EXPE 2024Q2

Good day everyone and welcome to the Expedia Group Q2 2024 Financial Results Teleconference. My name is Elliot and I will be your operator for today's call. For opening remarks, I will turn the call over to Senior Vice President, Corporate Development, Strategy and Investor Relations, Harshit Vaish. Please go ahead.

Good afternoon and welcome to Expedia Group's second quarter 2024 earnings call. I'm pleased to be joined on today's call by our CEO, Ariane Gorin; and our CFO, Julie Whalen. As a reminder, our commentary today will include references to certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in our earnings release. And unless otherwise stated, any reference to expenses excludes stock-based compensation. We will also be making forward-looking statements during the call which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions which are subject to risks and uncertainties that are difficult to predict. Actual results could materially differ due to factors discussed during this call and in our most recent Forms 10-K, 10-Q and other filings with the SEC. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. Our earnings release, SEC filings and a replay of today's call can be found at our Investor Relations website at ir.expediagroup.com. And with that, let me turn the call over to Ariane.

Thanks, Harshit and thank you all for joining us today. I've been CEO for about a quarter now and have spent most of my time in three areas: First, refocusing our team on the basics and execution to accelerate growth in our consumer business; second, sharpening our long-term strategy; and third, making sure we have the right leadership team in place. All with the goal of delivering better experiences to travelers and more value to our partners. I'm really pleased to already see some signs of progress as demonstrated by our second quarter results. We grew room nights by 10% and grew gross bookings and revenue by 6% versus last year. This was at the high end of our expectations and was driven by substantial improvement of Vrbo as well as continued strength in Brand Expedia in our advertising business and in our B2B segment. We also executed well in controlling our costs with cost of sales and overheads both declining year-over-year. The travel environment was healthy in the second quarter. And like the last few quarters, we saw stronger demand internationally relative to the U.S. Compared to last year, we grew room nights mid-single digits in the U.S. low double digits in Europe and in the high teens in the rest of the world. Prices held up for both hotel and vacation rentals but we saw continued pricing pressure for air and car. In terms of trends so far in the third quarter, we've seen some softness in demand and Julie will provide more details on this in a few minutes. But regardless of the market environment, we're focused on executing what's in our control and what we know will drive long-term value. Now, let me talk a little bit about the second quarter results themselves. In our Consumer business, we grew gross bookings by 1% which was an improvement of nearly 400 basis points in the first quarter. Our focus on the basics, traffic, conversion, attach rates and marketing efficiency is showing solid early results. The traffic growth across our three core brands which are Expedia Hotels.com and Vrbo accelerated sequentially by roughly 500 basis points and conversion rates continue to improve. The percent of bookings through our apps also increased, up over 500 basis points year-on-year. And in terms of attach, multi-item trips grew by 9% compared to last year. And this is important because when travelers buy more than one product from us, they're getting more value, so they're more likely to repeat. On marketing, excluding our investments in Vrbo and international markets, our consumer business showed some year-on-year marketing leverage in the second quarter. Brand Expedia continued its strong performance with booked room nights up nearly 20%, while Vrbo improved meaningfully from its Q1 low point and exited the quarter back to modest growth. Vrbo's recovery continued from higher marketing spend, better supply and Vrbo specific product releases. Look, we certainly have more product work to do on Vrbo, in particular, on our app but we're encouraged with our progress and the sequential improvement in the business. Vrbo also benefited from more cross shoppers from our One Key loyalty program. Nearly 30% of travelers that earned One Key Cash on either Brand Expedia or Hotels.com and then redeemed it on Vrbo were completely new to Vrbo. So One Key is a great source of new travelers for the brand. Also, One Key hit its first year anniversary in the U.S. this summer. We're super pleased to see our large growing member base enjoy the flexibility to earn and burn One Key Cash across our three core brands and get great tiered member discounts. Customers who redeem One Key Cash or use member discounts repeat more often. So this gives us a lot of confidence that the benefits of One Key will build further over time. This summer, we're hitting two more milestones in the program. In July, we launched a co-branded credit card with Wells Fargo and MasterCard in the U.S. and expect this to reinforce the value proposition of One Key. We're also launching One Key in the U.K. in the third quarter. Like the U.S., the U.K. is a market where all three of our big consumer brands are present. Beyond the U.K., though, we're pausing further international rollout of One Key. Most international markets have only either Brand Expedia or Hotels.com operating at scale with limited Vrbo presence. So we're going to take the time to tailor our value proposition for these markets. In addition, this should minimize further near-term disruption to Hotels.com which was the brand most impacted by One Key's U.S. rollout. More importantly and as a reminder, all our loyalty members worldwide on our legacy Expedia and Hotels.com programs continue to benefit from the improved member discounts that we launched last summer. Finally, we made good progress on our international expansion. As an example, in May, we launched Expedia point of sale in UAE and Saudi Arabia. Though it's early days, we've been pleased with the results so far. Turning to B2B. We had another strong quarter with bookings growing 20%, though like last quarter, this was a 200 basis point deceleration. All of our partner segments grew well. And always, while we on-boarded new partners, a significant portion of the quarter's growth came from existing partners. A couple of highlights from the quarter were the renewal of our lodging deal with Trip.com and a new partnership with Cathay Pacific using our White Label Template. Moving on to supply which powers both our consumer and B2B segments, we continue to improve our offerings. For flights, we just signed a partnership with Ryanair and will soon add their supply to our marketplace. In Vacation Rentals, we grew our supply double digits while removing properties that weren't providing acceptable guest experiences and we source more listings with flexible cancellation policies and discounts. All of this reinforces the Vrbo value proposition. We're also investing in more powerful tools, what we call our visibility boosters to help our supply partners attract the travelers they want. More hotels are using these tools to fill hotel rooms and our revenue from these products grew over 40% in the first half of this year and that's a great win-win. Before I turn the call over to Julie to talk about our financial results and guidance, I want to touch on our path forward and where I'm focusing our teams. Improving the performance of our consumer business remains our biggest priority. We're capitalizing on our tech investments for the last few years, while at the same time, digging into what product capabilities and configurations, we need to strengthen Vrbo and the Hotels.com brand. We're getting surgical in identifying drivers of repeat behavior in addition to loyalty and app usage, whether it's burning One Key Cash or adopting AI-enabled products like price predictions. We want all of our core brands, Expedia, Hotels.com and Vrbo to have clear value propositions and drive healthy growth and we're making adjustments to ensure we have the right focus. In B2B, after 12 quarters and over 20% booking growth, we expect continued normalization and we'll continue to invest in our technology, supply and partnerships to extend our lead in the segment. Finally, we continue to execute with cost discipline everywhere. On cost of sales, we've reduced spend and improved gross margins substantially over the last several quarters. We're exploring additional opportunities to rationalize our marketing spend and on overhead, we're using technology and AI to further boost productivity. In closing, I'm encouraged by our second quarter results and I'm incredibly proud of and thankful to our employees who rallied together and are working tirelessly to deliver on our ambition to help travelers around the world experience great trips and create lifelong memories. And with that, let me hand it over to Julie.

Thank you, Ariane and good afternoon, everyone. We are pleased with our second quarter results including double-digit room night growth, a sequential acceleration in our B2C business, driving gross bookings to 6% and EBITDA margins expanding approximately 70 basis points in the first half. As far as the financial details for the second quarter, total gross bookings of $28.8 billion were up 6% versus last year, driven by total lodging gross bookings which grew 8%, led by our hotel business growing 11% and the improvement in our Vrbo business. We were happy to see that we have held or grown hotel gross booking share in virtually all of our key markets. In our Vrbo business, we saw a significant acceleration as we moved through the quarter which drove our total gross bookings sequential acceleration of approximately 300 basis points from the first quarter. Revenue of $3.6 billion grew 6% versus last year, led by our B2B business, Brand Expedia and our advertising business. Total revenue margin was flat year-over-year as the uplift from advertising growth was offset by fewer stays given the lower gross bookings in the first quarter, the shift of Easter stays into the first quarter and the contra revenue arising from pricing actions. As a reminder, pricing actions from prior periods negatively impacted both revenue and revenue margins this quarter as it is recorded as contra revenue at the time of the stay. Cost of sales was $358 million for the quarter and $45 million or 11% lower versus last year which combined with our strong revenue growth, drove approximately 190 basis points of leverage as a percentage of revenue year-over-year. We continue to see our ongoing initiatives are delivering transactional efficiencies. Direct sales and marketing expense in the second quarter was $1.8 billion which was up 14% versus last year. Sales and marketing deleverage this quarter as a percentage of gross bookings primarily due to higher commissions to our partners from the strong growth in our B2B business which grew over 20% as well as the planned ramp in marketing spend in Vrbo and international markets to drive incremental growth. As we have stated previously, commissions paid to our B2B partners are in our direct sales and marketing line and are more expensive as a percentage of revenue than our B2C business. However, because they are generally paid on a stayed basis to contractually agreed upon percentages, the returns are more guaranteed and immediate. In our B2C business, we saw some deleverage this quarter as we reinvested back into our Vrbo business and our international markets to drive improving growth in global market expansion. Excluding these investments, we saw some marketing leverage in our B2C business in the second quarter. Overhead expenses were $606 million, a decrease of $21 million versus last year or 3%. This resulted in approximately 165 basis points of leverage, primarily driven by lower people costs in products and tech from our actions to rationalize our headcount as well as the timing of both new hires and other salary-related costs across our key growth areas of the business. We remain committed to driving efficiencies across our P&L and we're pleased to see that the cost actions we have taken, as previously announced, continue to drive savings across capitalized labor, cost of sales and overhead costs. On the bottom line, we delivered strong second quarter EBITDA of $786 million which was up 5% year-over-year with an EBITDA margin of 22.1%, deleveraging slightly for approximately 15 basis points year-over-year. Our first half EBITDA margins, however, expanded by approximately 70 basis points year-over-year which exceeded our expectations due to strong expense management despite the impact from our pricing actions and our investments in marketing. As far as our EBIT performance which includes the impact of stock-based compensation, depreciation and amortization, we delivered $475 million of EBIT with a margin of 13.3%, delivering approximately 20 basis points of expansion year-over-year in the second quarter and 95 basis points of expansion in the first half. The additional 25 basis points of expansion as compared to EBITDA is driven by leverage from stock-based compensation from flat year-over-year cost as well as leverage from depreciation that grew slower than revenue. Our year-to-date free cash flow remained robust at $4 billion, up 4% year-over-year, driven by our strong first half EBITDA growth and lower capital expenditures. Moving on to our balance sheet. We ended the quarter with strong liquidity of $8.7 billion, driven by our unrestricted cash balance of $6.2 billion and our undrawn revolving line of credit of $2.5 billion. Our debt level remains at approximately $6.3 billion with an average cost of 3.7%. Our gross leverage ratio had further reduced 2.3x, continuing to make progress towards our target gross leverage ratio of 2x driven by our ongoing strong EBITDA growth. In addition, our strong cash position enabled us to repurchase $1.2 billion or 9.2 million shares year-to-date. We continue to believe that our stock remains undervalued and does not reflect our expected long-term performance of the business. As such, we expect to utilize the strong cash-generating power of our business and our remaining $3.6 billion share repurchase authorization to continue to buy back our stock opportunistically. Moving now to our outlook for the rest of the year. While we accelerated our gross bookings throughout Q2, entering the third quarter, we have seen a more challenging macro environment and a slowdown in travel demand, consistent with recent commentary from others in the travel industry. And while we saw flat ADRs on a like-for-like basis in Q2, we saw a decline in July stemming from FX headwinds and from consumers trading down to lower-priced properties. And we've also seen more continued softness in air ticket prices. In addition, we have seen some headwinds from new pricing display regulations that kicked off on July 1st in California and we are monitoring it closely. These factors collectively drove weaker-than-expected growth across both our consumer and B2B businesses in July and are influencing our outlook for Q3 and the full year. Given this backdrop, we expect third quarter gross bookings and revenue growth to be in the range of 3% to 5% versus last year. And as a result of the range of possible top line growth and our marketing investments in Vrbo and our international markets, we expect approximately 100 basis points of deleverage to our third quarter EBITDA and EBIT margins versus last year. As for the full year, we expect gross bookings to be at the low end of our previously communicated range of mid- to high single digits at approximately 4% and revenue growth to be 2 points higher at approximately 6%, with our earnings outlook holding at EBITDA and EBIT margins relatively in line with last year. In closing, we are pleased with our performance and the acceleration we saw in our Vrbo business during the second quarter. And while the more recent market environment is challenging, it is this ongoing execution against our growth initiatives, combined with our strong financial position to give us confidence in our long-term opportunity to deliver profitable growth. And with that, let me open the call for questions.

Our first question comes from Mark Mahaney with Evercore ISI.

Two questions, please. First on Vrbo. It sounds like that's started to recover to growth exiting the quarter. Any thoughts on what that trajectory is like? And I know you've got headwinds going into the back half of the year but if you can isolate out the headwinds, just talk about what that growth recovery path looks like. And then real quick hit on advertising revenue, expectations for how that's trending? Are you able to kind of maintain the growth you've had there? And I think that was sort of solid 20%.

Yes. I mean, for Vrbo, obviously, it's hard to make that call right now because we're staring at these July trends. But certainly, our expectation is to drive that business to growth and get it back to where it used to be. And so as we said, we saw substantial acceleration as they moved from the beginning of the year. So basically, as we ended the quarter with some modest growth but now we're in this moment in July, where it's a little bit hard to read the business. But certainly, long term, that is our expectation. As far as the advertising business, I mean, that business is on fire. We have got a lot of opportunity with that business to continue to drive its growth. I mean, if I think if you look back, it's been at least in the high 20s for a while now and we don't have any reason to believe that that's going to significantly change going forward.

And I would just add that on the advertising business, when the market gets soft, actually, you could imagine that some of our supply partners will want to spend more in advertising where they know that the travel demand is going to be. So as we're looking at how the market evolves, obviously, I think our teams will be looking at how can we help our supply partners in getting the volume.

Our next question comes from Eric Sheridan with Goldman Sachs.

Maybe 2 questions, if I could, a bit more of a bigger picture in nature. In terms of the role of CEO that you've now had for a couple of months, wanted to know if you could just reflect on some of the key learnings you've had and go a little bit deeper on the turnaround of some of the brands like Vrbo and Hotels.com. And what you've learned about the ability to possibly speed up some of that recovery or some of the aspects that might take longer pieces of time to sort of implement leaving the side or isolating some of the macro variables from your insights there. And then the second, you come out of the B2B business. As you continue to move out of B2B and into this broader CEO role, what do you think remains relatively underappreciated or misunderstood about the B2B business, now it sits inside Expedia?

Thank you for the question, Eric. As I joined the consumer business, I always valued the efforts we put into the platform that enable us to enhance innovation overall. For instance, in the second quarter, we successfully launched flexible date search across all three major brands simultaneously, which would not have been possible without the platform groundwork. However, in migrating Vrbo and Hotels.com to a common front end, we sacrificed some aspects that made those brands unique. Collaboration was a significant feature for Vrbo but upon migration, while we successfully integrated trip planning collaboration into Brand Expedia, we lost some functionality on Vrbo. The positive side is that we've reinstated much of it, though there's more to be done, indicating we faced a period of regression during the migration. Similarly, with Hotels.com, transitioning to One Key led us to diminish the distinctive loyalty program advantage it had. The good news is that both brands enjoy strong recognition and loyalty from customers. However, I recognize it will take effort to restore them to our desired level. As I look to the incoming months and quarters, I consider how to utilize the platform's capabilities horizontally and determine what modifications or new developments are necessary for Vrbo and Hotels.com. Overall, I am optimistic but acknowledge it will require time. Additionally, for Hotels.com, returning to international markets will be beneficial. The brand enjoys strong recognition in regions like the Nordics, and initial results from reentering these international markets have been promising. Regarding the B2B business, what may be misunderstood is that when I took over about a decade ago, I contemplated the unique aspects of it. Over time, I've realized it’s a blend of several factors. A robust supply, particularly in lodging, is crucial, and we are working to enhance B2B-specific lodging options. Great technology, a strong sales team, excellent partner relationships, and an eagerness for partnerships are also vital. I believe there is a massive travel industry worth $2.3 trillion, and our brands represent a small segment of it. Thus, with the B2B business, we can leverage our innovative capabilities to support other players in the travel sector.

Our next question comes from Lee Horowitz with Deutsche Bank.

Two, if I could. So you clearly have a number of marketing priorities ahead of you as you look to take share in Vrbo, lean back into international markets, while also facing some building ADR pressures, as you called out which have their own margin impact. I guess with that in mind, how do you think about the levers that you have at your disposal to drive margin expansion sort of on a go-forward basis given those investment priorities? And then maybe, Ariane, another one on the B2B business. I guess, how do you think about sort of the interplay between B2B and B2C? Is there a world where the success of your B2B business can actually prove cannibalistic to your B2C business? If you help partners create super compelling travel rewards programs, presumably that's a piece of the pie that core Expedia doesn't have access to anymore. How do you think about managing those two in that sort of environment?

Okay. Thanks for the question, Lee. Julie, do you want to take the first one and I'll take the second.

From a leverage perspective, we've done an excellent job with our cost of sales, which have decreased year-over-year, resulting in less leverage. While this trend will eventually stabilize, we still anticipate significant leverage in this area. We have numerous opportunities to enhance efficiency across our merchant fees and operations, including investments in AI and technology. This quarter is somewhat of an exception, as we've seen a reduction in our overhead compared to last year, benefiting from various cost measures we implemented earlier this year. We're keenly analyzing every aspect of our P&L to identify opportunities to optimize, enabling us to either return that value to stakeholders or reinvest in the business. This year, as previously mentioned, we are making significant investments in marketing, specifically for Vrbo and international markets, to revitalize those sectors. The positive outcomes we observed in the second quarter affirm this strategy. Although we don't expect much leverage this year, our long-term vision includes margin leverage as we push for increased direct traffic, which should enhance our marketing efficiency alongside the ongoing improvements in cost of sales and overhead. If you look at the Brand Expedia P&L, it shows strong top-line growth and effective marketing leverage, setting a model for our other brands to aspire to over time. Regarding B2B and B2C dynamics, in certain regions, our B2C brands have minimal presence, making our B2B efforts incremental in those areas. Nonetheless, there are many regions where both business and consumer travel coexist, reflecting a broader market utilization. While ideally, we would prefer consumers to rely solely on our platforms, they often seek travel options through their preferred OTAs or utilize corporate travel resources. This scenario presents opportunities for us to enhance technology and inventory solutions, creating significant value for our supply partners by facilitating demand access through both B2B and B2C channels. Ultimately, this competition drives our B2C brands to improve and elevate their offerings.

Our next question comes from Trevor Young with Barclays.

First question, can you just expand a bit on the cadence of growth throughout the quarter? Was it steady and then July saw the step down? And was there any nuance around that step down in July across geos? And then second question, more of a bigger picture one. We're now a few quarters in from the completion of the tech platform migration. What gives you confidence that all the transformation work that you've done in the past few years is working and will pay off?

Yes, sure. In the second quarter, we basically saw comps accelerating and that's because, as we've said, the main accelerating driver was Vrbo. And so we basically came from a low, so to speak, at the beginning of the year and accelerated by quarter and was the main driver to drive the full acceleration of the business. So we saw accelerating comps in Q2 and then like I said, in July, there's just a lot going on that's hard to understand with precision. And so we saw sort of this noise in the P&L in our business. And really, when you look at it from a geo perspective, to answer your question, it's a lot in the U.S. that we're seeing. We're seeing a couple of other areas but mostly it's U.S. focused.

In terms of the replatforming, it has unlocked many capabilities that we previously lacked. For instance, our testing platform has allowed us to conduct more tests on Vrbo this year than we did during all platform migrations. We've also implemented One Key, which gives us a holistic view of a customer across all our brands. Additionally, we were able to introduce flexible date shopping in the second quarter for all our brands. This means we can roll out several e-commerce essentials across all our brands without repetitive work. Moving forward, we are focusing on identifying any configurations or brand-specific features that we need to develop, because over the past few years, a significant portion of our capacity was directed toward rebuilding the foundations and migrations.

Our next question comes from Conor Cunningham with Melius Research.

Just on B2B, I think your growth in the quarter was over 20%, a pretty tough comp sort of in process. But I think in the prepared remarks, you mentioned a deceleration. Just curious if you could unpack that a little bit, what's driving the slowdown. And then just on the implied guide for fourth quarter, I realize that you don't have a lot of visibility but can you just talk about how you see the booking window kind of evolving from here?

Yes. So on B2B, yes, we've seen a little bit of deceleration. And as you alluded to, of course, we're still at 20%. So it's still really a strong business. And we alluded to the fact that as global demand normalizes, that, that business would see some of that growth come down as it also normalizes. So that's not too unusual for us to see. Obviously, in the July period that we've alluded to, they also are impacted by a lot of the dynamics that I mentioned as far as what's going on in July. And so they can have a little bit more of an impact than what was sort of just the global normalization but we're really excited about that business. Ariane spoke about it. There's just so much opportunity there. And given our leadership position and all the opportunities we see going forward, it should continue to drive strong growth. It's just that we've got this moment right now, where we're seeing some of this macro impacting it. But the underlying health of the business is incredibly strong. As far as the booking windows, it's interesting, we have been seeing for a while now in our B2C hotel business that the windows have actually been expanding slightly year-over-year. But as we entered July, they actually shortened just a little, not a lot but just a little bit in that month. And that's the first time we've seen that in a while. On the Vrbo side, they've been shortening for a while and they're kind of just doing a similar thing. So there wasn't anything material that changed in July but we did see a little bit of that in the hotel side of things.

I'll add a bit about B2B. As Julie mentioned, B2B has a broader geographical reach compared to our consumer business. Recently, it has greatly benefited from increased travel demand, especially in Asia. The slowdown we've observed over the past few quarters, although still representing strong growth, is largely due to the normalization of that growth in Asia. As Julie noted, entering July, we did experience some slowdown, primarily in the U.S. segment of the business.

Our next question comes from Naved Khan with B. Riley.

I wanted to revisit the annual guidance a bit. Previously, you indicated mid- to high single digits for both bookings and revenue, but now you're projecting revenue at 6% and bookings at 4%. You also mentioned a decline in airfare. I'm trying to understand the outlook for the lodging business, especially considering the ADR weakness. Should we expect room nights to grow faster than the 6%? I'd appreciate your insights on the lodging business, room nights, and ADRs.

Yes, fortunately, we don't provide that level of guidance by line item. All of that is reflected in the numbers we've presented for the full year. However, everything I mentioned will affect the lodging business, so there will be an impact on all those metrics for the lodging business, but we're not offering guidance on those at this time.

Okay. And then I have a follow-up on the cost side of things. So of the restructuring that you announced earlier this year, how much of that has been action and how much has yet to follow in the second half?

Yes. The majority of that has been action. There were some that we took action on in Q1, some that we took action on Q2 and so that's why you're seeing the favorability in overhead because you're getting the full quarter of the Q1 action and then you're getting the additional Q2 action that's coming through. There's a little bit that's left on that but not significant. But of course, it doesn't mean we're stopped looking at every single line and where we can find efficiencies elsewhere. It's just on that particular cost action that we mentioned, we're almost through it.

Our next question comes from Kevin Kopelman with TD Securities.

Just one, so quickly on the macro. You called out ADR softness. Are you seeing any softness in nights? And then could you just give more color on how you're managing the B2C advertising expenses in the second half given the backdrop?

Sorry, can you repeat the first part of the question?

The first part was on the macro softness that you're seeing quarter-to-date, you called out the ADR softness but are you also seeing a slowdown in kind of underlying nights activity, particularly with stays.

Yes, we are. In particular, stage, you said?

Well, just kind of separating out the window versus how much we actually look like they're going to be traveling.

Yes, we are seeing a reduction in nights, and it's not just about the booking window or the average daily rate. There has been some softening in travel demand that is affecting transactions. It's a combination of various factors. Regarding your question about B2C advertising expenses, our plans are based on the guidance we've provided, which indicates that we expect EBITDA margins to be in line with last year. We are managing towards that while still investing in Vrbo and international markets. We will evaluate advertising and its relevance to the top line and variable costs based on the top line's performance, but our goal for the full year EBITDA margins remains in line with last year's figures.

And I would just remind you and as Julie said, obviously, looking very closely at what are the macro trends, what are the demand trends, where do we want to spend in marketing and advertising. And we look at marketing, promotions and pricing and loyalty all sort of in the same bucket to then say which of these is going to be most effective given the environment. And then even within marketing, are we going to put money more into performance or into social or into other channels. And I spent a lot of time with our marketing team just looking at where we're getting the best returns, where we're leaning in, where do we need to pull back, and the like.

Our next question comes from Ken Gawrelski with Wells Fargo.

Just two, if I may. First, could you've talked about the EXPLORE Conference in May a lot about your marketing plans and your advertising and media plans, I should say, not your marketing plan, sorry. Could you talk about opportunities, not necessarily in the short term but over the kind of next 1 to 2 years, how you can continue to grow that business robustly and what the opportunities look like? And then second is just more tactical. As you think about the One Key expansion to the U.K., do you expect that to be a material and how material do you expect that to be on Hotels.com in the back half of the year?

Thank you for the question. Let me address the first part. You're correct that we've discussed the travel media network at EXPLORE and we're very enthusiastic about the potential to enhance advertising and deliver value to our advertisers. Currently, much of our advertising business occurs during the shopping and booking stages of the travel funnel. There’s less activity when consumers are in the dreaming phase and even less after the booking process, which signals an opportunity for us. Additionally, we see potential in expanding the number of partners utilizing our advertising tools. This includes increasing the number of hotels and airlines using sponsored listings and introducing new products for destination management organizations. There’s significant growth potential in these areas as well. I should also mention that we are working on providing more resources to these advertisers to make it easier for them to use our advertising products, including enhancements that allow them to better target their audiences. We are about to introduce video into our ads, which we believe will improve their performance. Overall, we are optimistic about the long-term opportunities here. Regarding the One Key rollout and its expansion to the U.K., I don't anticipate it having a significant impact at the company level. We have learned from the One Key implementation in the U.S. how to engage with higher value Hotels.com customers who might perceive a drop in their value, and we are applying those lessons in the U.K. However, I don’t think it will be material at a company-wide level.

Our next question comes from Richard Clarke with Bernstein Societe Generale Group.

Just a question on the pause on the rollout of One Key. Does that mean that the Hotels.com buy 10 nights get 1 free. That will remain in all markets, apart from North America in the U.K.? And is that awkward to your sort of supply partners that they've got to deal with you in multiple different loyalty schemes? And what does it mean for your sort of B2B rollout? I think One Key was one of the things you were offering as part of the B2B rollout. So how would that affect the rollout of B2B in sort of non-U.S., non-U.K. markets?

Yes, thank you for the question. The Hotels.com 10 for 1 program will stay the same outside of the U.S. and the U.K. It's a straightforward program and will remain unchanged as we explore the way forward. For our supply partners, such as hotels, this process is completely transparent. They take part in member deals, offering various discounts for different member tiers, which we incorporate into our Hotels.com rewards program. This means hotels can engage with Hotels.com rewards members regardless of whether they are in a country with the current 10 for 1 stamps or in the U.S. Regarding B2B, One Key has not been introduced to that sector. We provide inventory and technology, but many of our partners have their own loyalty programs. We have discussed rolling out One Key to our advertising partners, allowing them to use their advertising budgets to enhance One Key earnings for their hotels. However, this will only apply in the U.S. and the U.K. We are taking the necessary time to consider the value proposition for our loyalty programs in countries where we have only one major brand at scale.

Our next question comes from John Colantuoni with Jefferies.

Great. Two quick ones for me. First, on the 3Q outlook, does your outlook for the third quarter assume there's a recovery in night in August and September relative to July? And second question, just talk to some of the pricing reductions you started making last quarter and how that impacted conversion. And now that you're seeing some trade down, whether you might have to lean in a little bit more there.

Yes. As far as the first question on the 3Q outlook, we have not sort of baked in any upside or something in September. We've looked at obviously run our various scenarios and what the information that we have based on what's happening in July and ran that out as to where we think the quarter will land. Certainly, it's also you have to take into consideration for revenue at least what happened in prior quarters because then the states come to fruition in the third quarter. So we already have some of that data and that's just going to play out. But certainly, based on all the new data in July, we've just run our scenarios and let it play out for Q3 accordingly but there wasn't any sort of step-up in September that we assumed. As far as the pricing actions, yes, we had made a call, you probably remember from last quarter that we had done some pricing actions towards the end that then we're going to be coming into this quarter, we did see that come in. And we only do those pricing actions if we get the returns. And so certainly, they are driving conversion for us. And so as we have been doing, we're going to continue with that going forward as it is a good returning marketing lever for us.

Our next question comes from Jed Kelly with Oppenheimer.

Great. Just going back to the B2B opportunity. Is there any way you can sort of give us a backlog or just frame like the amount of contracts you think are up that can potentially drive growth there? And then just on Vrbo, just thinking of the fourth quarter marketing strategy, that's usually when you have like a large brand campaign. If this softness continues, can you just talk about how that impacts your marketing strategy?

So on the first one, I'm not going to share details about the pipeline. What I will say is we're thoughtful about which deals we want to bid for. I think often when you have a B2B team, it's as important which deals you decide not to bid for and which ones you decide to bid for. And we have a super experienced team, a great business development team that's being thoughtful about where do we want to play and where do we not. I'd also say that growth can come from finding new partners but growth also comes from our existing partners. So sometimes you might have a partner that we're powering three of their points of sale and then they decide that they're going to expand into another couple of countries and it's incumbent on our team to make sure that we're the ones powering them as they're growing their business. So when you think about the B2B business, it's not just that sort of the pipeline of new business, it's also what are all the actions we're doing in our existing partners in order to either win share or to just grow along with them.

Regarding the Vrbo marketing strategy, we learned from last year that it’s important not to significantly reduce marketing spending, especially as we enter Q1, which is a key period for Vrbo. That’s part of the reason we are guiding towards some pressure on EBITDA in Q3; we want to keep investing in Vrbo for the long term. We plan to continue our investment in Vrbo unless there’s a significant downturn, which we do not anticipate. Therefore, we expect to maintain our investment in Vrbo, which we have also factored into our margin guidance for the year, keeping it in line with last year.

Our final question comes from Ron Josey with Citigroup.

Maybe, Ariane, a follow-up to your comment there on investment in marketing. I thought the 20% growth in room nights in Brand Expedia was a really key highlight. So I wanted to understand just the drivers here, maybe a little more on geographic mix. And really, the benefits from the advertising side of the brand continues to evolve. And then I think I heard you say conversion rates improved in the quarter as in multiproduct attach rates. And so again, just wanted to dive a little bit deeper on the product to hear how the funnel, how transactions are going on Expedia overall.

Yes. Thanks, Ron, for the question. As you said, I mean, Brand Expedia has been a great highlight for us. And it's also what gives me confidence because it was the least disruptive of all of our brands and it's the brand that's gotten all of our innovation going into it. We've also, over a number of years, really built up the brand value there. We spent quite a bit in marketing over time and now we're seeing leverage with it because we have a great app installed base, strong repeat, a great member base and the value proposition on Brand Expedia to shopping and booking multi-item scripts, whether it's directly through the package path or buying a flight and then later coming back and buying a hotel at a discounted rate, is really strong for travelers. So I would just say, in general, we feel good about it. It's still to my liking to U.S. focused. I mean, as is our whole consumer business, we'd like to see more growth internationally. But as you say, Expedia is really a highlight. So thank you for the question. Okay. Well, so I just want to thank you all again for joining us. Julie and I appreciate the questions. I just want to leave you with the thought that we know the environment is becoming more volatile. But regardless, we believe we have a lot of opportunity ahead. We have great consumer brands that travelers love, a differentiated B2B business, diverse supply, the strongest it's ever been and a really powerful tech platform. So as we look to the future, we're going to use these assets to drive profitable growth. Thank you, all.

That concludes today's call. You may now disconnect your lines. Have a nice day.