Q2 2020 Expedia Group Inc Earnings Call
[music].
Good afternoon, and aim is frederico and I'll be your conference operator today at this time I would like to welcome everyone. Today, Expedia group's second quarter 2020 conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session. If he would like to ask a question. During this time simply press star well about another one on your telephone keypad. If you will like to withdraw your question press. The pound key. Thank you I would now like to turn the call over to Mike.
Oh, So you know vice President Investor Relations and Treasurer.
Thank you all had good afternoon.
Thank you good afternoon, and welcome to Expedia group's financial results Conference call.
For the second quarter ended June Thirtyth 2020, I'm pleased to the joins on the call today by our Vice Chairman and CEO, Peter card and our CFO Eric Heart.
The following discussion including responses to your questions reflect management's views as of today July Thirtyth 2020, only did you not undertake any obligation to update or revise this information.
As always if some of the statements made on todays call are forward looking typically preceded by words such as we expect we believe we anticipate we're optimistic we're confident that were similar statements.
Please refer to today's 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. The most comparable GAAP measures discussed today in our earnings release, which is posted on the company's Investor Relations website, I Art, Todd Expedia group Dot Com I encourage you to periodically visit our IR website for other important content.
Unless otherwise stated all references to cost of revenue selling and marketing expense general and administrative expense and technology and content expense exclude stock based compensation and all comparisons on this call will be against our results for the comparable period of 29 team.
There's no doubt depreciation expense is now reported in a separate line item I'm prior periods have been restated to reflect this change.
Let me turn the call over the Peter.
Thank you very much Michael and good afternoon, everyone. I hope everyone has been safe and sound. During this difficult time as we said in our release a second quarter was obviously, a very challenging one for the travel industry and for us, but a we were pleased to see generally speaking bat a after April we had.
Consistent growth out of out of the trough and ER and May and June got considerably better I would point out that we view this not simply as a positive for the business in the short term because obviously our numbers remain very challenged relative to prior periods, but I think it speaks to Uh huh.
Manatees demand and desire to travel and at when they can and when the opportunity avails itself and when they feel safe and there are no restriction.
It really dying to travel and we've seen that this summer and Ah I have every expectation that we'll continue to see that hopefully at the world opens up more.
But we will have a bouncy recovery. There's no question, we've seen virus numbers go up in certain places, we've seen new restrictions come into certain geographies and it appears like that will be the state of the union until things change scientifically and so we expect us not to be a linear recovery, obviously and we expect some.
Bumps in the road.
Having said that there's a lot of things there we can't control.
And so as I said in our last call. We are keenly focused on everything we can control we're focused on helping our customers and suppliers, obviously get through a challenging uncomplicated time, we're focused on our or on our own cost structure and making sure we are being efficient.
But more broadly we're just focused on our internal functioning our structure, our speed and agility and building for the future and while we recognize it will take time, probably to see the benefits of all that effort.
That is really our focus so in a little bit here, Eric will take you through our second quarter numbers. They are noisy, obviously and frankly I don't think terribly telling I would not try to dissect them I think it's a waste of a lot of energy most of what's happened is really a fun.
One of whatever's going on in the macro world and we are a reflection of that and we are keenly focused on our long term fixes and strategy and less focused on a day to day tactics are finding another dollar in the marketplace doesn't mean, we don't care. We just think there's so much more upside and doing a real foundational work that we need to do.
Do.
So if you don't see us shaping every last dollar that's why we're doing that work.
As far as the work goes I just want spend a little time on.
The things you can't see through the numbers, which is you know we talked about simplifying we talked about accelerating our business, we talked about pushing through initiatives during the cold the time that might be harder to do and regular at times and we've made a lot of progress on this front and there are our threads all over our company working towards this but just to give you a sense.
We took down or Homeaway brand in the U.S., which was something that was scheduled to take you probably another year to do and we deprecated. It just a few weeks ago and have moved all that traffic or turbo and now we will be a single brand in the U.S. and that will allow us to go much faster and ER and do more around.
Robo, we folded our car rentals business in Europe into brand Expedia again, a smaller initiative, but just a way to simplify and allow us to go faster and put our talent against more important projects.
We sold bodybuilding dotcom and shut down a pillar one apartment yet.
During our verbal business again, just small distracting you know interesting things, we tried but but didn't have long term benefit we believed and so we took the action for simplifies the company.
And that's really on the brand side in the business side on the tech side.
Perhaps even more importantly, we were able to accelerate a lot of technical.
Projects, we had in the works and just to name a few here our media solutions business have relied on a third party vendor for its auction technology, we brought that technologies onto our own platform I. Just a couple of weeks ago here that was about a quarter early earlier than we expected to and our teams were able to push that across the.
Line and now we have that much more time to optimize that platform and that's not just the cost savings from no longer licensing a third party platform, but it also gives us much more latitude to grow that business and a and we believe there's a lot of upside there are our hotels dot com brand was able to.
Move its mobile traffic to a new platform again, a project that was scope for to take another six <unk> up to another six months that we finished.
And about a month ago again, another opportunity just accelerate get things done during the virus and get to the other side.
And finally, just and maybe one more how we talked about the opportunity for our virtual agents help us on the cost and the customer satisfaction side.
It's something you'll hear again and again, because it's a big opportunity for us in one of our better platform technologies.
Well, we watch that are on our Gensia corporate brand, we watch it in the U.S. in France and that would literally two years practically two years ahead of schedule. So we've just been moving on every front, we can to try to accelerate and that's really all about being faster.
Getting simpler and being able to move the business much more quickly and actually and that's because we really want to be able to attack our big strategic goals and those revolve much more around how we use our platform, particularly data where we have a unique competitive advantage with the best dataset of travel data in the world where we.
Believe we can help our.
Our customers are b to B partners, and our suppliers make much better decisions.
Be happier and drive their own businesses, where the business customers and help the customer the end customer just make better decisions that make them happier make our products stickier and.
And generally drive the long term appeal of our business to third parties. So we are keenly focused on that that is our long term goal and we have a bunch of tactical work, we are pushing through the cleanup a runway if you will to get there and on the supplier side of course, we continue to push to help our supply partners get stronger.
Okay and come out of a the covert times, it's obviously been a challenging time for hoteliers and airlines, we put in a relief in recovery program for hotels or to help them get back up and running to help them better utilize our tools.
And likewise, we are looking at air and we're rebuilding our own air product and a large part to make it just a better more more fulfilling.
Product for our suppliers. So we are driving a lot there and we believe and obviously, helping our supply partners get out of it but longer term again, we believe and in helping as partners all make better decisions and drive their business through our platform.
On the more nuts and bolts a bit.
We know you're all interested in the cost side, we continue to drive our efficiency programs throughout the company. We've told you before that we had a target.
It's a $500 million that we expected to exceed we've achieved about $400 million that on a run rate basis and again, we expect to do much better than our targets reason, we're not being highly specific about how much better is that were really attacking everything and their timing implication to a lot of what we're doing a key.
Contract that need to be.
Run out.
Things like releasing a real estate and other things that just take time to come into effect, so rather than get caught up in that some debate about how much in over what period.
We feel strongly that will do better than the 500 and and I would point out that there is much more to it than just the 500 of cost savings that we scope to you before because that doesn't really take into account are the variable side of our business and that's a place where we have the opportunity to drive efficiencies through bringing down customer service costs with our virtual agents.
We've talked about bringing down transaction costs by focusing on our payments platform technology and opportunities there and then of course, bringing down our variable marketing costs, where we have recently put these teams together as we told you before a we've merged our brand groups we've merged their performance Mark.
Getting groups and there's big opportunities ahead, we believe and doing the work as a portfolio of brands and optimizing for that portfolio as opposed to optimizing each brand by itself now that is hard work it is foundational.
Some of you may have noted that we gave up some share and some of the performance marketing.
Lines, and Mehta and NFC M. A that is something we willingly have done as I said, we're not worried about the Nichols right now in a market where there isn't a lot of volume we are much more focused on the long term foundational work to drive long term benefits when the volumes really are back at full scale, but we will continue to too.
Fine that I wouldn't get used to scale. The the share we were at I know there is often debate about can we grow and still be more profitable on the performance side, we believe absolutely weekend, but there was a lot of foundational work to get these brands together to get their strategies unified and data unified and we are doing that work.
Right now as fast as we can so as we come out we will be in the best position to take advantage of that.
And finally, what is probably the main event to most of you which is what is the recovery really looking like and are there anything to glean from what we've seen I would say by and large we've seen exactly what you'd expect April was very tough for everybody. It was the bottom of the trough, we have seen consistent growth coming out of that.
We were down on a net basis, a 90% for the quarter, but by June that with less than down 70% and the booking the lodging side of that was considerably better down less than 60%. So all of that is you know a very good trends, but still obviously well below.
Anything we'd like to see in the business as for July I would say, it's roughly in line with June slightly off those numbers are and just Eric will get into its a more but just to give you. Some flavor. What we've seen is a verbal.
Had a ton of business and has been a great reader for us out of in the recovery.
As we got into summer people, obviously have a real interest in the whole home model and being able to have their families alone and not in shared space and so verbal really led the way for us.
There was a lot of compression in the early part of the booking window in the early part of the summer and so as we've gotten to July there's a lot of it's still quite a strong business for us and way ahead of our other businesses, but Jack compression has softened a little bit on the flip side. The hotel business, it's been a slightly stronger even into July so.
So there are some puts and takes and there's some GR geographical differences, but but in general July has plateaued cancellation rates have stayed consistent so we haven't seen a real rise in those in July so I think well just sort of.
Stabilize here and we'll see what the next few months bring in terms of.
Restrictions virus growth et cetera, and I think that will largely tells the tale.
On the good side I would just day in addition to verbal being a great driver and had the strongest part of our story. We also saw a terrific new customer growth, which is just a this is proving a great opportunity to introduce a hole in the group of people per BOE experience and I think that will pay longer term dividends and helps amount of a brand.
Which as you know, we pivoted to not that long ago, and I think that's it again, a great opportunity longer term.
So to wrap up I would just say a you know again, we've seen nice recovery from the bottom.
Got it was strong through May and June and flattish through July a we expected to be bumpy and hopefully we'll have some good and some bad in there and it won't be linear I happened to be huge believer in the scientific community and expect them to all the great minds working on this the save us all.
From ourselves.
And we have seen clearly that a the world and wants to travel again wants to get back out and move around and we believe as soon as every time those opportunities become greater and safer that people will indeed take the opportunity to travel.
So with that again I would encourage you not to get too caught up in the ups and downs of small numbers abroad. We we are focused on the longer term and we believe we're making real headway, even though we acknowledge it will take a little while flow for all of you to see it into numbers and I will turn it over to Eric. Thank you.
Thanks, Peter Thank you everyone for joining as well I do you can see our financial results. This quarter are indicative of the severe impact Kevin Knight had on our business and also the rapid travel industry as well.
Peter mentioned we've been.
275 million dollar cash burn rate that we talk about.
Over the when we've talked about over the last couple of months in quarter.
Remember this is effectively contribution neutral.
Revenue less cost of revenue less marketing, we assume bad zero and then what is the costa from running the business. So I was the cost to keep the site up what does it come to keep the lights on we had said previously that we would be at approximately a $275 million burn rate per month.
And we said we would get to that by the end of the year I'm happy to say that we are operating broadly in that range right. Now so we have achieved it faster than we anticipated.
Just one.
One point of clarification, because I know it comes up occasionally is it does exclude restructuring costs associated with our our our cost program and then because we raised a 1.25 billion.
We will have about $5 million of incremental interest expense, but sort of net net feel very good about dnbi and we're in the trend is where in a strong cash position and feel really good about our overall cost program and what veterinary looks like.
Great. Thanks for all the color.
Got it thank you for the question.
Your next question comes from the line overly horwitz with Evercore ISI.
Your line is open.
Great. Thanks for taking my question.
So you're sticking with very low was obviously booking trends remaining really strong should the pandemic I guess is there anything you're seeing there as it relates to traffic next in terms of page asset versus direct suburb out and how you would expect that to perhaps evolve over the course of this crisis.
Yeah absolutely.
One of the things that I think you have heard other places as well as many of us retrenched.
Got out of.
Competitive advertising out of the auctions.
To a large extent when things got really bad in March and April.
We have been waiting back in with all our brands, but a much more delicately with verbose because candidly.
Verbal has been the beneficiary of a huge amount of direct traffic.
And you know essentially organic traffic so.
So the mix of business has been extremely profitable on a relative basis.
Verbal.
And that has been terrific or were not.
Against using performance marketing Verboten, we certainly are trying to use it definitely but but.
Our mix and our returns on marketing or at massively higher levels than we were historically running out and call. It late 2019 so.
Yeah, there's there's definitely been.
I don't want to say, it's a structural shift we'll see what the world like when everything normalizes, but oh, we have seen that the brand is quite strong.
People.
Confined to.
And that were important as an organic option.
Great option for travelers so.
I think the mix a terrific there right now and no doubt as we grow but as we continue to grow and other players get a little healthier we may see them the exchange a bit, but but right now the makes a terrific.
Great. Thanks for taking my question.
Thank you.
Your next question comes from the line of Brent deal with Jefferies.
Your line is open.
Great. This is came down for Brent Thanks for taking my questions I just had one for Eric can you give us an update on what your Capex spend is looking like for the back half 2020, and then first half. The 21 I know you have the headquarters, but should be completed by early next year, but I'm just wondering now what your other capex spend might look like and.
How do we should think about that from a from a modeling perspective. Thanks.
Yeah, our our Capex presume you saw was 206 million of that a 34 million was headquarters again, we gave an update last quarter that we had.
Restarted on on headquarters and that's been 115 million for the first half of the year excluding headquarters.
172 million I just to give you the components out there to highlight of it at a high level. The vast majority of them capitalized labor that's essentially.
Employees that are doing tech developments, and we should see some improvement in that capitalized labor just given the cost program and some of the actions that we've taken today.
We've got the data center as we continue to move more into the cloud that data center Capex should moderate as well.
And then.
Why essentially that the cap labor and data data center captures most of it.
What I would say I'm, not giving you too specific numbers, if you well in that.
For 2020, we should come in less than we were in 2019 with all the various moving parts and then as we go into 2021 as that headquarters rolls off.
We should be much more efficient, we should require less capex and ultimately see better cash conversion, but hopefully that gives you an order of magnitude on the on 2020, and then over time as it should get more efficiently.
Very helpful. Thank you very much.
Thank you.
Your next question comes from the line of Chris country.
No two bank.
Your line is okay.
Hi, Thanks, maybe just start on the vacation rental side and just kind of parsing out the difference of what's going on and vacation rental when hotel I think he has mentioned that garbo was growing.
So just maybe first since you guys have seen sort of the plateau in July.
Is there any difference going on in the cancellation in new bookings from the too.
Yeah, I would say broadly cancellation rates such they.
Pretty consistent.
You know we don't.
I wouldn't say there's anything noteworthy.
Between.
Between how hotels and.
And the vacation rental is performing excepted hotels has taken longer to.
Is on a slow introductory to recoveries clearly vacation rental was very strong we saw demand exceed.
Prior years during some of these compression periods, which you know in a world like this.
It's great to see and hotels has just been on a slower pace to recovery, but I think on the cancellation side.
We haven't seen anything noteworthy.
And and again broadly cancellations have remained stable.
For the last.
The you know for July June et cetera, it's not there's no big uptick and cancellations that we've seen so the real real differences.
That compression due to early bookings that were in the vacation rental space that the hotels shouldn't see Jose and and then the easing of that compressing period into July.
And whereas the hotels that then you know so are we making up ground on a more linear but.
Got it and maybe just a follow up.
As it relates to cloud costs I think you guys had called out previously that 2020 level should be below 2019 and was curious as you guys have gotten further ended the year. If you could put any bit of a finer point on that thanks.
Yeah, I I think the story remains the same just to recap for those that may not have that will story. We brought all of our cloud teams into a single unit. They have the ability to to optimize to rightsize the commute to compute excuse me.
So we've been able to really pushing accelerate that in the kogan environment.
So it gave us some short term benefits and we think that will really bear fruit over the long term as well better economics, and with our vendors et cetera.
But overall that by 2020 I'm with you are expected to be down.
However, when volumes start to increase yes. It does obviously have a variable component to it and so at that volume comes back you would you would expect a tough to grow along with it as well, but I think the.
Order of magnitude or that the story that we talked for still holds.
Got it thanks.
Thank you next question comes from the line of Brian Fitzgerald with Wells Fargo.
And your line is open.
Thanks, guys that we wanted to ask Ed tests out of a hypothesis on you generally when consumers travel or close to home I think you see shorter durations and less expensive accommodations versus when you're traveling farther and.
Internationally is that valid that valid in old days, but are you seeing those dynamics change now with more local travel coming back.
Placing longer international trips and you see consumers trading up versus what they would normally spend staying longer on durations anything you could tell us about kind of their propensity. This to span days as local starts first versus international thanks.
Are you want me to go first though I'll take a look the other two aren't.
Sure sure.
There's a lot going on in that question, but I would say a few things.
We have seen.
Pricing and propensity to pay et cetera, and long duration very evident in in the vacation rental business, you know people and compressed markets have been able to push but they charge.
And.
The buyers that is and people have as I mentioned in bidding order.
And so that if anything in dry.
I don't think about other than from him.
Pardon my letter or anything wrong with five into her.
Or.
No no eurs are the more than one rather I think im wondering.
Why do we.
Can you go those comfort on prepared to go to hotels has been.
Less robust so it's kind of exactly what you'd expect from a supply and demand standpoint, I think in terms of local versus non local and duration on the hotel side I don't know Barrick has made good data there, but I don't think we've seen dramatic change there I think that's been similar.
And yes, you know terms of total wallet share of the domestic trip is it tends to be smaller than in international trips.
Again I think this is just everyone's finding their opportunity so of course air.
Suffering more than lodging.
Even though as far as I know a nobody's nobody is yet said they've gotten sick on an airplane.
But Eric still is something people are less comfortable with.
And so people are driving and finding other ways to get to hotels and things.
And and but I think domestic local domestic is sort of fully filling up the holes of.
Of.
Of international So I think it's really just the volume game I think the IDR question is really just a function of overall supply and demand and acting exactly as you would expect it which is if you're in a compressed market on the.
Florida Coast, and ER and there aren't enough homes and a lot of interested people you can push pricing.
You do and ER and if you're a hotel somewhere where not a lot of tourists are going maybe like New York right now.
You have to compete and therefore, you try to compete on price.
Yeah got it deck there got it.
Yeah, I think I hope Peter I think you covered it I'd be I'd be careful extrapolating too much on any of the.
The trends you see Oh gosh, it's really people solving for the travel that they they can and still want to travel.
I think there the real positive, though is that right and Peter mentioned it earlier that we just got a lot of people that are getting exposed to the bareboat brand and alternative accommodations and it's been about a fast stored in that exposure and we're going to take the approach to build the relationship with those individuals and.
And I think people are having a great experience at least that's what I can in my conversations anecdotally. So I think that it's a very positive outcome riverboat from that perspective.
Yeah, and apologies I would just triple down don't extrapolate too much from any of this I think this is really a unique moment and I said it before but I don't think this portends any difference in how people think about things you know it may exposed on the more they make them open to think they weren't opens you before but I don't think we're seeing some structural shift.
People's views about hotels or other things, it's just a moment.
Just about their comfort on their safety and what they're able to do.
Thank you Peter let Gary.
Thank you.
Well now turn the call back over to C O Pete occurring.
Okay. Thank you everybody for your questions.
Hopefully gives you good.
Perspective on the business I just want to reiterate we're feeling really good about the internal work, we're doing I commend our teams who have.
Done amazing work in impossible circumstances for everybody's working from home and everything is harder so can't thank all of them enough and appreciate you all are all your questions.
As Eric and I said, we hope that you will see the benefit of all this hard work, we've been doing as the numbers come back.
And I look forward to talking to you in another quarter. So thank you for your time and everybody stays fish.
Take care.
Yeah.
This concludes todays conference call you may now disconnect.