EXPEDIA GROUP, INC. Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. Actual results could differ materially from those contained in these forward-looking statements for a variety of reasons, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , Part I, Item 1A, "Risk Factors," in Exhibit 99.2 to our Current Report on Form 8-K filed with theSEC onApril 23, 2020 , and in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 , filed with theSEC onMay 21, 2020 , as well as those discussed in the Risk Factor section and elsewhere in this report. COVID-19, and the volatile regional and global economic conditions stemming from it, and additional or unforeseen effects from the COVID-19 pandemic, could also give rise to or aggravate these risk factors, which in turn could materially adversely affect our business, financial condition, liquidity, results of operations (including revenues and profitability) and/or stock price. Further, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations. Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition and results of operations. Accordingly, readers should not place undue reliance on these forward-looking statements. The use of words such as "anticipates," "believes," "could," "estimates," "expects," "goal," "intends," "likely," "may," "plans," "potential," "predicts," "projected," "seeks," "should" and "will," or the negative of these terms or other similar expressions, among others, generally identify forward-looking statements; however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. We are not under any obligation to, and do not intend to, publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Please carefully review and consider the various disclosures made in this report and in our other reports filed with theSEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations. The information included in this management's discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . OverviewExpedia Group is one of the world's largest travel companies. We help reduce the barriers to travel, making it easier, more attainable and more accessible, bringing the world within reach for customers and partners around the globe. We leverage our platform and technology capabilities across an extensive portfolio of businesses and brands to orchestrate the movement of people and the delivery of travel experiences on both a local and global basis. We make available, on a stand-alone and package basis, travel services provided by numerous lodging properties, airlines, car rental companies, activities and experiences providers, cruise lines, alternative accommodations property owners and managers, and other travel product and service companies. We also offer travel and non-travel advertisers access to a potential source of incremental traffic and transactions through our various media and advertising offerings on our websites. For additional information about our portfolio of brands, see "Portfolio of Brands" in Part I, Item 1, "Business", in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . All percentages within this section are calculated on actual, unrounded numbers. Trends The widespread outbreak of the COVID-19 pandemic, and measures to contain the virus, including government travel restrictions and quarantine orders, have had a significant negative impact on the travel industry. COVID-19 has forced many of our supply partners, particularly airlines and hotels, to operate at significantly reduced service levels, and has negatively impacted consumer sentiment and consumers ability to travel. Our financial and operating results for the first half of 2020 were significantly impacted due to the decrease in travel demand related to COVID-19. 28
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As the spread of the virus has been contained to varying degrees in certain countries over the past few months, some travel restrictions have been lifted and consumers have become more comfortable traveling, particularly to domestic locations. This has led to a moderation of the declines in travel bookings and in cancellation rates compared to the March andApril 2020 time period, however, travel booking volume remains significantly below prior year levels and cancellation levels remain elevated compared to pre-COVID levels. During the recovery period, there have been instances where cases of COVID-19 have started to increase again after a period of decline, which in some cases impacted the recovery of travel. In addition, the degree of containment of the virus, and the recovery in travel, has varied country to country. We expect that to remain the case in the near-term. Overall, the full duration and total impact of COVID-19 remains uncertain and it is difficult to predict how the recovery will unfold for the travel industry and, in particular, our business. COVID-19 has also had broader economic impacts, including a significant increase in unemployment levels and reduction in economic activity, which could lead to a recession, and further reduction in consumer or business spending on travel activities, which may negatively impact the timing and level of a recovery in travel demand. Additionally, further health-related events, political instability, geopolitical conflicts, acts of terrorism, significant fluctuations in currency values, sovereign debt issues, and natural disasters, are examples of other events that could have a negative impact on the travel industry in the future. Prior to the onset of COVID-19, we began to execute a cost savings initiative aimed at simplifying the organization and increasing efficiency. Following the onset of COVID-19, we accelerated execution on several of these cost savings initiatives and took additional actions to reduce costs to help mitigate the impact to demand from COVID-19 and reduce our monthly cash usage. While some cost actions during COVID-19 are temporary and intended to minimize cash usage during this disruption, we expect to continue to benefit from the majority of the savings when business conditions return to more normalized levels. Overall, we now expect to exceed$500 million in annualized run-rate fixed cost savings, and we continue to evaluate additional opportunities to increase efficiency and improve operational effectiveness across the Company. As a result of the cost savings effort launched prior to COVID-19 and additional cost reductions during COVID-19 that we expect to remain in place, we expect Adjusted EBITDA margins to increase compared to historical levels when revenue returns to more normalized levels. Lodging Lodging includes hotel accommodations and alternative accommodations. As a percentage of our total worldwide revenue in the first six months of 2020, lodging accounted for 73%. As a result of the COVID-19 outbreak and impact on travel demand, room nights declined 81% in the second quarter of 2020, and 51% in the first six months of 2020. Many hotel partners were forced to shut a number of properties due to the virus, and some remain closed. The timing of hotel operations returning to normal levels, and recovery in consumer sentiment on staying at hotels will be a factor in our level of room night growth, and as noted above, we expect that to vary by country. Average Daily Rates ("ADRs") for rooms booked onExpedia Group websites increased 1% in the second quarter and was flat in the first half of 2020. During the second quarter of 2020, ADRs for our Vrbo business increased year-over-year at a higher rate than in prior quarters and Vrbo accounted for a higher percentage of room nights due to the faster recovery in alternative accommodations during this period. This was offset by declines in hotel ADRs. The uncertain environment related to COVID-19, and the potential for a higher degree of discounting activity due to the lower travel demand, could result in continued hotel ADR declines for a period of time. Similarly, fluctuations in supply and demand for alternative accommodations, could impact ADRs for Vrbo. In addition, travel restrictions and shift in consumer behavior during COVID-19 that impact the mix of our lodging bookings across geographies and types of accommodations could impact total ADRs. Given these dynamics, it is difficult to predict ADR trends in the near-term. Hotel. We generate the majority of our revenue through the facilitation of hotel reservations (stand-alone and package bookings). After rolling out Expedia Traveler Preference ("ETP") globally over a period of several years, during which time we reduced negotiated economics in certain instances to compensate for hotel supply partners absorbing expenses such as credit card fees and customer service costs, our relationships and overall economics with hotel supply partners have been broadly stable in recent years. As we continue to expand the breadth and depth of our global hotel offering, in some cases we have reduced our economics in various geographies based on local market conditions. These impacts are due to specific initiatives intended to drive greater global size and scale through faster overall room night growth. Additionally, increased promotional activities such as growing loyalty programs contribute to declines in revenue per room night and profitability. Since our hotel supplier agreements are generally negotiated on a percentage basis, any increase or decrease in ADRs has an impact on the revenue we earn per room night. Over the course of the last several years, occupancies and ADRs in the lodging industry generally increased on a currency-neutral basis in a gradually improving overall travel environment. However, with certain travel restrictions and quarantine orders implemented due to COVID-19, current occupancy rates for hotels in the 29
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United States are at historically low levels and ADRs could decline for a period of time. In addition, other factors could pressure ADR trends, including the continued growth in hotel supply in recent years and the increase in alternative accommodation inventory. Further, while the global lodging industry remains very fragmented, there has been consolidation in the hotel space among chains as well as ownership groups. In the meantime, certain hotel chains have been focusing on driving direct bookings on their own websites and mobile applications by advertising lower rates than those available on third-party websites as well as incentives such as loyalty points, increased or exclusive product availability and complimentary Wi-Fi. We have continued to add supply to our global lodging marketplace with over 1.7 million properties on our global websites as ofJune 30, 2020 , including over 805,000 integrated Vrbo alternative accommodations listings. Alternative Accommodations. With our acquisition of Vrbo (previouslyHomeAway ) and all of its brands inDecember 2015 , we expanded into the fast growing alternative accommodations market. Vrbo is a leader in this market and represents an attractive growth opportunity forExpedia Group . Vrbo has transitioned from a listings-based classified advertising model to an online transactional model that optimizes for both travelers and homeowner and property manager partners, with a goal of increasing monetization and driving growth through investments in marketing as well as in product and technology. Vrbo offers hosts subscription-based listing or pay-per-booking service models. It also generates revenue from a traveler service fee for bookings. As ofJune 30, 2020 , there are over 2.1 million online bookable listings available on Vrbo. In addition, we have actively moved to integrate Vrbo listings into our global Retail services, as well as directly add alternative accommodation listings to our offerings, to position our key global brands to offer a full range of lodging options for consumers. Air The airline industry has been dramatically impacted by COVID-19. As a result of the significantly reduced air travel demand due to government travel restrictions and the impact on consumer sentiment related to COVID-19, airlines have been operating with less capacity and passenger traffic has declined significantly. As some travel restrictions were lifted during the second quarter of 2020, air passenger traffic declines moderated, but to a lesser degree than lodging bookings. The recovery in air travel remains difficult to predict, and may not correlate with the recovery in lodging demand. According to theTransportation Security Administration ("TSA"), air traveler 7-day average throughput declined approximately 95% inApril 2020 compared to prior year levels and have since moderated to down approximately 73% as ofmid-July 2020 . In addition, theInternational Air Transport Association ("IATA") currently expects airline passenger traffic to decline 55% in 2020 compared to 2019 levels. For 2021, IATA estimates traffic to increase 62% compared to 2020, representing a decline of nearly 30% compared to 2019 levels. In addition, there is significant correlation between airline revenue and fuel prices, and fluctuations in fuel prices generally take time to be reflected in air revenue. Given current volatility, it is uncertain how fuel prices could impact airfares. We could encounter pressure on air remuneration as air carriers combine, certain supply agreements renew, and as we continue to add airlines to ensure local coverage in new markets. Air ticket volumes increased 5% in 2018 and 7% in 2019. In the first half of 2020, air ticket volumes declined 55%. As a percentage of our total worldwide revenue in the first half of 2020, air accounted for 1%. Advertising & Media Our advertising and media business is principally driven by revenue generated by trivago, a leading hotel metasearch website, and Expedia Group Media Solutions, which is responsible for generating advertising revenue on our global online travel brands. In the first half of 2020, we generated$228 million of advertising and media revenue, a 58% decline from the same period in 2019, representing 8% of our total worldwide revenue. Given the decline in travel demand related to COVID-19, online travel agencies have dramatically reduced marketing spend, including on trivago, and given the uncertain duration and impact of COVID-19 it is difficult to predict when spend will recover. In response, trivago has significantly reduced its marketing spend and taken additional actions to lower operating expenses. We expect trivago to continue to experience significant pressure on revenue and profit until online travel agencies and other hotel suppliers begin to see consumer demand that warrants an increase in marketing spend.Online Travel Increased usage and familiarity with the internet are driving rapid growth in online penetration of travel expenditures. According to Phocuswright, an independent travel, tourism and hospitality research firm, in 2019, approximately 45% ofU.S. and European leisure and unmanaged corporate travel expenditures occurred online. This figure was estimated to reach approximately 50% in 2020, prior to the outbreak of COVID-19. Online penetration rates in the emerging markets, such asAsia Pacific and Latin American regions, are lagging behind that ofthe United States andEurope . These penetration rates increased over the past few years, and are expected to continue growing, which presents an attractive growth opportunity for our business, while also attracting many competitors to online travel. This competition intensified in recent years, and the industry is expected to remain highly competitive for the foreseeable future. In addition to the growth of online travel agencies, we see 30
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increased interest in the online travel industry from search engine companies such as Google, evidenced by continued product enhancements, including new trip planning features for users and the integration of its various travel products into theGoogle Travel offering, as well as further prioritizing its own products in search results. Competitive entrants such as "metasearch" companies, including Kayak.com (owned by Booking Holdings), trivago (in whichExpedia Group owns a majority interest) as well as TripAdvisor, introduced differentiated features, pricing and content compared with the legacy online travel agency companies, as well as various forms of direct or assisted booking tools. Further, airlines and lodging companies are aggressively pursuing direct online distribution of their products and services. In addition, the increasing popularity of the "sharing economy," accelerated by online penetration, has had a direct impact on the travel and lodging industry. Businesses such asAirbnb , Vrbo (previouslyHomeAway , whichExpedia Group acquired inDecember 2015 ) andBooking.com (owned by Booking Holdings) have emerged as the leaders, bringing incremental alternative accommodation and vacation rental inventory to the market. Many other competitors, including vacation rental metasearch players, continue to emerge in this space, which is expected to continue to grow as a percentage of the global accommodation market. Finally, traditional consumer ecommerce and group buying websites expanded their local offerings into the travel market by adding hotel offers to their websites. The online travel industry also saw the development of alternative business models and variations in the timing of payment by travelers and to suppliers, which in some cases place pressure on historical business models. In particular, the agency hotel model saw rapid adoption inEurope .Expedia Group facilitates both merchant (Expedia Collect) and agency (Hotel Collect ) hotel offerings with our hotel supply partners through both agency-only contracts as well as our hybrid ETP program, which offers travelers the choice of whether to payExpedia Group at the time of booking or pay the hotel at the time of stay. We have recently shifted to managing our marketing investments holistically across the brand portfolio in our Retail segment to optimize results for the Company, and making decisions on a market by market basis that we think are appropriate based on the relative growth opportunity, the expected returns and the competitive environment. Over time, intense competition historically led to aggressive marketing efforts by the travel suppliers and intermediaries, and a meaningful unfavorable impact on our overall marketing efficiencies and operating margins. During 2020, we have increased our focus on opportunities to increase marketing efficiency, drive a higher proportion of transactions through direct channels and improve the balance of transaction growth and profitability. Growth Strategy Global Expansion. Our Brand Expedia,Hotels.com , Vrbo portfolio, Expedia Partner Solutions and Egencia brands operate both domestically and through international points of sale, including inEurope ,Asia Pacific ,Canada andLatin America . In addition, ebookers offers multi-product online travel reservations inEurope and the Wotif portfolio of brands are focused principally on theAustralia and New Zealand markets. We own a majority share of trivago, a leading metasearch company. InDecember 2016 , trivago successfully completed its initial public offering and trades on the Nasdaq Global Select Market under the symbol "TRVG." In addition, we have commercial agreements in place withTrip.com and eLong inChina , Traveloka inSoutheast Asia , as well as Despegar inLatin America , among many others. In conjunction with the commercial arrangements with Traveloka and Despegar, we have also made strategic investments in both companies. In the first half of 2020, approximately 36% of worldwide revenue was through international points of sale. Our strategy is focused on continuing to grow our international market share, and over the longer term we aim to increase our mix of international revenue as we execute to strengthen our brands and products in key international markets. In expanding our global reach, we leverage significant investments in technology, operations, brand building, supplier relationships and other initiatives that we have made since the launch ofExpedia.com in 1996. More recently, we have invested in migrating parts of our technology platform to the cloud, as well as focused on expanding our lodging supply, particularly in key international markets. Our scale of operations enhances the value of technology innovations we introduce on behalf of our travelers and suppliers. We believe that our size and scale afford the company the ability to negotiate competitive rates with our supply partners, provide breadth of choice and travel deals to our traveling customers through an expanding supply portfolio and create opportunities for new value added offers for our customers such as our loyalty programs. The size ofExpedia Group's worldwide traveler base makes our websites an increasingly appealing channel for travel suppliers to reach customers. In addition, the sheer size of our user base and search query volume allows us to test new technologies very quickly to determine which innovations are most likely to improve the travel research and booking process, and then roll those features out to our worldwide audience to drive improvements in conversion. Product Innovation. Each of our leading brands was a pioneer in online travel and has been responsible for driving key innovations in the space for more than two decades. We have made key investments in technology, including significant development of our technical platforms, that make it possible for us to deliver innovations at a faster pace. Improvements in our global platforms forHotels.com , Brand Expedia and Vrbo continue to enable us to significantly increase the innovation cycle, thereby improving conversion and driving faster growth rates for those brands. Since 2014, we have acquired Travelocity,Wotif Group and Orbitz Worldwide, includingOrbitz , CheapTickets and ebookers, and migrated their brands to the Brand 31
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Expedia technology platform. In addition,Orbitz for Business customers were migrated to the Egencia technology platform in 2016. We intend to continue leveraging these technology investments when launching additional points of sale in new countries, introducing new website features, adding supplier products and services including new business model offerings, as well as proprietary and user-generated content for travelers. Channel Expansion. Technological innovations and developments continue to create new opportunities for travel bookings. In the past few years, each of our brands made significant progress innovating on its mobile websites and mobile applications, contributing to solid download trends, and many of our brands now see more traffic via mobile devices than via traditional PCs and an increasing percentage of transactions are coming through mobile. Mobile bookings continue to present an opportunity for incremental growth as they are often completed with a much shorter booking window than we historically experienced via more traditional online booking methods. Additionally, our brands are implementing new technologies like voice-based search, chatbots and messaging apps as mobile-based options for travelers. In addition, we are seeing significant cross-device usage among our customers, who connect to our websites and apps across multiple devices and platforms throughout their travel planning process. We also believe mobile represents an efficient marketing channel given the opportunity for direct traffic acquisition, increase in share of wallet and in repeat customers, particularly through mobile applications. During 2019, more than 40% of transactions acrossExpedia Group's Retail brands were booked on a mobile device. Seasonality We generally experience seasonal fluctuations in the demand for our travel services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue for most of our travel services, including merchant and agency hotel, is recognized as the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks for our hotel business and can be several months or more for our alternative accommodations business. Historically, Vrbo has seen seasonally stronger bookings in the first quarter of the year, with the relevant stays occurring during the peak summer travel months. The seasonal revenue impact is exacerbated with respect to income by the nature of our variable cost of revenue and direct sales and marketing costs, which we typically realize in closer alignment to booking volumes, and the more stable nature of our fixed costs. Furthermore, operating profits for our primary advertising business, trivago, have typically been experienced in the second half of the year, particularly the fourth quarter, as selling and marketing costs offset revenue in the first half of the year as we typically increase marketing during the busy booking period for spring, summer and winter holiday travel. As a result on a consolidated basis, revenue and income are typically the lowest in the first quarter and highest in the third quarter. The growth of our international operations, advertising business or a change in our product mix, including the growth of Vrbo, may influence the typical trend of the seasonality in the future. Due to COVID-19, which impacted travel bookings in the first half of 2020 and led to significant cancellations for future travel, we do not expect our typical seasonal pattern for bookings, revenue and profit during 2020. In addition, with the lower new bookings and elevated cancellations in the merchant business model, our typical, seasonal working capital source of cash has been significantly disrupted resulting in the Company experiencing unfavorable working capital trends and material negative cash flow. It is difficult to forecast the seasonality for the upcoming quarters, given the uncertainty related to the duration of the impact from COVID-19 and the shape and timing of any sustained recovery. Critical Accounting Policies and Estimates Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with generally accepted accounting principles inthe United States ("GAAP"). Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if: • It requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate; and
• Changes in the estimate or different estimates that we could have selected
may have had a material impact on our financial condition or results of
operations.
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The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business disruptions and adversely impact our results of operations. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods. Recoverability ofGoodwill and Indefinite and Definite-Lived Intangible AssetsGoodwill . We assess goodwill for impairment annually as ofOctober 1 , or more frequently, if events and circumstances indicate impairment may have occurred. During the first quarter of 2020, as a result of the significant turmoil related to COVID-19, we concluded that sufficient indicators existed to require us to perform an interim impairment assessment. In addition, during the second quarter of 2020, due to a recent decision to streamline operations for a smaller brand within our Retail segment, we performed another targeted interim impairment assessment. In the evaluation of goodwill for impairment, we typically perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value and, if applicable, record an impairment charge based on the excess of the reporting unit's carrying amount over its fair value. Periodically, we may choose to perform a qualitative assessment, prior to performing the quantitative analysis, to determine whether the fair value of the goodwill is more likely than not impaired. We generally base our measurement of fair value of reporting units, except for trivago, which is a separately listed company on the Nasdaq Global Select Market, on a blended analysis of the present value of future discounted cash flows and market valuation approach. The discounted cash flows model indicates the fair value of the reporting units based on the present value of the cash flows that we expect the reporting units to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of our business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the Company to comparable publicly traded firms in similar lines of business. Our significant estimates in the market approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting units. The fair value estimate for our trivago reporting unit is based on trivago's stock price, a Level 1 input, adjusted for an estimated control premium. We believe the weighted use of discounted cash flows and market approach is generally the best method for determining the fair value of our reporting units because these are the most common valuation methodologies used within the travel and internet industries; and the blended use of both models compensates for the inherent risks associated with either model if used on a stand-alone basis. In addition to measuring the fair value of our reporting units as described above, we consider the combined carrying and fair values of our reporting units in relation to the Company's total fair value of equity plus debt as of the assessment date. Our equity value assumes our fully diluted market capitalization, using either the stock price on the valuation date or the average stock price over a range of dates around the valuation date, plus an estimated acquisition premium which is based on observable transactions of comparable companies. The debt value is based on the highest value expected to be paid to repurchase the debt, which can be fair value, principal or principal plus a premium depending on the terms of each debt instrument. Indefinite-Lived Intangible Assets. We base our measurement of fair value of indefinite-lived intangible assets, which primarily consist of trade name and trademarks, using the relief-from-royalty method. This method assumes that the trade name and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. Definite-Lived Intangible Assets. We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying amount and its estimated fair value. The use of different estimates or assumptions in determining the fair value of our goodwill, indefinite-lived and definite-lived intangible assets may result in different values for these assets, which could result in an impairment or, in the period in 33
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which an impairment is recognized, could result in a materially different impairment charge. For additional information on our goodwill and intangible asset impairments recorded as a result of our interim impairment testing during the first six months of 2020, see Note 3 - Fair Value Measurements in the notes to the consolidated financial statements. For additional information about our other critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 as well as updates in the current fiscal year provided in Note 2 - Summary of Significant Accounting Policies in the notes to the consolidated financial statements. Occupancy and Other Taxes Legal Proceedings. We are currently involved in eight lawsuits brought by or against states, cities and counties over issues involving the payment of hotel occupancy and other taxes. We continue to defend these lawsuits vigorously. With respect to the principal claims in these matters, we believe that the statutes and/or ordinances at issue do not apply to us or the services we provide, namely the facilitation of travel planning and reservations, and, therefore, that we do not owe the taxes that are claimed to be owed. We believe that the statutes and ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations. Recent developments include: •City of San Antonio, Texas Litigation. OnJuly 6, 2020 ,the United States
en banc of the decision affirming the district court's award of over
million in appeal bond costs against the city.
• Palm Beach, Florida Litigation. The Florida Fourth District Court of
Appeals denied the plaintiff's motions for rehearing, rehearing en banc
and certification to the
defendants on June 3, 2020 . On July 1, 2020 , the plaintiff filed a notice
to invoke discretionary jurisdiction of the Florida Supreme Court .
For additional information on these and other legal proceedings, see Part II,
Item 1, Legal Proceedings.
We have established a reserve for the potential settlement of issues related to
hotel occupancy and other tax litigation, consistent with applicable accounting
principles and in light of all current facts and circumstances, in the amount of
$59 million as of June 30, 2020 , and $48 million as of December 31, 2019 .
Certain jurisdictions, including without limitation the states of New York , New
Jersey , North Carolina , Minnesota , Oregon , Rhode Island , Maryland , Pennsylvania ,
Hawaii , Iowa , Massachusetts , Arizona , Wisconsin , Idaho , Arkansas , Indiana ,
Maine , Nebraska , Vermont , the city of New York , and the District of Columbia ,
have enacted legislation seeking to tax online travel company services as part
of sales or other taxes for hotel and/or other accommodations and/or car rental.
In addition, in certain jurisdictions, we have entered into voluntary collection
agreements pursuant to which we have agreed to voluntarily collect and remit
taxes to state and/or local taxing jurisdictions. We are currently remitting
taxes to a number of jurisdictions, including without limitation the states of
New York , New Jersey , South Carolina , North Carolina , Minnesota , Georgia ,
Wyoming , West Virginia , Oregon , Rhode Island , Montana , Maryland , Kentucky ,
Maine , Pennsylvania , Hawaii , Iowa , Massachusetts , Arizona , Wisconsin , Idaho ,
Arkansas , Indiana , Nebraska , Vermont , the city of New York and the District of
Columbia , as well as certain other jurisdictions.
Pay-to-Play
Certain jurisdictions may assert that we are required to pay any assessed taxes
prior to being allowed to contest or litigate the applicability of the
ordinances. This prepayment of contested taxes is referred to as "pay-to-play."
Payment of these amounts is not an admission that we believe we are subject to
such taxes and, even when such payments are made, we continue to defend our
position vigorously. If we prevail in the litigation, for which a pay-to-play
payment was made, the jurisdiction collecting the payment will be required to
repay such amounts and also may be required to pay interest. However, any
significant pay-to-play payment or litigation loss could negatively impact our
liquidity.
Other Jurisdictions. We are also in various stages of inquiry or audit with
domestic and foreign tax authorities, some of which, including the City of Los
Angeles regarding hotel occupancy taxes and the United Kingdom regarding the
application of value added tax ("VAT") to our European Union related
transactions, may impose a pay-to-play requirement to challenge an adverse
inquiry or audit result in court.
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Segments
Beginning in the first quarter of 2020, we have the following reportable segments: Retail, B2B, and trivago. Our Retail segment provides a full range of travel and advertising services to our worldwide customers through a variety of consumer brands including:Expedia.com andHotels.com inthe United States and localized Expedia andHotels.com websites throughout the world, Vrbo,Orbitz , Travelocity,Wotif Group , ebookers, CheapTickets, Hotwire.com,CarRentals.com ,CruiseShipCenters ,Classic Vacations andSilverRail Technologies, Inc. Our B2B segment is comprised of our Expedia Business Services organization including Expedia Partner Solutions, which operates private label and co-branded programs to make travel services available to leisure travelers through third-party company branded websites, and Egencia, a full-service travel management company that provides travel services to businesses and their corporate customers. Our trivago segment generates advertising revenue primarily from sending referrals to online travel companies and travel service providers from its hotel metasearch websites. Operating Metrics Our operating results are affected by certain metrics, such as gross bookings and revenue margin, which we believe are necessary for understanding and evaluating us. Gross bookings generally represent the total retail value of transactions booked for agency and merchant transactions, recorded at the time of booking reflecting the total price due for travel by travelers, including taxes, fees and other charges, and are reduced for cancellations and refunds. As travelers have increased their use of the internet to book travel arrangements, we have generally seen our gross bookings increase, reflecting the growth in the online travel industry, our organic market share gains and our business acquisitions. Revenue margin is defined as revenue as a percentage of gross bookings.
Gross Bookings and Revenue Margin
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)Gross bookings$ 2,713 $ 28,292 (90 )%$ 20,598 $ 57,701 (64 )% Revenue margin (1) 20.9 % 11.1 % 13.5 % 10.0 %
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(1) trivago, which is comprised of a hotel metasearch business that differs
from our transaction-based websites, does not have associated gross
bookings or revenue margin. However, third-party revenue from trivago is
included in revenue used to calculate total revenue margin.
During the three and six months ended June 30, 2020 , gross bookings decreased
90% and 64%, respectively, compared to the same periods in 2019, resulting from
the impacts of the COVID-19 pandemic.
In January 2020 , gross bookings growth was positive, as COVID-19 modestly
impacted results, with the virus largely limited to the Asia Pacific region. In
February 2020 , gross bookings declined year-over-year as the virus spread,
particularly into Europe by later in the month. During March 2020 , with COVID-19
becoming a global pandemic, including significantly impacting North America , our
largest region, cancellations exceeded new bookings, and total gross bookings
were negative for the month.
In April 2020 , as COVID-19 spread globally, cancellations exceeded new bookings,
and, as a result, total gross bookings were negative for the month.
Subsequently, as the virus was contained to varying degrees in certain countries
and certain travel restrictions were lifted, the decline in new bookings slowed
and cancellation rates moderated. Gross bookings turned positive in May 2020 and
the year-over-year decline moderated further in June 2020 , led by growth at
Vrbo, Expedia Group's alternative accommodation business.
Revenue margin for the three months ended June 30, 2020 was higher than the
prior period due in part to the significant lodging cancellations, which reduced
gross bookings, creating an unusual mix of bookings and revenue in the quarter.
Current period revenue margins are not indicative of our future expectations.
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Results of Operations
Revenue
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Revenue by Segment
Retail $ 463 $ 2,333 (80 )% $ 2,045 $ 4,234 (52 )%
B2B 68 657 (90 )% 553 1,213 (54 )%
trivago (Third-party
revenue) 15 163 (91 )% 118 315 (63 )%
Corporate
(Bodybuilding.com) 20 - N/A 59 - N/A
Total revenue $ 566 $ 3,153 (82 )% $ 2,775 $ 5,762 (52 )%
Revenue decreased 82% and 52% for the three and six months ended June 30, 2020 ,
compared to the same periods in 2019. Revenue grew for both January and February
2020 before significantly declining year-over-year in March 2020 . In the second
quarter of 2020, revenue declined significantly year-over-year in both April and
May 2020 , and the decline moderated in June 2020 due to the improved trends in
the lodging business.
Three months ended June 30,
Six months ended
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Revenue by Service Type
Lodging $ 487 $ 2,204 (78 )% $ 2,029 $ 3,893 (48 )%
Air (70 ) 228 N/A 39 476 (92 )%
Advertising and media(1) 25 284 (91 )% 228 549 (58 )%
Other 124 437 (72 )% 479 844 (43 )%
Total revenue $ 566 $ 3,153 (82 )% $ 2,775 $ 5,762 (52 )%
____________________________
(1) Includes third-party revenue from trivago as well as our transaction-based
websites.
Lodging revenue decreased 78% and 48% for the three and six months endedJune 30, 2020 , compared to the same periods in 2019, on an 81% and 51% decrease in room nights stayed in the respective periods, partially offset by a 15% and 6% increase in revenue per room night in the respective periods. Air revenue, which is recognized when booked net of an estimate of cancellations, was negative in the second quarter of 2020 due to several revenue offsets that exceed new booked revenue in the quarter. The negative impacts to revenue included significantly elevated cancellations, which were higher than estimated cancellations of previous period bookings, higher than previously anticipated cash refunds to customers for certain cancellations, as well as a reduction to previously estimated and recognized volume-based revenues due to lower ticket volumes. Air tickets sold declined 85%, in the second quarter of 2020, reflecting the adverse impact of COVID-19 on demand for air travel. Air revenue declined 92% for the six months endedJune 30, 2020 , compared to the same period in 2019, reflecting the adverse impact of COVID-19 on air travel. Advertising and media revenue decreased 91% and 58% for the three and six months endedJune 30, 2020 , compared to the same periods in 2019, due to declines at trivago and Expedia Group Media Solutions. All other revenue, which includes car rental, insurance, destination services, fee revenue related to our corporate travel business andBodybuilding.com (during the period of our ownership ofJuly 2019 toMay 2020 ), decreased 72% and 43% for the three and six months endedJune 30, 2020 , compared to the same periods in 2019. The decline in all other revenue was more modest than the decrease in total revenue mainly due to the inorganic benefit related toBodybuilding.com . 36
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In addition to the above segment and product revenue discussion, our revenue by business model is as follows:
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Revenue by Business
Model
Merchant $ 368 $ 1,758 (79 )% $ 1,708 $ 3,193 (47 )%
Agency 105 1,047 (90 )% 667 1,889 (65 )%
Advertising, media and
other 93 348 (73 )% 400 680 (41 )%
Total revenue $ 566 $ 3,153 (82 )% $ 2,775 $ 5,762 (52 )%
Merchant revenue decreased for the three and six months ended June 30, 2020 ,
compared to the same periods in 2019, primarily due to the decrease in merchant
hotel revenue driven by a decrease in room nights stayed, partially offset by an
increase in Vrbo merchant alternative accommodations revenue.
Agency revenue decreased for the three and six months ended June 30, 2020 ,
compared to the same periods in 2019, primarily due to the decline in agency
hotel and air as well as Vrbo agency alternative accommodations revenue.
Advertising, media and other decreased for the three and six months ended
June 30, 2020 , compared to the same periods in 2019, primarily due to declines
in advertising revenue, partially offset by the inorganic impact of
Bodybuilding.com .
Cost of Revenue
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Direct costs $ 254 $ 345 (26 )% $ 722 $ 680 6 %
Personnel and overhead 135 155 (13 )% 296 310 (5 )%
Total cost of revenue $ 389 $ 500 (22 )% $ 1,018 $ 990 3 %
% of revenue 68.8 % 15.9 % 36.7 % 17.2 %
Cost of revenue primarily consists of direct costs to support our customer
operations, including our customer support and telesales as well as fees to air
ticket fulfillment vendors; credit card processing, including merchant fees,
fraud and chargebacks; and other costs, primarily including data center and
cloud costs to support our websites, supplier operations, destination supply,
certain transactional level taxes, costs related to Bodybuilding.com as well as
related personnel and overhead costs, including stock-based compensation.
Cost of revenue decreased $111 million during the three months ended June 30,
2020 , compared to the same period in 2019, primarily due to a decline in
merchant fees resulting from lower transaction volumes as well as a decrease in
personnel costs, partially offset by the an inorganic impact related to
Bodybuilding.com and an increase in bad debt reserves related to future
collection risk from the impact of COVID-19.
Cost of revenue increased $28 million during the six months ended June 30, 2020 ,
compared to the same period in 2019, primarily due to an increase in bad debt
expense, an inorganic impact related to the Bodybuilding.com acquisition and
higher cloud expenses, partially offset by a decrease in merchant fees resulting
from lower volumes and a decrease in personnel costs.
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Selling and Marketing
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Direct costs $ 95 $ 1,382 (93
)%
201 261 (23 )% 452 521 (13 )%
Total selling and marketing $ 296 $ 1,643 (82 )% $ 1,506 $ 3,164 (52 )%
% of revenue 52.2 % 52.1 % 54.3 % 54.9 %
Selling and marketing expense primarily relates to direct costs, including
traffic generation costs from search engines and internet portals, television,
radio and print spending, private label and affiliate program commissions,
public relations and other costs. The remainder of the expense relates to
indirect costs, including personnel and related overhead in our various brands
and global supply organization, as well as stock-based compensation costs.
Selling and marketing expenses decreased $1.3 billion and $1.7 billion during
the three and six months ended June 30, 2020 , compared to the same periods in
2019, primarily due to a decrease in direct costs driven by a significant
reduction in marketing spend in March 2020 and continuing into the second
quarter of 2020 related to the impact on travel demand from COVID-19, as well as
lower personnel costs.
Technology and Content
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Personnel and overhead $ 186 $ 235 (21 )% $ 405 $ 463 (12 )%
Other 69 69 1 % 158 138 15 %
Total technology and
content $ 255 $ 304 (16 )% $ 563 $ 601 (6 )%
% of revenue 45.2 % 9.6 % 20.3 % 10.4 %
Technology and content expense includes product development and content expense,
as well as information technology costs to support our infrastructure,
back-office applications and overall monitoring and security of our networks,
and is principally comprised of personnel and overhead, including stock-based
compensation, as well as other costs including cloud expense and licensing and
maintenance expense.
Technology and content expense decreased $49 million and $38 million during the
three and six months ended June 30, 2020 , compared to the same periods in 2019,
primarily reflecting lower personnel costs. The decrease in the year-to-date
period was partially offset by higher software license costs.
General and Administrative
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Personnel and overhead $ 113 $ 148 (23 )% $ 246 $ 286 (14 )%
Professional fees and
other 39 57 (33 )% 93 103 (10 )%
Total general and
administrative $ 152 $ 205 (26 )% $ 339 $ 389 (13 )%
% of revenue 26.8 % 6.5 % 12.2 % 6.7 %
General and administrative expense consists primarily of personnel-related
costs, including our executive leadership, finance, legal and human resource
functions and related stock-based compensation as well as fees for external
professional services including legal, tax and accounting.
General and administrative expense decreased $53 million and $50 million during
the three and six months ended June 30, 2020 , compared to the same periods in
2019, mainly driven by lower personnel costs, professional fees and lower
stock-based compensation.
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Depreciation and Amortization
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Depreciation $ 191 $ 176 9 % $ 376 $ 352 7 %
Amortization of
intangible assets 41 52 (21 )% 85 104 (18 )%
Total depreciation and
amortization $ 232 $ 228 2 % $ 461 $ 456 1 %
Depreciation increased $15 million and $24 million during the three and six
months ended June 30, 2020 , compared to the same periods in 2019, due to
depreciation related to our new headquarters and higher internal-use software
and website development depreciation, partially offset by lower data center
depreciation. Amortization of intangible assets decreased $11 million and $19
million during the three and six months ended June 30, 2020 , compared to the
same periods in 2019 primarily due to the completion of amortization related to
certain intangible assets.
Impairment of Goodwill and Intangible Assets
During three months ended March 31 2020, as a result of the significant negative
impact related to the COVID-19, which has had a severe effect on the entire
global travel industry, we concluded that sufficient indicators existed to
require us to perform an interim quantitative assessment of goodwill and
long-lived assets. As a result, we recognized goodwill impairment charges of
$765 million and intangible asset impairment charges of $121 million . In
addition, during the three months ended June 30, 2020 , we recognized goodwill
impairment charges of $20 million and intangible asset impairment charges of $10
million related to a recent decision to streamline operations for a smaller
brand within our Retail segment. See Note 3 - Fair Value Measurements in the
notes to the consolidated financial statements for further information.
Legal Reserves, Occupancy Tax and Other
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)Legal reserves, occupancy tax and other $ 8 $ 4 75 %$ (13 ) $ 14 N/A % of revenue 1.3 % 0.1 % (0.5 )% 0.2 % Legal reserves, occupancy tax and other consists of changes in our reserves for court decisions and the potential and final settlement of issues related to hotel occupancy and other taxes, expenses recognized related to monies paid in advance of occupancy and other tax proceedings ("pay-to-play") as well as certain other legal reserves. During the six months endedJune 30, 2020 , we recorded a$25 million gain in relation to a legal settlement, which was partially offset by changes in our reserve related to hotel occupancy and other taxes. During the three and six months endedJune 30, 2019 , we received a$10 million refund of prepaid pay-to-play amounts from theState of Hawaii in connection with the general excise tax litigation resulting in a corresponding benefit during the period, which nets down increases in reserves for other matters. Restructuring and Related Reorganization Charges In lateFebruary 2020 , we committed to restructuring actions intended to simplify our businesses and improve operational efficiencies, which have resulted in headcount reductions, and, during the second quarter of 2020, the Company has continued to implement actions beyond our initial commitments. As a result, we recognized$53 million and$128 million in restructuring and related reorganization charges during the three and six months endedJune 30, 2020 . Based on current plans, which are subject to change, we expect total reorganization charges in the remainder of 2020 and into 2021 of approximately$60 million . However, we continue to actively evaluate additional cost reduction efforts and should we make decisions in future periods to take further actions we will incur additional reorganization charges. We also engaged in certain smaller scale restructure actions in 2019 to centralize and migrate certain operational functions and systems, for which we recognized$4 million and$14 million in restructuring and related reorganization charges during the three and six months endedJune 30, 2019 , which were primarily related to severance and benefits. 39
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Operating Income (Loss)
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Operating income (loss) $ (849 ) $ 265 N/A $ (2,143 ) $ 134 N/A
% of revenue (149.9 )% 8.4 % (77.3 )% 2.3 %
During the three and six months ended June 30, 2020 , we had operating losses of
$849 million and $2.1 billion , compared to operating income of $265 million and
$134 million for the same periods in 2019, primarily due to declining revenue in
the current year periods resulting from the COVID-19 pandemic as well as the
intangible impairment charges mentioned above.
Adjusted EBITDA by Segment
Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
($ in millions) ($ in millions)
Retail $ (203 ) $ 548 N/A $ (181 ) $ 743 N/A
B2B (128 ) 130 N/A (102 ) 202 N/A
trivago (16 ) 20 N/A (17 ) 44 N/A
Unallocated overhead
costs (Corporate) (1) (89 ) (130 ) (31 )% (212 ) (245 ) (13 )%
Total Adjusted EBITDA
(2) $ (436 ) $ 568 N/A $ (512 ) $ 744 N/A
____________________________
(1) Includes immaterial operating results of
acquisition on
(2) Adjusted EBITDA is a non-GAAP measure. See "Definition and Reconciliation of
Adjusted EBITDA" below for more information.
Adjusted EBITDA is our primary segment operating metric. See Note 10 - Segment Information in the notes to the consolidated financial statements for additional information on intersegment transactions, unallocated overhead costs and for a reconciliation of Adjusted EBITDA by segment to net income (loss) attributable toExpedia Group, Inc. for the periods presented above. Our Retail, B2B and trivago segment Adjusted EBITDA all declined during the three and six months endedJune 30, 2020 , compared to the same periods in 2019, resulting from impacts of the COVID-19 pandemic as revenue decreased for the current year period, partially offset by a decline in direct sales and marketing expense. Unallocated overhead costs decreased$41 million and$33 million during the three and six months endedJune 30, 2020 , compared to the same periods in 2019, primarily due to lower general and administrative expenses. Interest Income and Expense Three months ended June 30, Six months ended June 30, 2020 2019 % Change 2020 2019 % Change ($ in millions) ($ in millions)
Interest income $ 3 $ 17 (78 )% $ 13 $ 28 (52 )% Interest expense (95 ) (39 ) 142 % (145 ) (80 ) 81 % Interest income decreased for the three and six months endedJune 30, 2020 , compared to the same periods in 2019, as a result of lower rates of return. Interest expense increased for the three and six months endedJune 30, 2020 , compared to the same periods in 2019, as a result of additional interest on the$1.25 billion senior unsecured notes issued inSeptember 2019 , the$2.75 billion senior unsecured notes issued inMay 2020 as well our$1.9 billion draw on our revolving credit facility inMarch 2020 . 40
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Other, Net
Other, net is comprised of the following:
Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
($ inmillions)
Foreign exchange rate gains (losses), net $ (3 ) $ 2 $ 42$ (12 ) Gains (losses) on minority equity investments, net (7 ) (10 ) (195 ) 12 Other (2 ) - (4 ) 12 Total other, net $ (12 ) $ (8 )$ (157 ) $ 12 During the six months endedJune 30, 2020 , losses on minority equity investments, net included$134 million of impairment losses related to a minority investment as well as$60 million of mark-to-market losses related to our publicly traded marketable equity investment, Despegar. See Note 3 - Fair Value Measurements in the notes to the consolidated financial statements for further information. Provision for Income Taxes Three months ended June 30, Six months ended June 30, 2020 2019 % Change 2020 2019 % Change ($ in millions) ($ in millions)
Provision for income taxes $ (213 ) $ 48 N/A
$ (295 ) $ 7 N/A Effective tax rate 22.3 % 20.4 % 12.1 % 7.2 % We determine our provision for income taxes for interim periods using an estimate of our annual effective tax rate. We record any changes affecting the estimated annual tax rate in the interim period in which the change occurs, including discrete tax items. For the three months endedJune 30, 2020 , the effective tax rate was a 22.3% benefit on a pre-tax loss, compared to a 20.4% expense on a pre-tax income for the three months endedJune 30, 2019 . The change in the effective tax rate was primarily due to discrete tax benefits in the prior year period. For the six months endedJune 30, 2020 , the effective tax rate was a 12.1% benefit on pre-tax loss, compared to 7.2% expense on pre-tax income for the six months endedJune 30, 2019 . The decrease in the effective tax rate was primarily driven by the nondeductible impairment charges and a valuation allowance principally related to unrealized capital losses in the first quarter of 2020. We are subject to taxation inthe United States and foreign jurisdictions. Our income tax filings are regularly examined by federal, state and foreign tax authorities. We filed a protest with the Internal Revenue Service ("IRS") for our 2011 to 2013 tax years and our case has been forwarded to appeals. We are under examination by theIRS for our 2014 to 2016 tax years. During the fourth quarter of 2019, theIRS issued final adjustments related to transfer pricing with our foreign subsidiaries for our 2011 to 2013 tax years. The proposed adjustments would increase ourU.S. taxable income by$696 million , which would result in federal tax of approximately$244 million , subject to interest. We do not agree with the proposed adjustments and formally protested theIRS position. Subsequent years remain open to examination by theIRS . We do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. OnMarch 27, 2020 ,President Trump signed into law the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which, along with earlier issuedIRS guidance, provides for deferral of certain taxes. The CARES Act, among other things, also contains numerous provisions which may benefit the Company. We continue to assess the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued. Definition and Reconciliation of Adjusted EBITDA We report Adjusted EBITDA as a supplemental measure toU.S. generally accepted accounting principles ("GAAP"). Adjusted EBITDA is among the primary metrics by which management evaluates the performance of the business and on which internal budgets are based. Management believes that investors should have access to the same set of tools that management uses to analyze our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP. Adjusted EBITDA has certain 41
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limitations in that it does not take into account the impact of certain expenses to our consolidated statements of operations. We endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the most directly comparable GAAP measure and a description of the reconciling items and adjustments to derive the non-GAAP measure. Adjusted EBITDA also excludes certain items related to transactional tax matters, which may ultimately be settled in cash, and we urge investors to review the detailed disclosure regarding these matters included above, in the Legal Proceedings section, as well as the notes to the financial statements. The non-GAAP financial measure used by the Company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. Adjusted EBITDA is defined as net income (loss) attributable toExpedia Group adjusted for (1) net income (loss) attributable to non-controlling interests; (2) provision for income taxes; (3) total other expenses, net; (4) stock-based compensation expense, including compensation expense related to certain subsidiary equity plans; (5) acquisition-related impacts, including (i) amortization of intangible assets and goodwill and intangible asset impairment, (ii) gains (losses) recognized on changes in the value of contingent consideration arrangements, if any, and (iii) upfront consideration paid to settle employee compensation plans of the acquiree, if any; (6) certain other items, including restructuring; (7) items included in legal reserves, occupancy tax and other; (8) that portion of gains (losses) on revenue hedging activities that are included in other, net that relate to revenue recognized in the period; and (9) depreciation. The above items are excluded from our Adjusted EBITDA measure because these items are noncash in nature, or because the amount and timing of these items is unpredictable, not driven by core operating results and renders comparisons with prior periods and competitors less meaningful. We believe Adjusted EBITDA is a useful measure for analysts and investors to evaluate our future on-going performance as this measure allows a more meaningful comparison of our performance and projected cash earnings with our historical results from prior periods and to the results of our competitors. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole and our individual business segments. In addition, we believe that by excluding certain items, such as stock-based compensation and acquisition-related impacts, Adjusted EBITDA corresponds more closely to the cash operating income generated from our business and allows investors to gain an understanding of the factors and trends affecting the ongoing cash earnings capabilities of our business, from which capital investments are made and debt is serviced. The reconciliation of net income (loss) attributable toExpedia Group, Inc. to Adjusted EBITDA is as follows: Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 (In
millions)
Net income (loss) attributable to Expedia Group, Inc. $ (736 )$ 183 $ (2,037 ) $ 80 Net income (loss) attributable to non-controlling interests (4 ) 4 (100 ) 7 Provision for income taxes (213 ) 48 (295 ) 7 Total other expense, net 104 30 289 40 Operating income (loss) (849 ) 265 (2,143 ) 134 Gain (loss) on revenue hedges related to revenue recognized 36 8 30 11 Restructuring and related reorganization charges 53 4 128 14 Legal reserves, occupancy tax and other 8 4 (13 ) 14 Stock-based compensation 54 59 109 115 Depreciation and amortization 232 228 461 456 Impairment of goodwill 20 - 785 - Impairment of intangible assets 10 - 131 - Adjusted EBITDA $ (436 )$ 568 $ (512 )$ 744 Financial Position, Liquidity and Capital Resources Our principal sources of liquidity are typically cash flows generated from operations, cash available under our revolving credit facility as well as our cash and cash equivalents and short-term investment balances, which were$5.5 billion and$3.8 billion atJune 30, 2020 andDecember 31, 2019 . As ofJune 30, 2020 , the total cash and cash equivalents and short-term investments held outsidethe United States was$861 million ($602 million in wholly-owned foreign subsidiaries and$259 million in majority-owned subsidiaries). Managing our balance sheet prudently and maintaining appropriate liquidity are high priorities during the current COVID-19 pandemic. In order to best position the Company to navigate our temporary working capital changes and depressed 42
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revenue, we have taken a number of actions to bolster our liquidity and preserve financial flexibility, including: • Suspension of Share Repurchases. We have not repurchased any shares since
our earnings call on
repurchases.
• Suspension of Quarterly Dividends. We do not expect to declare quarterly
dividends on our common stock, at least until the current economic and
operating environment improves.
• Credit Facility Draw. On
borrowing
revolving credit facility bore interest at 2.55% as of
proceeds from the draw are available to be used for general corporate
purposes, including working capital. This existing revolving credit
facility was subsequently amended in May 2020 as discussed below.
• Private Equity Investment . On April 23, 2020 , we entered into an
investment agreement with
in a private placement of shares of a newly created series of preferred
stock and warrants to purchase our common stock. The transaction was
completed on May 5, 2020 .
• Senior Notes Issuance. On
unsecured 6.250% senior notes that are due in
and
Notes", and, together with the 6.25% Notes, the "6.25% and 7.0% Notes").
The 7.0% notes have certain redemption provisions starting with the second
anniversary of the issuance. The 6.25% and 7.0 % Notes were issued at a
price of 100% of the aggregate principal amount. Interest is payable
semi-annually in arrears in May and November of each year, beginning
November 1, 2020 . We expect to use the net proceeds of this offering forgeneral corporate purposes, which may include, but are not limited to, the
repayment or redemption of our 5.95% senior notes due 2020.
OnJuly 14, 2020 , we privately placed$500 million of unsecured 3.600% senior notes dueDecember 2023 (the "3.6% Notes") and$750 million of unsecured 4.625% senior notes dueAugust 2027 (the "4.625% Notes" and, together with the 3.6% Notes, the "3.6% and 4.625% Notes"). The 3.6% Notes were issued at a price of 99.922% of the aggregate principal amount. Interest is payable on the 3.6% Notes semi-annually in arrears in June and December of each year, beginningDecember 15, 2020 . The 4.625% Notes were issued at a price of 99.997% of the aggregate principal amount. Interest is payable on the 4.625% Notes semi-annually in arrears in February and August of each year, beginningFebruary 1, 2021 . We expect to use the net proceeds to redeem outstanding shares of its 9.5% Series A Preferred Stock afterMay 5, 2021 , when the redemption premium is scheduled to decrease. Depending on business, liquidity and other trends or conditions, however, we may elect to use all or part of the proceeds for other general corporate purposes, which may include repaying, prepaying, redeeming or repurchasing other indebtedness in lieu of or pending such redemption. • Credit Facility Amendment. In connection with the issuance of the Notes
and private placement transaction, on
restatement agreement, which amends and restates our existing revolving
credit facility (as amended and restated, the "Amended Credit Facility")
to, among other things, provide additional flexibility under pliable
covenant provisions.
Our credit ratings are periodically reviewed by rating agencies. As ofJune 30, 2020 , Moody's rating was Baa3 with an outlook of "negative," S&P's rating was BBB- with an outlook of "negative" and Fitch's rating was BBB- with an outlook of "negative." TheApril 2020 rating agency downgrades were in connection with the severe disruption to global travel caused by the COVID-19 pandemic. Changes in our operating results, cash flows, financial position, capital structure, financial policy or capital allocations to share repurchase, dividends, investments and acquisitions could impact the ratings assigned by the various rating agencies. Should our credit ratings be adjusted downward, we may incur higher costs to borrow and/or limited access to capital markets and interest rates on the 6.25% and 7.0% Notes issued inMay 2020 as well as on the 3.6% and 4.625% issued inJuly 2020 will increase, which could have a material impact on our financial condition and results of operations. As ofJune 30, 2020 , we were in compliance with the covenants and conditions in our revolving credit facility and outstanding debt, which was comprised of$750 million in registered senior unsecured notes due inAugust 2020 that bear interest at 5.95%,$500 million in registered senior unsecured notes due inAugust 2024 that bear interest at 4.5%,Euro 650 million of registered senior unsecured notes due inJune 2022 that bear interest at 2.5%,$750 million of registered senior unsecured notes due inFebruary 2026 that bear interest at 5.0%,$1 billion of registered senior unsecured notes due inFebruary 2028 that bear interest at 3.8%,$1.25 billion in registered senior unsecured notes due inFebruary 2030 that bear interest at 3.25%,$2 billion of registered senior unsecured notes due inMay 2025 that bear interest at 6.25% and$750 million of registered senior unsecured notes due inMay 2025 that bear interest at 7.0%. Under the merchant model, we receive cash from travelers at the time of booking and we record these amounts on our consolidated balance sheets as deferred merchant bookings. We pay our airline suppliers related to these merchant model 43
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bookings generally within a few weeks after completing the transaction. For most other merchant bookings, which is primarily our merchant lodging business, we generally pay after the travelers' use and, in some cases, subsequent billing from the hotel suppliers. Therefore, generally we receive cash from the traveler prior to paying our supplier, and this operating cycle represents a working capital source of cash to us. Typically, the seasonal fluctuations in our merchant hotel bookings have affected the timing of our annual cash flows. Generally, during the first half of the year, hotel bookings have traditionally exceeded stays, resulting in much higher cash flow related to working capital. During the second half of the year, this pattern typically reverses and cash flows are typically negative. With the impacts of the COVID-19 pandemic, including the high degree of cancellations and customer refunds and the lower new bookings in the merchant business model, these seasonal influences and the working capital source of cash to us has been significantly disrupted resulting in the Company experiencing unfavorable working capital trends and material negative cash flow in the first half of 2020. The full duration and total impact of COVID-19, and how the recovery will unfold, remains difficult to predict. We expect cash flow to remain negative until the decline in new merchant bookings improves further with cancellations either remaining stable or moderating further. Prior to COVID-19, we embarked on an ambitious cost reduction initiative to simplify the organization and increase efficiency. In response to COVID-19,Expedia Group has taken several additional actions to further reduce costs to help mitigate the financial impact from COVID-19 and continue to improve our long-term cost structure. In addition, certain capital expenditures have been deferred, including temporarily halting construction on several real estate projects, and we continue to evaluate opportunities to defer other capital expenditures that are not critical to our operations. After temporarily halting construction on our new headquarters during initial quarantine order, we have restarted construction. We expect to spend approximately$900 million in total for the project. Of the total, approximately$680 million was spent between 2016 and 2019, and approximately$115 million was spent during the first half of 2020. Due to the delays related to COVID-19, we now expect the project to be complete in the first half of 2021. Our cash flows are as follows: Six months ended June 30, 2020 2019 $ Change (In millions) Cash provided by (used in): Operating activities$ (2,630 ) $ 3,287 $ (5,917 ) Investing activities (341 ) (1,166 ) 825 Financing activities 5,333 34 5,299 Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents (93 )
20 (113 )
For the six months endedJune 30, 2020 , net cash used in operating activities was$2.6 billion compared to cash provided by operations of$3.3 billion for the six months endedJune 30, 2019 with the change due to a significant use of cash for working capital changes in the current year compared to a prior year cash benefit from working capital driven by the COVID-19 pandemic as well as a decline operating income after adjusting for impacts of depreciation, amortization and impairments. The largest driver of the swing in working capital relates to a significant use of cash for deferred merchant bookings as refunds for cancelled bookings exceeded new bookings compared to an increase from deferred merchant bookings in the prior year period. For the six months endedJune 30, 2020 cash used by investing activities was$341 million compared to cash used in investing activities of$1,166 million for the six months endedJune 30, 2019 . The change was due to net sales and maturities of investments of$76 million during the current year period compared to net purchases of investments of$609 million in the prior year. For the six months endedJune 30, 2020 , cash provided by financing activities primarily included$2.7 billion of net proceeds from the issuance of the 6.25% and 7.0% Notes issued inMay 2020 ,$1.9 billion of proceeds from our revolving credit facility draw,$1.1 billion of net proceeds from our private equity investment as well as$96 million of proceeds from the exercise of options and employee stock purchase plans. These sources of cash were partially offset by cash paid to acquire shares of$414 million , including the repurchased shares in the first quarter of 2020 and treasury stock activity related to the vesting of equity instruments, and cash dividend payments of$65 million . For the six months endedJune 30, 2019 , cash provided by financing activities primarily included$156 million of proceeds from the exercise of options and employee stock purchase plans, partially offset by cash dividend payments of$95 million and treasury stock activity related to the vesting of equity instruments of$29 million . 44
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Table of Contents
During the first six months of 2020 and 2019, the Executive Committee, acting on
behalf of the Board of Directors, declared and we paid the following common
stock dividends:
Dividend Total Amount
Declaration Date Per Share Record Date (in millions) Payment Date
Six Months Ended June 30, 2020
February 13, 2020 $ 0.34 March 10, 2020 $ 48 March 26, 2020
Six Months Ended June 30, 2019
February 6, 2019 0.32 March 7, 2019 47 March 27, 2019
May 1, 2019 0.32 May 23, 2019 48 June 13, 2019
During the second quarter of 2020, we paid $17 million (or $14.02 per share of
Series A Preferred Stock) of dividends on the Series A Preferred Stock. The
Company does not expect to make future quarterly dividend payments on our common
stock, at least until the current economic and operating environment improves.
Future declarations of dividends are subject to final determination by our Board
of Directors.
Foreign exchange rate changes resulted in a decrease of our cash and restricted
cash balances denominated in foreign currency during the six months ended
June 30, 2020 of $93 million reflecting a net depreciation in foreign currencies
relative to the U.S. dollar during the period. Foreign exchange rate changes
resulted in an increase of our cash and restricted cash balances denominated in
foreign currency during the six months ended June 30, 2019 of $20 million
reflecting a net appreciation in foreign currencies during the period and higher
foreign-denominated cash balances.
In our opinion, our liquidity position provides sufficient capital resources to
meet our foreseeable cash needs. There can be no assurance, however, that the
cost or availability of future borrowings, including refinancings, if any, will
be available on terms acceptable to us.
Summarized Financial Information for Guarantors and the Issuer of Guaranteed
Securities
Summarized financial information of Expedia Group, Inc. (the "Parent") and our
subsidiaries that are guarantors of our debt facility and instruments (the
"Guarantor Subsidiaries") is shown below on a combined basis as the "Obligor
Group ." The debt facility and instruments are guaranteed by certain of our
wholly-owned domestic subsidiaries and rank equally in right of payment with all
of our existing and future unsecured and unsubordinated obligations. The
guarantees are full, unconditional, joint and several with the exception of
certain customary automatic subsidiary release provisions. In this summarized
financial information of the Obligor Group , all intercompany balances and
transactions between the Parent and Guarantor Subsidiaries have been eliminated
and all information excludes subsidiaries that are not issuers or guarantors of
our debt facility and instruments, including earnings from and investments in
these entities.
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