Things may finally be turning around for Trivago N.V. (NASDAQ:TRVG). After the stock lost as much as 80% from its peak last year as revenue growth suddenly ground to a halt, the hotel-booking specialist showed signs of life in its third-quarter earnings report. Though revenue continued to slide, that seemed to be by design, as management scaled back on advertising, its biggest expense, to drive a significant improvement in profitability.  

As a result, the stock surged as much as 26% Wednesday morning. Revenue slipped 12% to 253.7 million euros, but net income came in at 10.1 million euros, reversing a loss of 7.1 million euros a year ago. On a per-share basis, earnings was $0.03, better than expectations of a penny-per-share loss. Beyond the headline numbers, let's take a look at some of the key points management made and what's driving the shift in strategy.

A pool at a Cancun hotel listed on Trivago.

Image source: Trivago.

1. Improving profitability is no accident

In the second-quarter report, Trivago management signaled that it would focus on profitability after seeing bidding partners like Booking Holdings (NASDAQ:BKNG) and Expedia (NASDAQ:EXPE) cut back on spending on Trivago's platform. However, the market seemed to have underestimated Trivago's ability to pivot toward profitability.

In order to do so, Trivago pulled back on advertising, driving a sharp increase in return on advertising spending, or ROAS, which is defined as revenue divided by advertising spending and is one of the company's key performance metrics. Advertising spending fell 28% to $184.3 million, which drove a 25-percentage-point increase in ROAS to 136% in the quarter, the main reason the loss from a year ago flipped to a profit. As a booking platform, the bulk of Trivago's expenses is in marketing and advertising, as the company needs to bring in traffic to give booking referrals to its hotel partners. 

ROAS was up significantly in all three of the company's operating regions --Europe, Americas, and Rest of World -- and it drove adjusted EBITDA of 26.6 million euros, up from a loss of 7.1 million in the year-ago period. Management noted that ROAS had some seasonality, but the improving returns should lead to profitability increases over the coming quarters.

2. A new-look app

Trivago launched a new app in the quarter, available on Android and iOS, with an improved interface that provides more information to consumers up front to keep them in Trivago's ecosystem longer. The app has improved functionalities and an increased focus on in-app content. As a result of the upgrade, Trivago expects qualified referrals to decline as fewer customers click out to a hotel-booking provider, but it sees revenue per qualified referrals growing as it sends higher-value referrals to its bidding partners.

During the quarter, qualified referrals, or the number of visitors who come to the site and click on a hotel listing, fell by 12%, but revenue per qualified referral was flat at 1.32 euros, a positive sign, as that's an improving trend over past quarters. The enhanced app should also pay returns in the future, as user interface functionality is a key component of customer retention, especially in a highly competitive industry like hotel booking.

3. Moving beyond traditional hotels

Finally, CFO Axel Hefer said more than a year ago that the threat from Airbnb and similar platforms would be neutralized as hotel-booking platforms like Trivago add more listings like vacation rentals and individual homes, and Trivago is doing just that. Trivago said that the number of its "alternative accommodation" listings has increased from more than 250,000 in the fourth quarter of 2017 to more than 1 million currently, showing that Trivago's efforts to expand into nontraditional listings is paying off. Airbnb, by contrast, has more than 4 million listings on its platform.

Management would not disclose the financial impact from the growth of its alternative accommodations, and it's clear whatever growth it accomplished was not enough to reverse the slide in revenue, but like the app upgrade, it should improve the company's brand and positioning in the future as vacation rental platforms like Airbnb continue to take share from traditional hotels.     

After returning the company to profitability, CEO Rolf Schromgens underscored the intent to rebalance the business on a higher profitability level and then return it to revenue growth through increased advertising spending. With revenue still declining by double digits, it's clear Trivago has work yet to do, but the hotel-booking platform took some important steps in turning around the business in the third quarter.

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