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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, 2022, Part I, Item 1A, “Risk Factors,” as well as those discussed elsewhere in this report. 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, 2022.
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 empower travelers to efficiently research, plan, book and experience travel. 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.
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, had an unprecedented impact on the global travel industry and materially and negatively impacted our business, financial results and financial condition. In May 2023, the World Health Organization formally declared an end to the COVID-19 global health emergency and countries around the world are generally open for international travel. However, it remains difficult to predict with any certainty any future impact that COVID-19, including any future variations, may have on the travel industry and, in particular, our business.
More recently, inflation and other macroeconomic pressures in the U.S. and the global economy, such as rising interest rates, currency fluctuations and energy price volatility, as well as evolving geopolitical conflicts, have contributed to an increasingly complex business environment. Our future operational results may be subject to volatility, particularly in the short-term, due to the impact of the aforementioned trends. Broad, sustained negative economic impacts could put strain on our suppliers, business and service partners, which increases the risk of credit losses and service level or other disruptions.
Additionally, further health-related events, political instability, geopolitical conflicts, acts of terrorism, significant fluctuations in currency values, sustained levels of increased inflation, sovereign debt issues, and natural disasters, are examples of other events that could have a negative impact on the travel industry in the future.
Despite these factors, we have witnessed a healthy recovery of travel demand, which remains strong and is attributable to factors including pent-up demand from the COVID-19 pandemic, and consumers prioritizing spend on travel and experiences over other discretionary spending.
Online Travel
Increased usage and familiarity with the internet have continued to drive rapid growth in online penetration of travel expenditures. Online penetration is higher in the U.S. and Western European markets with online penetration rates in some emerging markets, such as Latin America and Eastern European regions, lagging behind those regions. Emerging markets continue to present an attractive growth opportunity for our business, while also attracting many competitors to online travel. The industry is expected to remain highly competitive for the foreseeable future. In addition to the growth of online travel agencies, we have seen continued interest in the online travel industry from search engine companies such as Google, evidenced by continued product enhancements, and prioritizing its own AdWords and metasearch products such as Google Hotel Ads and Google Flights, 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 and Booking.com have emerged as the leaders, bringing incremental alternative accommodation and vacation rental inventory to the market. Other competitors have arisen, including vacation rental property managers such as Vacasa, who operate their own booking sites in addition to listing on Airbnb, Vrbo, and Booking.com, and are expected to continue to grow as a percentage of the global accommodations market. Additionally, traditional consumer ecommerce players have expanded their local offerings by adding hotel offers to their websites. Most recently, ride sharing app Uber has added transportation and experience offerings to its app via partnerships with other travel providers. Our B2B business has grown significantly but faces competition from other online travel agencies (“OTAs”) with B2B offerings, as well as other competitors.
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 2022, we began evolving our strategy from being largely transactionally focused, where we were primarily focused on acquiring customers through performance channels, to building a direct relationship with our customers by allocating more marketing spend towards our loyalty programs, paid app downloads, and brand awareness. While we maintain a large portfolio of consumer brands, we put the majority of our marketing efforts towards our three core consumer brands: Expedia, Hotels.com and Vrbo.
Lodging
Lodging includes both hotel and alternative accommodations. As a percentage of our total worldwide revenue in the third quarter of 2023, lodging accounted for 82%. Room nights booked grew 13% in the first nine months of 2023, as compared to growth of 26% in 2022 and 71% in 2021. Average Daily Rates (“ADRs”) booked for Expedia Group declined 2% in first nine months of 2023 and increased 3% in 2022 and 28% in 2021. Over the last couple of years, our lodging business saw a significant increase in ADRs compared to pre-pandemic levels, which were driven by broader industry trends, a mix shift to Vrbo and high ADR geographies.
As of September 30, 2023, our global lodging marketplace had over 3 million lodging properties available, including over 2 million online bookable alternative accommodations listings through Vrbo and over 950,000 hotels and alternative accommodations through our other brands.
Hotel. We generate the majority of our revenue through the facilitation of hotel reservations (stand-alone and package bookings). 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, discounting, and couponing have contributed to declines in revenue per room night and profitability in certain cases.
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 programs, increased or exclusive product availability and complimentary benefits.
Alternative Accommodations. Over the past decade, we expanded into the fast-growing alternative accommodations market. Vrbo is a leader, specializing in unique whole home inventory, primarily in North American leisure markets, 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.
Since our hotel and alternative accommodation 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. In the future, we could see macroeconomic factors influence ADR trends, including rising living costs due to inflation and higher interest rates. Other factors that could lead to moderating ADRs include growth in hotel supply and the increase in alternative accommodation inventory.
Air
Similar to the rest of travel, the airlines experienced a surge in pent-up demand when COVID-19 restrictions were lifted, however they continued to operate at reduced capacity due to staffing shortages and supply chain disruptions.
In the future, 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.
Booked air tickets increased 4% in the first nine months of 2023, and increased 8% in 2022 and 43% in 2021. As a percentage of our total worldwide revenue in the third quarter of 2023, air accounted for 3%.
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 first nine months of 2023, we generated $616 million of advertising and media revenue, a 3% increase from the same period in 2022. As a percentage of our total worldwide revenue in the third quarter of 2023, advertising and media accounted for 6%.
Since the onset of COVID-19, online travel agencies, including ourselves, have reduced marketing spend on trivago. In response, trivago has reduced its own marketing spend and lowered operating costs to preserve profitability. We expect trivago to continue to experience revenue pressure going forward.
Business Strategy
As we endeavor to power global travel for everyone, everywhere our focus is to: leverage our brand, supply and platform technology strength, to provide greater services and value to our travelers, suppliers and business partners, and build longer-lasting direct relationships with our customers.
Leverage Brand and Supply Strength to Power the Travel Ecosystem. We believe the strength of our core brand portfolio and consistent enhancements to product and service offerings, 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, we are also able to provide value to supply partners seeking to grow their business through sophisticated technology, a better understanding of travel retailing and reaching consumers in markets beyond their reach. Our 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. We also market to consumers through a variety of channels, including internet search, metasearch and social and digital media.
In 2021, we announced plans to unify and expand our existing loyalty programs into one global rewards platform called “One Key” spanning all our main brands, which launched in July 2023 in the United States with other markets to follow.
Leverage Our Platform to Deliver More Rapid Product Innovation Resulting in Better Traveler Experiences. During 2020, Expedia Group unified its technology, product, data engineering and data science teams to build services and capabilities that can be leveraged across our business units to provide value-add services to our travel suppliers and serve our end customers. The unified team structure enables us to deliver more scalable services and operate more efficiently. All of our transaction-based businesses also now benefit from our shared platform infrastructure, including customer servicing and support, data centers, search capabilities, payment processing and fraud operations.
As we continue to evolve our shared platform infrastructure, our focus is on developing technical capabilities that support various travel products while using simpler, standard architecture and common applications and frameworks. We believe this strategy will enable us to: simultaneously build pieces of technology that work in tandem; ship products faster; create more innovative solutions; and achieve greater scale. Ultimately, we believe this will result in faster product innovation and therefore better traveler experiences. In addition, over time, as we execute on our streamlined application development framework, we believe we can unlock additional platform service opportunities beyond the scope of our internal brands and 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. Since 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. 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 in our B2B segment, international operations, advertising business or a change in our product mix, among others, may also influence the typical trend of seasonality in the future.
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.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
Goodwill. We assess goodwill for impairment annually as of October 1, or more frequently, if events and circumstances indicate impairment may have occurred. During the third quarter of 2023, as a result of trivago’s recent strategic shift which included intensifying its brand marketing investments with an anticipated decrease in profitability, we concluded that sufficient indicators existed to require us to perform an interim impairment assessment. In the evaluation of goodwill for impairment, we typically perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value and, if applicable, record an impairment charge based on the excess of the reporting unit's carrying amount over its fair value. Periodically, we may choose to perform a qualitative assessment, prior to performing the quantitative analysis, to determine whether the fair value of the goodwill is more likely than not impaired.
We generally base our measurement of fair value of reporting units on a blended analysis of the present value of future discounted cash flows and market valuation approach. The discounted cash flows model indicates the fair value of the reporting units based on the present value of the cash flows that we expect the reporting units to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of our business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the Company to comparable publicly traded firms in similar lines of business. Our significant estimates in the market approach model include identifying similar companies with comparable business factors such as size,
growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting units.
We believe the weighted use of discounted cash flows and market approach is generally the best method for determining the fair value of our reporting units because these are the most common valuation methodologies used within the travel and internet industries; and the blended use of both models compensates for the inherent risks associated with either model if used on a stand-alone basis.
In addition to measuring the fair value of our reporting units as described above, we consider the combined carrying and fair values of our reporting units in relation to the Company’s total fair value of equity plus debt as of the assessment date. Our equity value assumes our fully diluted market capitalization, using either the stock price on the valuation date or the average stock price over a range of dates around the valuation date, plus an estimated acquisition premium which is based on observable transactions of comparable companies. The debt value is based on the highest value expected to be paid to repurchase the debt, which can be fair value, principal or principal plus a premium depending on the terms of each debt instrument.
Indefinite-Lived Intangible Assets. We base our measurement of fair value of indefinite-lived intangible assets, which primarily consist of trade name and trademarks, using the relief-from-royalty method. This method assumes that the trade name and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.
The use of different estimates or assumptions in determining the fair value of our goodwill and indefinite-lived intangible assets may result in different values for these assets, which could result in an impairment or, in the period in which an impairment is recognized, could result in a materially different impairment charge.
For additional information on our goodwill and intangible asset impairments recorded as a result of our interim impairment testing during the third quarter of 2023, see Note 3 – Fair Value Measurements in the notes to the consolidated financial statements.
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, 2022 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 eight 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 and other recent developments 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 $46 million and $44 million as of September 30, 2023 and December 31, 2022, respectively.
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: B2C (formerly referred to as Retail), B2B, and trivago. Our B2C segment provides a full range of travel and advertising services to our worldwide customers through a variety of consumer brands including: Expedia.com, Hotels.com, Vrbo, Orbitz, Travelocity, Wotif Group, ebookers, CheapTickets, Hotwire.com and CarRentals.com. Our B2B segment is primarily comprised of Expedia Partner Solutions, which offers private label and co-branded products to make travel services available to travelers through third-party company branded websites. 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, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Gross bookings | $ | 25,685 | $ | 23,987 | 7 | % | $ | 82,407 | $ | 74,538 | 11 | % | |||||||||||||||||||||||
| Revenue margin (1) | 15.3 | % | 15.1 | % | 12.1 | % | 12.1 | % |
(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, 2023, gross bookings increased 7% and 11%, compared to the same periods in 2022, as gross bookings for lodging improved due to continued strength of travel demand. Booked room nights for our lodging business increased 9% and 13% for the three and nine months ended September 30, 2023.
Revenue margin increased slightly during the three months ended September 30, 2023 and remained relatively consistent during the nine months ended September 30, 2023 compared to the same periods in 2022.
Results of Operations
Revenue
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Revenue by Segment | |||||||||||||||||||||||||||||||||||
| B2C | $ | 2,819 | $ | 2,707 | 4 | % | $ | 7,155 | $ | 6,867 | 4 | % | |||||||||||||||||||||||
| B2B | 995 | 788 | 26 | % | 2,524 | 1,870 | 35 | % | |||||||||||||||||||||||||||
| trivago (Third-party revenue) | 115 | 124 | (8) | % | 273 | 312 | (13) | % | |||||||||||||||||||||||||||
| Total revenue | $ | 3,929 | $ | 3,619 | 9 | % | $ | 9,952 | $ | 9,049 | 10 | % |
Revenue increased 9% and 10% for the three and nine months ended September 30, 2023, compared to the same periods in 2022, on strong growth in our B2B segment resulting from increased lodging revenue.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Revenue by Service Type | |||||||||||||||||||||||||||||||||||
| Lodging | $ | 3,233 | $ | 2,881 | 12 | % | $ | 7,960 | $ | 6,891 | 16 | % | |||||||||||||||||||||||
| Air | 100 | 100 | (1) | % | 324 | 269 | 20 | % | |||||||||||||||||||||||||||
| Advertising and media(1) | 240 | 222 | 8 | % | 616 | 601 | 3 | % | |||||||||||||||||||||||||||
| Other | 356 | 416 | (14) | % | 1,052 | 1,288 | (18) | % | |||||||||||||||||||||||||||
| Total revenue | $ | 3,929 | $ | 3,619 | 9 | % | $ | 9,952 | $ | 9,049 | 10 | % |
(1)Includes third-party revenue from trivago as well as our transaction-based websites.
Lodging revenue increased 12% and 16% for the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily driven by an increase in room nights stayed.
Air revenue remained consistent for the three months ended September 30, 2023 and increased 20% for the nine months ended September 30, 2023, compared to the same periods in 2022. The increase in the year-to-date period was primarily driven by an increase in revenue per air ticket.
Advertising and media revenue increased 8% and 3% for the three and nine months ended September 30, 2023, compared to the same periods in 2022, due to an increase at Expedia Group Media Solutions, partially offset by a decline in trivago revenue. All other revenue, which includes car rental, insurance, cruise and activities, decreased 14% and 18% for the three and nine months ended September 30, 2023, compared to the same periods in 2022, from a decrease in travel insurance with lower attach rates as consumers’ appetite for insurance normalizes and car rental revenue as rates decline on supply increases.
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, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Revenue by Business Model | |||||||||||||||||||||||||||||||||||
| Merchant | $ | 2,739 | $ | 2,427 | 13 | % | $ | 6,833 | $ | 6,037 | 13 | % | |||||||||||||||||||||||
| Agency | 918 | 935 | (2) | % | 2,408 | 2,309 | 4 | % | |||||||||||||||||||||||||||
| Advertising, media and other | 272 | 257 | 6 | % | 711 | 703 | 1 | % | |||||||||||||||||||||||||||
| Total revenue | $ | 3,929 | $ | 3,619 | 9 | % | $ | 9,952 | $ | 9,049 | 10 | % |
Merchant revenue increased for the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to an increase in merchant hotel revenue driven by an increase in room nights stayed.
Agency revenue decreased slightly for the three months ended September 30, 2023, compared to the same period in 2022, and increased for the nine months ended September 30, 2023 primarily due to an increase in agency hotel and air revenue.
Advertising, media and other increased for the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to an increase in Expedia Media Solutions advertising revenue.
Cost of Revenue
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Direct costs | $ | 328 | $ | 378 | (13) | % | $ | 977 | $ | 1,022 | (4) | % | |||||||||||||||||||||||
| Personnel and overhead | 84 | 77 | 9 | % | 256 | 223 | 14 | % | |||||||||||||||||||||||||||
| Total cost of revenue | $ | 412 | $ | 455 | (9) | % | $ | 1,233 | $ | 1,245 | (1) | % | |||||||||||||||||||||||
| % of revenue | 10.5 | % | 12.6 | % | 12.4 | % | 13.8 | % |
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 as well as related personnel and overhead costs, including stock-based compensation.
Cost of revenue decreased $43 million and $12 million during the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to lower costs associated with our direct customer service costs and other operations, partially offset by higher cloud costs and customer service personnel costs primarily as a result of increased transaction volumes. As a percentage of revenue, cost of revenue decreased for both periods on leverage driven by ongoing efficiencies across our customer support and other operations.
Selling and Marketing
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Direct costs | $ | 1,671 | $ | 1,504 | 11 | % | $ | 4,737 | $ | 4,229 | 12 | % | |||||||||||||||||||||||
| Indirect costs | 185 | 165 | 13 | % | 563 | 495 | 14 | % | |||||||||||||||||||||||||||
| Total selling and marketing | $ | 1,856 | $ | 1,669 | 11 | % | $ | 5,300 | $ | 4,724 | 12 | % | |||||||||||||||||||||||
| % of revenue | 47.2 | % | 46.1 | % | 53.3 | % | 52.2 | % |
Selling and marketing expense primarily relates to direct costs, including traffic generation costs from search engines and internet portals, television 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 $187 million and $576 million during the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily driven by an increase in B2B partner commissions to support strong growth. Indirect costs increased compared to the prior year period due to higher headcount as well as compensation increases.
Technology and Content
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Personnel and overhead | $ | 250 | $ | 227 | 10 | % | $ | 735 | $ | 636 | 16 | % | |||||||||||||||||||||||
| Other | 90 | 83 | 8 | % | 266 | 228 | 17 | % | |||||||||||||||||||||||||||
| Total technology and content | $ | 340 | $ | 310 | 10 | % | $ | 1,001 | $ | 864 | 16 | % | |||||||||||||||||||||||
| % of revenue | 8.7 | % | 8.6 | % | 10.1 | % | 9.5 | % |
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 $30 million and $137 million during the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to higher personnel costs from increased headcount to support our strategic initiatives, as well as higher stock-based compensation of $7 million and $23 million period over period.
General and Administrative
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Personnel and overhead | $ | 156 | $ | 153 | 2 | % | $ | 467 | $ | 445 | 5 | % | |||||||||||||||||||||||
| Professional fees and other | 38 | 34 | 13 | % | 105 | 117 | (10) | % | |||||||||||||||||||||||||||
| Total general and administrative | $ | 194 | $ | 187 | 4 | % | $ | 572 | $ | 562 | 2 | % | |||||||||||||||||||||||
| % of revenue | 4.9 | % | 5.2 | % | 5.8 | % | 6.2 | % |
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 during the three months ended September 30, 2023 increased compared to the same period in 2022 primarily due to compensation increases and miscellaneous business taxes. General and administrative expense during the nine months ended September 30, 2023 increased slightly compared to the same period in 2022 as higher headcount and compensation increases were partially offset by lower professional fees and miscellaneous business taxes.
Depreciation and Amortization
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Depreciation | $ | 194 | $ | 176 | 10 | % | $ | 555 | $ | 527 | 5 | % | |||||||||||||||||||||||
| Amortization of intangible assets | 14 | 23 | (38) | % | 44 | 66 | (33) | % | |||||||||||||||||||||||||||
| Total depreciation and amortization | $ | 208 | $ | 199 | 5 | % | $ | 599 | $ | 593 | 1 | % |
Depreciation increased $18 million and $28 million during the three and nine months ended September 30, 2023, compared to the same periods in 2022. Amortization of intangible assets decreased $9 million and $22 million during the three and nine months ended September 30, 2023, compared to the same periods in 2022 primarily due to the completion of amortization in the fourth quarter of 2022 related to certain intangible assets.
Impairment of Goodwill and Intangible Assets
During the three and nine months ended September 30, 2023, we recognized a goodwill impairment charge of $297 million related to our trivago segment.
During the three and nine months ended September 30, 2023, we recognized intangible impairment charges of $15 million, and during the three and nine months ended September 30, 2022, we recognized intangible impairment charges of $52 million and $81 million related to an indefinite-lived trade name within our trivago segment.
See Note 3 – Fair Value Measurements in the notes to the consolidated financial statements for further information.
Legal Reserves, Occupancy Tax and Other
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Legal reserves, occupancy tax and other | $ | — | $ | — | N/A | $ | 6 | 23 | (75) | % | |||||||||||||||||||||||||
| % of revenue | — | % | — | % | 0.1 | % | 0.3 | % |
Legal reserves, occupancy tax and other primarily consists of increases 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 the nine months ended September 30, 2023 primarily included changes to our reserve related to other taxes. During the nine months ended September 30, 2022, the charges primarily related to certain other legal reserves for trivago.
Operating Income
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Operating income | $ | 607 | $ | 747 | (19) | % | $ | 929 | $ | 957 | (3) | % | |||||||||||||||||||||||
| % of revenue | 15.5 | % | 20.6 | % | 9.3 | % | 10.6 | % |
During the three and nine months ended September 30, 2023, the decrease in operating income in the current year periods was primarily due to the impairment charges discussed above, partially offset by the growth in revenue in excess of other operating costs.
Adjusted EBITDA by Segment
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| B2C | $ | 1,056 | $ | 943 | 12 | % | $ | 1,857 | $ | 1,713 | 8 | % | |||||||||||||||||||||||
| B2B | 266 | 221 | 21 | % | 605 | 457 | 32 | % | |||||||||||||||||||||||||||
| trivago | 18 | 34 | (48) | % | 51 | 92 | (45) | % | |||||||||||||||||||||||||||
| Unallocated overhead costs (Corporate) | (124) | (119) | 4 | % | (365) | (362) | 1 | % | |||||||||||||||||||||||||||
| Total Adjusted EBITDA (1) | $ | 1,216 | $ | 1,079 | 13 | % | $ | 2,148 | $ | 1,900 | 13 | % |
(1) 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 9 – 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 B2C segment Adjusted EBITDA increased during the three and nine months ended September 30, 2023, compared to the same periods in 2022, as a result of marketing efficiencies. Our B2B segment experienced an improvement in Adjusted EBITDA during the three and nine months ended September 30, 2023, compared to the same periods in 2022, primarily as a result of strong revenue growth. Our trivago segment Adjusted EBITDA decreased during the three and nine months ended September 30, 2023, compared to the same periods in 2022, as a result of revenue declines.
Interest Income and Expense
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Interest income | $ | 56 | $ | 20 | 177 | % | $ | 162 | $ | 33 | 396 | % | |||||||||||||||||||||||
| Interest expense | (62) | (63) | (4) | % | (184) | (217) | (15) | % | |||||||||||||||||||||||||||
| Gain on debt extinguishment, net | — | 73 | N/A | — | 49 | N/A |
Interest income increased for the three and nine months ended September 30, 2023, compared to the same periods in 2022, as a result of higher rates of return. Interest expense decreased for the three and nine months ended September 30, 2023, compared to the same periods in 2022, as a result of lower average senior notes outstanding in the current year periods.
During the three and nine months ended September 30, 2022, we settled a tender offer to purchase $500 million in aggregate principal of our 2.95% senior unsecured notes, which resulted in the recognition of a net gain on debt extinguishment of $73 million. In addition, during the nine months ended September 30, 2022 as a result of the early redemption of the 3.6% and 4.5% senior unsecured notes, we recognized a loss on debt extinguishment of $24 million, which primarily included the payment of early payment premiums as well as the write-off of unamortized discount and debt issuance costs.
Other, Net
Other, net is comprised of the following:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Foreign exchange rate losses, net | $ | (31) | $ | (16) | $ | (79) | $ | (47) | |||||||||||||||
| Losses on minority equity investments, net | (127) | (71) | (73) | (423) | |||||||||||||||||||
| TripAdvisor tax indemnification adjustment | — | — | 67 | — | |||||||||||||||||||
| Gain on sale of businesses, net | — | — | 24 | 2 | |||||||||||||||||||
| Other | 1 | — | 1 | 1 | |||||||||||||||||||
| Total other, net | $ | (157) | $ | (87) | $ | (60) | $ | (467) |
During the nine months ended September 30, 2023, we recognized a $67 million gain, which together with amounts recorded in a prior period, represented the estimate of an indemnification reimbursement due to Expedia Group from TripAdvisor. See “Provision for Income Taxes” below for more information and discussion of a corresponding charge to income tax expense in the current period.
During the nine months ended September 30, 2023, we recognized $24 million in gains related to sales of businesses in prior years.
For more information on our losses on minority equity investments, see Note 3 – Fair Value Measurements.
Provision for Income Taxes
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||
| ($ in millions) | ($ in millions) | ||||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 139 | $ | 214 | (35) | % | $ | 295 | $ | 187 | 58 | % | |||||||||||||||||||||||
| Effective tax rate | 31.2 | % | 31.0 | % | 34.8 | % | 52.6 | % |
Our tax provision for interim periods is determined 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, 2023, the effective tax rate was 31.2%, compared to 31.0% for the three months ended September 30, 2022. The increase in the effective tax rate quarter over quarter was due to a nondeductible
goodwill impairment and nondeductible mark-to-market adjustments offset by foreign tax credits and discrete adjustments recorded in the third quarter of 2023.
For the nine months ended September 30, 2023, the effective tax rate was 34.8%, compared to 52.6% for the nine months ended September 30, 2022. The decrease in the effective tax rate was primarily due to nondeductible mark-to-market adjustments recorded in the prior year period.
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 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 have formally filed a protest for our 2011 to 2013 tax years and the case is currently in Appeals. During the third quarter of 2023, the IRS issued final adjustments related to transfer pricing with our foreign subsidiaries for our 2014 to 2016 tax years. The adjustments would increase our U.S. taxable income by $1.232 billion, which would result in federal tax of approximately $431 million, subject to interest. We do not agree with the position of the IRS and intend to formally file a protest. We are also under examination by the IRS for our 2017 to 2020 tax years. We believe it is reasonably possible that the audit of the 2011 to 2013 tax years will conclude within the next 12 months.
On December 20, 2011, we completed a spin-off of TripAdvisor into a separate publicly-traded corporation. Pursuant to the tax sharing agreement between Expedia Group and TripAdvisor, TripAdvisor is responsible for its potential tax liabilities in connection with any consolidated income tax returns filed as a part of Expedia Group’s consolidated income tax return prior to or in connection with the spin-off. TripAdvisor is required to indemnify Expedia Group for any such taxes, including interest, penalties, legal, and professional fees.
In the first nine months of 2023, TripAdvisor agreed in principle with the IRS to an assessed amount of $120 million, inclusive of interest and state tax effects, for transfer pricing adjustments with its foreign subsidiaries for the 2009 through 2011 tax years. The assessment is a tax liability for tax years when TripAdvisor was part of Expedia Group's consolidated income tax return and is covered by the indemnification pursuant to the tax sharing agreement. In May 2023, Expedia Group received from the IRS the final assessment for the 2009 through 2011 tax years related to the TripAdvisor matter. Expedia Group remitted $113 million in settlement payments to the IRS, as the primary obligor for this assessment, and received the reimbursement required from TripAdvisor in settlement of the indemnification receivable for this matter. To date, we have recorded $67 million of additional income tax expense and a corresponding tax indemnification adjustment in other, net in our consolidated statements of operations representing the estimate of the incremental assessed payment to the IRS, including state tax effects.
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, Inc. 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, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Net income attributable to Expedia Group, Inc. | $ | 425 | $ | 482 | $ | 665 | $ | 175 | ||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | (120) | (6) | (113) | (7) | ||||||||||||||||||||||
| Provision for income taxes | 139 | 214 | 295 | 187 | ||||||||||||||||||||||
| Total other expense, net | 163 | 57 | 82 | 602 | ||||||||||||||||||||||
| Operating income | 607 | 747 | 929 | 957 | ||||||||||||||||||||||
| Gain (loss) on revenue hedges related to revenue recognized | (16) | (16) | (12) | (34) | ||||||||||||||||||||||
| Legal reserves, occupancy tax and other | — | — | 6 | 23 | ||||||||||||||||||||||
| Stock-based compensation | 105 | 97 | 314 | 280 | ||||||||||||||||||||||
| Depreciation and amortization | 208 | 199 | 599 | 593 | ||||||||||||||||||||||
| Impairment of goodwill | 297 | — | 297 | — | ||||||||||||||||||||||
| Impairment of intangible assets | 15 | 52 | 15 | 81 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 1,216 | $ | 1,079 | $ | 2,148 | $ | 1,900 |
Financial Position, Liquidity and Capital Resources
Our principal sources of liquidity are typically cash flows generated from operations, cash available under our credit facility as well as our cash and cash equivalents and short-term investment balances, which were $5.1 billion and $4.1 billion at September 30, 2023 and December 31, 2022. As of September 30, 2023, the total cash and cash equivalents and short-term investments held outside the United States was $776 million ($460 million in wholly-owned foreign subsidiaries and $316 million in majority-owned subsidiaries). Our revolving credit facility with aggregate commitments of $2.5 billion was essentially untapped at September 30, 2023.
Our credit ratings are periodically reviewed by rating agencies. As of September 30, 2023, Moody’s rating was Baa3 with an outlook of “positive,” S&P’s rating was BBB with an outlook of “stable” and Fitch’s rating was BBB- with an outlook of “positive.” 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 our 6.25% senior notes, 4.625% senior notes as well as our 2.95% senior notes will increase, which could have a material impact on our financial condition and results of operations.
As of September 30, 2023, we were in compliance with the covenants and conditions in our revolving credit facility 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.
For 2023, we expect total capital expenditures for the full year to increase relative to our 2022 spending levels as we look to continue to improve our technology platforms, infrastructure, operational capabilities, and in the development of service offerings and expansion of our operations.
Our cash flows are as follows:
| Nine months ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | $ Change | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Cash provided by (used in): | ||||||||||||||||||||
| Operating activities | $ | 2,928 | $ | 3,622 | $ | (694) | ||||||||||||||
| Investing activities | (635) | (514) | (121) | |||||||||||||||||
| Financing activities | (1,599) | (2,245) | 646 | |||||||||||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents | (53) | (302) | 249 |
For the nine months ended September 30, 2023, net cash provided by operating activities decreased by $694 million primarily due to decreased benefits from working capital changes driven mostly by a change in deferred merchant bookings. In the prior year as the business emerged from the pandemic, we saw meaningful year-over-year increases in our deferred merchant bookings, which has since normalized in the current year. This decrease was partially offset by higher operating income after adjusting for impacts on depreciation and amortization as well as lower interest expense paid and higher interest income received in the current year.
For the nine months ended September 30, 2023, we had net cash used in investing activities of $635 million compared to $514 million in the prior year period. The change was primarily due to higher capital expenditures in the current year as well as higher net sales and maturities of investments in the prior year, partially offset by higher uses of cash for the settlement of currency forward contract losses in the prior year period.
For the nine months ended September 30, 2023, net cash used in financing activities primarily included $1.7 billion of cash paid to acquire shares, including the repurchased shares under the authorizations discussed below and for treasury stock activity related to the vesting of equity instruments, partially offset by $53 million of proceeds from the exercise of options and employee stock purchase plans. For the nine months ended September 30, 2022, net cash used in financing activities primarily included payments of $2.2 billion related to the extinguishment of our 2.5%, 3.6%, 4.5% senior notes and the tender offer for a portion of our 2.95% senior notes as well as $241 million of cash paid to acquire shares, including the repurchased shares under prior authorizations and for treasury stock activity related to the vesting of equity instruments. These uses of cash were partially offset by $125 million of proceeds from the exercise of options and employee stock purchase plans.
In December 2019, the Board of Directors and the Executive Committee of the Board, pursuant to a delegation of authority from the Board, authorized a program to repurchase up to 20 million shares of our common stock (the “2019 Share Repurchase Program”). During the nine months ended September 30, 2023, we repurchased, through open market transactions, 15.4 million shares under a 2019 share authorization for a total cost of approximately $1.6 billion, excluding transaction costs and excise tax due under the Inflation Reduction Act of 2022. As of September 30, 2023, 2.7 million shares remain authorized for repurchase under the 2019 Share Repurchase Program. In October 2023, the Executive Committee of the Board of Directors, pursuant to a delegation of authority from the Board, authorized an additional program to repurchase up to $5 billion of our common stock (“2023 Share Repurchase Program”). Our 2019 and 2023 Share Repurchase Programs do not have fixed expiration dates and do not obligate the Company to acquire any specific number of shares. Under the programs, shares may be repurchased in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be subject to the discretion of the Company and depend on a variety of factors, including the market price of Expedia Group’s common stock, general market and economic conditions, regulatory requirements and other business considerations.
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, 2023 of $53 million compared to $302 million decrease in the prior year period both reflecting a net depreciation in foreign currencies relative to the U.S. dollar in the respective periods.
Other than discussed above, there have been no material changes outside the normal course of business to our contractual
obligations and commercial commitments since December 31, 2022.
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, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Combined Balance Sheets Information: | |||||||||||
| Current Assets | $ | 7,619 | $ | 6,720 | |||||||
| Non-Current Assets | 10,699 | 10,458 | |||||||||
| Current Liabilities (1) | 12,650 | 10,407 | |||||||||
| Non-Current Liabilities | 6,787 | 6,777 | |||||||||
| Nine Months Ended September 30, 2023 | Year Ended December 31, 2022 | ||||||||||
| Combined Statements of Operations Information: | |||||||||||
| Revenue | $ | 7,892 | $ | 9,431 | |||||||
| Operating income (2) | 857 | 747 | |||||||||
| Net income | 114 | 150 | |||||||||
| Net income attributable to Obligors | 226 | 146 |
(1)Current liabilities include intercompany payables with non-guarantors of $872 million as of September 30, 2023 and $466 million as of December 31, 2022.
(2)Operating income includes net intercompany income with non-guarantors of $199 million for the nine months ended September 30, 2023 and $35 million for the year ended December 31, 2022.
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