Reaching consistent profitability is a rite of passage for every company, and especially among internet stocks, getting to the point at which revenue exceeds expenses is a landmark event. Online travel specialist Trivago (NASDAQ:TRVG) had seen some profitable quarters in the past, but for more than a year now, red ink was prominently featured in its results.

Coming into Wednesday's third-quarter financial report, Trivago investors didn't really expect the losses to stop, and they were braced for a significant drop in revenue as well. Yet even though the company did indeed face top-line challenges, smart management led to a better result on the earnings front.

Conference booth with Trivago logo and description of Hotel Manager product, with three people talking at a table.

Image source: Trivago.

The key to Trivago's comeback

Trivago's third-quarter results were mixed. Revenue plunged 12% to 253.7 million euros, which was even more dramatic than the 9% drop that most of those following the stock were looking to see. However, Trivago turned things around on the bottom line, posting net income of 10.1 million euros that worked out to earnings of 0.03 euros per share, far better than the consensus forecast for a 0.01 euro per-share loss.

The essential component of Trivago's return to profitability was its greater efficiency in using marketing funds effectively. The travel specialist said its consolidated return on advertising spend jumped by 25 percentage points to 135.9%, reflecting the company's efforts to shift its focus toward more profitable advertising decisions. Trivago also explained that the decision to optimize its marketing campaigns was directly responsible for the big decline in revenue, and qualified referral counts also dropped precipitously. The company brought in 189.1 million qualified referrals during the third quarter, down 12% from the year-ago period.

Operationally, Trivago also had some good news. The provider hit the 1 million mark in terms of offering listings from providers of alternative accommodations, including private apartments and vacation rental properties. Trivago also continued to gain penetration into the mobile realm, as more than 60% of its revenue came from apps or mobile websites.

Trivago is getting good reception in key areas of potential growth. Traffic quality referred to advertisers improved in developed Europe as well as Trivago's rest-of-world segment, and even though Trivago's largest advertisers have made similar moves to boost their targets for returns on their advertising spend, the travel specialist has confidence that referral quality is improving continuously.

Trivago was optimistic about the process it had followed to produce the period's solid results. Founder and CEO Rolf Schromgens said, "We continued to focus on our core principles and what has made us successful by optimizing our marketing, improving our traffic quality, and putting our users at the center of the experience."

What's next for Trivago?

Trivago has high hopes for the future. As CFO Axel Hefer put it, "Our aim was to return to profitability in a sustainable way by reducing inefficiencies and getting the business back on track. We believe we are now well-positioned moving forward and have adjusted our guidance to reflect our improved outlook."

Shareholders also got the good news that Trivago now expects to do better for the full 2018 year than it had previously expected. Just six months ago, Trivago had expected that it could lose between 25 million and 50 million euros on an adjusted pre-tax operating basis for the year. Now, the company thinks it might be able to break even on that basis, and any losses are likely to amount to less than 10 million euros.

Trivago investors were ecstatic about that news, and the stock soared 15% in morning trading following the announcement. To be clear, Trivago still has work to do, but shareholders are impressed at the extent of the turnaround thus far and seem more confident than ever about its eventual success. With a major institutional investor sharing that confidence, Trivago has the capacity to see even bigger gains in the future if it can stay on course with operational improvements.

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