Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Expedia Group Third Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I'll now turn the call over to Michael Feno, Vice President, Investor Relations and Treasurer.
Thanks, Christine. Good afternoon, and welcome to Expedia Group's financial results Conference Call for the Q3 ended September 30, 2020. I'm pleased to be joined on the call today by our CEO, Peter Kern and CFO, Eric Heart. The following discussion, including responses to your questions, reflects management's views as of today, November 4, 2020 only. We do not undertake any obligation to update or revise this information.
As always, some of the statements made on today's call are forward looking, typically preceded by words such as we expect, we believe, we anticipate, we are optimistic or confident that or similar statements. Please refer to today's earnings release and the company's filings with the SEC for information about factors which could cause our actual results to differ materially from these forward looking statements. You will find reconciliations of non GAAP measures to the most comparable GAAP measures discussed today in our earnings release, which is posted on the company's Investor Relations website at ir. Expediagroup.com, and I encourage you to periodically visit our IR website for other important content. Unless otherwise stated, all references to cost of revenue, selling and marketing expense, general and administrative expense, and technology and content expense exclude stock based compensation, and all comparisons on this call will be against our results for the comparable period of 2019.
Please note that depreciation expense is now reported in a separate line item and prior periods have been restated to reflect this change. And with that, I'll turn the call over to Peter.
Thank you, Michael, and good afternoon, everybody. I hope you are well. We appreciate we are not the most newsworthy that you've seen going on right now in the country, but thank you for spending a little time with us and hopefully we can help give you some more color on our quarter. I'll start by saying, as I said before, that travel generally performs in this period as everyone has expected. And in general, closings, openings, worries over the pandemic have the exact influence you expect.
But we were pleased to see in the Q3 that we're stabilizing travel trends and significant improvements on our cost structure. We were able to post markedly improved performance. I'm going to get into some of the internal workings, including margin expansion on that, which actually Eric will cover in his remarks. But first, I just want to make a few comments on the recent trends in travel. What we saw over the Q3 was basically a stabilization, as I said.
July was down and lodging gross bookings net of cancellations. This was a function of 2 things. You may recall there was a slight increase in COVID cases being reported then and that had some impacts on travel along with Vrbo for us, which had a very, very strong June and that strength subsided a bit, it still was strong in July. So July, again, lodging gross bookings net of cancellations was up about 65% and in the months that ensued that got to the low to mid-fifty range down. So a reasonable improvement, a steady improvement and that obviously helped with our 3rd quarter results.
Vrbo continued to be quite strong, as I said, coming off that June high, which was a lot of pent up demand. But the Q3 was strong. We were up year over year, which for any travel business, of course, is terrific in the world we're living in. And we think it bodes well both because we brought in a lot of new customers and we believe those customers will have long term value for us and it's helping to land the Vrbo brand and making people more familiar with it. On the hotel side, North America actually has been pretty steady and improving since July, but Europe for us in general has been a little rockier.
Places were rising in the ensuing months. And of course in the last week or 2, we've seen lots of changes and I'll get into that in a minute. But so North America was generally positive through the period in conventional lodging and Europe was slightly subsiding over that period. Air continues to lag lodging. Obviously, international air is very injured at the moment.
But I think generally air has been improving. We've seen that across domestic air and we think that people are getting more comfortable with the safety protocols and understanding the safety of flying and we think that's good news and obviously the airlines all reported and they have higher hopes subject to this 3rd wave, of course, for the holiday season. The last couple of weeks, which we're all acutely watching, again have had the impact I would suggest that pretty much most of us would expect. Let's say to say Europe has been acutely hurt by it. But North America has remained pretty strong.
It's down but still showing relative strength compared to Europe. Obviously, in our case, that's a little towards North America. But nothing can be known yet about how these trends will continue. And of course, if there are more closures, if there are closures in the U. S.
In any way or if there are other lockdowns in Europe, that will have an impact on the overall business. I want to talk a minute about market share because you may have observed that in some cases market share has been shifting around in weird ways during COVID and for us certainly that is true. There's a few things to note here. One is obviously alternative accommodations have been quite strong, not just for us but for others. Obviously, that's been great news for Vrbo and we've been a big beneficiary of that, but that has shifted our lodging share significantly across geographies.
We've also seen that there's a lot of unique use cases during the pandemic, much more not only domestic and not only secondary and tertiary market travel, but very purpose driven travel, going to visit family, needing to do specific work, needing to go to one of these small markets, there's much less discovery going on and price shopping and there seems to be more direct bookings in these smaller market independent hotels as people are calling to make sure they're open, make sure that safety protocols, etcetera, are happening. And conversely, the places where we typically have the most share strength like big urban markets, international travel, international package travel, etcetera, have obviously been among the most impacted. So we have seen some share shift in that. And I want to reiterate and I've said it before that we have recombined our performance marketing teams during this period and we're doing a lot of plumbing work to retool and recalibrate all the algorithms and everything we do so that we can optimize for multi brand instead of brand against brand. There's a lot of work going on.
It is significant effort. But during this period, while we do that and while there is so much uncertainty in the market, we clearly have a bias towards profitability, which you've probably seen in our numbers and the bias towards caution given that cancellation rates and other things are very volatile and very hard to predict. So we are not chasing share that might be unprofitable or the brick wall we might run into with closures and COVID cancellations. We're trying to be very prudent here while we rebuild everything on the theory that we will be at our end state by the time COVID is over or more precisely travel trends come back to more normal levels. And we believe, as I said before, that once that plumbing is rebuilt and once we're ready for multi brand, that we will be able to not only maintain the gross share at similar or better profitability as we have had before.
Moving on to what we are doing internally, again, I won't belabor this, but we're focused on several areas, one of which I talked about before, but that is our brands and how we join those groups together. We're focused on brand differentiation, clearly showing and demonstrating what those value propositions are to the market and how they differ from one another, making choices about which brands we market where geographically and how we lean into all the marketing channels for different brands. And there's a lot of work going on for the coming out of COVID and through COVID brand marketing side. We're obviously leaning heavily into Vrbo. We think it's having a moment.
All the research shows that it has gained share and it has gained awareness and there's some very positive things going on with that brand. But we are also looking out and we'll start to lag in. We're obviously being cautious given the last couple of weeks news, but we will lag into our other brand marketing, including Hotels.com. Brand Expedia just signed a long term sponsorship with Liverpool, the soccer team in the UK that we think will be important to landing that brand and pushing it in the UK and EMEA particularly. And there's a brand new raft of creative coming out on the back end of the virus.
So a lot of work going in there to be really clear on what we're doing, where we're doing it and how we're investing behind each brand. We're also heavily interested and excited about the opportunity in the B2B side in helping our supply partners. We've talked before about our Expedia Partner Services business. We are a leader in this space and we feel very good about our opportunity here. In fact, we believe we can grow share here during COVID as we helped our B2B partners come out faster and help more partners over time.
We have expanded our partnership on the supply side with Marriott in terms of their wholesale distribution partnership and we are extending that partnership similar partnerships to optimize distribution with other chain partners. And we think that's going to be a great opportunity to help our supply partners and also build our B2B business. So a lot of exciting things going on there, including extending a lot of the technological advances we've made on our platform, things we've talked about before like our voice, our conversation platform, which we had externalized to some of our B2B partners and now we've done that with our advertising platform, media services, MISO we call it. So there's a number of places we've been able to take advantage of the improvements technologically in our B2B business. There are lots more to go there.
And finally and perhaps most importantly, the underpinning technical platforming architecture that we have talked about, that work continues. It is big structural foundational work. It is part of what helps us on the efficiency side. We've had great wins on the cloud and licensing areas, which we've talked about before. But there's 1,000 small wins across the business.
I'm getting out of the business, talking about little ones here and there and so they're really noticeable and impactful. But the whole idea of putting that platform together, it for the future was so that we could be agile, make these improvements that were wins across much more of the business, not just the brands, but the B2B businesses. And we're starting to unlock those things and obviously a lot more work to do here, but we're doing as much as we can as fast as we can while we suffer through COVID. And with that, I will turn it over to Eric except to say that we obviously can't control what's going on there out there in the travel market or in the scientific community. We are hoping for all the same things you are in terms of vaccine and other treatments that will help us get through this.
We do believe that people have been up until this recent wave getting increasingly comfortable with the idea of traveling. This will obviously have an impact this recent wave, but it will remain bumpy and unpredictable. We can't control that. In the meantime, our teams are highly focused internally. And I'll just say I want to thank our teams that have done tremendous work in a very unpleasant environment and really done a lot to help our customers, help our suppliers, help the company do better and also importantly, we've done some very hard work around how we manage our human resources and how we structure our organization.
Unfortunately, we've had to make some significant moves on people, which is of course the worst work we do. But the teams have done a terrific job and I'm very optimistic about the work they're doing for the future. And with that, I will turn it over to Eric.
Thanks, Peter, and thanks, everyone, for joining as well. While we continue to see significant year over year declines in our business in the Q3, Taking into account the impact of COVID is having on travel, our financial performance was better than we expected with over $300,000,000 in adjusted EBITDA and reaching essentially cash flow neutral in September for the first time since February. As you know and I've discussed in previous quarters, we are keenly focused on driving margin expansion, which largely falls within 3 buckets: resetting the fixed cost base, reducing variable cost of revenue and increasing marketing efficiency. I'm going to touch on each of those individually. So first on fixed cost basis, as you'll recall, we started the year targeting $300,000,000 to $500,000,000 in annualized savings and we were tracking ahead of that amount as of our last call.
Since then, we've identified additional headcount reductions in certain areas and incremental opportunities across the P and L to drive areas and incremental opportunities across the P and L to drive efficiency in areas
like real estate and software and licensing.
We are now targeting $700,000,000 to $750,000,000 in annualized run rate savings compared to our 2019 exit rate and we've already actioned over $550,000,000 As you project this forward, please keep in mind, we'll have annual increases in the remaining cost base and also make targeted investments in some areas. But overall, we've made great progress on fixed costs and longer term, our platform operating model will position us to scale the business far more efficiently going forward. On variable cost of revenue, there are 3 primary areas we're targeting. First is on our payments platform, we're lowering our transaction fees and improving economics on our virtual cards that we use for merchant payments. 2nd is we're extending the conversations platform to handle more customer calls through self-service and virtual agents to lower our customer service costs.
And we're reducing our variable portion of cloud spend with the optimization efforts we've already executed and will continue to do so. Given the variable costs are volume based, these savings will not be fully evident until we return to normalized operating levels. We still have work to do in these areas, but I wanted to give some context that if we overlay what we believe we can achieve on these initiatives on our 2019 business level, they would collectively deliver savings of over $200,000,000 which is incremental to the $700,000,000 to 7.50 $1,000,000 fixed cost savings that I mentioned previously. The 3rd area of margin improvement is around marketing efficiency. As we've discussed, we expect the combination of operating at higher ROIs, the benefits of lower variable costs and optimization across our brands to result in lower direct marketing expense as a percent of revenue over time.
Turning to our Q3 results. The impact from COVID-nineteen continued to distort some areas of our P and L, but the bookings improvement that started in the middle of Q2 led particularly by Vrbo and the progress on cost initiatives led to the improved profitability in the quarter. ADRs in our lodging business increased 8% due to solid ADR growth at Vrbo and a mix shift to Vrbo, which carries significantly higher ADRs than hotels. Hotel ADRs declined double digits, but improved sequentially from Q2. Revenue per room nights grew 14% in the quarter, also boosted by the mix shift to Vrbo.
In addition with Vrbo's shift to merchant of record over the past year, we now recognize transaction fees as revenue, which added to the growth in revenue per room night. Do keep in mind that the fees recognized as revenue are largely offset by merchant expenses and cost of revenue. And lastly on take rate, the product mix shift from air to lodging as well as the incremental merchant related revenue at Vrbo contributed to the elevated 17% revenue take rate in the quarter. Moving on to costs, the progress we've made on the margin expansion initiatives I've mentioned are becoming evident in our P and L. On our overhead costs, which include indirect selling and marketing, second content and G and A collectively declined 29%.
Excluding trivago, about 2 thirds of the overhead savings stem from our fixed cost savings initiative with the balance from temporary cost savings related to the current environment. On cost of revenue, they declined 32%. Two items impacted the year over year comparison. First is incremental transaction costs related to Vrbo's shift to merchant of record, which are highest in Q3 due to Vrbo's seasonality and then second, they were offset partially by a benefit from the disposal of bodybuilding.com. Excluding these two factors, cost of revenue was down 40% year over year.
And as we noted, we expect deleverage on cost of revenue until booking volumes return closer to normalized levels. On direct marketing, we continue to see leverage on direct marketing expenses. We are prudently increasing activity in brand marketing campaigns and in performance marketing options where we see demand, but intend to remain significantly better than B2B. Retail benefited from growth at Vrbo in the quarter and the higher mix of business in North America, which has seen stronger recovery than Europe. Meanwhile, the slower recovery in corporate travel impact in Egencia is a drag on the B2B segment.
On cash flow and balance sheet, our reported free cash flow was nearly negative US1 $1,000,000,000 in Q3. The business driver was approximately $670,000,000 working capital impact from Vrbo's merchant bookings, mainly due to a seasonal decline in Vrbo's deferred merchant bookings given the increased stays over the summer. But as we've noted, Vrbo's merchant bookings largely flows through restricted cash. If you exclude the working capital impact from Vrbo merchant bookings, free cash flow was approximately negative $325,000,000 as the seasonal working capital impact from the decline in deferred merchant bookings plus other cash items such as CapEx and interest more than offset our adjusted EBITDA in Q3. On deferred merchant bookings, they declined a total of $1,400,000,000 in Q3 to 3,200,000,000 dollars or $2,500,000,000 excluding deferred loyalty.
Vrbo was the biggest contributor to the decline as it ended Q2 with a relatively higher balance and the seasonality of its stateroom nights is even more weighted to Q3 than the rest of our business. In addition, booking windows have been significantly shorter than usual, which reduces our outstanding deferred booking balance. On our capital structure, as we noted last quarter in July, we opportunistically raised $1,250,000,000 in debt. Subsequently, we repaid the $750,000,000 notes that matured in August and used the funds raised in July to repay $1,250,000,000 of our outstanding revolver draw to reduce interest expense. We currently have $650,000,000 drawn on our revolver.
As the end of the 3rd as estimated the 3rd quarter, unrestricted cash and short term investments totaled $4,400,000,000 Excluding the capital markets activity I just mentioned, cash declined roughly $325,000,000 similar to our free cash flow, excluding the Vrbo merchant activity. And total cash was essentially flat in September for the first time in February. In addition, amounts held in restricted cash and other non cash balance sheet assets covered nearly 60% of our deferred merchant booking balance, excluding deferred loyalty. Looking ahead to Q4 adjusted EBITDA, as you can imagine, it's a very difficult environment in which to forecast or predict the business and also will result in a wider range of outcomes. With our current trading volumes and what we're seeing in the business, we do expect Q4 adjusted EBITDA to be negative.
There are 2 primary factors that are contributing to it. 1 is Q4 is seasonally a quarter with lower revenue and profit. So it's just lower relative to our cost basis. And then number 2, given the recovery in lodging bookings has essentially plateaued relative to the recovery over the summer months, we currently expect the revenue decline to be in the similar range as it was in Q3. In closing, this remains a tough environment for our business and we're going to be dealing with the COVID impact for the foreseeable future.
And as Peter mentioned, we have clear priorities that our teams are making great progress on and we're confident the actions we're taking now will benefit us through the recovery and over the long term. Operator, we're ready to take our first question.
Your first question comes from the line of Lloyd Walmsley from Deutsche Bank. Your line is open.
Thanks. 2, if I can. 1st, just wanted to make sure I understood you correctly earlier. When you said I think you said the core fixed cost savings target is now $7,000,000 to $7,500,000 But then you said you've been able to reduce variable costs, if I heard you right, which overlaid on 2019, for example, would be an additional $200,000,000 in savings. So approaching $1,000,000,000 on kind of a normalized basis.
So the question is just did I catch that right? And does that does it feel like you're getting to the kind of edges of the scope of savings there given the magnitudes we're talking about? And then the second one would just be, as you work to bring all the marketing data from separate brands into kind of a consolidated into the consolidated kind of new data storage for marketing. Any is it early enough that you or in enough that you can see some early learnings? Or is it too soon to say?
And any sense for the timing on when you guys will be in a place where you feel good about that transition? Thanks.
Peter, do you want me to take the first? Yes. Yes, I'll take the first. You take the second. So on the first, yes, you did hear correct me.
So the $700,000,000 to $750,000,000 is on the fixed cost basis. It's in relation to the $300,000,000 to 500,000,000
dollars that we spoke of
earlier in the year. Of the $700,000,000 to $750,000,000 we've actioned $550,000,000 of that. So we are feeling like we are making good progress against it. We, of course, continue to leave no stone unturned. And just as we continue to work through it, we get more costs that we've identified, we get confidence in those that we get better line of sight in.
And then also, obviously, we've actioned a fairly large percentage of it. So yes, it's the $700,000,000 on a fixed cost basis and then the incremental $200,000,000 on the variable cost of sales, which then approaches to your math approximately $1,000,000,000 in savings. Now you mentioned it, but I want to reiterate it as well. That is on the 2019 exit rate, if you will. So those numbers presume that we're back in a range that is approximately at the 2019 levels.
And then lastly, there will be some offsets to that over time. You can imagine inflation on contracts or increases in headcount costs, etcetera. So there will be some offsets. So we feel pretty confident in the numbers that we're going after and the teams are doing a great job. And I guess there was the last part of your question just around are we reaching the edge of it?
And I would say we're still flipping over rocks, but it's diminishing returns to a certain extent. So I would say the range that we shared with you is sort of the probability of just where we think that it will get.
Yes. And Lloyd, I'll just jump in on the other question. I would say the answer is no. We haven't it's not wired together yet in a way that we can see the early wins. I think we are getting closer, but it's not simply a matter of taking 3 different groups and putting them together.
I've mentioned on previous calls that we've been also consolidating all our data and 17 data lakes into hopefully one soon and all of these things are kind of linked together. So there's a lot of great work going on. I think we are getting closer and I'm excited about what we're going to be able to see when we can see the granular level of detail on profitability by customers, by geos, by everything, which we haven't had the granularity we like and that has made us, I would say, blunter instrument than we'd like to be. And we believe there's significant good guys from getting us all wired together. And that again is why we're willing to make short term trade offs to do that important work to get that done.
But we haven't seen any earlier terms yet. It will be a little while still.
Okay. Thanks. Impressive job on the cost side, guys. Thanks.
Yes. Thanks. And just one other quick add to that, and thanks for the question again, is we are still taking the actions to achieve those numbers. So I just want to make sure as you're building those in, there's the lens of we need the volume to come back to see particularly on the variable cost side and we are still actioning these. And as I mentioned, the $550,000,000 on the fixed cost side is going to take us still some time to get to the gap of that and the $7,000,000 to $7,500,000 And the same thing on the cost of revenues as well.
It will take us a bit of time to get there, but that's what we're shooting for and what we think we'll get.
All right. Yes, that's helpful. Thank you.
Thanks.
Your next question comes from the line of Navide Khan from Tuohyun Securities. Your line is open.
Yes, thanks a lot. Just a couple. 1 on the cost side, Eric, you called out the incremental $200,000,000 in variable cost savings and you named 3 areas. If you had to think about the relative magnitude of sailings in each of these areas, how would you stack them up or number them? And then I had a question on the gross booking side.
So you talked about a plateauing in October versus Q3. Is that overall for the business or is it just U. S? How should we think about that? And is that flat towing on gross bookings or on net basis?
How should
we think about that? Yes,
I'll take the first one and Peter Grassho, you can take the second one, but I'm happy to take it as well. But on the cost of revenue, there's 3 components. There's the conversation platform and the cost off savings, the credit card and the variable. And I would effectively put them in that order to a certain extent, but I think the one that has the largest opportunity for us is on the conversation platform. We are historically primarily a phone based contact center type of conversations with customers and with our supply partners as well.
And with the technology that we've developed, we have the ability to move a lot of those either to self-service or virtual agent. And on the virtual agent side, you're able to get more service more customers, if you will, per agent. And so both of those add leverage to the system. And we've really started to roll out into that. We've gotten good NPS scores and good returns, if you will, from doing that.
And it's really a process of rolling that out, making sure that we have more and more use cases. We get it embedded into the right flows, into the site, the and variable cloud as well are meaningful, but I would say that those 2 are a distant second, if you will, after conversation platform opportunity.
Yes. And then I guess, Eric, you can follow on and I'll do cover commentary then.
Yes. On the volume side, this recovery is going to be a series of many stories. And so if you take hotel, for instance, and I could say that that's been flat for the last couple of months, but if you de average that number, what you actually end up seeing is that there are areas that are flat to declining and there are areas that are gradually improving. And so using the hotel as the example, Europe has been more challenged. Peter already mentioned that.
And it got even more challenged over the last week or 2, just given the increasing lockdowns that are reoccurring. Whereas the U. S. Has had a more steady increase over time on the hotel side, we will see what happens with the Wave 3 that's occurring right now and something that we're looking at very closely. But as we say it's plateaued, it's actually many stories underneath.
And I think we're going to see the same thing. We've got international versus domestic and we wait in some regions of the world and one versus the other. And that's the series of many stories that will make up how we see overall the business is performing.
And the only color I'd add to that is our numbers also include bookings from our B2B partners and people in other parts there. So it makes the mini stories even more vast in terms of our exposure to different geographies, our exposure to different types of business. So I would say thinking of it as a whole is probably the simplest way. But all things being equal, with the trends the way they are in the last 2 weeks, it's probably good news that we're weighted towards North America. But there have been times when it's been something else.
And we wish we had more China business since domestic China is doing quite well relative to the rest of the world. Sure. Thank you.
Your next question comes from the line of Mark Mahaney from RBC. Your line is open.
Two questions, please. You mentioned market share, but in North America, do you see any evidence of material share shifts amongst the different providers Airbnb, Booking, Expedia? Secondly, you mentioned those three areas cost efficiency, the fix, the variable, and then you talked about performance marketing. Could you just drill down a little bit more on performance marketing? I know you've had some pretty bold robust plans for bringing performance marketing efficiencies and then all of a sudden we had COVID.
Is it clear to you that you've got enough evidence that you can really that there are new found efficiencies in performance marketing? Is that still TBD to when we get real robust recovery in travel conditions? Just spend a little bit more time, please, on performance marketing efficiencies. Thanks a lot.
Sorry, Peter, are you there?
Did we lose you? Sorry, sorry, sorry. Your button was on. Sorry, Mike. I'll jump in.
I was saying I'll take the second one first and then you can remind me of the first one. I would say on the performance marketing side, you are correct. We have talked historically about winning more efficiency out of it, getting our return on marketing better, more precise, etcetera. The problem was, I think, that was to some extent wishful thinking because we did not have all the data, all the tooling and all the approaches synchronized, if you will. We let our brands compete.
That had some dissynergies that never were quantified, but certainly existed. We did not have the benefit of all the data because each brand had its own data and on and on and on. So, I am positively optimistic that when we have all the data flows right and we have all the algorithms rewritten for that and when we have the tooling right, there should be significant upside for us in actually getting ringing out that return that you've heard about over these many years. I think that is what is required and it is real and we will get to it. We have to do it, obviously.
We haven't done it yet. But to otherwise sort of mess around with the idea of taking one brand higher or lower doing this. It was a very blunt set of instruments. And I think, candidly, it was optimistic to think we could do a lot better. We certainly could have run more profit at the expense of share that we certainly made some trades for share over a profit historically and we certainly might make trades like that in certain geos and for certain reasons over time.
But I think more broadly, the opportunity to just perform better is really unlocked by stringing all of those 4 together and really making it powerful. So I'm a total believer in it and I think it will happen, but we haven't done it yet. So we have to do it. And then sorry, Mark, your first question? I apologize.
Yes. Do you think that there's clear
signs of any market you brought up market share. Has there been any signs of market share shifts in North America?
Yes, I think well, definitely, you've seen alternative yet an outsized share relative to where it was. And we have been beneficiaries of some of that. Airbnb has been beneficiaries of some of that. So the more concentrated you are towards the things, the use cases that are working well, I think you're going to get share benefits. More broadly, I think share has moved around for a lot of brutal reasons and you're dealing with low volumes.
So I look at markets where share points move around and then you look at the dollars related to it and they're tiny and you say, okay, it doesn't really matter, it could just be a bad weekend or a good weekend. But I think nothing we're seeing is portend anything for the future for like a long term effect. I don't think there is anything that suggests anyone's winning or losing in a way that will give them long term benefit. I think for us with Vrbo, we believe it's really good for the brand and people are getting a lot of exposure to that use case and people are seeing how nice that vacation can be. I don't think that means that people never go back to hotels, but I think it helps us relative to Airbnb.
So that's good for us. And I think beyond that, we don't expect anything going on in any single geo or overall is really a long term effect, which is partly why we're not overly exercised. We're not exercised. We're not perfectly tuned as a machine to on the performance marketing side because none of this is was levels down 50%, 60%, whatever plus percent in certain markets, it's hard to think that any of that is sustainable or meaningful for the long term. So that's been our approach.
Your next question comes from the line of Eric Sheridan from UBS. Your line is open.
Thanks for taking the question. Maybe 2 if I can, following up on some of the topics I've talked about so far. On Vrbo, with the success you're seeing in terms of the demand and the new customers that are coming into our platform, is there anything to call out in terms of your go to market strategy and your marketing strategy that you might then portend for sort of longer term that overturns our marketing spend or margin structure in Vrbo as a business? And then on your brand strategy and sort of the realignment of the marketing platform, are you also at the same time thinking through whether you need to be in the same number of brands or on the same scope of brands on a multiyear view towards an eye of like managing a mix of sort
of growth versus profitability? Thanks guys. Sure. So let me do Vrbo first. Yes, well, a few things.
One, there's a lot of good work that's been going on over the last several months on Vrbo and its margins in terms of Eric mentioned or we've mentioned in the past bringing it on to our payments platform. That's been good for us, saves us money with a third party provider, allowed us to use the power of Expedia's payment platform, which itself is getting stronger every day and more efficient. So those kinds of benefits are there. There's work being done on the consumer process, on the fees and other things that where we think we're on the market. So I think we've had opportunity and we've found opportunity to spend margins at Vrbo.
But to your bigger question, we definitely think that we did not plan the Vrbo rebranding as strongly as we wanted to, that there is opportunity now given that so many people are using it and the use case is so attractive right now and that we are concentrated in whole home, which is like the most attractive part of the alternative market right now that we intend to and are already pushing into a much more aggressive plot to broadly push the brand. We've turned the brand over in a few more markets in Europe just a few weeks ago and we will keep pushing. But yes, there's an opportunity there and we think that is a place we want to be more bold even in a down market and we will continue to be pushing into that. To your second question about how many brands we have, yes, we have a lot. We certainly won't keep any we don't think makes sense.
But right now, we think the number of brands creates opportunity as long as we have segmented them and thought about them geographically, etcetera, to their greatest effect. So my big push has been if we have a brand, frankly, that maybe none of you have heard of, like What If in Australia, that is our strongest brand for the moment in Australia, then we need to Hotels.com or anything else. Likewise, Vrbo has a different brand, a different company it acquired in Australia that we're not going to change that brand because it's a strong local brand and we should push into that. We have historically had this record of, okay, we have an existing brand or we bought a brand, we're also going to push Expedia into that market, we're also going to push hotels And that kind of, I would say, took away the value of multi brand because it didn't allow us to optimize for each one. So that's why we're doing the segmentation work.
That's why we're trying to figure out what the proposition is for each brand. Some brands admittedly we have historically run for more profit whereas others we have pushed. We are looking at that whole panoply of options and driving the best result by country, by brand that we can. And that may mean we close some brands in some countries, that may mean potentially we closed some brands full stop, but we have no intention right now to do that. But we are looking at the whole thing and trying to optimize for it all.
But we think in general having more gives us the opportunity to do more if we do it smartly.
Your next question comes from the line of Deepak Mathivanee from Barclays. Your line is open.
Great. Hi, guys. Thanks for taking the question. Just a couple of ones on VARGO. So, Bruce, can you talk about where you are currently in terms of merchandising Vrbo's alternate accommodations inventory on Expedia and Hotels dotcom?
Is that something that you're seeing benefits from currently? It's like this is a perfect time to kind of channel Vogo inventory at a higher level into your other strong brands since consumers are looking for that type of inventory? And then second question related to it, how do you feel about the inventory levels on VIRGO, particularly given the strong demand that's there for alternative accommodations. So are there any markets where there is inventory pressure on Virgo at this time? Thanks.
Sure. So a couple of things there. I would say on the latter part, no. There's we've seen some pressure over the summer, a little bit in few markets, but we haven't generally seen literally no inventory. There's few spots, but in summer recall was everybody heading headlong into the only alternative they were comfortable doing.
So there was a really acute demand spike there. We do think there's more opportunity to serve home more opportunity and I think we will continue to try to grow our inventory. The question is and obviously anywhere we see demand, we will want to drive inventory. The question longer term is we have historically had deficit in particularly in cities and those kinds of use cases and that is a bigger strategic question for us. It's a place where Airbnb obviously has made great hay, although it hasn't helped them during COVID.
Likewise, bookings has done a nice job with city based inventory and to your point, a more integrated experience. And so sort of moving on to that question, the product is not great when it comes to surfacing vacation rental opportunities or alternative accommodations through our main OTA brands. We've been slow to get there and it's not where we want it to be. It's definitely an opportunity, but we have found that there is
a little bit of
a conflict from the standpoint of people don't generally go to our alternative go to our OTA brands for alternative accommodations, not what they think of. So even though it's there and present, it hasn't performed perhaps the way you or I might think it would. So I think we've got a combination of what we need to do on that front, which is we can definitely make significant improvements in the product and how the content will surface, how people see alternative accommodations and where they see it and etcetera. But also we need to lean into it and we need to market particularly in places where our big ATAs have good reach and brand recognition and Vrbo does not, it may well be more sensible for us to lean into get a vacation home on Expedia as opposed to trying to introduce cold the Vrbo brand. So we are looking at all that.
I would say dual work streams where we're trying to materially improve the product experience with alternative accommodations on the main OTAs and then how do we market that and how do we test to push that into those markets. And I'd just say that while that seems like that would be job 1 and we'd be all after it because of the appeal of alternative right now, You have to keep in mind that we are rearchitecting literally our entire technical infrastructure and platform and some of these things have to sort of get prioritized and it's in the works, but it's not the only thing we're working on.
Your next question comes from the line of Justin Post from Bank of America. Your line is open.
Great. Thank you. My first question on hotel supply. Are you seeing any inroads there or good deals on Expedia that you might not otherwise get? Any reason for consumers to come directly to Expedia versus other sites?
And then secondly, thanks for the verbal update. I know you said it grew in 3Q. I'm assuming that's bookings and revenues. Can you give us a year to date update on Vrbo? Thank you.
Eric, you want to try to answer this? I'm not sure we can.
I don't think we have not shared or disclosed on the Vrbo the year. I would say we are healthily up for the year. We clearly had the spike in June just given the summer compression where people felt comfortable traveling. We continued to be up year on year in Q3, let's call it, at more reasonable levels than June, but both revenue and gross bookings were up year on year and I think you can extrapolate that to the start of the year as
Got it. And then on hotel supply?
Yes. On the hotel supply side, we have obviously among the most competitive hotel supply in the world. There's not a lot of discounting that is unique to the Montblanc. The hotels are discounting, but I don't think they're discounting unique to us. And I think what we provide, what Expedia provides obviously beyond just very good value is a bunch of ways to find what you want, a bunch of ways to book multi product, a way to do everything in one place.
So there are a lot of offerings with HCOM, With teles.com, you get very robust rewards. So there's other offerings that are differentiating for us on the brand side, including where we're trying to go with the product to get to much better personalization, help you make good value choices, etcetera. So I would say that is where we have to push our business. The differentiated hotel supply, even when we can get it, is usually not sustainable. It's not like something that is consistent.
But we do want our hotels to be in a better position to optimize our platform. So we are doing inverse, which is trying to give them better data so that they can be much more effective at pricing and moving the inventory they want to move on our platform. So that suites or certain kinds of rooms or whatever, like we want to be feeding them the inbound information so they can understand the market, understand where there's opportunity to price up or down to gain both rooms, etcetera. So that's where we're pushing and we think that's going to make us a much more valuable partner with suppliers. But I don't think it's going to be about did you get 5 dollars better deal than the next person.
I think it's really going to be about how you can help them build their businesses.
Your next question comes from the line of Kevin Kopelman from Cowen. Your line is open.
Thanks a lot. I just had a quick follow-up on Vrbo. If you could comment on the seasonality patterns there that you're seeing in the Q4 and the current environment. Are you seeing any change there, any kind of continued shift into Vrbo even as
we get outside of what is typically the peak season? Thanks. Thanks for the question.
Vrbo is, I mentioned earlier, is much more seasonal than the rest of our business. So it's concentrated in the summer months, even more so given North America, given summer. So we would naturally expect to see it come down into Q3 and into Q4. And that is what we're seeing. It continues to be at healthy rates and continues to be a product that I think consumers and the environment that we're in in particular find compelling to be able to continue to travel.
So you can think about our the normal travel seasonality of booking in the early part of the year to stay in the middle part of the year and then less activity in the latter part of the year just magnified in Vrbo relative to the rest of travel.
Right. And then
go ahead.
No, I was just going to add that that is an area we believe there is opportunity and a lot of the advertising and marketing we've been doing with Vrbo have to do with sort of staycations, if you will, in North America where kids may not be going to school, people may not be going to work, sort of take your life somewhere else. We think there is opportunity to break some patterns while this is going on, but that's just a COVID centric issue.
Got it. And then longer term, I think on a
like for like
basis, Vrbo's take rate has been a little bit lower than traditionally you would get with hotel. How do you see that pulling out longer term in terms of revenue take rate?
Yes. There is a I'm happy to take that one. Thanks for the question again. There is a gap between us and Airbnb in particular. And it's something that we do feel that it gives us a bit of an advantage with consumers, but it is something that we are looking at.
It is something that we test. We do think there are opportunities to increase monetization over time. But I would say there continues to be a gap. We are actively looking at that. We are actively testing it.
And I do think that there is upside in our monetization over time.
Thank you.
Your next question comes from the line of Jed Kelly from Oppenheimer. Your line is open.
Just on Vrbo, just circling back. I mean, can you talk about the supply into the winter travel season? It seems like that's going to be premium supply and how you think you're there. And then just a follow-up on virtual agent. I mean, what's your confidence level in virtual agent as travel volumes start to normalize?
Like, can that just around handling of normalized volumes?
Yes. So just on the Vrbo supply, I think we are well equipped and well equipped. I think they have lots of good value, high value inventory show up in lots of places people want to go in the winter, do that for Thanksgiving, Christmas, etcetera. And we think there's an opportunity that those trips will be longer in duration than they typically are given school holidays, etcetera, around the U. S.
In particular. But we don't feel like we're deficient on the inventory side. That does not mean we don't have opportunity and it doesn't mean we have parity everywhere on everything. But we think we have plenty of inventory to power a very robust winter season if the demand is there. So we're not worried about that.
And sorry, the second part was?
Confidence around virtual agent.
Yes, the comp virtual agent. So I would say to you a couple of things. 1, despite the fact that our volumes are down, given COVID, given cancellation rates, given all the issues that travelers have, I wouldn't necessarily assume that our servicing volume is proportionately down because we've had there's been a lot of traveler issues going on in the world that have created huge relative spikes in traffic. So we've been testing the conversation platform into all kinds of use cases and we will ultimately have it in virtually everything we do, including our dealings with supply partners and other things. So it is being rolled out broadly.
As Eric said, the NPS scores have been strong on it. People generally like to deal with the machine if they can and just get it over with and not have talk to a person. It's not true universally, but that seems to be true for most people. And we feel very good about it. So it's scaling up.
It's a platform tool. It's the kind of tool we want to have in our company, across the company that we have a platform technology that needs to be taught and taught different use cases and applied consistently. So we have high confidence in its ability to continue to roll out and handle as much traffic as comes in. So, no issues there.
We will now take our final question, Lee Horowitz from Evercore ISI. Your line is open.
Great. Thanks so much for the question. Just one if I could. Peter, you had mentioned some of your North American suppliers seeing greater direct bookings perhaps as people shop less. I'm wondering if you could comment at all on your mix of direct bookings through the quarter, how that may be trending, what you're seeing through this crisis and perhaps your view on how sustainable those trends may be beyond COVID?
Thanks so much.
Yes, surely. I would say that what we've seen is mix wise, we've mixed towards a lot more direct traffic. App bookings are up considerably, direct is up considerably. But I would caution anyone from taking too much from that because we have been less aggressive in the performance market. So it's a little bit of self blending, if you will, down to a mix that is more free, which of course has helped all our margins and helped us post the numbers we posted last quarter.
But that is inherently in part because we have taken our foot off the gas in certain areas in terms of performance marketing and unprofitable performance marketing. So I think, again, as we blend back into normalcy, assuming we will be more proficient and have these tools we've discussed about on the performance marketing side, etcetera, my sincere hope is we can grow more share through those performance channels at attractive levels and attractive profitability. And I believe that will happen. And if that's true, of course, we'll mix our way back to a more historical balance. But the trends have been very good.
It's a credit to our brand loyalty or brands loyalty, I guess. And app has been very strong and of course, we are putting lots of energy into improving the products for all those things and making them stickier because it has gratefully not been a topic today. We do want to have more direct traffic, avoid the performance marketing pools as much as we can and create recurring business. So that remains a core goal for us.
Hey, Peter, before we end, I just wanted to clean up one quick comment I made earlier, just on Vrbo on the year to date. Year to date, we have seen declines due to the impact earlier this year on COVID. Q3 was up year on year and we were growing early in the year before COVID. So just wanted to clean up the fact that in the early days, if you will, of COVID that if you aggregate them for the year, it is down relatively, but was up before and up during.
So just wanted to clean that up.
I will now turn the call back over to Peter Kern.
Great. Well, thank you, everybody. Appreciate the questions. Hopefully, it helped give you some clarity. Again, we're keenly focused internally still on everything we talked about.
And I suspect our next call will sound a lot like that. And hopefully, the world's health will get better and that will help our business along the way. But appreciate the time. Thanks again to our people and appreciate you listening to questions today. So take care.
Bye.
This concludes today's conference call. You may now disconnect.