Expedia Group Inc (EXPE) — Q4 2019 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, 2019. I'm pleased to be joined on the call today by our Chairman, Barry Diller; our Vice Chairman, Peter Kern; and acting CFO, Eric Hart. The following discussion, including responses to your questions reflect management's views as of today, February 13, 2020 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'll find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release, which is posted on the Company's 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 exclude 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 effort. 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 Barry.

Thank you, Michael. I haven't been on one of these analyst calls, and I don't know how many times. So, I'm probably a bit ragged. But, I won't ask for your indulgence. I'll just kind of plunge in. Since December 4, which is when we made the management change, Peter Kern and I, not a day's gone by that we have not been engaged in Expedia business. And during this period of time, I mean, having been Chairman of Expedia for I don't know, I think almost 20 years or so, I thought I knew a lot about the Company. But, there's nothing like being on the ground, and we've been on the ground. And I've gotten to know the leaders of the businesses. And I'm definitely impressed. I believe in the future of Expedia as do my colleagues emphatically. We bought in the last couple of months $634 million of our stock, which is more than we've ever bought in an entire year. And we're not going to end that process now. But, what we've really done is we've taken as immediate steps as we can to refocus the Company on the day-to-day operations of and the execution for what the Company is engaged in every day. Last year, we spent probably nine months of the year on this massive reorganization. We're contemplating changing 350 I think of 500 jobs. It was a vastly complicated process that froze us. Management at the same time didn't really have a clear path how to grow the Company. It's just kind of a top-down commandment to deliver X earnings. And that misled a lot of people into actions that kind of made sense for a quarter of a day and the rest of the day, results kind of birthed from this top-down pressure without understanding how to actually execute and simplify the business and give clarity. We had somewhat become a kind of consultant-led and wildly complex business. I said sporadic and bloated. And I'll give you one anecdote that kind of rang in my ears that I heard, I don't know, I guess a month or half or two months ago, kind of out there in Seattle, that at Amazon the whole concept of working life balance that at Amazon, it was all work and no life; and then Expedia was all life and no work. Now, that's an enormous exaggeration. We've got wonderful people in the business. This is not damning our employees. But for several years, we really lost clarity and discipline. So, we're changing a great deal. We're stopping this too large complexity. We're simplifying our strategy. We're stopping doing dumb things and starting to do what we think are good things. So, from doing that dumb to doing this smart, here are a few examples. From wasteful activities that weren't core to our business to actually driving sustained growth, from every brand working in silos around the world to one strategy on marketing, and geographies across all of our brands, from our reliance on Google and metasearch, to aggressively moving to grow our own direct business and have loyal relationships with our customers. So, separate teams and data that's dispersed all over the place to one platform, driving the entire Company. From an air business we basically took for granted; it's just another line of business to actually prioritizing it, energizing it as a true competitive differentiator; and from chasing all these grand goals to focusing on day-to-day execution and making that customer experience great. So, we're in. We're energized, we're enthusiastic, and from now on, I hope, I think, you'll see the effect of that and the excellent people of Expedia and what we can all accomplish together. So, with Mr. Kern, my colleague, my partner, in this process, is going to say a few things.

Thanks, Barry, and good afternoon, everyone. I want to echo what Barry mentioned earlier. We've gained a lot of insights over the past two months, encountering both impressive individuals and initiatives, while also recognizing some instances of misallocated efforts that may not lead us to our goals. We've acknowledged our need for greater agility and the ability to decline certain paths when necessary, and we are committed to improving in this area. We are making strides in this direction and fostering a sense of discipline throughout the organization, which is encouraging. Now, I'll delve deeper into our guidance. There are three main components of our broad guidance approach. First, our core business has adopted new disciplines, particularly in managing marketing expenditures and other operational areas, leading us to believe that it will see growth compared to 2019, although it may occur later in the year. Second, as noted in our press release, we are pursuing additional savings of $300 million to $500 million across all aspects of the business, including technology, procurement, and geography. While the timing for realizing these savings is uncertain, we expect to achieve the desired run rate by the end of the year. The ongoing coronavirus situation is challenging and impacts our business, though we have a clearer understanding of its effects for the first quarter. The duration and intensity of this impact remain difficult to predict. Given this uncertainty, we've modeled various scenarios based on historical trends and, despite these challenges, we are confident that we will see growth in the double digits. Shifting focus to our operations and some areas Barry discussed, it's critical that we bring our brands together to collaborate more effectively. A prime example is our strategy for geographical rationalization. Instead of a brand-by-brand focus, we are now adopting a market-by-market strategy to push our strongest brands where they will perform best. This means possibly withdrawing some brands from certain markets to optimize our operations. On the marketing front, we aim to streamline our spending and standardize measurement and tools across brands. Historically, our different silos utilized varied metrics for performance marketing, but we are working to unify these processes for enhanced collaboration and greater returns. Regarding Vrbo, which has garnered much attention, we saw a muted performance during the fourth quarter. The replatforming and rebranding last year were distractions, but the team is now concentrating on core operations. They are also benefiting from our geographical rationalization, identifying inefficient spending and leveraging our other brands to enhance supply distribution. Expedia Partner Solutions remains a strong segment for us, with confidence in its momentum and the opportunity to address gaps in demand. EPS will benefit from enhancements to our core technology platform, improving configurability and customer experiences for our business partners. We recently integrated Egencia with EPS under a new umbrella called Expedia Business Services to simplify our operations and leverage shared practices among different business units, despite their differing end users. Our platform transformation represents a significant opportunity, enabling us to consolidate technology and unite our teams. Barry mentioned our Data and AI group, which is an exciting development as we integrate our company-wide data for better insights and solutions that enhance customer experiences and monetization. Our marketplace teams are also collaborating closely to align supply with demand effectively. Additionally, we’ve established a centralized team to govern our cloud spending, addressing costs as we transition to the cloud. This journey has been challenging, but we're nearing the end and now focus on optimizing our cloud expenditures for maximum benefit. Overall, our themes revolve around simplification and efficiency. We are determined to pursue these goals aggressively throughout the year and will keep you updated on our progress. It's important to note that this year will be noisy due to the impact of the virus and the effects of a slower second half of 2019. We are investing strategically in areas where we expect growth in the latter part of the year, which may create fluctuations in revenue and EBITDA. Nonetheless, we remain convinced that we will achieve double-digit EBITDA this year and are optimistic about the future. We anticipate strong momentum heading into 2021 if we execute our plans well. Now, I'll hand it over to Eric.

Thanks, Peter. Before diving into our results, I want to lay out three main areas we're focused on in 2020. One, driving margin expansion and unit economics; two positioning the Company to move faster and invest back into key areas to accelerate top-line growth; and three, delivering attractive shareholder returns. Turning to the fourth quarter results. While gross bookings and revenue trends moderated, disciplined marketing spend and overhead cost containment resulted in a 1% increase in adjusted EBITDA. And for the full year, we came in slightly ahead of our revised guidance range. The slowdown in gross bookings largely related to our air business as we started to compound the enterprise deals at Expedia Partner Solutions, which drives significant air volume for us. Lodging revenue grew 9% in Q4 on 11% stayed room night growth and a 2% decrease in revenue per room night, largely related to growth in our loyalty program. Domestic room night growth remained strong accelerating to 10% as we continue to gain share in the U.S. on the back of strong trends and direct channels. Cost of revenue was up 19% for the quarter. The majority of the growth related to the increase in cloud costs, inorganic impact of Bodybuilding.com and processing fees related to the ramp-up in Vrbo’s transition to the Expedia payment platform. By leveraging Expedia’s payment platform, we expect Vrbo to see improved conversion in unit economics as it benefits in several areas including fraud detection, order completion rates and flexibility on payment options. Also, as a reminder, Bodybuilding.com is essentially neutral to adjusted EBITDA. Free cash flow grew 46% for full year 2019. Normalized for Vrbo’s payments transition, free cash flow grew approximately in line with adjusted EBITDA to nearly $1.1 billion. Based on Vrbo’s current payment structure, the funds are held at a third-party and are restricted. On a normalized basis, we expect solid free cash flow growth. And going forward, with declining capital intensity and favorable working capital dynamics, we're well-positioned to drive healthy free cash flow growth going forward. On the balance sheet, in September, we placed $1.25 billion and 3.25% 10-year notes. We will use a portion of that to regain $750 million notes that mature in August 2020. Our prudent approach to managing the balance sheet is unchanged and we are committed to operating within our investment grade credit rating. In terms of capital allocation, given our conviction and Expedia's growth prospects, we repurchased 5.8 million shares for $634 million from early December through this month. We believe our stock remains undervalued and plan to use our free cash flow and cash position to continue to actively repurchase shares. Now turning to 2020. As Peter mentioned, we will continue to drive efficiency on direct marketing spend. That will lead to some tradeoffs and modestly slower unit growth for most of the year. But, we believe focusing on higher quality unit growth and on driving our direct business will lead to a stronger, more sustainable top and bottom line growth over time. On cost of sales, we expect growth to remain elevated the next few quarters due to the same factors we saw in Q4. Our cost of sales outlook also incorporates higher digital service taxes as we currently expect legislation to take effect in additional countries this year. This remains a dynamic issue and we are closely monitoring developments. In terms of the quarterly phasing, it will take time to work through the carryover effects from the trends of the past two quarters. So, we do expect the majority of our profit growth to come in the second half of 2020. Now, looking at Q1 specifically, we expect adjusted EBITDA to be down substantially. Vrbo losses will be significantly higher due to the usual seasonal trends as we invest to drive growth that will come later in the year. Cloud costs continue to ramp and will have some carryover effect from the operational headwinds that we experienced late in 2019. Each of these is magnified in the first quarter as a reminder, given our seasonally low adjusted EBITDA base. In addition, the coronavirus outbreak is adding further pressure on the top and bottom line in Q1. Based on the current trends, we expect approximately $30 million to $40 million impact to adjusted EBITDA in Q1, and we expect some impact beyond Q1 and 2020 as well. But, the exact amount will depend on how long it takes for travel trends to normalize. Looking below the line, we started to recognize depreciation related to our new headquarters in Q4 and forecast approximately $30 million of incremental depreciation related to the building for the full year in 2020, which will account for the majority of our depreciation growth this year. In closing, we are excited, we are executing on a clear formula that we believe can create significant value, positioning the Company for consistent healthy revenue growth with leverage down the P&L to drive even faster profit growth. And with strong cash conversion, we expect to generate substantial free cash flow to fund capital returns through shareholder repurchases and our dividend. We believe executing that formula will create significant shareholder value over time.

Thanks so much for taking the question. Maybe one big picture and one modeling question if I can. Barry, Peter, I want to know, maybe we can get a little more granularity on your vision where online travel is going over the next couple of years. And then, peeling that back to how you're thinking about the exposure to those big trends and whether Expedia has the right assets or not, how should we think about aligning the assets within Expedia against your longer-term vision for online travels going? And then, on the model, with the $300 million to $500 million of cost savings, is there a way to think through what that might mean on a division-by-division basis or where you see the biggest areas where you could gain leverage in your model year-on-year from cost cutting? Thanks so much.

Thanks. Online travel began over 20 years ago and was one of the first areas to thrive with the advent of the internet. There’s no sign that its adoption will slow down; it has already seen significant growth and will continue to do so. Currently, there are no major obstacles in its way. Some existential concerns have been mentioned, particularly regarding competition from Google and hotels. Starting with hotels, there’s been a claim that they are gaining market share. However, the statistics show that the online travel agency (OTA) share of hotel bookings has remained stable at around 38% for many years. In fact, OTAs are increasing their share in the overall market as more business shifts online, growing from 17% to 19% since 2015. At Expedia, our total room rights have also increased, from 10.5% in 2019 to 11.2%. While some consumers prefer using direct channels, the majority still book hotels through online agents and will continue to do so. Regarding Google, it holds a significant market share globally and is expanding its business in various directions. As long as they operate fairly, that’s not an issue. However, when they compete against their own advertisers—of which we and Booking.com are among the largest—it presents a problem. This practice is not just unfair, but also detrimental to the businesses contributing to their advertising revenue. I've openly communicated our concerns to Google’s management and urged them to stop undermining the profitability of their key advertisers. Whether this will have any impact remains uncertain, but I have been clear about our position. As large businesses grow, I believe reasonable regulation is necessary; I’m not advocating for extreme measures like breakups but think regulation will eventually occur. Meanwhile, we are focusing on building direct relationships with consumers. Our app downloads have reached around 400 million, with a 40% increase this year. We plan to continue boosting downloads and diversifying our traffic sources. We also have a business-to-business segment that operates independently of Google and is experiencing substantial growth, which we will continue to develop. I apologize for the lengthy response. Peter, would you like to add anything?

I would like to add a couple of points. First, regarding cost savings by division, we can't clearly identify that yet and may not be able to. There are many shared costs, and we are encouraging collaboration among our businesses. Therefore, it's not particularly useful to consider this on a division-by-division basis in the long term. We're exploring shared opportunities and inefficiencies, looking to eliminate elements that don't make sense and reduce friction wherever possible. This is not merely a division-specific issue. Additionally, to address Barry's point about EPS and whether we have the right assets to compete, I believe we do have excellent assets at our disposal. Our brands are strong in some areas while weaker in others, and we need to enhance how we differentiate our brands and their customer offerings. We have various means to meet diverse demands, utilizing EPS to address gaps in our service and reach certain markets and demand pools that we can't access directly. I believe we have a great opportunity to capture as much gross booking potential as exists in the market, and that's our aim as we proceed efficiently.

Okay. Thank you. Barry, it's nice to have you back on the call. I think, the question I want to focus on is.

It’s not going to go on that long.

I want to ask about the growth in the lodging business, particularly between alternative accommodations and Vrbo compared to the core hotel industry. From your high-level perspective, where do you see the most interesting growth for the industry and for Expedia specifically? How confident are you in the current state of Vrbo? It appears that you’ve undertaken different branding strategies over the past two years. Is Vrbo fully equipped in terms of operations and marketing to compete in the alternative accommodations market? Thank you, Barry.

No, Vrbo is not where it needs to be. However, it is much different than it was a few months ago. We have a new leader who is on the ground and someone we have confidence in. What happened with Vrbo is that it was, as you all know, a mix of various unrelated businesses and brands from around the world that were brought together under the name HomeAway, which didn't resonate with anyone. We did have one brand, Vrbo, that was meaningful to people, and we have been working on rebranding it. I’m not sure if we moved too quickly or too slowly on this, but we made a significant change right from the start to consolidate everything under Vrbo. Unfortunately, this led to a substantial loss of SEO traffic. Given the existing trends in SEO, it wasn't executed well. We have been cleaning that up, and I think one of my colleagues might comment on our progress so far. Nevertheless, Vrbo occupies a valuable niche. It isn’t just about renting out rooms where someone stays with you; it’s about accommodations like family homes and large apartments in resort areas and other locations. The product is strong, and we need to market it better. There’s a significant opportunity ahead. We also recently integrated it with Expedia, which took about six months of adjustments. Now, I believe all of Vrbo's offerings are available on Expedia. Is that correct?

Almost all.

That was a challenging situation. Regarding the category, I'm quite impressed with what Airbnb has achieved over the years. I wouldn't label it a revolution, but it has certainly expanded the available inventory and made travel accessible to individuals who previously couldn't afford it or preferred not to deal with traditional hotels. It has also catered to older travelers seeking a more personal experience, especially those who may feel lonely. While I think we have a solid hotel business, I don’t believe that Airbnb's model will completely merge with hotels. Instead, I see both sectors thriving separately, and we are part of that landscape. That's all I have to say on that.

Okay. Thank you, Barry.

You're welcome, Mark.

Thank you. Barry, maybe you can give us an update on CEO outlook and how you're thinking about that role going forward. And then, secondly, I thought it was interesting in your prepared remarks talk about improved revenue growth. Is that just as you take out the fact this year, easier comps next year, or do you see some real drivers for improvement in revenue growth, as you look out to the second half of next year? Thank you.

We're not conducting a CEO search, and I don't foresee us ever doing one. I don't believe in searches since they often overlook the usual candidates. In my experience, when the only way to get to know someone is through interviews and recommendations, the failure rate tends to be over 50%. So, we won't be going down that path. Peter and I are fully engaged in operating the Company and we take full responsibility for it. While I can't predict whether a new CEO will arise this year, time will reveal what happens. Following the unfortunate management change, which was not meant to undermine Mark Okerstrom or the CFO, I became more energized. I started to gain a deeper understanding of the business operations, the opportunities available, and the company's state, recognizing that we had the potential for quick improvements. We're actively addressing these issues, and this focus won't extend beyond this year. That's our current status. Now, regarding revenue growth drivers, I'll hand it over to Mr. Kern.

Certainly. Justin, we view the revenue drivers not as a comparison issue. Our goal is to achieve as much healthy revenue growth as possible. Currently, we are coming off a challenging second half of 2019, which is dampening our results. We are being very strategic about our focus on specific geographies and marketing expenditures, aiming to eliminate inefficiencies. While it's beneficial to enhance performance marketing and increase throughput when you can successfully attract repeat customers and convert them into direct customers, if we aren't performing at our best, it can be an inefficient use of resources. We aim to improve in all these areas. Therefore, in the near term, we anticipate some pressure on top-line revenue from these adjustments, which we believe are necessary for long-term health. We expect to identify better investment opportunities by geography and brand, and to enhance our efforts in repeat business and direct customer experiences by improving our customer service. There's significant potential leverage from our platform technology group, including data and AI, management, yield, and cloud capabilities. These improvements will enhance conversion rates, customer experiences, and foster stronger customer relationships, enabling us to invest more aggressively and ultimately accelerate revenue growth moving forward.

Great. Thank you very much. Barry, you called out the consumer experience in your initial remarks, that and loyalty. What are the key things you need to do to get right, improve the customer experience and build loyalty?

One of the challenges we've faced is that we've somewhat lost sight of the product and how consumers interact with it, including the overall user experience. We need to focus not only on making travel easier for them but also on genuinely adding value. As a result, we are now concentrating on improving that experience, which will be a significant area of organizational effort and investment. This investment is more about focus and time rather than just financial costs. In my view, online travel agencies lack differentiation. For example, Expedia has a unique advantage as it offers a comprehensive travel solution—including hotels, flights, cars, and experiences—all in one place. While it hasn’t been as efficient as Booking.com, especially in Western Europe, it still serves a purpose for many. However, as we continue to enhance Expedia, we aim to simplify the process and add real value because we are uniquely positioned to package services and provide lower prices along with better experiences. So, I think I’ve made my point. Peter will elaborate on loyalty.

I will discuss loyalty. The industry has experienced a high level of commercialization, focusing heavily on transforming customers into consumers who book hotel rooms, a trend that's evident across all OTAs. Interestingly, the pressure from Google and performance marketing compels us to prioritize the consumer experience. We cannot simply take their business for granted; we need to ensure they feel valued and have a reason to return. It is our responsibility to enhance that experience, and we are actively working on various initiatives related to this, from how we present offerings to customer service interactions. We recognize the need for improvement, and while Google's influence may have motivated us, we understand that we should have been proactive in this area all along. As for loyalty, it plays a significant role in our consumer strategy at Hotels.com. We aim to better differentiate our brands, as Barry highlighted with the opportunities across brand Expedia, Hotels.com, and Vrbo. Our goal is to distinguish these brands and tap into the largest demand pools while ensuring they work together for mutual benefit.

Berry, it's great to hear your energy. I guess, I wanted to sort of ask about your view over the next two to three years for the Company. So, understanding that the near term, focusing more on higher quality room night growth, rationalizing some ad spend, really focusing on direct, pressure near term room nights. But, talk to us about how you think about the keys to really driving sustained, faster room night growth in ’21, ’22 and beyond as you sort of get through the important steps you're going to take in 2020. Thanks.

It's all about continued execution and maintaining focus without becoming complacent. This is something we must embed within our organization. Overall, I believe the outlook is positive, despite some challenges. I'm less concerned about these significant challenges now that I've delved into them than I was prior to that. Those challenges exist, but Expedia, along with its brands and unique offerings, has the potential to grow loyalty through more engaging forms of rewards and incentives. I believe we can significantly build loyalty against our competitors. The idea is that we invested heavily in the first experience with an online travel agency, hoping for a return for subsequent ones. Moving forward, our goal is to ensure customers return for their second, third, and fourth experiences. We're focusing on the fundamental aspects—what the experience is really like. Initially, we chased growth, and while that approach seemed effective at first, we've realized the importance of refining our processes. By concentrating on improving conversion rates and other key areas, I truly believe that in two, three, five, or even ten years, Expedia can outperform its competitors. This focus will ensure we don't need to seek new avenues for growth; we can find plenty of opportunities by simply streamlining our operations. Previously, our organization became overly complex just from the continual pursuit of growth, adding more employees and complications, which made it hard for anyone to understand their daily responsibilities. Simplifying our approach will not only reduce costs—our expenses were too high—but we anticipate that these figures could drop significantly, from $300 million to $500 million, as we simplify our operations. Simplification allows us the space to focus on what matters, giving us a stronger position moving forward.

Thanks for taking the questions. So, two quick ones from us. First, can you elaborate on the cost savings? You noted that the expected cost savings to reach $300 million, $500 million run rate. Should we assume this progression to be relatively linear? Just trying to understand how much is factored in the low-double-digit guide? And then, the second question about coronavirus. Is the impact currently largely contained to Asia Pacific or is there demand softness in other markets as well? Thank you.

I'm going to share some thoughts on the virus situation. I believe it's affecting people more than we realize. People seem anxious and are taking precautions, like wearing masks on public transportation in New York City, where only one case has been reported. This situation is definitely creating a sense of concern. Just a week ago, there were signs that the situation might be improving, but then we saw a spike in both infections and deaths. I'm uncertain if we have a pandemic on our hands. I hope that the global response will help contain it swiftly. That said, this is just my opinion without any solid evidence, so take it as you will. We really don’t know how extensive it is, and it appears to be spreading beyond Asia.

Yes. Deepak, this is Peter. Regarding your question about the timing and how to analyze the expenses, I’m afraid we can’t provide much clarity at this moment. This is an ongoing process throughout the entire Company, affecting all areas of spending and activities. We are making progress on numerous fronts, but some initiatives will take time to develop while others will yield quicker results. You will be informed as soon as we have updates, but we cannot offer much detail right now. As we implement these changes and they accumulate, we expect improvements in the coming quarters, which should lead to greater savings over time. However, the exact amount and its variability is still uncertain. We are focused on navigating this process in a manner that benefits the business without causing new issues. We believe we can manage most of this by the end of the year and achieve our full operational capacity. However, due to the extensive scope of these efforts, it is difficult to provide a specific timeline.

I would like to emphasize that our efforts to simplify the business and reduce costs have a significant impact on our team. We have been engaged in this process for several months now, and I am genuinely impressed by the thoroughness and careful consideration that everyone involved has demonstrated. This is not merely about a small segment of the company; every senior leader has contributed to this initiative. In fact, I believe we should consider sharing the details of our process because, in my experience, I haven't witnessed a transformation carried out with such thoughtfulness and respect. While I acknowledge there may be some missteps in our communication plan, I find the overall process quite remarkable.

Hi. Thanks. This is Chris on for Lloyd. How are you guys thinking about driving app downloads from here? It seems like you guys have done some good download growth. But, should we be thinking about a rebuild of the app or spending to drive app downloads or expanding a loyalty program? Just any color you can share beyond what you guys have shared so far? Thanks.

Thank you for the question, Lloyd. The specifics are happening on many fronts. This is not a rebuild or anything like that. As you and Barry know, the Company has been transitioning to PWA to enhance mobile capabilities across our brands. This transition has taken time and faced some challenges. However, our major brands are now there or almost there, presenting a significant opportunity for us to improve the app experience. In fact, app growth and conversion rates are showing signs of exceeding the rest of the business. I believe some of that success can be attributed to PWA and the experimentation we're able to conduct. Once we refine it, we need to actively promote it through marketing and encourage more consumer engagement, including sign-ins. This effort spans multiple areas. The most significant change is our commitment as a Company to prioritize this initiative and redirect users from traditional performance channels to building genuine relationships with us. It's a comprehensive approach involving marketing, product development, innovation, and more. Therefore, I believe we will focus on all these areas.

So, I have a question on SEO. Can you give us a better sense of what happened to SEO in the third quarter, because externally looking into revenue and ad trends, it's really hard to tell how big of an impact that was and what changed there? And on that, how big ballpark is Expedia's exposure to SEO? Thanks.

This is Peter. I'll address the latter part of your question, Kevin. We don't disclose the specific size of our SEO, nor do we plan to. However, it remains a significant and valuable aspect of our business. We've emphasized this point, but as we transition to building direct relationships and driving direct traffic with our customers, this approach offers the best way to mitigate any declines stemming from SEO. Regarding the third quarter, various tactical changes made by Google, along with our inadequate responses, contributed to the challenges we faced. As Barry noted at the start, we were heavily involved in a major reorganization that distracted us from our core focus. We recognize that we could have performed better, should have done better, and are committed to improving. Additionally, there were some shifts in auction dynamics at Meta that we did not respond to effectively. Overall, we encountered several issues that we weren't able to manage properly, SEO being one of them. Looking ahead, we anticipate SEO will continue to be a headwind. Google will likely maintain its current practices unless there's a change in direction. Just last week, we observed some changes that could have an impact, and we hope they will reconsider and promote a more equitable marketplace. Nonetheless, we can only control our own actions. We're working diligently to counteract the challenges posed by SEO, while also striving to enhance other areas of the business to compensate for any losses in that segment.

The SEO is not going to harm us significantly, nor is it the future of our business. The trends associated with it started seven or eight years ago, and we should have been more aware of the ongoing consequences. I believe we won't find salvation in any government bill. I certainly think regulation is on the horizon, but we are actively working to reduce its importance in our operations. While SEO still plays a role in our business, it’s not a major component and certainly not our future.

I wanted to ask a follow-up on coronavirus. Everyone's inquiring about it. What are you observing? Clearly, you can't make predictions, but what are you noticing up to this point in the Asia Pacific business? I appreciate the EBITDA guidance being very helpful, but I just need to know how much…

Very good. Eric Hart is going to respond.

Yes, hi, this is Eric Hart. If you consider how it has impacted the business over time, it began in mainland China domestically, then moved to inbound and outbound effects, eventually spreading through the Asia Pacific region. We believe it's now affecting other areas of the business. We've analyzed the fundamental underlying drivers, and we've observed that in the Asia Pacific region, the impact exceeds 50%, which increases significantly as you approach China. However, when we isolate the Asia Pacific effects and examine North America and EMEA, we do notice a decline in those regions as well. Overall, the concentration in the Asia Pacific region poses a challenge for us, and we believe it is also influencing other parts of the world. We estimate the impact to be in the range of 30 to 40, based on various scenarios.

$30 million to $40 million.

Yes. Listen, it truly is an unknown. I know everybody's asking about it. Look, you've got to believe it's going to be contained. If it's not contained, by the way, the entire world's going to shut down. So, all you can do is every day you read the news and react to it. I think, anybody as an investor, unless you think this is going to be the end of life as we know it, who cares? Believe me, I don't mean who cares a lot of people are going to get sick and whatever. But really, this is an exogenous list events, will end. And frankly, no one should count it. All we're trying to do is separate what we absolutely believe is the effect of the virus from our ongoing business, so we can prepare ourselves and make that ongoing business as strong as possible when this thing is over.

Great. Thanks for taking my question. Back to Vrbo. It's primarily domestic and it seems like you're rationalizing your marketing outside the U.S. So, does that have the most opportunity this year to inflict back to growth? And then, I have another question. As you think of driving more differentiation, more loyalty, do you ever think about getting more-closer to the inventory and taking more inventory risk?

So, I think I'll start at the top there. I think Vrbo, yes, we're rationalizing some international spend. But, that is by no means all international spend and ambition. And as I mentioned, now that Vrbo inventory is available on brand Expedia and actually went live partially in Hotels.com for the first time a few days ago, we have many ways to get that inventory into other markets that may be way more efficient than trying to build a brand in a place where we have no brand recognition. So, there's lots of ways to look at that. I don't think we believe Vrbo is on a path to any greater inflection than any other of our businesses. All the businesses are working hard. And there's a lot of various drivers. So, I wouldn't think of it that way. But, we do believe Vrbo will grow EBITDA and get back to growing top-line, again as we lean into our stronger opportunities in the beginning of this year. And no, inventory risk, no, not right now. We got plenty of other things to do before we get to figuring out whether we're going to take inventory risk.

Operator, we'll take our last question.

Thank you, all. Actually, I’ve said before, I really am enjoying this process, and I think so too is Mr. Kern. And I hope many of our executives are enjoying that too. But, nevertheless, we'll plow through it on. In any event, thank you for being with us. And we'll talk to you in a few months and update you with our progress. Good day.