Q3 2019 Earnings Call

Cloud expenses contributed approximately 250 basis points to growth.

We continue to expect technology and content expenses to deleverage for the full year.

In terms of our cloud migration, we continued to progress as planned we are on track to largely complete the lodging stacked by the end of this year and expect to be positioned to complete the air migration next year as well as push further on our other products and back end systems.

We expect 2019 cloud costs to come in slightly lower than $250 million.

We are still completing the planning for 2020, but based on what we know at this point, we anticipate cloud expenses to be in the neighborhood of $350 million next year.

General and administrative expenses increased 8% year over year, largely due to higher professional fees and approximately 150 basis points of inorganic impact from bodybuilding Dot com.

Looking below the line depreciation expense growth remains muted increasing just 3% as we continue to benefit from the lower datacenter capex over the past few years.

Adjusted net interest expense decreased year over year, while our adjusted tax rate increased to 25% in Q3, which resulted in adjusted EPS declining 7% year over year.

Year to date through Q3, excluding capex investments for our new headquarters free cash flow increased a solid 15%.

In the third quarter free cash flow decreased more than usual due to a shift in the timing of certain payables and the comparison to settlement payments received last year.

The balance of the change in Q3 related to supplier payments for merchant bookings from the first half of the year given the normal seasonality of our business.

Looking ahead, we see an opportunity to drive further improvement in cash flow conversion overtime.

Turning to the balance sheet, we took advantage of favorable market conditions to issue a $1.25 billion tenure note with a 3.25% coupon.

Our approach to managing the balance sheet is unchanged and we continue to operate within an investment grade credit rating.

In addition, during the quarter, we redeemed the 400 million dollar convertible notes that we held following the Liberty Expedia deal.

On the capital allocation front, we resume share repurchases following the completion of Liberty Expedia deal repurchasing $418 million in stocks since Q2 earnings.

Together with the Liberty Expedia transaction, we were pleased to have brought in a total of 6.3 million shares so far this year.

Moving to our financial expectations for 2019, as Mark noted earlier, our updated guidance of 5% to 8% adjusted EBITDA growth reflects the mixed shift into high cost channels and the lower than expected 80 ours, both of which we expect to continue to play a role over the next few quarters.

In addition, we now expect lower full year 2019 contributions from verbose answer logo.

Overall, we are not satisfied with our results and we'll continue to navigate these changes over the coming quarters. We do however remained confident that executing our strategy will strengthen expedia groups position in the market and lead to share gains and healthy growth over the long term.

Operator, we're ready to take our first question.

Thank you view like to ask a question the signal by pressing star one to six Oclock keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to longer signal reach our equipment again press star one last question.

And we'll take our first question from Lloyd Walmsley with Deutsche Bank. Please go ahead.

Thanks.

A couple if I can first just on the Seo challenges can you maybe give us a sense of which brands are which goes or maybe blitch, Google products are causing.

The most disruption any any color you can give us there would be helpful and I guess as a follow up.

Specifically looking at the vacation rental category and Google moving to kind of mimic what they didnt hotel of vacation rental wondering.

It does your strong presence in their new unit, there Metasearch unit offset some of the Seo challenges from moving kind of organic links for the down the page.

And when Google what do you expect in terms of the timeline for Google starting to charge for that product in kind of what kind of impact could we expect.

From that thanks.

Thanks Floyd so the Seo challenges were.

I would say things that we saw across multiple product categories.

They were things that in some cases, we saw across multiple regions. So the impact was is really something we felt a little bit more broadly across our multi line of business brands than we did the lodging specific brands.

And generally what what we saw was a continued shift of essentially the freed links further down the page by other modules that were answered it and ultimately a shift of traffic from the Seo channel over to some of the other products, whether its flight metasearch shore or hotel Metasearch over time now of course as it related to the hotel.

Product the lodging product, we were able to pick up some of that volume in that ultimately resulted in us spending more on sales and marketing than we otherwise would have we're happy with the returns that we saw on it but ultimately not as good returns as we would see from the CEO channel.

With respect to the VR category.

Right now it's pretty small.

And it's something that we are actively looking at in terms of.

Evaluating that product in and looking at whether it's something that we think it's going to be a good thing for us over the long term or not but right now it's still pretty small.

Okay. Thanks, guys.

Welcome next question please.

Next question comes from Mark Mahaney RBC capital markets. Please go ahead.

A little more color please behind that lower HDR trends in Asia is that just a lot of that's just.

Political turbulence around Hong Kong, but any any other color there and then any any update on the ability to diversify more into social marketing channels.

Facebook and alike, and whether it's possible that are there any improvements. There you are you seeing the ability to tap into commercial intent or is that still far away. Thanks a lot.

Yes, Mark this is Alan so on your first question on the 80 ours I would just say a few things as you dissect those numbers first is on a reported basis. The 80 hours were reporting are pretty consistent through the year. The key there is that the foreign currency impact was much more of a negative in the first half and much less of a negative in the back half year answer that.

Kind of masks to the actual kind of decline we're seeing in terms of local currency.

Relative to our expectations, we did not forecast the degree of slowdown in 80 ours in North America that we ultimately ended up seeing.

And in the industry, you can see that industry.

Analysts and hotel companies also are just kind of systematically reducing their expectations on on room night economics as we move through this period. So that's the that's the largest area in APAC.

I think you're you're exactly right to point out that the protests in Hong Kong some tensions between.

Other countries is having some impact on on travel and on 80 ours and we're certainly seeing that in our business as well and then mark in terms of social media marketing channels.

We have seen some interesting progress in some of the social media channels Instagram for example.

To some extent Facebook largely around Influencer type campaigns as much harder to measure than traditional performance marketing channels. So it's tough to get real read on on the ROI, but in terms of just.

Some of the softer metrics were seeing around awareness and.

Some of the other social metrics that you can take a look at they are they are interesting, but still in the grand scheme of things relative to other performance channels pretty small we continue to see good progress around digital video.

We see good progress and we continue to like brand marketing, which has been.

Something that's been part of our overall a tool kit for very long period of time.

But again on social nothing that significantly.

Sort of needle moving at this point.

Thank you.

All right next question please.

Our next question comes from Justin Post with Bank of America Merrill Lynch. Please go ahead.

Hi, Thank you could you give us an update on the verbal rebranding and do you think you can start seeing better results next year or we are we near a bottom and then secondly, you mentioned the cloud expenses up 100 million next year anything else, we should be thinking about when we do our 2020 models on a big picture basis. Thank you.

Justin on on Verbose listen we continue to be happy with the trends, we're seeing at verbose. They continue to see growth rates in the double digits continues to be healthy. Unfortunately that is swamped by some of the FCO impacts and some of the replatforming work and sort of pulling spend away from some of the reach.

Little brands. The plan is to rollout the verbal brand in more markets over the course, the next couple of quarters and verbal does plan to put some marketing spend against those rollouts.

And then there'll be further roll ups across across 2020 in terms of better results I think we're going to see the next several quarters.

We expect there to be continued muted growth rates and then we're optimistic that once we get past the lapping over some of these changes that became more acute in the first half of this year that we should be in a spot where we're able to return to growth rates that were more satisfied with.

Yes, and then just in on your question about things to think about as we head into 2020 I would just say.

To be clear and as is usual for us at this time, we are right in the middle of planning for 2020, So nothing specific to share you mentioned the cloud.

Impacts that that is one factor.

These factors that we laid out in our prepared remarks on FCO headwinds mix into higher costs channels and the lower 80 ours are things that we think we'll continue to impact us for the next few quarters.

As Mark mentioned, it will take little while we think for vote to get back.

Going going the way, we want it to be going and certainly contributing.

From a profit perspective.

And so those are some of the things that would be I guess in the category of headwinds on the other and we are pushing forward on international expansion efforts. We're seeing good results from our supply acquisition efforts as you can see from our sustained room night growth.

We continue to focus on driving direct business and seeing good results, there and and as we've mentioned the.

Expedia partner solutions is doing is doing well. We also will obviously work to manage our overhead costs very tightly as we have this year and we'll continue to do that as we move through 2020. So I think those are those are some of the factors that I would that I would consider yeah I would just.

Add to that was in the long term opportunity here. The playbook, we're executing skilled very much does remain intact. I mean, the focus areas. We have around customer Centricity. For example are really focused on helping us deliver much better loyal customer relationships Sina squarely aimed at at actually decreasing our reliance on.

Lot of these performance marketing channels that are causing us some anx I think our locally relevant globally effort I think is going as Alan mentioned, we're going to continue to move.

Into international markets, and we continue to be happy with the progress, we're making on the supply efforts.

And listen the recent organizational changes that we that I spoke about in my prepared remarks are going to set us up well too much more effectively leveraged a lot of it the technical assets, we've got across the organization. The data assets. We've got at the same time align our customer facing and partner facing teams just a better X.

Acute on on the full strategy, we've got in place. So long term opportunity remains very much intact and we've got some near term headwinds that we are certainly navigating right now, but we're confident we'll be able to get through this.

Thank you.

Thank you. Our next question comes from Eric Sheridan with the US. Please go ahead.

Maybe two if I can one just following up on per BOE, I guess, just trying to discern out how much of this really is about the rebranding versus is there a change competitive landscape and shared accommodations. Obviously some of your competitors are trying to go after growth.

Trying to highlight that growth in some of their own comments just trying to understand how much of this is within your control on the inventory level and the execution level.

Branding versus what you might be seeing from a broader competitive landscape for those that are likely to book shared accommodations. That's number one and then number two I would love to get a little color on the Marianne agreement that was sort of an interesting nuance at highlighted by the company at your quarter, maybe give us a little bit of color of the underlying premise behind the agreement and how you think it plays out.

And what you're able to bring to market via your partnership with Marriott. Thanks, So much.

Sure.

So listen with respect to verbose, we can certainly point to things that we have done in terms of platform consolidation.

Reducing spend on certain flanker brands and point to direct impact on our on our topline trends.

That said I think it's it's hard to ignore the fact that the overall competitive environment continues to be well competitive.

But that said verbal has got a it's got an excellent brand, particularly here in the US. We're pleased with the growth rates were seeing against that brand may have got a great value proposition in terms of lot of these large whole homes that exists that are great for groups and family and certainly they're working on continued customer facing and.

Partner facing innovation to really press on that press on that advantage. So.

So again I think to the core question is a competitive or is it internal I think it's a combination of both but we remain optimistic that through great execution on on product development continued international rollout of the verbose brand getting the inventory from verbal onto the core OTI business to help bolster that internet.

Additional expansion with ultimately more demand in all of these things are things that point to a brighter future than verbal than certainly we've seen over the course with the last couple of quarters.

With respect to Marriott listen, we're very pleased with that that relationship and that deal I think it's a unique first of its kind.

Type arrangement and I think it's just an example of how we can bring the power of our platform to bear for our partners. We've really establish an incredible network of connectivity and distribution reach across Expedia group and what we're able to do is his help Marriott.

Basically make sure that they are having their rates and inventory displayed in a way that they intend them to be displayed for their customers and we take it. So we think it's a great leverage of what we've gotten I think it helps them achieve what they want to and were optimistic that ultimately this will be the first of many because we think it's a great.

We think it's a great relationship.

Thanks, so much.

Youre Welcome next question. Please our next question comes from Kevin Kopelman Cowen and company. Please go ahead.

Hi, Thanks, a lot.

Had a couple of follow up questions on the change in the EBITDA trajectory.

Could you talk about the increased payment processing costs, and what were those and others ongoing or more onetime in nature. Thanks.

Yes. Thanks, yes, so verbal has been using a third party for payment processing.

And we made the decision to move the payments onto the Expedia groups stack.

So that will become the merchant of record for those in order to make sure that we had a seamless transition there.

And then it went went well.

We we put in place some.

Incentive payments, if you will for the third party processor.

And that's what we're referring to those were accelerated based on this the pace at which we were moving the volumes over so not only were their expenses, but we pulled some of them forward.

From what maybe would have been in 2020.

So that's that's the nature of what we're seeing there that'll there'll be an impact of those in Q4 as well and again I think that the rationale for getting onto the Expedia payments stack we've got.

Excellent payments platform that has a broad array of payments methods.

International exposure World class fraud detection.

Very good merchant arrangements with with all of our providers. So we're we're confident this will unlock more growth for for verbal going forward and we just need to get through this transition period.

Great and then just a follow up on Omelettes question earlier about as CEO can can you give us.

Just more details on kind of specific changes that you saw in the search channel that led to.

Some of that SCR traffic ending up more on pay traffic. Thanks.

Sure again, a lot of it was around either different modules that they were introducing.

To search results that were putting traditional FCO links down the page and then in some cases, just steering more queries over to the hotel adds module or to the Google flights module than they had been doing historically, which ultimately just resulted in a traffic shift and as we were.

Prominently featured in the Google Hotel adds product of course, we were the recipient of that that traffic again pretty pleased with the returns that we see in that channel, but not as good as they were in the placed the traffic was coming from.

Okay. Thanks very helpful.

You're welcome next question. Please our next question comes from Deepak Mathivanan with Barclays. Please go ahead.

Okay, great. Thanks for taking the questions guys, Mark sorry to beat the dead horse on the ESCO issue. This is being and obviously, a recurring and kind of highly while at the for several years now can you help quantify the exposure right now I mean, you have floor.

I think at this time and then you noted that you expect base year to sustain for a few quarters, but what is the broader long term strategy to steadily mid to get to exposure from traffic standpoint, using is it more branding or is there any other kind of marketing programs that.

Good to offset some of the impacts from this thank you very much.

Yes, Thanks Deepak.

I'll tell you the ESCO exposure is shrinking all the time.

It is one of many sources for us and we havent gotten into the specifics of of how big It is but it is becoming less important to us overtime for for better for worse.

Listen to the strategy to mitigate is really what we've been talking about is being much more customer centric and for us that means ultimately developing better loyal customer relationships. So that we have customers come back to us directly we've been very focused on for example building out great feature functionality in our apps and across.

Many of our brands working to ultimately provide differentiated features in the apps that are differentiated offers in the apps that lead customers to come back to us directly obviously, just having great product and and across the board, whether it's in the app or or elsewhere as part of the strategy as well.

We've got great rewards programs, both at hotels Dot Com stay Tonight's game, one free and then make speedy rewards program again, another reason for people to come back to US ultimately directly and then in terms of channels again, we have been ultimately optimizing our marketing spend and some of these performance channels over the course of the last.

Year, and a half or so and ultimately putting more money into more of the branded channels. We mentioned some of the things we've been doing around Influencers, which is not huge yet, but that's part of it but also just television and digital advertising, where we can really feature more prominently the brand and build the brand and and really scale.

I mean, what's different about the brand has been part of the part of the Formula as well.

Okay. Thanks, Bob.

You're welcome. Our next question comes from Jed Kelly with Oppenheimer. Please go ahead.

Great. Thanks for taking my questions.

Yes, with the success, you're having rolling out core LTA outside the U.S.

Do you ever think about unifying your vacation old vacation rentals more through the Expedia brand or the hotels Dot Com, Brad and then on your comments on.

Are you think thats more macro driven or are we finally seeing some of the alternative accommodation providers have more of an impact.

Thanks Jed.

Listen in terms of.

Unifying the VR through backs or age calm, we're taking a bit of a hybrid strategy. So one of the things that we have done as part of our recent organizational realignment is brought the partner facing our host facing teams closer together between the main OTI a team and the Verboten team with a view.

At a minimum them, having a more consistent go to market strategy and more alignment so that as it relates to our partners. They really don't have multiple places to go do they have got one I think thats part of the equation.

Other side of it is as we get more of the inventory from verbal onto brand Expedia and hotels dot com overtime.

I will provide us with the opportunity to drive more incremental volume two new properties internationally as as we signed them up.

Plan is to still rollout the verbal Brandon will be thoughtful about how we do that how quickly we do it how much money, we put against it but really the end state here is that we do end up having at least in a number of markets.

Pretty broad portfolio of brands, where we've got the multi product.

Brand and brand Expedia that has alternative accommodations, you've got some of our single lodging providers like hotels Dot Com also providing then of course, you've got verbal which is which is dedicated to it as well, but again part of the goal is to harmonize on the partner side, and then distribute where we can through through his many brands as we can.

And then Jed this is Alan on the on your HDR question I would say that that big factor there is going to be the macro trends and you can kind of see that.

Throughout the industry I would say our exact HDR trends do not match exactly with the industry and I do think thats because of mix.

You referenced if there's an impact from on vacation rental I think to the extent that we're integrating verbose vacation rentals and the are our core lodging team is adding.

Alternative accommodations as well around the edges that can have a little bit of an impact.

But I don't think it would be meaningful at this point on the other factor is there is some geo mix in there so certain countries where were strong versus other countries where were weaker do have different 80 are just different overall mdrs and so that plays into it as well, but really the big story here is the macro the macro slowing.

Yeah.

Thank you.

Our next question comes from Naved Khan with Suntrust. Please go ahead.

Yes, thank lunch Nova Khan from Suntrust.

Maybe that clarification on the on the it how much of the on the decline I guess, it's mechel macro related but how much of that is really.

Noted sort of trading down, meaning and lower price point hotels versus.

Loading and price planned by the hotels across the board and then.

You talked about.

Yes, you attend does.

Impacting maybe more of a non non laws in kind of products or said. Another thing is that is that fair kind of try this again.

How should we think about that impact across different geos.

So now on the first one you it's really hard to say how much is travelers booking lower price point hotels versus.

A broader slowing that we're seeing I would say that the slowing that that we saw its not dramatically different from what we're seeing across the overall the overall industry.

So you know Alan called out rightly that there may be some mix impact in our in our channel.

It's hard to call it specifically at its consumer behavior or trade down at this point in terms of the CEO impact.

I think the impact is is pretty broad it's just that when you have a lodging only provider the only see it in one in one channel versus if you've got multi lines of business like air activities car et cetera, you can feel it and other lines of business and in some cases those other lines of business can drive lodging business as well.

Well in terms of attach so it can have a bit of a larger impact on the overall business, even though as between lodging and the other the other products and total.

It's not that big of a difference.

Got it thank you.

You're welcome.

Our next question comes from Justin Patterson with Raymond James. Please go ahead.

Great. Thank you very much can you talk about how OTA sensitivity differs today versus the last lodging cycle. It does seem like there is some more incremental head wins this time through and it doesnt seem like some of the countercyclical elements of OTI age are kicking in and then secondly on I know organize organizational realignment.

Could you highlight how this realignment it's a different from some of the past ones and how we should think about the timeline towards seeing operational efficiencies. Thanks.

Thanks, Justin.

Listen I think OTI is in this cycle in terms of what we saw during the last slowdown I.

I think where we continue to be in a good spot I think we are much larger than we have been historically and therefore, our importance as a channel is more significant what we've seen in past cycles is that corporate and meetings business starts to.

Essentially get get shrunk essentially as corporate start tighten the belt and that ends up creating more of a spot market in our channel where.

Partners are able to discounted in many cases discount in more opaque ways, either through our hotwire product or through our packages product.

So that ultimately make an offer incredible deals to our customers in a way that does undermine their overall pricing structure I think that continues to be a big opportunity for us I don't think that were necessarily at that point in the cycle. Yet you continue to be occupancy rates continue to be pretty pretty healthy.

For us and a healthy for the overall industry. So I think if we were going to see it it's a bit it's a bit earlier you know I would also say that in terms of our position unit downturn. We have introduced a bunch of new products that help are putting their lodging partners target customers more effectively.

In a way that goes beyond just traditional discounting our travel adds product for example, as a product that is more of a sponsored liftings product, which allows our lodging partners to get demand in a really targeted way when they need it and that's just significantly more sophisticated today than it was.

In the prior year. So I think represents represents an opportunity.

In terms of the organizational alignment.

Listen we have not done a ton of organizational realignment over the years, but this one is.

Significant in that does bring a number of teams together in a way that does really align well with our overall strategy.

Bringing the partner facing teams together for example, I talked about the way that we will have.

Much more unified go to market approach between verbal and our and our lodging team that and our traditional lodging team I think thats going to bear benefits over time, and really allows us to unleash a lot of the benefits that that we can deliver across the whole platform to our partners like we have with with Marriott like we have with.

I did airlines for example, bringing together more of our tech and data teams are aligning the more closely you know really allows them to be more effective and collaborating with one another and finding opportunities where they can leverage each other's technology leverages, others code and redeploy resources against things that are.

For more differentiated in terms of what our customers and partners might see and then we brought across some of the functions in our in our customer facing team to be more effective in terms of international expansion to find more opportunities to collaborate with one another in ways like we have done between verbal and brand Expedia for exam.

Apple wherein verbal you're able to book hotels and cars.

On on brand Expedia, you're able to log in with your brand Expedia log in.

Login credentials. So these are all.

Changes that are aimed at unlocking new opportunities that are aligned squarely with our strategy in terms of how long it's going to take two to scale. These things listen it is going to take some time to realize the full benefit of what we're able to do here.

But we're confident that is going to make us much more effective and efficient as we realize benefits over time.

Great. Thank you.

Our next question comes from Heath, Terry with Goldman Sachs. Please go ahead.

Thanks. This is Daniel pile on for he is just a couple of quick ones from us.

First would love to get from an update about where you feel you are on your international supply expansion.

Should we continue to expect to see.

Pretty elevated growth in those supply as or do you feel like you're getting to a point, where you have pretty competitive coverage across across major markets.

And then secondly, just curious if you could give us.

Update on what you're seeing on the reward side.

Both from your perspective on what you run through hotels Dot com, but also on the hotel side of things are the branded side of things and injecting rewards rate onto your platform. Thanks.

Sure. So in terms of international supply expansion, we're pleased with what we see we continue to add properties that.

At a healthy rate onto the core platform. These include traditional conventional lodging and also.

Include alternative accommodations.

I think were again pleased with the progress, we're making them in the priority markets on that front and pleased with a lot of the work we're doing to actually enhance our product to make it more locally locally relevant.

You've seen with our international room night growth.

Adjusting for Easter, it's broadly consistent with what we saw the last quarter I think it's a testament to some of the some of the benefits that were seeing that said, we we have seen mixed results in some of these markets depending on what's happening in various marketing channels and as we add new properties, we have to be mindful of making sure that we back.

Plants.

Both supply and demand. So I think the good news is we've got the capability to add more properties, we continue to add to our assortment which is.

Fantastic and I think as we continue to expand internationally, we're going to blend those efforts with putting resources against other efforts that ultimately might move the needle more effectively to help us be more locally relevant in terms of the rewards programs. You again, we remain very happy with the hotels Dot Com rewards program.

Results in higher customer loyalty nice repeat rates that we see in that business. We do think that it is overall accretive to the PNM and we're happy to have that program. It is a very strong program in terms of putting loyalty rates other partners loyalty rates on our platform.

We've had good success with a lot of the partners that we have rolled out with and again, we're eager to continue to work in that way and other ways with our hotel partners.

As we as we move forward.

And our next question comes from Brian Nowak with Morgan Stanley . Please go ahead.

Thanks for taking my question Ive to this to go back to the CEO issues I guess I think you guys last updated guidance on on July 25th.

Can you just sort of let us know.

Around what period you saw the CEO issue started just so we can sort of think about the sizing of a partial quarter impact on your your AD spend per bookings the way to think about full quarter impacted for Q and into 2020.

And then on the comment about higher cost marketing channels, you just help us understand what are the largest one or two marketing challenger moving dollars toward and then sort of bigger picture.

What marketing channel or you sort of most optimistic about longer term that could maybe help you diversify your overall paid bookings mix away from Google.

Yes, Brian This is Alan just in terms of kind of how the factors that we talked about on the call develops we were you referenced our last earnings call we were.

Just finishing up a first half of the year that was pretty terrific starts. The year. We were ahead of our expectations at that moment and and felt like the things that we saw in the business in the first half would carry out.

End of the second half.

As we moved through third quarter.

We could we could start to see the impact from these ESCO challenges.

And we also started to see the trends in 80 ours working against us.

And with particular strength as we got to the very tail into the quarter.

So thats, how I would think about it in terms of.

The the that the challenges and the timing as I said, we do expect them to continue to be a headwind for us in Q4 and into 2020 on just the last part of that FCL question in terms of whereas the traffic going I mean, I don't have a specific answer for you other than to say, if you're just thinking about the Google platform.

To the extent that that FCO is pushed lower on the page and people who normally maybe would have transacted through those through those links are moving to paid length, you're looking at SCM and and Google Hotel ads and as Mark said.

It's some.

Did we see good returns on those volumes, except for the fact that volumes through FCO are essentially free to us.

And so going from free to to anything, especially especially the other Google paid placements.

Then create a sizable headwind for us and then Brian in terms of other channels I mean, we're actively.

Spending more in digital video, we're spending more in traditional television I mentioned experimenting with.

Some of the Influencer type things on Instagram, another social channels.

As I think you know we've got a sponsorship for champions League.

In Europe , which we've been pretty happy with so far so the goal here is to help start start basically accelerating our direct business and we were happy with the growth in our direct our direct channels in the quarter.

And overall our strategy is to continue to actually differentiate the product and build more direct business overtime. So I think you'll see us.

You know continue to find new channels that are more branded in nature to help build our direct business.

Great. Thanks, guys.

You're welcome.

Next question comes from Brian Fitzgerald with Wells Fargo. Please go ahead.

Thanks, a couple quick ones, you mentioned that lodging stack fully cut over by the end of year does how does that match up with your original plans do you see accelerating trends as you apply best practices or or get scale or optimize tools.

And then related does your stack switch make for a lighter shift.

So thats first question second one was just simply around Mark you mentioned.

Moving friction with a unified sign on at point of sales across Expedia and verbal because that predicated on did you have to do the move off of the VR Vvo verbose third payment provider and then we'd imagine you get incremental or better or fresher data I measure unified those two and do you see that.

Levered into better first party data means better.

Targeting amongst the whole platform.

Tailwinds and targeting thanks.

Thanks, Brian I'd say broadly the cloud migration is moving along nicely, it's always impossible to do to estimate exactly when you're going to get it done. So we're pleased with the progress and I think where we thought we'd be at the end of the year versus.

Where we are I think were broadly in line with where we want it to be.

In terms of the air stack I think the teams done a lot of great work to actually get ourselves cloud ready there.

Obviously, the the lodging business for US is what are the biggest lifts and so.

The air business going to teams done a great job and I think thats something that we'll be moving in.

Towards the end of this year and entered into the following year as well.

In terms of removing friction really what we're talking about is is enabling verbose users to log in using their expedia credentials.

From that point on yes, we're able to collect more information on them and and TEG TEG more of their intent towards their particular user profile.

We are interested in making sure that we can deliver the most tailored and relevant experiences to our customers. So I think that type of thing represents an opportunity for us to do that better. It is not related to the payment side of things. So it's completely it's completely different.

Thanks.

Okay, you're welcome and our next question comes from Stephen Ju with Credit Suisse. Please go ahead.

So thank you so mark anything you can share about the consumer awareness as well as the willingness to transact.

50000 verbal properties, you've now integrated and is that improved quarter on quarter year over year are you seeing any sort of conversion rate headwinds because it seems like conceptually if you present people with more choice. This should respond positively and also trying to think about when some of the headwinds for verbal should and could that be.

Yes, our recollection for when it was a publicly traded company was that Google will de rate one property versus another if they see the same inventory on both so where are you in terms of integrating what properties that can be integrated from for both two brand Expedia. Thanks.

Yes, Stephen so on on the basically the performance of the verbal properties on the CRO Ta side of things.

It's still relatively small it's growing very quickly.

And the teams have continued to test and when the right thing you know the right time to present the properties I think as a reminder, each of these properties essentially represents one unit as opposed to a traditional hotel than maybe call. It 50 different units for the total volume potential of these is is just smaller than a penetration will.

Property, but certainly when you present these to the right customer at the right time, they definitely improve conversion.

You just got to be smart about when you present them and do it in a very targeted way because customers also definitely want to have some curated results that are that are relevant just to them.

In terms of FCO headwinds for verbose.

You know listen I think that they pick. He is here is that we are really putting our weight behind the verbal brand and as a result of that have done a bunch of platform consolidation work really we saw the step up in the headwinds from FCO really started at the beginning of the beginning of this year.

And I think we're into the end of 2020 before we see.

Those types of things lapping, but I think listen FCO is.

As a headwind for everyone in the Internet I think you saw us call it out and Thats why verbose has been pretty focused on defining the real differentiated value proposition.

Being smart about their brand spend and exploring more digital video type advertising and you know again against the verbal brand itself, which is growing double digits. We we like the progress we're seeing there.

Thank you.

You're welcome.

Our next question comes from Ron Josey with JMP Securities. Please go ahead.

Hi, This is Andrew Byrne on for Brian .

I'd like to go first to your supply strategy, just with 1.4 million properties that are in on the platform can you talk about your strategy with priority markets are there more priority markets today versus say a year a year in Africa, and you're going deeper or you guys, adding more priority markets and then secondly, Google rolled out Bert.

A few weeks ago, just with all the talk on FCO you guys had any impacts there. Thank you.

Sure. So in terms of priority markets, we did expand the number of priority markets from the first wave that we did.

And we are essentially going.

I'm not completely broad we have expanded the numbers, but we are trying to go deep and make sure that ultimately we have a broad selection not only in the primary markets, but the secondary and tertiary markets, which is important to make sure that you can develop locally relevant product that ultimately customers will go back to again and again and again so.

With respect to to Bert listen I think Google continues to experiment with new products, I think where we see the biggest impact is when those products ultimately take away real estate from what was traditionally.

Free channel. So I think it's it's too early to call an impact on that particular product, but generally the trend is that Google does continue to push for more revenue per visitor and I think it's just the reality of where the world is in the Internet and the importance of Google at at the top of funnel.

Thank you.

Our next question comes from Brent Thill with Jefferies. Please go ahead.

Mark and Europe , just curious how that fared relative to your plan and your outlook Allen for Q4, Directionally, how you're thinking about the region. Thank you.

Yeah, I think Europe saw similar type of HDR softening that we saw across the us and some of the regions. I think so that would that was a factor for US we were broadly happy with our volumes in Europe again, we've been.

In a number those markets with our champions League sponsorship and some of the supply acquisition efforts that we've been.

That we've been pushing I think maybe a little bit isolated from some of the things that may have been happening there, but it was mixed I mean, we saw a weaker in the UK again, I think on Brexit concerns and country by country. There were there were mixed results either because of things that we were doing in performance marketing channels or whether it was because of my.

Ironman It was hard for us to tell but broadly speaking.

We were comfortable with the way that Europe Europe played out.

Our next question comes from Doug Anmuth with JP Morgan. Please go ahead.

Thanks for taking the questions.

First just if you could talk about.

Competition in the dynamic here in a APAC in particular, just with some of the local players they were really getting more aggressive from a global perspective.

And then second on holistic travel.

Deals like the market and other players are coming just shifting more in your direction.

Talk about what you're able to do there just to continue to differentiate the products and platforms. Thanks.

Yeah listen to competition in Asia continues to be fierce you've got a number of regional players that.

We continue to do.

Really significant discounting in a couple of Pan regional and global players that are that are doing the same in many cases leveraging.

Rates that maybe you shouldn't be online and actually putting them online. So it is it does continue to be a pretty.

Fierce environment.

For us and for I think everyone in the region. We are having success in a number of markets in Asia, but in other markets. It does end up being a little bit more a little bit more challenging we do have however, with our expedia partner solutions.

Business, the ability to tap into that market and we are powering a number of players in Asia Pacific region with our inventory both in a APAC and then you know around the world as well. So we are able to benefit from from what's happening there, but for our consumer brands. It does continue to be a pretty.

Competitive environment for us.

And sorry on holistic travel.

Listen we continue to innovate on on finding ways, where we can leverage our flights and car rental and hotel advantage not only in terms of just actually being able to offer discounts, but also ultimately being able to in the future provide just more information on flight.

Flight delays et cetera, or even for hotel bookers. So the team has got a bunch of plans to.

Actually build more in the way of the connected trips experienced beyond what is our traditional core competitive advantage, which is being able to bundle things together heavier chinnery all in one place and do so in a way that ultimately can deliver great savings for our customers.

Okay. Thanks.

Welcome.

Thank you. Our next question comes from Tom White with D.A. Davidson. Please go ahead.

Great. Thanks for taking my question just clarifying question on on the mix shift to higher cost marketing channels.

Was that more just sort of the passive event, Alan you mentioned, resulting from the search platforms kind of prioritizing their own.

Vertical search experiences and that impacting your mix or was it also was there any sort of proactive steps that you guys were taking the maybe lean into CPC bids or specific higher price channels to kind of trying to preserve unit growth in the face of some of the pressures you talked about and then just secondly on the free cash flow conversion comment.

Just hoping you maybe you could provide a little bit more color there any any thoughts on magnitude timetable that you can share.

Yeah, Tom So on our first question I would say more of the former than the latter I mean, it's.

If you think about what we described here, it's principally Google pushing FCO down the page and.

Theres just a natural outcome of that obviously the team is very dynamic and is constantly looking at opportunities and and trying to do a good job of balancing room night growth with with our overall profitability. So.

So there are elements of that but for the most part I think it's more just natural shift as as FCO gets tougher to combine.

On the free cash flow bad I mean, I think we've been clear that we we do expect over the over the long term to continue to deliver healthy and solid adjusted EBITDA, which is where it all starts.

The next main factor here is that we will be.

Moving through and completing our.

Our Seattle facility and so that will provide a tailwind on on our free cash flow, we expect to continue to see a good tailwind on our.

Working capital flows as our merchant business continues to grow.

So all of that together, we think adds up to a situation where we can drive.

The free cash flow and good cash flow conversion going forward.

Thanks.

You bet.

This will conclude our Q and a session for today's call I'll now turn it over to Mark Oakridge jump for closing remarks.

Well. Thank you all for listening in today any huge thanks to expedia employees around the world while the quarter did not play out as we had planned that we've got lots of work ahead, we're seeing great progress across many areas and remain well positioned to capitalize on the significant long term opportunity in the travel market ahead, we look forward to talk into next quarter.

Thank you.

Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.

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