trivago N.V. Q3 FY2024 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by and welcome to trivago's Q3 Earnings Call 2024. All lines are being placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I must advise you that the call is being recorded today, Wednesday, the 6th of November 2024. We are pleased to be joined on the call today by Johannes Thomas, trivago's CEO and Managing Director; and Robin Harries, trivago's CFO and Managing Director. The following discussion, including responses to your questions, reflects management views as of today, Wednesday, November 6th, 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 Q3, 2024 operating and financial review and trivago'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 reconciliations of non-GAAP measures to the most comparable GAAP measures today in trivago's operating and financial review, which is posted under our Investor Relations website at ir.trivago.com. You are encouraged to periodically visit trivago's Investor Relations website for important content. Finally, unless otherwise stated, our comparison on this call is against results for the comparable period of 2023. With that, let me turn the call over to Johannes. Please go ahead.

Good morning, everyone. Thank you for joining our Q3 2024 earnings call. In the third quarter of 2024, we delivered solid brand revenue growth in our Developed Europe and Rest of the World segments, maintaining their positive trajectory. While the mid-tier segment faced temporary market headwinds, including softer demand earlier in the quarter and reduced TV reach due to shifted viewership from major sports and political events. In the Americas, we demonstrated our agility by adjusting our brand investments accordingly. This technical response contributed to a better-than-expected adjusted EBITDA. Google ad format changes continue to be a headwind, which we expect to gradually normalize by Q1 2025. As we move into Q4, we are seeing a return to typical seasonality patterns and are excited to be approaching our turning point. We are well-positioned for growth this quarter and aim for sustainable growth next year. Our disciplined approach keeps us on track to achieve breakeven on a full-year basis in 2024. We remain confident in our ability to achieve double-digit growth in the medium term. Robin will share further insights on Q3 and our future expectations. Let me first give you an update on our strategic priorities. Our first strategic priority is branded growth. We strive to be top of mind for travelers booking hotels. We are encouraged by the positive returns on our brand marketing investments in 2024 and are committed to advancing this trajectory. To further increase the effectiveness of our investments, we have secured a partnership with Jurgen Klopp as the face of our upcoming marketing campaign. As a globally recognized soccer coach celebrated for his remarkable leadership, Klopp guided Liverpool to triumph in both the Premier League and the Champions League. We understand that he is among a cycle of soccer legends, with worldwide recognition for his smart personality and authentic character, qualities that perfectly align with what we stand for. Klopp has been carefully selected after comprehensive pretesting, with his resonance with trivago's audience surpassing that of other potential candidates, making him an ideal ambassador for the brand. The campaign will kick off with a master spot recorded in English, which will then be localized into various languages using advanced AI technology. This approach builds on trivago's pioneering efforts in AI-driven marketing, first introduced in our brand marketing campaign at the end of last year. Our second strategic priority is to improve our hotel search experience. We aim to help travelers find the ideal hotel. We've significantly expanded our AI-powered hotel highlights, increasing our coverage from 120,000 hotels to 250,000 hotels across eight languages and 27 markets. In doing so, we are enhancing our user experience by providing more relevant information and placing a particular focus on surfacing unique selling points of hotels. We've also introduced new personalization algorithms, improving the relevance of our hotel search results. Our third strategic priority is to offer the best deal recovery experience. We endeavor to help travelers find great deals and better prices. We have enhanced deal visibility with the expansion of super saving deals to our apps and the introduction of price drop deals, which highlight recent price decreases of a hotel. We have further improved rate accuracy in our platform by incorporating our partners' full booking funnels, ensuring that the deals we present are current and still available. This is an important initiative, as we continue to surface more deals to our users. Our fourth priority is to empower our partners on our platform. We continue to improve our conversion rate by optimizing our marketing mix and enhancing our product. As a result, we anticipate that our advertisers will recognize these advancements and find us increasingly attractive as a marketing channel. This year, we successfully introduced a second price auction to mitigate economic risk and reduce complexity in our marketplace, particularly for small and medium-sized advertisers. We will continue to support our advertising partners by optimizing their bids through our Smart Bidding solutions and aim to expand our trivago-branded Book & Go funnel to more advertisers in the course of 2025. In summary, our Q3 2024 results reflect solid brand revenue growth in Developed Europe and Rest of the World, demonstrating the effectiveness of our investments. At the same time, we demonstrated our adaptability in response to the situation and market headwinds in the Americas. We are diligently focused on executing our strategic priorities and expect to deliver sustainable growth in the near term. A heartfelt thank you goes to all our employees, whose commitment and hard work has been vital to our success. Your efforts are the driving force behind trivago's progress, and we look forward to continued success together. With this, I'll hand over to Robin.

Thank you, Johannes, and good morning, everyone. Q3 was an important quarter for us. We saw better-than-expected revenue growth in our Rest of World segment and a notable improvement in Developed Europe. In the Americas, temporarily unfavorable market conditions impacted our revenue, and we made a tactical decision to adjust our marketing spend accordingly. We have observed a positive start to our fourth quarter. So far, we see revenue growth in Q4 compared to the prior year. We believe that after about one-and-a-half years of challenges, we are on the verge of a sustainable turnaround and are confident that we can return to growth in Q4. This turning point could represent a significant milestone in our journey to restore trivago's position in the market. As of the end of Q3 2024, we had EUR108 million in cash and had a net working capital of around EUR140 million. Our current market cap is only roughly as high as our cash position, highlighting what we see as a tremendous opportunity in trivago. We have a strong team of over 600 people. We see that our product is stronger than ever, and the trivago brand remains one of the most recognized global travel brands in a huge and growing market. We are financially healthy, and we believe that we will be able to outperform the market in the mid-term. We are optimistic about the potential for our market cap to reflect our intrinsic value as our performance begins to demonstrate sustainable growth. Our focus on branded revenue growth continues to yield positive results. Year-over-year, we have seen noteworthy developments here, which remains our top priority. Additionally, our efforts to enhance booking conversions and lead quality are making us an increasingly attractive marketing channel for our partners. Let's now delve into our Q3 results and our outlook for the remainder of 2024 and into 2025. Unless I state otherwise, all comparisons for 2024 are on a year-over-year basis. In the third quarter, our total revenue was EUR146.1 million, representing a 7% decline compared to the same period in 2023. In our Rest of World segment, referral revenues increased by 9%, while Developed Europe showed an 8% decline, which is also an improvement from the previous quarter. The Americas experienced a 14% decrease. Our brand investment efforts are yielding positive results, particularly in Developed Europe and the Rest of the World segments, where we achieved double-digit revenue growth from branded channel traffic year-over-year. In the Americas, temporary unfavorable market conditions affected our return on advertising spend (ROAS), prompting a tactical reduction in brand marketing investments for this quarter. It's important to note that our brand marketing investments are still at an early stage and relatively low compared to pre-COVID levels, presenting significant upside potential in the coming years. Despite the positive branded revenue growth, we continue to face challenges in our performance marketing channels, primarily due to the changes in Google advertising formats. These changes have introduced volatility and resulted in traffic volume losses. However, we have observed stabilization over the past few weeks, which is encouraging. We remain committed to a disciplined opportunity-driven investment strategy and will not compromise long-term brand investments to offset performance marketing volume losses. While monetization was softer this quarter compared to the prior year, it remained healthy and stable in the Americas and Rest of World segments. To summarize, the Americas segment faced challenges due to lower branded revenue growth and headwinds in performance marketing. Developed Europe showed an 8% decline, which is an improvement from the previous quarter. The Rest of World segment delivered strong revenue growth, driven by branded revenue and healthy monetization. During the third quarter, we reported a net loss of EUR15.4 million and achieved an adjusted EBITDA of EUR13.6 million, moving us closer to our full-year goal of breakeven adjusted EBITDA. This performance exceeded expectations, primarily due to a conscious reduction in brand marketing spending in the Americas. The net loss was largely driven by a EUR30 million impairment charge related to our annual intangible asset impairment analysis. Operational expenses decreased by EUR176.5 million, totaling EUR165.7 million for the third quarter, primarily due to the goodwill impairment of EUR196.1 million in Q3 2023, partially offset by the current trademark impairment of EUR30 million. Additionally, we saw reductions in selling and marketing expenses, general and administrative expenses, and a slight increase in technology and content expenses. Advertising spending decreased by 12% in the Americas and 15% in Developed Europe, while increasing by 28% in the Rest of World. Overall, we invested 7% less than the same period in 2023. This reduction was driven by Google ad format changes and consciously reduced brand marketing investments in the Americas. Brand marketing investments in Developed Europe and Rest of World were higher than in Q3 2023. Globally, our return on ad spend (ROAS) remained comparable to Q3 2023, with improvements in Developed Europe due to efficient brand marketing and a decrease in Rest of World due to increased marketing investments. The ROAS in the Americas was just slightly below Q3 '23. Looking ahead, travel demand remains solid and healthy. We continue to provide high-quality traffic to our partners, and we are optimistic about regaining advertising appreciation over time. We remain confident in our ability to achieve year-over-year top-line growth in Q4 while maintaining a disciplined, results-oriented approach to our marketing investments. For the full 2024, we expect adjusted EBITDA to be close to breakeven levels. Looking forward to 2025, we anticipate adjusted EBITDA levels similar to this year, as we remain dedicated to investing in our brand marketing efforts. We see substantial opportunities to scale our brand marketing activities, enabling us to reach a larger audience and positively impact overall revenues long-term. We anticipate achieving year-over-year revenue growth in 2025, with double-digit revenue growth in the medium term. I plan to attend the Morgan Stanley European Technology Conference in November, as well as the UBS Global Technology Conference and Wells Fargo Annual TMT Summit Conferences in December. I look forward to meeting you in person, so please feel free to reach out. With that, let's open the line for questions. Operator, we are now ready to take the first question. Thank you for staying on the line and the operators working on fixing technical problems. We will open Q&A very shortly. Thank you.

Thank you. Your next question comes from Naved Khan with B. Riley Securities. Please go ahead.

Great. Thank you very much and good morning and good afternoon, depending on where you are. My first question is just on the return to positive growth in the fourth quarter. If I just look at the different regions, should we expect Americas to turn positive? I understand there were some transitory issues in the third quarter. Just maybe talk about that. And even Europe, in Europe, we're seeing pretty significant improvement sequentially. Should we also see Europe positive? Just give us a little bit of color there. The second question I have is just a little bit of commentary around sources in Rest of the World that are not Google, but some other sources that are helping to drive traffic. Can you just give us a better sense of what kind of marketing channels these might be? Are they social marketing channels or something else? Thank you.

Hi, Naved. This is Robin. Thanks for your questions. Regarding Q4, so far, we see growth in this quarter, which is encouraging. We see that Americas is back to positive. And we see Rest of World is positive. Improvements in Developed Europe are still a little bit negative, but overall, we're encouraged by the fourth quarter so far with positive growth. Regarding Rest of World performance marketing, so Google remains a headwind, still negative compared to the previous year and prior quarter. However, the non-Google performance marketing is positive. So overall, performance marketing is positive. Specifically, non-Google marketing in Japan is an important market for us and there Yahoo! is pretty strong. Of course, we also invest in social channels, but yes, that's about it.

Your next question comes from the line of Doug Anmuth with JPMorgan. Please go ahead.

This is Tay on for Doug. Thanks for taking the questions. I have two. On the first one, I think you just said U.S. America is back to profit growth. I'm wondering what happened in the quarter that caused the temporary unfavorable market conditions. And the Americas referring to growth means you've moved beyond that condition? So, if you could explain that a little bit more, at the end of the year, and I have a follow-up.

Yes. Thanks. I will do that. So, we saw in Q3 softer demand at the beginning of the quarter, and we observed viewership shifts in TV advertising due to major sports events and political events. And regarding our performance focus, we looked at the numbers and then realized that it was not as good as expected, which led us to reduce our spend to improve adjusted EBITDA; however, this also resulted in a decline in revenues.

Johannes here, so to clarify the dynamics a bit. What we mean by viewership shift is that when there are more political events, such as the attacks on Trump, the EuroCup, the Copa Americana, and the Olympics, viewership tends to move from regular programming to political coverage, news, and sports. This shift caused the effectiveness of our typical TV advertising to decrease. We noticed this trend fairly quickly and anticipated it would continue, which is why we made technical adjustments to our spending.

Got it. That makes sense. And then my follow-up question is, in the prepared remarks, you talked about brand intensity not being close to where you guys were at pre-pandemic levels. So, looking ahead with Jurgen Klopp coming in as your brand ambassador, does this mean you plan to step-up marketing investments in Q4 and going into 2025 as well?

Yes. We are planning to run a similarly impactful campaign as we did this year. The idea with Klopp is that we can leverage AI to localize his campaign into different languages. Previously, if you wanted to use well-known people in every market, it would become very expensive. With one celebrity we can bring a global presence that is feasible in terms of the investment we make there. He will air in European and American markets. We will test him in many different markets, and based on how effective it is, we will roll him out into select markets. We have conducted pretesting; if we select a spokesperson, we do thorough testing to see if it resonates with our audience. We saw very good results with him, both because he is known and because, even if people don't recognize him, he resonates very well with them. That can have a substantial effect on how efficient our TV spots are and how impactful they will be, which we see as an upside for the campaign.

Our next question comes from the line of Jeremy Liu from UBS. Please go ahead.

Good morning, everyone. This is Jeremy on for Steven. I have two questions. The first is you called out increased booking conversion across all geos. What drove this and how much more room for improvement do you see here? And second, the commentary regarding 2025's return to growth, what is underpinning that? Are you anticipating an improving backdrop, or are you starting to see more meaningful impact from brand advertising? Thank you.

Yes. Let me take the first one about conversion. We continuously improve our product and conduct hundreds of tests every quarter, seeing a lot of positive results. There is ongoing upside in the conversion rate from a product perspective that we can carry into the future. The conversion rate serves as a proxy for how well we send quality leads to our users. Moreover, users have a better experience on trivago, which increases the likelihood of them returning or talking about us. This sustaining effect for a segment of the users is significant. Additionally, we are improving our efficiency in marketing. If we look at brand marketing, it drives conversion rates as well. Both product improvements and brand marketing advancements contribute to this.

Regarding the outlook, we believe that we are reaching a turning point in Q4. We expect our growth in '25 to be closer to 10% than to 0%. Our drivers are branded revenue growth; the initiatives we are implementing are bearing fruit. We are pleased with the development and see significant room to further scale our investments. Additionally, we will have better comparisons next year because in Q1 this year, we experienced a significant drop due to Google changes, making the comps better next year. In summary, it's positive brand revenue development and improved performance marketing comparisons.

You can also consider how much we spent pre-pandemic. It was substantially higher than our current brand investments. Therefore, there’s considerable upside regarding efficient brand investments. We are confident that, apart from better comparisons, we have enough room to grow for the next couple of years.

Thank you. Our next question comes from the line of James Lee from Mizuho. Please go ahead.

Hello. This is Jack for James Lee. I have two questions. First, what are you seeing in terms of the average booking value and any particular reasons to call out? And the second question, on the broader travel environment, how would you describe user trends into holiday bookings? And how do these trends translate into auction bidding demand at trivago?

Thanks, Jack. Happy to take the question. This is Robin. For Q3, we can describe what we see in our internal data. Overall, ABV in Q3 was relatively stable compared to the previous year. In the Americas, ABV was slightly down, driven by a decline in average daily rates and stable length of stay. In Developed Europe, ABV was slightly up, driven by stable average daily rates and high length of stay. In the Rest of World, ABV was stable, driven by higher average daily rates and lower length of stay. As for the outlook for Q4 in terms of ABV, from our internal search requests for Q4, we have a solid outlook. In the Americas, ABV might be slightly down, our click prices for Q4 are slightly down, and length of stay is slightly up. In the Rest of World, ABV might also be slightly down, and in Developed Europe, ABV might be slightly up. So there, we see click prices and length of stay slightly rising.

Our next question comes from the line of Ron Josey from Citi. Please go ahead.

Great. Thanks for taking the question. So, I wanted to talk a little bit more about this hotel coverage. I think you mentioned Johannes of extending that to 250,000 hotels. So just wanted to understand the progress there from where we're coming from, I think 125,000 or so to that 250,000. So, any insights on greater supply and how you plan to do that would be great. And then, just a quick follow-up, we've talked about Google ad format changes impacting results for the better part of a year or so. Comps getting easier in the back half or sorry in 2025. Are you seeing things improve sequentially? I'm wondering where things are with these actual format changes. Thank you.

On the hotel initiative, I want to highlight that this is not a supply topic; it’s a content topic. We have been using AI to identify what is unique about each hotel, what its highlights are, and important information. Instead of merely presenting basic information in our search results, we now include two to three sentences summarizing the key qualities of the hotel. We rolled this out at the beginning of the year and have expanded it to more languages and platforms, and the underlying algorithms have improved. Users are engaging more with this content, as it provides a great summary without needing to sift through numerous reviews, allowing us to stand out as an aggregator of both content and price. Regarding your second question, can you please repeat it?

Just if we're seeing improvements in performance marketing as we lap or get to lapping the Google performance changes?

Yes. We expect the comparisons will normalize. We are adapting to the new formats in Google. We have seen the new formats stabilize and have reached a level of exposure that is quite steady now. We are expanding our coverage and participation with an opportunistic mindset. We are not trying to regain shares through that format, but rather take opportunities that we see. We are gradually becoming more competitive in those formats.

Just real quick on the follow-up to the content side and the aggregation or the summaries, just talk to us a little bit about the conversion rates as a result, given it's been in market for the better part of this year? Thank you.

Overall, we have conducted many tests throughout the year that have significantly improved our conversion rate. We've gradually but consistently increased conversion rates, and this has been one of the activities driving relevant improvements. It indicates that we are helping users make better decisions.

Our final question comes from the line of Tom White from D. A. Davidson. Please go ahead.

Great. Thanks for taking my questions. Just a couple on the branded channel commentary. There are a few different things that go into that. Could you maybe sort of rank which of the various drivers of that you think is driving the most success? Is it some of the investments in app downloads? Is it SEO? And then, you've made reference a couple of times to the upside in terms of how much you can invest relative to where brand spend was pre-pandemic. Can you just sort of remind us of the dollar amount of that spend or the percentage of marketing spend that was pre-pandemic?

Yes. This is Robin. Our brand marketing encompasses several channels—TV advertising, connected TV, and YouTube, among others. We also run social campaigns. However, we do not disclose the specific breakout of those. Overall, the brand marketing investment is just a small fraction of what it was at pre-COVID levels. We started in the end of last year in around 20 markets, testing and scaling investments in some markets while launching in new ones. Previously, we could run TV advertising in 50 countries simultaneously. Currently, we are doing TV advertising in just over 20 countries, and there’s still room to further scale investments across several channels. We're continually testing and assessing our creative's effectiveness. The partnership with Jurgen Klopp was a decision made based on good results we saw. We see a lot of potential for growth in investments in the coming years.

You can view the public records of pre-pandemic marketing investments, which will give you an idea of how much potential room there is for growth. In markets where we are already investing, we optimize across channels. If investments in the Americas are non-productive, we can transfer funds to other markets, for example. Additionally, we are exploring entering new markets.

That's very helpful. Thanks. And just a quick follow-up on the 2025 debt. Did I hear you correctly that the hope of the target is closer to 10 than to low single digits?

Yes, that's correct. It’s closer to 10 than to zero.

Thank you. That concludes our Q&A session. I would now like to turn the call back over to Johannes Thomas for final closing comments.

We greatly appreciate your questions and continued interest. I want to reiterate our confidence in the path ahead. Our team remains committed to delivering value to our users, partners, and shareholders. We are excited about the opportunities in the coming quarters and look forward to updating you on our progress. Thank you again for joining us and have a great day.

This concludes today's conference call. You may now disconnect.