trivago N.V. (TRVG) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the trivago Q3 Earnings Call 2020. [Operator Instructions] I must advise you the call is being recorded today, Tuesday, the 3rd of November 2020. We are pleased to be joined on the call today by Axel Hefer, trivago's CEO and Managing Director; and Matthias Tillmann, trivago's CFO and Managing Director. The following discussion, including responses to your questions, reflects management's views as of today, Tuesday, November 3, 2020, 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 2020 operating and financial review and the company's other filings with the SEC for information about factors which could cause trivago's actual results to differ materially from 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 the company's IR website at ir.trivago.com. You are encouraged to periodically visit trivago's Investor Relations site for important content. Finally, unless otherwise stated, all comparisons on this call will be against results for the comparable period of 2019. With that, let me turn the call over to Axel. Thank you.

Good morning. Thank you for joining our earnings call. In Q3, we wanted to achieve 2 things: first, to continue to progress on our recovery plan, adjusting our products, value proposition and marketing; and second, to preserve our cash position. Looking back at the third quarter, we are very happy with the results. Most notably, we managed to achieve a positive adjusted EBITDA and almost broke even on a cash flow basis. We released a number of new features in our core product and accepted the app version of our new local travel product. We launched our new CPA model in our marketplace and continued to scale our alternative revenue streams. And we improved our bidding and performance marketing and tested a new creative concept successfully. With the number of infections rising quickly in many of our core markets and partial or full lockdowns being implemented, the short-term business outlook appears challenging. However, we believe that a sustainable recovery in travel is coming closer as progress in testing, vaccination and treatments are likely to show effects in 2021. We continue to focus on this point in time and are disciplined in progressing on our plans, irrespective of the short-term travel outlook. And with that, I will turn it over to Matthias to cover our financial development in more detail.

Thank you, Axel, and good morning, everyone. We have seen a significant improvement in travel activity in the third quarter compared to the second quarter. The recovery was mainly driven by easing of lockdown measures in most countries due to lower number of COVID-19 cases and a general uptick in demand as we entered the peak summer holiday season in the Northern Hemisphere. In particular, in our segment Developed Europe, the subsequential increase in qualified referrals and revenue per qualified referrals was very strong. This allowed us to selectively invest in TV advertisement in certain European markets, and we were very pleased with the results. We tested a new campaign, and the positive response makes us confident that we can build up on the learnings to tailor our messaging for a sustainable recovery. Overall, we continued to focus on preserving our cash and, therefore, limited the brand marketing test to certain European countries. We were also mindful with our investments in performance marketing channels and focus on buying high-quality traffic. We finalized our restructuring, closed the sale of our Spanish entity and consolidated our operations in our headquarter in Düsseldorf. In addition, we reduced other selling and marketing expenses and other nondiscretionary items. As a result, our operating expenses, including stock-based compensation, decreased by EUR 15 million or 32% in the third quarter compared to the same period in 2019. The combination of higher travel activity and our cost-saving initiatives led to a net loss of EUR 2.3 million and a positive adjusted EBITDA of EUR 6.1 million. We are very happy with our financial results in the third quarter and the progress we made in setting up the company for what we expect will still be a challenging and unpredictable foreseeable future. Overall, our markets continue to be volatile, but there are a few trends emerging since the beginning of October. In Developed Europe, the rapid increase in new COVID cases since the second week of October had a negative impact on our qualified referral development. While the year-over-year growth rate had stabilized end of September, it began to drop again since mid-October as most countries are going into partial or full lockdowns again. Looking at our segment Rest of World, while there are regional differences, overall, both qualified referral and revenue per qualified referral year-over-year growth rates have been stable over the last couple of weeks. And hence, our referral revenue continues to be around 20% of 2019 levels. In Americas, we continue to observe a steady increase in our qualified referral year-over-year growth rate, which is mainly driven by a significant improvement in Latin America, while the year-over-year growth rate in the U.S. has been stable since August. Qualified referrals were around 50% of 2019 levels in October, improving from 35% of 2019 levels in the third quarter. Due to the country mix effect, the revenue per qualified referral year-over-year growth rate has started to decline slightly in October. As we have now entered our low season quarter and are faced with a second wave of COVID-19 cases, in particular, in Europe, we expect a negative EBITDA in the fourth quarter. However, we are confident that we have set up the company for this challenging environment and continue to focus on preserving our cash until travel rebounds. With that, let's open the line for questions. Operator, we are now ready to take the first question, please.

[Operator Instructions] And your first question comes from the line of Tom White from D.A. Davidson.

Just first on the cost per acquisition product that you guys have talked about, I guess my presumption would be that the net version of the CPA product, the one that factors in cancellations, would be more appealing to advertisers in the current environment. Is that accurate? And are you getting any real traction there? And I guess I'm curious, like, are you inclined to really push a net version of the CPA product? Or do you not really want that kind of maybe becoming the new normal that advertisers expect maybe once things get back to normal? And then I just have a quick follow-up.

Of course. So the -- just to be clear, I mean the CPA product that we have taken live in October and we are now rolling out is a gross CPA product. So we are taking over the risk of the booking happening, the booking conversion risk. We are not taking over the cancellation risk. And we think that it is a very, very good first step to help our advertisers, in particular, to deal with the uncertainty and data sparsity in the current market environment. Whether we will eventually move to a net CPA model or not is something that we will see in the next couple of weeks and months. But given that the time to travel has come down a lot and there are very, very short travel windows, we think that the gross CPA is actually helping our advertisers very significantly, and it's a very, very good foundation for entering next year.

Okay. That's helpful. Just a quick follow-up. Do you guys have any sense as to what percentage of your business or your referrals you think might come from corporate travel? And I guess I mean there, kind of unmanaged corporate travel. So the worker that's booking his own hotel rooms and then getting reimbursed as opposed to kind of corporate travel spend that maybe goes through the large travel management companies.

Yes. Sure. So on corporate travel, we don't know the exact mix of our business there, so we don't have perfect visibility on that. However, what we've said in the past is that, obviously, through interaction on our websites, through certain behaviors, et cetera, we estimate what kind of travel you're coming from. But in general, business travel is not the largest part of our business mix. A large part is rather city trips. And there, we have seen obviously a negative development relative to the rest of the market in the third quarter, and now that continues in the fourth quarter. Yes, does that answer your question?

Yes. Appreciate it.

And the next question comes from the line of Brian Fitzgerald from Wells Fargo.

Two questions, if I could. Axel, I just want to follow up on your exposure to city -- travel city vacations. Can you remind us how that has trended? Has it varied any over time, maybe specifically with 2020, in particular? And then the second question is around the rollout of sponsored listings and display ads. How would you assess the rollout? How far into the rollout are we? How is it being implemented? Is it broadly? Is it regional? Is it with respect to certain types of inventory? Is the onboarding process around those sponsored listings and display ads accelerating? We're trying to get a better understanding of the adoption rates and the runway there.

Thanks, Brian. This is Matthias, I will take the first part of your question and then pass it on to Axel. So in general, what we have seen is a clear shift in the third quarter to nature destination and nearby destinations, whereas, usually, a big part of our traffic mix, at least, is city destinations. And to give you an idea, so city trips, in Germany, we used that example before, yes? So there, we saw a decline of more than 50% of city destinations, large city trips, whereas we saw that trips to nature destinations were even up year-over-year in Germany. So if you look at those categories, like what we said in the past on -- in our last update is that we believe that nature and close destinations will come back first. That's exactly what we have seen. Then city travel and lastly, international travel, and that is exactly what we are seeing right now.

On your second question regarding the status of the rollout of sponsored listings and display, I mean, first of all, I would like to say that there has been huge and there is huge interest by our advertisers in these alternative products because they serve slightly different use cases. And by having a broader product offering towards our B2B advertisers, we can serve their needs much better. The adoption and the interest has been very broad. So I wouldn't say that there has just been a specific segment of the market being interested in these products. And some advertisers have started their tests and also permanent campaigns sooner. Others have taken a bit more time. And obviously, the environment is still very difficult for a lot of our partners. The surge in new infections in Europe is a bit of a temporary setback, I would have to say, because, obviously, there are markets where currently, none of the products is really generating significant volumes. But we remain very confident that with these products, we are very well prepared for a more sustainable recovery next year, and the interest remains very, very strong despite the difficult environment we are currently in.

The next question comes from the line of Naved Khan from Truist Securities.

This is Robert Zeller on for Naved. So 2, if I can. With COVID resurfacing in Europe and parts of North America, how would you compare the demand you see today versus the demand you guys saw during the lows of April and March? And then secondly, so you guys had mentioned that travelers have been traveling to more local nature destinations that they can drive to. And you called out in the letter, I think, this new feature, the local travel discover product that you guys plan on launching in 2021. So do you expect that this trend is going to continue into 2021? I guess when do you see a return to travel to bigger cities or more densely populated destinations?

Thanks, Rob. This is Matthias. I'll take the first part of your question. So yes, how does the current situation compares to March? So first of all, we just -- we have -- October is in the books, and October has been a mixed bag with different developments in our 3 segments. I broadly covered that in my prepared remarks, but let me give you a few more data points here. In Europe, we obviously clearly see the increase of new COVID cases and a negative development in our qualified referrals. But having said that, the first week was still very similar to the last weeks of September. And then only mid of October, it started to decline. So it's still early, and I think it's also too early to compare that to the situation in March and April given that, yes, we are now less than 3 weeks into that development in Europe. But overall, qualified referrals are declining and clearly impacted. How exactly that will compare to April, I think, again, will be -- it's a bit early, and we'll probably be -- we can probably get -- give you a better update on that in a couple of weeks. On the other hand, in Americas, we clearly see a positive trend, in particular in Lat Am, as I said before, and most notably in Brazil. So in the last week of October, qualified referrals were almost at last year's level in that country, and it confirms the trend that we have seen during the summer season in Europe. When summer comes, people want to travel. There might be shifts in travel demand. For example, what we have seen in Europe, and are now seeing in Brazil as well is that people choose domestic over international destinations. But overall, there is a pickup in demand, and this makes us confident that travel will recover in the second half of next year as well.

So on your question regarding our discover product, so -- and the outlook for next year, so you're absolutely right. We do think that local travel will be -- will also be very, very important for next year in all of our core markets. And there, in particular, the summer there, we expect to be -- show sustainable recovery. We do think that local travel will be much greater than what we've seen in 2019, so a similar trend to what we've seen this year. The return of city trips that are, as Matthias said earlier, are very important for us. For our core product, we expect in the second half of the year. And there is some opportunity that there might also be some recovery in the first half, but that is more uncertain. The discover product, more specifically, is not focused on nature or city, but it's more focused on local. So more driving distance destinations and is giving you inspiration to where you could go. And we do think that this is 100% spot on in terms of customer need for next year. It is accepted in the app, and we are working on launching it on the other platforms and have a full pipeline of features that we are planning to deploy in the product over the next couple of months so that it is ready with full features when the volume will come -- will increase again next year.

Next question comes from the line of James Lee from Mizuho Securities.

Great. I was hoping to get maybe a little bit more specific on the geographic trends here. You guys talk about referral revenues down about 80% year-over-year for Europe. Did you have a sense what the trend is like for qualified referrals? And for the U.S. specifically, you commented that qualified referral down 50% year-over-year in October, what does the referral revenue trend look like?

Sure. Thanks, James. So I mean I gave some data points. On the U.S., I think there's nothing specific to add here. As I said in my prepared remarks, qualified referrals -- the qualified referral year-over-year growth rate in the U.S. has been stable since August. And overall, the broader trends, they have not changed, yes? So we still see a shift towards domestic travel and fewer city trips. So that's on the U.S. If we look at Rest of World, there are regional differences. In Central Eastern Europe, for example, the development is very similar to our Developed Europe segment. Qualified referrals are declining fast with the increase in new COVID cases. In Southeast Asia, qualified referral year-over-year growth rates are also declining, but not as fast. And then on the other hand, in our biggest markets in that segment, namely Australia, Japan and in particular, India, we see a greater recovery offsetting the effects in the other regions in that segment. So overall, the year-over-year revenue growth rate is stable compared to what we've seen in Q3. Yes, that is all I can say, more specifically to the regions.

And Matthias, if I can have a follow-up question here.