Earnings Call Transcript - TRVG Q4 2024

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the trivago Q4 Earnings Call 2024. I must advise you the call is being recorded today, Wednesday, the 5th of February 2025. 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's views as of Tuesday, February 4, 2025 only, unless expressly stated otherwise, in which case, it reflects management's views as of today, Wednesday, February 5, 2025 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 2024 operating and financial review and trivago'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 reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in trivago's operating and financial review, which is posted on trivago's 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, all comparisons on this call will be against results from the comparable period of 2023. And with that, let me turn the call over to Johannes.

Johannes Thomas, CEO

Thank you, everyone, for joining us on our Q4 2024 earnings call. I'm excited to share that after 1.5 years of intense groundwork and strategic execution, we achieved revenue growth in Q4 2024. This marks a turning point for us as we see solid momentum heading into 2025. We are pleased to report that we achieved 5% growth in referral revenue and delivered €11.1 million in adjusted EBITDA last quarter, both exceeding our expectations. The start of this quarter has been equally promising with strong double-digit top line growth across all segments. Key drivers of our performance include major product enhancements over the past year and continued positive returns from our brand marketing investments. As we look ahead to 2025 and beyond, we are well positioned for continued growth. Early results from our new AI-powered marketing campaign featuring our brand ambassador, Jürgen Klopp, have been promising. We have already launched brand marketing campaigns in more than 23 key travel markets this year. We remain disciplined in our approach, aiming to invest near breakeven adjusted EBITDA levels. Although it's still early in the year, we expect to achieve at least high single-digit revenue growth in 2025. We see significant margin and growth potential, especially since our revenue has not yet returned to pre-COVID levels. The major reason for this delay in recovery has been conservative brand marketing investments during the pandemic and the rebound phase in 2022. However, we cost-corrected starting in Q2 2023, with the arrival of the new leadership team. Shortly after, we increased our brand investments and rebuilt a world-class brand marketing team. We have focused our technology investments on improving our hotel search and price comparison products. We have multiplied the number of experiments conducted on our website, resulting in substantial improvement in conversion rates during 2024. Since our arrival, we have cultivated a performance-driven culture that prioritizes continuous learning and rapid execution. We have accelerated the pace of experimentation rigorously measuring impact and boldly scaling successful initiatives. We implemented OKRs across the organization, established a new performance measurement approach and enhanced our reward structures to better incentivize impactful contributions from our employees. Our aim is to instill an entrepreneurial mindset with the objective of delivering more value to our users and partners faster. We made AI a central focus within our organization. One of our first initiatives in 2023 was to establish a company-wide AI Ambassadors group and fast track the implementation of GenAI tools, enabling our talents to leverage the technology. Today, we have built a competitive AI infrastructure with 70% of our employees reporting that these tools save them 30 minutes or more each day. We've launched AI powered TV ads, new personalization algorithms for our search results and unique AI highlights for over 300,000 hotels. In November last year, with the implementation of our new AI Smart Search, we offered travelers entirely new ways to search for hotels. We are very excited about the widespread internal AI adoption, which is unlocking both productivity gains and the potential to further increase user value. Trivago, a leading brand in a large and expanding market, is well positioned in a market estimated to be over €1.5 trillion in size. Especially the hotel segment is highly attractive in terms of margin and scope. We are among the strongest and most recognized travel brands across 3 markets: Developed Europe, the Americas and Asia. This brand recognition is an invaluable asset that we aim to continually leverage and strengthen. Compared to pre-COVID levels, there remains significant potential for us to increase our brand investment in the coming years, which we expect to be a growth driver. Our value proposition is more relevant than ever, particularly in an era where travelers seem to be price conscious. Our research indicates that about half of U.S. travelers place a high value on securing competitive prices. More than 40% actively seek out deals and compare prices across various booking sites. Since the pandemic, the number of deals and price discrepancies we have identified has significantly increased. U.S. travelers who use trivago to compare prices have a good chance of saving up to 40%. We aim to unlock value for our shareholders and users by diligently executing on our strategy. Going forward, our strategy will be laser-focused on 3 strategic pillars. Our first strategic priority is brand marketing. We will continue to optimize our brand investment globally and deliver captivating ads that strongly convey our value proposition. Our second strategic priority is our core hotel search product. We will continue to run a dozen experiments at a time and improve user experience and conversion rates for our core products. Further, we will dedicate investments to develop a differentiated member proposition. We want price-savvy travelers to start their journey on trivago instead of other search engines or GenAI applications. These efforts will be complemented by investments in personalization of our search results and cutting-edge AI features on trivago. Our third strategic priority is to empower our partners to maximize their potential on trivago. A key initiative in 2025 will be the evolution and expansion of trivago Book & Go, a facilitated booking funnel for our partners that offers them the opportunity to increase conversion rates and competitiveness in our marketplace. We believe that these priorities will drive sustainable growth and value to our users as well as partners. On behalf of our leadership team, I would like to thank our remarkable talent whose hard work and dedication were essential to return to growth. We look forward to continuing our successful journey together. With that, I'll turn over the call to Robin for a detailed financial review.

Robin Harries, CFO

Thank you, Johannes, and good morning, everyone. Q4 marks an important milestone for us. It is the first time since Q1 2023 that we can demonstrate top-line revenue growth again. Total revenues grew by 3% to €94.8 million in the fourth quarter compared to the same period last year, primarily driven by a 5% increase in referral revenue. We believe that returning to year-over-year growth represents a turning point in our strategic multiyear effort to revitalize the brand and achieve our previously announced goal of double-digit revenue growth in the midterm. We are pleased with the strong start to the year and have seen strong double-digit growth in January compared to the prior year. As of the end of Q4 2024, we had over €130 million in cash, no long-term debt and maintained robust financial health. Our focus on branded revenue growth continues to be fruitful with further positive developments over the quarter. 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 Q4 results and outlook for 2025. Unless otherwise stated, all comparisons for 2024 are on a year-over-year basis. In the fourth quarter, our total revenue was €94.8 million, representing a 3% increase compared to the same period in 2023. In our Rest of World segment, referral revenues increased by 15%, the Americas experienced an 8% increase and Developed Europe showed a 2% decline, which, although negative, is an improvement from the previous quarter. Our brand investment efforts are yielding positive results again, particularly in Developed Europe and Rest of World segments, where we achieved double-digit revenue growth from branded channel traffic year-over-year. In the Americas, we saw mixed effects with brand revenue growth in North America and a decline in LatAm, where we did not focus our investment efforts in Q4. Despite the positive branded revenue growth, we continued to face challenges in our performance marketing channels, primarily due to changes in Google advertising formats. These changes have introduced volatility and resulted in traffic volume losses. However, we have observed stabilization over the past months 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 in the Americas, whereas it was slightly negative in the rest of the world and challenges in Developed Europe still persist. During the fourth quarter, we reported a net income of €5.1 million and achieved an adjusted EBITDA of €11.1 million. The adjusted EBITDA in Q4 exceeded our expectations, primarily due to a higher-than-expected revenue growth and more efficient marketing, resulting in a higher return on ad spend (ROAS). Operational expenses decreased by €0.3 million, totaling €87 million for the fourth quarter, primarily due to a €0.5 million reduction in general and administrative expenses, and €0.1 million lower selling and marketing expenses, partly offset by €0.4 million higher technology and content expenses. Advertising spend increased by 18% in the Americas and 3% in Rest of World, while decreasing by 15% in Developed Europe. While overall advertising spend was only slightly more than the same period in 2023, we invested proportionately more into our brand marketing channels. This increase was driven by stronger brand marketing spend, especially in Developed Europe and the Americas, partly offset by reduced performance marketing spend, particularly in Developed Europe. Globally, our ROAS improved from Q4 2022 with improvements in Developed Europe and the Rest of World due to better marketing efficiency. The ROAS in the Americas was below Q4 2023 due to strong marketing investments. Looking ahead, travel demand remains solid and healthy. We continue to provide high-quality traffic to our partners, and we are optimistic about regaining more advertisers' appreciation over time. We remain confident that for the full year 2025, we will grow total revenue by at least high single-digit percentage levels compared to the same period in 2024. We expect adjusted EBITDA to be at least breakeven as we continue reinvesting our profits into our marketing strategy. We see substantial opportunities to scale our brand marketing activities, enabling us to reach a larger audience and positively impact overall revenues long term. With that, let's open the line for questions. Operator, we are now ready to take the first question.

Naved Khan, Analyst

Okay. Great. Congrats on return to growth and the positive EBITDA. I just have two questions. One on your commentary about getting to double-digit growth on the top line, trying to understand what needs to happen for you to accelerate growth into the double-digit from current levels? And then in terms of just your brand campaigns for 2025, do you plan to expand this into new markets beyond the '23 that you already in or do you just want to increase spending in these 2 markets? Just talk about that.

Robin Harries, CFO

Naved, this is Robin. Thanks for the question. Regarding top line growth, as we said, we already see strong double-digit top line growth in January. So we are very happy about the start into the year. And moving forward, we see opportunities to scale our brand investments, which we think is the right thing, which is important. And we also uploaded the investor presentation this time. There, you can see that we have a big opportunity to further scale our brand marketing investment and this will be, of course, one driver for our performance. The other is to further improve the product, we see nice developments here. The retention goes up, conversion rates go up, we deliver better quality leads to our partners so that we think it's brand and its product. And in terms of the brand marketing campaign this year, we started in over 20 markets. In the past, we had TV campaigns running in around 50 countries. So yes, there are further opportunities to also go into new markets. But there are also further opportunities to scale the investments in the current market.

Naved Khan, Analyst

Regarding the expectation for double-digit growth in January, you're still anticipating high single-digit growth for the year. What are the reasons for this? Does January have easier comparisons, or why do you foresee a slowdown in growth?

Robin Harries, CFO

Yes. So January was much better than we expected. So we had it in our plan, but the numbers now are much stronger in terms of top line, in terms of the bottom line, we see nice double-digit growth also in all 3 segments. We see growth in all channels. So the marketing campaigns are good. They are efficient. We are happy about the product. And yes, that's it.

Johannes Thomas, CEO

For the full year, I believe that our corrected messaging reflects a high single-digit growth expectation. The beginning of the year serves as an indicator for the full year, but it's still early to make definitive calls. As we gain more confidence, we will adjust our outlook. It's important to note that the first quarter comparisons are easier than those for the rest of the year, as we have already ramped up more in the summer. Therefore, we anticipate that the first quarter will be one of our stronger quarters.

Robin Harries, CFO

Yes. In terms of revenue growth compared to 2024, we anticipate Q1 will be a strong quarter due to the easier comparisons. Additionally, we expect Q3 to also be robust, as this is when we make our largest investments and foresee the highest revenues.

Dae Lee, Analyst

This is Dae Lee on for Doug. I have two. So when you look to 2025, you talked about these high single-digit percent of growth. And I guess there's potential that, that could be higher. So as you get more revenue, the idea is to continue ramping brand investments and keeping adjusted EBITDA posed to breakeven, and when could that flow so that you guys could start generating more profitability? And then secondly, on AI Smart Search, I realized it's still early days here, but curious if we have any early learnings to show on how search is that different in terms of conversion or monetization or any other KPIs where you're seeing different results there?

Robin Harries, CFO

Thanks for the questions. This is Robin. I'll take the first one. So at this stage, we believe that achieving growth is more important than being profitable. So we say we steer the business at least to adjusted EBITDA breakeven. We don't want to have losses, but we take the money and we invest it into growth opportunities. And when we look into where we are coming from, where we were pre-COVID, when we look at the revenue levels, we believe that this is a huge opportunity for us. And we also see when you look into the Q4 numbers, I just mentioned the strong start in January, we are convinced that it's the right thing to invest it into brand marketing and brand marketing is not only TV advertising; it's a connected TV, it's online video, it's brand campaigns. So we are convinced that this is a very good opportunity for us. That's why we'd rather take the money and invest it into growth to become more relevant and achieve better revenue levels.

Johannes Thomas, CEO

And how we are trading this off is by assessing when we notice diminishing returns on our investments. When the returns fall short of our expectations, it also depends on the elasticity of our spending, which looks promising this year. If we see that elasticity decline, we would shift our focus more towards profitability. Given trivago's size compared to the pre-COVID market, there is significant potential to activate our brand, raise awareness quickly, and subsequently enhance our profitability. Regarding AI Smart Search, we are very excited about this product as we haven't seen anyone else launch it or offer similar features. It represents a new way to search; instead of just looking for a city and entering a date, you can input a semantic sentence such as "I'm looking for a hotel with rooms that have views of the Eiffel Tower." We provide results, and our AI Hotel highlights, which we scaled up to 300,000 hotels in 27 markets, reflect your query. This allows for a new method of searching hotels, permitting searches that extend beyond a city. For instance, you can look for a hotel near Route 66 with a pool and receive quality results. We are cautious about introducing this feature to users; currently, it stands alone, but we recently launched it as part of our search suggestions to educate users on utilizing this free search functionality. We believe this will set realistic expectations, as user behavior generally changes slowly on trivago. Just like the gradual increase in mobile share over the years, we anticipate similar changes here. We won’t rush users into a product to inflate numbers; it will be a gradual behavioral shift that we will monitor, and depending on the outcomes, we will consider increasing its visibility.

Unidentified Analyst, Analyst

This is Robert on for Ron. You mentioned potentially introducing a differentiated member proposition in the prepared remarks. Can you maybe just help us understand how your approach would differ from the traditional loyalty program and perhaps expand on the strategic rationale for the loyalty program on trivago?

Johannes Thomas, CEO

Yes. This is Johannes. Thank you for your question. It's an important point. One key reason we are pursuing this approach is to set ourselves apart from other search engines and generative AI that display live prices for hotels. Many of our users are price-sensitive shoppers on trivago, and we aim to engage these users right from the start of their journey with us. This strategy is a significant part of our business model. Currently, we are collaborating with partners to access exclusive rates that are not available to the public but can be shared with members. We inform our members about these deals, enabling them to secure better prices by logging in. There’s no need for a traditional loyalty program; we simply provide this value to logged-in users. Additionally, we offer features like notifications when hotel prices drop and other incentives we’re developing to enhance the experience. However, the primary reason for logging in is to access better prices, which we believe is the biggest draw for users.

Unidentified Analyst, Analyst

Got it. And you mentioned a quick follow-up. You also called out specifically that Book & Go is a key initiative for this year for 2025. So I'd love to hear how you see the Holisto partnership evolving over the next few months here? And then given you have the option to purchase the remaining equity, what would have to happen for you to exercise this option?

Johannes Thomas, CEO

We are very excited about the partnership and believe it was a wise choice. The Holisto team is impressive and has met the objectives we set together. We have tested the concept of Book & Go and are currently evaluating its scalability. It's still early to provide specific numbers due to the project's complexity. Over time, we want to ensure they are meeting their goals and that we are satisfied with the results from Book & Go. We have the option to purchase for some time, and we will make a decision in due course, but no decision has been made yet.

Operator, Operator

And our next question comes from the line of a representative with Mizuho.

Unidentified Analyst, Analyst

And this is calling for James. Congrats on the turnaround. Just a quick follow-up on your branded channel. Can you share any metrics such as repeat customers or organic traffic mix that you are currently seeing?

Robin Harries, CFO

This is Robin. Thank you for the congratulations and for the question. We don’t share specific key performance indicators regarding our brand traffic or brand revenue. We do have our brand campaigns running, and we measure direct response, brand after effects, and unaided brand awareness, focusing on quality metrics. We monitor a range of KPIs and optimize based on performance. This involves assessing direct responses, the number of people we reach, the traffic to our website, and their actions there. While there are various metrics we track, we don’t disclose them publicly. However, we’ve started our brand marketing campaigns relatively early and have developed a strong understanding of how to optimize and measure their success.

Johannes Thomas, CEO

And maybe one comment on retention. I think everybody in the space knows how difficult it is to measure retention and travel given the low usage on average. How we think about it, the stronger proxy for retention is conversion rate. So if we see conversion rates going up, particularly among our branded users, that's for us a proxy that retention is improving, and part of why we think results are better than expected in Q4 and Q1. The product is a big part of it. In our investor presentation that we have shared as well, you will see an indication of how the conversion rate has changed and that can make a big difference on retention and the trajectory we are seeing.

Operator, Operator

And that does conclude today's question-and-answer session. So I will now turn the call back over to Johannes Thomas for closing comments. Johannes?

Johannes Thomas, CEO

Yes. Thank you for joining today. I want to remind you of the investor presentation. Have a look. I think there's a lot of insights into what we think has driven performance last year and will drive performance this year. Overall, we are very proud of the progress made in Q4 2024 and encouraged about the momentum we are seeing this year, and we are confident in our strategy and focus on execution to deliver strong results for our shareholders. Thanks a lot for joining today, and see you soon.

Operator, Operator

Thank you so much. And ladies and gentlemen, that concludes today's call. Thank you again for joining, and you may now disconnect. Have a great day, everyone.