March 5, 2024

Expedia Plays Long Game as it Awaits Fourth Quarter Finish to Vrbo Tech Shift

Investors looking for short-term gains may be disappointed in Expedia Group’s second quarter — it missed analysts’ revenue expectations by $10 million. But if things actually work out according to Expedia’s playbook, a carefully laid foundation may start to trigger more lucrative results in 2024.

Plank #1 — In July, Expedia rolled out its long-awaited One Key loyalty program, which for the first time consolidates its brands’ disparate loyalty programs into one unified plan for Expedia, Hotels.com, and vacation rental unit Vrbo, which gets a rewards scheme for the first time. Of Expedia Group’s dozen or more brands, these three are the core.

“This quarter, active loyalty members continued to hit new highs and were up 15% year-over-year in our core brands and the percentage of bookings coming through our apps was up 300 basis points sequentially versus the first quarter,” CEO Peter Kern told analysts Thursday in discussing the company’s second-quarter results.

But these are very early days and the financial benefits to Expedia so far have been inconsequential.

Plank #2 — Since early 2020, Expedia has been on a mission to transform the company. It consolidated brand teams that were sometimes working at cross-purposes, and eliminated a few non-core brands. In addition to the launch of One Key, one of the “final” — transformation is never final — pieces of the plan is to migrate the Vrbo platform onto the Expedia tech stack, and officials said that is expected to be completed in the fourth quarter. All of Vrbo’s U.S. web traffic has already been transitioned.

The fact that the Vrbo tech stack migration is incomplete — Expedia migrated the Hotels.com tech platform last year — negatively impacted Expedia’s second quarter results, officials said, and it also dampened Vrbo bookings.

One underlying reason for a soft quarter is that Expedia shifted some marketing spend into the third quarter to take advantage of the One Key rollout. With less marketing than previously anticipated, revenue came in at $3.4 billion, a tepid 6% increase.

Expedia’s Subliminal Message — Just Wait Until 2024

“As we finish our technology work in the coming quarters and look to redeploy resources and deprecate systems next year, we expect to realize cost efficiencies going forward,” said Chief Financial Officer Julie Whalen. “Despite this overhead pressure, we are pleased to see that with another quarter of strong revenue and overall expense discipline, including our decision to shift some marketing spend, we delivered record second quarter EBITDA of $747 million, which was up 15% with an EBITDA margin of 22.2%, expanding approximately 190 basis points versus the second quarter of 2022.”

The wait to complete Vrbo’s technology migration means engineers will be working up until then on redundant tech systems, and will be distracted from working on other projects, Whalen said.

As part of its fine-tuning, Expedia is also busy transitioning former Expedia, Hotels.com, and Orbitz loyalty program members to One Key, and the company is trying to get them accustomed to what officials say are the flexibility and benefits of the new program.

Former Hotels.com Members Coming Up Short in the One Key Transition?

There has been a lot of press about Hotels.com loyalty program members losing out as part of the One Key transition. Hotels.com previously offered one free night for every 10 booked.

Kern said Expedia Group has tried to make them whole, though some former heavy users may not feel that way. Kern said members of other loyalty programs often see their points diluted and that travelers are accustomed to it.

“There is a little bit of noise from our heaviest [Hotels.com] users about what does it mean for them,” Kern said. “But I will say we’ve taken care of them. We’ve made sure that the value they had did not get diluted in our view of the new program is that they get much more value through flexibility.”

The flexibility he referred to means that One Key members can earn and burn points on Hotels.com, Expedia and Vrbo. While a former Hotels.com loyalty program member could only earn and burn points on hotels, under the One Key program they can earn and burn points on airlines, hotels, vacation rentals and car rentals, for example.

Expedia’s One Key Versus Airbnb and Booking.com

Kern said that extending a loyalty plan to Vrbo “marks the first time any major vacation rental marketplace will have loyalty which is a significant differentiator against our competition.”

Of course, Homes & Villas by Marriott Bonvoy enables Marriott guests to earn and burn points on vacation rentals, but Kern doesn’t include this in his definition of a “major vacation rental marketplace.”

He pointed out that Airbnb doesn’t have a loyalty program — although Airbnb CEO Brian Chesky has pointed out that Airbnb has so much brand recognition and attracts such a great quantity of direct bookings that it doesn’t need one.

Regarding another competitor, Booking.com, Kern noted that its Genius rewards program has long had several member tiers with discounts funded by hotels, for example. Now One Key has benefits for gold and platinum members with benefits paid for by suppliers, as well, he added.

For the second quarter, which ended June 30, Expedia Group saw net income of $385 million compared with a net loss of $185 million a year earlier. Revenue rose 6% to $3.36 billion.

Generative AI Has No Material Impact Yet

Expedia currently has a trip-planning feature on iOS and Android, with OpenAI’s Chat GPT as the foundation, and it also has an OpenAI plug-in.

“We’ve been studying it,” Kern said, referring to how users engage with its generative AI-based features. “I won’t say it’s moved the numbers in any way that you could see.” He added: “Lots of customers don’t need it or don’t choose to. I think the future, though, lies much more in a better integration, which will come as more large language models come out, and we figure out how to embrace them with our own data.”

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