Good afternoon, everybody. Welcome to trivago NV's financial results conference call for the fourth quarter and full year ended December 31st, 2016. 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, reflect management's views as of today, February 24th, 2016 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 comparison on this call will be against our results for the comparable period of 2015. With that, let me turn the call over to Rolf.
Yeah. We are very excited to welcome you to trivago's first ever earnings call. This is very new for us, but we always think new is good, new is learning, new is experiences, and we are very much looking forward to this. We are especially happy because we are looking back on a strong finish of an already very good year. Already in our 11th year, we maintained the very strong revenue growth. We have grown approximately 55% year-over-year to about EUR 754 million in revenue. Despite the higher costs related to our IPO, we were able to significantly also increase profitability with an Adjusted EBITDA of more than EUR 28 million. We see that we are continuously growing our user base and also becoming more competitive in all of our marketing channels. The growth trajectory is unbroken in all segments.
Let's say trivago becomes more and more a truly global company. For the first time in trivago's history, actually, the majority of revenue was generated outside of the core EU market. We did not only improve our financial profile, but we also made significant progress in key areas of our business. For example, we rolled out our Mr. trivago creative platform that enables us to steadily learn and optimize our campaigns to now more than 26 different markets. Part of our mission is also to find the ideal hotel, and thus we focus on personalization and semantic analysis. We built an expert team now in Amsterdam that only focuses it on improving our algorithms and building up knowledge about hotels. On the product side, we continuously improve and optimize the user experience. Our open and liquid marketplace allows us now to focus more and more on end-to-end value creation.
As this is our first earnings call, please give me the chance to shortly summarize some key facts about trivago. trivago was founded in 2015, and we have grown since 2007 profitably with just EUR 1.4 million external capital. After our two financing rounds in 2006 and 2007, we focused the business in 2008 and created our mission statement, which is actually unchanged since then. With our mission statement, we took three important decisions. First, we only wanted to focus on hotels, so we didn't want to do flights or rental cars or other products. The second important decision, we're only focusing on search. We don't want to be a shop. We don't want to sell room nights. We are not a community or a video portal.
The third was to conquer the position at the top of the funnel, to really build a brand that everybody knows and get people to us first. We think that this was basically the basis of our success. These were the muscles that we were building out over the last eight years. With our focus on continuously learning and improving, we expanded step by step throughout Europe, America, and beyond. Starting at point of sale, always with a low return on advertising, improving it over time, scaling and taking the profits then to speed up learning in other geographies. This also helped us last year to grow that fast and improve our profitability at the same time. Still, when we're looking at the market, we have to conclude that this can just be the beginning.
The hotel market is huge, it's growing, and only a third of that market is already online. Even looking at the current online market potential, our share is less than 5%, so we see a lot of headroom for us to grow, and we think that this also confirms our focus on growing and generating more revenue and generating more data to best solve the major challenges of the traveler. Here you can see basically the three major challenges for travelers that we want to solve. We see the first challenge is the challenge of choice. When you're looking at a destination, you are always confronted with such a huge number of options of hotels and accommodations. It's super hard and clumsy process if you really want to find the best place for you. Second, there's the challenge of availability.
Even if you found your ideal hotel, it still doesn't mean that this hotel is also bookable at the website we are currently looking at. The third is the problem of price, because even if you found your ideal hotel and it's bookable, you can still not be sure that you book it for the best price. What we want to do is we want to use our knowledge about hotels and accommodations to get users into their ideal place to stay. We want to give them an overview about all available hotels, and we want to empower them to see the different prices for the same room. Actually, they can decide where they want to book and for what price. Here you get an overview of the trivago structure, the trivago system.
When you're looking at our value chain, this chain is also a reflection of our organizational structure, which is actually divided into marketing, hotel search, and advertiser relation. All of these three areas have a very clear mission. First, we get users in through our unique and very analytical marketing approach, where we attract high-quality traffic to our platform. By leading users to their ideal hotel and our hotel search, we transform this traffic to clear intent to book a very specific hotel at a very specific advertiser. Last but not least, in our liquid marketplace of advertisers, we secure that we always get a fair share of the value that we are generating. Let me now hand over to Axel to take a little bit deeper look into the numbers.
Thanks, Rolf. During the fourth quarter, our revenue grew from EUR 99.3 million to EUR 169.2 million, which is a growth rate of 70%. That growth accelerated from the growth in the third quarter, where you saw a year-on-year growth of 55%. The total growth in 2016 was 83%, growing from EUR 493.1 million to EUR 754.2 million. Looking at the profitability at our Adjusted EBITDA for the fourth quarter, you see a slight decline from EUR 12.3 million to EUR 11.9 million, which is impacted by two effects. One is that we had a EUR 3.5 million expense in the fourth quarter that was related to our initial public offering and the corporate restructuring that we are going through. The second effect was an increased investment pace, which I will come to a bit later.
In the third quarter, we see a significant improvement of profitability from EUR 9.7 million loss in terms of Adjusted EBITDA to EUR 6.4 million profit. Even there, in the third quarter, you have a EUR 2.3 million IPO and reorganization-related expense. For the whole year, that means that, as Rolf mentioned before, the Adjusted EBITDA reaches EUR 28.2 million compared to a EUR 1.1 million loss in 2015. In terms of Return on Advertisement Spend, the key metric for our marketing efficiency, for the full year, you see an improvement from 113% up to 120%. You see the same trend in the third quarter where there was an increase from 105% to 115%. In the fourth quarter, though, there is a reduction in the Return on Advertisement Spend from 141% to 134%.
The reason for that is that we saw interesting investment opportunities in the fourth quarter compared to 2015, which is the quarter where in particular the TV advertisement prices are on a seasonal high, given that there is Christmas season in many markets, and in particular, commerce companies are bidding very high given that that is their peak season. But this year, we invested more and the first results of that investment are looking very promising. Looking at the Adjusted EBITDA margin in the fourth quarter, that came down from 12.4% to 7%. Again, keeping in mind the IPO-related cost, and for the full year, an increase from a 0.2% loss to a 3.7% positive Adjusted EBITDA margin. Let me just point out some highlights when you go through the 6-K that I think are worth commenting on to give you a bit of background there.
IPO-related costs, I mentioned them already. There we've got a total expense that you can see in the G&A line of EUR 5.7 million. The total costs that were incurred by us were EUR 11.1 million, of which EUR 5.4 million could be capitalized. The related party share service fee is worth mentioning. That is basically a non-cash expense that is shown in our books, which is reflecting the services that we receive from Expedia. The total number amounted to EUR 4.2 million for the whole year, of which EUR 600,000 were IPO-related and are actually part of this EUR 11.1 of the EUR 5.7 million IPO-related cost that I mentioned before. The reason why I'm pointing this out is that this EUR 3.6 million, in a way, headquarter management fee allocation that was coming to our books from Expedia is not pushed to the segment trivago in the Expedia reporting.
It's a structural difference in the way the numbers are shown, and that is, I think, very important to keep in mind, and particularly given the fact that we, for this earnings release and the next earnings release, we will have different timing of our release. That is a structural difference that will stay. We have to show this service fee, and Expedia is not showing it in the segment trivago. IPO proceeds, it's obvious. We had a net proceeds of EUR 207.8 million, which of course led to an increase in the cash position at the year-end. Share-based compensation is worth explaining.
We've got a total share-based compensation for the year of EUR 53.7 million, of which EUR 51 million were driven by fair value accounting treatment of liability awards, which is something that had to do with the way we historically structured the contract, actually, before we even considered going for an IPO. That is something that we don't foresee to continue going forward. Build-to-suit, again, is worth mentioning. We will move in, or we are planning to move in a new corporate headquarter in 2018, and that building is currently under construction. Unfortunately, when we signed that contract, we didn't check it for U.S. GAAP, so it did trigger a build-to-suit treatment. What that means is that we have to show the progress of the construction on our balance sheet. You see a EUR 30.9 million increase in PP&E and a EUR 30.9 million increase in liabilities.
The P&L effect that you see is a non-cash effect of EUR 1.7 million land lease expense, the term for it. Basically, of the lease payment that will commence in 2018, a fraction is assumed to be for the land, and that land portion is spread out across a longer time period because given that the building is under construction already, in a way, it is assumed that we rent the land already. Again, that is worth keeping in mind. It's a non-cash event, but it is included in our G&A numbers. There are more details in the back of the presentation, which we will not go through right now, but which will be online. There is commentary on there, which we hope is helpful. Now going one level deeper into the different KPIs in the business segments.
Overall, if we look at qualified referrals, an acceleration of growth, and more or less equal distribution of the absolute growth in terms of qualified referrals with 36%, 31%, and 33% coming from developed Europe, Americas, and rest of the world. Looking at Revenue per Qualified Referral, there is one effect that we talked about during the roadshow as well. When we introduced the marketplace in the first half of 2015, there was a temporary increase in commercialization Revenue per Qualified Referral. Why was that? That was basically by opening up the auction on an individual hotel level, we saw that the expensive, so high booking value hotels were coming to the top of the sorting, which helped the commercialization but led to a situation. Overall, it was positive for us financially, but the booking conversion went down.
That means that more and more of our users could not find what they were looking for. Analyzing that development, we recalibrated our sorting algorithm and adjusted for that. You see a bit of a peak in a way in the commercialization and the first and second quarter in 2015, which of course still has an impact on the full year comparisons. When you look at the third and the fourth quarter, we have a slight decrease and a slight increase, a more or less stable Revenue per Qualified Referral on an overall basis. Looking at the Return on Advertising Spend, I commented on that already. As I said, there were interesting investment opportunities in the fourth quarter 2016 compared to 2015, and that led to an increased spend and a reduced profitability in the fourth quarter.
Early indications are that that was a very wise decision. Looking at developed Europe, similar trend, an acceleration of the growth in the fourth quarter to 42% in terms of qualified referrals. Stable Revenue per Qualified Referral in quarter three and quarter four. As I mentioned on the overall business, an impact on the Return on Advertising Spend in the fourth quarter through the increased investments. Turning to Americas. Again, strong growth across the region, U.S., Brazil, and Mexico all significantly contributing to the absolute growth in qualified referrals. In terms of Revenue per Qualified Referral, there are two points to point out here. One is the U.S. dollar impact. There was a strong movement in the U.S. dollar/EUR exchange rate, which led to a translation effect that we estimate to have an impact of around 5% on the Revenue per Qualified Referral metric.
The second thing that we see, and particularly in Americas, is that there is an improved commercialization, which leads to an increase in the Revenue per Qualified Referral. This happens frequently, because we continuously optimize our marketplace algorithm and try out new things. Having said that, it takes some time to see whether actually these effects are temporary or not. We take it with a grain of salt and don't readjust our view on that business, and would like to see that improved commercialization for at least a second quarter, if not a third quarter, before we would change our view. It's very difficult to forecast whether these changes are temporary or lasting. Return on Advertising Spend, the trend continued, basically a strong improvement in our baseline traffic, which boosted our profitability across the region and the quarters. Rest of the world, very similar picture.
Strong growth driven by Japan, India, and Russia moving from a testing phase to scaling stage, where we start to invest significant EUR amounts on television, in particular. Revenue per Qualified Referral, pretty much stable in the third and the fourth quarter, and Return on Advertisement Spend increasing as a result of an increase in the baseline of direct traffic in the various markets. That brings me to our guidance for our 2017. We expect the revenue growth of the financial year 2017 versus 2016 to be 45% or higher. We expect the Adjusted EBITDA margin to remain flat, to slightly increase versus the margin in 2016. The long-term profitability drivers are intact. We still believe in our long-term profitability target.
Key investment areas are, as they have been in the past, advertisement, the growth in particular in the markets where we just entered the scaling stage and where we are still in testing phase. Of course, investment into the talent pool, in particular here in Düsseldorf. Adding to that, I would like to make two comments on the seasonality pattern, given that we only give annual guidance. The revenue distribution in the fourth quarters, we expect in 2017 to be similar than 2016, with a slightly higher share of the first and second quarter compared to 2016. In terms of Adjusted EBITDA, we, in principle, expect a similar distribution between the different quarters of the annual target as in 2016, with one slight change. As I mentioned before, the increased investment in the fourth quarter seems to have been a good idea. First indications are promising.
We expect the share of the fourth quarter to further go down and the share of the first three quarters to increase.
Yeah, thanks a lot. Let me summarize. We are really happy to be able to start a story with such a strong year, and an even stronger quarter. I think that shows that we are still able to grow even our most developed markets with growth rates plus 40%. We truly believe that going public was for trivago just a start. We are happy to receive your questions now.
Thank you. If you'd like to ask a question at this time, please press star 1 on your telephone keypad. Please ensure that the mute function is unblocked. Again, if you'd like to ask a question, please press star 1. We're now taking our first question from Brian Nowak from Morgan Stanley. Please go ahead. Your line is open.
Thanks for taking my questions. I have two. The first one, I apologize if it's a simple question, Could you just explain the commercialization issue a little bit more in detail, what happened, and is that one of the drivers of the U.S.? I guess the U.S. revenue and qualified referrals were light, but the ROAS was better. Just talk about commercialization and what happened in the U.S. in the quarter. Then bigger picture, if we step back, how do you think about the mix of your business over time between branded SEM and SEO to get to your long-term target margins? Thanks.
Let me just repeat the question. The question is, what the details are behind the comment on the improved commercialization in the U.S. and whether that is in effect, we only see in the U.S., but also in the other markets. As I said, we continuously are optimizing our marketplace algorithms, there are many small things that we continuously do. It's a bit difficult to give you the technical detail. Some of these tests show a lot of effect in the short term and then normalize over time as there is just an initial reaction of the advertisers and then they get used to it in a way, then the bidding is normalizing.
Some of them have a lasting effect because they overall improve the liquidity of the marketplace, as a result, improve our commercialization, which is just another term for our share of the overall value that we are creating. The marketplace algorithms are global. Absolutely, thanks for pointing that out. I think I didn't make that clear enough, in the changes there and the tests we have been running in the fourth quarter, the effect that we saw was just greater than the U.S. That is not uncommon that you have different reactions in different markets, given that the structures are very different, the competitive dynamics are very different by platform, by market. That is something that is typical.
Yeah, in this case, as I said, in Americas, the effect was greatest, but we are still conservative to see whether that is really a lasting effect.
Yeah. Let me take the second part of that question. We generally do not disclose the shares of the different channel in our marketing mix. I can say that we have not seen any significant changes in the last quarter. Besides that, we just natural through seasonality, and we don't expect that in the short term.
Okay, thanks.
We're now taking our next questions from Douglas Anmuth from JPMorgan. Please go ahead. Your line is open.
Great. Thanks for taking the questions. Two, I wanted to ask. First, can you guys talk about ROAS trends? If we think about Europe, for example, and some of the more mature markets, also some of the markets within that mix that are not quite at those levels. Can you talk about how some of those ROAS trends are going? Secondly, do you think 2017 is a year where we would see bid dynamics evolve at all, as you see the potential perhaps for more differentiation across devices or based on deeper audience from targeting or even local currency? Thanks.
Okay. Let me just repeat your question to make sure that we properly understood it. The first question was whether you could comment on ROAS trends across the markets, but in particular in the more developed markets in developed Europe. In terms of ROAS trends, we think it is better to look at the annual trends because the quarters tend to be slightly different and the cutoff points are slightly sometimes having an effect there. In general, we see the trend that we discussed on the roadshow intact. The markets, the more they develop, trend upwards. The drivers of that are twofold. One is that the time lag effect of the TV advertisement is kicking in the more a market develops.
The second one is that we continuously develop our loyal user base, which increases the direct baseline traffic, which has a positive impact on our overall profitability. We don't see any change to that trend. With the exception, as I said, that the seasonality we think will slightly change given that the test that we did in the fourth quarter looks very promising. We will probably almost slightly change our seasonal investment profile, but that should have a positive impact on the annual development. The second question that you raised was, whether we could comment on the marketplace dynamics 2017, and in particular, whether we would open up the marketplace to bids by device or bids by audience or into different currencies. Let me start with the different currencies. The bids are in euros, but can be updated every day.
De facto, that is a bid in local currency. It is just the way it is uploaded, given that you can change it every day. You, as an advertiser, really take the currency movement risk intra day if you're updating every day. There, I don't really see the benefit, and we don't get any requests in that dimension. I don't think that is anything that we will do going forward.
In terms of audience and devices, we continuously test various different things, but I don't think that we are in a position. We haven't taken any decision there, but we're continuously testing various different dimensions.
Okay. That's helpful. Thank you.
We're now taking our next question from Lloyd Walmsley from Deutsche Bank. Please go ahead. Your line is open.
Thanks. Two, if I can. First, just following up on Brian's question around commercialization changes. Hoping you can give us a bit more color on what drove that. Was that something like a higher number of clicks per user that drove the higher RPQR, or more of a change in sort order or something that drove the auction dynamics? Anything more you could share there would be helpful. Then a second one. Curious if you think that getting hotel loyalty prices distributed to trivago is something that would be helpful for your customers or something that you're talking to hotel chains about at all. Anything you can share there would be helpful.
Yes. To come to your first question, a bit more detail on the commercialization, whether that was driven by more clicks. When you look at the Revenue per Qualified Referral, really there are three drivers. One is the booking conversion, second one is the booking value, and the third one is really our revenue share, which we describe as commercialization. That in the short term can be influenced by triggering more clicks, but is very quickly then adjusting as long as the booking value behind the clicks is not going up in line. Otherwise, the profitability of us as a channel for advertisers would come down, and they would adjust their bids.
The test that we are doing there are more targeted at increasing the liquidity of the marketplace, because the more liquid it is, the fairer in a way our share of the overall value that we create is. The way to think about that is more to optimize the algorithm in a way that every advertiser is well-equipped and has a fair opportunity to participate in the marketplace. Can you repeat the second question?
The second question was about the hotel loyalty pricing. Is there an opportunity to get that distributed to trivago, and do you think that's something that would help and something you're talking to the chains at all about?
Yes. I think generally, our goal is to get full transparency about all deal-related factors, loyalty rates are of course also deal-related factors. We always push our advertisers to provide us more and more of this data. Sometimes it's a technology, most of the times a technology issue on the other side. We are continuously working on improving that, and we see a continuous improvement on our side. Still, we have to have a specific market coverage. Even if we see that already happening, we have to have specific market coverage to open that feature up to all users.
Okay, thanks guys.
We're now taking our next question from Jake Fuller. Please go ahead. Your line is open.
Hey, guys. Question in general on the margin side of the equation. In some of your most mature markets where this advertising strategy has played out, do you have markets that are at or above your mature margin target?
Jack, the question was, do we have markets that are above our long-term profitability targets?
Yes.
Yes.
Would you be able to say how many or which ones?
No. Unfortunately not.
Thought I'd give it a shot.
Yeah.
Thank you.
Worth a try.
We can now take our next question from Kevin Kopelman. Please go ahead, your line is open.
Hi. Thanks a lot. Can you give us an update on mobile usage trends and also maybe any early feedback from some of the features like price alerts and things like that? Thank you.
Yeah. I think trends are continuing. We see the trends towards mobile constantly continuing. Of course, the growth rates of the shares are not like in the years before. That I think is a natural global trend, and I think within that trend also our mobile, the part which is mobile is growing, it's growing over proportionally because we also stronger invest into app marketing because we see that is a very profitable channel for us. We see these trends continuing. I can't give you right now an update on the price alert feature and how much that impacted us. It's a feature that we constantly improving and we're still focusing on.
Okay, thanks.
As a reminder, if you'd like to ask a question, please press star one. As there are no further questions in the queue, I would now like to turn the call back over to the speakers for any additional comments.
Yeah. Thanks a lot again. Thanks a lot for joining this call. We were very excited at the beginning. Hopefully next time we can play this more cool. Yeah. Hope we see all of you again like in about three months, I think. Have a great weekend.