Good day. Welcome to the trivago Q2 Earnings 2017 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Matthias Tillmann, Head of Investor Relations. Please go ahead, sir.
Thank you. Good afternoon, everybody. Welcome to trivago N.V.'s Financial Results Conference Call for the second quarter ended June 30th, 2017. I'm pleased to be joined on the call today by Rolf Schrömgens, trivago's CEO and Managing Director, and Axel Hefer, our CFO and Managing Director. The following discussion, including responses to your questions, reflect management's views as of today, August 4th, 2017 only. We do not undertake any obligation to update or revise this information. As always, some of the statements made on today's call are forward-looking, typically preceded by words such as "we expect," "we believe," "we anticipate," or similar statements. Please refer to today's press release and the company's filings with the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements.
You will find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release, which is posted on the company's IR website at ir.trivago.com. I encourage you to periodically visit our investor relations site for important content, including today's earnings release. Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2016. With that, let me turn the call over to Rolf.
Welcome, everybody. Thanks for joining our Q2 earnings call. We're looking back on a very busy quarter with lots of innovation in actually all areas of the business, marketing as well in our hotel search product and also in advertiser relations. I think we are very proud that we keep the organization vibrant and fast learning. The recent introduction of our new leadership model was a very good example of that. We are very happy that we can look back on a very strong quarter. The second quarter 2017 actually exceeded again our expectations in terms of growth. With 67%, we kept the strong growth ratio from the previous quarter, and we actually massively accelerated our growth looking at the same quarter last year. We have grown our revenue from EUR 179 to EUR 298.3 million.
Looking at the first half of the year, we have also grown 67% to a total revenue of EUR 565.9 million. In line with our strategy, we reinvested our profitability into further growth by still nicely increasing our EBITDA to EUR 3.2 million, up 32% from Q2 2016. Looking at the full first half of 2017, actually our EBITDA went massively up about 125% to EUR 22.5 million. Looking at our geographical diversification, we see that it's still ongoing. We have seen very strong growth in the rest of the world markets, and the segment itself increased to close to 20% of our overall revenue. Americas kept their share at about 39%, while Developed Europe still growing strongly, went down to 42% of our revenue. We were saying that already in the last earnings call, every quarter we will discuss one special topic in our earnings call.
Last quarter, we actually spoke about the new developments in our marketplace. This quarter, we will focus on the supply side and speak about our advertiser relations initiatives. The advertiser relations pillar is a part of the organization that fuels our search with content and rates. We believe that only if you are providing a really perfect search experience, or when you really want to provide a perfect search experience, you have to give users a full market transparency. They should easily see that they can book their ideal hotels for the lowest rate. Comprehensiveness of the offering is a huge factor, and we also think it's a huge differentiator. To be comprehensive, you have to collect all bookable rates from online booking sites, hotel chains, as well as from individual hotels and show them in a very simple to digest format.
If you're looking at our overall purpose, a strong motive in trivago's purpose is empowerment. We want to empower our users, we want to empower our employees, and we also want to empower advertisers. When we generally speak about advertisers, we refer to all categories. We're speaking about 180+ booking sites, we're speaking about the 230+ hotel chains, and also about the more than 11,000 individual hotels. To empower them, we provide them with expertise, with marketing tools, and with enabling technology. Examples on the large advertiser side are tools like trivago Intelligence, with which we democratize information around exposure, rates, and bidding. trivago Automated Bidding, where we help advertisers to find the best bid for each individual hotel, and trivago Express Booking, where we provide advertisers with a booking funnel technology that can compete with the large OTAs.
On the individual hotel side, we empower through tools like trivago Hotel Manager to manage hotels' exposure on trivago and to do their marketing on trivago. Base7booking, a cloud-based operating system for hotels, and also the new My Hotel Shop product to optimize online advertising. Our advertiser relations team managed over the last 12 months to massively grow the number of booking sites and hotel chains that offer their inventory on trivago. As a consequence, that led to the fact that we were able to increase the number of hotels listed on trivago by more than 86% to 1.8 million properties. In the same time, we were able to keep the number of rates per property very stable at around 10 rates per property.
Keeping in mind that we added foremost long-tail inventory, which usually comes with way less rates per property, that is way better than you could expect, actually. We achieved this by raising our rates inventory in the same time span by more than 97%. Looking at the nature of the added inventory, that means that we significantly increased the competition on our high-traffic hotels. Taking a closer look at the tools that we provide, we can see that our approach to support advertisers with technology for their booking funnel is getting more and more traction. We are able to create very positive cases in which we actually see how we can make small advertisers way more competitive than they have been in the past. The number of advertisers using Automated Bidding increased by more than 60% in the last six months.
Also the growth ratios for our tools for individual hotels developed very nicely. We have now more than 300,000 hotels directly registered for our free Hotel Manager tool, which represents actually an increase of 96% in the last 18 months. On a smaller base, our paid subscription product, Hotel Manager Pro, grew more than 300% in the same time. To summarize, our advertiser relations team really delivered on its mission. They were able to improve the search experience by increasing our hotel inventory massively. They increased competition on our marketplace by significantly growing the number of rates. They empowered our advertisers to be more competitive in the marketplace, and they improved massively the participation of individual hotels. Many thanks for listening to this small update, and I would now like to hand over to Axel to give you some more detail on the financials.
As Rolf mentioned already, the second quarter showed very significant growth at 67%, reaching EUR 298.3 million. We continued to benefit in the second quarter from the Relevance Assessment, and we reinvested profitability into growth. As a result, the adjusted EBITDA went up by 39%, reaching EUR 3.2 million in the second quarter. The net income in the second quarter was negative at EUR 3.4 million, an improvement from a loss of EUR 49.9 million the year before. Looking at the Return on Advertisement Spend, in the second quarter, we saw a slight decline from 115%-113%. In the first half of the year, it was flat at 117%. The adjusted EBITDA margin, so we saw a slight decline from 1.3% in Q2 to 1.1% in Q2 this year, whereas the first half showed an improvement of 3% to 4% in 2017.
If you look at our KPIs, Qualified Referrals grew by 59% in the second quarter, reaching EUR 196 million. The Revenue per Qualified Referral continued to benefit from the Relevance Assessment and grew by 4% compared to the previous year, reached EUR 1.5. The Return on Advertisement Spend, as I mentioned before, declined to 113%. If you look at Developed Europe, the Qualified Referrals increased by 34%, reaching EUR 82 million in the second quarter. The Revenue per Qualified Referral increased by 7%, reaching EUR 1.47. The Return on Advertisement Spend declined by four percentage points, reaching 124%, and was impacted by a mix effect through a very strong growth in our performance marketing channels. In Americas, our Qualified Referrals grew from EUR 33 million-EUR 52 million.
Our Revenue per Qualified Referral improved by 7%, from €2.08 to €2.23, and the return on advertisement spend increased by three percentage points to 117% in the second quarter. Rest of the world, we saw very strong growth in Qualified Referrals at 114%, reaching 62 million in the second quarter 2017. An improvement of 12 percentage points in Revenue per Qualified Referrals, reaching €94, and an improvement of five percentage points in the return on advertisement spend, showing a very strong brand after effect in that quarter. Coming to our guidance, we confirm our annual guidance of around 50% revenue growth and slightly improved adjusted EBITDA margins. We expect a deceleration of growth in the second half compared to very strong quarters in 2016. As anticipated, advertisers reacted to our Relevance Assessment at the end of the second quarter. As a result, the Revenue per Qualified Referral levels normalized.
This reaction has led to an improved user experience, which we expect to improve retention going forward. In July, we started to modify our traffic acquisition strategy to improve traffic quality and conversion. Initially, this will slow down our Qualified Referrals growth, but ultimately leads to higher Revenue per Qualified Referral. On the individual quarters, we expect the revenue in the second half of the year to be significantly more weighted to the fourth quarter. The adjusted EBITDA in the second half of the year will be to more than 100% coming from the fourth quarter. We are now open for your question.
Thank you. If you would like to ask a question, please press the star or asterisk key followed by the digits one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Brian Nowak of Morgan Stanley. Please go ahead.
Thanks for taking my questions. I have two. The first one is going back to the final weeks of June and what you saw in the cost per click bid normalizing. Could you just talk about what your expectations are on Revenue per Qualified Referral, region by region, or how to think about the potential of that in the guidance right now from what you've seen in June? The second one, Axel, just going back to your comments around optimizing performance marketing mix and the potential slowdown in Qualified Referrals. Can you just talk about what you're changing, where you're changing, and how you think about that impacting the model now and then over the long term?
Yeah, sure. The impact of the Relevance Assessment that we talked about last quarter already, we saw pretty much with the same effect in the second quarter. We expect the Revenue per Qualified Referral to basically go back to old levels. This positive effect that we had in Q1 and Q2 to go away for the full third and fourth quarter. That's to your first question. To the second question, Rolf, do you want to take that? Yeah. I think if you're looking at it from a more theoretical point of view. If you would ask, what is the ultimate goal of user acquisition? There can just be one answer to what should be the target. The answer is a lifetime value of a customer, right? That is what we have to optimize for ultimately.
The nature of our business doesn't let us do that because we don't have, of course, full data on that. Nobody has, but we are as a search in a situation where we basically have a long way to go there. What will happen over time is, of course, that generating more data, generating more learnings, we will always take a more long-term perspective on user value. Looking beyond the session, looking beyond the visit, and beyond the day users came to us, but taking a more long-term view on it. Taking a more long-term view also changes the mix. The more long-term we're looking at our performance channel, that must ultimately change the mix of our campaigns. That is something that we continuously do. We continuously try to get more long-term oriented in the way we acquire customers.
That sometimes leads to also step changes in our attribution. One of these step changes happened now with the third quarter. To add to that, just because, I think I didn't fully answer your question. Technically, what we assume as a baseline is basically the flat Revenue per Qualified Referral, by region. On a region level, this positive effect will go back. Will be again, more comparable to the previous-year period. Whereas we expect a positive impact, not in the third quarter, but in the outer quarters of the change in our traffic acquisition strategies across all regions.
Okay, great. Thanks.
We will now take our next question from Lloyd Walmsley of Deutsche Bank. Please go ahead.
Thanks for taking the question. First one, just following up on your last point you made on a step function change in attribution. Can you elaborate a bit on what exactly that is and clarify whether that is an attribution improvement in your own marketing or for your customers in terms of their spend on trivago? I guess, somewhat related, you seem to have managed to get OTAs to use property-specific landing pages instead of landing users on search results page, which is abnormal for their behavior historically on other channels. Curious, how you think about your ability to have gotten them to do that. Is it simply just the quality score, or are they seeing other benefits in their business? I would think they historically have liked to get people using their search, and then optimizing their landing pages to perhaps upsell users.
Curious, it seems like you've been able to enact a big change besides the pricing carrot and stick. I guess, what else do you think they're seeing as a result?
Okay. Thanks a lot for the question. Let me first answer on the marketing side question. When we speak about that we change our marketing mix, it's really our marketing. It's like how we acquire customers. What we do there is we taking always like a more long-term view on things. Right now, for example, we change our attribution model and looking now not only on bookings alone, bookings right now for us, the value generation, which is more bookings than for us revenue that we generate, play a larger role now in our attribution. Yeah. Not only the bookings that happen in the session, but also happen over a longer time span. Yeah. That is the change that we have, leading to in the short term, they have less revenue coming in, but more value generated.
Of course, the marketplace has to react to that more value that is generated. That happened in the past. It's always coming with a delay, but that is what we are assuming that will happen in the future. That is the marketing part. Regarding the landing page experience. I think there is a difference because we ultimately have to serve our users best, and we have to maximize the whole experience. We cannot look at a single advertiser. When a single advertiser optimizes their experience, it's a difference or it's not always optimal. The optimum can only be reached if we optimize the experience of the users on the whole marketplace. That might differ. The landing page there might differ. We have to incentivize our advertisers in a way that we optimize for the perfect marketplace experience.
That's what LPS, landing page score, is for. We try to make this a variable in the optimization of our advertisers. We're using different kinds of tools to do that. We also optimizing that and developing that further step by step. At the end, it's an optimization for user value, for user that comes to our marketplace and wants to get the perfect experience from that marketplace. For that, it's just like for the users, it's often annoying when they already decided for a rate on trivago, and then they are forwarded, for example, to a landing page where there are lots of results. They get maybe disturbed. They might even stay there, go to another hotel, but they don't find what they would expect from us.
We have to deliver them their perfect experience, meaning we have to do directly deliver them to their respective rate and know that they can really easily book it. I think that is something that we're trying to do here to optimize for our users and to give them the best marketplace experience and not individual advertiser experience.
Thank you.
We will now take our next question from Mark May of Citi. Please go ahead.
Thanks for taking my questions, and good morning. Just one clarifying question on your prepared remarks regarding second half EBITDA. I think the read-through on that is that you're guiding for an EBITDA loss in Q3. I just want to clarify that that's the right way to interpret your comment. Then in terms of the Americas segment, the slowdown in Qualified Referrals, I mean, still significant growth, obviously, but slowdown both on absolute and percentage terms. Wondering if you could comment a little bit about what's going on there, what you're seeing in those markets, and what kind of contribution are you seeing in LatAm, which seems like was probably pretty strong during the quarter. Thank you.
First question. You're right. We expect the adjusted EBITDA to be negative in the third quarter, then to be overcompensating that in the fourth quarter. Trends in Latin America, we don't disclose sub-segment information or even country-specific information. That is something we cannot comment on. In terms of Americas segment slowdown in Qualified Referral growth, I would like to make a general comment there. We manage the business on an annual basis, and we're still growing very, very fast. To purely look at quarters is sometimes a bit misleading as
you need to look at a bit, a slightly longer period there. I would caveat the development of the individual quarters, to a certain extent. In general, we still see a very positive development in Americas and across all the markets.
Is it possible to provide a little bit more commentary on what's driving the Q3 EBITDA loss? Is it TV or performance? Is it certain regions that you're pushing harder in? Any additional commentary there?
Yeah. On the comments that we made already, I guess what you have as an impact on the third quarter is the normalization of the Revenue per Qualified Referrals, which obviously has a top-line effect, but at 100% margin. That is something to keep in mind when looking at the third quarter. The second point is obviously the adjustment in the slowdown in Qualified Referral, and the subsequent increase in Revenue per Qualified Referral, which obviously has a negative margin impact in the short term as well. Your revenue comes down, but your traffic acquisition stays the same, there is just a time lag effect in the change of the pricing dimension and the volume dimension.
Thanks.
We will now take our next question from Douglas Anmuth of JPMorgan. Please go ahead.
Thanks for taking the question. Can you guys just talk a little bit about Europe in 2Q specifically and just the drivers around the lower ROAS year-over-year and kind of specifically more on what you did with TV and the performance marketing shift that took place. Also, it looks like your related party spend, just as a percentage of revenue, is down a few points from recent quarters. Can you comment on that around Expedia and if there's something going on with them or perhaps some of your other advertisers stepping up more? Thanks.
On the second quarter in Europe, the return on advertisement spend has come down. The reason for that is that the investment into growth is faster in a way, and it is easier to scale in performance marketing channels. We scaled up our investment, but the impact of that scaling up the investment in the second quarter was more immediate in performance marketing. As a consequence, the share of performance marketing channels in our traffic mix and spend mix increased. Given that their profitability is lower than in the branded channels of a lot of different auctions. In a way, it just shows the end result of the marketplace.
Okay. Thank you.
Our next question comes from Kevin Kopelman of Cowen. Please go ahead.
Hi. Thanks a lot. Really just a couple of follow-ups. The first one is when we think about EBITDA in the fourth quarter and I think that looks like it's going to be higher than it maybe was expected earlier. Is that driven more by returns from the ad spend in the third quarter, given the new optimization, or is there a reduction in investment planned in the fourth quarter? Then I have another one.
I think when we spoke about the reasons why we see rather the third quarter coming in a little bit lower, and the fourth quarter higher, basically both are things that we recently introduced where we see rather short-term negative impact and long-term rather positive impact. That's true for LPS. Of course, we do LPS to, in the long run, see a positive impact from LPS. That's what we expect. Of course, we change our marketing mix because we expect also a positive impact on profitability. Otherwise, we wouldn't do that. Both comes with a time lag, and that's why you have a shift towards the fourth quarter. That's why we expect it.
Okay. Got it. That's helpful. Then, one more question. Can you give us any more color on the reaction of users since you implemented the Relevance Assessment, given that should have improved the user experience. What are you seeing?
It's still early, first of all. What we see is definitely a grown interaction. What we have seen in tests is also of course, like a grown retention of users. That's from the early test and that still has to be proven.
Okay, thanks Rolf.
Our next question comes from Peter Stabler, Wells Fargo Securities. Please go ahead.
Thanks. Two, if I could. First of all, I'm wondering if you've seen any impact in the market based on the changes by TripAdvisor. Any indication that there's more meta click supply in the market and that that's beginning to be reflected in bidding behavior? Secondly, hoping you could comment on the participation rate of individual hotels in the auction of the 310,000 who are now in Hotel Manager and the smaller group on Manager Pro. What are you seeing in terms of trends of participation rate? Thanks.
Okay. Looking at our top line, we don't see impact at all from what's driven by the DA. Looking at our visitor numbers, our branded visitor numbers, they seem not to be impacted. Currently, no positive impact on our side as well as no negative impact. We just see not an impact. We cannot prove that.
Coming to your second question, going through the different metrics. As Rolf has presented, we have significantly grown the number of users of our Hotel Manager basic version and the professional version. The way we think about it is basically a conversion funnel. In terms of participation of individual hotels in marketplace auctions, it's still early days, but we believe and we see that it is actually a long process where you first need to build a relationship, which is what we do with the Hotel Manager product. Then we invest into the online sophistication of the hotels, which we do through the Hotel Manager Pro. The third step is only a participation in the marketplace, which as of today is still, relatively speaking, limited.
We think that it will be very, very important in the long term and a great strategic asset in the long term. It is a process that takes some time, and it is important to basically build the funnel at each of these three conversion steps.
Thank you.
As a reminder, that's star 1 to ask a question. We'll now take our next question from Shyam Patil of Susquehanna. Please go ahead.
Hi, this is Brendan on for Shyam. I just have a couple quick ones. First, just how do you feel about your mix of hotels versus OTAs in the advertising business, and kind of where would you like to ideally see this mix over time? Then just one quick, unrelated one. With the EU ruling against Google Shopping, are you seeing any changes or expecting any changes in Google Hotel Finder, its hotel-related search offering, and maybe what kind of impact that could have on trivago?
Yeah, sure. In terms of mix of hotels versus OTAs, in a way, what is important for us is that the user finds the ideal hotel at the best rate. Whether that is coming through an hotel or an OTA, in a way, for us, they are all advertisers and participants in the marketplace. The share is more driven by their individual competitiveness and their profitability targets on our marketplace rather than anything else. In a way, for us, it doesn't really matter. We think that in the midterm, hotel chains that will invest or that are actively investing into technology will be able to become more competitive in online marketing. For us, it doesn't really matter who is actually winning the auction. On your second point, the EU decision.
Our read of the situation is that the EU is committed to ensure fair competition in various different verticals. In one vertical, they've proven that point and take a decision already. That decision is not applicable as of today to the other verticals, but we think that the direction of the commission is quite clear. I guess that is for us, neutral to positive because it will put more scrutiny on one of our competitors and ensure that we are treated fairly in the competition with that competitor.
Great. Thank you.
We will now take our next question from Heath Terry of Goldman Sachs. Please go ahead.
Great, thanks. I know you've gotten a lot of questions about the decline in ROAS, but one in particular that I just want to make sure we're understanding the right way, particularly with EBITDA turning negative in Q3. How much of that decline would you say is directly related to a like-for-like increase in the cost of ad units or conversions? We're obviously seeing the other participants in the space, Priceline, Expedia, step up their advertising spend. Is that simply just driving the cost on a per-unit basis up and impacting ROAS, or is there something else to it?
No, we see nothing of that, actually. When we're looking at the marketing side of things, we don't see the impact besides what we intentionally generate. What we intentionally generate is taking this long-term perspective where we exchange short-term revenue against long-term higher value creation. We wouldn't do that if we would not expect a higher value creation in the future than we lose revenue right now. That's the only effect on the marketing side. Besides that, we have the effect on the marketplace side through the LPS score. We have these two effects, and they basically are making up for the effect that we see now in the third quarter. We have not any indication that there's any other thing happening, that there's any other deviation from our plan that we have seen before.
Great, thanks. Then on the supplier side, can you give us a sense of sort of where your efforts are with the hotels themselves, particularly as the hotels continue to push more of the loyalty program rates to their base. Any success in getting access to those rates within the trivago sort, and can you give us a sense of what % of mix the hotel direct part of the business is, or at least qualitatively how that's growing?
We don't disclose numbers about the mix. Generally, the direct part is growing, we don't disclose any further details on that. The first part of the question was about loyalty rates. We see a high interest of hotel chains to get their loyalty rates on trivago. We also have efforts within trivago to offer these rates on trivago. That is a big project currently also in our advertising relations team, currently we still don't have these rates on trivago.
Great. Thank you.
We have no further telephone questions at this time.
Okay. Thank you. Thank you very much. Rolf, any closing remarks?
Yeah. Many thanks for joining the call. We are very pleased with our second quarter 2017. It's good to see that we maintain our focus and maintain our focus on long-term value generation, continuously reshaping the processes and really setting up the company for the years to come. We are very aware that there is a long way ahead of us and also that we have a lot to learn. On the other hand, we are very thankful what the super young team achieved during the last month. Thank you for your participation in the call, and see you next quarter.
Thank you. This does conclude the trivago Q2 Earnings 2017 conference call. Thank you for your participation. You may now disconnect.