Good afternoon, everybody. Welcome to trivago N.V.'s financial results conference call for the first quarter ended March 31st, 2017. I am 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, reflects management's views as of today, May 15th, 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 filing 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 relation site for important content, including today's press 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. Many thanks for joining our second quarterly earnings call. We are very happy to announce the results of what we think was a very strong quarter. The first quarter 2017 actually exceeded our expectations in both growth of revenue and growth of profitability. With +68%, we have grown our revenue nearly in the same pace that we have grown last quarter. Actually, we accelerated our growth ratio from the same quarter last year, and we have grown our revenue from EUR 159.4 million to EUR 267.6 million. In the same time, we have grown our EBITDA from EUR 7.7 million to EUR 19.3 million, and this 151% growth ratio is based on basically three factors. First, the continuous improvement of our baseline of loyal customers. Second, the payback of our higher investment in the last quarter 2016. Third, the slight improvement of commercialization.
It was not only financially a strong start into the year. We are also very pleased that with our first month as a public company we see that more and more people realize what we are up for and really want to be part of it. If you just look at the first quarter alone, we had more than 15,000 applications for people who wanted to work with us from around the world. As we discussed last time, every quarter, we want to pick a special topic and we already referred to recent changes in our marketplace algorithm during the Q4 2016 earnings call, and we talked about the higher commercialization on our platform. Some of you guys asked for some more details on this topic, which we are happy to provide you today.
In the past, we have constantly optimized our marketplace by introducing new dimensions that help to, on one hand, increase the flexibility and on the other hand, the efficiency for advertisers and at the same time improved our user experience. For example, we started with a CPA model in 2016 basically because we wanted to onboard the advertisers easily. We were convinced from the very beginning that advertisers should have an incentive to learn and improve their product, we switched to the CPC model in 2008. We constantly improved the CPC pricing, resulting into a free marketplace and Hotel level bidding beginning of 2015, and with a relevant assessment of the booking funnel right now, we introduced or in the end of 2016, we introduced another dimension to that.
If we go back in the history of trivago, it's important to say that we always felt responsible for the end-to-end user value creation. We have never really seen trivago as a pure traffic channel, not caring where the user at the end ends up and after he leaves trivago. The experience on the side of the advertiser is part of the trivago user journey and therefore also part of our service. For many years, our solution to secure this was rather simple. We defined pretty clearly what kind of landing pages we expect from the advertisers. An advertiser who did not want or could not comply with our expectation was not allowed to participate in the marketplace. This came with several problems. On one hand, advertisers were not able to join the auction if they were not changing the landing pages.
On the other side, existing advertisers did not really have the chance to test the landing experience and find better solutions. Sometimes advertisers were even finding ways around our specifications, they created inefficiencies in the marketplace and inferior overall user value. With the new dynamic relevance assessment of the booking funnel, we give advertisers the flexibility to adapt their landing pages, at the same time, the relevance factor becomes a variable in their optimization. With this, actually we became pretty agnostic of how booking funnels would look like, we still secure the maximum overall user value on trivago. We really believe that this is a natural extension of the free marketplace, allowing each individual advertiser to optimize, making the overall value creation a guiding principle.
To sum up, the advantage for the user, among others, is to get a really optimized experience throughout the booking process and across the advertisers. The advantages for the advertiser are an easy access to the platform and more flexibility in optimization. Throughout the company, it's always our goal to create self-learning systems, we think that if this is fully rolled out, at the end, it will be another good example of this. Looking at the early indicators, we have seen already some improvements in revenue per qualified referral. This effect is very comparable though to the volatility that we have seen after the introduction of the Hotel level bidding in 2015. We are optimistic that we will see positive long-term sustainable effects. Still, looking at the current revenue per qualified referral, this is just an early indicator.
Thanks a lot for following me through that special topic. I know it's not always easy through that. I'm happy to answer more of your questions later on, but for now I would hand over to Axel for some more details on the financials.
Thanks, Rolf.
Pardon media interruption, this is the operator. Mr. Hefer, we can't hear you at the moment.
Okay, I'm sorry. Okay, let me try again. Total revenues in the first quarter reached EUR 267.6 million, an adjusted EBITDA of EUR 19.3 million. As a result, our net income in the first quarter 2017 reached EUR 7.7 million, compared to a loss of EUR 0.1 million in the first quarter of 2016. The return on advertisement spent increased from 120% in the first quarter 2016 to 121% in the first quarter of 2017, and the adjusted EBITDA as percentage of total revenue went up from 4.8% in the first quarter 2016 to 7.2% in the first quarter of this year. If we now look at the development of the KPIs on a company level, the qualified referrals grew by 60% across all regions. The revenue per qualified referral increased by 4%, impacted by the higher commercialization, as Rolf elaborated on.
As a result, ROAS went up as well, 120% to 121%. If we now turn to Developed Europe, revenue per qualified referral increased by 6%. The ROAS increased by three percentage points, 136% to 139%, we partially reinvested the improved commercialization into higher growth, which resulted in a 35% growth of qualified referrals, Q1 2017 over Q1 2016. In Americas, growth of qualified referrals of 65% year-over-year, 7% revenue per qualified referral improvement, again, driven by better commercialization, the ROAS improved from 116% to 118% Q1 2017 to Q1 2016.
In our Rest of World segment, the year-on-year growth of qualified referrals was at 115%, driven by very strong growth across the region, in particular by the scaling of Japan, India, and Russia. The revenue per qualified referral improved by 6% Q1 2017 to Q1 2016, the profitability of the segment improved by eight percentage points, so 96% to 88% in 2016, driven by the revenue per qualified referral and the brand after effect through the scaling of the business. Let me now turn to our guidance for 2017. First comment that I would like to make on revenue per qualified referral. We expect that the positive effect that we saw in Q4 and Q1 will be partially mitigated in 2017. As a consequence, we expect the revenues for the overall year to grow around 50%, the adjusted EBITDA, as % of total revenue, to slightly increase.
In terms of seasonality, we expect the share of the revenue that is coming from the first and second quarter to be slightly higher compared to 2016, the share of the revenue coming from the third and fourth quarter to be slightly lower than in 2016. In terms of adjusted EBITDA, we expect the first quarter to have a higher share of the total adjusted EBITDA of the year, a significantly higher share, the fourth quarter to have a slightly lower share, again compared to 2016. Now we are opening up for questions.
Certainly. Ladies and gentlemen, if you would like to ask a question, you may press star one on your telephone keypad. Please make sure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Once again, you may press star one to ask your question. Our first question is coming from Brian Nowak from Morgan Stanley. Please go ahead. Your line is open.
Thanks for taking my questions. I've got two. Actually, you mentioned the benefits of the commercialization to be partially mitigated throughout 2017. Can you just talk about why it's going to be mitigated, and are there any other puts and takes that we should think about in the course of the year on revenue per qualified referral as you go over the course of the quarters? The second one, just to go to the commercialization, are you seeing user conversion improving, and can you talk to what's driving the improvements in conversion? Thanks.
On the mitigation, we overall assumed flat revenue per qualified referral on a regional level when we did our budget for this year. The positive effect that we've now seen in Q4 and Q1 on a regional level, as Rolf said, is partially driven by higher volatility and by the initial introduction, and we expect that positive effect to be partially mitigated. Yeah. In a way, the quarter over previous year quarter increase to come down. In addition, obviously we will see a mix effect between the different segments, because rest of the world is growing faster than, for example, developed Europe, and that has an additional impact. On the conversion, we don't see a significant change in conversion on the platform. Yeah, we don't see a significant change in conversion on the platform.
Okay.
Sorry, maybe I can just add a little bit color to that. The effects that we currently see in conversions are as not expected, because we have this volatility. Right now, rather in the first step of the introduction of this change within the marketplace, you would always assume a change rather in take rate, yeah? This change will hopefully then, in the long run, turn into a change in booking conversion because you optimize the booking conversion of the whole marketplace. That's what we expect.
Okay, thanks.
Our next question is coming from Lloyd Walmsley from Deutsche Bank. Please go ahead. Your line is open.
Thanks a lot. I had a couple on this new dynamic booking funnel relevance assessment. I'm trying to get my head around it exactly. Are advertisers using more data from trivago to optimize their landing pages on their own website? What exactly are they doing? Is there like a two-way data exchange? Do you give more data to help them optimize? They give more data, obviously, back to you in order to assess that conversion. Just wondering if you can elaborate a little bit more on exactly how this works. Some of your bigger partners are pretty secretive about their data. Curious, how broadly are you seeing this adopted, in particular among the larger players? If I can, you just mentioned conversions, and you don't think it's going up, but it sounds like that's the whole idea behind the relevance assessment.
Maybe you can just explain, maybe there's a time lag. Any color you can give on why this might be not driving conversion would be really helpful.
Yes. We see that we have even more exchange with our partners and more data exchange with our partners. That was also one of the reasons, because, of course, in the moment where we don't share or the partners don't share with us this data, we basically have to come with more basic hypotheses around it. We have to find indicators to basically assess the value creation on the advertiser side. In the moment where they deliver us more information, it's also, for us, easier to really get a better idea of what is the total value creation. That's a high incentive for our advertisers to share even more data with us. On the other side, we're sharing more data with them regarding the total value creation.
They see that when they do something on their website, which might even positively improve their booking conversion, but negatively improve the conversion or negatively affect the conversion of the whole marketplace, we feed them this data back. This is still in a very early stage. It's a quite complex thing, it's not very easy. We are currently in the early stages of this, and the system is currently still to a part rather rule-based or hypothesis-based, and we use data basically to continuously learn and improve it. Ultimately, we are very confident that we will be able to create a self-learning system, basically, that is self-learning to optimize the overall value for the user. That's the goal: optimize the overall value for the user so that everybody basically the cake gets larger. Everybody, we have more to share.
We see a quite high rate of adoption. That said, we are positive about the long-term effect of this. Otherwise, we would, of course, not do it. We are always trying to make the marketplace more liquid, create more dimension, take inefficiencies out of the marketplace. We think that is another thing to take inefficiencies out of the marketplace. If you take inefficiency out of the marketplace, the overall commercialization should go up. That's the goal. Still, this will be, of course, a development over time. It involves not only us, but it involves also all of our advertisers. Some of them are faster, some of them might be slower with their adoptions. It will, again, be a process over the next quarters and next years.
We are not yet fully sure when we will see the full effect of this, but it will rather be a long-term thing. I think what we should not look at the data right now and say, "Okay, the effect that we see right now, that's already fully the effect." This effect will get stronger and stronger over time. Right now, we have some volatility in there in these numbers, but we are very positive about the long-term positive effects of it, of course.
Let me just add one point to make sure that we don't have any confusion there. When I said we don't see a change in conversion, that is basically was a comment for the first quarter and the fourth quarter. In the long term, obviously, we expect an improvement in conversion through the optimization of our advertisers.
Okay. Thank you.
Our next question is coming from Douglas Anmuth from JPMorgan. Please go ahead.
Thanks for taking the questions. Wanted to ask you about your advertising spend. You stepped up TV spending more in the fourth quarter, and it looks like you also spent at least ahead of what we were thinking in 1Q. Can you just talk about your TV strategy in particular as you're heading into the busiest travel period? Second, was hoping you could just comment on whether you're seeing any pickup in activity from hotel suppliers themselves in terms of advertising, and if you could talk about your efforts on that side. Thanks.
From our side, first of all, we can see that our strategy to invest more into the fourth quarter, that this was paying out. That is also, you can see the brand after effect also on the profitability of the first quarter. We had higher investments into TV in the fourth quarter. We see some of the results today. We generally also, in the last quarter, we said we want to invest more in those quarters where we had a rather low seasonality in the last year, and we want to balance out the spend seasonality a little bit more. That's also what you can expect from us in this year, that we will balance it a little bit out better.
We will probably not spend as much, relatively as much, in the third quarter or end of the second quarter and the third quarter than we've spent last year. We don't see right now that the competition is picking up. We have been able also to invest more. I think that's what you're referring to, invest more in the first quarter. That was also, of course, driven by our learnings that we still have seen in several markets, still have seen that we can invest more, that we can be more aggressive, that the marginal benefit from investing into brand is also paying back in the short term, and that was motivating us to also rather spend a little bit more.
Any comment on the hotel suppliers themselves?
Actually, I don't have this data right now here, but I would not know that there's any significant change in the competition from our suppliers.
Okay. Thank you.
The next question is coming from Mark May from Citi. Please go ahead.
Thank you. Just on the topic of your efforts to continually innovate your bidding platform, any changes that you plan on introducing over the next foreseeable future, say, over the next year, for instance, mobile-only bidding? If so, what impact do you see those sorts of things having on RPQR? Second question, in the quarter or over the last three to six months, have you seen any interesting new advertisers join the platform or notable changes in spend by some of your top advertisers in the quarter? Along those lines, maybe if you could update us on the mix of Priceline Expedia? That'd be helpful. Thank you.
As the first part was dimensions on the marketplace.
Yes
develop over time. We think that you really have to be careful with introduction of new dimensions to the marketplace. It's always causing kind of disruption, so the advertisers have to adapt. They have to learn. There's different speed of learnings of advertisers. Even if you see a quite high adaption rate in the beginning, basically, it takes you also a while until you go through the long tail of advertisers. We have realized that over time, we want to be careful with introducing new things continuously. We also don't want to stretch, basically, their acceptance of those new dimensions. That's why for right now, we don't expect to add a new dimension.
We don't see currently such a pressure to introduce the mobile versus desktop dimension into the marketplace, because we see that we went through the conversion to mobile very far already. The majority, if now, of the leads are generated on mobile devices, and that also the development that you have seen last year continues. There is a constant transition towards mobile, and we don't see that there is a lot to come right now. We see that the current system works. There's also always some negatives with introducing the mobile dimension because you would have an inconsistent user experience. We're very careful about user experience. Right now, there's no intention.
There might be situations when also when the advertisers are more experienced also about the spill effects of the advertising on trivago, that we then also integrate mobile as an additional dimension, because of course, there's always inefficiency, and we want to avoid inefficiency in the long run. That was the first question. I think the second question was, are there any new advertisers? Yes, we have, for example, seen Agoda coming back in their core markets. I think that was something that about a year now. It's a staged process, so they went back in, I think, in the Q4 last year, but not in their core markets. Now they are, I think, back globally, across all markets, so that's definitely a new strong advertiser for our platform that also increases the competition on trivago. Thank you. Did that answer your question?
Thank you. Yes, perfect. Thank you.
The next question is coming from Kevin Kopelman from Cowen. Please go ahead.
Oh, hi. Thanks a lot. Just had a couple of questions on kind of inter-quarter trends. First, can you tell us what kind of response you're seeing from the new spokesperson in the U.S. market? Secondly, as we think about the quarter, is Easter something that you see in the business as being kind of a relevant factor? Thanks.
On the new spokesperson in the U.S., I think it's a bit early to say, but the concept of having two different persons active in the same market is something that we've tested with success before. That is the reason why we are now rolling it out, and that's why we believe that it is a good concept and that it will be successful. Maybe let me add to that shortly. I think what's important to understand is really the concept of this spot, of this platform, is not really bound to a person, and that's what you see also worldwide. For example, I know that Tim became quite famous in the U.S., but this concept is not focusing on one person.
What we see, and I think that is something that we can share, and that's something what we see throughout the world, basically the star of this, it's not the person, it's not the spokesperson. The star of the spot is basically the concept and the way we approaching advertising. Yeah. I think that's something that we can see in the results. We want to be more flexible in the future. We want to be more targeted. Our idea is to create fully targeted spots. The more we want to go into targeting, the more it's important for us that we also have the flexibility in the spokesperson, because a different spokesperson also can address different target groups. That's very important. We want to really micro-target and be micro-targeting in our advertising.
Great, thanks. Just on Easter, can you just walk us through how Easter kind of affects the business? Thanks.
We don't see these strong effects. I think it's just thinking it's rather from the OTA side often coming in because the OTAs both always have the problem between the booking of a hotel room and when it's on their balance sheet. Basically when they invest into the booking and when it's coming back. We don't have that, right? For us, basically, the revenue is directly coming in. I don't see such strong impact for us right now.
Thank you.
As a reminder, ladies and gentlemen, you may press star one to ask a question. Our next question is coming from Heath Terry from Goldman Sachs. Please go ahead.
Great. Thank you very much. Just wondering if you could, to dig a little bit deeper on the Hotel Direct part of the business. Could you give us a sense at what rate that part of your revenue streams are growing, whether or not you've had any success in building relationships that are allowing you to show more of these direct booking rates in your rate tables? Also, to the extent that you're seeing any change in the rate of adoption or progress in the rate of adoption for your back-end hotel management systems for the independents that you work with?
The way we are approaching the individual hotels is that we have a three-step process. The first step is to provide a free-to-use tool, which is our Hotel Manager, where we increase the number of hotels using the tool to 280,000 end of Q1. The second step is then to convert the hotels to use a more advanced version, Hotel Manager Pro, which offers more data and more functionality, and is a paid version where we increase the number of subscribers to 30,000. The third step is for the individual hotels to actively participate in the bidding. As of today, the bidding component is small, but we see it as a strategic investment into the platform, and we believe that more and more hotels will actively participate going forward. As of today, it is not a significant part of the bids on the platform.
Looking at the revenue stream, I think it's important to say that you can always, if you're looking at the subscription revenue, you can only see part of the effect because the subscription revenue is basically just the additional fee that the hotel pays for having a Hotel Manager Pro account. What you do not see is the increased competition that we generate through the hotel bidding directly. That is another effect which you don't see, which is basically included into our referral revenue. You can only see one part of this. Still, the revenue that we've seen, the subscription revenue that we've seen, this is basically a way to fund our organization directly, going to hoteliers that is not intended to be a significant revenue stream. Our focus is clearly on the search.
We want to build the best search product, and that's why we're doing that. We just do this to build the best search product. We don't want to use this as a big additional revenue stream.
Is there a sense that you could give us where you're seeing, I guess if at all, participation or cooperation on direct booking efforts from the larger chains as well as Marriott, Hilton, et cetera, push direct booking?
We don't disclose that number.
Okay. Do you, and I'm not necessarily looking for the number, but just in terms of whether or not you're actually able to show those rates or are participating in any efforts that the hotels have to promote that part of their business?
Could you repeat that, please? I'm not sure I understood your question.
Sure. No, just the direct booking efforts that you're seeing from the chains, are you able to show the rates, or more able than you have been in the past, to show those rates to trivago customers, and promote those within your rate tables?
Yeah. We see constantly more chains adapting and showing their rate. Let's say they were always showing the rates. That's not the problem. The question is how competitive have they been with their rates? What we see is definitely that they become more and more competitive. One thing that we do there, and what we also want to motivate the big chains to do, is to use our Express Booking tool to improve their booking funnel to be more competitive. There, we have seen some very good results where the first chains go on to Express Booking and are able to significantly improve their booking conversion and significantly use that to up-spend on trivago.
Great. Thank you.
The next question is coming from Shyam Patil from Susquehanna. Please go ahead.
Hi. Thank you. I had a couple questions. There's been some data out there that suggests that there's a gap in the conversion rate between trivago and some of the leading e-commerce or leading travel sites. Just curious if you agree with that and what you see as the key drivers to close that gap over time. Second question, can you just talk about the competitive landscape? There's been some consolidation over the past several months. Just curious what kind of impact you guys are seeing, whether it's on advertising rates or in the business, generally. Thank you.
First of all, I would have to ask which kind of conversion you're referring to. What kind of version, what kind of delta are you speaking about? Because that's something I was not aware of.
Just traffic on your site, click traffic converting into actual booking for your partners.
I actually do not know where we are standing compared about other websites. I also don't believe that this is a number that you can really compare. That's also the reason why we came up, for example, with a revenue per qualified referral because it's always a question like, how many click outs do you have per user? I think it's a quite weak indicator, I would not know how to interpret that data. For me, we don't see that there is a big gap and that we have to close this gap or so. We try constantly to improve our booking conversion, of course. We have many initiatives in trivago, to rather keep people longer on trivago, increase the value depth of trivago, have people longer stay on trivago than go later to an advertiser.
This ratio, basically, this conversion ratio will change over time. It does not always ultimately mean that in the same amount or the same ratio, the revenue goes up at the same time. I think it's quite tricky to compare. I would not be able to compare us to the others.
Yeah. Just to add to that, in a way, I think you always need to look at the dataset of these studies, and we don't have, for obvious reasons, full visibility on the booking conversion of our advertisers and our competitors. What we do know, though, is that part of our business is basically derived from our own activities on other platforms, for example, our search engine marketing, and that we are able to compete on these platforms against other players in the industry, while being profitable. In a way, through the improved conversion that we add in through our website, we can pass on referrals to advertisers rather than going directly and competing with us on performance marketing channels. That, in a way, gives us comfort that we are competitive in the marketplace, but we don't have full transparency on everybody's booking conversion.
I think the second question was about competition or consolidation. Actually, we have not seen that much of a consolidation right now. That would be really significant for us. That is also not leading to different rates for us. Basically, I think you have to differentiate. First of all, there's a direct competition, and there we've seen maybe some consolidation, but they were not really significant for us. If you're thinking about Momondo or Skyscanner, where the vast majority of the traffic is flight or other product, but not hotel. That is probably not impacting us. On the other side, basically, when we buy media, for example, when we buy TV media, I think we're competing against everyone. We're competing also against the Procter & Gamble. It's not that we compete even against other travel players.
I think that it's not a direct competition, that's why we don't see the rates being influenced by this. We can also not see it on our direct channels.
Great. Thank you.
Ladies and gentlemen, as there is no further question, I would like to turn the call back to our host for any additional or closing remarks.
Yeah. Thanks everybody for joining us on the call today. Rolf, do you have any final thoughts?
Well, no. First of all, thanks again for joining the call. We are very pleased with our first month as a public company. Of course, we were quite curious of how being a public company might have an influence on the organization. Judging from the first few months, it's quite impressive actually how we have shown again and how the organization has shown again how fast it is learning, how fast it is adapting, and by still maintaining its strong values. We are really proud that we seem to have built an organization which is so welcoming to change. We really hope that this will hold on in the future. We are now very excited to go into the new season 2017. Yeah. Thanks a lot for your participation. See you in a couple of months.