Peter Kern
Vice Chairman and Chief Executive Officer at Expedia Group
Thank you, Harshit, and good afternoon, and thank you all for joining us today. First of all, I just want to acknowledge the news that I will be stepping down in May as CEO after my contract ends and will be passing the baton to Ariane Gorin, who currently heads our Expedia for Business. As many of you know, when I started this unexpected journey during COVID, travel was at a standstill, money was flowing out of the company faster than we could replace it, and our people, our shareholders, and most of the world were unsure how and when we would ever come back. Strangely, those days never really worried me. Maybe I'm an optimist, but I always believed we'd get back to life and travel would follow.
While you might assume that COVID was the defining part of my tenure, in reality, we quickly saw an opportunity to use our COVID time to embark on one of the most audacious and ambitious transformations I think a company of our size has ever attempted. It was always my hope that we would finish this massive task by now, but I'd be lying if I didn't say that was sometimes in doubt.
We had many fits and starts as we took on this massive overhaul. But when you do something as bold as we were attempting, you have to be prepared to deal with some mess. And as much as anything, I'm proud that we were not afraid of the mess and we pushed through. And as the work began to accelerate in the back half of last year, I could finally see that we would in fact meet my timetable. Over the last four years, we built a tremendous team who in turn accomplished amazing things. I have to say that what started in an unlikely and difficult way turned out to be one of the most compelling and challenging opportunities of my career.
Now I'm not going anywhere yet, and I intend to sprint through the finish line on the way out. Among my important tasks between now and then is ensuring an absolutely seamless transition to Ariane and making sure none of our team misses a beat. I just want to say that I've had the pleasure of working with Ariane closely for the last four years and I believe she is a terrific choice to take the company forward and build on what we have created. She is a seasoned leader with a very successful track record at Expedia Group, including most recently as head of our market-leading B2B business. I look forward to working with Ariane over the next few months, and I will not be going far as I return to my perch as Vice Chairman.
Now that I've addressed that, let's move on to our results. I was generally very pleased with our performance in '23. We met our guidance despite what was a year of tremendous change. It's really difficult to fully appreciate the breadth of change and the volatility that such change can create. We've discussed this many times. But when you have to willingly take steps backward to go forward, you create a lot of inherent unpredictability. And yet, despite that, we delivered and landed the year.
In the fourth quarter, we saw strong revenue and EBITDA performance, but we did see some softness in gross bookings, driven primarily by air, which in turn was largely driven by a reduction in average ticket prices. As you all know, air does not impact revenue or profitability very much, but it does have an outsized impact on our overall gross bookings. While air has been showing some signs of macro softening, we continue to improve our air product with new AI-driven features and pricing capabilities. And like many areas of our business, we see significant opportunity to grow regardless of any macro headwinds.
Our lodging business held up very well and had yet another record quarter, with our hotel gross bookings growing 13% year over year. Vrbo finished its planned front-end migration in Q4 and suffered expected conversion degradation, but it now has more tests running than ever in its history and we are clawing back conversion at a breakneck pace.
We also cut back last year on Vrbo marketing in concert with the expected conversion degradation, but are now really excited about our new brand work that is designed to punch our main competitor squarely in the nose, and we are leaning back into spend. There's a bit of lag effect as we ramp back up, but we are excited to get Vrbo back on offense with the product improving every day, the impact from improved and increased marketing and, of course, our secret weapon in One Key, whose effect will only continue to build.
We did an awful lot in '23 from the launch of One Key to the completion of the Vrbo migration from the plumbing of machine learning and AI into more and more of our customer experience, to the launch of ChatGPT-assisted trip planning. But more important than any win in '23 is the sheer magnitude of change we have driven since we embarked on our transformation journey at the beginning of 2020. Over this period, we rationalized investments in over 20 brands to three or fewer in every region.
We eliminated dependency on 76 different agencies around the globe and instead built an entire full service marketing, creative and media buying team internally. We consolidated all performance marketing into one group, with unified data and tools allowing us to optimize across brands and bring programmatic approaches to everything we do in metasearch, social, SEO and everywhere else. And we fundamentally shifted the business from transactional web arbitrage to app-first focused on acquiring and retaining the customers with the highest LTV and return on investment.
On the tech side, we decommissioned 17 CRM systems and built one universal messaging platform linking all brands. We went from seven different loyalty stacks to One Key. We consolidated from 13 machine learning platforms and four experimentation platforms to one. We converged 300 million customer data profiles into one common identity platform. We have meaningfully reduced the number of developer tools and optimized our IT footprint. And most importantly, all our brands are now on a single front-end stack with a unified test-and-learn platform that gives us the ability to rapidly launch tests and features across brands, platforms and geos.
It is hard to fully conceptualize how much we have changed, but perhaps one simple way is to double click on how all these elements allow us to massively accelerate our test-and-learn capability and drive faster feature deployment and better performance in the product. Our unified front-end now allows us to deploy features around the globe and on any brand at a pace we could not contemplate just a couple years ago. What used to take months, even years, now takes weeks and sometimes just days.
Our recent launch of cars on Hotels.com in the U.S. is a perfect example of something that never made the cut list because of the massive engineering lift. But post unifying the front-end stacks, it took literally weeks to deploy. That same unified front-end allows us to massively increase the breadth and impact of our tests and learns, while our single test environment, along with ML and AI woven throughout the customer experience, now allow us to run many multiples of the tests we used to and call them much faster, the combination of which will allow us to effectively 8x [Phonetic] our test-and-learn impact in 2024. It cannot be stated strongly enough.
We are just at a completely different place technologically, and the effects we have seen so far are only just scratching the surface of what is possible. And while there are endless achievements to be proud of in our transformation, it is equally remarkable that even while swapping out our engine mid-flight, we were able to deliver consistently solid financial performance. We grew our business throughout our transformation, notably reaching record levels of lodging gross bookings and revenue, despite having sold off and shuttered a number of businesses along the way.
Our continued operating discipline has driven EBITDA margins to the highest levels in over a decade. We have used our strong free cash flow to aggressively buy back our stock at attractive prices and, as a result, our share count today is down to 2015 levels. We have closed over 100 office locations and we have 30% fewer heads than our 2019 peak. And meaningfully, we have gone from approximately 30% of people working in product and tech in 2019% to 50% today.
Again, we are at a truly different place as a company as we launch into '24, which does not mean that it's all just linear improvement from here. That learn and test and learn is a big part of our journey, and we will still get things wrong in our tireless effort to improve the customer experience. But we can afford to get a lot more wrong as we in fact get a lot more right. Ultimately, more at bats, the sheer power of going fast and simplifying our ability to innovate is what puts us in a position to once again lead our industry technologically for the next decade.
So what does all that mean for 2024? On a macro level, we expect travel demand to remain relatively healthy, but we expect growth rates across the world to decelerate, especially early in the year as we lap the post-Omicron tailwinds we saw last year. We are still expecting much faster growth internationally outside North America and Western Europe, though we expect the gap to continue closing. We may also see some softness in prices across categories. This past quarter, both hotel and vacation rental ADRs grew very slightly, but the mix effects led to overall lodging ADRs declining year over year. And as I mentioned earlier, air ticket prices have declined, particularly in the U.S., and we are seeing some continued pressure on car rental rates.
Against this backdrop, though, we are well positioned to go back on offense, gain share against competition and ultimately grow our top and bottom line meaningfully this year. Our strategy will remain largely unchanged, but we can finally stop doing surgery on ourselves and instead execute without the numerous distractions we have faced in recent years.
We will be laser focused on five strategic priorities, which broadly translate to all parts of our business. First, we will continue our focus on acquiring and retaining high ROI travelers. We have become much sharper about measuring customer lifetime value and targeting who to go after and which channels. With a greatly improved product driven by the latest ML and AI capabilities, and One Key, which now has over 100 million members, we will continue to drive greater retention, repeat and direct business, all of which underpins our shift towards more loyalty and app members.
In fact, we ended the year with our highest ever percentage of business coming from the app of nearly 600 basis points year over year. We will be scaling One Key internationally this year and expect to see our mix of app members continue to increase in those markets. With better customer targeting, constantly improving a stickier AI-driven products and One Key, we feel really good about continuing to build momentum and value in our member roles.
Our second priority will be to increase our share of wallet with our travelers and partners, again with a product that uses AI and ML to predict a consumer's best next action in order to sell complementary items, be it in the booking flow, post booking and in CRM communications, our core experience will continue to drive more items and more dollars into the consumer's basket.
We will also drive more cross-brand and cross-product engagement through One Key, which enables cross-earn and redemption across all our key brands and encourages consumers to stay in our ecosystem for all their travel needs. We are already seeing early signs of this with an increasing number of customers who cross-shop our brands in the U.S. since the launch of One Key. And as we continue to roll out One Key outside the U.S. and now have the ability to roll out new lines of business on different brands, we expect all of these moves to allow us to capture more wallet share from our consumers.
Our third priority will be to accelerate our global market expansion. We've talked before about how we retrenched back to the U.S. during the pandemic, while we were overhauling our tech platform and marketing model. We pulled back in certain countries where we did not have the right product market fit and had been spending more but losing share. Now, after changing virtually everything from how we market to how we retain customers to our entire product experience, we have what it takes to go back on offense. In the back half of '23, we were able to hold or build share in most of our core markets and now we have the opportunity to be more aggressive. In '24, you will see us spend up in a number of markets to reclaim real share where we believe we have the right to win.
Our fourth priority will be to continue cementing our leadership in the B2B segment. Revenue in this segment grew a stellar 33% in 2023 versus 2022. While it benefited from the APAC reopening and we expect those geotailwinds to moderate somewhat this year, we are still expecting very strong growth given our differentiated capabilities and a huge TAM to still penetrate.
As I have explained before, our B2B business benefits from all the work we have done in product and technology to win in B2C, along with all the B3B-specific innovations we have rolled out over the last few years. We are seeing a strong pipeline of new customers globally and we continue to find ways to gain wallet share in our accounts. And beyond just offering supply, we have achieved good early results in externalizing components of our technology to our partners as well. Overall, I'm very enthusiastic about reinforcing our leadership empowering the travel industry.
Our fifth strategic priority will be to drive efficiency and effectiveness across our business. As I mentioned, we have grown our EBITDA margins to their highest levels in a decade, growing over 300 basis points since 2019. But we are capable of much more. All of our transformation work was not only to enhance our consumer experience, but also to allow us to do more with less. We have significant opportunity to run more efficiently across the company, to eliminate redundant systems, to keep optimizing in the cloud and utilize the latest productivity capabilities from AI.
In addition, we will keep leveraging our technology leadership to find opportunities for decreasing costs, while increasing customer experience. The work we have done in improving our customer service operations is a great case study. By building better technology and self-service tools, we have both improved our NPS and created massive efficiencies, all while maintaining our best-in-class service, and generative AI will only accelerate this trend.
So in closing, I'm incredibly pleased and proud of everything we have accomplished over the last few years, and I'm really excited about our path forward. Thanks to our massive transformation, we are now a very different company than we were four years ago. We are set up to out innovate our competition for the next decade and efficiently deliver the best experiences for our customers and partners. And if we do that, the business and shareholder returns will take care of themselves. While you have to kick me around for one more earnings cycle, let me just say that in addition to the gratitude I feel for the team and all that we have done to foster our collective interests, I'm also grateful to our Chairman, our Board and our shareholders for supporting the ambition we had and helping us get to this point.
And with that, I will hand it over to Julie.
