trivago N.V. (NASDAQ:TRVG) Q1 2024 Earnings Call Transcript

trivago N.V. (NASDAQ:TRVG) Q1 2024 Earnings Call Transcript May 1, 2024

trivago N.V.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen. Thank you for standing by, and welcome to the trivago Q1 Earnings Call 2024. [Operator Instructions]. I must advise you the call is being today, Wednesday, the 1st of May 2024. We are pleased to be joined on the call today by Johannes Thomas, trivago’s CEO and Managing Director; and Robin Harries, trivago CFO and Managing Director. Temporarily designated by Trivago’s Supervisory Board pending shareholders’ confirmation. The following discussion, including responses to your questions, reflects management’s views as of today, Wednesday, May 1, 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 Q1 2024 operating and financial review and trivago’s other filings with the SEC, but 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 trivago’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 2023. With that, let me turn the call over to Johannes.

Johannes Thomas: Good morning, everyone, and thank you for joining us for our Q1 2024 earnings call. To begin, I want to reflect on the journey we’ve embarked on last year. In May 2023, the new leadership team and I took the helm. In the quarter when we arrived at trivago, we encountered a business that was declining at double-digit pace year-over-year. We experienced the aftermath of several years of rather low brand investment while simultaneously dealing with the substantial changes Google began making to their search results and ad formats. At the same time, we were thrilled to observe the enduring appeal and relevance of our meta proposition. Our data indicated an increase in the rate disparity since the pandemic, which has increased the value of price comparison.

In addition, our research shows that trivago retained a significant global footprint as one of the most recognized global travel brands. And notably, we saw the company’s highly capable team and unique culture as a competitive edge in a rapidly changing environment that is being disruptive by technology and AI. Our belief in these invaluable assets has only grown stronger since then. We are committed to learn and execute at an unrivaled pace. We have stated our intentions to revitalize our brand and improve our core product with the goal of returning to growth in the near future. We are making long-term-oriented decisions to increase our branded visitor baseline, which we expect to yield long-term compounding effects. We have been diligently laying the foundation of our plans, and we believe these efforts will bear fruit throughout the remainder of 2024 and beyond.

The addition of Robin to our team as of April 1st is a key milestone. Robin’s wealth of expertise and experience enhances our collective vision. We’re delighted to welcome him back to lead our financial organization and help us execute our growth strategy. Now let me provide you an update on our four strategic priorities. Our first strategic priority is branded growth. We are pleased with the results of our latest campaigns, which is tracking well against our expectations. We are already seeing branded traffic growing on the back of this investment, reaffirming our decisions and strategic direction. Our renewed brand marketing team continues to impress us with the ability to drive positive impact and new TV ads that are being tested in preparation for our summer campaigns.

The importance of our brand has grown even further as Google has become a less relevant and less appealing marketing channel for us. We are opportunistically participating in new ad formats, though expect the channel to remain volatile and a substantial headwind. Our second strategic priority is to improve our hotel search experience. We are here to help travelers find the ideal hotel. Our new AI powered hotel highlights feature has been scaled significantly during the last quarter. It’s now available in seven languages across 25 markets and expanded to 120,000 hotels. Fully AI generated these hotel highlights are now visible in our search results and provide users with distinct aspects to know about hotel. Our tests indicate an increase in user engagement and improved search experience.

We will continue to invest in this differentiating feature of our platform. Our third priority is to offer the best deal discovery experience. We aim to help travelers find great deals and get better prices. Our recent consumer survey revealed that 71% of respondents in the U.S. Compare prices from different websites in order to find the best deals. To deliver on the needs of price heavy travelers, we have increased the visibility of relevant deals on our platform and made our search results more price-sensitive. By providing more savings options to our users, we aim to create more and more memorable experience and increase with user retention. Our fourth priority is to create value for our advertising partners. An increased share of branded traffic and continuous product improvements have substantially increased our conversion rate and therefore, the quality of leads we send to our partners.

As a result, we believe that trivago’s attractiveness as a marketing channel is growing. We expect this to be appreciated by our partners over time. We have also innovated our auction model and further rolled out our second price auction test last quarter. This auction model simplifies bidding for our partners and reduces the economic risk. Based on the positive feedback and test results, we plan to introduce a second price auction in all markets before the summer. To summarize, we are seeing positive impact of our brand investment. We expect this to continuously increase our branded visitor baseline and improve monetization in the long run. Despite headwinds, we continue to be optimistic for the summer season and in our ability to return the business to double-digit top-line growth in the medium-term.

With that, I want to say thank you to our teams for all your continued hard work and dedication. Now I’d like to hand over to Robin.

Robin Harries : Thank you, Johannes. Good morning, everyone, and welcome to our first quarter earnings call. It feels very good to return to trivago after nearly six years. I would like to express my gratitude to our interim CFO, Kevin Hu and the entire team for their outstanding work during the transition and onboarding process as well as Johannes, Jasmine and Andre who laid the foundation for our strategic initiatives over the last couple of months. I can say that I joined a highly energized team that wants to win. My return alongside Johannes, Jasmine and Andre underscores our belief in the tremendous opportunity we see to create value for our users, partners and shareholders. Today, our market cap is below $200 million despite having over €100 million in cash, generating €485 million in revenues and €54 million in adjusted EBITDA in 2023.

Our valuation today is significantly lower than in 2012 when I first joined trivago. We see tremendous upside potential. trivago still stands as one of the world’s foremost travel brands, operating across 53 local websites and apps in key global markets. Our products value proposition remains highly relevant scaling up brand marketing worked well for us in the past, and we already see successes from the initial campaign started at the end of 2023. We believe that our winning formula still works and remain confident in our ability to progress step-by-step towards renewed growth on the horizon. Now I would like to discuss our performance in Q1. I will start with a review of our results as well as provide an update on our outlook for the remainder of 2024.

All comparisons for 2024 are on a year-over-year basis unless otherwise stated. During the first quarter of 2024, we achieved total revenues of €101.4 million, which was a 9% decline compared to prior year first quarter. The year-over-year decline was of a lower magnitude as to what was observed in the past three quarters. The year started with softer bidding dynamics that gradually improved over the course of the quarter to healthier levels in the Americas, whereas Developed Europe and Rest of World are below the previous year. Overall, profitability decreased as we incurred higher selling and marketing expenses. We invested into our brand marketing activities globally as part of our strategy shift to long-term growth. Let me share some additional insights into our brand marketing efforts.

We saw first successes from our renewed brand marketing campaign that featured our AI driven creative that we launched late last year. We observed a total global brand traffic increase during the first quarter of 2024 compared to the same prior year period. We have seen significant branded traffic growth in Developed Europe and Rest of World and mixed results in Americas. Our North American markets performed much better than Latin American markets. As we see positive branded traffic development, our total traffic decreased due to higher performance marketing traffic losses as we continue to observe higher levels of competition on Google. During the first quarter, we continue to observe Google Ad changes which has made Google a less attractive marketing channel for us.

We continue to invest opportunistically in performance marketing channels, though we plan to maintain or selectively increase our profitability targets. We are not planning to compensate volume losses stemming from performance marketing channels at a cost of long-term oriented brands investments. The overall volume losses in performance marketing channels were partially offset by our brand marketing gains. I would like to next discuss the results of our three reporting segments. Referral revenues declined by 6% in Americas and by 15% in our Developed Europe segment, while it increased by 8% in our Rest of World segment. We invested across all three segments, advertising spend increasing by 45% in Americas, 12% in Developed Europe and 51% in our Rest of World segment.

The increased brand investments made during the quarter resulted in our return on advertising spend, or ROAS, our key ratio that compares referral revenue with advertising spend to decline across all three segments as a result of our marketing campaign. The declines in our Americas and Developed Europe segments were largely driven by performance marketing volume losses as a result of continued higher levels of competition. In Developed Europe, the losses were further driven by softer bidding dynamics on our platform compared to the same period in 2023. In our Rest of World segment, we continue to see referral revenue growth, primarily driven by higher traffic volumes as a result of increased brand investments and better booking conversion, which was partly offset by softer bidding dynamics.

Moving on to our operational expenses. We incurred €16.7 million higher operating expenses, totaling €113 million during the first quarter of 2024. The increase was primarily driven by €19.1 million higher advertising spend, which was partly offset by €1.4 million lower share-based compensation costs. Overall, we had a net loss of €8.4 million and an adjusted EBITDA loss of €9.2 million during the first quarter. Looking ahead, the main travel trends remain solid and we continue to see strong demand for hotels as we head into summer. We have continued to observe improved booking conversion levels on our platform, providing our partners with high-quality and better converting traffic. We expect advertisers to react to this over time.

We plan to maintain our profitability targets and do not plan to compensate for performance marketing volume losses as we continue to focus on our brand marketing campaign to drive long-term growth. We continue to expect revenues year-over-year to decline in the second quarter and to reverse the trend in the second half of the year. We continue to guide our adjusted EBITDA for full year to be at around breakeven levels. The initial results of our brand marketing campaigns are overall in line with our expectations, and we remain confident that our brand investments will help us to further increase our branded traffic over time to fill long-term growth and profitability. With that, let’s open the line for questions. Operator, we are now ready to take the first question, please.

Operator: [Operator Instructions]. Your first question comes from the line of Naved Khan of B. Riley Securities. Your line is open.

See also 12 Under-the-Radar Stocks With Massive Upside for 2024 and 13 Best Extremely Profitable Stocks to Invest in.

Q&A Session

Naved Khan: Couple of questions from me. Maybe just on the weakness in the performance channel. I mean, we had seen some weakness even in the prior quarters. Did any changes related to the implementation of DMA have any additional impact in March? And can you maybe just talk about the travel demand broadly across different regions? Did you see any changes in there and on that front?

Johannes Thomas: Hi. Thank you for the question, Naved. This is Johannes. I think on the first quarter in terms of performance marketing, there was weakness starting second half of the year already where Google gradually did changes to their search results and tested new ad formats, and that has gradually increased over time. In Q1, from what we observed, the visibility of the new ad formats PPA, especially in Europe and the U.S., our observation is PPA and GHA being more visible has increased in Q1, which we think is probably part of the DMA adjustment. So, it basically has increased the visibility. We are participating in these formats. Though we are very focused on brands. We see opportunistically where we are joining and what makes sense for us, we are seeing not the performance we would appreciate from a conversion perspective and also, we lack an optimization levers that would help us optimize these ads effectively.

And I think that’s the performance marketing perspective. Robin, can you comment on demand there?

Robin Harries: Yes. Thanks for the question. Regarding demand, so we see a robust demand. So, it remains strong. It’s rather increasing. So, on that side, it looks quite good.

Naved Khan: Maybe just a related follow-up on your answer to the headwinds and performance. So, what gives you the confidence that you can see positive growth in the back half given these headwinds are continuing in the third channel?

Johannes Thomas: We are seeing a strong response of our branded campaigns and branded campaigns have a compounding effect over time. So, it’s a matter of doing the right things and brand consistently. That means optimizing markets, optimizing our creatives. We see room for improvement and whenever we do improvements we see further impact. So, it’s a matter of doing this consistently throughout the year and we see a very good chance to offset losses in performance marketing. And we certainly are learning and how to adapting and participating in the new ad formats which we’re trying to optimize overtime as well.

Naved Khan: Thank you.

Operator: Your next question comes from the line of Stephen Ju of UBS. Your line is open.

Unidentified Analyst : Hey, guys. Good morning. This is Jeremy on for Stephen. So, I have two questions. First on brand marketing, can you talk broadly about how the ROAS and the payback period may be different from performance? And then second, as a follow-up on the demand side, the softer bidding activity you’re calling out for Europe and Rest of World, is this largely a consequence of local currencies devaluing relative to global, for example, with the yen and making it more expensive for travelers than APAC, or is this something underlying you’re seeing in terms of consumer demand? Thank you.

Johannes Thomas: So, let me comment on the first part on the ROAS. The difference in performance marketing is that you have a good level of ROAS with the acquisition of the users and that is basically in performance marketing the beauty you invest in quick and quickly get a return. With brand, it’s just a little bit of a longer horizon that we put on the perspective. But we see short-term impact and we know what the short-term impact are as proxies for long-term impact. That’s where we have a ton of data about and good assumptions on how the branded visitor baseline would evolve over time and that translating into long-term returns.

Robin Harries: So, regarding travel trends, what we see across the three segments is that ADRs are slightly down in the segments, so in our trivago internal data. And we see that length of stay is slightly down in Americas and Rest of the World, slightly up in Europe, yes. So, and this leads to slightly lower ABVs in Americas and Rest of the World and stable ABVs in Europe. So, when we look at the star hotels, yes, so we see a share of 4 Star to 5 Star Hotels continues and that is continuously going down, yes, so in all three segments. And yes, so this indicates that people are more price-sensitive and we also see this in rest of the world. So especially when you look into Japan, and we see ADRs going down there as well. Also, in local currency.

Operator: Your next question comes from the line of James Lee of Mizuho. Your line is open.

James Lee: Great. Thanks for taking my question. My question is on AI investments. And can you help us understand what you’re doing there specifically? Are you developing apps on top of the, find foundational model? If so, can we get a sense of who you’re working with and what use cases you are developing that could differentiate your product versus your peers? Thanks.

Johannes Thomas: Yes. Thank you for asking the question. I think it’s pretty central to our efforts. On the one side, there’s a ton of things we do internally to improve operations and be more efficient and we create a lot of awareness and it’s on everybody’s strategic priority internally to think about it. If you see our TV ads, we mentioned how we are leveraging AI to localize our ads. In the past, we have a lot of different speakers per market, which was quite expensive. Production was a very long period. We now use AI to localize our TV ads. So that’s something you see teams innovating and leveraging AI like at the edge of what’s actually possible. And that’s what we expect from every team in the company. When it comes to our product, I’ve mentioned the AI highlights.

So, you can go to New York, look at the Mandarin Oriental and you will see snippets that says unbeatable use, gourmet cuisine and then we give context around it, breathtaking, panoramas of Manhattan. So very distinct things USPs hotel can offer. These are not human-generated. They are AI-generated. And to be able to do this at scale for 120,000 hotels, we have built the infrastructure, we have used a range of models, tested different models where we are experimenting with. We have a solid set up that works for us now that is using, that is operational and effective and we continue doing that. We’re not sharing who we work with and this changes over time as well as we don’t want to be locked into one model, but continue run on where we see biggest impact.