For many young companies, declines in revenue are the kiss of death. Especially before a company reaches consistent profitability, rising sales are often the best indicator of how much potential a promising business has. For online travel provider Trivago (NASDAQ:TRVG), though, a long history of subpar performance forced the company to change its strategy. Now, instead of boosting revenue just for the sake of seeing top-line growth, Trivago is working to maximize profit -- even if it means big declines in sales.
Coming into Wednesday's first-quarter financial report, Trivago investors were once again prepared for big top-line declines and hoped that earnings would move higher. Trivago's results confirmed the wisdom of the online travel company's vision so far, and many see even more potential for gains in the future.
Trivago sees sales plunge, profit return
Trivago's first-quarter results once again followed the trends that the company has followed in the recent past. Revenue plunged 20% to 208.8 million euros, which was an even more dramatic pullback in sales than those following the stock were looking to see. Yet Trivago again turned around from a year-ago loss, posting net income of 7.8 million euros that translated to earnings of 0.02 euros per share, matching the consensus among investors.
At first glance, Trivago's top-line numbers look scary. Referral revenue in the Americas was down 27%, with the developed European market seeing a 14% drop year over year, while Trivago's "rest of world" segment saw 19% declines. The company explained that the weaker numbers stemmed from advertising spending optimization, which resulted in a drop in the number of qualified referrals it received. Trivago pointed to particular weakness in the U.K., presumably due to Brexit-related concerns, and Australia pulled "rest of world" numbers down considerably. Overall, qualified referrals dropped 32% to 129.3 million.
However, being more refined in seeking referrals led to two big benefits. The referral quality improved again this quarter, with revenue per qualified referral climbing 18% to 1.59 euros. Gains were especially strong in Europe. In addition, marketing costs plunged 36%, saving the company 93.5 million euros compared to year-ago results. Return on advertising spending soared 29 percentage points to 136.6%. The strategy led to an overall drop in total expenses of 32%, powering Trivago's profitability.
What's next for Trivago?
Trivago founder and CEO Rolf Schromgens pointed to the success of the business model. "Our strategy is already delivering tangible results," Schromgens said, "with a significant improvement in traffic quality as we continue to increase marketing efficiency and optimize our product." The CEO also noted that efforts to boost exposure to alternative accommodations like home-sharing are also going well, with more than 1.8 million units now available to customers.
Trivago also sees reason for optimism for the remainder of 2019. As CFO Axel Hefer put it, "We believe this positions us well to achieve our goal of profitable growth in the second half of the year."
Even so, Trivago didn't make any big changes to its guidance for the full 2019 year. The online travel specialist still believes its adjusted pre-tax operating earnings will end up between 50 million and 75 million euros as it keeps finding ways to optimize its spending. Declines in advertising expenses are likely to continue in the second quarter but start rising again in the second half of the year; however, Trivago also believes referral revenue will follow the same trajectory, leading to top-line growth by late 2019.
Trivago investors seemed reasonably content with the news, and the stock didn't make major moves in pre-market trading following the announcement. Given that the goal of any business is to maximize profit, Trivago appears to be moving in the right direction -- even if ugly sales performance might cause some to question its approach.