Q4 2019 Earnings Call
[music] Good day and welcome to the Expedia group incorporated fourth quarter 2000.
The 19 earnings call today's conference is being recorded at this time I would like to turn the conference over to Michael Senno, Vice President of Investor Relations. Please go ahead.
Good afternoon, and welcome to Expedia group's financial results conference call for the fourth quarter and full year ended December 30, Onest 2019.
I'm pleased to be joined on the call today.
German Barry Diller, or Vice Chairman, Peter Kern, and acting CFO, Eric Heart.
The following discussion including responses to your questions reflect management's views as of today February 13, 2020, only we do not undertake any obligation to update or revise this information.
As always some of the statements made on todays call are forward looking typically preceded by words such as we expect we believe we anticipated we are optimistic we're confident that or similar statements. Please refer to todays earnings release and the company's filings with the FCC for information about factors, which could cause our actual results to differ materially.
From these forward looking statements you will find reconciliations of non-GAAP measures and most comparable GAAP measures discussed today in our earnings release, which is posted on the company's Investor Relations website at IR Dot Expedia group Dotcom and encourage you to periodic revisit our IR website for other important content, including todays earnings release now.
Once all the or otherwise stated all references to cluster revenue selling and marketing expense general and administrative expense and technology and content expense excludes stock based compensation and depreciation expense and all comparisons on this call will be against our results for the comparable period of 2018.
A reconciliation of adjusted EBITDA guidance to the closest corresponding GAAP measure is not provided because we are unable to predict the ultimate outcome of certain significant items without.
Unreasonable effort.
These items include but are not limited to foreign exchange returns on investment spending and acquisition related restructuring expenses as such the items that are excluded from our non-GAAP guidance are uncertain depend on various doctors and could've immaterial impact on GAAP results for the guidance spirit.
And with that let me turn the call over to Barry.
Thank you Michael.
I haven't been on one of these analyst calls and I don't know endless amount of time, so I'm, probably a bit racking, but.
I won't ask your indulgent I'll, just kind of plunge in.
Since December four which is up when we made the management change.
Peter current on high.
Not a day's gone by that we have not been engaged in expedia business and.
During this period of time as I mean.
Having been chairman of Expedia for Iron on I think almost 20 years or so.
But I knew a lot about the company.
But.
There's nothing like being on the ground and we've been on the ground.
I've gotten to know the leaders of the businesses.
And I am.
Definitely impressed.
Uh huh.
I believe in the future of Expedia.
As do my colleagues.
And finally.
We bought in the last couple of months 634 million of our stock, which is more than we've ever bought in an entire year.
And we're not going to and that process now.
[music].
But what we've really done as we've taken as immediate steps as we can tell refocused the company.
On the day to day operations of our.
And the execution.
So what the company.
He is engaged in every day.
Last year.
We spent probably nine months of the year on this massive reorganization.
We're contemplating changing 350, I think of 500 jobs it was.
This vastly.
Complicated process that froze us.
Management at the same time didn't really have a clear path.
How to grow the company.
It just kind of a top down commandment to deliver ex earnings and.
That misled a lot of people into actions that kind of made sense for a quarter, if a day and rest of the day.
The results of kind of this top down pressure without understanding how to actually execute and.
Simplify the business and give it clarity.
We are somewhat become a kind of consultant led and wildly complex business.
I said and I think sclerotic loaded.
And.
I'll give you one anecdote that.
That kind of rank in my ears that I'd heard.
I don't know I guess, a month or half or two months ago.
Out there in Seattle.
At Amazon has a whole concept of working life balance that Amazon. It was all work in low life and it Expedia was all life and no work now Thats an enormous exaggeration, we've got wonderful people in the business.
This is not damning our employees.
But for several years, we've really lost clarity and disciplined.
So we're changing a great deal we're stopping this two large complexity, we're simplifying our strategy, we're stopping doing dumb things and starting to do what we think are good things.
So from doing that Dom doing this smart here a few examples from wasteful activities that weren't core to our business.
Actually driving sustained growth from every brand working in silos around the world to one strategy on marketing and geographies across all of our brands.
From our reliance on Google and Metasearch too aggressively moving to grow our own direct business and have loyal relationships with our customers.
To separate teams and data that's disbursed all over the place to one platform driving the entire entire company.
From an air business, we basically took for granted as just another line of business to actually read.
Eric I think it energizing it as a true competitive.
Differentiator and from chasing all these grand goals.
Focusing on day to day execution.
And making that customer experience great.
So.
We're in we're energized we're enthusiastic and from now on.
I hope I think.
You will see the effect of that in the excellent people of Expedia and what we can all accomplished together so with that.
Mr. Current my colleague my partner in this process is going to say a few things thanks, Barry and good afternoon everybody.
Let me start by reiterating what Barry said I think we've learned a ton in the last two months, we've seen some great people and great things and we've seen a fair bit of wasted energy and calories going and things that may not have promise may not get us to the promised land and certainly we have not all earned and been agile.
Enough and willing to say noted things and willing to acknowledge failure. When it happens I think we are getting about the business of that being highly disciplined and I think that is working its way through the organization and it's just frankly a terrific feeling.
And again to a few specifics I wanted to start by just covering guidance a little more closely is there sort of three components to how we built our way to this broad guidance approach.
One is the core business the base business, if you will with the new disciplines, we put in with some attention to wasted marketing spend and a few other areas. We believe the core itself will accelerate as against two 2019, it will be somewhat backend loaded but it will accelerate.
On top of that as we said in the press release, we are going after three to 500 million of incremental savings and that is across the waterfront and we're looking at every part of the business.
Whether it be tech licenses impure procurement to geography et cetera, and we think theres a lot of money the timing of which however is uncertain as it lays out through the course of this year, but we do believe by the end of the year, we will be at that run rate level.
On the other hand of course, there is the Corona virus terrible thing for humanity and also not very good thing for our business.
And that is highly tough to predict.
We have a pretty good line of sight on its impact on the first quarter, but in terms of its duration and the depth of its impact it is hard to predict so taking all that uncertainty running a number of scenarios on the virus based on historic patterns.
We have generally taking all that together and said notwithstanding all those uncertainties. We believe and are confident we will get into the double digits of course, the virus become something completely unexpected who knows but we feel confident about that.
Moving onto the operations and digging slightly deeper on a few of the theme as Barry was talking about.
This idea of bringing our brands together on out of silos and collaborating and a whole new way is super important to the future success of our business I would add to that that the best example, and the Cleanest example, today is probably a geographical rationalization, we have many brands over the world. They are different ones are strong.
Wrong in different markets, we have historically taken a brand by brand approach and now we are taking a market by market approach and we will push the best brands in every market and we may take some brands out of certain markets.
And we will do whatever is smart both on an operational basis and on a marketing basis to advance the greater good.
On the marketing side as an extension of that more generally we are working to rationalize some of our spend we are looking at common measurement common tools. These silos didn't always look at marketing the same way they didn't always attack performance marketing with the same metrics. We are unifying those things so that we have better way.
As of measurement, and therefore, better ways to collaborate and cooperate for the greatest return.
On bareboat, which I know everybody has followed closely.
The trends remained fairly muted through the fourth quarter.
The re platforming last year and the rebranding we're definitely a distraction slightly different than the distractions Barry more broadly talked about.
Now the team is keenly refocused on fundamentals driving core operations and they too are beneficiary of our geographic rationalization as they have looked at where they had really inefficient spend to drive reach in geographies that did not make sense and candidly now that we have the capacity to drive their supply.
Through other brands, we don't need to have robo in every market in the same way because.
Alternative accommodations can be provided to the customer base through our other brands.
Expedia partner solutions continues to be a very strong story for us.
We believe in the momentum there we believe in the opportunity to fill in gaps in demand, but whether they are geographical or just customer based.
And we believe that EPS can add to that momentum by capitalizing on all the things we are now going to be able to do with our core.
Technology platform, so out of exciting stuff going on there it will give as greater configurability and improved customer experience for their and business partners.
Oh.
We also brought you gensia together with EPS.
Under a business were calling Expedia business services, it's simply an effort on our part to further simplify get advantages between businesses. These businesses are not the same they don't have the same end users, but they have a number of common practices from which they can worn and help one another including.
Sales and customer management, and a variety of other business to business techniques.
Our platform.
As perhaps the biggest story it in part was to blame this reorganization to get us to this place, but it is in many ways our biggest opportunity this share technology across our businesses and bringing together groups Barry mentioned that data and AI group.
Im really excited about what's possible here, it's early days, but for the first time, we are bringing together all the data in the company into one place, where our best data scientists and AI and machine learning engineers can use that data to learn faster and build solutions across the company that will help us proved.
Customer experience and.
Obviously, our monetization.
Hi.
The teams in our marketplace have also come together and are working to better match supply with demand, which we believe again enhances the customer experience and enhances monetization. We've also brought together.
Group that will monitor cloud and work on the cloud spend I notice has been a interesting area for everybody as we have migrated to the cloud it's been a bumpy inexpensive road, we are getting to the end of that road, but importantly, we are getting to a point, where we need to and have to optimize our cloud spend and we now have a decentralized.
Group that will look a cloud spend across the company and work to optimize that and get the most out of it and ultimately get the leverage we've all been looking for there.
But overall the common themes here as we've said are really about simplification precision really bringing an efficient operating mine to everything we do we will be aggressive about that and we plan to.
Gigawatt out of that as we push through the year and we of course, we'll keep you apprised as we get through that.
I, just like to point out before I pass it onto Eric that year will be noisy not only because of the virus, but because the first half of the year, we are getting the benefit or detriment of a slow back half of 2019.
We're also spending into our strength areas, where we believe we can drive growth in the back half of the year rationalizing out some of our less efficient spend areas. So there will be noise between revenue and EBITDA, but as I said and Barry said, we believe strongly we will be in double digit EBITDA territory. This year.
We're excited about the future and I think we'll have terrific momentum going into 21, if we can pull all of this off and with that I will pass it onto Eric.
Thanks, Peter before diving into our results I want to lay out three main areas. We're focused on in 2021 driving margin expansion in unit economics.
Two positioning the company to move faster and invest back into key areas to accelerate topline growth.
And three delivering attractive shareholder returns.
Turning to the fourth quarter results, while gross booking and revenue trends moderated disciplined marketing spend an overhead cost containment resulted in a 1% increase in adjusted EBIDTA and for the full year. We came in slightly ahead of our revised guidance range.
The slowdown in gross bookings largely related to our air business as we started to comp the enterprise deals and Expedia partner solutions, which drive significant airborne and for us.
Lodging revenue grew 9% in Q4 on 11% stayed room night growth and a 2% did decrease in revenue per room night, largely related to growth and our loyalty program.
Domestic room night growth remained strong accelerating to 10% as we continued to gain share in the us on the back of strong trends and direct channels.
Cost of revenue was up 19% for the quarter. The majority of the growth related to the increase in cloud costs inorganic impact of bodybuilding dot com and processing fees related to the ramp up and verbose transition to the Expedia payment platform.
By leveraging Expedias payment platform, we expect barbo to see improved conversion and unit economics as it benefits in several areas, including fraud detection order completion rates and flexibility on payment options also as a reminder, bodybuilding dot com as essentially neutral to adjusted EBITDA.
Free cash flow grew 46% for four year, both for full year 2019.
Normalized for verbose payments transition free cash flow grew approximately in line with adjusted EBITDA to nearly 1.1 billion.
Based on verbose current payment structure. The funds are held at a third party and our restricted.
On a normalized basis, we expect solid free cash flow growth and going forward with declining capital intensity and favorable working capital dynamics, we are well positioned to drive healthy free cash flow growth going forward.
On the balance sheet in September we placed 1.25 billion.
Dollars and 3.25% 10 year notes, we will use a portion of that to redeem $750 million notes that mature and August 2020.
Our prudent approach to managing the balance sheet is unchanged and we're committed to operating within our investment grade credit rating.
In terms of capital allocation, given our conviction and expedias growth prospects, we repurchased 5.8 million shares for $634 million from early December three this month.
We believe our stock remains undervalued and plan to use our free cash flow and cash position to continue actively repurchasing shares.
Now turning to 2020 as Peter mentioned, we will continue to drive efficiency on direct marketing spend.
That will lead to some trade offs and modestly slower unit growth through most of the year, but we believe focusing on higher quality unit growth and on driving our direct business will lead to a stronger more sustainable top and bottom line growth over time.
On cost of sales, we expect growth remain elevated the next few quarters do the same factors we saw in Q4.
Our cost of sales outlook also incorporates higher digital service taxes as we currently expect legislation to take effect and additional countries. This year. This remains a dynamic issue and we're closely monitoring developments.
In terms of the quarterly phasing it will take time to work through the carryover effects from the trends for the past two quarters. So we do expect the majority of our profit growth to come and the second half of 2020.
Now looking at Q1, specifically, we expect adjusted EBITDA to be down substantially.
Further losses will be significantly higher due to the due to the usual seasonal trends as we invest to drive growth that will come later in the year.
Cloud costs continue to ramp and we'll have some carryover effect from the operational headwinds that we experienced late in 2019.
Each of these is magnified in the first quarter as a reminder, given our seasonally low adjusted EBITDA base.
In addition, the Corona bias outbreak as adding further pressure on the top and bottom line in Q1.
Based on the current trends we expect.
Approximately $30 million to $40 million impact to adjusted EBITDA in Q1, and we expect some impact beyond Q1, and 2020 as well, but the exact amount will depend on how long it takes for travel trends to normalize.
Looking below the line, we started to recognize depreciation related to our new headquarters in Q4 and forecast approximately 30 million of incremental depreciation related to the building for the full year in 2020.
Which will account for the majority of our depreciation growth this year.
In closing we are excited we are executing on a clear formula that we believe can create significant value positioning the company for consistent healthy revenue growth with leverage down the PNNT to drive even faster profit growth.
And with strong cash conversion, we expect to generate substantial free cash flow to fund capital returns through shareholder repurchases.
And our dividend, we believe executing that former formula will create significant shareholder value overtime.
Operator, we're ready for our first question.
Thank you as a reminder, if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function has turned off to allow your signal to reach our equipment again that star one to ask a question.
Well take our first question from Eric Sheridan.
Thanks, So much for taking my question may be one big picture in one modeling question if I can.
Peter wondering now maybe we can get a little more granularity on your vision, where online travel is going over the next couple of years, and then peeling that back to how youre thinking about at the exposure to those big trends and whether Expedia has the right assets or not how should we think about aligning the assets within expedia can share on long term vision.
For online travels going and then I'm on the model, which is three to 500 million of cost savings is are we to think through what that might lean on a division by division basis, or where you see the biggest.
Areas, where you gain leverage in in your model year on year from cost cutting.
Thanks, so much.
Thanks, well look online travel.
Started.
20, some odd years ago that was the easiest area colonize when the Internet came along.
Theres no indication that it's going to do anything but continue to gain adoption. There's been a lot of adoption. It will continue to grow.
Nothing and its path there are existential issues that have been raised of course, one of the Google.
And the other I just heard the other day, it's an existential issue, which is that we're losing share to hotels I'll start with hotels first.
This was.
Ticket was an analyst whose.
Mr. Terry right executing consistently wrong about actually if you paid attention to him at my other companies IC.
You would have given up I don't know.
An enormous billions of dollars, but anyway I want to do that pointless. The point is that he said that our hotels were gaining strength gaining share et cetera. So here are the stats.
For.
[music].
The business up.
Okay hold business the OTI a share of online hotel bookings.
Has basically remained steady at about 38% I don't know for many many years, but the OTI A's continue to gain share in the overall market.
As this shift goes continues to go online for instance from Twoq 2015, it's gone from 17% to 19%.
And at Expedia.
Our total room nights continue to grow.
11.2% in 19 versus 10.5%.
So I would say, yes, there are some direct channels that people like to use but overwhelmingly people use online agents to book hotels and are going to continue to do so.
As far as Google is concerned as much bigger topic and.
I've been quite vocal about this that.
Google has certainly monopoly share.
All over the world.
And it does what monopoly shares get you to do which is extend its business in every direction. They can.
Now ill so long as they don't use unfair practices I've got no problem with that but when they.
Compete against their advertisers and we are one of their largest advertise we have booking dotcom or in their top five with advertisers.
They are using their tactics.
To squeeze these these entities that are delivering real service.
Is.
Among many things anti social I mean, I think it's bad practice I think the government, which is getting engaged in this whether it's at the state level or the federal level.
Which I absolutely believe in the next period I don't think I ask anybody to come and save us from our mistakes and by the way we've made our own mistakes in arc FCO practices, which we are fast correcting.
I told us senior management of Google exactly what we feel about this.
And our have implored upon them too.
Basically.
Stop actually taking away the profits from businesses that are.
Probably one of their main contributors to their advertising revenue.
And I don't know whether that will have much effect, but I've been very straightforward about it and.
I think.
That there will be look.
Businesses get to the size they absolutely have to have regulation sensible regulation I'm not talking about breakups, I'm not talking about any crazy stuff, but.
I do believe that will happen.
But we are making our own efforts, we're driving direct relationships with consumers.
[music].
Our download apps, we have about 400 million of them.
And their growth I'd like for US is actually up 40%. This year, we're going to drive more downloads were going to do everything we can to diversify our traffic to more direct arenas. We also have an EPS our business to business business, which does not depend upon.
Google and Thats growing terrifically, and we're going to push that too so sorry, I went on a bit but.
Yes, I said I haven't done this in a while Peter you want to say anything I would just add to that.
A couple of things one around the question of cost savings by Division.
That's something we really can't identify yet and wont identified theres a lot of shared costs and a lot of because we're doing more to make the businesses collaborate. So I think it's really not helpful. Even for you I think long term to think of it on a by division basis, I think we're looking across.
Shared opportunities shared inefficiencies and where we can get out of things that don't make sense and eliminate friction so I think.
It's something we're looking for anywhere it exists and and it's not a division by Division question. I think also just to add to Barrys point at the end about EPS you asked whether we have the right assets to compete.
I think actually we have terrific assets to compete we've got brands.
Our strong in certain places and not and others, we've got and vice versa. We've got to do a better job of differentiating our brands and the customer proposition that our brands provide but we have a lot of ways to serve a lot of different demand and we're using.
As to filling the gaps and serve geographies and certain demand pools that we can't get at directly. So I think we have a very attractive way to go eat as much gross bookings as are out there in the world and Thats what were going to try to do as efficiently as we can now.
Next question Thanks for the color.
Yes. Thank you. Your next question from Mark Mahaney of RBC.
Okay. Thank you Barry it's nice to have you back on the call.
I think that question I want to focus on.
Our goal is not going to go along that long.
Yes.
The I think I want to ask you about is a high level.
The growth in lodging business between alternative accommodations and verbal and the growth in core kind of hotel.
Industry as you've kind of looking at it from a 30000 foot level for a while new and you're not getting back into the weeds.
Where are you most insurance, where do you think that growth is most interesting for the industry and for Expedia in particular and how confident are you that if it does seem from where we said that the growth is superior any alternative accommodations is verbal where you needed to be.
It seems like deep down to like branding strategy part a branding starchy part b over the last two years is verbal where you needed to be in terms of operations in terms of marketing et cetera in order to attack that alternative accommodations market. Thanks Barry.
No verbal was not where it needs to be but is a lot different than it was I'd say few months ago.
It has a new leader.
We have confidence in and he saw.
He is.
Also on the ground.
And.
Look what happened to verbal.
Is it was as I think all of you know.
Collection of a bunch of disparate businesses brands all over the world basically that were brought together.
And put under the name of Dom named called Homeaway.
And which meant nothing to now one.
We did have one business called Robo that did mean something to people.
And so called VR beyond which we've tried and I think are very beginning of branding or both.
And.
Whether I don't know if we went to fast actually are too slow on this but.
We did this absolute change day, one for today to.
From everything to Dan one thing verbal that caused us to lose a ton of FCO traffic.
Given the trends Casio anyway that was hardly that was not well executed.
So.
We've been now cleaning all of that up and I think its I don't know somebody here well my colleagues may comment on.
The progress of that today.
But.
Look verbal is in a great actually caught somewhat standalone category, it's not kind of rooms that.
In the attic that people rent you.
And stand next few while you go to the bathroom it is basically.
Accommodations family homes.
Large apartments things like that and resort areas and other places.
It's got great product, we just need to.
Market it better than we have.
But it's Scott I think it Scott certainly it's got large opportunity for us and we've also.
Just plug that into Expedia recently that took six months of somewhat disarray, but now all of verbal I think is available on expedia true or.
Install.
And but that was a difficult thing as far as the category.
I.
I'm very impressed with what air BNP has done over the over time.
I wouldn't call it a revolution, but it has opened up.
Not only has that opened up inventory that didnt exist, but it's also brought people in.
Traveling that.
Couldn't afford it before or Didnt want to mess with big step hotels, and also people who wanted to different experience older people, who were lonely and didn't want to go to some gold place, it's done a great job, but basically but by the way.
You put its inventory as against hotel inventory, they have kind of different Ortiz I'm not I don't I'm not a big believer that they're going to merge so I think theres, a very healthy standard hotel business.
And that's going to be this business will participants in it so.
That's as much as I got to say about that.
Okay. Thank you bye.
You're welcome Mark.
Thank you we'll take our next question from Justin Post Bank of America Merrill Lynch.
Thank you Hey, maybe you can give us an update on CEO outlook, and how you're thinking about that role going forward and then secondly, I thought was interesting in your prepared remarks talk about improved revenue growth is that just as you take out the fat this year easier comps next year or do you see some real drivers for improvement in revenue growth as you look.
Out to the second half and next year. Thank you.
Okay.
We're not going to CEO search under the will ever do an actual search I am not a big believer in quote searches.
They usually turn off the.
Usual an obvious suspects.
And when do you only know somebody from interviewing and recommendations I'd say your failure rate is usually certainly is about 50% my experience other people's for sure.
Anyway, we're not doing that.
I'll say this first of all Peter and I are completely engaged we are operating the company. We are responsible for the company and we are definitely it is our responsibility.
That is not to say that during the calendar here 28, chief executive will emerge from this process.
But right now.
Time will tell but.
What happened is amazingly once.
We had to make this management changes unfortunate management change and.
I have I've said before.
Is it was not too.
Jimmy Marco customer CFO, but it really was a real difference in.
What we actually thought.
And that happens so theres no damning here, but from that moment.
I got incredibly energized about this because I actually became and other than superficially.
As the chairman I began to really understand the levers of this business and what the opportunities were and what the condition of the company was the I bought relatively quickly we could turn so we're on it and it's not going to last beyond 20, but thats, where we are now as far as.
The drivers for revenue growth Mr. Kern.
Sure.
So just and I think the delay we look at the revenue drivers, it's not it's not a comp issue, we want to drive healthy rent as much healthy revenue growth as we can find.
In the near term we are in a period, where we are coming off a week or back half of 19, So thats a doubling effect and we are being very clinical about as I mentioned geographies and marketing spend and trying to get rid of empty calories.
It's not a bad thing to drive.
Performance marketing and to drive throughput when you're good at getting repeat customers and you're good at turning them into being direct customers, but when you're not as good as you could be it's not the most efficient use of capital. So we want to get better at all of those things and so in the near term I think you'll see some pressure on the topline from those movements, which we think.
Very healthy but out of that we believe we will find much better ways to invest our capital geographically by brand. We think we will do a better job of repeat business and direct customer experience, because we will be better at the customer experience side of the business we have.
Huge leverage that we can't even really calculate that will come out of the platform technology group, whether it be the data in a high side.
The management and yield side. The clout, there's just a number of places where we can just do a lot better and so we believe all of those things will drive conversion will drive better customer experience will drive stickier customer relationships will allow us to invest more aggressively and all of those things will accelerate revenue.
You are going forward.
Great. Thank you.
Thank you we'll take our next question from Justin Patterson of Raymond James.
Great. Thank you very much.
Sorry, I called out the consumer experience and your initial remarks that and loyalty what are the key things you need to do they get right improved customer experience loyalty.
Thanks, so much.
Well look.
One other things I think we suffered from is.
To a degree we lost attention.
Mentioned on the product itself, what the consumers get what do they see how do they interact with it what is the user experience et cetera et cetera, how do we not only knees their path to travel, but how do we really had value.
And so one of the things that has come out of this is now a eight.
Absolutely.
Focus on what that experience is that's where a lot of the organization and investment is going to come from.
In and it's by the way investment in focus and time, it's not investment really in cost.
But making that look OTI days.
Have not had in my opinion enough differentiation and differentiation, meaning that expedia, which has the benefits. The only one that's got the benefit I mean time God knows with important money into it. It has the benefit of being able to get you hotels air cars experiences anything you need and travel is in.
One place it Expedia it is not.
Certainly it has not been as efficient as booking dotcom in hotels, particularly in western Europe, though in the United States, It's been fine but.
That's our solitary diet and Thats fine for some people, but if you come to Expedia increasingly youre going to have a product that is actually going on not only ease the process, that's going to add value. The process because we're the only ones who can really package, where the only once we couldn't efficiently put things together and.
Magically offer people eight lower price and probably a better experience. So we it.
It's.
Anyway, I think I kind of Senate and loyalty Peter will talk about.
Okay, I'll talk about loyalty, but I was going to add that no thats. Okay.
The.
I would say that that the industry suffered or or benefited from a high degree of commercialization around everything. They did it was an aggressive how can we turn a customer into consumer into a buying a hotel room and that goes we're all OTI is and I think ironically to tie a few of these questions together that googles pressure.
And the pressure on performance marketing puts the pressure back on all of us to make it really about the consumer experience you can't just.
Casher ticket every time and not have the consumer feel like.
Like they're having a great experience and they have a reason that come back. So it's on us to do there's a lot of work streams going on against that it covers a lot of activities, including what you serve up to the customer and how well you match content and supply with them all the way through to how you take care of customer service calls and everything else. So we are on that path and we are aggressively focus.
And on that and we May have Google and the rest of thank for driving there, but we should have been there and we will be there.
As for royalty.
It's an important part of our consumer.
Proposition from from hotels, Dotcom again, we're going to strive to better differentiate our brands very took you through the end to end opportunity that brand Expedia offers hotels dot com is another thing verbal again another thing so we're going to differentiate those and drive to the biggest pools of demand.
We can take them, all and hopefully they will work symbiotically and to the greater benefit.
Great. Thank you next question.
Thank you we'll take our next question from Brian lack of Morgan Stanley.
Thanks, taking my question that during its good to hear your energy I guess I wanted to start asking about your view over the next the next two to three years for the company. So you understanding that the near term focusing more on higher quality room night gross rationalizing some AD spend really focusing on direct.
Pressure near term room nights, but talk to us about how you think about the keys to really driving sustained faster room night growth in 20, 122, and beyond actually sort of get through the important steps you're going to take in 2020. Thanks.
Continued execution and focus and not.
Not not resting not being very patient.
That is one of the things that we're going have to imbue in this organization.
And.
Again, I look I think the outlook is good it's got some challenges the I'm less worried now having gotten into it about these existential challenges and I was before I got into what those are what they are but expedia has with its brands with differentiation within with by the way in.
Creased, hopefully more interesting forms of loyalty rewards and things like that.
Expedia is going to be able to which I think it's going to be able to do as against its competitors I think we're going to be able to build up loyalty. The whole concept of all of this was you paid a lot for your first experience with up on OTI a with.
With what you did an advertising, but you were hoping for the second.
From now on its going to be the second third and fourth for us because what were because all were.
Really.
Well I'd say.
Driving ourselves down to is this kind of pragmatic focus on.
Basically the verities, which is what is the experience. We are we have chased the tail. The tail was pretty good to start offers online travel started off of the boom because it was an obvious better experiences kind of raw, but we have.
Simply chased it with you know look working on conversion working on all those things is good but the reason that I think 235 10 years from today Expedia can continue to actually beat its competition is because of what we're focusing on now that will give us we.
We'll have to do we would have to look for other pools will there is not there for us if we just get back to pragmatic focus on streamlining our business simplifying our business as I said before we were we were bloated organization.
Im not because people were lazy or whatever but over the years just chasing the tale of growth and all I would just adding people in people and complexity and all that stuff until frankly very few people to figure out what the hell. They were supposed to do during the day, so simplifying that.
Great.
Product of cutting our costs, our cost were too high.
And our costs are going to come down beyond this first.
Level of three to 500 million over the future because we are going to simplify simplifying lets us pay attention if we pay attention given.
Given the opportunity.
Hi, worried about two or three years.
Thank you great. Thanks.
Thank you want to take our next question from deep Hot coffee banning of Barclays.
Hey, Thanks for taking the question.
Quick ones from US first can you elaborate on the cost savings you noted that the expected cost saving to reached 300 500 million run rate should we assume this progression to be relatively linear just trying to understand how much is factored into.
And then the second question about Carnival is the impact currently largely contained to Asia Pacific or is there demand softness in other markets as well. Thank you.
I'm, just going to spout out something here on the virus thing I think it's been going much beyond that I think people are worried.
People are just saying you know I mean, they're all over the next New York City people are in buses and subways with masks on.
I think there's been one case report at New York.
So I think this is this is a damper how far this goes I mean, a week ago. It was supposed to be lessening and yesterday it.
Again shop in terms of that infected cases, and I guess deaths.
I mean do we have a pandemic I don't know I have to believe.
Now the activism of every country in the world on this.
He is going to contain it.
Quickly now by the way that's a statement with no facts and no knowledge. So you can all toss it but.
We don't truly know the extent of it and it is going beyond Asia and it will go beyond Asia.
Yes.
But this is Peter I would just to your question of the timing and how to think about the expenses I'm afraid we're not going to give you much satisfaction. Here. This is a work in progress across literally the entire company and all pockets of spend and all activities and we are making progress on many many fronts, but some will take.
Time to germinate and some will be sooner and.
You'll know as soon as we know but.
But we can't give you much color except to say, obviously as we take these things out and they stack up they obviously get better as the quarters. They should we should get more savings as the quarters go by.
But how much and how volatile that number is it's still pretty early to tell so we're committed to getting through it in an orderly fashion in a way that helps the business and Doesnt break something new.
And we believe we can get through the lions share of that by the end of the year and be kind of at our full run rate, but again, it's across so many things that that it would be impossible to give you a schedule.
I'll just add one more thing so I think it should be said, which is this process of.
Simplifying our business and.
Lowering our cost has an effect obviously on people we've been in that process of.
Going through this.
Over the last at least month.
I have never seen a process like this I keep saying it to my colleagues that are involved how impressed I am with the thoughtfulness.
The deliberations that go on.
In every part because this is not just saying okay isn't one little piece of the company every one of our senior leaders has participated in this and in a way I almost feel like we should publish the process we've gone through because.
I'd never.
Look I have been around and I have been do a lot of these processes I've never seen one.
As thoughtfully and decently done is to as this and the plan for communications.
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Is I mean, I'm sure, we'll make mistakes here or there but.
It's just impressive.
Away.
Good.
Operator next question.
Thank you we'll take our next question from Lloyd Walmsley of Deutsche Bank.
Hi, Thanks, This is Chris on for Lloyd.
Just thinking about driving app downloads from here. It seems like you guys have gotten some good download growth.
It should we be thinking about a rebuild or the after spending to drive app downloads or.
Expanding a loyalty program yeah, just any color you can share beyond what you guys have shared so far thanks.
Yes, thanks for the question what I think.
The specifics or our our take place on many fronts. This isn't a rebuild or anything else in fact, as you probably know as well as Barry and I.
The company has been moving to PW way to drive mobile abilities across our brands that trend solution has taken time, there's been some bumps in the road, but now all our biggest brands are there and.
And you know ordinarily there and I think thats, a big opportunity for us to improve on that App experience in fact, the app growth and App conversion has been showing signs of being better than the rest of the business I attribute some of that to PW, a and and the experimentation people can do we obviously.
Once we have it nailed we've got to push into it and push into it with marketing and push into it with getting our consumers there more get into sign anymore and the all of those things. So it's across a whole waterfront I think that's the biggest seachange is just.
Our push to the company that this has to be our focus and this has to be where we want to move people, we need to get them out of.
We fishing for them in the performance channels and into having real relationships with us so.
It's a holistic kind of approach, but it's taking place on the marketing side on the product side on the innovation side and everything else and so I think I think we're going to push across all those things.
Next question.
Thank you we'll take our next question from Kevin Kopelman of Cowen and company.
Oh, Thanks, a lot so.
I had a question on SCS can you give us a better sense of.
What what happened to as CEO in the third quarter, because externally and looking at the revenue in AD trends, it's really hard to tell how bhavan impact that was.
And what changed there and on that how big ballpark is expedias exposure to scf. Thanks.
Yes.
This Peter I'll take the end of that Kevin which is we don't we don't really disclose how big Ezio is.
And don't intend to but it's still a significant part of the business and a good part of the business. We've been belaboring this but clearly as we move to direct relationships and direct traffic with our customers that is this single best way, we can offset any declines that come from FCO.
In terms of what happened in the third quarter I think.
It was a compounding of a number of tactical things that.
That Google bid and we did not respond well to again Barry mentioned in the in the very beginning we were caught up in a rather large undertaking in terms of reorganization.
Took people's eyes off the ball and our view and we could have done better we should have done better we will do better.
We're also some changes to auction some auction dynamics in Mehta that we did not respond, particularly well too.
So there are number of things that were going on that we were not really on top of ESCO is one of them.
But I think as you think about it we expect FCO to be a continued headwinds Google until someone stops them is not going to stop doing what they've been doing we've seen signs as early as recently as last week of some changes that may have impact and hopefully they will think better of it and create a fair marketplace.
But we can only control weekend, we're working really hard to offset those headwinds in pure FCO activity as well as do everything we can around the rest of the business to make up for whatever we give up inacio FCO is not going to kill us.
And FCO is not the future of our business.
The trends have been the these trends began.
Great years ago.
We should have been more alert.
Obviously to continue consequence with us So I said I don't think we're going to be saved by some bell by government Bell I, absolutely believe it will be regulation, but we're doing all the things that we intend to do to de emphasize it it's still a part it's not a huge part it is apart.
Of our business, but today the future.
Operator, Thanks next question.
Thank you we'll take our next question from Joe You can go ahead, what did you want to add.
Right I wanted to ask and I appreciate that but I just wanted to ask a follow up on Corona virus everyone's asking us about it.
What are you seeing obviously you can't predict it but what are you seeing quarter to date and in the Asia Pacific business that I appreciate the EBITDA.
Got it is very helpful, but just as far as if how how much that Ryan. Thanks.
Our very good Eric heart is going to respond yes, hi, this is aircard.
So if you think about how it has.
Affected the business over time it started in mainland China domestic than inbound outbound then started going through a APAC and then.
We believe that is impacting other areas of the business, we've broken down as best we can looking at the fundamental underlying drivers for it and of the business and what we see as in APAC itself upwards of 50% plus and obviously higher that as you get closer to in a back to China that that can get Barry.
Much north of that.
But then when you try to control for APAC and you look at North America in EMEA. It does appear that there is weakening of the business as well and those and as those areas of the business. So overall concentration in APAC. Obviously is the is an issue for US we do see that we believe that as having some impact and other areas that were up.
Well in that 30 to 40 of what we're able to estimate based on the different scenarios 30, 40 million $30 million to $40 million. It listen it truly is an unknown I know everybody's asking about it look you've got I believe it's going to be contained if it's not contained by the way the entire worlds going to shutdown.
So all you can do is everyday you read the news and react to it I think anybody as an investor.
Unless you think this is going to be the end of life as we know it who cares I believe me I don't mean, who cares a lot of people are going to get sick and whatever but really this is this is an example of this event will end.
And frankly.
No one should count at all we're trying to do a separate what we absolutely believe is the effect of the virus from our ongoing business. So we can prepare ourselves and make that ongoing business strong as possible when the things over next.
Thanks, Thank you.
Thank you won't take our next question from Jed Kelly of Oppenheimer.
Great. Thanks for taking my question.
Back to variable, it's primarily domestic.
And it seems like your rationalizing your marketing and not outside the U.S. So does that have the most opportunity this year to inflect back to growth.
And then as another question as you think of driving more differentiation more loyalty you ever think about getting more closer to the inventory and taking more inventory risk.
So I think I'll have started at the top there I think I think verbal yes, we're rationalizing some international spend.
But that is by no means all international spend an ambition.
And as I mentioned now that verbal inventory is available on brand Expedia and actually went live partially in hotels dot com for the first time, a few days ago.
We have many ways to get that inventory into other markets that may be way more efficient than trying to build a brand in a in a place where we have no brand recognition. So theres lots of ways to look at that I don't think we believe verbal is on a path to any greater inflection in any other of our businesses. All the businesses are working hard and Theres a lot of.
Fair various drivers so I wouldn't think of it that way, but there, but we do believe verbal.
We'll grow EBITDA and get back to growing top line again, as we entered into our stronger opportunities in the beginning of this year.
And no inventory risk no [laughter] now right now we've got plenty of other things to do before we get the figuring out whether we're going to take inventory risk.
Operator, we'll take our last question.
And so we have no further questions in queue.
Well good time.
Well thank you all.
Hi.
Actually.
But before I really am enjoying this process snack and I think so two is Mister car and.
I hope many of her executives are enjoying that too, but nevertheless, we will plow through went on in any event. Thank you for being with US and we'll talk to you in a few months and update you with our progress.
Good day.
This concludes today's call. Thank you for your participation you may now disconnect.
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