EXPE 2022Q2

Good day, everyone and welcome to the Expedia Group Q2 2022 Financial Results Teleconference. My name is Brika and I will be your operator for today’s call. For opening remarks, I will turn the call over to SVP Corporate Development, Strategy and Investor Relations, Harshit Vaish. Please go ahead.

Good afternoon and welcome to Expedia Group’s earnings call for the first quarter of 2022 that ended June 30. 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 view as of today, August 4, 2022 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 other similar statements. Please refer to today’s earnings release and the company’s filings with the SEC for information about factors, which could cause our actual results to differ materially from these forward-looking statements. You will find reconciliation 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 consistently visit our IR website for other important information. Unless otherwise stated, any reference to expense excludes stock-based compensation. And with that, let me turn the call over to Peter.

Thanks, Harshit, and good afternoon everyone and thank you for joining us today. Let me begin by saying that we were very pleased with our financial results in the quarter on the back of a continued recovery in all markets and products and our expanding margins. We've seen strong consumer demand for travel this summer and are encouraged that travel remains a top spending area even as other parts of the economy seem to be showing cracks. We posted our highest ever lodging bookings this quarter on the highest revenue and adjusted EBITDA for any second quarter and we continue to further strengthen our liquidity with a strong free cash flow and the early redemption of an additional $1 billion of debt. We delivered these strong results despite the current macroeconomic backdrop and the limitations and disruptions we've seen in air travel around the world. Of particular note, while domestic flight capacities have recovered close to 2019 levels, international flight capacity is lagging with long-haul capacity still down roughly 30%. While these disruptions and shortages don't appear to be abating soon, we do look forward to when these long-haul capacities return as this has always been a relative strength of ours. Now moving on to my main topic of the day. For the last few quarters, we spent a lot of time talking about the transformation of our technology platform and how that will enhance both our B2B and B2C businesses going forward. And last quarter, I took time out to explain in greater depth, how we were pursuing our B2B strategy, driving travel as a service to partners of all sizes. But as investors digested our Q1 results, it became very clear to us that we needed to clarify our B2C strategy and begin to provide incremental data to help you understand what metrics we think are important to measuring our success in pursuit of this strategy. In particular, there's been a lot of interest in the shifts in room night share, as travel has recovered. And whether something has changed in the market, or if it is just a temporary shift, as we put more of our attention into our technical transformation and attracting the right mix of consumers. Today, we hope to answer this more directly and give you a better understanding of our strategy and tactics as we evolve our consumer business. As for the backdrop, I think by now you all have a decent understanding of how the mix effect domestic versus long-haul international or geo mix for example with the robust recovery of EMEA in Q2 can cover share results. And I also believe you are well acquainted with the fact that we've divested or shut down a number of noncore businesses, shedding certain volume over the last two years, whereas some competitors were buying business and thereby adding volume. So today, I'm going to focus more narrowly on how our long-term consumer strategy is impacting these short-term share issues. To be clear, we have been evolving our consumer approach from being largely transactionally focused, where we and the industry spent virtually all of our time, tuning our products for maximum arbitrage and performance marketing channels and spending more and more money on intermediaries, to a future where we build longer-lasting direct relationships with loyal high-lifetime value customers. This means that we have not chased all traffic available in performance marketing, no matter the cost and instead have focused on the pockets of consumers, we think will drive the highest long-term value and the best future shape of our business. To give you more perspective on why it's so valuable to focus on these types of consumers, I'd like to give you a few facts about our biggest OTA brands. Over the last 18 months in our Expedia and Hotels.com brands, loyalty members drove approximately 3x the gross bookings per customer and over twice the gross profit per customer and twice the repeat business as compared to nonmembers. Similarly, app users drove over 2.5x the gross bookings per customer, 2.5x the gross profit per customer and 2.5x the repeat bookings versus non-app users. And of course, when we combine the two and have loyalty members who also book through the app, you get the highest production of any customers. Given these core drivers our entire company is focused on getting the right customers in the funnel and then turning them into loyalty members and app users. And while both will accelerate as we deliver on our platform with better features, better personalization and with one overarching loyalty program. I'm pleased to highlight that we are already seeing strong traction. For example, in Q2 '22 alone we grew new loyalty members 33% compared to Q2 2019. Similarly, on the app side, new app downloads grew 58% in Q2 '22 versus Q2 2019. Not surprisingly therefore, our direct business continues to grow with almost two-thirds of our B2C gross bookings in Q2 generated from traffic that came to us directly. And really this is just the beginning. With improving products and features including our price tracking product for flights, which has been a huge engagement driver in the app and with the rollout of loyalty to all of our customers next year, we will be able to drive much more direct engagement with our customers. That being said, it's also important to remember that lifetime value and travel does not come through the numbers instantly because of the frequency of travel for most consumers. While we have been gaining ground building up our base of high lifetime value customers and are confident in their ability to drive future velocity, it is not as quick twitch as buying transactions through Google and other meta channels. In the coming quarters, we will continue to update you on these important core drivers of our future success and provide any additional disclosures that may help you measure and understand our progress. For example, starting today we have added an incremental disclosure of room nights on a booked basis. This disclosure should not only give you a better sense of our trajectory, but should also help you better understand our marketing spend. But to be clear it is not the complete picture. Ultimately, what you need to understand is that we are spending against the profit we derive from the market. And while we may currently look less efficient on even a booked room night basis compared to booked gross profit, we are still spending below historical levels. We have done this while allocating more money to channels that drive direct traffic and the kind of high lifetime value of consumers we seek. It is early days even for this but we know we have the best creative in the category and a great plot to acquire app customers and believe strongly in these veins of opportunity. Now as anyone forget while we've been making the transition from volume at all costs to the right volume with the right long-term characteristics we have also been going through a massive technical transformation as we move to a single platform. Transitions like this always entail certain short-term versus long-term trade-offs. The perfect example of which is our migration of Hotels.com onto the Expedia stack. We accelerated this over the last two quarters because the benefits of being able to optimize across our largest two OTA brands on the same stack are massive. But to be clear migrations generally disrupt customer patterns and can impact conversion in the short term. And we were no exception. We had to make some choices to prioritize speed over perfection. The really good news is that Hotels.com front end is now nearly fully migrated and we've been freeing up engineers who can now turn their attention to optimizing the full stack. This is just one example of the many choices we make every day to trade modest short-term disruption for significant long-term growth. And frankly, we are more excited every day by our progress, the acceleration of the transition and what is still to come. So in summary, we know we are massively improving our technical position. We know we are engaging more customers in our membership programs and our apps and we know both will drive significant improvement in our business. And in general, we are willing to give up short-term unprofitable volume for longer-term sustainable growth. Because we know that at any given moment a large portion of the traveling public is up for grabs searching around for the best travel options. The industry literally serves billions of searches and customers every year and rarely has engendered true loyalty. Traffic has never been an issue in travel. It's always been a question of retention. We mean to once and for all change that dynamic by providing a product and set of services, worthy of customer loyalty and ultimately, we intend to spend much less of our time and money chasing them over and over again in the wild. Of course, in the meantime, we will look for every opportunity to grab back share where it makes sense and where we are bringing the right kind of traffic at the right value. As fixated as some of you may be on share, I can assure you we are more so. Our competition has been very promotional and highly geared to performance marketing, but we are determined to build our business in a better way. And we fully believe that as we build our base of high lifetime value customers, we will be able to buy the right customers more efficiently and grow revenue and share far more quickly and profitably than we ever have. Let me end by reverting to our core theme. We are evolving all things in the business to a place of better customer-oriented products and capabilities, better service and understanding of our customers, personalization and ultimately, building what we believe will be the best and stickiest product in the industry. And all of these advancements also benefit our B2B business, which continues to grow at an accelerated rate. Just this quarter we had a variety of wins. We now power Delta Airlines car rental offering along with hotel, which we have powered for some time and we've already seen significant benefit to our partner. We've become the exclusive provider of hotel supply to Avios, the rewards program for all the airlines under the IAG flag. And while we continue to find new ways to add value to classic travel partners, we have also expanded into emerging pools of captive consumers. To wit, this quarter, we proudly partnered with Bilt, which has the first-ever loyalty program for renters and we now power their travel portal. And as we continue to power old and new partners, we are also looking for new capabilities to externalize to expand our Open World platform product suite. Late last year, we externalized our travel ads platform that allows travel suppliers to advertise to our consumers. With this externalization, we are expanding the reach for our travel advertisers and the scope of what we power for our demand partners. This quarter alone we added travel as to multiple template partners. We continue to see enormous potential for travel as a service and the continued growth of our product lineup will help fuel our ambition to power the whole industry. So in closing, we had a record financial quarter and we added more loyalty members and app customers than ever before all while continuing to make huge progress on our technical transformation. We're grateful to our employees, our customers and our partners, who are helping us change the industry. And with that, I'll pass it on to Eric for financials.

Thanks Peter. The second quarter was strong on multiple fronts, and I am pleased with the financial results that the business continues to generate. Before I dive into the numbers, let me preface that I'll provide our reported numbers and growth rates as well as like-for-like growth rates that exclude Egencia’s AmEx GBT and the non-lodging elements of our Chase relationship. I will go through that last one as that is a new adjustment. Chase is a valuable B2B partner and our relationship remains strong. But as of February 2022, we stopped powering their non-locking business, which consists of air and car. However, we continue to power their lodging business, which has performed well. While the non-locking business was significant on a gross booking basis, it was not material to us on profitability. And as a reminder, we completed the sale of Egencia's AmEx GBT on November 1, 2021 and our EPS business entered into a 10-year lodging supply agreement with AmEx GBT. We believe these like-for-like numbers are more reflective of the actual performance of our business. Moving on to the P&L. Total gross bookings for all products were up 1% on a like-for-like basis and down 8% versus Q2 2019 on a reported basis, which was a sequential improvement as compared to Q1 down 9% on a like-for-like basis and down 17% on a reported basis. Like-for-like gross bookings growth was driven by an improvement in lodging bookings and ADR is well above 2019 levels. We've seen a continued recovery across all our geographies and main product types with particular strength in North America. Total lodging gross bookings, which were the highest we've ever had, were up 9% on a like-for-like basis versus Q2 2019 and up 8% on a reported basis. Now for the monthly walk. On a reported basis, lodging gross bookings were up 9% in April, up 9% in May and up 5% in June. As for July, we saw some choppiness early in the month, likely due to airport and airline disruptions. But in the back half of the month, we have seen strong performance similar to the rest of Q2. All in, we expect July to land in line with 2019 levels. Currently we are seeing a robust summer with Q3 lodging bookings pacing ahead of 2019. The same is true for pacing for the remainder of the year, but it's still early with the majority of bookings for the back half of the year yet to be made. We remain optimistic and as Peter mentioned, we will continue to monitor bookings and other leading indicators closely and adjust our actions accordingly. Total revenue was up 5% versus Q2 2019 on a like-for-like basis. On a reported basis, revenue was $3.2 billion up 1% and a sequential improvement from down 10% on a like-for-like basis and down 14% on a reported basis. Direct sales and marketing expense was $1.5 billion up 12% versus Q2 2019 levels as we continue to spend into the recovery to capture demand. As Peter mentioned, we increased the efficiency on marketing expense as a percent of booked gross profit. As part of our strategic focus to build a direct relationship with travelers, we continue to allocate spend towards higher lifetime value channels such as pay-at-installs and brand creatives. Moving on to overhead. Costs were $551 million, a sequential increase of $18 million from Q1 2022 and were approximately $170 million or 23% lower than Q2 2019. Adjusted EBITDA for the quarter was $648 million, the highest second quarter in our history and was up 20% versus Q2 2019 on a like-for-like basis and was up 14% on a reported basis. Adjusted EBITDA margin for the quarter was 20% over 230 basis points higher than the 18% adjusted EBITDA margin in Q2 2019. This quarter I also wanted to call out the other expense line which was a loss of $385 million. This was primarily driven by a mark-to-market loss on our minority equity investment in American Express Global Business Travel, which we received in exchange for our equity interest in Egencia. The loss is due to the reduction of GBT share price since the company became public in May 2022 through the end of Q2. We continue to bring long-term believers in AmEx GBT and is the leading corporate travel management company in the world led by a terrific management team. And additionally, corporate travel has been rebounding faster than many anticipated and our supply deal with GBT continues to perform very well. On to free cash flow, which showed a $1.5 billion in Q2 on a reported basis. Excluding the change in restricted cash primarily driven by the change in Vrbo's deferred merchant bookings, free cash flow was approximately $1.3 billion. As it relates to our current cash position we have $8 billion in total liquidity, which includes $5.6 billion of unrestricted cash on hand as of quarter end, which provides us ample cash to operate the business. We remain committed to maintaining our investment-grade rating. And consistent with this in May, we announced the early redemption of our senior notes due 2023 and 2024 totaling approximately $1 billion. Post this redemption we have no notes maturing until 2025. Since May of 2021, we have repaid over $2.9 billion in net debt and preferred equity. Regarding our capital allocation strategy we had a strong track record of returning capital to shareholders and we believe our stock remains undervalued. As we get more clarity on the macro picture, we will accordingly reevaluate our options including potential share repurchases. In closing, we are pleased with the results we achieved this quarter. I believe executing on our strategy will yield a stronger direct relationship with travelers and improve our overall financial performance further.

Our first question comes from Eric Sheridan of Goldman Sachs. Your line is open.

Thank you so much for taking the question. Maybe coming back to all the disclosure and framing strategy around B2C which I think was really helpful for investors. Can you talk a little bit whether it's either qualitatively or quantitatively about how we should be thinking about longer-term marketing ROI or gross profit per booked room night? I'm thinking about ways in which you could generate additional leverage in the model beyond some of the margin targets or margin framework we've talked about before coming out of the cost-cutting exercises during the pandemic just a bit better framing on what might that do for sort of returns for the business over the long-term? Thanks.

Sure. Thank you for the question. I'll certainly try to put a little more color on it. Ultimately, as we drive towards high lifetime value customers and moving our customers into these high value positions in app and membership et cetera and up the membership ladder. We believe that we'll be able to use our marketing capital more efficiently through a variety of channels, including loyalty, including CRM and a variety of ways to drive more direct relationships. And ultimately, we believe we're going to get better and better at being able to buy the right kinds of customers out of the market. We are trying to do that now. We are doing it, I would say, with fairly rudimentary tools, but we are getting better and better as we get better at a more granular understanding of each customer and each customer's potential LTV and what channels they come from. So we're on that journey to basically drive lifetime value broadly, but also ultimately understand lifetime value in a very granular way, so that we can then, again, be buying that lifetime value out of the market in the most efficient way as we can. We think we're doing that now. But admittedly, our tools are somewhat rudimentary. As we get all of our customer accounts together. You've heard us talk about consolidating data, consolidating the one loyalty plan across everything. As that loyalty plan reaches everybody, as we have one identity for every customer we are going to get better and better at understanding LTV and understand each customers' performance and that's going to allow us to get a lot sharper on how we acquire traffic and who we acquire. So, ultimately, we are looking to drive more efficient acquisition of the right kinds of customers. And as I've said on a couple of calls, that doesn't mean we're necessarily planning to spend less money, it means we expect to get more value out of the money we spend. And if we get really good at it, we may be spending more money and buying just more and more value out of the marketplace. So that is our ultimate goal. I think, there's lots of tools we have already to drive LTV, but we're going to have many more and a better understanding of how to buy the right kinds of customers out of the market as time passes.

Great. Thank you.

Thank you. Your next question comes from Kevin Kopelman of Cowen. Kevin, your line is open.

Thanks a lot. I was hoping you could drill down a little bit more on how you view the current travel booking environment that you're seeing quarter-to-date, given you did see some of that choppiness early in the quarter, but then it sounds like growth has come back quite a bit since then. Thanks.

Yes, of course. Eric can add his perspective. I’ll share my thoughts. We did experience some fluctuations in the early part of July, as Eric mentioned. There has been significant disruption at airports in North America and Europe, particularly with Heathrow capping the number of flights. This has led to considerable noise and cancellations, which we believe has contributed to the situation, especially during this unusual macro environment. Despite the uncertainties, we observed a strong rebound in the last few weeks of July, suggesting the challenges were likely temporary. We are noticing improved resilience and similar strength compared to earlier in Q2. Therefore, we remain optimistic. The summer period appears strong, with no notable downturn besides what we saw in July. Additionally, there are still many bookings available, which fuels our optimism.

Could you also provide some insights on the factors influencing EBITDA in the third quarter, considering it's usually the most profitable quarter of the year? Thank you.

Yes. Maybe, I'll let Eric take that, but I think he may be having some technical difficulties.

Yes. Over here, you got it. Okay. Kevin, can you hear me okay? Okay.

Yes.

As you mentioned, Q3 is our peak season for EBITDA. Looking back at Q2, we're pleased with our overall EBITDA performance and the leverage I referenced earlier. We are running the business fairly consistently, so we're optimistic about the quarter. I also noted that our bookings for the upcoming periods are exceeding 2019 levels. While most transactions are still pending for Q3 and Q4, we're encouraged by the trends we're observing. Adding to Peter's comments, we're navigating a more volatile trading environment than we've seen historically due to the pandemic and its variants, which has created some disruption. There may be times when volatility increases, but consumers remain resilient and are focusing on travel expenditures. As Peter and I noted, the latter half of July and early August saw performance similar to Q2 levels.

Great. Thanks, Eric. Thanks, Peter.

Thanks, Kevin.

We now have a question from Naved Khan of Truist Securities. Please go ahead, when you are ready. Your line is now open.

Great. Thank you. Just a quick clarification maybe. So the monthly trends you shared for 2Q and into July. Are they like-for-like, or are they on a reported basis? How should we understand them? And then on the – maybe Peter so you said that, the Hotels.com tech integration is complete. Are there any early results you can share with us in terms of any kind of benefits you might be able to drive from that?

Hey, Naved, I'll take the first part of that, and perhaps Peter you take the second one. They are on a like-for-like basis. So that is giving you a sense for what we believe is the more accurate representation of the trajectory of the business. And again, just for everyone clarification, it's essentially taking out Egencia, the Chase non-lodging components and then also the lodging service agreement that we have with Amex GBT, so that it gives you a sense for our core business and what the trends look like given the puts and takes that we've had given the changes that we've made over the last few years.

And I'll take the H.com question. So the short answer is, we've mostly seen the disruption and not much of the win yet. Obviously, as I mentioned, the engineers we're now freeing up to optimize the stack is are highly valuable to us, and we expect now to get wins not only on the H.com stack, but on the beta the Expedia stack at the same time. So the whole idea has been broken into two different stacks. We've had to engineer, we've needed twice as many engineers to work both stacks. And we've been – any test any wins any improvements are made on one stack or the other and not necessarily working the same across. So now that we get more on to the same stack, every time we get a win, it's a win for everybody. And it's a win for much more of our traffic. So the opportunity to now have one consolidated place where we can do that is massive. And we are just getting going now that we've moved so much of the front end, we can put those engineers on the work and we can start to get lift across not only for commercial, but Expedia the portfolio brands, and everywhere else that runs on that stack. And ultimately, we will all be on the same front-end stack. And then every iteration, every test and win every opportunity to make the product better, we'll go to all our customers and we'll get the benefit across the biggest space. So that's what we're driving to Naved and early days in that particular bit. But I will say, the disruption was somewhat less than we expected, which is good and the opportunity is enormous. So, we're putting people on it now and we're starting to get those benefits. But it's very early days.

Yes. Hey, Naved, I want to just clean-up my quick remarks, because we actually have both in there both on a like-for-like, and on a reported basis. So let me just be really clear. We provided both numbers, which is the 9% on a like-for-like basis for total lodging gross bookings, and then the 8% on a reported basis. And then the WACC, itself is on a reported basis just to make that clear.

So, let me just maybe understand that better maybe for July. So you shared the trends and how July started out weak and sort of picked up towards the back end. Is that on a reported basis, or how should we look at that?

Yes. That's reported.

Yes. That's on a reported basis.

And that's lodging bookings only, right?

Correct. Just to make sure you heard me.

Thank you. Our next question comes from Lee Horowitz of Deutsche Bank. Your line is open Lee.

Great. Thanks for the question. Appreciating that long-haul capacity still remains constrained. Can you guys comment at all on what you're seeing in terms of urban travel trends either in the quarter or into 3Q, or are you still seeing kind of robust accelerated recovery there? And is it fair to think that you guys still kind of remain below 2019 levels within this travel quarter?

Yes. In response to the first part, Lee, cities have been experiencing a strong comeback. If you have traveled this summer, especially in Europe, you would have noticed this. While the recovery is not as pronounced as that of beach destinations and others, it is significantly improving. As I mentioned earlier, we've observed enhancements across all products, though the performance varies by location and between urban and non-urban areas. Overall, everything is trending upward, and urban areas have shown substantial recovery. Our data indicates that we are not pursuing unprofitable business. I won't specify which locations are performing differently, but urban travel is growing well for us and for the industry as a whole. Cities are definitely back, and this summer will offer plenty of opportunities for urban travel.

Great. And one follow-up if I could. In the past you guys have talked about struggle in terms of bringing on as much headcount as you may have liked. I guess given maybe some of the ground slack in the labor market would you say that that's no longer a problem, or are you still trying to kind of ramp in and having some, I guess the word loss in terms of bringing new headcount in media?

Yes, I can take that Peter.

Go ahead.

Yes, I would say we continue to trend below both our forecasted and candidly, what we want to do from a new hire perspective. So, I would say that that continues to persist. Obviously the market is dynamic at the moment. So, it's something that we're watching to see if there's greater accessibility of talent if you will. There's also continues to be some wage inflation challenges as well which I think you're probably hearing across a lot of these calls. So, we haven't seen that necessarily come through at this point, but it's something that we are watching closely. But I will also say from a recruiting standpoint, I do think our strategy and our execution on our story does resonate quite well as we are recruiting. We are excited about what we're trying to accomplish. We're just doing that within a broader context of a challenging environment. And not that I wish ill on any people out there from a layout perspective or whatever else, but I think there could be an opportunity for us to ramp some of that hiring over the coming months. Now, with that said, there is a lot of uncertainty out in the environment. We are like everyone else looking at our head count and making sure that we are prioritizing accordingly putting people on our highest priority items and looking at our open headcount to make sure that we're making the appropriate investment decisions. So, it's dynamic like a lot of the other aspects of the business but we continue to have success in recruiting talent but not necessarily at the levels that we want to relative to our priorities. Peter not sure if you want to add anything to that?

Yes, I would just add Lee that as we continue to make progress on our technical transition. We're constantly solving problems and freeing up people to work on new things. So, it's kind of we're solving it two ways, which is we're looking for talent in the market to help fill open roles where we need people and every day we're also kind of freeing up capacity that can work on the next thing. So, we're moderating it that way. And ultimately as I've said before we're going to get more efficiency out of the machine over time. So, balancing that trajectory is something we're always looking at.

Okay. Thank you, both.

Thank you.

Thank you.

Thank you. Our next question comes from Tom Champion of Piper. Please go ahead when you are ready, Tom.

Hi. Good morning. Thanks for taking the questions. Just curious if you could talk a little bit about Vrbo and the alternative space and whether or not you encountered any supply constraints in the summer with inventory? And then second maybe you could just talk a little bit more about new partnerships in the B2B business and very strong revenue and EBITDA in the segment. Just your thoughts on that sustainability. Thank you.

Thanks for the question. Regarding Vrbo, the business remains robust, significantly exceeding 2019 levels. We are experiencing some supply limitations in our top markets, particularly in Southeast U.S. beaches. However, we have been rapidly increasing supply, especially in our strongest areas, outpacing our main competitors. While we are confident in this trend, there were indeed sold-out markets this summer, and we wish we could provide more supply in those regions. In terms of new partnerships, I would love to share specific details, but we have some restrictions due to agreements with our partners. Nevertheless, our B2B business is experiencing considerable growth, and we believe there are many products we can offer our partners. As we improve our offerings, such as the integration with Hotels.com and Orbitz, we’re also enhancing our front-end modules for easier use by partners in their travel products. There's a significant opportunity in enhancing our products for existing partners and introducing new offerings that can provide additional value. We're actively pursuing both these paths. Exciting developments, like our new car deal with Delta, illustrate how we can deliver greater value for our partners, which in turn fosters mutual success. Our technology and supply enable us to achieve better results for all our travel partners, transforming these relationships into true partnerships rather than just supplier agreements. We believe there’s substantial growth potential ahead. It's not just a straight line of acceleration; we expect to introduce new products and establish significant partnerships over time. These additions will enhance our external offerings, thereby attracting more partners, which is what excites us the most.

Thank you.

You bet.

Thank you.

Thank you. Our next question comes from Deepak Mathivanan of Wolfe Research. Please go ahead when you are ready.

Hey, guys. Thanks for taking my question. Sorry to jump on the monthly trends again. Given that it's kind of staying near sort of 10% about 2019 levels, is it sort of fair to assume that the volume recovery from kind of the pent-up demand that we saw over the last few quarters is somewhat now behind us, and it's a more normalized growth environment driven by more marketing and sort of like the product and some other partnership efforts that you mentioned just now? Are there any markets geographically maybe where recovery could still be significant? How do you kind of think about the growth from here to take it much higher about 2019 levels? Thanks so much.

Sure, I'll respond to your question. There are still many markets that have not fully bounced back, particularly in APAC and Latin America. Within certain regions, there are areas that remain less strong. However, this presents plenty of opportunity. I believe the robust recovery we've seen so far is likely to continue in the near future. As Eric mentioned, the macroeconomic situation remains uncertain, and it could potentially affect travel patterns, but everything appears solid at this moment. Therefore, we still see growth opportunities from our standpoint. The global travel market is vast, and we, along with other major online travel agencies, capture around 15% of it. This leaves a significant amount to pursue. Our strategy aims to attract high-value travelers, which will help us grow our business. While global travel is still below pre-pandemic levels due to many regions lagging behind, we've observed high average daily rates that have driven increased numbers. There is still a considerable amount of demand that hasn't yet returned. Eric, do you have anything to add?

No.

Okay. Thank you, Deepak.

Great. Thank you so much.

You bet.

We now have Lloyd Walmsley of UBS. Please go ahead when you're ready.

Thanks. Two questions if I can. First on the marketing side, it looks like there was a bit of deleverage in the quarter and just looking at direct marketing per booked room night. It's up by my math, I think 28% year-over-year. Is that just a function of bidding up because of the higher ADRs or something going on a brand campaign? You guys mentioned efficiency improvements on like a gross profit basis. So if you can just explain that a little more? And then just second one on the product side, you guys talk a lot about improving the product and doing driving more direct from product improvements. Wondering how does adding hotel supply and localizing that supply fit in as a priority in the product strategy? Are you guys rebuilding supply acquisition team like where does that fit in? Thanks.

Sure. I'll answer that in reverse order. On the supply side, supply is crucial for our business in terms of variety, pricing competitiveness, and transactions. We offer different types of discounts, including member and package discounts, which highlight the importance of supply. We've been increasing our acquisitions but are also focusing on enhancing our self-service capabilities to make it easier for suppliers to sign on. In the past, onboarding partners took a lot of time due to our merchant model and the cumbersome process. We're actively working to streamline this and onboard more suppliers through self-service, which will help us scale beyond just hiring more market management personnel. This is a key area of focus for us. Regarding our expenses, we need to consider all marketing costs, including loyalty and pricing strategies, rather than just what's shown in the marketing line. When we examine our booked gross profit and compare it to our bookings, we're seeing leverage in those numbers. It's important not to just look at room nights, as that misses other factors like mix issues and loyalty programs. While some competitors might seem to be gaining leverage, they're actually facing challenges because of increased discounting and aggressive promotional tactics. We, however, are obtaining leverage from our collective actions, whereas others are not.

Yeah. Hopefully, you can hear me okay. Peter, if I can a thumbs up.

Yeah. Yeah. You're back on. Go for it.

Thank you. Peter and I have discussed gross profit in detail, and I want to emphasize a couple of key points. First, we are committed to being aggressive in our marketing spending and recovery efforts. We will pursue opportunities to attract the types of travelers and customers Peter mentioned, and we are already seeing favorable returns from these efforts. Second, we're also focusing on the profile of the travelers and customers we are attracting, shifting our marketing to build longer-term relationships through brand marketing and creative initiatives, including app downloads. This approach allows us to create customer cohorts with a higher lifetime value, though it may take longer to reflect on our financial statements. Overall, we are confident in our gross profit, and we believe that being aggressive in marketing is crucial given the post-pandemic recovery. Additionally, we are mindful of the longer spending profiles resulting from our marketing strategy.

Got it. Okay. Thanks.

Thanks, Lloyd.

We now have a question from Brian Fitzgerald of Wells Fargo. You may proceed with your question, Brian.

Thanks. Maybe a bit of a follow-on to Lloyd's question. As you look ahead into 2023 and the implementation of the Digital Markets Act in the EU, just wondering if you could offer any thoughts in terms of how that could change the marketing environment for you potentially benefit the business from a marketing perspective? Thanks.

Yeah. Thanks for the question. I appreciate it, Brian. It's a very dynamic environment. As you can imagine, there's international tax treaties that are being negotiated. They're DST taxes that are ebbing and flowing if you will. That ultimately, it is something that we're watching. We're building it in of course where we need to. Don't necessarily have a crystal ball on it. But ultimately, I believe that we won't be the only ones that are impacted if you will on a per geography basis. And it will impact pricing and ultimately what the consumer may end up paying in the end. And so, I don't foresee at this time any detrimental impact to our ability to acquire the types of customer relationships that Peter and I have both spoken to, but it is a very dynamic environment and something that we're spending time on in Washington.

Thank you. We now have Justin Post of Bank of America. You may proceed with your question.

Great. I appreciate the other booked night disclosure and I think that has been the overhang last quarter. A couple of questions around that. So as you're presumably trying to get better customers, what have you seen on return rates so far, since you've changed your strategy? And are those higher? And second, what time frame is the Board or the management team holding the marketing group to start showing better leverage on that line? Thank you.

I want to mention a few things. While we don't disclose repeat rates, it's clear from my previous comments about our app users and direct business that you can see the trend as we focus on acquiring higher value and higher repeat customers. In terms of timing, we aim to improve marketing efficiency in the long run, but it's not solely dependent on marketing. The effectiveness of our products and supply chain are also crucial factors that influence our marketing success. We are committed to investing in the right customers that contribute to a base of high lifetime value. Currently, we are managing our spending more efficiently, which is encouraging us to continue investing. Over time, we expect to refine our approach to identify the best customer segments. Right now, we are concentrating on driving app membership and attracting the right customers into our system as effectively as we can. We're not setting a fixed target for the end of 2023 regarding specific marketing metrics. Instead, our focus is on ensuring that marketing brings in high-value customers and that our processes improve in converting them. If we can achieve both, we see that as a win and will continue to push in that direction.

And just – sorry I can just add to that as well quickly. Just around we've announced and launched some new products at our EXPLORE conference and then subsequently are ramping those. And just a couple of examples on how we can drive engagements with our travelers and customers and the relationships that one example of that is our price tracking product that we rolled out relatively recently. And early days, it's quite positive what we're seeing. We're seeing good uptake and people signing up for it. We're seeing great open rates when we send notifications and then seeing very strong return rates as well. So again, it is of course about our ability to generate transactions from customers so that we can deepen our relationship but we now have new tools that we have developed that we are rolling out that are showing great promise and engaging those customers along the way in their journey. And then subsequently you can imagine after that first transaction that just gives us more and more opportunities with an increasing number of customers using the app which is the multiplier as Peter talked about and being a member which is the multiplier on the amount of – the depth of the relationship and a number of transactions. So that all of those are adding up for us to increase our number of customers or share of wallet and ultimately drive the business in a profitable way.

Great. Thank you. Maybe one follow-up. You do see take rates up from 2019. And I was wondering if the strategy is driving higher value customers that maybe spend on different types of hotels, or is that just more timing related? Thank you.

You have the typical seasonal component on take rates. But what I would say is there are a number of different moving parts. We've got a higher mixed North America the Vrbo to Hotel relative to some of our historical numbers, which I think we've talked about in previous quarters. We also have a slightly higher margins on Vrbo itself just given some of the take rate decisions that we've made over the last few quarters. And so that revenue margin has benefited from mix so more lodging or less air. So I would expect that to come down just to revert somewhat back to the mean. But there are promotional activities as Peter talked about that we're not necessarily as aggressive or making different choices along the way and balancing that with marketing spend. That will continue to be dynamic. So feel good about the take rates. They are higher. They have – some of that is because of mix. We should expect some of that to come back down but we feel good about the absolute level where we landed.

Great. Thank you.

And I think – sorry I was just going to add in if you look at our ADRs, we've driven quite strong ADR growth and I think stronger than some of our competitors at any rate. And part of that is driving the right customers, driving the right products. And as Eric says, being less promotional. And we think that's evidence of that as compared to what's going on in other places.

Great. Thank you.

Thank you.

Thank you, Justin. We now have Ron Josey of Citi. Please go ahead as soon you’re ready, Ron.

Great. Thanks for taking the question. Peter I just wanted to follow up on your comments around grabbing back share and the mix shift to direct. Can you just help us understand over time or talk to us how this has just evolved over time and maybe the mix of direct between mobile web and app and I think I've heard you use the term we've got blunter instruments several times today, I think as we talk about moving upstream to LTV. Just talk to us about how these instruments could become sharper? What are you looking for? What needs to happen to be more efficient as we attract these LTV customers? Thank you.

Yes. To clarify, our aim is to gain a detailed understanding of each customer's lifetime value, including where these customers come from and what actions they take that indicate higher lifetime value. This is the key to understanding customer value and achieving efficiency in acquiring the right customers. Currently, we have preliminary insights indicating that members and app users perform significantly better, and those who utilize both perform even better. However, this understanding is still quite broad, and we aspire to refine it further, identifying specific performance patterns by factors like geography or the products they initially engage with. We want comprehensive information about our customers, which has been fragmented across different brands such as Hotels.com and Expedia. As we merge our data and consolidate customer profiles into a unified loyalty program, we will gain a more nuanced view of our customers, enhancing our tools for marketing. While our current tools are effective, they are not as precise as we envision them to be in the future. Additionally, with the implementation of personalization, we will create more triggers for higher lifetime value events. There’s significant potential for improvement and growth ahead. Regarding our strategy to regain market share and shift focus to direct traffic, we have acknowledged our willingness to sacrifice unprofitable short-term traffic for sustainable long-term benefits. This transition requires us to pursue different types of traffic. We've focused more on customer acquisition strategies that present greater value, even if it means making short-term trade-offs, especially during technical shifts where certain short-term advantages may need to be sacrificed for quicker progress. We are improving our understanding of how to drive member sign-ups and enhance our app downloads, which allows us to acquire customers who will engage in high lifetime value activities, ultimately generating greater long-term value. This reflects our efforts to regain share and capitalize on opportunities. While these processes are not perfect, we are constantly seeking new ways to drive growth and increase our market presence.

Very, helpful. Thank you, Peter.

You bet. Thanks, Ron.

Thank you. I would like to hand back to our final question will be from Jed Kelly of Oppenheimer. Please go ahead.

Hi. Great. Thanks for sneaking me in. Just two if I may. One, can you talk about how the stronger US dollar, could benefit your long-haul international business potentially into next year? And are you developing any strategies around that given your higher North American base? And then two, just Peter you mentioned, you're seeing stronger Vrbo supply gains over your largest competitor. Can you talk about where that's coming? Is that coming more from the property managers or individual homes? Thank you.

Sure. I'll start with the second question. We have seen broad gains in our supply, particularly from property managers, where we have a strong presence. In North America, we are likely the preferred partner for many of them. Our focus has been on systematically increasing supply in areas of high demand, where we can enhance performance for our supply partners, whether they are homeowners or management companies. Successful management companies that expand their portfolios are advantageous for us since they already know how to collaborate with us and can bring those properties into our system. Additionally, we are also acquiring properties directly from homeowners at a robust rate, so we are tapping into both sources. We aim to find the right supply in the right markets, regardless of who manages or owns it. Regarding the U.S. dollar, it remains significantly down for long-haul travel. Airlift capacity has decreased by about 30%, with 20% less capacity in travel to and from EMEA. Travelers have noticed higher prices, and airlines are managing less capacity while maintaining higher revenue per air mile. However, we anticipate that demand will rebound over time. The strength of the U.S. dollar bodes well for international travel, and despite concerns about pricing and airlift availability in these markets, a strong dollar is a positive indicator for U.S. international travel. This has historically been one of our strengths, and we hope to see continued opportunities in this area. As we look ahead to 2023, we remain optimistic about how these factors are interacting for us.

Thank you.

One quick thing to add, which may be helpful, is that we didn't spend much time in this call discussing constant currencies or foreign exchange impacts on our P&L, given our focus on the U.S. market. However, if we adjusted for constant currency compared to 2021, our EBITDA would have been 4% higher in Q2. As a result, we experienced a slight decrease in our EBITDA margins, and we would have reported 4% higher EBITDA in dollar terms as well. While this isn't directly related to your question, I believe there is a marketing opportunity due to the strong dollar encouraging U.S. residents to travel to Europe, although there have also been some adjustments affecting this quarter.

Thank you.

Thank you. That concludes today's call. You may now disconnect your lines. And have a nice day.