The key to success in many industries is to grow as quickly as possible to stay ahead of the competition. For online travel company Trivago (TRVG +1.88%), the presence of large competitors has made that task a bit more difficult, but that hasn't stopped the up-and-coming player in the industry from working hard to expand its presence in an increasingly crowded market. With major hurricanes hitting the Gulf of Mexico and Caribbean Sea during the summer months, pressure on the entire travel sector created new challenges for Trivago to overcome.
Coming into Wednesday's third-quarter financial report, Trivago investors were comfortable with the idea that the company wouldn't yet post a profit, but they wanted to see the revenue growth that would signal continuing progress toward reaching a leadership position in the online travel sector. Sales gains for the quarter were sluggish, but Trivago still has ambitious targets for longer-term top-line growth that it believes are attainable. Let's take a closer look at Trivago and what long-term investors should take from the report.
Image source: Trivago.
Trivago's growth slows down
Trivago's third-quarter results weren't as attractive as they've been in past quarters. Revenue was up just 17% from the year-ago quarter, coming in at 287.9 million euros and decelerating dramatically from the 67% growth rate that Trivago posted last quarter. The online travel specialist also continued to suffer red ink, with a 5.9 million euro net loss attributable to the company being wider than the year-earlier figure.
Trivago's most basic fundamental numbers show the tug of war going on in the travel industry right now. The company did a reasonably good job of finding new business, with qualified referrals climbing by a fifth to 214.2 million. The problem Trivago faces is that it wasn't able to generate as much revenue from each of those qualified referrals as it had in the past. The quarter's figure for revenue per qualified referral fell 3% to 1.32 euros. Returns on advertising spending fell by about four percentage points to 111%, also reflecting weakness among the company's partners.
Trivago has seen big differences in its geographical segments. In the Americas, referral revenue gains amounted to 12% on a 9% rise in qualified referrals, outpacing the 6% sales boost and 1% rise in referrals from developed Europe. Trivago saw nice gains in the rest of the world, with a better than three-fifths rise in revenue coming from a 56% boost in referrals. Yet foreign exchange issues weighed on growth, and decelerating spending on advertising contributed to slower increases. Moreover, revenue per referral in the rest of the world segment are far less than what it makes in the Americas and Europe.
Can Trivago get moving forward again?
One thing to understand about Trivago's business is that it relies to a large extent on other online travel sites for advertising revenue. In particular, Trivago has grown more dependent on Priceline Group's (PCLN +2.20%) Booking.com and other sites, and Expedia's (EXPE +1.93%) brands have also played a key role. During the quarter, Priceline accounted for 45% of Trivago's total revenue, while Expedia made up 34%. When those companies face challenges, the impact can leak through to Trivago as well.
Trivago specifically cited changes in advertising activity for some of its slowdown. Increased testing activity from several large advertisers has changed their strategies in cost-per-click bidding on Trivago's marketplace. In order to make sure Priceline and Expedia aren't able to use their market dominance to cut what they pay for ads, Trivago believes it needs to keep leveling the playing field in its marketplace and give more industry players a clear shot at generating qualified referrals there.
Once again, Trivago moderated its guidance for the 2017 year. The company now believes it will grow total revenue this year by 36% to 39%. That's down from 40% from its previous guidance during the middle of the quarter, and well below the 50% growth it had predicted earlier in the year.
Trivago investors weren't happy with the new outlook, and the stock plunged 16% in pre-market trading following the announcement. Until the online travel specialist can figure out how to keep its primary customers from using their pricing power to affect its financial results adversely, Trivago will face competitive pressure among industry players vying to keep as much profit as possible for themselves.
