What happened

Trivago N.V. (NASDAQ:TRVG) stock was surging today after the company posted a surprising return to profitability in its third-quarter earnings report, despite a continuing decline in revenue. As a result, shares of the struggling hotel-booking platform were up 16.3% as of 1:07 p.m. EDT.

So what

Revenue fell 12% in the quarter to 253.7 million euros, which was worse than analyst expectations of a 9.1% decline in revenue. However, the slide in the top line was consistent with Trivago's strategy as it scales back advertising to build profitability. That strategy delivered the desired results as return on advertising spend (ROAS) increased by 25 percentage points to 136%, leading to net income of 10.1 million euros, up from a loss of 7.7 million euros a year ago. That translated into a profit of $0.03 per share, better than expectations of a loss of a penny.

A bed in a hotel room with a terrace in the background.

Image source: Trivago.

The results marked the company's return to profitability after more than a year of losses. Adjusted EBITDA also improved significantly from -7.1 million euros a year ago to 26.6 million euros. 

CEO Rolf Schromgens said that the company is focused on rebalancing the business at higher profitability levels and then driving revenue growth after that.

Now what

Looking ahead, management sees another adjusted EBITDA profit for the fourth quarter, of 3 to 13 million euros, a sign that bottom-line momentum from the current quarter should continue. Advertising spend was down 28% in the previous quarter to 184.3 million euros, and that pattern should continue as the company seeks to drive increased ROAS in the future, as that figure is the biggest component in underlying profits.

While declining revenue is generally a bad sign, these results show that the company is capable of adapting to changing market conditions and delivering profits with less revenue. That should be a reassuring sign to investors after the stock's collapse over the last several quarters.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.