Expedia Group Inc (EXPE) — Q4 2021 Earnings Call Transcript

Good afternoon, and welcome to Expedia Group's financial results conference call for the fourth quarter ended December 31, 2021. I am pleased to be joined on the call today by our CEO, Peter Kern; and our CFO, Eric Hart. The following discussion, including responses to your questions, reflects management's views as of today, February 10, 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 plan, 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 that 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 frequently visit our IR website for other important content. Unless otherwise stated, any references to positive revenue, selling and marketing expense, general and administrative expense, and technology and content expense exclude stock-based compensation. And with that, let me turn the call over to Peter.

Thank you, Jon. Good afternoon, everybody, and thank you for joining us. Let me start off with a few broad comments about what we experienced in the fourth quarter, which I would say, even though we had to deal with a meaningful Omicron wave and a bunch of disruption in travel, it was encouraging in many ways. What we observed most notably is that the issues involved were really issues of inconvenience. There were border shutdowns. There were planes out of service because pilots and crew were sick, things of that nature, but there was far less consumer fear over traveling. Really, it was an issue of the inconvenience of health issues. What we believe will come from this, presuming the next waves continue in an ever-lightening way, is that the world has essentially gotten accustomed to the pandemic. It will enter perhaps an endemic stage, and governments and industry will adapt much more easily as the next waves come. This will continue to disrupt travel less and less, and certainly, consumers have remained willing to travel throughout. With the return of staff to the air and the relief of border issues, we are seeing a solid return to travel. Eric will take us through the numbers and trends, but suffice it to say that we are pleased to see bookings have strongly rebounded since opening, anywhere the Omicron has tapped out. We feel good that big cities have not recovered as much yet, and that is a good guide for us. International travel is still yet to return as strongly. That is another good guide for us. So generally, we feel like directionally, the things that are coming back will generally benefit us, and we're looking forward to the days of those returns. We're starting to focus more on the future of our business and what we're going to deliver instead of how we manage COVID day-to-day. We've been able to simplify and make the business more efficient. We've been able to use our push for new technology solutions and we've optimized third-party spending and tools and many other things, and we've become a much more efficient enterprise today. We have had a great influx of terrific talent, and that momentum is increasing. We feel we're in a great position as we move forward. Overall, we believe in the reigniting of travel. We think we're going to play a central role in it. We want to be important in driving the future of the industry. And we believe we can bring that not only to travelers but to the entire travel ecosystem, and that will be our focus this year. And with that, I will turn it over to Eric.

Thanks, Peter, and thanks, everyone, for joining the call. I too am optimistic about the travel recovery this year. I'd like to start by providing an update on booking trends. While we witnessed a notable pullback due to Omicron in December, which continued into January, I'm encouraged by the improvement we have seen in recent weeks. Overall, in the fourth quarter, total gross bookings for all products, net of cancels, were down 25% versus Q4 of 2019, a slight sequential improvement versus the third quarter. We have continued to see a mix shift towards lodging, specifically Vrbo versus air. For October, it was down 4% versus 2019. It was down 5% in November, 27% in December, and down 11% in January, with trends improving throughout January, and we are up versus 2019 in the most recent weeks. From a geography perspective, this improvement has been driven by the U.S., followed by EMEA, while APAC and LatAm are lagging. Total revenue was down 17% versus Q4 2019, roughly the same level of decline we saw last quarter. In the quarter, Egencia contributed $29 million in revenue. Adjusted EBITDA was $479 million, up $1 million versus 2019 levels despite revenue down 17%. This marked the third consecutive quarter of positive adjusted EBITDA and our highest Q4 EBITDA ever. Overall, we are pleased to have maintained our investment-grade rating through the pandemic and remain committed to deleveraging while also looking for ways to further reduce our cost of capital. In closing, despite the continued impact of the pandemic in 2021 and most recently from Omicron, I'm encouraged by the progress made last year to reshape the company for a better financial position going forward.

First, I want to ask about the loyalty program. Can you give us more details on when you expect to roll out the consolidated loyalty program, how that might change? And if you can give us a sense of how important your loyalty programs are today and maybe where they could go.

Yes, thanks, Kevin. This is an ongoing effort. We revamped our Expedia loyalty program recently to create a construct that we think is better for travelers. We are migrating the old stack, as I talked about. We are rebuilding our loyalty platform to accommodate one broad loyalty construct that can serve all the different brands. The loyalty program will cover all our brands, all our products, and you'll be able to earn and burn across all of them. This will take the better part of this year to get all those pieces lined up, and hopefully, we'll be moving some of the program over that in the course of this year.

And if I could just ask about the latest trends. You noted that lodging is now up in the last week versus 2019. Can you talk about how that might play out given cities haven't fully come back yet and international travel is still certainly not fully back given the restrictions are not up yet?

Yes, sure. There's a lot of benefit in that for us in the sense that historically, big cities and international have been an area of strength for us. On the other hand, we benefited greatly. Vrbo has been super strong. It's benefited from leisure travel and the longer-term travel of vacations. So it's a bit tricky to predict. But broadly, the things that are left to come favor our strongest areas, so we feel positive.

Great. Two questions, please. Maybe just one on the comeback in travel. As it continues to build in '22, how do you see the mix of direct versus paid traffic coming to your platform? Can you maybe just touch on the opportunities between the different levers that you have to pull between CRM versus branding versus performance channels? And then maybe just another one on capital allocation. So you continue to deleverage and also you have kind of gotten preferred out. How do you see the scope for M&A opportunities here and maybe other use of capital, like share buyback? Just maybe talk about that a little bit.

I think we have much opportunity to improve our direct relationship with consumers. We have historically fished out of the big ponds of Google and Meta. We are keenly focused on bringing travelers in now, making sure they enjoy the benefits. We want to derive much more long-term value from those customers we acquire. So our hope is that the denominator will expand as we keep bringing in more travelers and that more and more of them will create direct relationships where they recognize the benefits we give them in price and service.

I know we've talked about it in previous quarters, but we are keenly focused on cleaning up our balance sheet given the disruption we've experienced over the last couple of years. That includes deleveraging the business. We're looking at different M&A opportunities opportunistically. On buybacks, I think you can look at our long history. It’s something that we have done regularly and consistently. I suspect we will get back to that at the right time.

On the M&A front, we’re much more focused. It has to fit with our long-term platform strategy. We are not going to buy things just because they are good deals, we are going to buy things that drive what we're trying to achieve.

Could you provide more clarity on the capital allocation strategy? I understand that you've moved on from the efficiency program established a couple of years ago, and there are necessary investments planned for 2022 and 2023 to seize growth opportunities. How should investors consider the aspects where volume-driven leverage can benefit the model over the next 12 to 24 months, compared to areas where you plan to invest incremental margin or leverage back into the business for long-term gains over the next 3 to 5 years in relation to the larger travel market?

You should think about it this way. When those things are right, they will drive further efficiencies. We have a lot of work still going on in building the platform to get it right. The efficiency borne of these improvements has not really been seen because of COVID's elevated service demand. We believe there's still much opportunity to become more efficient over time for margins to expand.

Two questions, if I can. First, any update on just the marketing integration consolidating data and ops into a unified group, like any early learnings there? And then secondly, can you kind of help us parse out the strong ADR growth? How much of that is a function of HomeAway growing in the mix? And what are the puts and takes of how you see ADRs migrating over the course of the year?

We've made significant progress in moving along on the marketing integration and learning as we go. We'll push heavily into mobile and other areas for new opportunities. The reality is until things normalize, it’s hard to measure performance. On the ADR side, core ADRs continue to be strong across both hotel and Vrbo. We expect core ADRs to remain strong as we believe this is going to be a strong rebound travel year.

First question, can you help us at all with summer booking pacings, whether lodging or in total, versus either '19 or last year?

Vrbo continues to perform well overall. We're seeing ourselves up against both 2019 and 2021 time periods. The hotel side is recovering but not quite at the levels we would have seen in the past.

Can you talk about the hiring plans and headcount levels for 2022? Do you feel like you're in a good position with respect to headcount right now and generally well prepared for demand recovery across various products?

In Q4, we were a bit lighter on expected people costs. We do have plans to continue hiring around some of our initiatives as we go into next year. I expect that we will have higher-than-expected compensation increases this year.

Can you share what percent of the Vrbo inventory has now been integrated into Brand Expedia and the other outlets?

We are still building towards a better integration of Vrbo. The aim is to improve product experience for travelers. It is an important focus for our teams and is not our lowest priority.

On cancellation rates, was it much higher in 4Q and early in 1Q due to Omicron? And do you think those that cancel could potentially be a tailwind to future bookings?

Yes, we saw cancellation rates go up, particularly in the December and early January time periods as Omicron impacted the business. I think everyone feels when people can travel, they will. So while it’s hard to quantify, we remain optimistic.

If home accommodation continues to gain traction in urban markets, how do you feel about your supply in Vrbo? Any plans to increase ahead of demand?

It’s not been a huge focus of ours. We do have some in big international cities, but we want to improve our property offerings, and as demand trends appear, we'll adjust accordingly.

How should we view Expedia relative to the Google risk going into '22, which is looking like a nice demand environment relative to 2019?

We don't consider it a Google risk. Google is Google. We have to do our part in optimizing the marketplace. We have a lot of room to do better. That’s what we are focused on. Our focus is on improving product and loyalty to secure long-term customers.

If home accommodation continues to gain traction in urban markets, how do you feel about your supply in Vrbo? Any plans to increase ahead of demand?

Thank you for joining us. I hope you all travel this summer, and you know where to find us if you need to travel, and we'll talk to you next quarter.