trivago N.V.

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Trivago Q4 Earnings Call 2022. At this time, all lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I must advise you, the call is being recorded today, Wednesday, the 8th of February, 2023. We are pleased to be joined on the call today by Axel Heffer, Trivago's CEO and Managing Director, and Matthias Tillmann, Trivago's CFO and Managing Director. The following discussion, including responses to your questions, reflect management's views as of today, Wednesday, February 8th, 2023, only. Trivago does not undertake any obligation to update or revise this information. As always, some of the statements made on today's call are forward-looking. typically preceded by words such as we expect, we believe, we anticipate, or similar statements. Please refer to the Q4 2022 operating and financial review and the company's other filings with the SEC for information about factors which could cause Trafalgar's actual results to differ materially from these forward-looking statements. You will find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed in today's, in Trafalgar's operating and financial review. which is posted on the company's IR website at ir.travago.com. You're encouraged to periodically visit Travago's investor relations site for important content. Finally, unless otherwise stated, all comparisons on this call will be against the results of the comparable period of 2021. With that, let me turn the call over to Axel.

Thank you, everyone, for joining us for our Q4 earnings call today, 2021. 2022 was a very strong year for Trivago. We saw leisure travel bouncing back as COVID restrictions were lifted around the globe. The pent-up demand was fueled by consumer savings during the pandemic and a strong desire to travel. As prices for accommodation continue to rise, consumers need to compare prices more to maximize their savings. We are therefore confident that the role of meta-search will become even more relevant this year. Moving forward, we are further developing and strengthening our core product and unique brand positioning. We're leveraging growth opportunities by offering travelers more direct access to hotels in addition to our traditional online travel agency offering. In Q4, we've run a new product design in five test markets, allowing us to generate valuable learnings in how to expose travelers to more prices and qualify their intent further before passing them on to our advertisers. In addition, We have established the building blocks of our direct hotel strategy, and we will build up on those in 2023. At now more than 50% of direct hotel rate coverage, we are getting close to the next phase of our strategy, launching consumer-facing features around direct hotel access.

Thank you, Axel, and good morning, everyone. As Axel said, we are very pleased with our Q4 and full-year 2022 financial results. Last year, our revenue increased by 48% year-over-year to 535 million euros, while our marketing efficiency measured as return on advertising spend improved eight percentage points to 164.4%. Due to the impairment charges recorded in the second and third quarters of 2022, totaling 184.6 million euros, we had a net loss of 127.2 million euros. The combination of greater marketing efficiency and continued cost discipline led to an increase in adjusted EBITDA, which excludes the effect of the impairment charge, of 210% year-over-year, reaching a full-year record for the company of €107.5 million. This is an increase of more than 50% relative to our most profitable year before the pandemic in 2019, and for the first time we achieved an adjusted EBITDA margin of over 20%. Now, looking at the fourth quarter, our referral revenue grew 21% year-on-year, driven by continued higher ADRs, which led to an increase in overall average booking value. Other revenue declined by €2 million year-on-year to €3.4 million as we stopped certain B2B products like white label solutions and display ads, as we mentioned during the summer. Net income decreased year-on-year by €4.8 million to €10.4 million. The decrease was mainly driven by the non-recurrence of a €12 million COVID-19 subsidy that we had received from the German government in the fourth quarter of 2021 and recognized as other income. Excluding this one-time subsidy payment, our net income increased by €7.2 million. Adjusted EBITDA also increased by 15% year-on-year to €22.6 million. In the following, I will give a bit more color on the drivers of our referral revenue development relative to 2019 levels for our three regional segments in the fourth quarter. Starting with Developed Europe, qualified referrals were at 72% of 2019 levels, roughly at the same level as in the third quarter. Revenue per qualified referral recovered to 102% of 2019 levels, as ADRs continued to be above 2019 levels and bidding levels of our partners reflected the increase in traffic quality. In America, qualified referrals relative to 2019 levels decreased slightly sequentially from 59% in the third quarter to 56% in the fourth quarter, primarily driven by qualified referral declines in Latin America, resulting mainly from a large-scale market test in Brazil that led to a significant decline in qualified referrals in that country. However, on the flip side, the click-to-book conversion increased significantly in Brazil, which had a positive impact on our revenue per qualified referral. Similar to Europe, revenue per qualified referral in America also benefited from continued high ADRs relative to 2019 levels. In addition, positive forex exchange and country mixed effect were similar to what we already observed in the third quarter. leading to an overall increase of revenue per qualified referrals in America of 33% relative to 2019. Lastly, our segment rest of world continues to be impacted by the war in Ukraine and the fact that China was still mostly closed during the quarter. Consequently, our qualified referrals remain significantly below 2019 levels at 47%. While we do not operate a Chinese platform, we believe that the opening of China will have a positive impact on many Asian platforms for us, as it will be possible again to travel to China, and Chinese travelers will increase the demand for hotel rooms in the region, which we expect will be positive for ADRs. We already observed a positive impact from increasing ADRs in the fourth quarter, and revenue per qualified referral improved sequentially from 91% of 2019 levels in Q3 to 94% in Q4. Moving on to advertising expenses. As we entered our low season quarter, we pulled back on advertising expenses in the fourth quarter relative to the third quarter, as we have always done historically. Advertising expenses were 55.4% of referral revenue in the fourth quarter compared to 63.1% in the same period in 2019, as we continued to be disciplined with our marketing ROI targets and improved our marketing efficiency. Consequently, our return on advertising spend improved 22 percentage points in the fourth quarter relative to 2019 levels. However, contrary to last year, we started to run some brand TV campaigns in selected markets at the end of the quarter in anticipation of higher travel demand going into the new year. And we continue to expect to increase our brand marketing investments in 2023 relative to 2022. I will now discuss our operational expenses, excluding advertising expenses relative to last year. In the fourth quarter, our operational expenses, including share-based compensation, decreased by €2.9 million, or by 8.6%, compared to the same period in 2021. The main drivers for the decrease were lower other marketing expenses, lower share-based compensation expenses, and a decrease in depreciation. Other marketing expenses decreased as a result of lower TV production costs and lower commission fees for acquiring traffic as we started to sunset our wide-level product. The decrease in expenses was partly offset by an increase in IT related costs, mainly due to set up fees for the onboarding of independent hotels and an increase in cloud cost as we made progress with our migration from data center to the cloud. As we have mentioned before, we expect to reduce our operating expenses in 2023 relative to 2022, despite the inflationary pressure, mainly through the headcount reduction we have done in the second half of 2022. We expect our quarterly operational expenses, excluding advertising expenses and excluding share-based compensation, going forward to be roughly in line with what we have reported for this quarter. The strong operational performance in 2022 led to a significant increase in our cash, cash equivalents and short-term investment position to 293.9 million euro as of December 31st, 2022, compared to 256.4 million euro at the beginning of the year. The increase of 37.5 million euros was mainly driven by strong operational results, which more than offset financing activities resulting from the repurchase of shares and penalty payments from the litigation Australia. Our liquidity position is stronger than ever, and we continue to be debt-free. As we expect to continue to generate positive free cash flows, we will continue to look at different ways to return capital to our shareholders in the future. Now, moving on to trends in January. As expected, year-on-year referral revenue growth was strong in January at over 30% as a result of continued robust travel demand trends and favorable comms due to COVID-related travel restrictions in January 2021. As in prior years, monetization levels decreased sequentially in January relative to December, and overall, we were at similar monetization levels as last year in January. However, as ADRs continue to be strong and booking conversions improved, our revenue per qualified referral increased year-over-year in January more than qualified referrals. Developed Europe in particular is benefiting from easier comps in Q1, and consequently, we saw a healthy increase in both qualified referrals and revenue per qualified referrals in January. We started to invest opportunistically in brand marketing, also beyond TV advertisement. For example, we were a main partner of the Handball World Cup in Sweden and Poland, which we believe had a positive impact on our branded traffic in the Nordic region, as well as core European markets like Germany, France or Spain. We will continue to invest in brand activities and expect to be able to increase our brand marketing expenses in the coming months. In America, qualified referrals continue to be negatively impacted by the large-scale market test in Brazil. In Latin America, qualified referrals were down low double digits, which was partly offset by a single-digit qualified referral increase in North America. Revenue per qualified referrals increased around 20% year-on-year in the segment, decelerating from the 44% year-on-year increase in the fourth quarter, as positive foreign exchange and country mixed effects and our monetization were lower compared to Q4. In rest of the world, we saw a single-digit increase in qualified referrals in January year over year, while revenue per qualified referrals increased significantly, driven by strong increases in booking conversion, average booking values, and positive country mix effect. Consequently, referral revenue increased around 60% year on year. While the near-term macro outlook is still uncertain, the underlying trends remain unchanged. Travel demand continues to be robust, while ADRs continue to be at elevated levels. While we continue to see some changes in consumer behavior, like shorter lengths of stay, more interest in cheaper destinations, or more clicks on lower hotel offers, we do not believe these trends change the overall picture. We believe that Metasearch is well positioned in this environment as consumers shift their focus to cost savings and we will focus on improving the user experience and make it even easier for travelers to find great deals on our platforms. In summary, we are very pleased with our financial results in 2022 and the progress we have made with key strategic initiatives. We believe that we are well positioned to increase our investments into brand marketing, thereby driving further branded traffic growth and to execute on key strategic projects like increasing the coverage of independent hotels, while still expecting our full year 2023 adjusted EBITDA to exceed our pre-COVID adjusted EBITDA in 2019. With that, let's open the line for questions. Operator, we are now ready to take the first question, please.