trivago N.V. Q4 FY2023 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the trivago Q4 Earnings Call 2023. I must advise you the call is being held today, Wednesday, the 7th of February 2024. We are pleased to be joined on the call today by Johannes Thomas, trivago's CEO and Managing Director; and Kevin Hu, trivago's Interim CFO. The following discussion, including responses to your questions, reflects management's views as of today, Wednesday, February 7, 2024, 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 Q4 2023 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 those forward-looking statements. You'll find that reconciliations 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 2022. With that, let me turn the call over to Johannes to begin.

Good morning, everyone, and thank you for joining us for our Q4 2023 earnings call. The fourth quarter has unfolded as anticipated. We saw a decline in revenue in line with the trends observed in previous quarters. This decline was primarily due to lower levels of monetization and headwinds in performance marketing. Additionally, we have felt the adverse effects of low brand marketing investments in recent years. However, these declines were partially mitigated by volume growth in our Rest of the World segment. Andre and I returned to trivago about 9 months ago with Kevin providing remarkable support as the interim CFO until Robin's arrival. As a new leadership team, we continue to believe in the potential of the business. The value proposition of trivago remains highly relevant as consumers continue to be price conscious. We remain confident that maintaining the business at a full-year breakeven adjusted EBITDA will enable us to rebuild our branded visitor baseline and achieve double-digit growth in the medium term. We are committed to executing our strategy to revitalize our brand and enhance our products in every aspect. Let me now give you an update on our strategic priorities. Our first strategic priority is branded growth. Within just a few months, we have assembled a highly skilled media buying team that effectively optimizes our global brand marketing investments. We have undertaken a brand refresh to enhance trivago's memorability and appeal. By the end of Q4, we launched TV campaigns in over 20 markets and introduced new AI-powered Mr. trivago spots. We are thrilled by the progress on our team's rapid execution. While it's too early to fully assess the brand campaigns' impact, initial results are promising, particularly in developed Europe and the rest of the world. The response in the Americas has been mixed with North America performing better than Latin America. We are continuously optimizing our brand budget allocation as well as our TV creative. Over time, we anticipate that these efforts will enhance the efficiency of our marketing investments and expect to see the compounding effect materialize over time. Our second strategic priority is to enhance our hotel search experience. We have travelers find the ideal hotel. Our ongoing website test has been focused on improving the visual experience of hotels and exposing more relevant content to our users. Notable efforts include AI-generated hotel highlights which we qualified and launched for 60,000 hotels. The hotel highlights provide users with key aspects to know about the hotel, helping them select the one that best fits their needs. We have also introduced new static search results stages, targeting our users with low travel intent. This change has led to higher user engagement and improved quality of leads we sent to our partners. Our third strategic priority is to offer the best deal discovery experience. We have travelers find great hotel deals and better prices. Our experiments have been aimed at refining how we display and rank deals on our search results. Furthermore, we have improved the rate accuracy on our platform by evolving our deal intelligence and rate accuracy scoring system for our partners. Continuing to improve our deal exposure and rate accuracy will be a focus in the coming months as we expect these improvements to foster trust and retention among our users. Our fourth strategic priority is to empower our advertising partners to realize their full potential on trivago. In Q4 2023, we began testing the second-price auction in three key markets. This initiative aims to simplify our auction, and we anticipate it will unlock user value by delivering more relevant search results. The initial test was successful, and we are in the process of expanding the test. As we continue to see satisfactory results, we aspire to roll out the second-price auction model across all markets before summer. We don't expect this to have a material impact on our monetization in the short term, but we anticipate positive long-term effects. To sum up, we see great momentum within the organization, improvements in our products, and encouraging indications from our brand investments, which set the stage for results in the rest of the year. We have streamlined our operations and organizational structure around our strategic priorities with the objective to drive our pace of execution and learning. As we look ahead, we are confident of showcasing our enhancements and a positive brand trajectory. With that, I'd like to pass over to Kevin.

Thank you, Johannes. Welcome everyone, to our fourth quarter earnings call. I will start with a review of our fourth-quarter results as well as share some early thoughts for 2024. All comparisons for 2023 are on a year-over-year basis unless otherwise stated. During the fourth quarter of 2023, we achieved revenues of €91.7 million, which was a 13% decline compared to the prior year fourth quarter. The year-over-year decline was at a similar rate to what was observed in the second and third quarters of this year and is in line with the seasonality trend observed in the previous year. Lower levels of monetization combined with foreign exchange headwinds negatively impacted our financials in the fourth quarter. Higher levels of competition in performance marketing channels continue to impact our traffic volumes. We also continue to observe ad format tests and changes made in our performance marketing channels as the compliance state set forth for the identified gatekeepers in the European Union's Digital Markets Act, or DMA, approaches. Diving deeper, we see different dynamics among our three reporting segments. Referral revenues declined by 20% in the Americas and by 14% in our developed Europe segment, while it increased by 14% in our Rest of World segment. When discussing our year-over-year comparisons and trends, I would like to draw your attention to the strong prior year dynamics included in our comparative financials. The declines in our Americas and Developed Europe segments were largely driven by softer bidding dynamics on our platform compared to the same period in 2022 when we benefitted from a strong auction. Higher levels of competition in certain marketing channels continue to result in performance marketing volume losses, compounded by foreign exchange headwinds stemming from the weakening of the U.S. dollar against the euro compared to the same period in 2022. In our Rest of World segment, we continue to see growth driven by recovery in markets like Japan, where we see a strong increase in travel demand as many markets recover post-COVID and respond to increased marketing investments. Moving on to our operational expenses, we maintained stable operating expenses at €87.3 million in the fourth quarter. We incurred higher selling and marketing expenses compared to the prior year, offset by lower share-based compensation costs and lowered personnel costs primarily attributed to non-core-related products that we stopped last year. Overall, we achieved a net income of €2.5 million and an adjusted EBITDA of €7.3 million during the fourth quarter. For the full year, our net loss was €164.5 million, which was largely driven by the indefinite-lived intangible asset and goodwill impairment analysis conducted in the third quarter in conjunction with our annual impairment test. For the full year, we achieved an adjusted EBITDA of €54.1 million. During the fourth quarter, we paid out a one-time extraordinary dividend totaling €184.4 million and completed a ratio change under the company's American Depository Share program. I'm extremely proud and would like to thank the many trivago employees that worked hard on these transactions as we successfully returned capital to our shareholders. We continue to be well capitalized for our operating needs, with cash, cash equivalents, and short-term investments balance at the end of the quarter exceeding €125 million. Looking ahead to 2024, the main travel trends remained solid in January, and we continue to see strong demand for the year ahead. While discussing trends observed in January 2024 compared to January 2023, it is important to note the differing dynamics observed during the first full quarter of 2023. We enjoyed elevated levels of average daily rates and higher monetization, which resulted in referral revenue gains exceeding 30% when comparing January 2023 and January 2022. These gains, however, did not persist throughout the first quarter as we trended lower by the end of the first quarter of 2023. As a result, we do not believe comparing our early January 2024 results to prior year will be particularly meaningful. From our previously announced strategy shift, we kicked off our new brand marketing campaign in mid-December. While it is still too early to draw conclusions on the financial results, we are encouraged by early signals. While investments in our brand will have a negative impact on our near-term profitability, for the full year 2024, we continue to expect our adjusted EBITDA to be at around breakeven levels. We remain confident that our brand investments will help us maintain our brand presence in the minds of travelers. Finally, I'd like to close by sharing an update on our previously announced CFO transition. We look forward to welcoming back Robin Harries, who will be rejoining trivago and stepping into the leadership team as Chief Financial Officer on April 1. I'd also like to personally thank all our trivago team members who are leaning in during this transition period. With that, let's open the line for questions.

We are now ready to take the first question, please.

This is Jeremy on for Stephen. I have two questions. First, you called out normalizing booking values for the first time since the pandemic this quarter. Is this a matter of supply finally balancing with demand, or are there other factors you want to mentioned? For instance, do you think the consumer is trading down in terms of what they're choosing? And second, maybe this is tied to your normalizing booking value comment, but you're also mentioning softer bidding dynamics on your platform in the Americas, specifically, I believe, for the first time. Is there anything idiosyncratic about the U.S. market that you can talk about? Thank you.

Hi Jeremy, I can take the first question about average booking values. Overall, we continue to see hotel demand to be quite robust and at similar levels to the prior year. Across the three segments, I can maybe walk you through a little more detail on what we're seeing there. In our developed Europe segment, we are seeing a higher length of stay, which is raising the average booking values, whereas in the Americas, we see a slight decrease in our average daily rate, which together kind of nets out. But these average booking values have normalized compared to prior year levels, which were at a relatively higher level overall.

Yes. I think that's important, and thank you for asking the question. It's not coming down, so it's normalizing at a high level. And then to your question on the bidding dynamics; there’s nothing particularly to call out in the Americas. I think the overall quarter and beginning of the year have been volatile as previous years have been as well, where last end of Q4 was stronger into the year, and it was a little bit softer, but they're trending towards expected levels.

Thank you.

Thank you. Our next question comes from Naved Khan of B. Riley Securities. Your line is now open. Please go ahead.

Yes hi, thanks guys. So maybe just a clarification on the trends you spoke about, Kevin, about January. So you called out the difficult comparisons in the beginning of the quarter, and you said they should normalize at the quarter end. But just give us some guidance about how we should be modeling for top line with similar declines as Q4 or less than that? And then Johannes, maybe just on the growth. Given that the payback from branded advertising comes with some kind of a lag, should we expect the top line to start showing some growth as you progress into the year, or do we expect that to be further out maybe 2025?

Sure. So why don't I start with the first question, which was about the average booking values. In January so far, we are seeing very similar trends to what we saw in the fourth quarter. However, I can provide a bit more guidance on the top line and how we're kind of looking at the first quarter. We are expecting to see some revenue declines decelerate during the first half of the year compared to the fourth quarter. For the first quarter, we're expecting mid-single-digit declines, and that segment would be true for our Americas and Developed Europe segments. While we expect for the Rest of World, we would continue to expect similar levels of growth for the first quarter.

And then maybe I can extend to the rest of the year. I think our overall expectation is that the first half is negative and the second half turns positive when our brand investments pay off because there are compounding effects kicking in. The early signals that we are seeing in all segments are supporting our hypothesis on this.

Got it. That's very helpful. And then maybe a quick follow-up, if I may. So it seems like you continue to see more competition in the paid performance channels. Is the trend pretty much the same as you saw in the last couple of quarters, or has it worsened or maybe improved a little bit? Can you provide some color on that? And then as the DMA rolls out in Europe, do you have any thoughts on what we can expect in terms of impact on the business?

Yes. So there is no big change in terms of impact; we continue to have a negative impact until roughly the second quarter. That is when the ad changes started, and the headwinds began. Until then, we expect some headwind to continue. Though it’s volatile, we see Google making changes as they aim to comply by March 8th. We see bigger changes in Europe, and they are not linking to their hotel product anymore from the search results page. Instead, they have placed this card on the right side, showing hotels similarly to other attractions you can find on Google. At the same time, they have increased the exposure of PPA, at least from what we observed, and we have launched and participated in that auction across all relevant markets in order to learn and gain share if we see conversion rates improving. That is a problem we called out in the past; we see much lower conversion rates on PPA compared to tax ads. That is something where we are trading off and investing. It's still unclear what changes will be present in the future depending on Google's tests and what will be accepted by the commission.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Doug Anmuth from JPMorgan. Your line is now open. Please go ahead.

Great. This is Doug's line. Thanks for taking the questions. The first one is about monetization trends for this year. How do you see the easing of monetization headwinds as we progress through 2024? Additionally, how should we view the scale of your ad spending this year compared to last year? Should we anticipate single-digit growth, or will it lean more towards the double-digit range?

Yes. Thank you for your question. Regarding monetization, it's trending towards expectations; it's very hard to predict how this will go throughout the year. Our conversations with our partners indicate they are satisfied with the incrementality our brand investments deliver and the additional incrementality, as well as the improved quality of the leads we send. So that's our perspective on monetization, and we wouldn't expect big changes. In terms of spending, we certainly invest substantially more in brand marketing and less in performance marketing. We are seeing a shift with brand marketing taking a bigger share of our business. Whether we see single or double-digit growth depends on Google's actions and how the compounding effects kick in throughout the year. It’s a bit early to give a clear signal on that. What we are confident in is that we can deliver double-digit growth in the medium term.

Thank you.

Thank you. Our next question comes from Ron Josey of Citi. Ron, your line is now open. Please go ahead.

Yes, this is Robert on for Ron. Thanks for taking the questions. The first question is on ad spend for next year. How should we think about the allocation of these investments in terms of targeting existing markets versus spending in new markets? And which new markets are you all leaning into the most? I may pause and ask the second question after.

So we're not commenting on individual markets. Generally, we are not dogmatic about where to invest; it’s market-dependent. We invested in over 20 markets by the end of Q4. We might explore additional markets, focusing on those where the unit economics work. We invest in our brand and analyze the response, then understand where it's most efficient to allocate our dollars. It’s a gradual process that we optimize over time.

Okay. Got it. That's helpful. And then the second question on the adjusted EBITDA guidance, which remained relatively unchanged from last quarter. Can you walk through where you see the most opportunity for outperformance here?

Sure. For adjusted EBITDA, with these additional investments into our brand, we expect a negative impact on near-term profitability. In the first half of the year, we would expect the adjusted EBITDA to be negative, a low single-digit number. Then we expect this to trend positively in the second half of the year when the dividends from our brand investments begin to materialize, getting us to full-year breakeven. In terms of operational expenses, I would imagine we would maintain those at a stable level consistent with the prior year, adjusted for advertising and share-based compensation costs.

Great. Thank you.

Thank you. Our next question comes from Stan Velikov of Wells Fargo. Your line is now open. Please go ahead.

Hi everyone. Thanks for taking our questions. I'm curious how you are looking at the progression of brand spend through the year. What cadence should we expect to see in 2024? Your prepared remarks kind of implied the brand spend would be gradually increasing.

We are not commenting on where exactly we spend. What we do is we spend more consistently, and the seasonality from last year will not substantially change our brand spend. This is something to consider.

Thank you. Our next question comes from Kevin Kopelman from TD Cowen. Your line is now open. Please go ahead.

Thank you so much. Could you touch on Google's planned deprecation of cookies in Chrome? How significant of a change will that be for trivago, and what impact might you anticipate?

That is on our radar, and we are working on our broader display campaigns to address it. It will not have a material impact on our business, particularly because our brand is very strong, and performance marketing is also robust. There is no significant impact on those channels.

Perfect. Thank you.

Thank you. At this time, we currently have no further questions. So I'll hand it back to you, Johannes, for any further remarks.

Thank you for joining us today. Our mission is clear: we want to be the obvious choice for price-savvy travelers searching for a hotel. We are energized and fully committed to the journey ahead. Thank you again for your trust, and we look forward to sharing our continued progress with you.

Thank you for joining today's call. You may now disconnect your lines.