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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. Actual results could differ materially from those contained in these forward-looking statements for a variety of reasons, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, Part I, Item 1A, “Risk Factors,” as well as those discussed elsewhere in this report. COVID-19, and the volatile regional and global economic conditions stemming from it, and additional or unforeseen effects from the COVID-19 pandemic, could also give rise to or aggravate these risk factors, which in turn could materially adversely affect our business, financial condition, liquidity, results of operations (including revenues and profitability) and/or stock price. Further, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations. Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition and results of operations. Accordingly, readers should not place undue reliance on these forward-looking statements. The use of words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “goal,” “intends,” “likely,” “may,” “plans,” “potential,” “predicts,” “projected,” “seeks,” “should” and “will,” or the negative of these terms or other similar expressions, among others, generally identify forward-looking statements; however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. We are not under any obligation to, and do not intend to, publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Please carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
The information included in this management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2020.
Overview
Expedia Group's mission is to power global travel for everyone, everywhere. We believe travel is a force for good. Travel is an essential human experience that strengthens connections, broadens horizons and bridges divides. We help reduce the barriers to travel, making it easier, more enjoyable, more attainable and more accessible. We bring the world within reach for customers and partners around the globe. We leverage our supply portfolio, platform and technology capabilities across an extensive portfolio of consumer brands, and provide solutions to our business partners, to orchestrate the movement of people and the delivery of travel experiences on both a local and global basis. We make available, on a stand-alone and package basis, travel services provided by numerous lodging properties, airlines, car rental companies, activities and experiences providers, cruise lines, alternative accommodations property owners and managers, and other travel product and service companies. We also offer travel and non-travel advertisers access to a potential source of incremental traffic and transactions through our various media and advertising offerings on our websites. For additional information about our portfolio of brands, see the disclosure set forth in Part I, Item 1, Business, under the caption “Management Overview” in our Annual Report on Form 10-K for the year ended December 31, 2020.
All percentages within this section are calculated on actual, unrounded numbers.
Trends
The COVID-19 pandemic, and measures to contain the virus, including government travel restrictions and quarantine orders, have had a significant negative impact on the travel industry. COVID-19 has negatively impacted consumer sentiment and consumer’s ability to travel, and many of our supply partners, particularly airlines and hotels, continue to operate at reduced service levels.
As the spread of the virus has been contained to varying degrees in certain countries, travel restrictions have been lifted and consumers have become more comfortable traveling, particularly to domestic locations. This led to a moderation of the declines in travel bookings and in cancellation rates since March and April 2020. However, travel bookings remain below and cancellation rates still remain elevated compared to pre-COVID levels.
The degree of containment of the virus, and the recovery in travel, has varied country by country. During the recovery period, there have been instances where cases of COVID-19 have started to increase again after a period of decline, which in some cases impacted the recovery of travel in certain countries. Additionally, there continues to be uncertainty over the impact of the delta or other new variants of the virus, including the efficacy of the vaccines against such variants, which has contributed, and may continue to contribute, to delays in economic recovery. COVID-19 has also had broader economic impacts, including an increase in unemployment levels and reduction in economic activity, which if COVID-19 starts to increase again, could lead to a reduction in consumer or business spending on travel activities, which may negatively impact the timing and level of a recovery in travel demand. Broader, sustained negative economic impacts could also put strain on our suppliers, business and service partners which increases the risk of credit losses and service level or other disruptions.
Our financial and operating results for 2020 were significantly impacted due to the decrease in travel demand related to COVID-19. While we have seen an improvement in trends during 2021, the impact to the overall travel market, and our business, has continued. The full duration and total impact of COVID-19 remains uncertain and it is difficult to predict how the recovery will unfold for the travel industry and, in particular, our business.
Additionally, further health-related events, political instability, geopolitical conflicts, acts of terrorism, significant fluctuations in currency values, sovereign debt issues, and natural disasters, are examples of other events that could have a negative impact on the travel industry in the future.
Prior to the onset of COVID-19, we began to execute a cost savings initiative aimed at simplifying the organization and increasing efficiency. Following the onset of COVID-19, we accelerated execution on several of these cost savings initiatives and took additional actions to reduce costs to help mitigate the impact to demand from COVID-19 and reduce our monthly cash usage. While some cost actions during COVID-19 are temporary and intended to minimize cash usage during this disruption, we expect to continue to benefit from the majority of the savings when business conditions return to more normalized levels. Overall, we continue to expect annualized run-rate fixed cost savings of $700 to $750 million compared to the fourth quarter of 2019 exit rate, and we continue to evaluate additional opportunities to increase efficiency and improve operational effectiveness across the Company. In addition to the actions to reduce fixed costs, we are executing initiatives to reduce certain variable costs and improve our marketing efficiency.
As a result of these cost savings initiatives, we expect Adjusted EBITDA margins to increase compared to historical levels when revenue returns to more normalized levels.
Online Travel
Increased usage and familiarity with the internet are driving rapid growth in online penetration of travel expenditures. According to Phocuswright, an independent travel, tourism and hospitality research firm, in 2019, approximately 49% of U.S., European and Latin American leisure and unmanaged corporate travel expenditures occurred online. As of January 2021, this figure was estimated to reach approximately 53% in 2022. Online penetration rates in the emerging markets, such as Asia Pacific and Latin American regions, have historically lagged behind that of the United States and Europe. These penetration rates increased over the past few years, and are expected to continue growing, which presents an attractive growth opportunity for our business, while also attracting many competitors to online travel. This competition intensified in recent years, and the industry is expected to remain highly competitive for the foreseeable future. In addition to the growth of online travel agencies, we see increased interest in the online travel industry from search engine companies such as Google, evidenced by continued product enhancements, including new trip planning features for users and the integration of its various travel products into the Google Travel offering, as well as further prioritizing its own products in search results. Competitive entrants such as “metasearch” companies, including Kayak.com (owned by Booking Holdings), trivago (in which Expedia Group owns a majority interest) as well as TripAdvisor, introduced differentiated features, pricing and content compared with the legacy online travel agency companies, as well as various forms of direct or assisted booking tools. Further, airlines and lodging companies are aggressively pursuing direct online distribution of their products and services. In addition, the increasing popularity of the “sharing economy,” accelerated by online penetration, has had a direct impact on the travel and lodging industry. Businesses such as Airbnb, Vrbo (previously HomeAway, which Expedia Group acquired in December 2015) and Booking.com (owned by Booking Holdings) have emerged as the leaders, bringing incremental alternative accommodation and vacation rental inventory to the market. Many other competitors, including vacation rental metasearch players, continue to emerge in this space, which is expected to continue to grow as a percentage of the global accommodation market. Finally, traditional consumer ecommerce and group buying websites expanded their local offerings into the travel market by adding hotel offers to their websites.
The online travel industry also saw the development of alternative business models and variations in the timing of payment by travelers and to suppliers, which in some cases place pressure on historical business models. In particular, the agency hotel model saw rapid adoption in Europe. Expedia Group facilitates both merchant (Expedia Collect) and agency (Hotel Collect) hotel offerings with our hotel supply partners through both agency-only contracts as well as our hybrid Expedia
Traveler Preference (“ETP”) program, which offers travelers the choice of whether to pay Expedia Group at the time of booking or pay the hotel at the time of stay.
In 2020, we shifted to managing our marketing investments holistically across the brand portfolio in our Retail segment to optimize results for the Company, and making decisions on a market by market and customer segment basis that we think are appropriate based on the relative growth opportunity, the expected returns and the competitive environment. Over time, intense competition historically led to aggressive marketing efforts by the travel suppliers and intermediaries, and a meaningful unfavorable impact on our overall marketing efficiencies and operating margins. During 2020, we increased our focus on opportunities to differentiate brands across customer and geographic segments, increase marketing efficiency, drive a higher proportion of transactions through direct channels and ultimately improve the balance of transaction growth and profitability.
Lodging
Lodging includes hotel accommodations and alternative accommodations. As a percentage of our total worldwide revenue in the third quarter of 2021, lodging accounted for 78%. As a result of the improvement in travel demand this year, stayed room nights grew 59% in the third quarter of 2021 and 25% in the first nine months of 2021, as compared to a decline of 55% in 2020 and growth of 11% in 2019. The timing of a further recovery in consumer sentiment on travel and on staying at hotels will be a factor in our level of room night growth, and as noted above, we expect that to vary by country. Average Daily Rates (“ADRs”) for rooms booked on Expedia Group websites decreased 1% in 2019, increased 3% in 2020 and increased 20% in the first nine months of 2021. During 2020 and the first nine months of 2021, the year-over-year increase in ADRs for our Vrbo business remained elevated compared to years prior to the COVID-19 outbreak. Vrbo carries a higher ADR than hotels and has accounted for a higher percentage of room nights due to the faster recovery in alternative accommodations during this period.
The uncertain environment as a result of COVID-19, including travel restrictions and shifts in consumer behavior, the mix of our lodging bookings across geographies and types of accommodations, and general variability in supply and demand, make it difficult to predict ADR trends in the near-term.
As of September 30, 2021, our global lodging marketplace had approximately 3 million lodging properties available, including over 2 million online bookable alternative accommodations listings and approximately 885,000 hotels.
Hotel. We generate the majority of our revenue through the facilitation of hotel reservations (stand-alone and package bookings). After rolling out ETP globally over a period of several years, during which time we reduced negotiated economics in certain instances to compensate for hotel supply partners absorbing expenses such as credit card fees and customer service costs, our relationships and overall economics with hotel supply partners have been broadly stable in recent years. As we continue to expand the breadth and depth of our global hotel offering, in some cases we have reduced our economics in various geographies based on local market conditions. These impacts are due to specific initiatives intended to drive greater global size and scale through faster overall room night growth. Additionally, increased promotional activities such as growing loyalty programs contribute to declines in revenue per room night and profitability.
Since our hotel supplier agreements are generally negotiated on a percentage basis, any increase or decrease in ADRs has an impact on the revenue we earn per room night. Over the course of the last several years, occupancies and ADRs in the lodging industry generally increased on a currency-neutral basis in a gradually improving overall travel environment. However, due to COVID-19, current occupancy rates for hotels in the United States are at reduced levels. In addition, other factors could pressure ADR trends, including the continued growth in hotel supply in recent years and the increase in alternative accommodation inventory. Further, while the global lodging industry remains very fragmented, there has been consolidation in the hotel space among chains as well as ownership groups. In the meantime, certain hotel chains have been focusing on driving direct bookings on their own websites and mobile applications by advertising lower rates than those available on third-party websites as well as incentives such as loyalty points, increased or exclusive product availability and complimentary Wi-Fi.
Alternative Accommodations. With our acquisition of Vrbo (previously HomeAway) and all of its brands in December 2015, we expanded into the fast growing alternative accommodations market. Vrbo is a leader in this market and represents an attractive growth opportunity for Expedia Group. Vrbo has transitioned from a listings-based classified advertising model to an online transactional model that optimizes for both travelers and homeowner and property manager partners, with a goal of increasing monetization and driving growth through investments in marketing as well as in product and technology. Vrbo offers hosts subscription-based listing or pay-per-booking service models. It also generates revenue from a traveler service fee for bookings. In addition, we have actively moved to integrate Vrbo listings into our global Retail services, as well as directly add alternative accommodation listings to our offerings, to position our key global brands to offer a full range of lodging options for consumers.
Air
The airline industry has been dramatically impacted by COVID-19. As a result of the significantly reduced air travel demand due to government travel restrictions and the impact on consumer sentiment related to COVID-19, airlines have been
operating with less capacity and passenger traffic has declined significantly. During the third and fourth quarter of 2020, air passenger traffic declines further moderated and remained stable, but continue to lag the recovery in lodging bookings. The recovery in air travel remains difficult to predict, and may not correlate with the recovery in lodging demand. According to the Transportation Security Administration (“TSA”), air traveler 7-day average throughput declined 95% in April 2020 compared to prior year levels. The declines moderated to 60 to 65% in mid-October 2020 and, as of mid-October 2021, further moderated to down 20 to 25% compared to 2019 levels.
In addition, there is significant correlation between airline revenue and fuel prices, and fluctuations in fuel prices generally take time to be reflected in air revenue. Given current volatility, it is uncertain how fuel prices could impact airfares. We could encounter pressure on air remuneration as air carriers combine, certain supply agreements renew, and as we continue to add airlines to ensure local coverage in new markets.
Air ticket volumes increased 132% during the third quarter of 2021 and 32% in first nine months of 2021 compared to a decline of 63% in 2020 and an increase of 7% in 2019. As a percentage of our total worldwide revenue in the third quarter of 2021, air accounted for 2%.
Advertising & Media
Our advertising and media business is principally driven by revenue generated by trivago, a leading hotel metasearch website, and Expedia Group Media Solutions, which is responsible for generating advertising revenue on our global online travel brands. In the third quarter of 2021, we generated $202 million of advertising and media revenue, a 116% increase from the same period in 2020, representing 7% of our total worldwide revenue. Given the decline in travel demand related to COVID-19, online travel agencies dramatically reduced marketing spend, including on trivago, and given the uncertain duration and impact of COVID-19 it is difficult to predict when spend will recover to normalized levels. In response, in 2020, trivago significantly reduced its marketing spend and took additional actions to lower operating expenses. We expect trivago to continue to experience pressure on revenue and profit until online travel agencies and other hotel suppliers see consumer demand that warrants increasing in their advertising spend with trivago.
Business Strategy
As we endeavor to power global travel for everyone, everywhere our focus is to: leverage our brand and supply strength, and our platform, to provide greater services and value to our travelers, suppliers and business partners, and generate sustained, profitable growth.
Leverage Brand and Supply Strength. We believe the strength of our brand portfolio and enhancements to product and service offerings, which when combined with our global scale and broad based supply, drive increasing value to customers and customer demand. With our significant global audience of travelers, and our deep and broad selection of travel products, there is a rich interplay between supply and demand in our global marketplace that helps us provide value to both travelers planning trips and supply partners wanting to grow their business through a better understanding of travel retailing and consumer demand in addition to reaching consumers in markets beyond their reach. Our multi-brand strategy and deep product and supply footprint allows us to tailor offerings to target different types of consumers and travel needs, employ geographic segmentation in markets around the world, and leverage brand differentiation, among other benefits. Additionally, we know that consumers typically visit multiple travel websites prior to booking travel, and having a multi-brand strategy increases the likelihood that those consumers will visit one or more of our websites. We also market to consumers through a variety of channels, including internet search, metasearch and social media websites, and having multiple brands appear in search results also increases the likelihood of attracting new visitors.
Leverage Our Platform. During 2020, Expedia Group shifted to a platform operating model with more centralized technology, product, data engineering and data science teams building services and capabilities that are leveraged across our business units to serve our end customers and provide value-add services to our travel suppliers. This model enables us to deliver more scalable services and operate more efficiently. All of our transaction-based businesses share and benefit from our platform infrastructure, including customer servicing and support, data centers, search capabilities and transaction processing functions, including payment processing and fraud operations.
As we continue to evolve our platform infrastructure, our focus is on developing technical capabilities that support various travel products while using common applications and frameworks. We believe this strategy will enable us to: build in parallel because of simpler, standard architecture; ship products faster; create more innovative solutions; and achieve greater scale. Over time, as we enable domains around application development frameworks, we believe we can unlock additional platform service opportunities beyond our internal brands and other business travel partners.
Seasonality
We generally experience seasonal fluctuations in the demand for our travel services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue for most of our travel services, including merchant and agency hotel, is recognized as the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks for our hotel business and can be several months or more for our alternative accommodations business. Historically, Vrbo has seen seasonally stronger bookings in the first quarter of the year, with the relevant stays occurring during the peak summer travel months. The seasonal revenue impact is exacerbated with respect to income by the nature of our variable cost of revenue and direct sales and marketing costs, which we typically realize in closer alignment to booking volumes, and the more stable nature of our fixed costs. Furthermore, operating profits for our primary advertising business, trivago, have typically been experienced in the second half of the year, particularly the fourth quarter, as selling and marketing costs offset revenue in the first half of the year as we typically increase marketing during the busy booking period for spring, summer and winter holiday travel. As a result on a consolidated basis, revenue and income are typically the lowest in the first quarter and highest in the third quarter. The growth of our international operations, advertising business or a change in our product mix, including the growth of Vrbo, may influence the typical trend of the seasonality in the future.
Impacts from COVID-19 disrupted our typical seasonal pattern for bookings, revenue, profit and cash flows during 2020. Significantly higher cancellations and reduced booking volumes, particularly in the first half of 2020, resulted in material operating losses and negative cash flow. Although travel volumes remain materially lower than historic levels, booking and travel trends normalized during the second half of 2020, and first nine months of 2021. This resulted in working capital benefits and positive cash flow more akin to typical historical trends. It remains difficult to forecast the seasonality for the upcoming quarters, given the uncertainty related to the duration of the impact from COVID-19 and the shape and timing of any sustained recovery.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with generally accepted accounting principles in the United States (“GAAP”). Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:
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It requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate; and
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Changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.
The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business disruptions and adversely impact our results of operations. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods
For additional information about our other critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2020 as well as updates in the current fiscal year provided in Note 2 – Summary of Significant Accounting Policies in the notes to the consolidated financial statements.
Occupancy and Other Taxes
Legal Proceedings. We are currently involved in ten lawsuits brought by or against states, cities and counties over issues involving the payment of hotel occupancy and other taxes. We continue to defend these lawsuits vigorously. With respect to the principal claims in these matters, we believe that the statutes and/or ordinances at issue do not apply to us or the services we provide, namely the facilitation of travel planning and reservations, and, therefore, that we do not owe the taxes that are claimed to be owed. We believe that the statutes and ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations
For additional information on these and other legal proceedings, see Part II, Item 1, Legal Proceedings.
We have established a reserve for the potential settlement of issues related to hotel occupancy and other tax litigation, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $50 million as of September 30, 2021, and $58 million as of December 31, 2020.
Certain jurisdictions, including without limitation the states of New York, New Jersey, North Carolina, Minnesota, Oregon, Rhode Island, Maryland, Pennsylvania, Hawaii, Iowa, Massachusetts, Arizona, Wisconsin, Idaho, Arkansas, Indiana, Maine, Nebraska, Vermont, Mississippi, Virginia, the city of New York, and the District of Columbia, have enacted legislation seeking to tax online travel company services as part of sales or other taxes for hotel and/or other accommodations and/or car rental. In addition, in certain jurisdictions, we have entered into voluntary collection agreements pursuant to which we have agreed to voluntarily collect and remit taxes to state and/or local taxing jurisdictions. We are currently remitting taxes to a number of jurisdictions, including without limitation the states of New York, New Jersey, South Carolina, North Carolina, Minnesota, Georgia, Wyoming, West Virginia, Oregon, Rhode Island, Montana, Maryland, Kentucky, Maine, Pennsylvania, Hawaii, Iowa, Massachusetts, Arizona, Wisconsin, Idaho, Arkansas, Indiana, Nebraska, Vermont, Colorado, Mississippi, Virginia, the city of New York and the District of Columbia, as well as certain other jurisdictions.
Pay-to-Play
Certain jurisdictions may assert that we are required to pay any assessed taxes prior to being allowed to contest or litigate the applicability of the ordinances. This prepayment of contested taxes is referred to as “pay-to-play.” Payment of these amounts is not an admission that we believe we are subject to such taxes and, even when such payments are made, we continue to defend our position vigorously. If we prevail in the litigation, for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts and also may be required to pay interest. However, any significant pay-to-play payment or litigation loss could negatively impact our liquidity.
Other Jurisdictions. We are also in various stages of inquiry or audit with various tax authorities, some of which, including the City of Los Angeles regarding hotel occupancy taxes, may impose a pay-to-play requirement to challenge an adverse inquiry or audit result in court.
Segments
We have the following reportable segments: Retail, B2B, and trivago. Our Retail segment provides a full range of travel and advertising services to our worldwide customers through a variety of consumer brands including: Expedia.com and Hotels.com in the United States and localized Expedia and Hotels.com websites throughout the world, Vrbo, Orbitz, Travelocity, Wotif Group, ebookers, CheapTickets, Hotwire.com, CarRentals.com and Expedia Cruises. Our B2B segment is comprised of our Expedia Business Services organization including Expedia Partner Solutions, which offers private label and co-branded products to make travel services available to travelers through third-party company branded websites, and Egencia, a full-service travel management company that provides travel services to businesses and their corporate customers. Our trivago segment generates advertising revenue primarily from sending referrals to online travel companies and travel service providers from its hotel metasearch websites.
Operating Metrics
Our operating results are affected by certain metrics, such as gross bookings and revenue margin, which we believe are necessary for understanding and evaluating us. Gross bookings generally represent the total retail value of transactions booked for agency and merchant transactions, recorded at the time of booking reflecting the total price due for travel by travelers, including taxes, fees and other charges, and are reduced for cancellations and refunds. Revenue margin is defined as revenue as a percentage of gross bookings.
Gross Bookings and Revenue Margin
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Gross bookings | $ | 18,725 | $ | 8,631 | 117 | % | $ | 54,962 | $ | 29,228 | 88 | % | |||||||||||||||||||||||
| Revenue margin (1) | 15.8 | % | 17.4 | % | 11.5 | % | 14.6 | % |
(1)trivago, which is comprised of a hotel metasearch business that differs from our transaction-based websites, does not have associated gross bookings or revenue margin. However, third-party revenue from trivago is included in revenue used to calculate total revenue margin.
During the three and nine months ended September 30, 2021, gross bookings increased 117% and 88%, compared to the same periods in 2020. Booking trends for our lodging, air and other travel products all improved sequentially in the second quarter of 2021 from the first quarter, but decreased sequentially in the third quarter of 2021 from the second quarter largely due to the impact of the COVID-19 delta variant.
Revenue margin for the nine months ended September 30, 2020 was higher than in the current period due in part to significant lodging cancellations in the prior year period, which reduced gross bookings, creating an unusual mix of bookings and revenue.
Results of Operations
Revenue
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| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Revenue by Segment | |||||||||||||||||||||||||||||||||||
| Retail | $ | 2,351 | $ | 1,246 | 89 | % | $ | 5,091 | $ | 3,291 | 55 | % | |||||||||||||||||||||||
| B2B | 490 | 203 | 142 | % | 979 | 756 | 30 | % | |||||||||||||||||||||||||||
| trivago (Third-party revenue) | 121 | 55 | 119 | % | 249 | 173 | 43 | % | |||||||||||||||||||||||||||
| Corporate (Bodybuilding.com) | — | — | N/A | — | 59 | N/A | |||||||||||||||||||||||||||||
| Total revenue | $ | 2,962 | $ | 1,504 | 97 | % | $ | 6,319 | $ | 4,279 | 48 | % |
Revenue increased 97% and 48% for the three and nine months ended September 30, 2021, compared to the same periods in 2020. Our Retail, B2B and trivago segments revenue all increased compared to prior year periods with the growth reflecting improvements in travel trends during the current year.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Revenue by Service Type | |||||||||||||||||||||||||||||||||||
| Lodging | $ | 2,300 | $ | 1,229 | 87 | % | $ | 4,736 | $ | 3,258 | 45 | % | |||||||||||||||||||||||
| Air | 61 | 27 | 128 | % | 189 | 67 | 183 | % | |||||||||||||||||||||||||||
| Advertising and media(1) | 202 | 94 | 116 | % | 451 | 322 | 40 | % | |||||||||||||||||||||||||||
| Other | 399 | 154 | 159 | % | 943 | 632 | 49 | % | |||||||||||||||||||||||||||
| Total revenue | $ | 2,962 | $ | 1,504 | 97 | % | $ | 6,319 | $ | 4,279 | 48 | % |
(1)Includes third-party revenue from trivago as well as our transaction-based websites.
Lodging revenue increased 87% and 45% for the three and nine months ended September 30, 2021, compared to the same periods in 2020, on a 59% and 25% increase in room nights stayed and a 17% and 16% increase in revenue per room night across hotel and alternative accommodations. For the three and nine months ended September 30, 2021, revenue per room night benefited from higher ADRs driven by an increase in regional rates and a higher mix of U.S. hotels.
Air revenue increased for the three and nine months ended September 30, 2021 driven by an increase in air tickets sold of 132% and 32% as air travel demand improved.
Advertising and media revenue increased 116% and 40% for the three and nine months ended September 30, 2021, compared to the same periods in 2020, due to increases at both trivago and Expedia Group Media Solutions. All other revenue, which includes car rental, insurance, destination services, fee revenue related to our corporate travel business and Bodybuilding.com (through its sale in May 2020), increased 159% and 49% for the three and nine months ended September 30, 2021, compared to the same periods in 2020, from growth in car as well as travel insurance products.
In addition to the above segment and product revenue discussion, our revenue by business model is as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Revenue by Business Model | |||||||||||||||||||||||||||||||||||
| Merchant | $ | 1,923 | $ | 1,032 | 86 | % | $ | 4,057 | $ | 2,740 | 48 | % | |||||||||||||||||||||||
| Agency | 800 | 329 | 143 | % | 1,696 | 996 | 70 | % | |||||||||||||||||||||||||||
| Advertising, media and other | 239 | 143 | 67 | % | 566 | 543 | 4 | % | |||||||||||||||||||||||||||
| Total revenue | $ | 2,962 | $ | 1,504 | 97 | % | $ | 6,319 | $ | 4,279 | 48 | % |
Merchant revenue increased for the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to an increase in merchant hotel revenue driven by an increase in room nights stayed as well as an increase in Vrbo merchant alternative accommodations revenue.
Agency revenue increased for the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to an increase in agency hotel, car and air revenue.
Advertising, media and other increased for the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to an increase in advertising revenue. The year-to-date period increase was largely offset by declines related to our prior year sale of Bodybuilding.com and certain miscellaneous other declines.
In the below discussion, we reclassified certain prior period information to conform to the current period presentation primarily related to the classification of licensing and maintenance costs within our operating expenses. For additional information, see Note 1 – Basis of Presentation in the notes to the consolidated financial statements.
Cost of Revenue
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Direct costs | $ | 339 | $ | 250 | 35 | % | $ | 806 | $ | 977 | (17) | % | |||||||||||||||||||||||
| Personnel and overhead | 103 | 113 | (8) | % | 321 | 396 | (19) | % | |||||||||||||||||||||||||||
| Total cost of revenue | $ | 442 | $ | 363 | 22 | % | $ | 1,127 | $ | 1,373 | (18) | % | |||||||||||||||||||||||
| % of revenue | 14.9 | % | 24.1 | % | 17.8 | % | 32.1 | % |
Cost of revenue primarily consists of direct costs to support our customer operations, including our customer support and telesales as well as fees to air ticket fulfillment vendors; credit card processing, including merchant fees, fraud and chargebacks; and other costs, primarily including data center and cloud costs to support our websites, supplier operations, destination supply, certain transactional level taxes, costs related to Bodybuilding.com during our period of ownership as well as related personnel and overhead costs, including stock-based compensation.
Cost of revenue increased $79 million during the three months ended September 30, 2021, compared to the same period in 2020, primarily due to increased expenses from significantly higher transaction volumes, including merchant fees.
Cost of revenue decreased $246 million during the nine months ended September 30, 2021, compared to the same period in 2020, primarily due to a decrease in bad debt expense, which was significantly elevated in the first nine months of 2020 due to the initial impacts of COVID-19, decreased customer service and personnel costs, and the absence of expenses related to Bodybuilding.com, which was disposed of in the second quarter of 2020. These decreases were partially offset by an increase in merchant fees resulting from recovering transaction volumes.
Selling and Marketing
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| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Direct costs | $ | 1,132 | $ | 337 | 236 | % | $ | 2,621 | $ | 1,381 | 90 | % | |||||||||||||||||||||||
| Indirect costs | 182 | 188 | (3) | % | 556 | 640 | (13) | % | |||||||||||||||||||||||||||
| Total selling and marketing | $ | 1,314 | $ | 525 | 150 | % | $ | 3,177 | $ | 2,021 | 57 | % | |||||||||||||||||||||||
| % of revenue | 44.3 | % | 35.0 | % | 50.3 | % | 47.2 | % |
Selling and marketing expense primarily relates to direct costs, including traffic generation costs from search engines and internet portals, television, radio and print spending, private label and affiliate program commissions, public relations and other costs. The remainder of the expense relates to indirect costs, including personnel and related overhead in our various brands and global supply organization, as well as stock-based compensation costs.
Selling and marketing expenses increased $789 million and $1.2 billion during the three and nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to an increase in direct costs as marketing spend increased in response to improved demand. The change in indirect costs reflect lower personnel costs in connection with previously announced cost savings initiatives, partially offset by higher stock-based compensation expense.
Technology and Content
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| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Personnel and overhead | $ | 205 | $ | 166 | 24 | % | $ | 583 | $ | 580 | 1 | % | |||||||||||||||||||||||
| Other | 72 | 76 | (5) | % | 217 | 248 | (12) | % | |||||||||||||||||||||||||||
| Total technology and content | $ | 277 | $ | 242 | 15 | % | $ | 800 | $ | 828 | (3) | % | |||||||||||||||||||||||
| % of revenue | 9.4 | % | 16.1 | % | 12.7 | % | 19.4 | % |
Technology and content expense includes product development and content expense, as well as information technology costs to support our infrastructure, back-office applications and overall monitoring and security of our networks, and is principally comprised of personnel and overhead, including stock-based compensation, as well as other costs including cloud expense and licensing and maintenance expense.
Technology and content expense increased $35 million during the three months ended September 30, 2021, compared to the same period in 2020, primarily reflecting higher personnel and related costs resulting largely from compensation change impacts, which shifted discretionary bonuses to salary in the current year, as well as higher stock-based compensation expense.
Technology and content expense decreased $28 million during the nine months ended September 30, 2021, compared to the same period in 2020, primarily reflecting lower personnel and related costs as well as license and maintenance expense in connection with previously announced cost savings initiatives, partially offset by higher stock-based compensation.
General and Administrative
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| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Personnel and overhead | $ | 145 | $ | 102 | 43 | % | $ | 413 | $ | 348 | 19 | % | |||||||||||||||||||||||
| Professional fees and other | 37 | 30 | 23 | % | 109 | 118 | (9) | % | |||||||||||||||||||||||||||
| Total general and administrative | $ | 182 | $ | 132 | 38 | % | $ | 522 | $ | 466 | 12 | % | |||||||||||||||||||||||
| % of revenue | 6.2 | % | 8.8 | % | 8.3 | % | 10.9 | % |
General and administrative expense consists primarily of personnel-related costs, including our executive leadership, finance, legal and human resource functions and related stock-based compensation as well as fees for external professional services.
General and administrative expense increased $50 million and $56 million during the three and nine months ended September 30, 2021, compared to the same periods in 2020, mainly due to an increase in stock-based compensation. To a lesser extent, the increase during the quarterly period was also due to an increase in other personnel costs. The increase in the year-to-date period was partially offset by a decrease in personnel costs in connection with previously announced savings initiatives.
Depreciation and Amortization
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| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Depreciation | $ | 177 | $ | 183 | (3) | % | $ | 538 | $ | 559 | (4) | % | |||||||||||||||||||||||
| Amortization of intangible assets | 24 | 37 | (36) | % | 77 | 122 | (37) | % | |||||||||||||||||||||||||||
| Total depreciation and amortization | $ | 201 | $ | 220 | (9) | % | $ | 615 | $ | 681 | (10) | % |
Depreciation decreased $6 million and $21 million during the three and nine months ended September 30, 2021, compared to the same periods in 2020. Amortization of intangible assets decreased $13 million and $45 million during the three and nine months ended September 30, 2021, compared to the same periods in 2020 primarily due to the completion of amortization related to certain intangible assets as well as the impact of definite-lived intangible impairments in the prior year.
Impairment of Goodwill and Intangible Assets
During the three and nine months ended September 30, 2020, as a result of the significant negative impact related to COVID-19, which had a severe effect on the entire global travel industry, we recognized goodwill impairment charges of $14 million and $799 million as well as intangible asset impairment charges of $41 million and $172 million. See Note 3 – Fair Value Measurements in the notes to the consolidated financial statements for further information.
Legal Reserves, Occupancy Tax and Other
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| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Legal reserves, occupancy tax and other | $ | 10 | $ | 2 | 452 | % | $ | 1 | $ | (11) | N/A | ||||||||||||||||||||||||
| % of revenue | 0.3 | % | 0.1 | % | — | % | (0.3) | % |
Legal reserves, occupancy tax and other consists of changes in our reserves for court decisions and the potential and final settlement of issues related to hotel occupancy and other taxes, expenses recognized related to monies paid in advance of occupancy and other tax proceedings (“pay-to-play”) as well as certain other legal reserves.
Legal reserves, occupancy tax and other for three months ended September 30, 2021 primarily included a charge for certain other legal reserves. For the nine months ended September 30, 2021, these charges were mostly offset by net reductions to our reserve related to hotel occupancy and other taxes. During the nine months ended September 30, 2020, we recorded a $25 million gain in relation to a legal settlement, which was partially offset by changes in our reserve related to hotel occupancy and other taxes.
Restructuring and Related Reorganization Charges
In 2020, we committed to restructuring actions intended to simplify our businesses and improve operational efficiencies, which have resulted in headcount reductions and office consolidations. As a result, we recognized $12 million and $78 million in restructuring and related reorganization charges during the three months ended September 30, 2021 and 2020 and, during the nine months ended September 30, 2021 and 2020, we recognized $54 million and $206 million. Based on current plans, which are subject to change, we expect total reorganization charges in the remainder of 2021 of up to $10 million. However, we
continue to actively evaluate additional cost reduction efforts and should we make decisions in future periods to take further actions we will incur additional reorganization charges.
Operating Income (Loss)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 524 | $ | (113) | N/A | $ | 23 | $ | (2,256) | N/A | |||||||||||||||||||||||||
| % of revenue | 17.7 | % | (7.5) | % | 0.4 | % | (52.7) | % |
During the three and nine months ended September 30, 2021, we had operating income of $524 million and $23 million, compared to operating losses of $113 million and $2.3 billion for the same periods in 2020. The improvement in the current year periods was primarily due to growth in revenue in excess of operating costs. The change for the year-to-date period was also impacted by the prior year goodwill and intangible impairment charges mentioned above.
Adjusted EBITDA by Segment
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| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Retail | $ | 867 | $ | 429 | 102 | % | $ | 1,264 | $ | 248 | 411 | % | |||||||||||||||||||||||
| B2B | 68 | (52) | N/A | — | (154) | N/A | |||||||||||||||||||||||||||||
| trivago | 18 | 7 | 170 | % | 19 | (10) | N/A | ||||||||||||||||||||||||||||
| Unallocated overhead costs (Corporate) (1) | (98) | (80) | 23 | % | (285) | (292) | (2) | % | |||||||||||||||||||||||||||
| Total Adjusted EBITDA (2) | $ | 855 | $ | 304 | 181 | % | $ | 998 | $ | (208) | N/A |
(1) Includes immaterial operating results of Bodybuilding.com through its sale in May 2020.
(2) Adjusted EBITDA is a non-GAAP measure. See “Definition and Reconciliation of Adjusted EBITDA” below for more information.
Adjusted EBITDA is our primary segment operating metric. See Note 11 – Segment Information in the notes to the consolidated financial statements for additional information on intersegment transactions, unallocated overhead costs and for a reconciliation of Adjusted EBITDA by segment to net income (loss) attributable to Expedia Group, Inc. for the periods presented above.
Our Retail, B2B and trivago segments all experienced improvements in Adjusted EBITDA in current year periods as a result of the recovering travel environment as well as impacts of the costs saving initiatives implemented in 2020.
Unallocated overhead costs increased $18 million during the three months ended September 30, 2021, compared to the same period in 2020, primarily due to an increase in general and administrative expenses. Unallocated overhead costs during the nine months ended September 30, 2021 was comparable to the same period in 2020.
Interest Income and Expense
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Interest income | $ | 2 | $ | 3 | (25) | % | $ | 5 | $ | 16 | (66) | % | |||||||||||||||||||||||
| Interest expense | (86) | (113) | (23) | % | (267) | (258) | 4 | % | |||||||||||||||||||||||||||
| Loss on debt extinguishment | — | — | N/A | (280) | — | N/A |
Interest income decreased for the three and nine months ended September 30, 2021, compared to the same periods in 2020, as a result of lower rates of return. Interest expense decreased for the three months ended September 30, 2021, compared to the same period in 2020, primarily as a result of interest related to high cost senior notes outstanding in the prior year but
extinguished in March 2021, as well as interest related to our prior year draw on our revolving credit facility, which we fully repaid in December 2020. Interest expense increased for the nine months ended September 30, 2021, compared to the same period in 2020, primarily as a result of higher average debt balances due to additional debt issued since May 2020, partially offset by prior year interest expense related to the outstanding revolving credit facility.
As a result of the debt refinancing transactions during the nine months ended September 30, 2021, we recognized a loss on debt extinguishment of $280 million, which included the payment of early payment premiums and fees as well as the write-off of unamortized debt issuance costs. See Note 4 – Debt in the notes to the consolidated financial statements for further information.
Other, Net
Other, net is comprised of the following:
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| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Foreign exchange rate gains (losses), net | $ | (24) | $ | 10 | $ | (42) | $ | 52 | |||||||||||||||
| Gains (losses) on minority equity investments, net | (11) | (7) | (7) | (202) | |||||||||||||||||||
| Gain (loss) on sale of businesses, net | 54 | — | 55 | (1) | |||||||||||||||||||
| Other | 6 | (4) | 4 | (7) | |||||||||||||||||||
| Total other, net | $ | 25 | $ | (1) | $ | 10 | $ | (158) |
In July 2021, we completed the sale of one of our smaller businesses within our Retail segment, which resulted in a gain of $53 million. See Note 10 – Divestitures in the notes to the consolidated financial statements for further information.
During the nine months ended September 30, 2020, losses on minority equity investments, net included $134 million of impairment losses related to a minority investment as well as $68 million of mark-to-market losses related to our publicly traded marketable equity investment, Despegar. See Note 3 – Fair Value Measurements in the notes to the consolidated financial statements for further information.
Provision for Income Taxes
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 87 | $ | (24) | N/A | $ | (129) | $ | (319) | (60) | % | ||||||||||||||||||||||||
| Effective tax rate | 18.7 | % | 10.8 | % | 25.3 | % | 12.0 | % |
We determine our provision for income taxes for interim periods using an estimate of our annual effective tax rate. We record any changes affecting the estimated annual tax rate in the interim period in which the change occurs, including discrete items.
For the three months ended September 30, 2021, the effective tax rate was an 18.7% expense on pre-tax income, compared to a 10.8% benefit on pre-tax loss for the three months ended September 30, 2020. The change in the effective tax rate was primarily due to discrete items in the prior year.
For the nine months ended September 30, 2021, the effective tax rate was a 25.3% benefit on a pre-tax loss, compared to a 12.0% benefit on pre-tax loss for the nine months ended September 30, 2020. The change in the effective tax rate was primarily due to nondeductible impairments and a valuation allowance recorded in the prior year.
We are subject to taxation in the United States and foreign jurisdictions. Our income tax filings are regularly examined by federal, state and foreign tax authorities. During the fourth quarter of 2019, the Internal Revenue Service (“IRS”) issued final adjustments related to transfer pricing with our foreign subsidiaries for our 2011 to 2013 tax years. The proposed adjustments would increase our U.S. taxable income by $696 million, which would result in federal tax of approximately $244 million, subject to interest. We do not agree with the position of the IRS. We filed a protest with the IRS for our 2011 to 2013 tax years and Appeals returned our case to Exam for further review. We are also under examination by the IRS for our 2014 to 2016 tax
years. Subsequent years remain open to examination by the IRS. We do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years.
Definition and Reconciliation of Adjusted EBITDA
We report Adjusted EBITDA as a supplemental measure to U.S. generally accepted accounting principles (“GAAP”). Adjusted EBITDA is among the primary metrics by which management evaluates the performance of the business and on which internal budgets are based. Management believes that investors should have access to the same set of tools that management uses to analyze our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP. Adjusted EBITDA has certain limitations in that it does not take into account the impact of certain expenses to our consolidated statements of operations. We endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the most directly comparable GAAP measure and a description of the reconciling items and adjustments to derive the non-GAAP measure. Adjusted EBITDA also excludes certain items related to transactional tax matters, which may ultimately be settled in cash, and we urge investors to review the detailed disclosure regarding these matters included above, in the Legal Proceedings section, as well as the notes to the financial statements. The non-GAAP financial measure used by the Company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.
Adjusted EBITDA is defined as net income (loss) attributable to Expedia Group adjusted for (1) net income (loss) attributable to non-controlling interests; (2) provision for income taxes; (3) total other expenses, net; (4) stock-based compensation expense, including compensation expense related to certain subsidiary equity plans; (5) acquisition-related impacts, including (i) amortization of intangible assets and goodwill and intangible asset impairment, (ii) gains (losses) recognized on changes in the value of contingent consideration arrangements, if any, and (iii) upfront consideration paid to settle employee compensation plans of the acquiree, if any; (6) certain other items, including restructuring; (7) items included in legal reserves, occupancy tax and other; (8) that portion of gains (losses) on revenue hedging activities that are included in other, net that relate to revenue recognized in the period; and (9) depreciation.
The above items are excluded from our Adjusted EBITDA measure because these items are noncash in nature, or because the amount and timing of these items is unpredictable, not driven by core operating results and renders comparisons with prior periods and competitors less meaningful. We believe Adjusted EBITDA is a useful measure for analysts and investors to evaluate our future on-going performance as this measure allows a more meaningful comparison of our performance and projected cash earnings with our historical results from prior periods and to the results of our competitors. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole and our individual business segments. In addition, we believe that by excluding certain items, such as stock-based compensation and acquisition-related impacts, Adjusted EBITDA corresponds more closely to the cash operating income generated from our business and allows investors to gain an understanding of the factors and trends affecting the ongoing cash earnings capabilities of our business, from which capital investments are made and debt is serviced.
The reconciliation of net income (loss) attributable to Expedia Group, Inc. to Adjusted EBITDA is as follows:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Net income (loss) attributable to Expedia Group, Inc. | $ | 376 | $ | (192) | $ | (374) | $ | (2,229) | ||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | 2 | (8) | (6) | (108) | ||||||||||||||||||||||
| Provision for income taxes | 87 | (24) | (129) | (319) | ||||||||||||||||||||||
| Total other expense, net | 59 | 111 | 532 | 400 | ||||||||||||||||||||||
| Operating income (loss) | 524 | (113) | 23 | (2,256) | ||||||||||||||||||||||
| Gain (loss) on revenue hedges related to revenue recognized | (8) | 15 | (14) | 45 | ||||||||||||||||||||||
| Restructuring and related reorganization charges | 12 | 78 | 54 | 206 | ||||||||||||||||||||||
| Legal reserves, occupancy tax and other | 10 | 2 | 1 | (11) | ||||||||||||||||||||||
| Stock-based compensation | 116 | 47 | 319 | 156 | ||||||||||||||||||||||
| Depreciation and amortization | 201 | 220 | 615 | 681 | ||||||||||||||||||||||
| Impairment of goodwill | — | 14 | — | 799 | ||||||||||||||||||||||
| Impairment of intangible assets | — | 41 | — | 172 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 855 | $ | 304 | $ | 998 | $ | (208) |
Financial Position, Liquidity and Capital Resources
Our principal sources of liquidity are typically cash flows generated from operations, cash available under our credit facilities as well as our cash and cash equivalents and short-term investment balances, which were $5.0 billion and $3.4 billion at September 30, 2021 and December 31, 2020. As of September 30, 2021, the total cash and cash equivalents and short-term investments held outside the United States was $840 million ($614 million in wholly-owned foreign subsidiaries and $226 million in majority-owned subsidiaries). Our credit facilities were essentially untapped at September 30, 2021 and December 31, 2020.
Managing our balance sheet prudently and maintaining appropriate liquidity are high priorities during the current COVID-19 pandemic. In 2020, in order to best position the Company to navigate our temporary working capital changes and depressed revenue, we took a number of actions to bolster our liquidity and preserve financial flexibility. During the nine months ended September 30, 2021, we continued these actions, including suspension of our share repurchases and quarterly common stock dividends as well as completed the following:
*•*0% Convertible Notes Issuance. On February 19, 2021, we completed our private placement of $1 billion aggregate principal amount of unsecured 0% convertible senior notes due 2026 (the “Convertible Notes”). The net proceeds from the issuance of the Convertible Notes was approximately $983 million after deducting debt issuance costs. The Convertible Notes will mature on February 15, 2026, unless earlier converted, redeemed or repurchased. The Convertible Notes will not bear regular interest. The Convertible Notes have an initial conversion rate of 3.9212 shares of common stock of Expedia Group with a par value $0.0001 per share, per $1,000 principal amount of Convertible Notes, which is equal to an initial conversion price of approximately $255.02 per share of our common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends.
- 2.95% Senior Notes Issuance. On March 3, 2021, we privately placed $1 billion of senior unsecured notes that are due in March 2031 that bear interest at 2.95% (the “2.95% Notes”). The 2.95% Notes were issued at a price of 99.081% of the aggregate principal amount. Interest is payable semi-annually in arrears in March and September of each year, beginning September 15, 2021, and the interest rate is subject to adjustment based on certain ratings events. The net proceeds from the issuance of the 2.95% Notes was approximately $982 million after deducting the discount and debt issuance costs.
*•*Extinguishment of High Cost Debt. On March 3, 2021, we used the net proceeds from the Convertible Notes and 2.95% Notes and completed the redemption of all of our outstanding 7.0% Notes as well as settled the tender offer to purchase $956 million in aggregate principal of our 6.25% Notes, which resulted in the recognition of a loss on debt extinguishment of $280 million during the nine months ended September 30, 2021 comprised of early payment premiums and fees associated with the tender offer as well as the write-off of unamortized debt issuance costs.
- Repayment of Preferred Stock. On May 20, 2021, we completed the prepayment of 50% of the outstanding Series A Preferred Stock at a price equal to 103% of the Preference Amount, plus accrued and unpaid distributions as to the redemption date using cash on-hand. On October 15, 2021, we completed the prepayment of the remaining 50% of the outstanding Series A Preferred Stock also at a price equal to 103% of the Preference Amount, plus accrued and unpaid distributions as to the redemption date using cash on-hand.
Our credit ratings are periodically reviewed by rating agencies. As of September 30, 2021, Moody’s rating was Baa3 with an outlook of “stable,” S&P’s rating was BBB- with an outlook of “negative” and Fitch’s rating was BBB- with an outlook of “negative.” Changes in our operating results, cash flows, financial position, capital structure, financial policy or capital allocations to share repurchase, dividends, investments and acquisitions could impact the ratings assigned by the various rating agencies. Should our credit ratings be adjusted downward, we may incur higher costs to borrow and/or limited access to capital markets and interest rates on the 6.25% Notes issued in May 2020, the 3.6% and 4.625% Notes issued in July 2020 as well as the 2.95% Notes issued in March 2021 will increase, which could have a material impact on our financial condition and results of operations.
As of September 30, 2021, we were in compliance with the covenants and conditions in our revolving credit facilities and outstanding debt as detailed in Note 4 – Debt in the notes to the consolidated financial statements.
Under the merchant model, we receive cash from travelers at the time of booking and we record these amounts on our consolidated balance sheets as deferred merchant bookings. We pay our airline suppliers related to these merchant model bookings generally within a few weeks after completing the transaction. For most other merchant bookings, which is primarily our merchant lodging business, we generally pay after the travelers’ use and, in some cases, subsequent billing from the hotel suppliers. Therefore, generally we receive cash from the traveler prior to paying our supplier, and this operating cycle
represents a working capital source of cash to us. Typically, the seasonal fluctuations in our merchant hotel bookings have affected the timing of our annual cash flows. Generally, during the first half of the year, hotel bookings have traditionally exceeded stays, resulting in much higher cash flow related to working capital. During the second half of the year, this pattern typically reverses and cash flows are typically negative. During 2020, impacts of COVID-19 disrupted our typical working capital trends. Significantly higher cancellations and reduced booking volumes, particularly in the first half of 2020, resulted in material operating losses and negative cash flow. Although travel volumes remain materially lower than historic levels, booking and travel trends normalized during the second half of 2020, and during the first nine months of 2021 have increased from 2020 levels, resulting in working capital benefits and positive cash flow in the current period more akin to typical historical trends. However, it remains difficult to forecast the working capital trends for the upcoming quarters, given the uncertainty related to the duration of the impact from COVID-19 and the shape and timing of any sustained recovery.
Prior to COVID-19, we embarked on an ambitious cost reduction initiative to simplify the organization and increase efficiency. In response to COVID-19, we took several additional actions to further reduce costs to help mitigate the financial impact from COVID-19 and continue to improve our long-term cost structure. We temporarily halted construction on our new headquarters during the initial quarantine order in March 2020 but restarted construction later in the year. We spent approximately $850 million on construction between 2016 and 2020 and approximately $23 million was spent during the nine months ended September 30, 2021. As of the end of the second quarter of 2021, the project was substantially complete and was within the expected total project spend of approximately $900 million.
Our cash flows are as follows:
| Nine months ended September 30, | ||||||||||||||||||||
| 2021 | 2020 | $ Change | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Cash provided by (used in): | ||||||||||||||||||||
| Operating activities | $ | 3,463 | $ | (3,449) | $ | 6,912 | ||||||||||||||
| Investing activities | (506) | (107) | (399) | |||||||||||||||||
| Financing activities | (351) | 4,571 | (4,922) | |||||||||||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents | (126) | (31) | (95) |
For the nine months ended September 30, 2021, net cash provided by operating activities was $3.5 billion compared to cash used in operations of $3.4 billion for the nine months ended September 30, 2020. In the prior year period, impacts from the COVID-19 pandemic resulted in a significant use of cash to fund working capital changes and operating losses compared to a current year cash benefit from working capital. The largest driver of the swing in working capital relates to a significant use of cash in the prior year for deferred merchant bookings as refunds for cancelled bookings exceeded new bookings compared to a meaningful increase in booking volumes and deferred merchant bookings in the current year period.
For the nine months ended September 30, 2021, cash used in investing activities increased $399 million compared to the prior year period largely due to lower net sales and maturities of investments, partially offset by lower capital expenditures, including those related to our new headquarters as our construction winds down.
For the nine months ended September 30, 2021, cash used in financing activities primarily included payments of approximately $2 billion related to the extinguishment of debt and $618 million for the 50% redemption of preferred stock both discussed above as well as $108 million of cash paid for treasury stock activity related to the vesting of equity instruments and $50 million in preferred stock dividends. These uses of cash were largely offset by approximately $2 billion of net proceeds from the issuance of Convertible Notes and 2.95% Notes issued in February and March 2020, respectively, as well as $421 million of proceeds from the exercise of options and employee stock purchase plans. For the nine months ended September 30, 2020, cash provided by financing activities primarily included $3.9 billion of net proceeds from the issuance of senior notes issued in May and July 2020, $1.1 billion of net proceeds from a private equity investment, $650 million of net proceeds from our revolving credit facilities draws, as well as $105 million of proceeds from the exercise of options and employee stock purchase plans. These sources were partially offset by cash paid to acquire shares of $419 million and cash dividend payments of $65 million.
During the nine months ended September 30, 2021, we paid $50 million (or $47.11 per share of Series A Preferred Stock) of dividends on our Series A Preferred Stock. At this time, we do not expect to make future quarterly dividend payments on our common stock. Future declarations of dividends are subject to final determination by our Board of Directors.
Foreign exchange rate changes resulted in a decrease of our cash and restricted cash balances denominated in foreign currency during the nine months ended September 30, 2021 and 2020 of $126 million and $31 million reflecting a net depreciation in foreign currencies relative to the U.S. dollar during the periods.
In our opinion, our liquidity position provides sufficient capital resources to meet our foreseeable cash needs. There can be no assurance, however, that the cost or availability of future borrowings, including refinancings, if any, will be available on terms acceptable to us.
Summarized Financial Information for Guarantors and the Issuer of Guaranteed Securities
Summarized financial information of Expedia Group, Inc. (the “Parent”) and our subsidiaries that are guarantors of our debt facility and instruments (the “Guarantor Subsidiaries”) is shown below on a combined basis as the “Obligor Group.” The debt facility and instruments are guaranteed by certain of our wholly-owned domestic subsidiaries and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. The guarantees are full, unconditional, joint and several with the exception of certain customary automatic subsidiary release provisions. In this summarized financial information of the Obligor Group, all intercompany balances and transactions between the Parent and Guarantor Subsidiaries have been eliminated and all information excludes subsidiaries that are not issuers or guarantors of our debt facility and instruments, including earnings from and investments in these entities.
| September 30, 2021 | December 31, 2020 | ||||||||||
| (In millions) | |||||||||||
| Combined Balance Sheets Information: | |||||||||||
| Current Assets (1) | $ | 8,201 | $ | 5,076 | |||||||
| Non-Current Assets | 10,375 | 10,245 | |||||||||
| Current Liabilities | 8,903 | 4,595 | |||||||||
| Non-Current Liabilities | 8,247 | 8,804 | |||||||||
| Series A Preferred Stock | 511 | 1,022 | |||||||||
| Nine Months Ended September 30, 2021 | Year Ended December 31, 2020 | ||||||||||
| Combined Statements of Operations Information: | |||||||||||
| Revenue | $ | 5,251 | $ | 4,229 | |||||||
| Operating loss (2) | (74) | (1,884) | |||||||||
| Net loss | (338) | (1,890) | |||||||||
| Net loss attributable to Obligors | (509) | (1,965) |
(1)Current assets include intercompany receivables with non-guarantors of $1.4 billion as of September 30, 2021 and $1.2 billion as of December 31, 2020.
(2)Operating loss includes intercompany expenses with non-guarantors of $473 million for the nine months ended September 30, 2021 and $600 million for the year ended December 31, 2020.
Contractual Obligations, Commercial Commitments and Off-balance Sheet Arrangements
There have been no material changes outside the normal course of business to our contractual obligations and commercial commitments since December 31, 2020. Other than our contractual obligations and commercial commitments, we did not have any off-balance sheet arrangements as of September 30, 2021 or December 31, 2020.
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