Yahoo Finance Expedia Group, Inc. (NASDAQ:EXPE) Q1 2024 Earnings Call Transcript
Expedia Group, Inc. (NASDAQ:EXPE) Q1 2024 Earnings Call Transcript May 2, 2024
Expedia Group, Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $-0.37. Expedia Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to the Expedia Group Q1 2024 Financial Results Teleconference. My name is Lauren, and I will be the operator for today’s call. [Operator Instructions] For opening remarks, I will turn the call over to SVP, Corporate Development, Strategy and Investor Relations, Harshit Vaish. Please go ahead.
Harshit Vaish: Good afternoon, and welcome to Expedia Group’s first quarter 2024 earnings call. I’m pleased to be joined on today’s call by our CEO, Peter Kern; our CFO, Julie Whalen; and our incoming CEO, Ariane Gorin. As a reminder, our commentary today will include references to certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in our earnings release. And unless otherwise stated, any reference to expenses exclude stock-based compensation. We will also be making forward-looking statements during the call, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions, which are subject to risks and uncertainties that are difficult to predict.
Actual results could materially differ due to factors discussed during this call, and in our most recent Forms 10-K, 10-Q and other filings with the SEC. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. Our earnings release, SEC filings and a replay of today’s call can be found on our Investor Relations website at ir.expediagroup.com. And with that, let me turn the call over to Peter.
Peter Kern: Good afternoon and thank you all for joining us today. As you all know by now, this will be my last earnings call. I’m excited to be handing the reins over to Ariane, and we have reserved time for her to share some thoughts after Julie so you can get a sense of her ambition for the company going forward. Ariane and I have been working closely these last few months to make sure she can take over without a hitch, and I just want to say I’m truly excited to see how she and our team bring this company forward and accelerate on top of everything we have built over these last several years. As for the quarter, we saw a healthy but more normalized market environment for travel globally. North America remains the slowest growing geography relative to major international markets, but the gap is closing now that we are largely past the pandemic-driven recovery.
Adjusting for geo and product mix, prices held up in general for lodging, but we’re under continued pressure in the air and car business. Against this backdrop, our results for the first quarter of 2024 met our guidance with a revenue and EBITDA beat, but less robust gross bookings. Julie will get into the details, but revenue and EBITDA performance benefited from our mix of business, a strong performance in our advertising business, and our decision to invest more in pricing actions as opposed to direct marketing. As for gross bookings, our B2B business continued its strong performance, and our B2C business, excluding Vrbo, was in line with our expectations. Unfortunately, that only partly made up for a slower than expected ramp-up for Vrbo post its technical migration.
As we discussed last quarter, we had pulled back on Vrbo marketing in the second half of last year while we went through our migration. And while we have been ramping that spend and the product has been improving, we have seen a slower than expected recovery. Based on this and the overall trends in our B2C business so far in Q2, we expect growth to be lower than what we had initially anticipated for 2024. We are, therefore, lowering our full year guidance to a range of mid to high single-digit top line growth, with margins relatively in line with last year. We still expect to see broad improvement across 2024 in our B2C business, with the best early indicator being the conversion gains we have seen driven by higher test velocity and future rollouts.
Behind that, we will continue to invest in Vrbo and our international growth markets to reignite those flywheels to set us up for continued growth in the years to come. All in all, I’m pleased to say that while momentum is not yet back consistently in all the business lines, we are improving every day, wanting to optimize all of our new capabilities, and I have tremendous faith in our team’s ability to extract the full potential of what we have built. With that, I will just close by expressing my profound appreciation to all our teams at Expedia for their dedication throughout our multiyear, often painful, transformation journey. When the returns from this work are fully realized, we will owe this determined bunch of people a great debt of gratitude.
I also want to thank all of you, our existing shareholders, the analysts covering us, and the broader investor community who have been with us along this sometimes bumpy journey. There’s a reason most companies don’t undertake transformation on this scale, and it takes patience and a commitment to understanding to come along for this journey. I’m very appreciative of all the constructive engagement over the years and it has been a pleasure working with all of you. So with that, over to Julie.
Julie Whalen: Thank you, Peter, and good afternoon, everyone. Let me start with the key metrics for the first quarter. Total gross bookings of $30.2 billion were up 3% versus last year. Growth was driven primarily by total lodging gross bookings, which grew 4%, led by our hotel business growing 12%. This strong hotel growth was partially offset by the ongoing softness in our Vrbo business that, while improving, is taking longer than expected to fully recover. Revenue of $2.9 billion grew 8% versus last year, led by B2B, Brand Expedia and our advertising businesses. The revenue strength was driven by higher revenue margins, which increased over 50 basis points from a product and geo mix during the quarter, increased advertising revenue, which contributes to revenue but not gross bookings, and the pull-in of stays in Q1 driven by the Easter shift.
Cost of sales was $356 million for the quarter and $55 million or 13% lower versus last year, which combined with our strong revenue growth, drove approximately 310 basis points of leverage as a percentage of revenue year-over-year. We are pleased to see our ongoing initiatives delivering transactional efficiencies. Direct sales and marketing expense in the first quarter was $1.7 billion, which was up 11% versus last year. Sales and marketing deleveraged this quarter as a percentage of gross bookings primarily due to the commissions to our partners as a result of our strong growth in our B2B business with growth of 25%. As we have stated previously, commissions paid to our B2B partners are in our direct sales and marketing line and are more expensive as a percentage of revenue than our B2C business.
However, because they are generally paid on a stayed basis to contractually agreed upon percentages, the returns are more guaranteed and immediate. In our B2C business, we also saw some marketing deleverage this quarter as we reinvested back into our Vrbo business to drive improving growth and our increased investments to drive our global market expansion, one of our key strategic growth initiatives this year. Overhead expenses were $611 million, an increase of $23 million versus last year or 4%, leveraging 95 basis points. We were able to drive our costs below our revenue growth, particularly in our product and tech operations. And now that we are done with the major boulders of platform migration, we remain committed to driving further efficiencies across our P&L.
To that end, in February, we announced cost actions that will impact approximately 1,500 employees through this year. We expect that these actions will unlock substantial savings on an annualized basis across capitalized labor, cost of sales and overhead costs. And as a result of all of these factors, we delivered strong first quarter EBITDA of $255 million, which was up 38% year-over-year, with an EBITDA margin of 8.8%, expanding over 190 basis points year-over-year. This was higher than expected given the higher revenue we delivered and the leverage to the P&L that provides, along with lower cost of sales, both of which more than offset our marketing investments to drive future growth. It is also important to note that EBITDA also benefited from a decision we made to invest more in pricing actions as opposed to additional direct marketing.
These pricing actions are reflected in the P&L when the stay occurs. As a result, these investments will instead impact future quarters as contra revenue when the stays come in. Starting this quarter, in addition to EBITDA, we are providing additional disclosure around our EBIT performance, which includes the impact of stock-based compensation, depreciation and amortization. In the first quarter, EBIT was negative $59 million with a margin of negative 2.1%, an improvement of $51 million or 205 basis points versus last year. The additional approximately 15 basis points of expansion as compared to EBITDA is driven by leverage from stock-based compensation. Our first quarter EBITDA growth enabled us to generate another quarter of robust free cash flow at $2.7 billion.
The year-over-year decline in free cash flow is associated with timing changes within working capital, which includes lower deferred merchant bookings, primarily driven by the softness in Vrbo bookings this quarter. Moving on to our balance sheet, we ended the quarter with strong liquidity of $8.2 billion, driven by our unrestricted cash balance of $5.7 billion and our undrawn revolving line of credit of $2.5 billion. Our debt level remains at approximately $6.3 billion with an average cost at only 3.7%. Our gross leverage ratio at a further reduced 2.3 times continues to make progress towards our target gross leverage ratio of 2 times, driven by our ongoing strong EBITDA growth. Our strong cash position enabled us to continue repurchasing shares with over $780 million or approximately 5.7 million shares repurchased year-to-date.
And we continue to believe that our stock remains undervalued and does not reflect our expected long-term performance of the business. As such, we will utilize the strong cash-generating power of our business and our remaining $4.1 billion share repurchase authorization to continue to buy back our stock opportunistically. As far as our financial outlook, given the lower-than-expected growth in gross bookings in the first quarter and the trends we are seeing so far in the second quarter in our B2C business, in particular, in Vrbo, we are lowering our full year guidance to reflect the range of possible outcomes on the top line, while we continue to invest in marketing to drive growth for Vrbo and international markets. As such, we believe our top line growth will now be in the range of mid- to high single-digit growth with EBITDA and EBIT margins relatively in line with last year.
In the shorter term, we expect our second quarter to deliver top line growth in the mid-single digits, which reflects a sequential acceleration in gross bookings from the first quarter as we expect Vrbo to continue to improve from our marketing investments. We expect revenue growth to be lower than the first quarter growth rate given the lower gross bookings in the first quarter, the pull forward of Easter stays into the first quarter, and the contra revenue arising from pricing actions. And with this revenue growth, along with our continued investments in marketing to drive growth, we expect some pressure in our second quarter EBITDA and EBIT margins versus last year. However, when combined with our first quarter outperformance, we expect EBITDA and EBIT margins to be relatively in line with last year to slightly above in the first half.
In closing, despite the lower guidance, we remain committed to the long-term opportunity that our transformation has given us to deliver profitable growth and shareholder returns. And with that, let me turn the call over to Ariane.
Ariane Gorin: Thanks, Julie. And thank you, Peter, for your leadership over the last four years and for all I have learned working closely with you. I joined our company 11 years ago and most recently led Expedia for Business. This includes our B2B and Advertising businesses, both of which have consistently delivered double-digit growth. I also led our global supply teams that source inventory for our whole company, so I know our industry very well. And having lived in Europe for the last 23 years, I have seen firsthand opportunity for us in international markets. My immediate priority as CEO is to work with our teams to accelerate our growth and to sharpen the longer-term strategy for our Consumer Business. Since our leadership announcement in February, I’ve spent time getting to know our consumer business in more detail.
It’s undergone extreme transformation over the last few years, from technical migrations and changes in our loyalty program to changes in how our teams operate the business. So we’ve dealt with a lot of turbulence. While we built new capabilities like our common front end, we have less development capacity to build new features, and this, in turn, impacted the competitiveness of some of our brands and products. Expedia, which was our least disrupted brand, benefited a lot from our investments and has grown very well, while Hotels.com and Vrbo, which were the most impacted by our migrations, aren’t where we’d like them to be. To get the acceleration we want from our consumer business, we need to focus on the basics: driving traffic, increasing conversion and expanding our margins through higher attach, take rates and more efficient marketing.
Ultimately, this is going to come down to having great products and great brand value propositions. Our platform now allows us to innovate at scale, and we’re running more tests and seeing the benefits of AI across all of our brands, which is great. But we’re still learning to use all of this most effectively. For example, a recommendation algorithm gets smarter faster because of our scale, but it has to be trained on the differences between a traveler shopping on Vrbo compared to one on Expedia. And tests that work on one brand may behave differently on another. While we still have some work to fully complete our tech platform, moving forward, we’ll dedicate more of our development capacity to building great traveler experiences and making up for lost time.
Looking ahead, while it’s going to take somewhat longer than we’d anticipated to see the benefits come through in our numbers, the investments we’ve made rebuilding our consumer business will pay off. Our new tech platform gives us a solid foundation to grow our business. And we also have other real strengths to build on. We’re leaders in the B2B segment and just posted another fantastic quarter, and there’s still a big opportunity to win share. Our advertising business is big, differentiated and growing, and I equally see lots of opportunity ahead here. We have strong relationships with our supply partners and great supply for our travelers. And of course, our consumer business is the market leader in the U.S. with well-recognized and loved brands, and we’re starting to get traction as we move back into international markets.
As you know, we’re also focused on driving efficiencies, and we’ll continue to look carefully at every dollar we invest. So in closing, we have great consumer brands, a leading B2B business, a powerful platform, and what I think is the best team in travel. We have lots of work to do to realize our potential, and I couldn’t be more excited about the opportunity ahead. And with that, let me open the call to questions.
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