trivago N.V. Q1 FY2020 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the trivago Q1 Earnings Call 2020. I must advise you the call is being recorded today, Tuesday, the 19th of May 2020. We are pleased to be joined on the call today by Axel Hefer, trivago's CEO and Managing Director; and Matthias Tillmann, trivago's CFO. The following discussion, including responses to your questions, reflects management's views of the day today, Tuesday, May 19, 2020, only. trivago does 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 or similar statements. Please refer to the Q1 operating and financial review and the company's other filings with the SEC for information about factors, which could cause trivago's actual results to differ materially from these forward-looking statements. You will find reconciliation of non-GAAP measures to the most comparable GAAP measures discussed today in trivago's operating and financial review, which is posted on the company's IR website at ir.trivago.com. You are encouraged to periodically visit trivago's investor relationship site for important content. Finally, unless otherwise stated, all comparisons on this call will be against results for the comparable period of 2019. With that, let me turn the call over to Axel. Please go ahead, sir.

Good morning, everybody. Many thanks for joining our Q1 earnings call. I hope you had the chance to read our shareholder letter that we filed yesterday. We have received very positive feedback on the format, and we'll continue to publish it going forward. Before we start the Q&A, I would like to point out one thing. Despite all the challenges this unprecedented crisis is bringing to us personally and to the industry, we at trivago see this as an opportunity; an opportunity to focus our organization on our core and structurally reduce our cost base, an opportunity to improve our core meta product while adding a complementary and more inspirational, local, and sustainable travel product; an opportunity to diversify our revenues by adding new revenue streams such as display advertisement and sponsored listings; and an opportunity to set sustainable performance marketing levels going forward. We believe that these initiatives will allow us to leave the crisis much stronger than we entered. With that, we are now moving to Q&A.

And the first question comes from Naved Khan from SunTrust.

Just a couple of questions, Axel. Can you provide more details on how you can make your site locally relevant? You mentioned increasing daily or weekly usage. What measures do you have in place to achieve that? Additionally, do you think the effect on your revenue will follow the declines in travel bookings, or could it be even more significant due to your reliance on advertisers who may take time to return?

Thanks for the question. So on the question regarding the product development and the complementary product, when you look at our core product, it is basically a product that allows you to find the best deals available for specific trips that you have in mind. So you know where you want to go and you might or might not know the time already, and we help you in a very efficient and effective way to find the best times and the best deals for your trip. What we are currently working on and what we think will increase the engagement and the relevance of the website is a more inspirational product. So basically, we are slightly moving up in the travel funnel that is focused on local travel because we believe that local travel right now, and we see that local travel right now is the first travel that is restarting, and we believe that local travel will be much more important for the foreseeable future. So, it is more focused on giving you an idea of what kind of trip you would like to do and you could do that is locally available, easy to reach by car. And because of that, it is a trip that you can do a lot more often than, for example, a summer vacation.

Yes, I'll address the second question about the P&L. At this moment, it's challenging to predict when and how much travel activity will resume. As noted in our quarterly report, our referral revenue fell by over 95% in the last week of March compared to last year. In April, we leveled off at those low figures, and while we are observing a slight increase in May, our year-over-year performance for Q2 will significantly lag behind Q1. Nevertheless, we are concentrating on what we can manage. We promptly reduced performance marketing efforts when volumes declined and shifted our TV budgets to the second half of the year and into next year. Additionally, as mentioned in our April shareholder letter, we took various steps to decrease our fixed costs. Regarding how this correlates with the overall travel market, that's something we can influence only to a limited degree. Our auction has already experienced volatility even before the crisis, and we began implementing features in our marketplace earlier this year to enhance monetization. We believe the crisis may lead to further consolidation in the industry, which will increase pressure on the auction. Ultimately, it depends on how effective we are with our marketplace initiatives to counter that pressure, but it's still too early to determine if we will come out ahead, in line with the market, or below it.

And the next question comes from Tom White from D.A. Davidson.

In the prepared remarks or in the letter, rather, you talked about possible consolidation on the supply side of things. Can you dig into that a bit more? It would seem that, that wouldn't be a good thing for kind of travel intermediaries like yourself, but just curious on your thoughts there. And then I guess, while I'm also on the topic of consolidation, curious whether you think the role of travel intermediaries such as metasearch sites or OTAs kind of changes meaningfully in a post-pandemic world and whether you might see similar consolidation on that front as well to the extent that there's still meaningful consolidation possible?

Thank you for the question. Generally, we expect that we and other performance marketing providers will have a more consolidated advertiser base as we move forward. We believe that well-capitalized industry players who can endure the current crisis and restart operations more quickly are likely to gain market share from smaller and mid-sized hotels. Additionally, there's reduced willingness to take on cancellation risks. In a cost-per-click auction, this might lead to referrals that are less valuable than anticipated since cancellation rates may increase. This is why we've begun developing some marketplace features aimed at mitigating these pressures. Axel, would you like to share more details about those features and our efforts?

Absolutely. As Matthias mentioned, during a crisis like this, we need to consider that there will likely be more consolidation, though the extent is currently uncertain. Before the crisis, we began testing ways to diversify our revenue base and create a more solid foundation. Alongside tools that address the current uncertainty, such as CPA bidding, we have also introduced live display advertisements and sponsored listings. These products offer different benefits to our advertisers compared to the existing CPC-based model, which we believe will be crucial in compensating for or exceeding any potential weaknesses in the auction in the coming months.

And the next question comes from the line of Lloyd Walmsley from Deutsche Bank.

I have two, if I can. First, just kind of going back to that CPA model shift, we’ve definitely heard OTAs are putting pressure throughout the marketing channel to shift to this model, and our question for you is when you look at the rev shares OTAs are looking for, how does that compare to the effective take rates you've historically seen in the CPC model? The affiliate models have historically been much lower effective take rates, I think, than the CPC model, so wondering how that's shaking out. And then secondly, going back to the comments on higher consolidation in the industry from larger players, you also mentioned structurally reduced spending in SEM. Can you just talk about why you think SEM spend will be structurally lower, and then why you think the negative impact to your marketplace, yes you put it at 6 to 12 months, could it be longer? Anything you could share on these fronts would be helpful.

Absolutely. When considering the CPA model, we view it as a necessary service for our advertisers, especially given the current climate of low-risk appetite following the crisis. We have seen substantial cash outflows due to refunds for cancellations and ongoing uncertainty about potential second waves of the crisis and further cancellations. By offering a CPA, we can reconnect with many advertisers sooner rather than later, leveraging our valuable data and visibility to give them more confidence and encourage their participation in the auction process. Regarding your question about take rates, I believe that current take rate indications are not a reliable forecast for the future due to the special circumstances we are facing and the high level of uncertainty. We do not anticipate that the CPA will have structurally lower take rates compared to a CPC model. Instead, it serves as a tool that is especially beneficial for smaller advertisers who typically have access to less data, and in the current environment, even less access. They can gain from our data aggregation, and we actively bid on their behalf while sharing the associated risks.

Yes. And on your second question on dynamics in performance channels, I would mention that there are three key things that we take into consideration and why we believe that the auctions will be softer at least in the short to medium term. The first one, as we mentioned, consolidation. I mean it's clear, if there are fewer players actively participating that has put pressure on the auction. The second one that I mentioned before as well, cancellation risk. I think there's awareness now in the market that there should be a risk premium for that. And at this point, we don't know, nobody knows if we see a second wave or not and what a click or referral you're buying is worth in the end. And then the third one is more specifically to us. That's our large-scale test that we mentioned already last time. So even before the crisis hit us, we started to bid on performance channels to see how we can drive incrementality or how incremental that channel is for us. And we started that in February, but then had to pause earlier than anticipated due to the COVID-19 outbreak. But what I can share is that we got some early learnings, and what I can tell you is that we got some indications that we might benefit from reducing our bids in performance channels, but obviously, we need to get more data, and we will continue with the test once volumes come back. Obviously, it's a special situation because now it's at zero, and it's like a reset. So we also need to see how the dynamic evolves when things come back, but then at the right point in time, we will certainly continue our test.

And the next question comes from the line of Brian Fitzgerald from Wells Fargo.

A couple of follow-ons. Maybe one to the discussion on different formats. Can you give us a sense of what those breakdowns are now? I know it's newer days on CPA, but where you think they will get to? And then you just mentioned that the take rates aren't necessarily lower. They're more useful to smaller advertisers who don't have as much information to bring to bear on leverage. Do you anticipate a snapback in terms of ad format usage at some point when if we get out of here because obviously, smaller advertisers may not be able to weather the storm. And then you're left with larger guys with more data that they can use on their own, and so hence, maybe more CPC there.

Yes. So on the new format, I assume you're referring to the bidding formats, so CPC versus CPA?

On the CPA, we do believe that it is a lot more relevant in the recovery phase, as I mentioned before, because there is more uncertainty, less data and more risk structurally. And that will become less relevant once we are at whatever steady state means in the future because it will be easier to predict cancellation rates, conversion rates, and there will be, generally speaking, more data available. Having said that, it is not something new. So in particular, smaller and smallest advertisers, individual hotels to the extremes have for a very long time asked for this format. So we are basically now have just reprioritized the development and brought it forward because now it becomes relevant for a very sizable part of our advertiser base.

And the next question comes from Shyam Patil from Susquehanna.

It's Ryan on for Shyam. Can you talk about trends in markets that are opening up sooner than most, such as like Hong Kong or Germany? Has there been any material rebound anywhere? And then secondly, do you anticipate seeing demand for alternative accommodations return a bit faster? Or travelers maybe preferring their own place to a big hotel in these times?

Yes, thank you for your question. We did notice an increase in May in several markets, particularly where governments began to ease lockdown measures. However, we remain very cautious, and it's important to do so since this recovery is starting from a low point, so we don’t want to overinterpret this situation just yet. It's still too early to draw conclusions, and it's challenging to take data from a specific market, such as Germany, and apply it to others due to varying timelines for entering shutdowns and differing measures in place. Overall, we don’t too focused on the data because we recognize there is a lot of background noise. We believe that the volumes need to increase before we can gather useful insights. This also relates to your second question; in the first quarter, there wasn't a significant shift from hotels to apartments—things were fairly consistent with prior trends. In April, there was a noticeable interest in apartments, but again, volumes were very low, so we’re not reading too much into that yet. We need more data to determine if this is a genuine trend or just a temporary situation as certain countries start reopening. We had also started investing in alternative accommodations over two years ago, believing it was important, and we’ve integrated these options alongside hotels in our core offerings. Regardless of the trend, it remains strategic for us, and we will continue to enhance its relevance and visibility for our users. Does that address your question?

And the next question comes from the line of Doug Anmuth from JPMorgan.

I have two questions. First, you mentioned various changes, Axel, particularly regarding the products, such as focusing more on the upper funnel and local aspects, as well as the newer ad formats that are shifting towards display and sponsored listings. Could you elaborate on how much these changes have been discussed with your advertising partners? I'm curious about their perspectives on the changes you're implementing on the platform. Secondly, regarding costs, can you clarify how much you're reducing on an annual basis at this stage? Additionally, can you provide an update on your fixed and variable cost structure?

So on the B2C and B2B product changes, if you want to group them like that, I mean, for now, quite some time, we are working very, very closely together with our key partners. And in particular, in the current crisis, if anything, we are even closer. It is a crisis for the whole industry. And only if we all work together, we will be able to come out sooner rather than later. So it's in full alignment with the key partners. On the B2C side, the complementary product that is focusing on local travel, I mean, that is obviously well appreciated by our partners because there is wide agreement that domestic and local travel will pick up first, and that's what we currently see, and that will stay for quite some time a more relevant experience and product for our users and travelers globally. So there is a need for products that actually supports that demand. On the B2B side, the products are jointly developed with our partners. I mean they need to. And there is strong interest in particularly for the recovery phase for those 2 new products that I mentioned, and there are other ideas that we are testing and working on. And the easiest way to think about it is on sponsored listings key additional benefit to a traditional auction is that you can get a lot of visibility and a lot of volume into a specific property, which when you think about how capacity can be added and how hotels can be reopened is actually highly relevant to actually fill the hotels that are open very quickly in a very focused manner. So there's big interest and big demand. For display advertisement, there is also very big demand. And there, the key value proposition is that it allows for additional messaging that is on our site. It's in the flow of users searching for accommodation. And there, in particular, the safety standards that is applied to the specific accommodation is highly relevant and can be messaged very well. Both products, as I said, are highly relevant for the recovery phase. And so we expect them to get quite a bit of traction for the months to come with volumes coming back to more decent levels.

Yes. So on the cost side, I mean, as we mentioned in our disclosure, we have stopped all unnecessary spending, such as marketing, business travel, company events and others. The, by far, largest bucket in there is marketing obviously, and we pulled back very quickly on that one. So to give you more guidance on quarterly expenses for the remainder of this year, I think a good starting point is to look at our costs and expenses in Q1. And there, you would need to adjust for the credit losses that we called out in our release and that are higher this quarter given the impact of COVID-19. And when you then look at the base, at that base, it is already lower compared to Q1 2019 for the reasons mentioned above. And we expect to have similar savings for the remaining quarters this year. But given we started to implement the cost-saving initiatives during the quarter, the impact should be slightly higher in the coming quarters. In addition, we spent some time on thinking about the optimal setup going into 2021. And we believe that we need to be a smaller company. And as we mentioned in our earnings release, we expect to reduce our personnel and related costs by approximately EUR 20 million in 2021. So that gives you a good idea on the savings for the remainder of this year as well. Though for the transition period, in Q2 and Q3, the savings will be slightly lower than that. And just for clarity, I'm referring here to expenses between revenue and EBITDA, so not full GAAP expenses.

And the next question comes from the line of Kevin Kopelman from Cowen.

I had a follow-up question on advertising expense. Can you give us more color on the latest trend there? Specifically, do you see advertising expense declining at a similar rate to revenue in the current environment? Or is it declining more or less than revenue?

Yes, Kevin, thanks for your question. As I mentioned earlier, we immediately reduced our performance marketing spend. Our revenue dropped by over 95% at the end of March, and we maintained that level in April. Therefore, our spending is minimal right now. On the brand marketing side, we also shifted our budget to the second half of the year and into next year, resulting in minimal expenditure there as well. Currently, it's difficult to discuss trends since we’re at such a low level, but we anticipate re-entering the market as traffic increases, which should be closely connected. However, we are not at that point yet.

Okay. That's very helpful. And then one other quick follow-up. Could you talk a little bit more about the local travel trips, maybe some examples of what those trips might look like just because I think that's an important dynamic in the near term, as you mentioned.

Absolutely. So the highest interest that we currently see, which is also intuitively clear, is short trips from metropolitan areas to more remote areas. And that obviously differs then a bit by metropolitan area. But if you take Germany as an example, you should see very, very strong interest in the coastal destinations and in the mountains. And you pretty much see no interest in the metropolitan area. So it's really from crowded areas to basically completely noncrowded, very remote areas. That is the first most obvious use case. With the overall situation and also the comfort level of travelers improving, the next use case is more, okay, it could actually be closer to a town or some activity that will restart at some point in time. But it should be driving distance, so that you don't have to worry about flight schedules. Will the flight be on? Will they be canceled? Is it too crowded on planes, etc.? So that's then a second step in terms of what travelers do feel or perceive as safe travel. And then obviously, the ultimate step is returning to normal where you go anywhere you want, probably still with initially some focus on shorter destinations as there is still some uncertainty whether there will be a second wave that will make long-haul flights more complicated and cumbersome. So that's super roughly and simplifying the evolution of travel, how we see it in the months to come, and that's what we are preparing the product for.

And the next question comes from the line of Jason Bazinet from Citi.

I just had a very basic question. For the travel industry overall, what portion of all hotel rooms or nights, if you will, were related to this local travel segment that didn't involve airfare? And what, if you know, what share of the OTA market did it represent prior to COVID?

To be honest, I don't have the exact answer to your question. However, I do know that a significant majority of the travel on our site is domestic. In Europe, I consider domestic travel to be within the Schengen area, similar to how we view it in the U.S. Most of the travel is either within driving distance or possible to drive. But I don’t have the specific answer to your inquiry.

Okay. So I'll give you our back of the envelope, and you tell me if you think this is wrong, that 65% of hotel room nights do not involve air travel globally. Does that seem plausible to you?

Looking at our data, that could be plausible, but I'm uncertain if our data is representative.

And the next question comes from Brian Nowak from Morgan Stanley.

This is Alex Wang on for Brian. Just two, please. First, as you guys talked about sort of positioning the business for some trends that you might expect coming out of this crisis, specifically local, can you talk about perhaps the need to maybe diversify the portfolio and maybe add offerings, such as rental cars, a greater emphasis on alternative accommodations or more local attractions to really capitalize on this local trip trends? And then the second question really is, as we think about the top line of the business between the trend of QR and RPQR, is there a way to help us think about the composition of what you saw in March and April as you think about the coming months and quarters how those 2 metrics might trend?

Absolutely. So on diversification, let me answer that a bit broader and not focus on specific ideas. I mean we have tested quite a few things already pre-crisis, and we do believe that it is important to permanently challenge your setup and your product offering. And that's why we actually started to work on display advertisement and sponsored listings already end of last year, which now proves to be quite beneficial. But in particular, in a situation like the one that we are currently facing, where the future market might look very different than the market that we've experienced for the last years, it is very important to be very open and really look at opportunities and see which opportunities are right for your own business. So what I can just say is we are very open. We are testing various different ideas. And we will make a fact-based decision which ones we do believe are accretive to our value proposition and which ones are more distractions to our organization.

Yes, regarding your second question about trends in QR and RPQR, it's a complex topic because it's challenging to assess right now. Looking ahead, QR reflects our volume aspect, which should align with the recovery of travel volumes. RPQR, on the other hand, relates to monetization. We anticipate some pressure in the auction moving forward, which we aim to address with upcoming marketplace changes, though those will take time to implement. Generally, I would expect improvements in QR year-over-year trends first, with RPQR likely following later. It's important to note that currently, it doesn't resemble a typical auction, and for RPQR to be meaningful and for monetization to be assessed properly, we need a certain volume and level of activity. So, how this evolves is crucial. That's my perspective on those two metrics.

And your next question comes from the line of James Lee from Mizuho Securities.

Great. Can you discuss the government subsidies you are receiving and how they are providing some financial cushion? Also, have you performed any stress tests on your balance sheet? If the effects of COVID-19 exceed your expectations, will you need to seek capital from the market? Lastly, could you provide insights into the search trends as we approach the summer travel season? We’re interested in understanding the destinations people are looking for and any demographic shifts or changes seen in the search results.

Yes, thank you, James. To address your first question about subsidies, we used a program in Germany called Kurzarbeit, which allows for reduced working hours. We implemented this in April but returned everyone to full hours in May alongside our restructuring announcement. Only a few employees were on reduced hours in April, and since we maintained most staff at 50% or more, this won't significantly affect our costs in the second quarter. Regarding your second question on our balance sheet, by the end of Q1, we had over EUR 200 million in cash and short-term investments with no debt. We’ve adjusted our cost structure to prepare for lower travel volumes in 2021 compared to 2019. Even if there is no recovery in travel this year and activity remains low next year, we are confident in our liquidity. Lastly, concerning trends, it is currently challenging to draw any conclusions from the activity on our platform. We’ve noticed that local travel has increased compared to international travel, which is expected. Similarly, apartments are becoming more popular than hotels, but I wouldn't read too much into this as an indicator of future trends once travel volumes normalize. In the short term, we expect people to focus on local destinations, such as the German coast rather than Italy, Spain, or Greece. However, this also hinges on how borders are managed and the perceived safety from our users. That's all I can share for now.

And that was our last question for today. Please continue.

Yes. Thanks, everyone, for joining us today. Yes. The travel industry is facing an unprecedented challenge, but travel will come back. The slope of the recovery is uncertain, and it will be key to stay flexible and adapt quickly. The past months have not been easy for any of us at trivago. We had to take tough decisions, move to a fully remote setup and deal with a very difficult business environment. But it has been very comforting to see how well our team has responded to these challenges, adapting at an amazing pace with a positive forward-looking attitude. With our dynamic and entrepreneurial culture, our lean organization and our collaborative approach with our partners, we believe that we are well set up to navigate through the quarters to come. Last but not least, we are using the time of low travel activity to fundamentally improve our value proposition to both towards our users and our advertisers and leave the crisis stronger than we entered. Many thanks for your time, and stay safe.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all disconnect.