on new staff to ensure it aligns with the most important and value-adding areas of the business. Additionally, we are assessing opportunities across Expedia Group to better utilize our technology and resources to achieve greater efficiencies. We are beginning to see some positive effects from these efforts, which we intensified last year. I want to emphasize that we do not anticipate achieving the same growth level in Q1 for the entire year. We are making investments and undertaking some hiring, so the growth rates may not be consistent throughout the year. However, we do expect to realize efficiencies in our fixed costs and overhead as we progress.

And on Europe, I'd say Europe was broadly in line with our expectations, grew broadly in line with the overall rest of the business. We did see nice growth in the domestic markets of most of the major markets probably with the U.K. as an exemption. So that would be the one thing I would call out. But broadly, it was in line with our expectations and, like I said earlier, broadly stable from what we can tell.

So I wanted to ask another question about your supplier relationships and take rates on the air side. So can you talk about how you're approaching your dispute with United Airlines and what's going on there, and more generally with your air partners? And how do you expect those negotiations to impact your metrics and financials?

Sure. On the air side, we have a mix of very strategic partners. Over the past few years, many of them, including major U.S. carriers, have started collaborating with us more effectively, recognizing our mutual value and potential for adding more. Most of our U.S. carriers, including some major competitors of United, are in this space. Our distribution business has evolved significantly, and we now reach hundreds of millions of visitors and customers, making it a highly cost-efficient channel, especially as issues like consumer credit card fraud and customer service automation have arisen. We're generating substantial revenue for our partners while effectively managing fraud costs and customer service expenses, which can lead to significant savings for each carrier. We’re collaborating with American Airlines on reducing customer service costs and exploring innovative upselling strategies. Moreover, our strategic partners are utilizing our advertising platform to highlight their unique offerings, and Air Canada has made remarkable strides with our Media Solutions team. Through Expedia Partner Solutions, we support many carriers’ websites and provide valuable technology. Our Egencia business has strong relationships with carriers like Delta, facilitating innovative programs. Recently, as we've transitioned into more of a platform company, we've leveraged our real-time review data to help airline partners assess their customer service performance against peers. We're also collaborating with partners to provide demand data for revenue management. We're only scratching the surface of these opportunities. Looking at our relationships with airlines, especially with United, we see significant potential for value creation. With about five months until our contract expires, we remain eager to engage in discussions with United. However, if they choose a different path, it won't drastically affect us, as no single carrier accounts for more than 1% of our revenue. Our customer base chooses Expedia largely because they're not tied to one carrier. Ultimately, while we want to expand value rather than divide it, the decision lies with United, and we will adapt accordingly. I believe United’s competitors would benefit from any decisions made, but such a move would disrupt value for both parties, which likely isn’t a desired outcome for either side.

Mark, just kind of curious, I mean, we're obviously in a moment in time as it relates to the way that many of the companies in the OTA space are creating marketing efficiency goals and the ROIs that they're trying to target within their advertising. We talked about it before. You guys have clearly been a beneficiary of this. We saw this obviously in Trivago's numbers yesterday and your results today. Curious if you have a view on how stable this environment that we're in is and to what extent having other competitors for keyword buys, retargeting buys, pulling back from the market has sort of benefited Expedia's profitability or growth and what your expectations for that are going forward. And just merchant side of things, well, I completely understand and have seen in your numbers that the take rate or commission piece of this has been relatively stable. We've seen in prior negotiations, structural changes, things around pricing parity and last room night availability. I'm just curious to the extent that you can share with us or give us some direction whether or not you're seeing the hotel partners or Expedia pushing for certain structural changes within the operating agreements that you have with your hotel partners.

I believe, Heath, that we are not at a steady state regarding marketing efficiency at this moment. We are currently seeing benefits from a significant change in our approach and that of some competitors to marketing. As we progress through the latter part of this year, we expect to return to more normalized levels once we eliminate non-incremental spending. We will also have a much clearer understanding of our returns, enabling us to re-engage in a more disciplined manner. While we're not quite there yet, the improvements so far have been beneficial for all of us. Inefficient marketing spend has impacted revenue, as it still generates some income. We are looking forward to the second half of the year, not only for our core OTA business but also for Trivago, as we transition from this new base and focus more on efficient and balanced growth on a consistent basis moving forward. Regarding our relationships with major chain partners, there is nothing specific to mention. The overarching goal for us is to explore new ways to customize our arrangements to better align with the value that these partners derive from our channels. We aim to implement programs like Accelerator and TravelAds to give partners more control over volume when needed. Additionally, we are exploring unique methods for collaboration that extend beyond just packaging deals, leveraging our platform capabilities. It’s not a singular focus; we are striving to be flexible and tailor our strategies on a case-by-case basis with each strategic partner.

So first for Alan. Alan, regarding your comment on revenue acceleration in the back half, can we read the commentary as applicable to the room nights as well? And then secondly, on Vrbo bookings growth, I realize the headwinds from comps and the SEO issues from brand consolidation, but is the benefit of online bookability penetration gains fully achieved at this time? And also, considering the scale of marketing investments, is it smaller compared to what you are doing last year? Wondering about this kind of deceleration in the face of ongoing investments.

Yes, Deepak. There are definitely connections between my comments on revenue and room nights. For instance, Easter being a factor in the first half impacts both areas. We've mentioned previously that trivago, both at the meta level and specifically for Trivago, has posed a significant challenge for us regarding room night growth as we've adjusted and they've reset their business. If everything goes as expected and they begin to normalize in the latter half of the year, leading to growth, we should notice some relief and benefits from that as the year progresses. Additionally, we will have cycled through much of the marketing optimization we implemented in 2018, which may also have an effect. Therefore, there is a clear relationship between revenue and room night trends that we will observe. As I've mentioned earlier, we are quite pleased with the core business, which continues to perform steadily, and we believe it will maintain or improve as we advance.

Deepak, the team at Vrbo has done an exceptional job over the past three years in transitioning a significant amount of offline business online. Right now, we are tackling some of the more challenging aspects of integrating offline and online efforts, and I believe we are reaching a more stable point in that process. However, the main issue affecting gross bookings and the deceleration in online gross bookings has been the platform changes we've implemented, which have impacted some offline business, possibly allowing it to shift to other areas in the industry. Additionally, we've streamlined our platform and brand as part of this process. That's been the primary concern. Concerning our marketing investments, we are still satisfied with the returns we've seen. We are overcoming a previous period of rapid growth and are now in a stable phase.

I had two questions. First, how much of the performance or strength observed in the quarter outside the U.S. is attributed to improvements from the property supply growth and acquisitions in Europe and other regions, along with any related marketing efforts? I'm trying to understand how much of the strength is due to year two developments versus better stability in the macro environment. My second question pertains to Vrbo and the investments being made there. I know you're working to compete in urban and international markets and expanding supply in those areas. I'm curious whether the goal is primarily to enhance consumer engagement with those newer listings on Vrbo or how much you're considering the integration of those listings on Expedia.com as well.

The new inventory we've added is performing well. However, it's really just one part of the overall strategy, which involves adding new inventory, ensuring that it sells effectively through disciplined performance and marketing, and providing locally relevant user experiences with accurate content, translations, and local payment options. This combination is beginning to show promise in terms of improved customer engagement, repeat rates, and efficient growth, and we hope to maintain this momentum. As we noted last quarter, we’ve integrated this effort into our regular operations. In 2019, we are aiming for a broader market outreach while continuing to enhance our initial markets. Regarding Vrbo, our investments aim to increase consumer engagement with alternative accommodations by expanding Vrbo globally as an exceptional product while also incorporating inventory into our core OTA brands. These core brands already attract significant urban demand and are seeing strong international interest. Initially, integrating new alternative accommodation properties into our core OTA brands will be beneficial. We are confident that Vrbo, with its unique user experiences and focus on families and friends, along with its innovative collaboration tools, has the potential to drive significant growth and foster strong customer loyalty both domestically and internationally, while also enhancing its presence in urban markets independently.

Yes, this is Chris on for Lloyd. Maybe a few, if I can. We've seen some of your peers migrate away from the traveler fee model. Just curious how disruptive a change like that would be for Vrbo and if you think industry forces would really kind of move you in that direction. And then we've seen a little bit of news lately that some of the hotel brands are starting to compete in the vacation rental space. And was just curious if that inventory is something you guys would expect to get on the platform and how those take rates would look relative to a like your core lodging business. And then maybe one on your Add-On Advantage product. I think it's been about a year since you guys have rolled it out. And I was just curious if you could give us an update on what markets that product is currently in, some of your early learnings there and maybe how we should be thinking about the program rolling out to additional markets and the potential integration of other products like vacation rental into it.

Sure. Vrbo has a strong position with various monetization options, including traveler fees and subscription or pay-per-booking models. They are exploring how to align their monetization strategy with the types of inventory available and the preferences of both suppliers and consumers. Vrbo is well-prepared to handle any shifts regarding traveler fees and is actively implementing changes and testing within its supply base. Regarding hotel brands entering the vacation rental space, we've noticed interest from companies like Marriott, which, although new for them, is part of a broader trend involving other core players. This development is intriguing and suggests that the combination of different accommodation types could benefit from increased professionalism. Major hotel companies are adept at delivering exceptional guest experiences, and enhancing professionalism in this area could be advantageous for the industry. We aim to support our partners as they introduce new types of inventory, just as we have assisted with all their other offerings, ensuring they reach the right consumers at the right time. As for the Add-On Advantage, it has been active in the U.S. for some time and has extended into several international markets with notable success domestically and moderate success abroad. The key to its effectiveness lies in two main factors: having a strong product that entices consumers to purchase bundled deals, and effective merchandising and marketing. Our team is continually experimenting to see how well Add-On Advantage resonates with consumers outside the U.S. We are dedicated to ongoing testing and improvement. So far, we've seen positive developments, and the product continues to improve significantly over time, while our marketing strategies are evolving as well.

I have two. You guys are a very data-driven company, sort of very analytical. I guess, could you sort of talk us through some of the main KPIs that you're watching in the markets where you've rolled out the new inventory and the new supply you've added over the last couple of years just so that investors would kind of get an understanding for the merits of your investments sort of paying off. What are you watching and what are you seeing in these markets? And then, Mark, can you talk to us about the way you think about loyalty, the importance in sort of investing in loyalty program to potentially build a stickier customer base?

Certainly. As a data-driven company, we analyze various key performance indicators to assess our success, so here are some key insights. Our main goal is to be relevant in local markets, which is a vital part of our customer-centric approach. To measure this, we examine customer repeat rates to see if we are developing more engaging products through our efforts, from inventory acquisition to increased local relevance. We evaluate whether adding more inventory helps us reach new customers by creating competitive new destinations and expanding our keyword and metasearch presence. We also focus on room night growth, specifically domestic room night growth, to determine if we are generating additional room nights or simply reallocating share among our partners. Additionally, we assess marketing efficiencies and whether the partners we onboard are benefiting from increased bookings and relevance. Overall, in all of our markets, the metrics are trending positively. We are continuously learning and optimizing our strategies. While we don't always get it perfect, we are committed to integrating these efforts into our routine operations. Regarding loyalty, we firmly believe that the best loyalty program is offering an outstanding product, and we concentrate on providing a customer-centric, locally relevant offering. Our Hotels.com loyalty program, which rewards customers with a free night after staying 10 nights, enhances this value proposition. Similarly, the Expedia and Orbitz programs emphasize building quality products, while also encouraging customers to ascend loyalty tiers and receive improved treatment and amenities at properties. These enhancements contribute to product differentiation, ultimately leading to increased customer loyalty and retention over time.

So I wanted to dig in a little bit more on the SEO headwinds you called out for HomeAway from the brand consolidation. Our recollection from back when HomeAway was an independent company was that this was an issue that they had to navigate slowly. So are the headwinds you're calling out, I guess, a more rapid pace of brand consolidation you have put in, so at some point you just have to comp these? Or are you consolidating the sites one at a time into mainly Vrbo?

Sure, Stephen. So I would say SEO headwinds for every player in the Internet have been a story for a long time. Google is absolutely taking free and moving it to paid and moving from paid to more qualified like they're doing in hotel ads products. What we've done with Vrbo though, of course, has been on top of that. And Vrbo and essentially HomeAway and all of the brands that they've had internationally traditionally been actually quite dependent on SEO. And as we have consolidated platforms, it has changed essentially the linking structure of those brands and ultimately resulted in bigger headwinds for them. In some cases, there are places where we can recapture this. I think in Vrbo, for example, the teams have got great playbooks in place. And even as Vrbo has changed platform structures, we're marching up. We're seeing good metrics and there are signs that things are moving in the right direction. But with some of these brands, some of these regional brands, it will be something where, by and large, we're just going to have to comp it and lap it over time. And we'll move past this. Again, we're a long-term player. We're very much focused on building great brands and building great customer relationships and growing them internationally. We're backing Vrbo as the primary brand and we're optimistic that Vrbo has got a long runway ahead of us and it will move past some of these transitional issues like we're seeing with SEO.

Great. Well, a big thanks to all of you for listening today. I especially want to thank all of the Expedia Group employees around the world for your hard work this past quarter. I'm just incredibly impressed with the collaboration that's happening and the progress I'm seeing across the Company. I'm just so excited about what we can achieve together. I look forward to speaking to all of you next quarter. And with that, we'll turn it back to the operator.