trivago N.V. Q2 FY2020 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the trivago Q2 Earnings Call 2020. At this time, all participants are in a listen-only mode. I must advise you the call is being recorded today, Wednesday, July 29, 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 and Managing Director. The following discussion, including responses to your questions, reflects management's views of today, Wednesday, July 29, 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 Q2 2020 operating and financial review and the Company's other filings with the SEC for information about factors that 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 Relations 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.

Good morning, thank you for joining us today. Only two months have passed since our last earnings call and it feels like a long time ago. Since then, we have seen some return of travel activities globally but more importantly, COVID-19 has been a catalyst to accelerate our strategic repositioning and the changing industry. Despite the difficult situation, our teams have moved mountains. Starting in May, we saw a return of travel, first in Germany, the U.S., and New Zealand, later in other markets. Almost everywhere, leisure nature destinations have been the first to pick up, predominantly in driving distance and with an increasing demand for alternative accommodation, exceeding 20% of our referrals for the first time. Germany, as one of the most stable markets right now, has seen leisure nature demand pick up approximately up to 100% of last year's volumes, while city trips and international travel were around 50% of last year's volumes, but recovery is not a one-way street. In the U.S., we've seen how closely travel demand is tracking the health situation, and starting in the middle of June, the recovery and year-over-year growth rates in the U.S. have reverted. During this difficult time, our teams have done remarkable work. Our tech teams have significantly increased their innovation pace, not only improving the core product but also launching the first better version of our new local travel feature. The marketing teams have fully ramped down our marketing activities and are ramping up in line with the market with tailored messaging and campaigns for the current situation. Our sales and marketplace teams have worked as true partners with our advertisers, supporting them when the crisis hit them and jointly working on significant recovery initiatives. Most notably, the sponsored listings and display advertisement products have been commercially launched, and various end-to-end conversion optimization tests are in the works. Despite the operational and strategic progress that we've been making, we are not unaffected by the crisis that has hit the industry. Matthias will cover all financial developments in more detail.

Thank you, Axel, and good morning, everyone. Let me start by saying that Q2 has been a very special quarter. Given the low revenue base of €60 million, some of our ratios and KPIs are not as meaningful as during normal quarters. Our net loss in the second quarter was €20.2 million. Despite the loss, we were able to strengthen our cash balance without taking up extra funding. This is largely due to the fact that we were able to collect a significant amount of outstanding receivables, but also because we reacted fast to the changing environment by focusing on preserving our cash. Our finance teams have done an amazing job here. As a result, our overall cash position increased by €19.8 million to over €230 million at the end of the second quarter. This will give us the financial flexibility to meet future challenges. To keep that flexibility, we changed our structure in the second quarter. Our HR team has done an outstanding job dealing with many challenges in a very short time period. I am particularly happy that we found a new home for around 60 employees in Palma. Adjusting for those restructuring costs of €5 million, we reduced operating expenses by €10.2 million in the second quarter compared to the same period in 2019. Moving onto trends in July, we see a high correlation between demand for local leisure trips and the health situation in the respective region. Hence, the demand in various markets continues to be volatile and remains largely unpredictable. In July, the recovery has been strongest in developed Europe so far, as we see co-markets like Germany and Italy recovering fast, and most other markets experiencing a gradual improvement in traffic volumes. More specifically, as of July 24 months-to-date, our qualified referrals decreased year-over-year less than 50% in developed Europe and were down around 50% in the rest of the world. While in America, our qualified referrals were down around 70% year-over-year months-to-date. As the pickup in demand set out in the U.S. in the second half of June, we have not seen a recovery in Latin America yet. Overall, our advertisers remain cautious, so bidding levels are still down significantly compared to 2019. Our revenue for qualified referrals, which reflects the current bidding levels, is down more than 50% globally year-over-year months-to-date as of July 24. Nonetheless, we expect revenue in July to exceed our revenue that we reported for the whole second quarter. With that, let's open the line for questions.

Thank you. The first question is coming from Tom White from D.A. Davidson. Please go ahead. Your line is open.

I was hoping you could give a bit more color just on kind of the early iterations of the local travel product? What's kind of the vision there? How quickly can you roll that out and evolve it? And then also just maybe an update on the cost per acquisition offering, any early states you can give us on advertiser interest uptake, that sort of thing?

On the local travel product, as I said, it is in better testing phase right now, which means that we have a first usable product live that we are testing with a small subset of users. That is a very important milestone and I'm very, very happy with how quickly the team managed to get to that point. Realistically, it needs a few iterations before the product is ready for further rollout, but in the third quarter, we expect to make significant progress. On CPA, we do have a net CPA product currently live with the first advertisers. We are working on rolling that out further. There is significant interest from many advertisers to move fully or partially to that product, and I would expect the rollout to see significant interest and traction again in the next couple of months.

And just a quick follow-up on CPA, how does that handle cancellations? I mean, is that somehow factored in or something that you guys can monitor? Or is it basically the acquisition is defined as kind of the initial booking of room nights, not necessarily a stay room night?

There are different models. We do offer a gross CPA, which is basically for every booking and does not factor in cancellations, and we also do offer net CPA, where there is a credit for cancellations that are coming in.

Next question is coming from Brian Fitzgerald from Wells Fargo. Please go ahead.

A couple of questions. Thanks for the referral data on what you're seeing in Germany. I think booking.com is mentioned generally, when you see customers travel close to home, you see them having shorter durations of stay today in less expensive accommodations versus when they travel further. We wanted to hypothesize and ask, being that you're seeing some of those trends this year, and maybe local travel is replacing some of the bigger international travel. Are you seeing customers, consumers trading up versus what they would normally spend on local vacations, in terms of duration and property class, anything you could tell us about the propensity to spend locally?

It's a bit difficult to generalize, but if we take Germany as a market, the duration of the trips has actually gone slightly up. We don't see that the duration has come down. There is obviously a mixed effect because currently there is a lot more leisure rural travel versus city trips that tend to be a bit shorter. But if you look at the overall data, the trips are getting a bit longer. In terms of price levels overall again, there is a different trend; the city prices tend to have dropped this year compared to last year, which is clear because there is a lot less demand while beach destinations in particular, but all nature destinations tend to hold up or even go up slightly. The development is different, really market-by-market. But, yes, just taking Germany as a market, which has currently recovered most globally for us, those are the trends that we observe.

And then maybe we have one quick follow-up that's related and it's just a broader question. Revenues are down, unclear how long, unclear of what the linear path or how linear the path is to recovery? Are there any opportunities or any other problems in the travel market that are being unearthed right now by COVID that you can address, maybe longer-term rentals for remote or potential nomadic workforces? We've been hearing about locations opening up for monthly rentals, where people want to travel and work from a remote location?

There are for sure many opportunities that we are looking at, which are opening up right now or that we expect to open up in the months and even years to come. Domestic local travel is clearly a part of the overall travel universe that is benefiting as are apartments. One of the drivers of that is to use apartments and longer-term rentals as an alternative to working from home. So, yes, we do see those opportunities and we, as an organization, are very focused on those opportunities. The challenges are clear, and the opportunities will outweigh the challenges from all perspectives.

Next question is coming from Naved Khan from SunTrust. Please go ahead.

This is a question about local leisure opportunities. Can you comment on whether there is sufficient lodging supply available to meet the demand you are observing? Also, in terms of your offerings, how do you plan to market them to consumers? Are you looking to attract more advertisers and new advertising initiatives? I have a follow-up as well.

So, your first question is about whether there is enough local supply, which depends obviously by market. You have some countries in Europe that are net exporters of tourists, like the UK, Germany, etc. What you see in Germany, for example, is that there is also international travel, but still the majority is or the vast majority is within driving distance. The Netherlands is very popular, Austria is very popular, Poland is getting more popular, Croatia. All these destinations are within driving distance, and you could drive back if something were to happen, which is important in the overall consideration. In terms of advertisers, we have very broad coverage and we think we actually have the broadest coverage of all platforms by having all major providers of apartments and hotels on our platform. So right now, that is, from a customer value proposition, a clear benefit of having still something available when other platforms will have run out. We don't think we need to catch up in that direction, but rather that we are ahead of our competitors in that regard.

And then maybe a quick clarification on the state assistance you've gotten in Germany. Can you quantify what the impact was for the second quarter? And how should we think about that continuing for the remainder of the year?

Yes. So, we used that scheme in April and part of May for some teams, and then as of June, everybody except a few. In April, we used it for less than 30% of all employees overall. Most of those people still worked 50%, so this gives you a rough idea. I mean, we didn't call out the exact number, but the impact was not very significant.

Next question is coming from Shyam Patel from Susquehanna. Please go ahead.

Hi, guys. It's Ryan on for Shyam. So first in the letter, you mentioned the full rollout of sponsored listings and display is coming in the second half. So could you talk more about that rollout? And just the low activity on the platform may have made rollout any easier and more difficult? And then secondly, I know it's still early, but what are your thoughts on the travel environment during the holiday season as of right now?

On the listing product, we have technically qualified the product already last quarter and are now commercially rolling it out, which means that we have quite a few advertisers live already on the product and have a very strong pipeline of advertisers that we want to launch the product and the campaign. There is a lot of interest in the product. What is holding it back? There are obviously some limitations in onboarding new campaigns and new advertisers, because there are some technical implementations required on both sides. Additionally, some advertisers don't have their full marketing teams back and still have a significant part of their team in furlough programs. That is also a limitation, as sometimes just not all the right partners and producers are available to really move this forward. But we are very happy with the pipeline that we have and expect a significant increase in participation rate in the third quarter.

On your second question, regarding trends we're seeing with summer travel, we observed an uptick in demand since the beginning of May, particularly in the U.S. and in Europe. While the uptick in demand since May in the U.S. has plateaued in the second half of June, the positive trends largely continue in Europe. Generally, we believe that travelers are returning in three phases. First, leisure vacation trips to local destinations, then city trips, and lastly international trips. This is a general theme we are observing across most countries. We included a slide in the investor presentation where we provided Germany as an example. There, the year-over-year recovery rate of local leisure trips increased 75 percentage points in the first two weeks of July compared to the first two weeks in April, while the recovery rate for city trips for the same period increased only 58 percentage points, and for international trips, 45 percentage points. Overall, there is still a lot of uncertainty, with governments changing restrictions based on new infection rates. Given the uncertainty, many travelers opt for local destinations they can reach by car, for example.

Next question is coming from James Lee from Mizuho Securities. Please go ahead.

Thanks for taking my questions and appreciate the color on the recovery that you're seeing in Europe and the U.S. so far in terms of referrals. Can you talk about the auction density a little bit here, in terms of revenue per qualified referral trends into July? You sort of mentioned that advertisers are a little bit cautious at this point in time. Just want to see how that trends compare versus June?

The marketplace remains volatile and levels can vary significantly by market. So it is difficult to make a general statement. But what I can say is that as of July 24th, revenue per qualified referral, which is a good proxy for bidding levels, is down more than 50% globally year-over-year months-to-date. We do see some recovery if you compare that to the Q2 number, but it is slower than, for example, the recovery in qualified referrals. However, as more and more advertisers are coming back, we expect bidding levels to normalize. But again, it's hard to make an exact prediction here, and we will see how that works in the remainder of the quarter.

I can ask a follow-up question regarding alternative accommodations here. Obviously, you talk about skewing towards local travel and also alternative accommodations here. Do you feel you have enough supply currently, and if you do, what are you doing specifically to optimize your search result conversions here?

We believe that we have sufficient supply. As I mentioned before, we have the broadest offering overall with the highest number of hotel and apartment providers on the platform. To optimize, we are running several tests on the product side to improve the user experience for apartments, as the platform has historically been built for hotels. We started over 2.5 years ago to integrate apartments. It's fair to say that we are not done there. One specific example is that we've launched a new search selector product that allows you to search for larger groups more intuitively, which wasn't as optimal before. However, there are many other tests we are running to better integrate apartments and refine the search experience.

If I can squeeze in one more question regarding alternative accommodation here since you said Germany is the first country that you see recovering. Can you give a sense of the percentage of room nights for alternative accommodations in Germany?

We shared that globally, our share of referrals exceeded 20% in the second quarter. We don't disclose that number on a market level, and yes, that's all we can say.

Next question is coming from Lloyd Walmsley from Deutsche Bank. Please go ahead.

Hi, you got Chris on for Lloyd. Maybe a few on your guys' down marketing spend. Can you just talk a little bit about the adoption of the CPA products and how that will potentially impact your guys' lower marketing spend? I know you guys made the distinction between having a net and a gross CPA product? And then looking out to Q3, how should we be thinking about you guys also mentioned that TV ads are starting back up. How can TV ads really be driving sequential growth for you guys versus spending your own performance dollars? And just thinking about those TV ads that you guys have been experimenting with so far? Just any color that you can provide on the KPIs versus how TV ads KPIs have looked running in a pre-COVID environment?

Sure, on the net and gross CPA models that we're offering, we have started with some launch partners and are working on rolling the product out further. There is very significant interest, particularly in the net CPA, where smaller advertisers have concerns predicting cancellation rates, and they see value in us aggregating data from multiple advertisers to predict those rates. That is a value creation opportunity on top of taking our bidding algorithm, which aggregates all the data we have access to versus just the individual advertisers' data. Those are the two levers to improve auction dynamics and support the overall recovery that Matthias mentioned earlier.

And then on your second question, let me say that, as you can see from the numbers we disclosed in the second quarter, we put our marketing activities largely on hold. Beginning of June, we engaged in some performance marketing activities and launched TV campaigns in some of our core markets. In July, we increased our brand marketing spend and began to launch our new campaign. Depending on the first results—and it's still a bit early—and the general further demand, we will adjust our spend for the remainder of the third quarter. However, given the unstable health situation, we remain cautious in our marketing activities overall. We believe that flexibility is key, and our TV partners have predominantly supported us here. Our fixed commitments for TV advertisements for 2020 have been mostly reduced or pushed to 2021. To your question about how we approach TV and what KPIs we look at, that is not really different. The one thing that is different is that we are trying to be more flexible and correspond to what we see.

Next question is coming from Kevin Kopelman from Cowen. Please go ahead.

I have a couple of questions on pricing dynamics in the market for accommodations. Have you seen any change in the variability of pricing for accommodation from one locale to the next or from the OTAs versus supplier direct sites?

I wouldn't be able to call anything out. There is obviously more volatility than usual. In particular, for all marketplaces, what we observed in the second quarter was that some advertisers indeed even deactivated their campaigns and dropped off of our marketplace. Now, they are coming back, but there is a lot of volatility, and all the shifts and changes only add to the noise. However, there's not one specific thing I would mention.

And then when you look at ADRs coming down, do you have a sense of how much of that ADR declines from the suppliers are due to mix shifts in terms of where the travelers are going versus the suppliers cutting prices in their accommodations?

Looking at that, we need to assess individual markets. In the German market, prices have not really come down for leisure nature destinations because there is a lot of demand, whereas prices have come down in city destinations. The average is heavily influenced by that mix, but one cannot say that overall prices have fallen. It depends very much on which segment and which destination we're discussing, and we see similar trends in other markets, with the mix being very different market-by-market.

Just to add to that, ADRs are part of our revenue per qualified referral. The biggest driver there is clearly the bidding levels we are currently seeing on the marketplace, so for the volatility there plays a much bigger role than changes in ADRs.

And then just a follow-up on kind of the market-by-market data. Can you talk more about how strong the recovery in Germany and Italy has been? What kind of levels you're at there, relative to where you are?

We don't give specific numbers for individual countries, but Germany is a very strong market. The recovery has been stronger than in other markets. A good starting point for you is to look at general trends that you can find, and what we report across all platforms shouldn't deviate too much from that.

And then I want one other one there. So America month-to-date, qualified referrals are down 70%. Can you talk about what that looks like, compared to the previous month? What kind of levels are you at in June there for Americans?

If you look at qualified referrals in the second quarter, we reported that number. Back in April, that number was down much more. In May, we saw some recovery, but that was very slow. The majority of qualified referrals in Q2 were from June, so if you take that as a starting point and compare it to the 70% I called out, you get a good idea of where we were in June.

And if I could just ask one last question, a follow-up on your previous questions. So I was wondering on TV advertising costs, when you're going out and making new placements, can you talk about how much pricing has come down on TV to reach the same number of people?

Yes, thanks for the question. This has been a development that has been very positive. We've seen a highly collaborative approach from almost all of our TV partners, trying to help us out in a difficult situation and valuing the relationship we've built up over the last couple of years. We've experienced everything from getting free advertisement during the lockdown from certain partners to receiving discounts on the relaunch. While I cannot comment on exact discount levels, we have been very happy with the support from our partners.

Next question is coming from Brian Nowak from Morgan Stanley. Please go ahead.

This is Alex Wong on for Brian. A couple of questions from us. One, just maybe a bigger picture following up on the advertising questions given you guys have the opportunity to maybe rebuild the advertising spend from a lower base given the travel environment. Have you sort of given any thought around longer term bigger picture fundamental shifts in sort of the travel marketing mix and how you guys are approaching your marketing spend going forward?

Sure. So, let me start with the advertising mix question. Generally, we do not comment on the channel mix, but for TV advertisements to be successful, you need a certain threshold in terms of travel interest. In the early phase, you won't see us as much on TV in most markets. Whereas selectively investing into performance marketing channels might make sense. In June, we began reengaging in performance marketing but did not advertise significantly on TV. Now, as the positive trend is continuing in July, especially in Europe, we are increasing our TV investment again. Our strategy has not changed. We mentioned the last performance marketing test that we started pre-COVID-19 and continue to invest into those channels. Making a statement on how this will look next year, I think that is too early.

And then on your second question around the advertiser mix, obviously helpful to see the chart that you provided in the slide, but any color you can provide on the change in mix you saw this quarter and how that progression looks going forward?

In general, the dynamic has been as follows: in March and early April, we saw pretty much all advertisers significantly reducing their bids due to the lockdown and the wave of cancellations hitting them. Some advertisers even completely deactivated their campaigns and went offline. Conversely, some brands have kept all of their campaigns live throughout the quarter and were among the first to adjust their bids upward once they felt cancellation rates were under control and volumes were picking up. This has helped them to increase the overall share that we've reported. More and more advertisers are now coming back online and getting more comfortable with predicting cancellation rates. As I said earlier, we believe that our CPA and net CPA bidding models will support advertisers in feeling more comfortable, and we expect the structure to normalize over time, and we've already seen some trends in that direction.

Just one last question. It sounds like Europe is seeing a steady recovery but given some of the recent announcements by the UK to re-impose a quarantine on Spain and potentially other markets as well. Just curious to get your view on whether it's a more regional improvement that you are seeing, or more broad-based, and is there potential for some flattening out like what you saw in the U.S. in late June for Europe?

There's always a risk of a deterioration of the health situation that will lead to a reduction in travel demand. However, as of today, we observe significant improvement in most markets. In the UK specifically, we have seen a drop in demand for Spanish destinations following the government announcement, but not an overall drop, rather a shift towards domestic destinations. As long as there are safe travel destinations that one can access, we expect demand to continue to increase and recover. However, if the general health situation deteriorates domestically or in particular destinations, similar to what we've seen in the Americas, we expect global travel demand to drop again.

Next question is coming from Doug Anmuth from JP Morgan. Please go ahead.

This is Dae for Doug. First for Axel, just a follow-up on your local travel product, I'm curious to hear how this product is different from your core search product in the marketplace or if advertiser participation is different for the local travel product. And then a follow-up for Matthias, can you talk about how you feel about your cost base right now? What is your current cost run rate, and do you plan to bring this down further or are you comfortable at current levels?

Let me start with the local travel product. The opportunity we see is that local travel allows for a more inspirational approach to travel planning. The challenge we're facing is that the top destinations that people have in mind may not be within driving distance or might be very crowded. It is therefore crucial for travelers to discover alternatives that might be less well-known but are just as attractive and nearby. That is the main difference; the product is designed to be more inspirational and starts earlier in the travel planning funnel. The commercialization is identical, but it is designed to inspire, while our core product requires you to know exactly where you want to travel.

On your cost run rate question, we have made significant progress implementing the restructuring that we announced earlier this year. By now, we have closed our Leipzig office; we have signed an agreement for the sale of our Spanish Development Center and we're in the process of closing our Amsterdam offices. Overall, we reduce our operating expenses and adjusted for share-based compensation and restructuring costs by €9.4 million in the second quarter compared to the same period in 2019. You need to adjust that for the reduction in other selling and marketing expenses, which mostly came from lower TV production costs that we do not consider permanent. This gives a good idea about our cost structure at year-end and going forward. In Q3, that number will be a bit higher as we don't get all the benefits from those restructurings that we expect to realize at year-end. We continue to expect to reduce personnel and related costs by approximately €20 million for 2021.

There are no questions. Please continue.

Thank you, everyone for joining us today. Before we close, let me reiterate that the crisis is a big challenge but it's also a huge opportunity. We see the crisis as a catalyst, a catalyst to focus even more on our customers' needs, to differentiate our product, improve our competitiveness and positioning in the industry. No matter how challenging the time might be, we are taking a positive perspective and hope you do so too. Many thanks for taking the time. See you next quarter and stay healthy.

That does conclude the conference for today. Thank you for participating. You may now disconnect.