Expedia : Q4 2018 Transcript

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EDITED TRANSCRIPT

EXPE - Q4 2018 Expedia Group Inc Earnings Call

EVENT DATE/TIME: FEBRUARY 07, 2019 / 9:30PM GMT

OVERVIEW:

EXPE reported 4Q18 YoverY revenue growth of 10%.

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CORPORATE PARTICIPANTS

Alan R. PickerillExpedia Group, Inc. - Executive VP, CFO & TreasurerMark D. OkerstromExpedia Group, Inc. - President, CEO & DirectorMichael SennoExpedia Group, Inc. - VP of IR

CONFERENCE CALL PARTICIPANTS

Anthony Joseph DiClementeEvercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research AnalystBrian Thomas NowakMorgan Stanley, Research Division - Research Analyst

Deepak MathivananBarclays Bank PLC, Research Division - Research Analyst

Eric James SheridanUBS Investment Bank, Research Division - MD and Equity Research Internet AnalystJed KellyOppenheimer & Co. Inc., Research Division - Director and Senior Analyst

Justin PostBofA Merrill Lynch, Research Division - MD

Justin Tyler PattersonRaymond James & Associates, Inc., Research Division - Internet Analyst

Kevin Campbell KopelmanCowen and Company, LLC, Research Division - MD & Senior Research AnalystLloyd Wharton WalmsleyDeutsche Bank AG, Research Division - Research Analyst

Mark Stephen F. MahaneyRBC Capital Markets, LLC, Research Division - MD and AnalystNaved Ahmad KhanSunTrust Robinson Humphrey, Inc., Research Division - AnalystStephen D. JuCrédit Suisse AG, Research Division - Director

PRESENTATION

Operator

Good day, and welcome to the Expedia Group Q4 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Senno, Vice President of Investor Relations. Please go ahead, sir.

Michael Senno- Expedia Group, Inc. - VP of IR

Good afternoon, and welcome to Expedia Group's financial results conference call for the fourth quarter and full year ended December 31, 2018. I'm pleased to be joined on the call today by Mark Okerstrom, Expedia Group's CEO and President; and Alan Pickerill, our CFO.

The following discussion including responses to your questions reflects management's views as of today, February 7, 2019 only. We do not undertake any obligation to update or revise this information.

As always, some of the statements made on today's call are forward-looking, typically preceded by words such as we expect, we believe, we anticipate, we're optimistic that, or similar statements. Please refer to today's earnings release and the company's filings with the SEC for information about factors, which could cause our actual results to differ materially from these forward-looking statements.

You will find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release, which is posted on the company's Investor Relations website at ir.expediagroup.com, and I encourage you to periodically visit our IR website for other important content, including today's earnings release.

Unless otherwise stated, all references to cost of revenue, selling and marketing expense, general and administrative expense and technology and content expense excludes stock-based compensation and depreciation expense, and all comparisons on this call will be against our results for the comparable period of 2017.

Finally, a reconciliation of adjusted EBITDA guidance to the closest corresponding GAAP measure is not provided because we are unable to predict the ultimate outcome of certain significant items without unreasonable efforts. These items include, but are not limited to, foreign exchange, returns on investment spending and acquisition-related restructuring expenses. As such, the items that are excluded from our non-GAAP guidance are uncertain, depend on various factors and could have a material impact on GAAP results for the guidance period.

And with that, let me turn the call over to Mark.

Mark D. Okerstrom- Expedia Group, Inc. - President, CEO & Director

Thanks, Michael. We were pleased with our overall financial performance for 2018. Not only did we deliver excellent financial results that exceeded our expectations, but we also moved into execution mode on the transformational strategy that we laid out at the beginning of the year.

As part of that strategy, we articulated 3 key themes: being locally relevant on a global basis, being customer-centric and speeding up the pace of execution and innovation across our platform. We entered 2019 with solid operational and financial momentum and an organization more focused and aligned than ever before. I'm truly excited about the opportunities ahead as we have only just begun harnessing the true power and potential of our platform.

For 2018, full year gross bookings grew 13%, reaching nearly $100 billion. We increased stayed room nights 13% and revenue was up 12%. Our solid execution on marketing optimization led to even faster profit growth, with adjusted EBITDA increasing 15% and adjusted earnings per share up 35%.

We delivered these results while at the same time making strategic investments in several key initiatives, including our cloud migration and accelerated pace of supply acquisition. On that note, our team added approximately 200,000 new properties to our core lodging platform in 2018, roughly double the amount added in 2017.

We ended the year with over 1 million total properties, including over 370,000 HomeAway listings now integrated into our core platform. We continue to make solid progress on our priority markets. While we still have more work to do both on the supply and product side to be truly locally relevant for customers in these markets, we saw positive signs as we moved through the year.

We expect to build on that momentum as we head into 2019, and we remain confident that as we drive deeper supply coverage, deliver a more locally relevant product and layer in brand and other marketing efforts to increase awareness, we can accelerate both the top and bottom line growth in these markets over a multiyear period. This focused market approach is now our standard international expansion strategy, and we plan to continue investing in the normal course of business.

HomeAway posted healthy financial results for the full year, with revenue increasing 29% and adjusted EBITDA up a robust 43%. Total online bookable listings increased 24% in 2018 to over 1.8 million, including over 1 million instantly bookable listings, which we think will provide a nice boost to conversion over time.

Given the attractive growth prospects, we plan to keep investing significantly in this business in 2019. That includes additional performance and brand marketing for HomeAway and VRBO as well as laying the groundwork to pursue the significant urban and international opportunities that we believe can unlock the next leg of growth for the business. We remain focused on positioning HomeAway and Expedia Group to capitalize on the significant long-term opportunity in the alternative accommodations space, and we believe we have a long runway of healthy top and bottom line growth ahead.

Egencia delivered solid results in 2018, growing gross bookings 14%, revenue 16% and adjusted EBITDA 13%. The sales team continues to sign new business at a healthy pace, and we're investing in customer service and product to further differentiate Egencia's offering. We're optimistic we can continue to take share in the managed corporate travel space while delivering attractive profit growth over the long term.

trivago is making nice progress on adjusting its strategic focus, posting strong profits for the second consecutive quarter. The team is executing well on its shift to better balance revenue and profit growth. And as outlined on their call yesterday, we expect trivago to carry its operating momentum into 2019.

Overall, our team achieved a lot in 2018, making solid progress on our transformation while delivering excellent results. I'm impressed with the high level of execution we exhibited across the company, and I'm optimistic we can carry that into 2019 and beyond. The travel market is as competitive and as dynamic as ever, but the opportunity is large. And we're confident that by continuing to execute our strategy, we can deliver exceptional products and services to our customers and create value for our partners, resulting in share gains, healthy growth and attractive returns for our shareholders for a long time to come.

With that, I'll turn it over to Alan.

Alan R. Pickerill- Expedia Group, Inc. - Executive VP, CFO & Treasurer

Thanks, Mark. We finished the year with another strong quarter, growing gross bookings 11%, revenue 10% and adjusted EBITDA, 17%. Total lodging revenue grew 10% on stayed room night growth of 11%. Across our core OTA segment, growth in both lodging revenue and stayed room nights were essentially in line with Q3 as we continued to execute on appropriately balancing healthy, quality top line growth with profitability.

When analyzing room night growth, keep in mind that our focused international strategy involves building supply depth in key markets by pushing into secondary and tertiary destinations. As a result, we're adding smaller properties than we historically have, and alternative accommodations are a growing portion of our overall property mix. We expect that pattern to continue going forward, and therefore expect room night growth to be less correlated with property growth than in the past.

Based on what we've seen, we believe the increasing depth and breadth of our supply will drive better conversion and higher customer repeat rates, leading to improved marketing efficiency over time.

At HomeAway, gross bookings growth moderated to 15%. The deceleration was primarily due to slower international trends, headwinds in SEO and ADR growth continuing to normalize. HomeAway's revenue and stayed room nights each increased 20%.

Total advertising and media revenue increased 9% for the quarter. Our Media Solutions business continued to perform well, growing 28% in Q4, partially offset by declines at trivago.

Air revenue grew 18%, with tickets sold increasing 10% and revenue per ticket up 7%. We saw solid contributions from Brand Expedia and Egencia as well as some benefit from Expedia Partner Solutions' new partnership with Chase Ultimate Rewards. Similar to the prior few quarters, air revenue also included a modest benefit from the reclassification of distribution fees from contra revenue to cost of revenue. As a reminder, this change is neutral to profitability, and Q4 is the last quarter it impacts our results.

We continue to drive leverage in the overall P&L, delivering over 100 basis points of year-over-year adjusted EBITDA margin expansion in Q4. In the quarter, cost of revenue grew slightly slower than revenue. That includes continued impact from our cloud migration and the accounting change related to the reclassification of air distribution fees, which combined, contributed over 300 basis points to cost of revenue growth.

Total selling and marketing and direct selling and marketing expenses each increased 7%. Leverage on direct expenses was largely driven by the ongoing marketing rationalization efforts at trivago. Excluding trivago, direct selling and marketing expenses grew 14%. That was faster than the past few quarters due to increased spending at HomeAway and higher brand marketing investments across some of our core OTA brands.

Indirect selling and marketing growth decelerated in Q4 as we started to comp against the hiring ramp to support our supply initiative. Technology and content costs continued to deleverage, although growth came in a bit lower than expected at 16%. General and administrative expense growth further decelerated from the past few quarters, increasing 8%.

We also continued to leverage below the line in Q4, with depreciation expense up only 2% and net interest expense down year-over-year, while our adjusted tax rate came in at 24%. Those factors, along with a lower share count, led to strong adjusted earnings per share growth of 49%.

We expect adjusted EPS to grow faster than adjusted EBITDA again in 2019, as we continue to see leverage on our below-the-line items.

Excluding CapEx investments for our new headquarters, free cash flow grew 7% in 2018 to $1.3 billion. That came on top of 46% growth in free cash flow, excluding headquarters, in 2017. The shift in timing of a couple of significant payments benefited 2017 and negatively impacted 2018. Normalized for that timing shift, growth would have been more balanced across the 2 years and faster than adjusted EBITDA growth each year.

Our business continues to generate attractive free cash flow, and we see an opportunity to improve our free cash flow conversion in the coming years.

In terms of capital deployment, we returned nearly $1.1 billion of capital to our shareholders in 2018, primarily through share repurchases, along with our quarterly dividend. In total, we bought back 7.7 million shares for $903 million, our highest amount in any year since 2007. In addition, we deployed $186 million on acquisitions and strategic investments. Going forward, we intend to continue prudently balancing opportunistic M&A with returning capital to shareholders.

Turning to our financial expectations for 2019. We expect total adjusted EBITDA growth of 10% to 15%.

We expect the seasonality of our adjusted EBITDA growth to follow a similar pattern to 2018 with pressure on adjusted EBITDA in Q1 and the large majority of growth coming in the balance of the year. One factor to keep in mind is that Easter fully shifts into Q2 this year, creating a drag on consolidated first quarter stayed room nights, revenue and profit.

In addition, as a reminder, we invest in selling and marketing to drive bookings ahead of the busy travel season, with lodging revenue recognized at the time of the stay, which peaks in summer months. This trend will continue to be even more pronounced at HomeAway due to its longer booking windows, and we expect that to result in an increase in losses in Q1 for HomeAway this year compared to last.

For the full year at HomeAway, as Mark mentioned, we intend to continue investing back into the business, including brand and performance marketing to position HomeAway to capitalize on the significant long-term opportunity we see in alternative accommodations. We expect the increased investment levels to result in slower adjusted EBITDA growth for HomeAway in 2019, with the returns coming over time.

Turning to our expense expectations for 2019. We expect more significant deleverage in cost of sales compared to 2018. The key drivers are the increased investment in cloud, customer operations cost related to new deals at Expedia Partner Solutions and HomeAway's shift to become merchant of record on more of its transactions.

We also forecast tech and content expenses to deleverage due to higher cloud cost as well as continued investments in product enhancements and platform initiatives across the company.

In total, we currently expect cloud expenses to increase from $141 million in 2018 to around $250 million in 2019. Excluding cloud expenses, adjusted EBITDA growth would be approximately 400 basis points higher.

We project total selling and marketing expense to leverage again in 2019, mainly reflecting the cost rationalization efforts at trivago, which will have a bigger impact on the first half of the year. Excluding trivago, we will lap the marketing optimization benefits we recognized in 2018 as we move through the year.