Good day, ladies and gentlemen, and thank you for standing by, and welcome to the trivago Q3 Earnings Call 2020. At this time, all participants are in a listen-only mode. After the speaker speech, there will be a question- and- answer session. To ask a question during the session, you will need to press star one on your telephone. 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 CEO and Managing Director, and Matthias Tillmann, trivago 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 EDGAR 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 irtrivago.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 two things. First, to continue to progress on our recovery plan, adjusting our products, value proposition, and marketing. 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. 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 sequential 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 continue 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 focused on buying high-quality traffic. We finalized our restructuring, closed the sale of our Spanish entity, and consolidated our operations in our headquarters in Düsseldorf. In addition, we reduced other selling and marketing expenses and other non-discretionary items. As a result, our operating expenses, including stock-based compensation, decreased by 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. There are a few trends emerging since the beginning of October. In developed Europe, the rapid increase in new COVID-19 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.
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.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Tom White from D.A. Davidson. Your line is now open. Please ask your question. Thank you.
Great. Thanks guys for taking my question. 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? Are you getting any real traction there? I guess I'm curious, are you inclined to really push a net version of the CPA product? Do you not really want that maybe becoming the new normal that advertisers expect, maybe once things get back to normal? I just have a quick follow-up.
Of course. Just to be clear, the CPA product that we have taken live in October and we're now rolling out as a gross CPA product. We are taking over the risk of the booking happening, the booking conversion risk. We are not taking over the cancellation risk. We think that it is a 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. Given that the time to travel has come down a lot, and there are very short travel windows, we think that the gross CPA is actually helping our advertisers very significantly, and it's a very good foundation for entering next year.
Okay. That's helpful. Thanks. Just a quick follow-up. Do you guys have any sense as to what % of your business or your referrals you think might come from corporate travel? I guess I mean their unmanaged corporate travel. The worker that's booking his own hotel rooms and then getting reimbursed as opposed to corporate travel spend that maybe goes through the large travel management companies.
Yeah, sure. 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 website, through certain behaviors, et cetera, we estimate what kind of travel you're coming from. 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. Yeah. Does that answer your question?
Yeah. Thank you very much. Appreciate it.
Thank you. The next question comes from the line of Brian Fitzgerald from Wells Fargo.
Thanks. 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? 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's 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.
Thanks, Brian. This is Matthias. I will take the first part of your question and then pass it on to Axel. 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. To give you an idea, city trips in Germany, we used that example before, yeah? 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. If you look at those categories, like what we said in the past, in our last update, is that we believe that nature and close destinations will come back first. That's exactly what we have seen. City travel, and lastly, international travel.
That is exactly what we are seeing right now.
On your second question regarding the status of the rollout of sponsored listings and display. First of all, I'd 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. 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. I wouldn't say that there has just been a specific segment of the market being interested in these products. 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. We remain very confident that with these products, we are very well prepared for a more sustainable recovery in next year. The interest remains very, very strong despite the difficult environment we are currently in.
Thank you, Axel. Thanks, Matthias.
Thank you. The next question comes from the line of Naved Khan from Truist Securities. Your line is now open. Please ask your question.
Hi, this is Robert Zeller on for Naved. Thanks for taking the question. Two, 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? Secondly, you guys had mentioned that travelers have been traveling to more local nature destinations that they can drive to. You called out in the letter, I think, this new feature of the local travel Discover product that you guys plan on launching in 2021. Do you expect that this trend is gonna continue into 2021? I guess, when do you see a return to travel to bigger cities or more densely populated destinations? Thanks.
Thanks a lot. This is Matthias. I'll take the first part of your question. Yeah, how does the current situation compares to March? First of all, we have October as in the books, and October has been a mixed bag with different developments in our three segments. I broadly covered that in my prepared remarks, let me give you a few more data points here. In Europe, we obviously clearly see the increase of new COVID-19 cases and a negative development in our qualified referrals. 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.
It's still early, and I think it's also too early to compare that to the situation in March and April, given that we are now less than three weeks into that development in Europe. Overall, qualified referrals are declining and clearly impacted. How exactly that will compare to April, I think, again, it's a bit early, and we can probably 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 LATAM, as I said before, and most notably in Brazil. In the last week of October, qualified referrals were almost at last year's level in that country. 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. 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.
On your question regarding our Discover product, and the outlook for next year. You are absolutely right. We do think that local travel will also be very important for next year in all of our core markets. There in particular, the summer that we expect to show sustainable recovery, we do think that local travel will be much greater than what we've seen in 2019. A similar trend to what we've seen this year. The return of city trips that, as Matthias said earlier, are very important for us, for our core product. We expect in the second half of the year. 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 it's giving you inspiration to where you could go. We do think that it 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 increase again next year.
Okay. Understood. Thank you very much.
Thank you.
Thank you. The next question comes from the line of James Lee from Mizuho Securities. Your line is now open. Please ask your question.
Great. Thanks for taking my questions. 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? 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? Thanks.
Sure. Thanks, James. 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, the qualified referral year-over-year growth rate in the U.S. has been stable since August. Overall, the broader trends there have not changed. Yeah? We still see a shift towards domestic travel and fewer city trips. 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.
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 effect in the other regions in that segment. Overall, the year-over-year revenue growth rate is stable compared to what we have seen in Q3. That is all I can say more specifically to the regions.
Matthias, if I can have a follow-up question here.
Sure.
When you talk of recovery normalization in first half of 2021, are you referring to revenues, or are you referring to growth of referrals?
Growth of referrals. Basically, when we talk about normalization in travel, we mean the underlying demand. That will translate into our qualified referrals. If you look at our revenue, obviously you have on top the monetization component. You have to look at that separately.
Okay, great. Thanks so much.
No problem. Thank you.
Thank you. Next question comes from the line of Shyam Patil from Susquehanna. Your line is now open. Please ask your question.
Hey, guys. It's Ryan on for Shyam. Just two quick ones. First, can you just talk about what's giving you confidence that travel demand should recover sustainably in the second half of next year? Is that contingent on a vaccine? Secondly, Google is under some DOJ scrutiny. Do you think that could maybe help you if they decide to ease off on funneling traffic into their own travel product? Thanks.
Sure. On the beginning of sustainable recovery next year, what makes us confident there? I think the first thing that is giving us confidence, that is what we've seen already in summer, in the Northern Hemisphere, in summer and now in the Southern Hemisphere, that there is a fundamental need of traveling, and that our travelers do want to travel. That need, we see to persist and also see the same trend for, or expect the same trend for next summer. It's strong nature demand in the peak season. For the second half of the year, in the segment that is very important to us, the city travel, we do think that a combination of faster and cheaper testing, where you see a lot of development happening right now.
The availability of a vaccine, at least to high-risk areas, and improvements in terms of treatment will give overall a better perception of control, which doesn't mean that the pandemic will be over, but we believe that there will be a positive impact on the autumn season next year, and that that will lead to some recovery of city trips. Why is that for us overall positive? City trips obviously are very important to us, and we are agnostic to the destination. As long as travelers are feeling comfortable to travel somewhere, we do have the right product to offer, and we don't need anybody to board a plane, neither domestically nor continentally, nor intercontinentally. That's why we do think that, in terms of recovery, we should benefit slightly sooner than other travel companies. On your second question regarding the investigation into Google's practices.
It's not only happening in the U.S., it's happening in quite a few countries, that there is an increasing skepticism that some of the mega platforms, and there most notably Google, are ensuring fair competition overall in the segments that they are participating in. With any kind of regulatory action, the one thing that they have in common is that they take some time. Our read of the overall situation is that there is now broad consensus that something is not right, and that ultimately at some point in time, will have an effect on the competitive environment.
Next question, please.
Thank you. The next question comes from the line of Lloyd Walmsley from Deutsche Bank.
Thanks. Two questions. First, when Kayak went public, they reported two segments, search and advertising, and their advertising was over half of total revenue. Can you maybe talk through the puts and takes of how your sponsored listing and display ads compare and contrast to what they've done, and give us a sense for where you think this can scale to as a % of maybe 2019 revenue? Second one, a little more out there, but have you looked at price comparison in other segments beyond travel? We just saw GoodRx go public in the U.S. doing prescription drug price comparison, and they're doing EUR 500 million in revenue, 30% growth, 35% EBITDA margins. Curious if you've ever explored leveraging your strong user base and brand to move into other categories that may be less competitive and have more attractive attributes.
Yeah, sure. Thanks for the questions, Lloyd. The first question on the business opportunity for our sponsored listings and our display products. I think you're spot on. There is significant opportunity to increase revenues there. Of course, we also looked at competitors and realized that we were pretty much the only player that was just depending on CPC revenue and the core product. Whether we can reach the levels that Kayak has reached at the time of their IPO, I am not 100% sure, given that their business mix is much more skewed towards flights versus us, obviously, in accommodation. As far as I understand, the search revenues are stronger on the accommodation side. I would expect our share to lack what you've seen at Kayak, but we do believe that there is significant opportunity.
I'm not sure that right now is the right time to try to quantify the exact share, given that there is so much volatility in the market. At some point in time next year, I would hope that we have a better view on what the overall perspective is and potential is. Yeah, we are very bullish on the additional products, and that's also what we've heard as a feedback from our advertisers.
Yeah. Hi, Lloyd, this is Matthias. On your second question, that's a very interesting thought. Obviously, we have built our brand equity around travel for many, many years and have invested a lot into that. As a result of that, we do believe that we have a strong global travel brand. If you were to go into completely different fields, that would be a bigger shift for sure, and I'm not sure that the timing right now is perfect for that. Overall, we have a very lean setup. We have focused teams, and we are very excited about our opportunity in travel.
With all that, we have a full product pipeline and the team knows exactly where to work on and what to do, and that has been one of our key strengths in the past and how we made it that far, that we were always very focused and everyone coming here to work every day knows exactly where we are and where we want to be. I think that's also a key asset. Never say never, and again, I think it's a very interesting thought. Right now, I believe we should continue on exploring our opportunities that we do have with our strong product teams and with our strong global travel brand.
Okay. Thank you.
Thanks.
Thank you. The next question comes from the line of Doug Anmuth from JPMorgan. Your line is now open. Please ask your question.
Great. Thanks for taking the questions. Axel, I was just hoping you could give us some more thoughts on the brand campaign that you did in some European markets, and just curious how your messaging and then mix of marketing could potentially change as things hopefully recover more next year. Then also, can you just give us an update on your progress with alternative accommodations and how you're thinking about the path there going forward? Thanks.
Hi, Doug. Thank you. I will take the first question on the brand campaign, then Axel will talk a bit about your second question. Given the production lead time that you usually have, we had to decide in April already what kind of creative we would want to air during the peak summer season this year. If you remember how the situation was back then, our revenue was close to zero in April. There was a global lockdown, and nobody knew how Q3 would turn out. With that in mind, we decided to produce a much softer TV campaign in terms of messaging. That turned out to be a very good decision. We got very positive results and got some valuable learnings out of that we can now apply for our new campaigns.
I won't be more specific than that, but the key takeaway is that we have by now tested a few different concepts, and not only in Q3 this year, but we already started end of last year to test different formats and different campaigns to diversify away from our Mr. trivago campaign. There we also got interesting learnings, and this has been now a next step into another direction and was very valuable what we have. I think by now we have a pretty good understanding of what is working for us, and that will give us the flexibility to tailor that towards a new campaign in next year to whatever the market environment will be.
On your second question, alternative accommodation. I think you're absolutely right. We are very happy that we started to really focus and invest significantly into alternative accommodation end of 2017. For this summer business, our apartment coverage was very important, and it was very important to really have all the inventory available, given that a lot of the top nature destinations were, frankly speaking, just fully booked out, and you needed to have all the inventory that was available to show availabilities to your users and customers. For next summer, we expect a similar dynamic. With the market overall recovering, we think that the significant increase in share that is going to apartments will normalize to a certain extent. We continue to believe that even with a recovering market, apartments will be a key part of our overall value proposition and a key differentiator for us.
Great. Thank you both.
Thank you.
Thank you. We have one more question on the line. Once again, if you wish to ask a question, please press star one on your telephone keypad. The next question comes from the line of Kevin Kopelman from Cowen. Your line is now open. Please ask your question.
Hi. Thanks so much. On marketing trends, in the third quarter, you were able to reduce your marketing spend year-over-year significantly more than your revenue decline. Can you give us an update on those dynamics headed into Q4? Any change there with what's going on in Europe? Thanks.
Sure. Thank you, Kevin. Yeah, I think that's a very good observation. If you look at Q3, as % of revenue, our advertising spend was around 50%. Compared to what we've done historically, that is a very low number. That was predominantly the case because we only tested in Europe or invested in TV in our segment developed Europe, as we didn't see the same opportunities in other segments and were more cautious. Again, as I mentioned before, our key focus during the third quarter was to preserve our cash. On the other end, in Europe, we did see a decent pickup, also wanted to invest into that. That's on the brands marketing side.
On the performance marketing side, when we saw a pickup in demand, we also went back in and invested more, but also more cautious than what we have done previously. We have talked about it before already pre-COVID, we started a test in our performance channels where we increased our return on advertising spend targets to really see what the incrementality of that channel is for us. Now when we went back in, we had a similar approach, and we're running higher ROI targets than what we had before. Obviously, we benefited also from the fact that overall competition in those auctions still is lower than compared to pre-COVID. If you look at the fourth quarter and what it means for our investments in the fourth quarter, historically it's been a low quarter for us in terms of brand spend anyways.
As we approach holiday season, TV advertisement becomes more expensive. At the same time, demand for our product drops. We usually cut back. If you look at the situation in Europe right now and if you look at the data points that I gave, you see that on a global level in Q4, it's fair to assume that we don't expect to have a higher ratio of revenue in the fourth quarter as a share of 2019 levels than what we had in the third quarter. If you take that as a starting point and then look at the 50% we had in the third quarter in terms of advertising spend of revenue, you can assume that this will be not higher in the fourth quarter. That gives you a good idea of how we're approaching our marketing activities in the fourth quarter. Does that make sense?
Yeah. Thanks, Matthias. This is very helpful.
Great. Thank you, Kevin.
Thank you. There are no further questions at this time. Please continue. Thank you.
Yeah. Many thanks for taking the time to participate in our Q3 Earnings Call. Irrespective of the very challenging situation we are facing in many markets, we continue to see the crisis as an opportunity. An opportunity to face our travelers and advertisers with better products, an opportunity to become more relevant and grow our market share. This is what is driving us forward, no matter how long the winter will last. Many thanks for your time. Stay safe and see you next quarter.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.