Good afternoon. My name is Federica, and I'll be your conference operator today. At this time, I would like welcome everyone to the Expedia Group Second Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. [Operator Instructions]. Thank you. I will now like to turn the call over to Michael Senno, Vice President, Investor Relations and Treasurer. Please go ahead sir.

Thank you. Good afternoon. And welcome to Expedia Group’s financial results conference call for the second quarter ended June 30, 2020. I am pleased to be joined on the call today by our Vice Chairman and CEO, Peter Kern; and our CFO, Eric Hart. The following discussion including responses to your questions, reflect management’s views as of today, July 30th, 2020 only. We do not undertake any obligations 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 will find reconciliations of non-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. 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 all comparisons on this call will be against our results for the comparable period of 2019. Please note that depreciation expense is now reported in a separate line item and prior periods have been restated to reflect this change. And with that, let me turn the call over to Peter.

Thank you very much, Michael, and good afternoon, everyone. I hope everyone has been safe and sound during this difficult time. As we said in our release, second quarter was obviously a very challenging one for the travel industry and for us. But we were pleased to see generally speaking that after April, we had consistent growth out of the troughs, and May and June got considerably better. I would point out that we view this not simply as a positive for the business in the short term, because obviously our numbers remain very challenged relative to prior periods. But I think it speaks to humanity's demand and desire to travel. And then when they can, and when the opportunity avails itself and when they feel safe, and there are no restrictions, they all are really dying to travel, and we've seen that this summer. And I have every expectation that we'll continue to see that hopefully as the world opens up more. But we will have a bouncy recovery. There's no question. We've seen virus numbers go up in certain places. We've seen new restrictions come into certain geographies. And it appears like that will be the state of the union until things change scientifically. And so, we expect this not to be a linear recovery, obviously, and we expect some bumps in the road. Having said that, there's a lot of things there we can't control. And so, as I said in our last call, we are keenly focused on everything we can control. We're focused on helping our customers and suppliers obviously get through a challenging and complicated time. We're focused on our own cost structure and making sure we are being efficient. But more broadly, we're just focused on our internal functioning, our structure, our speed…

Thanks, Peter. And thank you for everyone for joining us well. As you can see our financial results this quarter are indicative of the severe impact COVID-19 has had on our business and also the rest of the travel industry as well. As Peter mentioned, we've been focusing our energy on what we can control. And coming into the year I discuss several priorities aimed at delivering margin expansion. And that includes resetting our fixed cost base, premium variable cost of revenue and driving marketing efficiency. The impact from COVID has made these priorities even more important for us. And I'm pleased with the progress our teams have already made across these areas. And I expect it will become increasingly evident in our P&L as our business recovers. Peter also noted, we are running ahead of our initial cost savings target. And we now expect to exceed $500 million on a run rate basis. Over the last several months as we've accelerated and deepened our work across our cost initiatives and identified additional opportunities across the board for those in cloud, real estate licensing, procurements, people related cost that push the expected savings higher. We're still working across these areas and continue to look for more potential opportunities as we drive efficiency and simplify how we operate the company. The progress to date is already evident in our overhead cost categories, which collectively declined 22% in Q2. About half of that year-on-year decline reflects savings achieved thus far from these costs initiatives. While temporary cost measures related to COVID-19 accounted for the rest. We expect that over the next few quarters, the temporary benefits will phase out, while the savings from our cost initiatives will increase. In addition to the progress on the cost savings initiatives, we're also making nice…

[Operator Instructions] And your first question comes from the line of Naved Khan with SunTrust.

Yes. Hi. Thanks for taking the question. I just have a few. Maybe just on Vrbo first. Is there enough supply available to you to fulfill demand as you look out in to the back half? Or is it mostly booked? And then, I have a follow-up.

Sure. Thanks for the question I would say, it's definitely not mostly booked. We have seen certain compression in a few markets. And in fact, you may have heard that the pricing has been higher as our suppliers have been able to get higher pricing as there's more demand in their markets. But there's very few markets where we have real issues with sufficient supply to satisfy demand. And certainly as you look out over the next several months and into the fall of Christmas season, there's no shortage of supply. This summer has gotten a little tighter again in a few spots. But by and large, there's ample of supply around the globe.

That's helpful. And then, maybe just on the performance of different GOs [ph], as you look back into the July trends. Anything to call out with respect to performance of Europe and Asia. And how that compares with the U.S. business?

Sure. I'll just say quickly and Eric can jump in. I think what we've seen, again, it's one of those things that rarely surprises you. It's kind of what you think it would be. The U.S. has been strong, and with the increase in viruses slowed a bit, Europe and Asia have been less strong, but slow and steady and kind of beginning to -- continuing to improve. We're seeing a few spots of virus issues in Europe. So never know and Latam has been a little bit more like the U.S., but it's quite small for us. So I would say, it's pretty much exactly what you think it would be based on what you're hearing about virus and openings, et cetera. And there's no real mystery inside of that anywhere. I don't know, Eric, if you want to add anything.

Yes. The only thing that I would add to it is that the story as we evolve over time, it's going to be a series of micro stories and intersections of different geographies. And just to give you a flavor of that. When you look at air, that ultimately if you just look at our overall number, you'd see an improvement from April through to June and then a slight weakening in July. But if you then split between the various geographies, North America and Latam look pretty similar, which will follow a very similar curve that I just mentioned, whereas EMEA and APAC really haven't recovered very well yet from an air perspective. If you then look at lodging then however, Its somewhat of a different story where North America and EMEA look the same. So they will follow a curve or April was down quite significantly, but has rebounded a bit through June and the order of magnitude mentioned previously. But whereas APAC and LATAM are. So its going to be a story of comfort on domestic travel. How much of a given market historically and in this environment has domestic versus International. How comfortable people are across lodging versus air? But hopefully that will give you a sense for the various curves across two major problems, major geographies and products

That's helpful. Thank you, Peter. Thank you, Eric.

Yes. And I would just add before we take another question. That on the Vrbo side, one interesting part is that we have seen historically when you get economic downturns, you often get more people come -- more supply coming into the market. So we do have a hope that we will see. And we have seen some early signs of more supply coming in to the market, so that should help alleviate any inventory issues as well.

Got it. Thanks.

And your next question comes from the line of Deepak Mathivanan.

Great. Thanks for taking the question, guys. Peter, I wanted to ask you a little bit of a big picture question. Given the trends that you have seen over the past few months, do you think there is a secular change in consumer behavior towards alternative accommodations in a more permanent way? Obviously, you have Vrbo. But where do you see incremental opportunity if this theme becomes sticky and significant for the whole travel industry? And then the second question is on the market share. You noted that you are willing to lose share gains in the near term on the performance marketing channels. How do you think about that shares specifically something where you would like it to sustain? And is there a level where you would like demand to get to before you become aggressive in the performance market channels? Thank you.

Sure, thanks. On the first question, I would say, I personally don't think there I noticed there's been a lot of comments out there from my peers and others about the future of travel. I don't think we've seen anything to suggest that people's travel behavior will materially change. I do think that to your question specific to Vrbo, we are getting a lot of people experimenting with and hopefully being very happy and satisfied with the alternative accommodation experience and in particular for us Vrbo's main emphasis on the whole home. So I think there may well be people out there who are not as familiar either with our brand or with the experience who are now getting to experience it and having very satisfying great trips. And I think that's a great opportunity for us to create long term customer stickiness and value. And as you may know, we've been working over the last couple years to get more and more of that alternative product available through our main OTA brands, still a work in progress, but we are making real inroads there as well. So I think it will continue to be a great alternative for travelers. But, again, I am not want to believe that anything about what we're going through will be permanent. I recall very well, people's commentaries about the future of travel after 911 and the future of New York City after 911, all of which turned out to be untrue. So I am a general optimist in this regard. I think, again, people have shown -- I think travels like water it finds its way. If I can't go international, I'll go domestic. If I don't want to fly, I'll drive. If I don't want to stay in a hotel, I'll stay…

Right. Thanks, Peter.

Yes. Thank you.

And your next question comes from the line of Jed Kelly with Oppenheimer & Company.

Great. Thanks for taking my question. Can you just talk about the flexibility in your brand on spending in the latter part of 4Q if hopefully, optimistic here that we get some positive data on the vaccine news and travel could be recovering, your flexibility on brand. And then just Vrbo, can you talk about -- are you benefiting on the shoulder seasons and fall bookings with people being able to work from home? And can you talk about the Vrbo booking window?

Sure. Thanks for the questions. I would say, on the Vrbo part, we are focusing on the new realities around working from home. We have been pushing a variety of campaigns around helping people with that idea, home work, home school, the importance of WiFi and kind of products like that in this changed world. And as many of you are probably experiencing the question of the school year and how kids will go back to school varies greatly across the U.S. latter on world. And so I think there will be kind of different and unique opportunities to capitalize on that. We are using some campaigns, testing something out. We do thing the fall will be different that it has historically been. We do think the Christmas season could well be different, whether it just longer or we have seen over the summer these extended booking windows where people are booking for longer periods of time as they just recap to somewhere different with their family for a month. And I think we'll see some trends like that. But its too early to tell what the fall, honestly, what the fall will really look like. And I think candidly that's because probably uncertainty in the world that people still don't know if their kids are physically going to go to school or not. Are they going to need to go into work or now, all of those things. So I think as we get some clarity on that, which of course is coming in the month of August. In a large part, I think we'll start to get better picture. As far as brands can goes, whilst the lot of tools to push our brands. Some of them are historically the classic linear television or that matter all the…

Thank you.

And your next question comes from the line of Kevin Kopelman.

Thank you. So question on the revenue trends. You noted that new bookings from June were down about 45% and it fell off a little in July. Can you help us translate that new bookings metric directional into what it would mean for revenue given some of the puts and takes there? Thanks.

I'll take that one. I mean, generally, I guess there's a couple of components that I would point to in there. Cancellations just going back in time and the impact of COVID, cancellations obviously spiked in the April and March time. There's a largely come back down to near but still elevated historical levels. I point that out, obviously that was a big driver, some volatility in our P&L. There is -- when you look at the ADRs and revenue rev per room night, the reason I'm pointing -- I'm pointing out a couple of different areas that maybe different than historical. So that there maybe some noise. On the ADR side, you saw that that go up or increased 1%. And that's 45% numbers that you mentioned -- that ADR is driven by Vrbo. ADR is higher because there's strong demand. We're mixing the Vrbo. But our -- that offsets double digit decreases in hotel. And then revenue per night has some of the similar impacts as well. So I would say that the P&L is going to be noisy. And I just gave you a few examples of how the amount of noise that has flowed through in Q2. So I would love to say that it's -- that whatever the range falls in July for the rest of the quarter will hit our P&L in the way that it has historically, or as we've seen in last year, if you will. But as Peter and I both mentioned, there is a bunch of noise. I think Q2 at least the latter part of Q2 probably gives us some indication. But it's going to be a bit noisy over the next few months. So I can't give you a definitive answer, if you will.

Got it. Thanks. That's helpful. And then if I could just ask one other question. Can you talk about what you're seeing in Europe? And to what extent has Europe travel been picking up? And is that having a meaningful impact for Expedia in terms of offsetting their kind of recent role on U.S.?

Yes. I was going say -- I would say Europe was a was a bit slower than the U.S. could pick up. I think we've mentioned that a number of different times during the fundraising process, et cetera, where the U.S. started rebounding earlier, particularly in lodging, particularly as Peter mentioned, and the intersection of domestic drive to and whole homes, whereas EMEA was slower. Now, We have seen EMEA on the lodging side, start recover a bit. It's just more of a methodical improvement over time. I mentioned earlier on air, air is challenged more so than hotel and all geographies. And I would say, what we've seen thus far in Europe is continues to be quite challenged. There's a different mix between how domestic and international in Europe versus the U.S. And even though in the U.S., air still declined, still quite low. In EMEA, you just got a high rate of international travel, and there's just a lot of uncertainty that that remains. So. Europe continues to be pretty tepid on the on the air side. So good signals in EMEA. Time will tell. Slow on the air side.

Thanks, Eric. Thanks, Peter.

Yep. Thanks, Kevin.

thank you.

Your next question comes from the line of Eric Sheridan with UBS. And your line is open.

Thank you so much for taking the question. Maybe one for each of you. Peter, just understanding the industry dynamic, with demand where it is, anything you're seeing interesting on the supply side of either more alternative accommodations being listed broadly on a global basis, or hotels more willing to work with the OTAs? Typically, if go back and look historically, those are periods of time where the OTAs tend to gain some share of supply when end demand has never been as low as this, but low generally. So I'm just curious what you might be seeing on the supply side as opposed to the demand side looking at the marketplace? And then, Eric, you made a point in the 8-K of the merchant liabilities starting to improve. Wanted to just get a check in on the balance sheet. How you guys are thinking about merchant liabilities is the drag? Has that stabilized? And how should we think about aligning the balance sheet against both your growth goals and your capital return potential goals over the medium to long term? Thanks so much.

Yes. Thank you very much. So I'll take the first one and say, it's a couple different buckets. I mentioned the opportunity we think there is around more supply coming into the Vrbo rental base. People are all looking for ways to monetize their assets. And we do believe and we have seen some early signs, nothing, not a tidal wave or anything but some early signs that there's opportunity there. And we do market to that audience, and we do try to build that side of the platform. So, that's ongoing. I think there's solid opportunity there. But it's relatively early days. And I think, again, again, you all have your own views about what the economy will look like coming out of this and all -- globally, et cetera, but we think there's opportunity there. As for the big players on the air and lodging side, look, our main goal is to get everybody back in business and drive as much business as we can to all those players. We are trying to be as collaborative as we can. But I would say, yes, there is by and large a willingness and openness to work together on new ideas, things that have been sitting on the shelf for a while that have been talked about but never moved on. I think there's some interesting things we can do with some of our lodging partners that we're looking at. There's a lot of opportunity for air, and we're working to improve our air product and we're working with our air suppliers, so we can make that good for everybody. And yes, there is a general sense of collaboration and willingness to work on new ideas to drive business for everybody. And I would say that in times like this you would expect and we are making up more share of everybody's wallet on the supply side. So we're not trying to put the screws to anybody who are trying to collaboratively look at how we can grow their business, help grow our business. And we are keenly focused on that. So there is definitely opportunity. Again, I don't think it's about leveraging a moment. It's really about an openness that you get at a time like this where everybody's in a bit of a crisis to look at opportunities, to work together to grow the business, to improve both sides, and that's what we're focused on.

Hey, this is Eric. I'll take the second half of the question. And thanks for the question. I'm going to give slightly a longer update, because I think there's a fair number of questions I suspect we'll get during the call. So let me try to give a bit of a holistic update on the balance sheet and cash. So if you look at the deferred merchant bookings, and again, for everyone's edification, deferred merchant bookings is where we accept customers cash, we then hold on to that and remit it to suppliers post stay, if you well. It did decrease $1.3 billion during the quarter. But if you look at the trend over that quarter, it was a significant drop in April, a slight decline in May, and then actually increase in June. The increase in June is driven by Vrbo, which we've talked a lot about the strong bookings, growth actually year-on-year that occurred in Vrbo. If you look at non-Vrbo within that deferred merchant booking, it was essentially flat between May and June. So if you would go in reverse and we look back and what we are observing in the April and March, April, May timeline where that DMB or that Deferred Merchant Booking was really declining. I would say we feel pretty darn good about how the latter part of the quarter looked from a Deferred Merchant Booking standpoint. I then move to cash. I know a lot of this is in the financials that we publish. But essentially, we started the quarter with $4.1 billion, essentially a change, call it, operating of negative 1.4. We then raised approximately $4 billion of financing. Obviously, it was a little bit less than that from a net standpoint. So at the end of the quarter, we had…

Thanks for all the color.

Yep. Got it. Thank you for the question.

And your next question comes from the line Lee Horowitz with Evercore ISI. Your line is open.

Great, thanks for taking the question. So you're sticking with Vrbo with obviously booking trends remaining really strong for the pandemic. I guess, is there anything you're seeing there as it relates to traffic next in terms of paid traffic versus direct to Vrbo? And how you would expect that to perhaps evolve over the course of this crisis?

Yeah, absolutely. One of the things that I think I have heard other places as well, as you know, many of us retrenched that out of competitive advertising and ad of the auctions, to a large extent when things got really bad in March and April. We have been waiting back in with all our brands. But much more delicately with Vrbo, because candidly, Vrbo has been the beneficiary of a huge amount of direct traffic, and essentially organic traffic. So, the mix of business has been extremely profitable on a relative basis for Vrbo. And that has been terrific. We're not against using performance marketing in Vrbo. And we certainly are trying to use it definitely. But our mix and our returns on marketing are at massively higher levels than they -- we were historically running at in, call it, late 2019. So, yes, there's definitely been and I don't want to say, its a structural shift. We'll see what the world like, when everything normalizes. But what we have seen that the brand is quite strong that people can find us. And that we're important as an organic option and a great option for travelers. So I think the mix is terrific there right now. And, you know, no doubt as we grow --- but as we continue to grow and other players get a little healthier, we may see a mix change a bit, but right now, that makes it terrific.

Great. Thanks for taking question.

Thank you.

And your next question comes from the line of Brent Thill with Jefferies. Your line is open.

Great. This is James on for Brent. Thanks for taking my questions. I just had one for Eric. Can you give us an update on what your CapEx spend is looking like for the back half of 2020 and then first half of 21. I know you have the headquarters which should be completed by early next year, but just want to know what your other capex spend might look like and how we should think about that from a modeling perspective. Thanks.

Yes. Our CapEx presume you saw was $206 million. Of that 34 million was of headquarters, again, we gave an update last quarter that we restarted on headquarters, and that's been 115 million for the first half of the year, excluding headquarters to 172 million. Just to give you the components up there to highlight level. the vast majority is uncapitalized labor, that's essentially employees that are doing tech developments. And we should see some improvement in that capitalized labor, just given the cost program and some of the actions that we've taken to date. We've got the data center is where we continue to move more into the cloud. That data center CapEx should moderate as well. And then by -- essentially the cap labor on data center captures most of it. So what I would say, not giving you too specific numbers, if you will, is that for 2020, we should come in less than we were in 2019, with all the various moving parts. And then as we go into 2021, as that headquarters rolls off, we should be much more efficient. We should require less CapEx and ultimately see better cash conversion. But hopefully that gives you an order of magnitude on 2020. And then over time, it should it should get more efficient to.

Very helpful. Thank you so much.

Thank you.

And your next question comes from the line of Chris Kuntarich with Deutsche Bank. Your line is open.

Maybe just start on the vacation rental side, just kind of parsing out the difference of what's going on in vacation rental and hotel. I think you has mentioned that VRVO was growing. So just maybe first, since you guys have seen sort of the plateau in July. Is there any difference going on in the cancellation and new bookings From the two?

Yes. I would say broadly, cancellation rates have stayed pretty consistent. We won't . I would say there's anything noteworthy between how hotels and vacation rental is performing except that hotel has taken longer to, you know, is on a slower trajectory to recovery. Clearly vacation rental was very strong. We saw demand exceed prior years during some of these compression periods, which in a world like this is great to see and hotel just been on a slower pace to recovery but I think on the cancellation side we haven't seen anything noteworthy. And again broadly, cancellation have remained stable for the last -- for July, June et cetera, its not -- there's no big uptick in cancellations that we've seen. So the real different is, that compression of early bookings that were in the vacation rental space that the hotel shouldn't see I would say. And then easing of that compression period into July. And where the hotels have been slowly making up ground on a more leaner basis.

Got it. And maybe just a follow-up. As it relates to cloud cost, I think you been called up previously that 2020 level should be below 2018. And I was curious as you guys got further into the year. If you can put any bit of a final point on that? Thanks.

Yes. I think the story remains the same. Just to recap for those that may not have full story. We brought all of our cloud teams and do a singly unite, they have the ability to optimize the right side of the computer. So we've been able to really push and accelerate that in the COVID environment. So it gave us some short term benefits and we think that overly bear fruit over the long term as well. Better economics with our vendors etc cetera. But over that by 2020 we do expected to be down. However when volumes start a year. It does obviously have a variable component to it. And so, as that volume comes back you would expect to grow a long method as well. But I think sort of magnitude or the story that we tell before still holds.

Got it. Thanks.

And your next question comes from the line of Brian Fitzgerald with Wells Fargo. And your line is open.

Thanks, guys. We want to ask just sort of hypothesis on. Generally, when consumers travel close to home, I think you see shorter durations and less expensive accommodations versus when you're traveling farther and internationally. Is that valid? Is that valid in old days? But are you seeing those dynamics change now with more local travel coming back, replacing longer international trips. You see consumers trading up verse what they would normally spend staying longer on durations. Anything you could tell us about kind of the propensity to spend as local starts first versus International? Thanks.

Eric, I'm going to first. I'll take a whack at if you want.

Yes, sure.

There's a lot going on in that question. But I would say a few things. We have seen pricing and propensity to pay et cetera and long duration very evident in the vacation rental business. People in compressed markets have been able to push what they charge and suppliers that is. And people have, as I mentioned, they're staying longer. And so that, if anything driving up as you think about from an ADR standpoint that I think broadly find in hotel space. There has been not the inroads [ph] but there's more pressure on pricing and more discounting? Why do you look for keep those comfort and propensity to go to hotels has been less robust. So its kind of exactly what you'd expect from a supply and demand standpoint. I think in terms of local versus non-local and duration on the hotel side, I don't know, if Eric has any good data there. But I don't think we've seen dramatic change there. I think that's been similar. And yes, in terms of total wallet share of a domestic trip is tend to be smaller than an international trip. But again, I think this is just everyone's finding their opportunity. So of course, air is suffering more than lodging, even though as far as I know, nobody's yet said they've gotten sick on an airplane. But air still is something people are less comfortable with. And so, people are driving and finding other ways to get to hotels and things. And -- but I think domestic -- local domestic is sort of slowly filling up the holes of international. So I think it's really just a volume game. I think the ADR question is really just a function of overall supply and demand and its acting exactly as you would expect it, which is if you're in a compressed market on the Florida coast, and there aren't enough homes and a lot of interested people, you can push pricing. And you do. And if you're a hotel somewhere where not a lot of tourists are going maybe like New York right now. You have to compete, and therefore you try to compete on price.

Yes. I think you've covered it. I'd be careful extrapolating too much on any of the trends you'd see. It's really people solving for the travel that they can and still want to travel. I think the real positive though is that, and Peter mentioned it earlier, that we've just got a lot of people that are getting exposed to the Vrbo brand and alternative accommodations and it's a bit of a fast-forward in that exposure, and we're going to take the approach to build a relationship with those individuals. And I think people are having a great experience. At least that's what I can -- in my conversations anecdotally. So I think that -- it's a very positive outcome for Vrbo from that perspective.

And apologies, I would just triple down. Don't extrapolate too much from any of this. I think this is really a unique moment. And I said it before, but I don't think this portends any difference in how people think about things. It may expose them the more or may make them open to things they weren't open to before. But I don't think we're seeing some structural shift in people's views about hotels or other things. It's just a moment. And it's just about their comfort and their safety and what they're able to do.

Thank you, Peter. Thank you, Eric.

Yep. Thank you.

We will now the call back over to CEO Peter Kern.

Okay. Thank you everybody for your questions. I hope we gave you a good perspective on the business. I just want to reiterate. We're feeling really good about the internal work we're doing. I commend our teams who have done amazing work in impossible circumstances where everybody's working from home and everything is harder. So can't thank all of them enough. And appreciate you all your questions. As Eric and I said, we hope that you'll see the benefit of all this hard work we been doing as the numbers come back. And we look forward to talking to you in another quarter. So thank you for your time. And everybody stay safe. Take care.

This concludes today's call. You may now disconnect.