Trivago [TRVG] Conference call transcript for 2022 q1
2022-05-04 13:49:09
Fiscal: 2022 q1
Operator: Good day, ladies and gentlemen and thank you for standing by and welcome to the trivago Q1 Earnings Call 2022. At this time, all participants are in listen-only mode. After the speakers presentation, there will be a question-and-answer session. I must advise you that the call is being recorded today Wednesday the 4 of May 2022. 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 Wednesday May the 4, 2022 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 2022 operating and financial review and the company's other filings with the SEC for the 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 2021. With that, let me turn the call over to Axel.
Axel Hefer: Thank you, everyone for joining us for our Q1 2022 earnings call today. We're living in turbulent times and the escalation of the conflict in Ukraine and sufferings of millions of people in the past few months have shocked all of us. Our teams have supported refugees whenever possible and we are all hoping for the conflict to end soon. As a business, we experienced a temporary drop in travel activity across many European countries at the end of February. But since then we have seen a continuation of the strong improvement in travel sentiment and activity. We continue to expect a very strong summer and believe that autumn and winter will see significantly higher travel activity than the last two years. Two years of pandemic and lockdowns have led to significant staffing shortages in the industry, contributing to rising hotel prices. We believe that the effect of this increase combined with inflation more generally will increase the value of price comparison that we can bring to our users in the months and potentially years to come. We are therefore continuing to focus both our messaging and product development on price comparison, as we believe that our core value proposition is more relevant than ever. Our teams have worked intensively on developing our core product and relevant price features that will be tested and implemented as we head into the summer season. As we have historically relied very heavily on brand marketing, we believe that the market will be ready this year to ramp up our brand marketing spending again across many markets. After very limited branding activities in the last two years, we are confident that we will be able to rebuild our branded baseline over the years to come. We believe that our investment into our brand will be supported by an increasing relevance of metasearch in the future. Another potential tailwind that we are anticipating over the next few years is the increasing regulation of mega platforms and the resulting improvement in free and innovation-based competition. The Digital Markets Act in the European Union is setting new standards and clearly states that self-preferencing of own products will be restricted, particularly for accommodation metasearches, we believe that this will make it much more difficult for search engines to steer traffic into their own metasearch products. To summarize, we believe, that we are in a strong position to meet travelers' increasing need to compare prices and find great deals this summer and beyond -- sorry and beyond. And that competitive dynamics will be in favor of pure-play, meta-players.
Matthias Tillmann: Thank you, Axel and good morning everyone. Before I discuss our numbers in detail and talk about trends, I would like to highlight that we are very happy with our financial performance in our underlying business. In the first quarter we achieved an adjusted EBITDA of €21.1 million, which is the highest since the start of the pandemic and only slightly below the €21.4 million in the comparable period in 2019. On April 22nd, the Australian Federal Court issued a judgment in the proceeding brought by the Australian Competition and Consumer Commission against us, ordering us to pay a penalty of AUD44.7 million. We had recorded a provision of AUD15 million, which we had estimated for the probable and estimable loss. The additional accrual in excess of previously established provisions had a negative impact of €21.1 million on our operating expenses leading to a net loss of €10.7 million in the first quarter. While we are disappointed with the outcome of the judgment, we are very encouraged by the current trends in our underlying business, even though you cannot see that in our net income in the first quarter for the reasons just mentioned. With that, out of the way, let me give you a bit more color on some of the trends in the different regions. Macro trends continue to have a significant impact on the travel recovery in the first quarter. In particular in Europe, the spread of Omicron and the war in Ukraine impacted traffic volumes on our platforms. However, as many countries started to lift travel related and other restrictions during the quarter, our qualified results relative to 2019 levels reached 53% on a global level. In our segment Developed Europe, we saw steady improvement every week since the beginning of the year, when qualified referrals were at approximately 50% of 2019 levels, until the invasion of Ukraine by Russia which led to a temporary decrease in traffic volumes in our core European markets in the weeks following the invasion. Since then, we have seen a gradual recovery from post-invasion levels. And as of beginning of April, traffic volumes fully recovered to pre-conflict levels. In the last week of March, qualified referrals were around 65% of 2019 levels in Developed Europe. Revenue per qualified referral also steadily improved during the quarter. And we did not observe a notable change since the start of the conflict in Ukraine. In the first quarter our revenue per qualified referral in Developed Europe was approximately 20% lower, compared to the same period in 2019. In Americas, traffic volumes during the first quarter were relatively stable with qualified referrals at 60% of 2019 levels. Revenue per qualified referral reached pre-COVID levels mainly driven by an improvement in our monetization year-over-year in the largest market in that segment the U.S. There was still no notable improvement in our segment Rest of World. Qualified referrals remain significantly below 2019 levels at 39%. We have seen new COVID-related lockdowns in some Asian countries during the first quarter and the one Ukraine had a significant negative impact on our Eastern European platforms which are part of our Rest of World segment. This was partly offset by signs of recovery in countries like Australia or Japan. As qualified referrals recovered from Omicron and auction dynamics continue to be healthy across many of our core markets, our global referral revenue increased significantly year-over-year and was at around 50% of 2019 levels in the first quarter of 2022. Other revenue increased to €3.2 million or by 52% year-on-year, mainly driven by revenues from new B2B offerings. We have onboarded a few more partners since the beginning of the year and we are happy with the progress so far as we continue scaling up their offering. Moving on to advertising expenses. With the increase in travel demand in most of our core markets, we ramped up our marketing expenses by 187% in the first quarter year-over-year. As we have improved our marketing efficiency and performance marketing channels and we're still cautious with brand marketing campaigns in the first quarter, advertising expenses were still significantly below pre-pandemic levels at around 35% of 2019 levels for the same period. Consequently, our return on advertising spend increased by 47 percentage points to 184% compared to the same period in 2019. In the following discussion of our operational expenses, excluding advertising expenses, I will exclude also the penalty imposed by the Australian Federal Court which led to an increase of €21.1 million in our G&A category as we consider this charge to have a distorting effect on the understanding of our underlying cost structure. Excluding advertising expenses and the penalty, our operational expenses increased €3.4 million or by 11.8% compared to the first quarter in 2021. The increase was mostly driven by items that scale with the traffic on our platforms like cloud-related costs or digital sales taxes expenses incurred to acquire traffic in connection with our B2B solutions but we did not incur in the same period in and the nonrecurrence of a gain realized in the first quarter of 2021 on the modification of the lease for . Our operating expenses excluding advertising spend and the penalty imposed by the Australian Federal Court, remains significantly below pre-pandemic levels. We expect to continue to benefit from most of the cost savings resulting from our restructuring that we conducted in the second quarter of 2020. We further improved our cash position, remain well capitalized with a cash position of €269 million and continue to be debt free. Our net loss increased from €6.7 million in the first quarter of 2021 to €10.7 million in the first quarter of 2022 due to the negative impact of the penalty. The penalty is excluded in our adjusted EBITDA due to its size and unusual nature and hence we achieved an adjusted EBITDA margin of 20.8%. Looking at recent trends, in April qualified referrals continue to improve and were around 60% of 2019 levels. Referral revenue was also around 60% of 2019 levels as our revenue per qualified referrals approach 2019 levels again. We are seeing the strongest recovery in Europe where qualified reverse were above 70% of 2019 levels in April, closely followed by Americas at around 65%, while rest of the world recovered to around 45%. Europe continues to improve nicely and we are excited to launch first TV campaigns in May in some of our core markets. We also plan to air campaigns in the US and Canada soon. While the recovery is still muted in most of the countries in Rest of World, we started to see a nice recovery in Japan mid of April, ahead of the Golden Week. We ran a regional TV campaign, the first since -- the first time since the start of the pandemic in that country with very encouraging results. Historically, we have invested significantly into our brand and benefited from high-quality brand traffic in subsequent periods. Since the start of pandemic, we cut our brand marketing spend significantly, and only invested selectively in a few markets at reduced levels. Consequently, we will not benefit from prior year's marketing investments in 2022, to the same extent as in pre-pandemic years. As mentioned before, we are confident that we can rebuild our brand baseline. However, it will take time and requires us to invest. We plan to ramp up our brand marketing investments in the following months in markets, where we expect the travel recovery to continue going into the peak summer season. With that, let's open the line for questions. Operator, we are ready to take the first question please.
Operator: Thank you. And the first question comes from the line of Naved Khan from Truist. Please go ahead.
Naved Khan: Yes. Hi. Thanks a lot. A couple of questions, so maybe just on the outlook for this year, I know you're not guiding for a specific number, but should we expect EBITDA to be positive for the year given that you're going to be spending more into brand spending which you have not done in the last few years or you're not going to be spending at the same level you're going to be spending at a higher level? The other question I had is just on the performance ad efficiency that you called out in your shareholder letter and versus 2019, I think you said you saw more efficiencies what's the driver of that?
Matthias Tillmann: Yeah. Sure Naved. So on the outlook of EBITDA, yes; we do not give specific guidance. I mean you have seen the strong EBITDA in Q1 which was similar to Q4. When you think about 2022, I would say, our historical seasonality is a good starting point. And there you have seen that normally EBITDA went down in the second and third quarter as we -- in the second quarter start to invest prior to the summer season. And then, during Q3, the biggest quarter for us and everybody in the industry we continue to push in particular on the brand marketing side and then cut back in Q4. So that will not change. So our approach to that will not change. What I mentioned is, in Q1, if you just look at the EBITDA it looks better than what you have seen historically relative to other quarters, because we did not invest significantly into brand, given at the start of the year we had the impact from Omnicom in most European countries. Then mid-quarter we had the impact of the war in Europe. So that's why we did not push our marketing activities to levels that we had anticipated before. So now, everything that I said on trends in April and what we expect for the summer, we've seen an improvement in Europe we are back to pre-conflict levels and we saw a continuous improvement in April. And now, with the summer in front of us we plan to change that. In May, we will start with the first TV campaign in selective markets, and then plan to ramp-up our investment significantly. So that will push down gross and EBITDA compared to Q1 in Q2 and Q3 and you won't see the positive effect of that brand campaign immediately given the long-term nature of it. But obviously, we do that because we do expect a positive long-term return from that. So I hope that gives you a bit of an idea how we think about the cadence for the rest of the year. And then on your second question, what was driving the efficiency in marketing. So there I would distinguish between performance and brand marketing. So if I start with performance marketing, it always depends what you compare it to, right? If you look at 2019, that was a year where we were pushing more aggressively pushing more for top line growth and we're not as – as much focused on margins. And what we have done now already last year in performance channels actually great teamwork from the performance marketing team over the past two years since the start of the pandemic is looking for pockets changing our way how we look at different segments and markets finding high traffic quality and focus on that and that is paying off. So when I say efficiency is higher then, if I look at the return on advertising spend numbers that is up compared to 2019. And I think that is in performance marketing because of the work that the team is putting in there. On the brand marketing side, we have some data points from summer when last year when we ran first campaigns. I mean, in Q1 as I said, we didn't spend as much, but the past two years again were very insightful for us in terms of learning given that we had to cut back then started in some countries to invest again. And that gave us valuable earnings in how we spend what we spend and where we spend and those learning's we will we will now take for the next couple of months, and optimize our brand marketing depends. And from that we expect higher efficiency obviously at a lower absolute level of spend compared to 2019, but at higher efficiency than what we have seen before.
Naved Khan: Got it. And a quick clarification if I may. So you – I think you said, you reached pre-pandemic levels subsequently in Europe after we saw the dip. So the improvement you're seeing is without the new ad campaigns and without the benefit of the campaign. So is it fair to assume that your traffic would actually be exceeding those levels when you have your campaigns out for the peak summer season?
Matthias Tillmann: So what I said is in Developed Europe that, beginning of April, we reached pre-conflict levels again. So we saw an improvement at the beginning of the year as countries in Europe were lifting restrictions. So week by week relative to 2019 levels, our qualified referrals were improving. And then we saw the dip from the impact of the war. And then it took a couple of weeks, until we saw an improvement again. And yes at the beginning of the second quarter, we basically recovered from that dip. And then I gave you a data point in April. So for the full month we were at 70% of 2019 levels. So that was not driven by brand marketing spend. That is correct. So now that we are ramping up, I would expect that this will further drive volumes to our platforms. How much to be seen to be honest. But yes, we expect obviously a further improvement from our marketing activities.
Naved Khan: Understood. Thank you.
Operator: Thank you. Next question comes from the line of Shyam Patil from Susquehanna. Please go ahead.
Unidentified Analyst: Hi, guys. It's Ryan on for Shyam. So you guys talked about inflation and rising hotel prices driving more customers to Meta for price comparison. So just generally do you view that as a tailwind for your business because of pull that dynamic, or could it be a bit of a headwind as well because it might reduce demand at prices become too expensive?
Axel Hefer: Yes, sure. So it is a very good question. And the way we are looking at it and we've also done quite a bit of market research there. So our view is that general inflation even outside of travel is leading to more cost consciousness overall. So because you can feel that prices are going up pretty much in your daily life. And cost consciousness is something that is very, very positive for us. And we've also seen it in -- in previous recessions if people are more price conscious and then obviously the value that we contribute to the search process is going up. So that we see as a big opportunity. And that as I said that's also the focus of our brand communication and also for our product development. On the volume side I think you had in principal right if there is high inflation if the budgets are getting tighter then obviously people cannot spend as much as they've done before. Having said that, we are right now coming out of pandemic. And there is still a big backlog in a way of experiences and spending time with friends and spending time with families and in really doing the trip that you wanted to do now for a few years. So we don't think that it would have an impact on the volumes for this year. For the years to come and the trajectory I guess that's a bit too early to tell, but we think that overall it is in our favor and it will be in our favor for quite a while.
Unidentified Analyst: Great. Thanks for the color.
Operator: Thank you. The next question comes from the line of Doug Anmuth from JPMorgan. Please go ahead.
Dae Lee: Hi. This is Dae Lee on for Doug. Thanks for taking the questions. I have two. So a number of large OTAs have talked about increasing spend into the recovery. I was curious if you're seeing this increased activity on your platform and how the bidding intensity looks like relative to pre-pandemic levels right now? And then secondly, could you elaborate on the -- on what kind of -- or what level of marketing efficiency you're targeting in 2Q or 2022 as you significantly ramp marketing investments if there's a kind of OI level that you guys are targeting?
Matthias Tillmann: Yes. Hey, Dae. Sure. So on your first question so it's something we talked about last quarter as well. We have seen that the competition in our auction increased as large advertisers but other advertisers as well became more active and increased their bids, auction dynamics from our perspective are very healthy. If we compare to 2019, we are roughly on similar levels. So -- and that was very different at the beginning of the pandemic. We talked about that. You could see that in our revenue per qualified referral, they dropped quite significantly because many appetites were cutting back and then we're slow to recover or to come back to the auction. And that has changed. And we -- in Q1, when I look at RPQR, I mentioned -- or you can see that it's close to 2019 levels again. Looking at April, we approached 2019 levels again as well. And yes, part of that is because our monetization levels, which is a result of the auction is back to those levels. So on your second question, in terms of targeting, we do have certain targets for our performance channels. We executed against that in a disciplined way for the last couple of quarters. It's not a big side though. We obviously, always look at the elasticity we look at the traffic quality. We -- and based on that we change and make decisions. But obviously, we want to invest at profitable levels. With regards to brand marketing, it's slightly different. So there obviously, the first dollar you invest is at sub-100 ore. So it's paying back over time. And we have our models where we estimate the payback period, how long that is. It's different by market. And based on that, we determine the short-term rows. So let's say, in campaign for the period on the campaign, what we like to see in terms of returns so that we think it's long-term profitable for us. So there we have targets. And then on a global level, we don't have a specific target but we want to rebuild our brand baseline as I said. And as long as we see opportunities, we are happy to invest and we'll push forward.
Q – Dae Lee: Got it. Thank you, Matthias.
Matthias Tillmann: Thanks, Dae.
Operator: Thank you. There are no more questions at this time. I would like to hand back over to the speakers.
Axel Hefer: Yes. Thank you for taking the time to participate in today's earnings call. We believe that in the months to come, we will see strong demand for accommodation and an increasing need to compare prices, to save money and to find good alternatives. We're excited about this outlook and are very much looking forward to the summer. Take care and see you next quarter.
Operator: That does conclude our conference for today. Thank you for participating. You may all disconnect.
