Trivago returns to referral revenue growth, ticks four consecutive quarters of profitability

Trivago’s marketing and product optimization efforts in the past year are paying off as the metasearch site grew its referral revenue in June compared to one year earlier, while its advertising spend was lower in the same time frame.

The second quarter of 2019 was Trivago’s fourth consecutive quarter of year-over-year improvement in profitability. Net income for the quarter was €5.9 million, compared to a net loss of €20.7 million in the second quarter of 2018, while total revenue decreased slightly, to €223.4 million, compared to €235.0 million last year.

Trivago also saw a significant improvement in adjusted EBITDA in the quarter – to €18.5 million compared to an adjusted EBITDA loss of €17.7 million in the second quarter of 2018.

“We think that the last four quarters is now our revenue base as well as our profitability base, and from now on we expect revenue to grow, we expect absolutely our profitably to grow, but we also want to keep on investing so that we can accelerate growth over time,” says Trivago founder and CEO Rolf Schrömgens.

The number of qualified referrals declined by 26%, to 131.3 million, in the second quarter of 2019 compared to the same period a year earlier, spread nearly equally across the company’s three segments of the Americas, developed Europe and the rest of the world. But revenue per qualified referral, a reflection of the quality of traffic being referred to advertisers, jumped to €1.67 in the second quarter of 2019, up 28%, compared to the same period in 2018.

And this increase is coming in tandem with a drop in the amount Trivago is spending on advertising.

In the second quarter of 2019, selling and marketing expense decreased by €46.7 million, or 21%, year-over-year to €180.8 million, of which €169.7 million, or 94%, was spent on advertising.

This resulted in an improvement in ROAS - return on advertising spend, which is a ratio of referral revenue to advertising spend - to 129.6% in the most recent quarter compared to 110.1% in the same period last year.

“Specifically in our performance channel, we are trying to buy traffic way more targeted than we did in the past. We are buying less visits, but we are buying more qualified visits,” Schrömgens says.

“The second impact ... is the product improvement. We are trying to massively increase the engagement on Trivago. We try to engage people into doing their research on Trivago, give them more details around the hotel, more images, more reviews and also more details when it comes to rates, so that user makes more of their decision on Trivago before they go to an OTA and finally book.”

Schrömgens says in the second half of 2019, advertising spend will increase to draw more users to the improved product. So going forward, growth in adjusted EBITDA, rather than profitability, will be a more accurate metric of success.

Product development

Trivago has also changed bidding options in its marketplace to add more flexibility. In June the company launched the first two new bid modifiers – “time to travel” and “length of stay” – in test markets and is now rolling them out across the platform.

“When you have something like 'time to travel' you usually have high correlation with holiday hotels, holiday travelers and so on because they usually book way more in advance,” Schrömgens says.

“And if you have then a specialized OTA who is very focused on that travel and long stays, they are able to bid more aggressively than they were able to bid before because they have a very good user experience.”

Schrömgens says these new bidding dimensions are enabling niche advertisers to be more competitive and should ultimately improve the total number of bookings and also improve the user experience.

Revenue from Trivago’s two main advertisers – Expedia Group and Booking Holdings – remained relatively flat. Expedia accounted for 35% of revenue and Booking Holdings 39% in the second quarter of 2019, compared to 38% for both in 2018.

But Schrömgens says the company has seen movement from smaller, local OTAs.

“In several markets we have local OTAs that are currently gaining confidence in the marketplace and therefore being more aggressive, going in with higher bids,” he says.

Responding to a question from analysts about Trivago’s alternative accommodations inventory – which currently stands at 1.8 million units – Schrömgens says rather than adding more listings, the priority is to make the existing inventory more productive.

“One of our principles is aggregation and comparing prices, and comparing prices on a larger inventory base is generally more difficult because if the inventory is very long tail you have less overlap,” he says.

“What we are trying to do is to get more than one offer for alternative accommodations, to have a higher density of advertisers so that we offer a real price comparison and a real aggregation for our users. That is something we now want to also focus on. And then of course it’s not only aggregating prices, but it is also aggregating reviews, aggregating images and so on, so users can be sure that on Trivago they get the best overview.”

On July 9, Trivago announced it has hired James Carter, formerly a Google engineering director working on the Hotel Ads product, as its new head of hotel search.

When asked whether he has concerns about Google’s continual development of its travel products, Schrömgens says, “Google has to do that because I think their product, in general, their general search product, is not very suitable for travel. So if they want to stay competitive, I think they have to move. ... It’s been happening since 2010.

"I think it’s true that we are seeing this more intensely in the last two years. We have noticed that, and now this guy who does it for them works for us.”