Matthias Tillmann - Head of IR Rolf Schromgens - Managing Director and CEO Axel Hefer - Managing Director and CFO.

Douglas Anmuth - JPMorgan Brian Novak - Morgan Stanley Mark May - Citigroup Heath Terry - Goldman Sachs Kevin Cooperman - Cowen Group Lloyd Walmsley - Deutsche Bank.

Good day and welcome to the Trivago Q3 Reports 2017 Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Matthias Tillmann, Head of Investor Relations. Please go ahead, sir..

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..

Yeah, welcome, everybody. Thanks for joining our Q3 earnings call.

So, for the last three quarters, I was always able to say that we happy of course the quarter exceeded our expectations, looking back on Q3, I can clearly say that we’re still happy with initiatives that we’ve driven forward, but actually we’re not really happy with the financial outcome that was not satisfying.

Before Axel explain the reason, why we get to the guidance update already earlier this year, in beginning of September, our numbers for Q3 did not end up where we expected it to be when we originally had the guidance earlier this year.

So that is also the reason why actually I would like to give you some background around the current situation before we go to the top line financials.

So, what [we learned] in the beginning of the quarter because of several initiatives that we were all starting at the same time, at the cane clearer throughout the quarter, we see strong indications that our large advertisers adjusted their profitability expectations towards us and therefore impacted our commercial vision.

So why we are confident that the value proposition and the growth potential of the company remains unchanged, we see that it simply translates less of the value that we generate into revenue.

And this has of course a direct impact on our total revenue but indirectly more in that it also effects our performance generators because we in keeping that profitability target that we had before constant.

So, taking this new level of commercialization now for given, we think that we have to face the fact that even if we keep on our track of constant optimization of our marketing channels constantly improving the product, it will be still challenging for us to grow the revenues before this impact is alluded in Q3 2018.

Although we see and we want to take it as a challenge, we also see the opportunity. So, on one side, we believe that our large advertisers are now much more profitable in our traffic and this should improve our position. It will be more costly for them now to make changes in their bidding strategies on our marketplace.

On the other side, we see a more diversified advertiser base that could serve as a foundation for more competition going forward. Honestly, of course we would have hoped that this adaption in the appetizer structure would have happened overtime to continuously improving the competitiveness of all players on the marketplace.

But actually, now that has happened, we have sharpened our focus again on even more rigorously working on getting all OTAs, all chains, individual hotels and other players access and a fair chance to compete on a marketplace. And this will be our main focus for the upcoming year. So, let’s now take a look at the top line financials.

For Q3, revenues grew mainly due to the negative impact of commercialization 17% year-on-year to €287.9 million. For the first nine months, total revenue has grown 46% to €853.8 million. The LTA for Q3 came down to minus 7.1 million, but looking at the first nine months EBITDA stayed stable around 15.3 million.

We are continuing our strong growth path in the rest of the world segment that gained importance on the side note, I think also specifically important for those markets we keep on track regarding the transition to mobile, now more than 60% of our revenues are generated on mobile devices. Many thanks.

so, let me now hand over to Axel to give you some more details on the financials..

So as Rolf has mentioned already, total revenue development in the third quarter was 17% versus the third quarter of 2016 and 46% in the first nine months compared to previous year.

Adjusted EBITDA went from 6.3 million in the third quarter 2016 to minus 7.1 million in the third quarter of this year and as a result the income went down from minus 1.5 million at the third quarter 2016 to minus 7.7 million in the third quarter of this year. Year to date the loss was reduced from 51.5 million loss to 3.5 million loss this year.

If we look at the return on advertising spent in the third quarter it came down from a 115% in 2016 to a 111% this year whereas in the first nine months of this year we reached 115% comparing to 116% in 2016.

The adjusted EBITDA margin came down from 2.6% in the third quarter of 2016 to a loss of 2.5% in the third quarter 2017 and the year to date numbers compare 2.8% for 2016 to 1.8% in 2017.

In that some drivers of the business have had an impact on multiple KPIs I would like to point out the different impact on our key KPIs upfront before going through the KPIs individually.

As Rob mentioned we believe that advertisers have changed their profitability targets on our platform compared to the third quarter of 2016 and as a consequence our commercialization has come down. There's lower commercialization implies a lower bit which for the same referrals lead to a lower revenue per qualified referral.

As it is a direct margin impact the return on advertising spent is going down at the same time and through the lower margin we are not in the same position to invest into advertisement and as a consequence qualified referral growth has come down as well.

Based on our data our booking conversion on the other hand has improved and so for two reasons, one is product optimization and the other reason is the implementation of our new attribution model that we covered in the previous calls. And the impact is slightly different on the different KPIs.

So, looking at product optimization there's more value generated per referral because the booking likelihood is going up and as a consequence there's more revenue per qualified referral. This again has a direct impact on profitability and as a consequence improves the return on advertising spent.

The pledges through the attribution model leads to a higher revenue per qualified referral as the marketing channels are more focused on higher converting traffic and are bidding more aggressively in that part of the performance marketing channel. The return on advertisement spent in the short term is coming down as we discussed in the past.

As the market place needs to adjust to factor in the higher than traffic quality into the bid levels. In the medium-term, we expect a higher growth through these changes as we have a more optimized marketing spend.

On qualified referrals, the higher focus on higher quality traffic leads to a lower overall number of qualified referrals but at a higher quality.

So, if you now turn to the KPIs as such, globally our qualified referrals have increased from $179 million in the third quarter of 2016 to $214 million this year, which represent the 20% growth and in the first nine months of this year, increased from $413 million by 42% to $588 million.

The revenue for qualified referrals came down from €1.36 to €1.33 in the third quarter, which is a 3% drop and increase in the first nine months from €1.40 to €1.43, which represents the 2-percentage increase. Return on advertisement spend came down from 115% to 111% in the third quarter and from 116% to 115% year-to-date.

Now look at Americas, the growth in qualified referrals was 19% in the third quarter from €46 million to €54 million and 44% in the first nine months from €112 million to €162 million. The revenue per qualified referral in euros came down from €2.12 to €1.99 impacted by foreign exchange movement, and particularly against the U.S.

dollar, which represents the 6 percentage points, drop and the year-to-date number went up from €1.99 to €2.01, which is a 1% increase. Return on advertisement spends came down from 112% to 110% in the third quarter and increased from 114% to 115% in the first nine months.

We now turn to Developed Europe, we can see very clearly the opposite effect of the key drivers that we’ve mentioned before. Despite the drop-in commercialization, the revenue per qualified referral increased from €1.28 to €1.34 or 5% as product improvement and our more targeted marketing have improved conversion.

Qualified referrals though have been negatively impacted by our change in attribution and grew from €89 million to €90 million or 1%. The return on advertising spend has stayed flat at 129% in the third quarter and showed a slight decline from 131% to 130% year-to-date.

In rest of the world, qualified referrals grew 56% from €45 million to €70 million in the third quarter and 87% in the first nine months from €96 million to €180 million. Revenue for qualified referral went from €0.76 to €0.79 in the third quarter and from €0.83 to €0.90 in the first nine months.

Return on advertisement spend saw a slight decline from 88% in 2016 to 87% in the third quarter of 2017, and in the first nine months, increased from 88% to 91%.

Looking at our guidance for 2017, we expect our results in the fourth quarter to be negatively impacted by changes in bidding strategies by our advertisers that could have a longer term negative impact on us. On the other hand, we have seen a reduced commercialization but on the other hand a reduced dependency on our two largest advertiser group.

As a result, we reduced our annual revenue growth guidance to 36 to 39% annual growth while we continue to expect a positive adjusted EBITDA for the year.

Looking to next year, we assume that these impacts will make it challenging for us to grow in the first six months of 2018 and we expect to return to a positive growth trajectory in the second half of 2018. .

Thank you, Axel. Allison, we would now like to take the questions. .

[Operator Instructions]. We’ll now take our first question from the line of Douglas Anmuth from JPMorgan. Please go ahead. .

Thanks for taking my question. I wanted to ask you to, just first you talked about your largest advertiser changing their profitability targets. Just curious if you could give us some more insight on why you think that’s happening.

Is it because of relevant assessment or something else or is it just more in terms of their own strategy and how they are marketing? And then second, you’re talking a couple of places just about obviously worrying the concentration from large advertisers and creating opportunity for other marketers.

How do you actually level the playing field going forward and get hotels direct and perhaps some other OTAs on board more? Thanks. .

Let me first say for us its super, super higher to comment on strategy of our advertisers, right. So, what we see on our side is the outcome but of course we don’t see the reasoning behind that. That can have different reasons.

I think what we’ve seen in the past that there have been always utility, I think there has been always different strategies throughout the years, sometimes it’s also driven by other channels, it’s also driven by that they want to be more profitable, that they maybe off to compensating for profitability or not so profitable traffic that they had before.

And there is a lot of different reasons why they could do that. There are some reasons maybe that might be more strategically that would have a longer impact but there could be more short-term impact. So right now, we would just take this new commercialization level as a given and will grow it upon that.

So, the second question was and I think that is closely connected because I think it depends on like how much are we able then in the future to support all other advertisers which are not part of large advertiser groups.

How do we support them to be so competitive that they are driving the overall revenue generation and not only the value generation for trivago? And I think the initiative that we have outlined in the past, they are still super valid.

And so, I think what you have seen is we have seen a lack in technology so which we are addressing with express booking and we have seen very good results with those chains where we're working with and those OTAs that we're working with we have seen very good results but they're still you know a pipeline of implementation ahead of us and we will even work harder to get this pipeline done partly.

It's not always up to us because we work probably with also sometimes more traditional companies that take a longer time but that's something that we ask for, providing them is a technology that is competitive with the large advertising.

On the other side I think we have to make sure that all advertisers have the same information and ability to compete on the market today. And I think that is something where we can also do better.

I think we have shown in the past that we have seen strong adoption rate from our automated biddings but that is still something that can be rolled out even further and for us it’s also not stopping with automated bidding. So, we're currently also thinking about [indiscernible]. I think maybe Axel wants to add something..

I think it is important to continue on the initiatives that we started in the past and it is very important to as we've done in the past to continue to broaden the universe of advertisers step and step and every incremental you know step is overall improving the market place and that is across geographies it’s across signed off advertisers across different kinds of recommendation and I think there is no fundamental change in our view there it is more continuous improvement that we are working very hard..

The next question comes from Brian Novak from Morgan Stanley..

Thanks for taking my questions, I have two, just to talk a little bit about the first half of '18 potential revenue declines, can you help at all in kind of even a high-level quantification kind of order of magnitude you're talking about and then how should we think about breaking down those declines between revenue per qualified referral from your advertiser adjustments and then referral deceleration from your attribution model changes.

And the second one I know you call out a couple of times in the conference, the transcript about diminishing margin returns on advertising in the Americas and Europe. Could you just talk about how you work through those diminishing margin returns, you had to start spending on new channels, how do you fix that, thanks..

Okay, so let me start with the first question, on the first half of 2015 and we are not in a position yet to give specific guidance there because we have not passed our budget for 2018 but we will do that once we are in a position to give more specific guidance.

On the impact on the revenue for qualified referral and the qualified referral impact, as you can see already in the Q3 numbers the main impact that you see in chains is really the qualified referral growth trajectory because we have compensated through the various initiatives that we've been working on for quite some time, the drop-in commercialization.

And so, I think that is something that we will aspire to continue to do and that’, at this point in time, as much as I can say about next year..

Yeah, regarding diminishing I think there is actual evidence for that. But I think we would not go further right now, actually. So, taking the current creative strategy as a given, which is not a given, but it’s currently developing. We've seen those diminishing returns in the summer months in some of our markets.

But after the spent level in the summer months is or was in some of these markets extremely high. And there is a time when you reach this point with the current setups in the specific months. That’s possible, that doesn’t mean that there no growth potential of that spend in the future.

And I think there are also several things came together, also that made us do this remark, which is also the effect of commercialization that became over the quarter pivotal for us, but this happened an effect that we may be underestimated before. So, I would be careful with these diminishing returns.

I would say that there is evidence in peak months in the large markets with the current creative setup. With a new creative setup, I would not say that this is ultimately -- would be ultimately the case..

Your next question comes from Mark May from Citigroup..

Thank you. I also had two questions.

First another clarifying question around the first half of 2018 commentary, I think, your language is around challenging the growth, should that be interpreted, because I think a lot of people are interpreting that as negative growth slightly in the first half of the year, or are you messaging that growth will continue to be challenged similar to the low-to-mid-single digit growth that you're guiding to in Q4? And second question is, do you think that the changes in the bidding strategies by some of your advertisers is, specific to trivago or are these likely broader changes that these advertisers are making across some of their other meta search and performance channels, just trying to understand, how company specific piece may be to trivago? Thanks..

On the question on 2018, so what we mean by our guidance comment is that it will be challenging to show positive growth. And so, in a way as I said, we can’t quantify that yet, so in a way we would - we wouldn't interpret that as zero, or potentially lower. But the more specific items we’ll provide once we pass our budget..

Regarding your second question, I think that's hard to say for us. And right now, there’s no indication that we’ve seen. So, for us, it’s really hard to tell, if that a general strategy shift, if it’s a reaction, if it is a general reaction that is impacting all meta searches, if it’s a reaction that is only impacting us.

It’s really, really, really hard to judge, right now..

The next question comes from Heath Terry from Goldman Sachs. .

Great, thanks. Just a couple of questions on and realize that your visibility into some of this is omitted but you know we’d certainly appreciate any insight that you have.

To what extent do you think the changes in strategy that you’re seeing are related to the changes that we’ve seen in either conversion rates or commissions being paid by hotels either because of hotel direct programs or simply renegotiations and contracts that we’ve seen over the past year so to the extent that they’re seeing lower price per lead or lower price per customers.

Is that simply being reflected back through trivago and then to the extent that hotel direct is becoming a bigger priority for the suppliers themselves.

Any plans on your part to accelerate the technologies that you’ve been developing to accommodate direct supplier relationships?.

Let me just take for the question [indiscernible]..

First question was just simply are you -- is the change in profitability per customer at the OTAs simply being reflected back through to their bidding strategies or is there something else?.

So, I think the indication that we is as we get less for the value that we generate and that is an indication that we have and I would think we are quite sure about that.

Still you know what expectation they have like or what they get of course through the margin development or what kind of changes are implied through margin development, that is something that’s really hard for us to say.

I can just like, I think if you’re looking like at the Expedia numbers that they show then they had a margin decrease but that happened basically rather in the previous period and it's not affecting us right now any more.

So, there you would get an indication basically that there is no indication right now that there is a significant margin decrease on this..

So, on the question on the acceleration of the technology to help advertisers, so I mean we’ve discussed that before, we have been very focused on providing two of our advertisers to level the playing field and we continue to believe that it is a very, very important part of our overall strategy.

The pace of the technology development is not necessarily the critical path, its more the time to implement the education and then in a way the onboarding and that’s for sure is a big focus of us and has been in the past and is for the future. .

And we also feel very big interest. So sometimes there is like, its struggling in the implementation but it's not struggling in really understanding we’re not driving the understanding of large players in this market that they say no actually this is the way how we want to advertise how we want to put and push into the marketing in the future.

So, I think there is a clear understanding and a big alignment sometime there is just like we struggle on the technical implementation because I think over the two companies have to work together and that is something where we have to be faster, develop better processes and that's what we definitely will focus on..

The next question comes from Lloyd Walmsley from Deutsche Bank. Lloyd may have stepped away; the next question comes from Kevin Cooperman from Cowen Group..

Hi, thanks a lot. Could you walk us through how do you think about returns on your performance has been and specifically your high-level approach for attributing revenue or value to the ads that you're buying.

And then as a follow up to that as we look at Q4 and into 2018 do you expect any change in your ad budget mix of TV versus performance spend compared to where it's been through the last couple of years, thanks..

So currently we have not changed the levels of profitability and that's also the reason why growth came down more massively, right because you have like when you're losing extra spend on commercialization then you're losing a multiple of that on revenue when you keep your profitability targets on the same level.

And I think that's what we have seen in this regard. And then of course now just looking at our current mix there's a tendency towards more brands because the growth is in the performance channel that has been there before the year on year growth is not there anymore.

So, I think when we compare it to year on year then there is a tendency toward brand.

Like how that will be in the future, I think that is something that we have not done yet because that's a budgeting question for the next year and I think there's also some decisions to take for us, you know like how aggressively do you want to be there, do you want to be maybe more aggressive in the performance channels.

Do you want to keep the current level, and I think there are decisions that we're taking right now for the next year and depending on that the mix will change?.

On your question on the attribution and the performance marketing channels, so the attribution model has changed and we are currently rolling that out, so basically in the new model we are focusing very much on the ultimate booking and so in a way on the quality of the specific campaign and attribute value based on the quality across the different campaigns whereas in the old model which we are step by step substituting there was a greater weight on the immediate click out and some of the immediate direct measured revenue..

Okay thanks, Axel that's really helpful and if I could ask one other question, you talked about the greater diversity in the advertiser mix. I think in the past you it was about 80% to the two large advertisers.

Can you give us any initial sense of what you're seeing for the fourth quarter in terms of that number changing, thanks?.

Obviously, it’s early days in the fourth quarter and it’s only at this point in time an estimate but we see a tendency of the two larger advertiser groups reducing share in the overall business..

[Operator Instructions] We’ll now take a question from Lloyd Walmsley from Deutsche Bank..

Thank you, guys. Sorry for the phone issues.

Can you guys talk about just what you're seeing over the course of the quarter and into October in terms of bidding activity? Are you continuing to see declines, are you seeing some bottoming, you guys have talked about improving conversion, so has that resulted in any improvement in the pricing trajectory? Apologies, if you already covered this..

So, we've seen -- as I indicated through the change in the mix so far in this quarter, a continuation of the trends in the third quarter, and I don’t know..

Yeah, I think for the fourth quarter, what are you seeing now is that there is a base in the structure that you are seeing. So, there is – you can see that in the first slide that I’ve shown. And that is not constant for a couple of weeks. So that is a quite constant for a couple of weeks. That is a good indication, right.

It’s a good indication that it’s now [indiscernible] but let's always take it with a grain of salt and let’s see what the future brings..

And I guess another if I can, can you just talk about what your conversations qualitatively, are like with big advertisers and how they are reacting to, the new landing pages and just generally what their feedback has been on the platform and with all the changes that have been going on?.

Great. We continue to have an active dialogue obviously through our key account managers with all advertisers, and there is nothing specific about the content of these discussions that we would be willing to share..

[Operator Instructions]. As there are no further questions in the queue, that will conclude today’s Q&A session. I’d now like to turn the call back to our host for any additional or closing remarks..

Thanks.

Rolf, any closing remarks?.

Yes. First of all, thanks for joining the call. So, yes, we would have hoped for better results in this quarter. But, our confidence in the long-term value proposition of the company is unchanged. We see that our way of incremental progress and everything of process is still delivering constant improvements in marketing and to product.

We see how we grow the user value that we create, and we believe in the potential that lies ahead of us. We think that with a lower diversified advertising structure, we will now have a solid basis that might also than in the future would be drive us a growth. So, thanks again for joining, and have a great day.

Ladies and gentlemen, this concludes today’s call. Thank you very much for your participation. You may now disconnect..