trivago NV (NASDAQ:TRVG) Q3 2021 Earnings Conference Call November 1, 2021 8:15 AM ET
Axel Hefer - Chief Executive Officer & Managing Director
Matthias Tillmann - Chief Financial Officer & Managing Director
Conference Call Participants
Brian Fitzgerald - Wells Fargo
Naved Khan - Truist Securities
James Lee - Mizuho Securities
Dae Lee - JP Morgan
Kevin Kopelman - Cowen
Good day, ladies and gentlemen. Thank you for standing by and welcome to the trivago Q3 Earnings Call 2021. I must advise you that the call is being recorded today, Monday, the 1st of November 2021. 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, Monday, November 1, 2021 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 2021 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, comparison on this call will be against results for the comparable period of 2020.
With that, let me turn the call over to Axel.
Thank you everyone for joining us today for our Q3 2021 earnings call. I hope everyone is doing well. Another quarter has passed and even though the pandemic is not over yet, it seems that things are slowly moving back to normal. In Europe and the Americas most travel restrictions have been lifted. More and more people are being vaccinated, kids are going back to school, and friends and family have reunited and business partners have met. That being said, the pandemic is not over yet, and the winter in the Northern Hemisphere is coming. In some countries, the situation is deteriorating quickly and tough months are ahead of us. However, we've come out of summer with confidence and we believe our strategic direction is right and offers significant opportunities for 2022 and beyond.
We believe that city trips will return at scale, a segment that is very important for us as our value add is greatest when prizes for many hotels are compared. Our teams have continued to work very hard on improving our user value proposition. In our local travel product weekend, we have added rated packages in Germany and custom activities in the UK. We have successfully taken live our first partners for b2b solutions and are very excited about the further scale up of this new line of business. By leveraging our technology, data and connectivity, we do believe that we will be able to offer unique solutions to existing and future partners over the years to come. We continue to stay optimistic and believe the changes and enhancements we've made to our product offerings are setting up as well and we are very excited to see what the next year will bring.
With that, I now hand over to Matthias.
Thank you Axel and good morning everyone. Summer has been strong in our core markets in Europe, as we have seen a lot of pent up demand. The positive trends we highlighted in July persisted well into August before we started to see the usual seasonal decline in September. Globally, our qualified refers increased 26% year-over-year. Our auction dynamics improved significantly as well in particular in markets where demand recovered strongly. As a result, our referral revenue increased by 133% year-over-year in the third quarter. Our segments are recovering at different paces though. Sequentially we saw the strongest increase in Europe, with our referral revenue increasing by over 70% compared to the second quarter. The region benefited from high pent up demand coming out of a lockdown early in the second quarter.
We recovering our segment Americas continued at a more gradual pace, while referral revenue in most countries in our segment rest of world improved only slightly compared to the second quarter. With the overall increase in traffic volume, we ramped up our marketing spend in the third quarter, which led to a decline in our return on advertising spend sequentially from 145% in the second quarter to 139% in the third quarter. As we had significantly reduced our advertising on TV in 2020, we believe that we did not benefit from past investments to the same extent as in prior years. However, we managed to run brand marketing campaigns with good returns in a few markets this summer. We believe that we can invest long term profitably to increase our baseline, but would need to do so in a disciplined manner, as with almost two years of reduced advertising levels, our starting point next year will be lower than in 2019.
Moving on to expenses, we increase our advertising expenses to 98.1 million Euro in the third quarter compared to 30.6 million Euros during the same period last year. The significant increase was mostly driven by the travel demand recovery in Europe and Americas. We continued with our brand TV campaigns that we started in June, and increased our investment during the third quarter. Given the different levels of recovery in different markets, we only selectively invested in markets where we had high confidence of achieving our long-term ROI target.
Excluding advertising expenses, our operational expenses increased by 1.8% compared to the third quarter last year. The increase was mostly driven by higher share-based compensation and by items that scaled with the traffic on our platforms, like cloud-related costs or digital sales taxes. In G&A, cost slightly increased due to higher share-based compensation and a reduction of expected credit losses in the third quarter last year, which was a one-off decrease in expenses that did not repeat this quarter. The increase in the selling and marketing category was mostly driven by an increase in digital sales taxes, while cost of revenue increased due to higher cloud costs. Those increases were partly offset by a decrease in T&C related expenses, resulting mainly from lower personnel costs and the non recurrence of restructuring costs compared to the same period in 2020. Overall, our expenses remained stable at a significantly lower unrest compared to pre-pandemic levels.
We also remain well capitalized with a cash position of 194 million Euro at the end of the third quarter, which is stable compared to the beginning of the quarter. The increase in accounts receivable and the decrease in accounts payable offset the positive impact on our cash position from other operating and investing activities. I would like to highlight again that we did not have to raise any capital during the pandemic. Our net loss of 2.3 million euro in the third quarter last year turned into a net income of 5.5 million Euros, while our adjusted EBITDA increased from 6.1 million Euros to 15.5 million Euros, an increase of 154% year-over-year.
Looking at the latest trends on our platform, we can observe the usual seasonal decline as we are now post the peak summer season in Europe. In most European countries, the number of new COVID cases is increasing again with the spread of the Delta variant and consequently some travel restrictions are still in place. In particular, in countries where the share of vaccinated people is relatively low, the situation is getting worse as we are approaching winter and while travelers are getting used to rules and restrictions, uncertainty is still high.
On the other hand, some intercontinental routes are opening up again. For example, the US will allow Europeans to enter the country again as of November 8, and as of today, vaccinated people traveling to Thailand do not need to quarantine anymore. As a result, we have seen that in some regions growth rates versus 2019 have improved further while for others, they are stable.
In the following, I will share a few more data points on recovery trends in our respective segment. All comparisons refer to the period from October 1 to October 29 versus the same period in 2019. Despite a few positive signs overall travel activity in our segment, rest of world is still muted. Qualified referred and referral revenue remained around 50% and 30% of 2019 levels respectively. In developed Europe, qualified referrals continued to be approximately at 80% of 2019 levels and referral revenue around 70%. With a rising number of new cases in most European countries, we do not expect a further improvement for the remainder of this quarter. In other segment, America's qualified referral further improved from 58% in the third quarter to around 70% of 2019 level, while referral revenue improved from 51% to around 60%. In particular, in Latin America and in the US travel demand picked up further coming out of the third quarter.
That brings me to our guidance. As we are approaching the low season travel period of the year, we are reducing our marketing activities in most countries and consequently expect our return on advertising spend to increase sequentially. With a seasonal decrease in travel demand and resulting lower revenue base, we expect our EBITDA to remain positive in the fourth quarter, but to be lower than in the third quarter.
With that, let's open the line for questions. Operator, we are now ready to take the first question please.
Thank you. [Operator Instructions] Our first question comes from the line of Brian Fitzgerald from Wells Fargo, please ask your question.
Thank you, guys. Matthias maybe rifting off your last coming on ROAS, it was set to compress, as I recall in 3Q and then was going to rebound in Q4. I am wondering if that transpired to the degree you expected and what's your outlook for ROAS, as we progress through Q4 into next year? You just said it's going to be up but is it going to be up to the extent that you surmised it was going to be when we started unpacking the unlocking of travel restrictions.
Yeah, sure. Thanks, Brian. So we said last quarter that we will invest into the recovery by ramping up TV and also online video spend and other brand marketing campaigns and that is exactly what we have done during summer now. This naturally leads to lower rewards compared to periods where we significantly reduced our brand marketing investment. So coming out of the summer peak season, we reduce our marketing spend, as we have always done historically, with a lower share of brand spend and that will lead to an increase in ROAS again, or that's what we expect for the fourth quarter. So what we have seen now in Q3 is broadly in line with what we expected and I think we are on track to delivering what we expected for the fourth quarter.
I mean, it's too early to talk about next year really but usually what we do is going into Q1, coming out of the winter holiday season, we ramp up our investment again, it's the first smaller peak season for us when people start looking for summer and start booking summer vacations, etc, so that's when we normally ramp up brand marketing as well. At this point, we plan to do that as well. To what extent is still a bit early given the uncertainty I mean, I mentioned it, we are now seeing that the number of cases in particular in Europe are going up again. And we will see over the next two months, what will change in terms of travel restrictions, etc and that would to some extent determined then the start to the next year.
And for us what is important right now or how we look at it is to stay flexible, to not commit any budget, but then react quickly when we see how things are playing out. And that is for sure a difference compared to pre-pandemic like in 2019, we usually committed some budget already for the first quarter. We did not do that in 2020. We did not do that last year. And we won't do that for Q1 next year to keep the flexibility and then invest into opportunities that we are seeing.
For some, I mean, at this point I would be a bit more confident given what we have seen last year and this year already. But then again, the exact level of spent, etc will also be a function of what we see in Q1 and the performance in particular in Europe, so that's probably something we can talk about early in Q1.
Okay, great. Thanks, Matthias.
Your next question comes from the line of Naved Khan from Truist Securities, please ask your question.
Yeah, thanks a lot. A couple of questions. Axel or maybe Matthias, can you talk about the return of city trips? How are you thinking in terms of timing in terms of what are you seeing on the ground? And then maybe also touch on the adoption of the weekend or the local travel offering? And the last question I had is just from the B2B, maybe expand on that a little bit, what are the different offerings and what's your timeline, how are you thinking about the launch of these products and their monetization?
Sure. So on the city trips, I mean, as I said, the city trips are for us extremely important because the value that we offer is to compare prices and that's where the value is greatest, their most options and price discrepancies are greatest. And what we've seen so far in the pandemic that the - and we talked about it on some of the previous earnings calls that the travel that has returned first is obviously friends and family, but then leisure, so really getting a break, coming out of some very, very long lockdowns and very difficult situations whereas city trips have not come back to the same level, I mean, partially earlier in the pandemic, because the lot of the attractions in the cities were not open. Right now, we do believe that there is still some hesitancy now entering the winter; now would actually be the time to do to city trips and that's why we are still not seeing the same recovery than we've seen in other trip types.
However, obviously, with some risk, and depending on what will happen over the next couple of months in the Northern Hemisphere, we do believe that it is very likely that we will see a normal travel behavior in most of our major markets next year. And there it is very difficult to estimate when exactly that will start. We think that spring is where we will see a change in mindset with a lot of people, whether it's early or late spring; I mean, we don't know. But let's say, I mean it later starting next summer and then the second half of next year, in most of the main markets, we do expect a normal travel behavior. On the leisure side business travel will be a bit different obviously still.
Your second question on weekend, so we are doing a lot of work on the product, we are adding more and more features. And we are benefiting from the fact that we are global, so we launched different tests, different features in different markets and so in a way in terms of adoption, we are still focusing on adding features and testing features, and then bringing all of those results together, really for next year. So the adoption is not our key focus, it's more an improvement of the product and a more complete feature set. What we've seen so far nevertheless, has been positive in summer. I mean, there, we've also run some marketing test, that are giving us good indications of where the product can go to. But as I said, the key focus is on adding more features and testing them in different markets to accelerate the speed of development there.
On the B2B side, I mean, we've run a few tests, or actually, tested with a few partners, I think that's probably the better way to put it in the last couple of months or even quarters. And we are now very excited because we actually moved into live stage with a few partners. In the beginning, obviously, the revenue is still scale scaling up but we do think that there is a very big and also very exciting opportunity for us by providing our services and also our data and connectivity to other partners. So more specifically, the first product that we are offering is it's basically an access to a full meta search, accommodation meta search experience and we offer that currently through an API, so our partners are basically able to integrate the comprehensiveness of our offerings in terms of hotels, but then also in terms of pricing options into their existing front end in a very seamless way. But that's - to us that's more the start of a long journey rather than the end. And yeah, as I said, we are very excited about the opportunity ahead of us.
Just on the B2B, can you give a sense of the types of partners, these are the large or smaller and are the go to a type of partners or other entities? Can you help us think through it?
Yeah. So, I mean, we are - I mean, the partners that are there are still in testing. I mean, there we are not in a position to give the names, obviously, but one partner that we've just announced last week is it's Huawei, and their - in particular their search product Petal Search. So, for search engines, it is obviously very interesting to get access to our services to offer an own hotel search product, which without a partnership with us would require a lot of scale and a very, very high upfront investment. And the partnership is much easier to launch and to scale by basically benefiting from our existing scale. But there are also partners that have completely different offerings, have a more targeted product offering, and are focused on price conscious users that prefer a meta search product than a normal OTA integration, which a lot of websites use for their affiliate business or for additional affiliate revenues.
Understood. Thank you. Thank you, Axel.
Your next question is from the line of James Lee from Mizuho, please ask your question.
Great, thanks for taking my questions. Maybe help us understand, maybe put some takes on QR and RPQR, when the travel mix start to returning back to normal, meaning a mix shift to urban and international travel? It seems like QR you should be able to get back to pre-pandemic level. How should we think about our RPQR that seem to be a little bit more challenging, in my view? What needs to happen for that to get back to prior levels? Thank you. Hello.
Thanks, James. Yeah, sure, I will take that question. So on RPQR, in general, it's the product of the average booking value, the conversion and/or monetization and I think we have talked about all three in the past. At the beginning of the pandemic, what we've seen is that the monetization dropped significantly as some partners completely stopped being active in our auction, others just bid down, there was high uncertainty around cancellation rates, future cancellation rates, which are also reflected in the CPC biz then. And what we have seen that over the last couple of quarters that with travel volumes coming back and confidence coming back and cancellation rates coming down a little bit, again, that monetization has improved. We commented last time already that in some markets in Europe, we saw towards the end of the second quarter and in July RPQR approaching 2019 levels again.
So, in general, and we've seen a continued improvement in Q3. I mentioned that the improvement in auction dynamics. We still see a difference in countries, like in rest of world versus Europe two big extremes where on the one hand, in rest of world, traffic volumes are still significantly below 2019 levels. There are more restrictions and all of that. And that results in less active and competitive auction and you can see that in the RPQR. Whereas in Europe, we have seen that with traffic coming back that our partners became more active again. And similar in Americas, in the US, in Latin America, whenever we saw volumes coming back, the dynamics in our auction improved as well.
With regards to conversion, I think we have seen a similar pattern in our estimated visitor book and that's important, so we don't have full visibility but estimates the downstream booking conversion but we've seen a similar pattern compared to pre-pandemic levels during the summer months. And yeah, there's clearly - you can clearly see the year-over-year improvement in RPQR. If you look at that together, it's - from what we can see, it's the combination of the improvement in monetization and conversion, but monetization for sure is the bigger driver.
[indiscernible], as a follow up question, as we head into next year, and you guys are looking at in a normalized travel pattern, at least for the Western Hemisphere, in the summertime, what do you expect your hotel partners to do? Do you expect them to drive the traffic directly or more relying on third party channels like OTAs? I remember from the financial crisis, hoteliers ship more to OTAs and their body channel. Just curious where you're thinking and how you're positioning your business accordingly.
Yeah, I mean, again, we have seen it already this year in Q3 that our partners, happy to buy incremental traffic when it's available and they did that in our platform and hence, we saw a significant improvement in our auctions. So I would expect that to happen again next year. I mean, I think that the key question is, can you deliver high quality traffic, if you can offer that, then there will always be someone willing to pay for that. And there, we think we are an attractive trainer and we have seen that this quarter.
We talked about offering different solutions for some advertisers as well like CPA, because for some, it's a bit more tricky, in particular in the current environment, to bid efficiently in a CPC auction, as they don't have the same depth and data as other players, so the CPA takes out some uncertainty, and we have increased the number of partners on that product, and received good feedback, so that helps them to participate and we will continue that dialogue. So we will talk to our partners and try to understand what helps them to beat efficiently in the auction and whatever we can do to support that, be it with technology solution or something else, we are there to do that and then I believe that they're happy to participate and by that quality, terrific.
Okay, thank you.
Your next question comes from line of Doug Anmuth from JP Morgan, please ask your question.
Hey, this is Dae Lee for Doug Anmuth. Thanks for taking the questions. The first one in the letter you talked about seeing an improvement in your auction and advertisers being more active in markets where travel demand has recovered. So curious to hear if you could provide a little more detail on the overall advertiser participation? Are you seeing broad-based improvement in advertiser participation, meaning is the auction density recovering to pre-pandemic levels? And then secondly, you talked about not benefiting as much from prior brand spend going forward? I'm sort of curious to hear like how long do you guys anticipate that take you guys to recover to previous levels of brand efficiency as you think about increasing your investment in brand going into next year?
Sure, so on the auction dynamic, so we have seen a significant - as Matthias said, a significant improvement in the auction really with the recovery progressing. And there we see very clearly that our partners are very eager to increase their volumes and to participate very actively in the channel. That being said, obviously, we have not seen a full recovery in our markets, I mean, particular rest of the world are still very problematic overall as a segment and also in the Western markets, there is still more uncertainty in the market. So I guess the way to put it is we are very happy with the dynamic that we are seeing in the auction but there is still some improvement potential. That's probably the best way to put it.
Yeah, and then on your second question on brand marketing, so through the pandemic, we got some valuable data points, like how much of the traffic is coming back direct after a long period with not rent advertising and what is the impact of ramping up again. I would caution though, that there's still a lot of noise in the numbers and the next seasonal peak after the winter holidays will be very important to understand the long-term effect even better. But when thinking about the right investment for next year, it is important to flag as I did in my remarks that we won't benefit in 2022 to the same extent from past investment, as we did in 2019, as we significantly reduced our spend in the last two years. So with a similar investment as in 2019, we will not be able to get to the same contribution number.
How exactly we will balance our marketing investments next year then will depend on the additional learning [ph] from our winter campaigns, the pass of the recovery and our expected long term results. At this point, I can only say that we will remain cautious as I said in Q1, given the high uncertainty and that means that we will stay flexible and do not commit to any budget. But if there's an opportunity to invest, we will go for it and we will continue to optimize for long term value creation.
Great, thank you.
Your next question on the line of Kevin Kopelman from Cowen, please ask your question.
Great, thanks a lot. I had a follow up, you are seeing COVID cases increasing in Europe and that influence your view on what's going to happen here in the fourth quarter? Are you seeing that rising cases already lead to reduced travel activity or impact on travel activity to what extent or are you seeing that or is it more that's what you're expecting in the future, just being cautious on it?
Yeah, thanks, Kevin. So I mean, I gave you an idea of the development in Europe in October, and they said, on QR level and referral revenue, it's been similar to the third quarter, stable compared to the third quarter in terms of 2019 levels, so we haven't seen a steep decrease or anything like that. It's more being cautious, looking at what's going on right now. I mean, we do see number of cases are increasing and it's something that could lead to reduced activity in November and December. I mean, right now, domestic travel is mostly possible without restrictions. Everywhere, almost everywhere, three rules apply, so you have to be vaccinated, recovered or tested but if that's the case, you can travel. For international travel most countries still apply traffic light system and for higher risk countries, stricter rules apply like you have to quarantine when entering from such a country. But for example, in Germany, we have seen that during the autumn school holidays in October now more people traveled than last year now, so there we have seen - had seen last year some deceleration and we haven't seen that to the same extent, so that's why trends are stable. And we expect essentially that in terms of 2019 levels that we will continue at the current trend that we are seeing, but we don't expect a further improvement.
Thank you, Matthias.
[Operator Instructions] There are no further questions at this time, please continue.
Manly thanks for taking the time to participate in today's earnings call and appreciate your continued interest. After almost two years of living through one of the worst pandemics in our lifetime, we are looking forward to 2022 and the opportunities ahead of us. We are dedicated to serve our users and customers better in the future, to improve our existing products and provide more value through new offerings. Many thanks for your time, stay safe and see you in 2022
This concludes today's conference call. Thank you for participating. You may now disconnect.