Good day, and welcome to the Expedia Group, Inc. Fourth Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Senno, Vice President of Investor Relations. Please go ahead.

Michael Senno - Vice President, Investor Relations

Good afternoon and welcome to Expedia Group's Financial Results Conference Call for the Fourth Quarter and Full Year ended December 31, 2019. I'm pleased to be joined on the call today by our Chairman, Barry Diller; our Vice Chairman, Peter Kern; and acting CFO, Eric Hart.

The following discussion, including responses to your questions, reflect management's views as of today, February 13, 2020, only. We do not undertake any obligation to update or revise this information. As always, some of the statements made on today's call are forward-looking, typically preceded by words such as we expect, we believe, we anticipate, we are optimistic or confident 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'll 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 to revenue, selling and marketing expense, general and administrative expense, and technology and content expense, exclude stock-based compensation and depreciation expense. And all comparisons on this call will be against our results for the comparable period of 2018.

A reconciliation of adjusted EBITDA guidance to the closest corresponding GAAP measure is not provided because we are unable to predict the ultimate outcome of certain significant items without unreasonable effort. These items include, but are not limited to, foreign exchange, returns on investment spending and acquisition-related or 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 Barry.

Barry Diller - Chairman and Senior Executive

Thank you, Michael. I haven't been on one of these analyst calls in, I don't know, endless amount of time. So I'm probably a bit raggy, but I won't ask your indulgence. I'll just kind of plunge in.

Since December 4, which is when we made the management change, Peter Kern and I, not a day has gone by that we have not been engaged in Expedia business. And during this period of time - and so I mean having been Chairman of Expedia for, I don't know, I think almost 20 years or so, I thought I knew a lot about the company. But there's nothing like being on the ground, and we've been on the ground. And I've gotten to know the leaders of the businesses, and I'm definitely impressed. I believe in the future of Expedia as do my colleagues, emphatically.

We bought in the last couple of months, 634 million of our stock, which is more than we've ever bought in an entire year. And we're not going to end that process now. But what we've really done is we've taken, as immediate steps as we can, to refocus the company on the day-to-day operations of - and the execution for what the company is engaged in every day.

Last year, we spent probably nine months of the year on this massive reorganization. We're contemplating changing 350, I think, of 500 jobs. It was this vastly complicated process that froze us. Management at the same time didn't really have a clear path how to grow the company. It just kind of a top-down commandment to deliver x earnings. And that misled a lot of people into actions that kind of made sense for a quarter of a day, and the rest of the day the results of kind of this top-down pressure without understanding how to actually execute and simplify the business and give it clarity. We've somewhat become a kind of consultant-led and wildly complex business.

I said and I think sclerotic and bloated. And I'll give you one anecdote that kind of rang in my ears, that I've heard, I don't know, I guess, 1.5 months or 2 months ago, kind of out there in Seattle, that at Amazon, the whole concept of work and life balance - that at Amazon it was all work and no life, and then Expedia was all life and no work. Now that's an enormous exaggeration. We've got wonderful people in the business. This is not damning our employees. But for several years, we really lost clarity and discipline.

So we're changing a great deal. We're stopping this too large complexity. We're simplifying our strategy. We're stopping doing dumb things and starting to do what we think are good things. So from doing that dumb to doing this smart, here are a few examples. From wasteful activities that weren't core to our business, to actually driving sustained growth. From every brand working in silos around the world to one strategy on marketing and the geographies across all of our brands. From our reliance on Google and Metasearch, to aggressively moving to grow our own direct business and have loyal relationships with our customers. The separate teams and data that's dispersed all over the place to one platform driving the entire company.

From an air business we basically took for granted as just another line of business, to actually prioritizing it, energizing it as a true competitive differentiator. And from chasing all these grand goals to focusing on day-to-day execution and making that customer experience great. So we're in. We're energized, we're enthusiastic. And from now on, I hope, I think, you'll see the effect of that and the excellent people of Expedia and what we can all accomplish together.

So with that, Mr. Kern, my colleague, my partner in this process, is going to say a few things.

Peter M. Kern - Vice Chairman

Thanks, Barry, and good afternoon, everybody. Let me start by reiterating what Barry said. I think we've learned a ton in the last two months. We've seen some great people and great things. And we've seen a fair bit of wasted energy and calories going at things that may not have promised - may not get us to the promised land. And certainly we have not learned and been agile enough and willing to say no to things and willing to acknowledge failure when it happens. I think we are getting about the business of that and being highly disciplined. And I think that is working its way through the organization, and it's just frankly a terrific feeling.

And to get into a few specifics, I wanted to start by just covering guidance a little more closely. There's sort of three components to how we built our way to this broad guidance approach. One is the core business, the base business, if you will, with the new disciplines we put in with some attention to wasted marketing spend and a few other areas. We believe the core itself will accelerate as against 2019. It will be somewhat back-end loaded, but it will accelerate. On top of that, as we said in the press release, we are going after $300 million to $500 million of incremental savings, and that is across the waterfront. We are looking at every part of the business, whether it be tech licenses and procurement to geography, et cetera. And we think there's a lot of money there, the timing of which, however, is uncertain as it lays out through the course of this year. But we do believe by the end of the year, we will be at that run rate level.

On the other hand, of course there is the coronavirus, a terrible thing for humanity and also a not very good thing for our business. And that is highly tough to predict. We have a pretty good line of sight on its impact on the first quarter. But in terms of its duration and the depth of its impact, it is hard to predict. So taking all that uncertainty, running a number of scenarios on the virus based on historic patterns, we have generally taken all that together and said notwithstanding all those uncertainties, we believe and are confident we will get into the double digits. Of course, if the virus becomes something completely unexpected, who knows, but we feel confident about that.

Moving on to the operations and digging slightly deeper on a few of the themes Barry was talking about. This idea of bringing our brands together and out of silos and collaborating in a whole new way is super important to the future success of our business. I would add to that, that the best example and the cleanest example today is probably geographical rationalization. We have many brands all over the world. They are - different ones are strong in different markets. We have historically taken a brand-by-brand approach, and now we are taking a market-by-market approach. And we will push the best brands in every market, and we may take some brands out of certain markets. And we will do whatever is smart, both on an operational basis and on a marketing basis to advance the greater good.

On the marketing side, as an extension of that more generally, we are looking to rationalize some of our spend. We are looking at common measurement, common tools. These silos didn't always look at marketing the same way. They didn't always attack performance marketing with the same metrics. We are unifying those things so that we have better ways of measurement and therefore better ways to collaborate and cooperate for the greatest return.

On Vrbo, which I know everybody has followed closely, the trends remained fairly muted through the fourth quarter. The replatforming last year and the rebranding were definitely a distraction, slightly different than the distractions Barry more broadly talked about. But now the team is keenly refocused on fundamentals driving core operations, and they too are beneficiary of our geographic rationalization as they have looked at where they had really inefficient spend to drive region geographies that did not make sense. And candidly now that we have the capacity to drive their supply through our other brands, we don't need to have Vrbo in every market in the same way because alternative accommodations can be provided to the customer base through our other brands.

Expedia Partner Solutions continues to be a very strong story for us. We believe in the momentum there. We believe in the opportunity to fill in gaps in demand whether they're geographical or just customer based. And we believe that EPS can add to that momentum by capitalizing on all the things we are now going to be able to do with our core technology platform. So a lot of exciting stuff going on there. It will give EPS greater configurability and improve customer experience for their end business partners. We recently also brought Egencia together with EPS. We - under a business we're calling Expedia Business Services. It's simply an effort on our part to further simplify, get advantages between businesses. These businesses are not the same. They don't - same end users, but they have a number of common practices from which they can learn and help one another, including sales and customer management and a variety of other business-to-business techniques.

Our platform is perhaps the biggest story. It, in part, was to blame for this reorganization to get us to this place, but it is in many ways, our biggest opportunity. They shared technology across our businesses in bringing together groups. Barry mentioned the data and AI group. I am really excited about what's possible here. It's early days, but for the first time, we are bringing together all the data in the company into one place where our best data scientists and AI and machine learning engineers can use that data to learn faster and build solutions across the company that will help us improve the customer experience, and obviously our monetization. The teams in our marketplace have also come together and are working to better match supply with demand, which we believe, again, enhances the customer experience and enhances monetization.

We've also brought together a group that will monitor cloud and work on the cloud spend. I know this has been an interesting area for everybody as we have migrated to the cloud. It's been a bumpy and expensive road. We are getting to the end of that road. But importantly, we are getting to a point where we need to and have to optimize our cloud spend. And we now have a centralized group that will look at cloud spend across the company and work to optimize that and get the most out of it and ultimately, get the leverage we've all been looking for there.

But overall, the common themes here, as we've said, are really about simplification, precision, really bringing an efficient operating mind to everything we do. We will be aggressive about that. And we plan to get a lot out of that as we push through the year. And we, of course, we'll keep you apprised as we get through that.

I'd just like to point out before I pass it on to Eric, that the year will be noisy, not only because of the virus, but because the first half of the year, we are getting the benefit or detriment of a slow back half of 2019. We are also spending into our strength areas where we believe we can drive growth in the back half of the year, rationalizing out some of our less efficient spend areas. So there will be noise between revenue and EBITDA. But as I said and Barry said, we believe strongly we will be in double-digit EBITDA territory this year. We're excited about the future, and I think we'll have terrific momentum going into '21 if we can pull all of this off.

And with that, I will pass it on to Eric.

Eric Hart - Chief Strategy Officer & Acting CFO

Thanks, Peter. Before diving into our results, I want to lay out three main areas we're focused on in 2020: one, driving margin expansion unit economics; two, positioning the company to move faster and invest back into key areas to accelerate top line growth; and three, delivering attractive shareholder returns.

Turning to the fourth quarter results. While gross booking and revenue trends moderated, disciplined marketing spend and overhead cost containment resulted in a 1% increase in adjusted EBITDA. And for the full year, we came in slightly ahead of our revised guidance range. The slowdown in gross bookings largely related to our air business as we started to comp the enterprise deals at Expedia Partner Solutions, which drives significant air volume for us.

Lodging revenue grew 9% in Q4 on 11% stayed room night growth, and a 2% decrease in revenue per room night, largely related to growth in our loyalty program. Domestic room night growth remained strong, accelerating to 10% as we continued to gain share in the U.S. on the back of strong trends and direct channels. Cost of revenue was up 19% for the quarter. The majority of the growth related to the increase in cloud costs, inorganic impact of bodybuilding.com, and processing fees related to the ramp-up in Vrbo's transition to the Expedia payment platform.

By leveraging Expedia's payment platform, we expect Vrbo to see improved conversion and unit economics as it benefits in several areas, including fraud detection, order completion rates and flexibility on payment options. Also as a reminder, bodybuilding.com is essentially neutral to adjusted EBITDA.

Free cash flow grew 46% for full year 2019. Normalized for Vrbo's payments transition, free cash flow grew approximately in line with adjusted EBITDA to nearly $1.1 billion. Based on Vrbo's current payment structure, the funds are held at a third party and are restricted. On a normalized basis, we expect solid free cash flow growth. And going forward with declining capital intensity and favorable working capital dynamics, we are well positioned to drive healthy free cash flow growth going forward.

On the balance sheet in September, we placed $1.25 billion and 3.25% 10-year notes. We will use a portion of that to redeem $750 million notes that mature in August 2020. Our prudent approach to managing the balance sheet is unchanged, and we are committed to operating within our investment-grade credit rating.

In terms of capital allocation, given our conviction and Expedia's growth prospects, we repurchased 5.8 million shares for $634 million from early December through this month. We believe our stock remains undervalued and plan to use our free cash flow and cash position to continue actively repurchasing shares.

Now turning to 2020. As Peter mentioned, we will continue to drive efficiency on direct marketing spend. That will lead to some trade-offs and modestly slower unit growth through most of the year, but we believe focusing on higher-quality unit growth and on driving our direct business will lead to a stronger, more sustainable top and bottom line growth over time.

On cost of sales, we expect growth to remain elevated in the next few quarters due to the same factors we saw in Q4. Our cost of sales outlook also incorporates higher digital service taxes as we currently expect legislation to take effect in additional countries this year. This remains a dynamic issue and we are closely monitoring developments. In terms of the quarterly phasing, it will take time to work through the carryover effects from the trends of the past two quarters, so we do expect the majority of our profit growth to come in the second half of 2020.

Now looking at Q1 specifically we expect adjusted EBITDA to be down substantially. Vrbo losses will be significantly higher due to the usual seasonal trends as we invest to drive growth that will come later in the year. Cloud costs continue to ramp and will have some carryover effect from the operational headwinds that we experienced late in 2019. Each of these is magnified in the first quarter as a reminder, given our seasonally low adjusted EBITDA base.

In addition, the coronavirus outbreak is adding further pressure on the top and bottom line in Q1. Based on the current trends, we expect approximately $30 million to $40 million impact to adjusted EBITDA in Q1, and we expect some impact beyond Q1 and 2020 as well. But the exact amount will depend on how long it takes for travel trends to normalize.

Looking below the line, we started to recognize depreciation related to our new headquarters in Q4 and forecast approximately $30 million of incremental depreciation related to the building for the full year in 2020, which will account for the majority of our depreciation growth this year.

In closing, we are excited. We are executing on a clear formula that we believe can create significant value, positioning the company for consistent healthy revenue growth with leverage down the P&L to drive even faster profit growth. And with strong cash conversion, we expect to generate substantial free cash flow to fund capital returns through shareholder repurchases and our dividend. We believe executing that formula will create significant shareholder value over time.

Operator, we're ready for our first question.

Question & Answers

Operator

Thank you. [Operator Instructions] We'll take our first question from Eric Sheridan of UBS.

Eric Sheridan - UBS Investment Bank - Analyst

Thanks so much for taking the question. Maybe one big picture and one modeling question, if I can. Barry, Peter, I wanted to know, maybe we can get a little more granularity on your vision where online travel is going over the next couple of years? And then filling that back to how you're thinking about the exposure to those big trends and whether Expedia has the right assets or not, how we should be thinking about aligning the assets within Expedia against your longer-term vision where online travel's going?

And then on the model, with the $300 million to $500 million of cost savings, is there a way to think through what that might mean on a division-by-division basis or where you see the biggest areas where you could gain leverage in your model year-on-year from cost cutting? Thanks so much.

Barry Diller - Chairman and Senior Executive

Thanks. Well, look, online travel started 20 some odd years ago. That was the easiest area to colonize when the Internet came along. There's no indication that it is going to do anything but continue to gain adoption. There's been a lot of adoption. It will continue to grow. There's nothing in its path. There are existential issues that have been raised. Of course, one is Google. And the other, I just heard the other day, it's an existential issue, which is that we're losing share to hotels.

I'll start with hotels first because this was in a - I think it was an analyst who's - it must be Terry who I think has been consistently wrong about - actually if you had paid attention to him at my other companies, IAC, you would have given up, I don't know, an enormous billions of dollars. But anyway, I don't want to do that. It's pointless. The point is that he said that hotels were gaining strength, gaining share, et cetera. So here are the stats. For the business - a whole business, the OTA share of online hotel bookings has basically remained steady at about 38%, I don't know, for many, many years. But the OTAs continue to gain share in the overall market as this shift goes - continues to go online. For instance from 2015, it's gone from 17% to 19%. And at Expedia, our total room nights continue to grow, 11.2% in '19 versus 10.5%. So I would say, yes, there are some direct channels that people like to use. But overwhelmingly, people use online agents to book hotels and are going to continue to do so.

As far as Google is concerned, it's a much bigger topic. I've been quite vocal about this that Google has certainly a monopoly share all over the world. And it does what monopoly shares get you to do, which is extend its business in every direction they can. Now so long as they don't use unfair practices, I've got no problem with that. But when they compete against their advertisers, and we are one of their largest advertisers, we have Booking.com within their top five of advertisers. They're using their tactics to squeeze these entities that are delivering real service is - among many things, antisocial. I mean I think it's bad practice. I think the government, which is getting engaged in this, whether it's at the state level or the federal level, which I absolutely believe in the next period, I don't think I ask anybody to come and save us from our mistakes. And by the way, we've made our own mistakes in our SEO practices, which we are fast correcting.

I told the senior management of Google exactly what we feel about this and have implored upon them to basically stop actually taking away the profits from businesses that are probably one of their main contributors to their advertising revenue. And I don't know whether that will have much effect, but I've been very straightforward about it. And I think that there will be - look, when businesses get to this size, they absolutely have to have regulation, sensible regulation. I'm not talking about breakups, I'm not talking about any crazy stuff. But I do believe that will happen.

But we are making our own efforts. We're driving direct relationships with consumers. Our download apps, we have about 400 million of them. And their growth, like a force, is actually up 40% this year. We're going to drive more downloads. We're going to do everything we can to diversify our traffic to more direct arenas. We also have in EPS, our business-to-business business, which does not depend upon Google. And that's growing terrifically, and we're going to push that too. So sorry, I went on a bit. But as I said, I haven't done this in a while. Peter, do you want to say anything?

Peter M. Kern - Vice Chairman

Yes. I would just add to that a couple of things. One, around the question of cost savings by division, that's something we really can't identify yet and won't identify. There's a lot of shared costs and a lot of - we're doing more to make the businesses collaborate. So I think it's really not helpful even for you, I think, long term, to think of it on a by-division basis. I think we're looking across shared opportunities, shared inefficiencies and where we can get out of things that don't make sense and eliminate friction. And so I think it's something we're looking for anywhere it exists, and it's not a division-by-division question.

I think also just to add to Barry's point at the end about EPS, and you asked whether we have the right assets to compete. I think actually we have terrific assets to compete. We've got brands that are strong in certain places and not in others. We've got - and vice versa. We've got to do a better job of differentiating our brands and the customer proposition that our brands provide. But we have a lot of ways to serve a lot of different demand. And we're using EPS to fill in the gaps and serve geographies and certain demand pools that we can't get at directly. So I think we have a very attractive way to go eat as much gross bookings as are out there in the world, and that's what we're going to try to do as efficiently as we can.

Operator

Next question..

Eric Sheridan - UBS Investment Bank - Analyst

Thanks for the color.

Peter M. Kern - Vice Chairman

Yep. Thank you.

Operator

Our next question from Mark Mahaney of RBC.

Mark Mahaney - RBC Capital Markets - Analyst

Okay. Thank you. Barry, it's nice to have you back on the call. I think the question I want to focus on is Vrbo…

Barry Diller - Chairman and Senior Executive

So count your blessings it's not going to go on that long.

Mark Mahaney - RBC Capital Markets - Analyst

The - I think I want to ask you about is a high level, the growth in the lodging business between alternative accommodations in Vrbo and the growth in core kind of hotel industry as you've kind of - looking at it from a 30,000-foot level for a while and you're now getting back into the weeds, where are you most - where do you think the growth is most interesting for the industry and for Expedia in particular? And how confident are you that if the - it does seem from where we sit that the growth is superior in the alternative accommodations. Is Vrbo where you need it to be? It seems like you've gone through like a branding strategy part a, branding part b over the last two years. Is Vrbo where you need it to be in terms of operations, in terms of marketing, et cetera, in order to attack that alternative accommodations market? Thanks, Barry.

Barry Diller - Chairman and Senior Executive

No. Vrbo is not where it needs to be, but it is a lot different than it was, I'd say, a few months ago. It has a new leader who we have confidence in, and he's - he's also on the ground. And look, what happened to Vrbo is it was as I think all of you know, a collection of a bunch of disparate businesses, brands all over the world, basically, that were brought together and put under the name of - dumb name, called HomeAway, and - which meant nothing to no one. We did have one business called Vrbo that did mean something to people. And so called VRBO [Phonetic], which we've tried and I think - or at the very beginning of branding Vrbo. And whether I don't know if we went too fast, actually, or too slow on this, but we did this absolute change Day 1 to Day 2, from everything to then one thing Vrbo. That caused us to lose a ton of SEO traffic. And given the trends in SEO, anyway, that was hardly - it was not well executed, I mean. So we've been now cleaning all of that up. And I think it's - I don't know, somebody here, one of my colleagues may comment on the progress of that to date.

But look, Vrbo is in a great - actually somewhat stand-alone category. It's not kind of rooms that in the attic that people rent you and stand next to you while you go to the bathroom. It is basically accommodations, a family of homes, large apartments, things like that in resort areas and other places. It's got great product. We just need to market it better than we have, but it's got - I think, it's got - certainly, it's got large opportunity for us. And we've also just plugged it into Expedia recently. That took six months of somewhat disarray. But now all of Vrbo, I think, is available on Expedia, is that true? Or…

Peter M. Kern - Vice Chairman

Yes. It might be. Almost all.

Barry Diller - Chairman and Senior Executive

And - but that was a difficult thing. As far as the category, I - look, I'm very impressed with what Airbnb has done over time. I wouldn't call it a revolution, but it has opened up - not only has it opened up inventory that didn't exist, but it's also brought people into traveling that couldn't afford it before or didn't want to mess with big, stiff hotels. And also people who wanted a different experience, older people who were lonely and didn't want to go to some cold place. It's done a great job. But basically - but by the way, you put its inventory as against the hotel inventory, they have kind of different audience. I'm not - I don't - I'm not a big believer that they're going to emerge. So I think there's a very healthy standard hotel business, and there's going to be this business. We're participants in it. So that's as much as I got to say about that.

Mark Mahaney - RBC Capital Markets - Analyst

Okay. Thank you, Barry.

Barry Diller - Chairman and Senior Executive

You are welcome, Mark.

Operator

Thank you. We'll take our next question from Justin Post, Bank of America Merrill Lynch.

Justin Post - Bank of America Merrill Lynch - Analyst

Great. Thank you. Barry, maybe you can give us an update on CEO outlook and how you're thinking about that role going forward? And then, secondly, I thought it was interesting, in your prepared remarks talked about improved revenue growth. Is that just as you take out the fact this year, easier comps next year? Or do you see some real drivers for improvement in revenue growth as you look out to the second half and next year? Thank you.

Barry Diller - Chairman and Senior Executive

Okay. We're not doing a CEO search. I don't know that we'll ever do an actual search. I'm not a big believer in quote searches. I think they usually turn out the usual and obvious suspects. And when you only know somebody from interviewing and recommendations, I'd say your failure rate is usually - certainly, it's above 50%, in my experience, other peoples' for sure. Anyway, we're not doing that.

I'll say this. First of all, Peter and I are completely engaged. We are operating the company. We are responsible for the company, and we are - definitely, it is our responsibility. That is not to say that during the calendar year '20, a Chief Executive will emerge from this process. But right now, look, time will tell. But what happened is, amazingly, once we had to make this management changes, unfortunate management change - and I've said before, it was not to demean Mark Okerstrom or the CFO, but it really was a real difference in what we actually thought, and that happens. So there's no damning here.

But from that moment, I got incredibly energized about this because I actually began, other than superficially, as the Chairman. I began to really understand the levers of this business and what the opportunities were and what the condition of the company was. Now I thought, relatively quickly, we could turn. So we're at it. And it's not going to last beyond '20, but that's where we are for now. As far as drivers for revenue growth, Mr. Kern?

Peter M. Kern - Vice Chairman

Sure. So Justin, I think the way we look at the revenue drivers, it's not a comp issue. We want to drive healthy - as much healthy revenue growth as we can find. In the near term, we are in a period where we are coming off a weaker back half of '19, so that's a dulling effect. And we are being very clinical about as I mentioned, geographies and marketing spend and trying to get rid of empty calories. It's not a bad thing to drive performance marketing and to drive throughput when you're good at getting repeat customers and you're good at turning them into being great customers. But when you're not as good as you could be, it's not the most efficient use of capital. So we want to get better at all of those things. And so in the near term, I think you'll see some pressure on the top line from those movements, which we think are very healthy. But out of that, we believe we will find much better ways to invest our capital geographically, by brand. We think we will do a better job of repeat business and direct customer experience because we will be better at the customer experience side of the business. We have huge leverage that we can't even really calculate that will come out of the platform technology group, whether it be the data and AI side, the management and yield side, the cloud - there's just a number of places where we can just do a lot better. And so we believe all of those things will drive conversion, will drive better customer experience, will drive stickier customer relationships, will allow us to invest more aggressively, and all of those things will accelerate revenue going forward.

Justin Post - Bank of America Merrill Lynch - Analyst

Great. thank you.

Operator

And we'll take our next question from Justin Patterson of Raymond James.

Justin Patterson - Raymond James - Analyst

Great. Thank you very much. Barry, you called out the consumer experience and your initial remarks, that and loyalty. What are the key things you need to do to get right to improve the customer experience and build loyalty? Thanks so much.

Barry Diller - Chairman and Senior Executive

Well, look, one of the things I think we suffered from is - so would you believe, we lost attention on the product itself. What the consumers get, what do they see? How do they interact with it? What is the user experience, et cetera, et cetera? How do we not only ease their path to travel, but how do we really add value? And so one of the things that has come out of this is now a absolute focus on what that experience is. That's where a lot of the organization and investment is going to come from. And by the way, it's investment in focus and time. It's not investment really in cost. But making that - look, OTAs have not had, in my opinion, enough differentiation. And differentiation, meaning that Expedia, which has the benefit, the only one that's got the benefit. I mean I've gotten those would - poured money into it. It has the benefit of being able to get you hotels, air, cars, experiences. Anything you need in travel is in one place at Expedia. It is not - certainly, it has not been as efficient as Booking.com in hotels, particularly in Western Europe, though in the United States it's been fine. But that's a solitary diet, and that's fine for some people.

But if you come to Expedia, increasingly, you're going to have a product that is actually going to not only ease the process, but it's going to add value to the process because we're the only ones who can really package. We're the only ones who can efficiently put things together and magically offer people a lower price and probably a better experience. So it's - anyway, I think I kind of said it.

Justin Post - Bank of America Merrill Lynch - Analyst

On loyalty?

Barry Diller - Chairman and Senior Executive

Peter will talk about.

Peter M. Kern - Vice Chairman

Okay. I'll talk about loyalty, but I was going to add that…

Barry Diller - Chairman and Senior Executive

Oh, I'm sorry.

Peter M. Kern - Vice Chairman

No, that's okay. The - I would say that the industry is suffered or benefited from a high degree of commercialization around everything they did. It was an aggressive, how can we turn a customer into a consumer, into a buying a hotel room? And that goes for all OTAs. And I think ironically to tie a few of these questions together, that Google's pressure and the pressure on performance marketing puts the pressure back on all of us to make it really about the consumer experience. You can't just cash your ticket every time and not have the consumer feel like they're having a great experience and they have a reason to come back. So it's on us to do. There's a lot of work streams going on against that. It covers a lot of activities, including what you serve up to the customer and how well you match content and supply with them, all the way through to how you take care of customer service calls and everything else.

So we are on that path, and we are aggressively focused on that. And we may have Google and the rest to thank for driving us there, but we should have been there, and we will be there. As for loyalty, it's an important part of our consumer proposition from Hotels.com. Again, we are going to strive to better differentiate our brands. Barry took you through the end-to-end opportunity that brand Expedia offers. Hotels.com is another thing, Vrbo again another thing. So we are going to differentiate those and drive to the biggest pools of demand. We can take them all, and hopefully, they will work symbiotically and to the greater benefit.

Justin Patterson - Raymond James - Analyst

Great.

Operator

Thank you. We'll take our next question from Brian Nowak of Morgan Stanley.

Brian Nowak - Morgan Stanley - Analyst

Thank for taking my question. Barry, it's good to hear your energy. I guess I wanted to sort of ask about your view over the next two to three years for the company. So understanding that the near term, focusing more on higher-quality room night growth, rationalizing some ad spend, really focusing on direct, it's going to pressure near-term room nights. But talk to us about how you think about the keys to really driving sustained faster room night growth in '21, '22 and beyond after you sort of get through the important steps you're going to take in 2020? Thanks.

Barry Diller - Chairman and Senior Executive

Continued execution and focus, and not resting, not being very patient. That is one of the things that we're going to have to imbue in this organization. And again - look, I think the outlook is good. It's got some challenges. I'm less worried now, having gotten into it, about these existential challenges than I was before I got into it. Those are what they are. But Expedia has, with its brands, with differentiation, within - by the way, increased, hopefully more interesting forms of loyalty, rewards and things like that, Expedia is going to be able to, which I think it's going to be able to do as against its competitors, I think we're going to be able to build up loyalty. The whole concept of all of this was you paid a lot for your first experience with an OTA with what you did in advertising, but you were hoping for the second. From now on, it's going to be the second, third and fourth for us because what we're - because all we're really - which I'd say driving ourselves down to is this kind of pragmatic focus on the - basically, the varieties, which is what is the experience?

We are - we have chased the tail. The tail was pretty good to start off. Online travel started off with a boom because it was an obvious better experience. It's kind of raw. But we have simply chased it with - look, working on conversion, working on all those things is good. But the reason that I think two, three, five, 10 years from today, Expedia can continue to actually beat its competition is because of what we're focusing on now. That would give us - we won't have to do - we don't have to look for other pools. There's enough there for us. If we just get back to pragmatic focus on streamlining our business, simplifying our business. As I said before, we were a bloated organization. I mean not because people were lazy or whatever, but over the years, just chasing the tail of growth and all that, we're just adding people, and people, and complexity, and all this stuff until, frankly, very few people could figure out what the hell they were supposed to do during the day.

So simplifying that has a great by-product of cutting our costs. Our costs were too high. And our costs are going to come down beyond this first level of $300 million to $500 million over the future. Because we are going to simplify. Simplifying lets us pay attention. If we pay attention, given the opportunity, I ain't worried about two or three years.

Brian Nowak - Morgan Stanley - Analyst

Thanks, Barry. Thanks.

Operator

Thank you. We'll take our next question from Deepak Mathivanan of Barclays.

Deepak Mathivanan - Barclays Bank PLC - Analyst

Thanks for taking the questions. So two quick ones from us. First, can you elaborate on the cost savings. You noted that the expected cost savings to reach $300 million, $500 million run rate. Should we assume this progression to be relatively linear? Just trying to understand how much is factored in the low double-digit EBITDA guidance. And then the second question about coronavirus. Is the impact currently largely contained to Asia Pacific? Or is there demand softness in other markets as well? Thank you.

Barry Diller - Chairman and Senior Executive

I'm just going to spout out something here on the virus thing. I think it's going much beyond it. I think people are worried. People are just saying - I mean, they're all over the place. New York City people are in buses and subways with masks on. I think there's been one case reported in New York. So I think this is a damper. How far this goes, I mean, a week ago, it was supposed to kind of be lessening. And yesterday, it again shot up in terms of the infected cases and I guess death. I mean do we have a pandemic? I don't know. I have to believe that now the activism of every country in the world on this is going to contain it quickly. Now by the way, that's a statement with no facts and no knowledge, so you can all toss it. But we don't truly know the extent of it. And it is going beyond Asia, and it will go beyond Asia.

Peter M. Kern - Vice Chairman

Yes. And Deepak, this is Peter. I would just - to your question of the timing and how to think about the expenses, I'm afraid we're not going to give you much satisfaction here. This is a work in progress across literally the entire company in all pockets of spend and all activities. And we are making progress on many, many fronts, but some will take time to germinate and some will be sooner. And you'll know as soon as we know, but we can't give you much color, except to say obviously as we take these things out and they stack up, they obviously get better as the quarters - they should - we should get more savings as the quarters go by. But how much and how volatile that number is, it's still pretty early to tell. So we're committed to getting through it in an orderly fashion in a way that helps the business and doesn't break something new. And we believe we can get through the lion's share of that by the end of the year and be kind of at our full run rate. But again, it's across so many things that it would be impossible to give you a schedule of that.

Barry Diller - Chairman and Senior Executive

I'll just add one more thing because I think it should be said, which is, this process of simplifying our business and lowering our cost has an effect, obviously on people. We have been in the process of going through this over the last, at least, month. I have never seen a process like this. I keep saying at my colleagues that are involved, how impressed I am with the thoughtfulness the deliberations that go on in every part, because this is not just saying, okay, there's one little piece of the company. Every one of our senior leaders has participated in this. And in a way, I almost feel like we should publish the process we've gone through because I've never - look, I have been around, and I have been through a lot of these processes. I've never seen one as thoughtfully and decently done as this and the plan for communications is - I mean I'm sure we'll make mistakes here or there, but it's just impressive anyway.

Operator

We'll take our next question from Lloyd Walmsley of Deutsche Bank.

Chris - Deutsche Bank - Analyst

Hi. Thanks. This is Chris on for Lloyd. How are you guys thinking about driving app downloads from here? It seems like you guys have gotten some good download growth. But should we be thinking about a rebuild of the app? Or spending to drive app downloads? Or expanding a loyalty program? Yes, just any color you can share beyond what you guys have shared so far. Thanks.

Peter M. Kern - Vice Chairman

Yes. Thanks for the question, Lloyd. I think the specifics are - take place on many fronts. This isn't a rebuild or anything else. In fact as you probably know as well as Barry and I, the company has been moving to PWA to drive mobile abilities across our brands. That trend solution has taken time. There's been some bumps in the road, but now all our biggest brands are there and - or nearly there. And I think that's a big opportunity for us to improve on that app experience. In fact, the app growth and app conversion has been showing signs of being better than the rest of the business. I attribute some of that to PWA and the experimentation people can do. We obviously - once we have it nailed, we've got to push into it, and push into it with marketing and push into it with getting our consumers there more, getting them to sign in more and all of those things. So it's across a whole waterfront. I think the biggest sea change is just our push to the company that this has to be our focus, and this has to be where we want to move people. We need to get them out of re-fishing for them in the performance channels and into having real relationships with us. So it's a holistic kind of approach, but it's taking place on the marketing side, on the product side, on the innovation side and everything else. And so I think we're going to push across all those things.

Barry Diller - Chairman and Senior Executive

Next question?

Operator

Thank you. We'll take our next question from Kevin Kopelman of Cowen and Company.

Kevin Kopelman - Cowen and Company - Analyst

Thank a lot. I had a question on SEO. Can you give us a better sense of what happened to SEO in the third quarter? Because externally looking at the revenue and ad trends, it's really hard to tell how big of an impact that was and what changed there? And on that, how big ballpark is Expedia's exposure to SEO? Thanks.

Eric Sheridan - UBS Investment Bank - Analyst

Yes. Well - this is Peter. I'll take the end of that, Kevin, which is we don't really disclose how big SEO is, and don't intend to, but it's still a significant part of the business and a good part of the business. We've been belaboring this, but clearly as we move to direct relationships and direct traffic with our customers, that is the single best way we can offset any declines that come from SEO. In terms of what happened in the third quarter, I think it was a compounding of a number of tactical things that Google did and we did not respond well to. Again, Barry mentioned in the very beginning, we were caught up in a rather large undertaking in terms of reorganization. And that took people's eyes off the ball, in our view. And we could have done better. We should have done better. We will do better. There are also some changes to auction - some auction dynamics in meta that we did not respond particularly well to.

So there are a number of things that were going on that we were not really on top of. SEO is one of them. But I think as you think about it, we expect SEO to be a continued headwind. Google, until someone stops them, is not going to stop doing what they've been doing. We've seen signs as early - as recently as last week of some changes that may have impact, and hopefully they will think better of it and create a fair marketplace. But we can only control what we can. We're working really hard to offset those headwinds in pure SEO activity as well as do everything we can around the rest of the business to make up for whatever we give up in SEO.

Barry Diller - Chairman and Senior Executive

SEO is not going to kill us, and SEO is not the future of our business. The trends have been - these trends began seven or eight years ago. We should have been more alert, obviously, to the continued consequence of this. As I said, I don't think we're going to be saved by some bell, by a government bell. I absolutely believe there will be regulation. But we are doing all the things that we intend to do to de-emphasize it. It's still a part. It's not a huge part, but it is a part of our business, but it ain't the future.

Michael Senno - Vice President, Investor Relations

Operator, we'll take our next question.

Kevin Kopelman - Cowen and Company - Analyst

Thanks Barry.

Operator

Thank you. We'll take our next question from…

Barry Diller - Chairman and Senior Executive

No. You can go ahead. What did you want to add? Or you would now…

Kevin Kopelman - Cowen and Company - Analyst

I just - I wanted to ask a - I appreciate that Barry. I just want to ask a follow-up on coronavirus. Everyone's asking us about it. What are you seeing? Obviously, you can't predict it, but what are you seeing quarter-to-date in the Asia Pacific business? And I appreciate the EBITDA guidance is very helpful, but just in terms of - how much is that decline?

Barry Diller - Chairman and Senior Executive

Our very good Eric Hart is going to respond.

Eric Hart - Chief Strategy Officer & Acting CFO

Yes. Hi, this is Eric Hart. So if you think about how it has affected the business over time, it started in mainland China domestic, then inbound/outbound. Then it started going through APAC. And then as we believe that it is impacting other areas of the business. We've broken down as best we can, looking at the fundamental underlying drivers for it and of the business. And what we see is in APAC itself, upwards of 50% plus. And obviously higher that as you get closer to an APAC to China that, that can get very much north of that. But then when you try to control for APAC and you look at North America and EMEA, it does appear that there is weakening of the business as well in those areas of the business. So overall concentration in APAC, obviously, is an issue for us. We do see that - we believe that is having some impact in other areas of the world as well. And then the $30 million to $40 million is what we're able to estimate based on the different scenarios that are…

Barry Diller - Chairman and Senior Executive

$30 million to $40 million.

Eric Hart - Chief Strategy Officer & Acting CFO

$30 million to $40 million.

Barry Diller - Chairman and Senior Executive

Yes. It - listen, it truly is an unknown. I know everybody's asking about it. Look, you've got to believe it's going to be contained. If it's not contained, by the way, the entire world is going to shut down. So all you can do is every day you'll read the news and react to it. I think anybody, as an investor, unless you think this is going to be the end of life as we know it, who cares? Believe me, I don't mean who cares that a lot of people are going to get sick and whatever. But really this is an exogenous event, will end. And frankly no one should count it. All we're trying to do is separate what we absolutely believe is the effect of the virus from our ongoing business, so we can prepare ourselves and make that ongoing business as strong as possible when this thing is over.

Kevin Kopelman - Cowen and Company - Analyst

Thanks.

Operator

Thank you. We'll take our next question from Jed Kelly of Oppenheimer.

Jed Kelly - Oppenheimer & Co. Inc. - Analyst

Great. Thanks for taking my question. Back to Vrbo it's primarily domestic and it seems like you're rationalizing your marketing outside the U.S. So does that have the most opportunity this year to inflect back to growth? And then as another question, as you think of driving more differentiation, more loyalty, do you ever think about getting more closer to the inventory and taking more inventory risk?

Peter M. Kern - Vice Chairman

So I think I'll start at the top there. I think Vrbo, yes, we're rationalizing some international spend. But that by no means, all international spend and ambition. And as I mentioned, now that Vrbo inventory is available on brand Expedia and actually went live partially in Hotels.com for the first time a few days ago, we have many ways to get that inventory into other markets that may be way more efficient than trying to build a brand in a place where we have no brand recognition. So there's lots of ways to look at that. I don't think we believe Vrbo is on a path to any greater inflection than any other of our businesses. All the businesses are working hard, and there's a lot of various drivers. So I wouldn't think of it that way, - but we do believe Vrbo will grow EBITDA and get back to growing top line. Again, as we lean into our stronger opportunities in the beginning of this year. And no, inventory risks? No. Not right now. We got plenty of other things to do before we get to figuring out whether we're going to take inventory risk.

Barry Diller - Chairman and Senior Executive

Operator we'll take our last question.

Operator

And sir, we have no further questions in queue.

Barry Diller - Chairman and Senior Executive

Well, good timing. Well, thank you all. Actually, I've said before, I'm really - I'm enjoying this process now. And I think so too is Mr. Kern, and I hope many of our executives are enjoying that, too. But nevertheless, we'll plow through and on. In any event, thank you for being with us, and we'll talk to you in a few months and update you with our progress. Good day.

Operator

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EXPEDIA GROUP INC

Q4 2019

Earnings Transcript

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