trivago - Earnings Call - Q4 2016

Transcript

Speaker 0

Good afternoon, everybody. Welcome to Tiwago and B's Financial Results Conference Call for the Fourth Quarter and Full Year Ended December 3136. I'm pleased to be joined on the call today by Rolf Schoemden, Tiwago's CEO and Managing Director and Akzo Reper, our CFO and Managing Director. The following discussion, including responses to your questions, reflect management's views as of today, February 2436 only. We do 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 today's press release and the company's filings with the SEC for information about factors, which could cause our 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 our earnings release, which is posted on the company's IR website at ir.revago.com. I encourage you to periodically visit our Investor Relations site for important content, including today's earnings release. Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2015.

With that, let me turn the call over to Rolf.

Speaker 1

Yes. Hello, everybody. So we are very excited to welcome you to trivago's first ever earnings call. So this is very new for us, but we always think new is good, is learning, new is experiences. And so we are very much looking forward to this.

So and we are especially happy because we are looking back on a strong finish of an already very good year. So already in our eleventh year, we maintained the very strong revenue growth. We have grown approximately 55% year over year to about EUR $754,000,000 in revenue. And despite the higher costs related to our IPO, we were able to significantly also increase profitability with an adjusted EBITDA of more than EUR28 million. We see that we are continuously growing our user base and also becoming more competitive in all of our marketing channels.

The growth trajectory is unbroken in all segments. Let's say, Trevago becomes more and more a truly, truly global company. For the first time in Trevago's history, actually, the majority of revenue was generated outside of the core European market. But we did not only improve our financial profile, but we also made significant progress in key areas of our business. For example, we rolled out our message about creative platform that enables us to steadily learn and optimize our campaigns to now more than 26 different markets.

Part of our mission is also to find the ideal hotel, and thus we focus on personalization and semantic analysis. We built an expert team now in Amsterdam that only focuses on improving our algorithms and building up knowledge about hotels. On the product side, we continuously improve and optimize the user experience. Our open and liquid marketplace allows us now to focus on more and more on end to end value creation. So as this is our first earnings call, please give me the chance to shortly summarize some key facts about trivago.

Trivago was founded in 2015, and we have grown since 2007 profitably with just 1,400,000.0 external capital. After our only after our two financing rounds in 2006 and 02/2007, we focused the business in 2008 and created our mission statement, which is actually unchanged since then. And with our mission statement, we took three important decisions. First, we only wanted to focus on hotel. We didn't want to do flights or rental cars or other products.

The second important decision, we're only focusing on search. We don't wanna be a shop. We don't wanna sell room nights. We are not a community or a video portal. And the third third was to conquer the position at the top of the funnel, to really build a brand that everybody knows and get people to us first.

We think that this was basically the basis of our success. We these were the muscles that we were building out over the last eight years. And with our focus on continuously learning and improving, we expanded step by step throughout Europe, America, and beyond. Starting at point of sale, always on a low return on advertising, improving it over time, scaling and taking the profits than to speed up learning in other geographies. This also helped us last year to grow that fast and improve our profitability at the same time.

But still, I mean, we're looking at the market, we have to conclude that this can just be the beginning. The hotel market is huge. It's growing. And only onethree of that online of that market is already online. But even looking at the current online market potential, our share is less than 5%.

So we see a lot of headroom for us to grow. And we think that this also confirms our focus on growing and you know, generating more revenue and generating more data to best solve the major challenges of the traveler. And and here you can see basically the three major challenges of travelers that we want to solve. We see the first challenge is a challenge of choice. So when you're looking at a destination, you are always confronted with such a huge number of options of hotels and accommodation.

And it's super hard and clumsy process if you really want to find the best place for you. Second, there's a challenge of availability. So even if you found your ideal hotel, it still doesn't mean that this hotel is also bookable. That's the website we are currently looking at. And the third is the problem of price.

Because even if you found your ideal hotel and it's bookable, you can still not be sure that you book it for the best price. So what we want to do is we want to use our knowledge about hotels and accommodation to get users into their ideal place to stay. We want to give them an overview about all available hotels, and we want to empower them to see the different prices for the same room so actually they can decide where they want to book and for what price. So here you get an overview of the survival structure, the survival system. And when you're looking at our value chain, then this chain is also a reflection of our organizational structure, which is actually divided into marketing, quota search, and advertiser relation.

And all of these these three areas have a very, very clear mission. First, we get users in through our unique and very analytical marketing approach where we attract high quality traffic to our platform. Then by leading users to their ID hotel and our hotel first, we transform this traffic to clear intent to book a very specific hotel at a very specific advertiser. And last but not least, in our liquid marketplace of advertisers, we secure that we always get a fair share of the value that we are generating. So let me now hand over to Axel to take a little bit deeper look into the numbers.

Thanks, Rolf.

Speaker 2

During the fourth quarter, our revenue grew from €99,300,000 to €169,200,000 which is a growth rate of 70%. And that growth accelerated from the growth in the third quarter, where you saw a year on year growth of 55%. The total growth in 2016 was 53%, growing from €493,100,000 to €754,200,000 Looking at the profitability at our adjusted EBITDA. For the fourth quarter, you see a slight decline from €12,300,000 to €11,900,000 which is impacted by two effects. One is that we had €3,500,000 expense in the fourth quarter that was related to our initial public offering and the corporate restructuring that we are going through.

And the second effect was an increased investment pace, which I will come to a bit later. In the third quarter, you see a significant improvement of profitability from €9,700,000 loss in terms of adjusted EBITDA to €6,400,000 profit. And even there, in the third quarter, you have a €2,300,000 IPO and reorganization related expense. For the whole year, that means, as Rolf mentioned before, that the adjusted EBITDA reaches €28,200,000 compared to a €1,100,000 loss in 2015. In terms of return on advertisement spend, the key metric for our marketing efficiency.

For the full year, you see an improvement from 113% up to 120%. And you see the same trend in the third quarter where there was an increase from 105 to 115%. In the fourth quarter, though, there is a reduction in the return on advertisement spend from 141% to 134%. And the reason for that is that we saw interesting investment opportunities in the fourth quarter compared to 2015, which is the quarter where typically the in particular, the TV advertisement prices are on a seasonal high, given that there is Christmas season in many markets. And in particular, commerce companies are bidding very high given that, that is their peak season.

So but this year, we invested more. And the first results of that investment are looking very promising. So looking at the adjusted EBITDA margin in the fourth quarter, that came down from 12.4% to 7%, again, keeping in mind the IPO related costs. And for the full year, an increase from a 0.2% loss to a 3.7% positive adjusted EBITDA margin. So let me just point out some highlights when you go through the six ks that I think are worth commenting on to give you a little bit of background there.

IPO related costs, I mentioned them already. So there, we've got a total expense that you can see in the G and A line of €5,700,000 The total costs that were incurred by us were 11,100,000.0 of which €5,400,000 could be capitalized. The related party shared service fee is worth mentioning. So that is basically a noncash expense that is shown in our books, which is reflecting the services that we receive from Expedia. And the total number amounted to €4,200,000 for the whole year, of which €600,000 were IPO related and are actually part of this 11,100,000.0 of the €5,700,000 IPO related costs that I mentioned before.

The reason why I'm pointing this out is that this €3,600,000 in a way headquarter management fee allocation that was coming to our books from Expedia is not pushed to the segment revargo in the Expedia reporting. So it's a structural difference in the way the numbers are shown. And that is, I think, very important to keep in mind, in particular given the fact that we for this earnings release and the next earnings release, we will have different timing of our release. So that is a structural difference that will stay. We have to show this service fee, and Expedia is not showing it in the segment trivago.

IPO proceeds, that's obvious. So we had net proceeds of €207,800,000 which, of course, led to an increase in the cash position at the year end. Share based compensation is worth explaining. We've got a total share based compensation for the year of fifty three point seven million euros of which €51,000,000 were driven by fair value accounting treatment of liability awards, which is something that had to do with the way we historically structured the contract actually before we even considered going for an IPO. And that is something that we don't foresee to continue going forward.

This to suit, again, is worth mentioning. So we will move in or we are planning to move in a new corporate headquarter in 2018. And that building is currently under construction. And unfortunately, when we signed that contract, we didn't check it for U. S.

GAAP. So it did trigger a build to suit treatment. So what that means is that we have to show the progress of the construction on our balance sheet. So you see a EUR 30,900,000.0 increase in PP and E and a EUR 30,900,000.0 increase in liabilities. The P and L effect that you see is a noncash effect, euros 1,700,000.0 land lease expense, the term for it.

So basically, of the lease payments that will commence in 2018, a fraction is assumed to be for the land. And that land portion is spread out across a longer time period because given that the building is under construction already in a way, it is assumed that we rent the land already. So again, that is worth keeping in mind. It's a noncash event, but it is included in our G and A numbers. There are more details in the back of the presentation, which we will not go through right now, but which will be online.

And there is commentary on there, which we hope is helpful. So now going one level deeper into the different KPIs and the business segments. Overall, if we look at qualified referrals, an acceleration of growth and more or less equal distribution of the absolute growth in terms of qualified referrals, with 36%, 3133% coming from developed Europe, Americas and Rest of the World. Looking at revenue per qualified referrals, there is one effect that we talked about during the roadshow as well. When we introduced the marketplace in the first half of twenty fifteen, there was a temporary increase in commercialization revenue per qualified referral.

And why was that? That was basically by opening up the auction on an individual hotel level. We saw that the expenses, so high booking value hotels were coming to the top of the sourcing, which helped the commercialization but led to a situation. So overall, it was positive for us financially, but the booking conversion went down. So that means that more and more of our users could not find what they were looking for.

So analyzing that development, we recalibrated our sorting algorithm and adjusted for that. So you see a bit of a peak in a way in the commercialization and the first and second quarter in 2015, which, of course, still has an impact on the full year comparisons. When you look at the third and the fourth quarter, we have a slight decrease and a slight increase or more or less stable revenue per qualified referral on an overall basis. Looking at the return on advertisement spend, I commented on that already. So as I said, there were interesting investment opportunities in the fourth quarter twenty sixteen compared to 2015.

And that led to an increased spend and a reduced profitability in the fourth quarter. Early indications are that, that was a very wise decision. Looking at Developed Europe, similar trend, an acceleration of the growth in the fourth quarter to 42% in terms of qualified referrals, stable revenue per qualified referral in quarter three and quarter four. And then, as I mentioned on the overall business, an impact on the return on advertisement spend in the fourth quarter through the increased investment. Turning to Americas.

Again, strong growth across the region, U. S, Brazil and Mexico, significantly contributing to the absolute growth in qualified referrals. In terms of revenue per qualified referral, there are two points to point out here. One is the U. S.

Dollar impact. There was a strong movement in the U. S. Dollar euro exchange rate, which led to a translation effect that we estimate to have an impact of around 5% on the revenue per qualified referral metric. And the second thing that we see, and particularly in Americas, is that there is an improved commercialization, which leads to an increase in the revenue per qualified referral.

This happens frequently because we continuously optimize our marketplace algorithm and try out new things. Having said that, you need to it takes some time to see whether actually these effects are temporary or not. So we take it with a grain of salt and don't readjust our view on that business and would like to see that improved commercialization for at least a second quarter, if not a third quarter before we would change our view. It's very difficult to see to forecast whether these changes are temporary or lasting. So and return on advertisement spend, the trend continued basically a strong improvement in our baseline traffic, which boosted our profitability across the region and the quarters.

Rest of the world, very similar picture, strong growth driven by Japan, India and Russia moving from a testing phase to scaling stage where we start to invest significant dollar amounts on television in particular. Revenue per qualified referral, pretty much stable in the third and the fourth quarter and return on advertisement spend increasing as a result of an increase in the baseline of direct traffic in the various markets. So that brings me to our guidance for 2017. So we expect the revenue growth of the financial year 2017 versus 2016 to be 45% or higher. We expect the adjusted EBITDA margin to remain flat to slightly increase versus the margin in 2016.

So the long term profitability drivers are intact. We still believe in our long term profitability target. Key investment areas are, as they have been in the past, advertisement, the growth, in particular, in the markets where we just entered the scaling stage and where we are still in testing phase and, of course, investment into the talent pool, in particular, here in Dusseldorf. Adding to that, I would like to make two comments on the seasonality pattern, given that we only give annual guidance. So the revenue distribution in the fourth quarters, we expect in 2017 to be similar than 2016 with a slightly higher share of the first and second quarter compared to 2016.

In terms of adjusted EBITDA, we, in principle, expect a similar distribution between the different quarters of the annual target as in 2016, with one slight change. As I mentioned before, the increased investment in the fourth quarter seems to have been a good idea. So first indications are promising. So we expect the share of the fourth quarter to further go down and the share of the first three quarters to increase.

Speaker 1

Yes. Thanks a lot. So let me summarize. We are really happy to be able to start a story with such a strong year and an even stronger quarter. So I think that shows that we are still able to grow even our most developed markets with growth rates plus 40%.

And we truly believe that going public works for trivago just to start. So we're happy to receive your questions now.

Speaker 3

Thank you. We're now taking our first question from Brian Novak from Morgan Stanley. Please go ahead. Your line is open.

Speaker 4

Thanks for taking my questions. I have two. Just the first one, and I apologize if it's simple question, but could you just explain the commercialization issue a little bit more in detail, kind of what happened? And is that one of the drivers of The U. S?

I guess The U. S. Revenue and qualified referrals were light, but the ROA was better. Just talk about commercialization and what happened in The U. S.

In the quarter. And then bigger picture, if we kind of step back, how do you think about the mix of your business over time between branded, SEM and SEO to kind of get to your long term target margins? Okay.

Speaker 2

So let me just repeat the question. So the question is what the details are behind the comment on the improved commercialization in The U. S. And whether that is an effect we only see in The U. S.

But also in the other markets. So

Speaker 1

as I said,

Speaker 2

I mean, we continuously are optimizing our marketplace algorithms. And there are many small things that we continuously do. So it's

Speaker 3

a bit difficult to give

Speaker 2

you the technical detail. And some of these tests are show a lot of effect in the short term and then normalize over time as there is just an initial reaction of the advertisers and then they get used to it in a way that the bidding is normalizing. Some of them have a lasting effect because they overall improve the liquidity of the marketplace and as a result, improve our commercialization, which is just another term for our share of the overall value that we are creating. And so the marketplace algorithms are global. So absolutely, thanks for pointing that out.

I didn't make that clear enough. But in the changes that and the tests we have been running in the fourth quarter, the effect that we saw was just great in The U. S. And that is not uncommon that you have different reactions in different markets given that the structures are very different, the competitive dynamics are very different by platform, by market. And so that is something that is typical.

But yes, in this case, as I said, in Americas, the effect was greatest. But we are still conservative to see whether that is really a lasting effect.

Speaker 1

Yes. Let me take the second part of that question. So we generally do not disclose the shares of the different channel in our marketing mix. But I can say that we have not seen any significant changes in the last quarter. And besides that, we're just natural through seasonality.

And we don't expect that in the short term.

Speaker 4

Okay. Thanks.

Speaker 3

We're now taking our next question from Douglas Zander from JPMorgan. Please go ahead. Your line is open.

Speaker 5

Great. Thanks for taking the questions. Two I wanted to ask. First, can you guys talk about ROAS trends? If we think about Europe, for example, and some of the more mature markets, but then also some of the markets within that mix that are not quite at those levels.

Can you talk about how some of those ROAS trends are going? And then secondly, do you think 2017 is a year where we would see bid dynamics evolve at all as you see the potential perhaps for more differentiation across devices or based on deeper audience and targeting or even local currency? Thanks.

Speaker 4

Okay.

Speaker 2

So let me just repeat your question to make sure that we probably understood it. So the first question was whether you could comment on ROAS trends across the market, but in particular, the more developed markets and developed Europe. So I so in terms of ROAS trends, we think it is better to look at the annual trends because they are the quarters tend to be slightly different and the cutoff points are slightly having sometimes having an effect there. So in general, we see the trend that we discussed on the Roadshow Intact. The markets, the more they develop, trend upwards.

And the drivers of that are twofold. One is that the time lag effect of the TV advertisement is kicking in the more market develops. And the second one is that we continuously develop our loyal user base, which increases the direct baseline traffic, which has a positive impact on our overall profitability. So we don't see any change to that trend, with the exception, as I said, that the seasonality, we think, will slightly change given that the test that we did in the fourth quarter looks very promising. So we will probably slightly change our seasonal investment profile, but that should have a positive impact on the annual development.

The second question that you raised was whether we could comment on the marketplace dynamics 2017 and in particular, whether we would open up the marketplace to bid by device or bid by audience or into different currencies. Let me start with the different currencies. So the bids are in euros but can be updated every day. So de facto, that is a bid in local currency. It is just the way it is uploaded, given that you can change it every day.

You, as an advertiser, really take the currency movement risk intraday if you're updating every day. So there, I don't really see the benefit, and we don't get any requests on in that dimension. So I don't think that is anything that we will do going forward. In terms of audience and devices, we continuously test various different things. But there I don't think that we are in a position where we would so we haven't taken any decision there, but we're continuously testing various different dimensions.

Speaker 5

Okay. That's helpful. Thank you.

Speaker 3

We're now taking our next question from Lloyd Walmsley from Deutsche Bank. Please go ahead. Your line is open.

Speaker 2

Thanks. 2 if I can. First just following up on Brian's question around commercialization changes. Hoping you can give us a bit more color on what drove that. Was that something like a higher number of clicks per user that drove the higher RPQR or more of a change in sort order or something that drove the auction dynamics?

Anything more you could share there would be helpful. And then the second one, curious if you think that getting hotel loyalty prices distributed to trivago is something that would be helpful for your customers or something that you're talking to hotel chains about at all? Anything you can share there would be helpful. Yes. So the to come to your first question, a bit more detail on the commercialization, whether that was driven by more clicks.

So when you look at the revenue per qualified referral, really, there are three drivers. One is the booking conversion. Second one is the booking value. And the third one is really our revenue share, which we describe as commercialization. So and that, in the short term, can be influenced by triggering more clicks, but is very quickly then adjusting as long as the booking value behind the clicks is not going up in line because otherwise, the profitability of us as a channel for advertisers would come down, and they would adjust their bids.

So the tests that we are doing there are more targeted at increasing the liquidity of the marketplace because that leads the more liquid it is, the fairer, in a way, our share of the overall value that we create is. So the way to think about that is more to optimize the algorithm in a way that every advertiser is well equipped and has a fair opportunity to participate in the marketplace. So and the sorry, can you repeat the second question? So the second question was about the hotel loyalty pricing. Is there an opportunity to get that distributed to trivago?

And do think that's something that would help and something you're talking to the chains at all about?

Speaker 1

Yes. I think I think generally, our goal is to get full transparency about all deal related factors. And and loyalty rates are, of course, like also deal related factors. And we always push our advertisers to provide us more and more of this data. Sometimes it's a technology.

So most of the times, it's technology issue on the other side. But we are continuously working on improving that. And we see like a continuous improvement on our side. Still, we have to have a specific market coverage. Even if we see that already happening, we have to have specific market coverage to open that feature up to our users.

Speaker 2

Okay. Thanks, guys.

Speaker 3

We're now taking our next question from Jack Fuller. Please go ahead. Your line is open.

Speaker 6

Hey guys. Question in general on the margin side of the equation. So in some of your most mature markets where this advertising strategy has played out, do you have markets that are at or above your mature margin target?

Speaker 2

Jack, that was the question was, do we have markets that are above our long term profitability targets? Yes. Yes.

Speaker 6

Would you be able to say how many or which ones?

Speaker 2

No. Unfortunately not.

Speaker 6

Give it a shot.

Speaker 3

We can now take our next question from Kevin Kauffman. Please go ahead. Your line is open.

Speaker 2

Hi, thanks a lot. Can you give us an update on mobile usage trends? And also maybe any early feedback from some of the features like price alerts and things like that? Yes.

Speaker 1

So I think trends are continuing. So we see the trend towards mobile constantly continuing. Of course, it's not the growth rates are not like of the shares, are not like in the years before. But that, I think, is a natural global trend. And I think within that trend, also our mobile the part which is mobile is growing, it's growing over proportionally because we also strongly invest into app marketing because we see that it's a very profitable channel for us.

So we see these trends continuing. And and but, you know, I I can't can't give you right now, like, like, an update on the price alert feature and like how much that impacted. It's a feature that we're constantly improving and we're still focusing on.

Speaker 2

Okay. Thanks.

Speaker 3

There are no further questions in the queue. I would now like to turn the call back over to the speakers for any additional comments.

Speaker 1

Yes. Thanks a lot again. Thanks a lot for joining this call. So we were very excited at the beginning. Hopefully, next time, we can play this more cool.

And and yeah. So hope hope we we see you all of you again, like, in about three months, I think. And and have a great weekend.