Takeaway: See company-specific takeaways for supporting detail.

KEY POINTS

  1. IS THE GAME CHANGING? TRVG may be in the midst of a strategic pivot away from maximizing revenue growth to targeting profitable growth, which we originally didn't expect to occur until 2018 at the earliest.  The other thing we didn't consider is that the pressure to do so could actually come from the street rather than its parent (EXPE).  If TRVG is in fact being pushed to produce legitimate EBITDA, then the meta game is changing.  Reason being is that TRVG would no longer have license to ramp ad spend with reckless abandon, which would not only level the playing field vs. TRIP, but would also give TRIP the opportunity to close the gap b/w their respective ad budgets. 
  2. 2H17 SETUP IMPROVING.  At a minimum, it appears the fundamental setup has improved meaningfully into 2H.  Note that TRVG appears to be curbing the growth of its ad budget into 3Q, which is the quarter that we expect TRIP to ramp its own ad spend the most this year.  Put another way, TRIP may be bringing the fight back to TRVG at the time TRVG appears to be backing away from it.  Meanwhile, EXPE mgmt implied that it is planning to lean into meta again in 3Q, which anecdotally would bode well for TRIP considering that EXPE has already guided to +20% room nights growth for 3Q, yet will have relatively less inventory to pull from TRVG in 3Q. 

TRVG TAKEAWAYS

The glaring takeaways from the print/call was 1) revenue guide and 2) its decision to "modify" its traffic acquisition strategy, which we suspect means paring back the growth of its ad budget by pulling back in the performance-based channels.  But more importantly, the print raises one big question.  Is TRVG starting to get pressure from its parent and/or the street to produce legitimate EBITDA?

We suspect this may be the reason for the odd revenue guide, which suggested that its 2H revenue would be "significantly more weighted" to 4Q.  That means that TRVG is expecting lower revenues in its seasonally strongest quarter than in its seasonally weakest quarter, which doesn't make any logical sense unless it is the result of a serious self-inflicted wound.  For context, even if 2H17 revenues were split evenly b/w 3Q and 4Q, TRVG would be facing roughly 50 percentage points of deceleration in y/y revenue growth from 2Q to 3Q.

Our best guess as to why is that TRVG (EXPE) was reacting to its pending miss in 2Q EBITDA by trying to shed some cost out of the model in 3Q, especially considering the timing of the decision to pare the growth in its ad budget (July).  However, we suspect that may have backfired badly in the form of waning, if not declining, demand in July considering the illogical weighting of its 2H revenue guide.  We're guessing here, but struggling for another plausible explanation outside of a poorly-executed sandbag of a guide.

As it relates to the street, the question is whether the initial sell-off in TRVG following EXPE's results was a result of the implied 2H revenue miss from the reiterated 2017 revenue guidance, or the 2Q EBITDA miss (Thoughts?).  We don't know the answer to that, but if it's the latter, then it's possible that the street may force TRVG's hand before EXPE does as it relates to driving legitimate EBITDA.  

EXPE Takeaways

There are a couple takeaways here.  1) EXPE's 2Q/3Q meta comments and 2)  how important meta has become to EXPE's bookings growth. 

EXPE suggested that it was leaning into the performance-based marketing channels in 2Q and planned to continue doing so after pulling back in the middle of last year.  EXPE also expects selling and marketing costs to grow faster than revenue for the remainder of the year.  EXPE called out meta in general as a "healthy" channel, but we suspect that was an understatement.  EXPE ramped its ad spend on Trivago by 72% y/y in 2Q, its fastest increase in Trivago ad spend since at least 1Q15.  Further, our back-of-envelope calcs suggests that Trivago alone may have driven about a quarter of EXPE's hotel bookings growth in 2Q17. 

Remember that TRVG's aforementioned 2H rev guide calls for material slowdown in 3Q revenue growth, which means a material slowdown Trivago inventory growth, hence relatively less inventory to sell to EXPE in a quarter where EXPE expects to produce room nights growth in the 20% range on stayed basis.  Granted some of that will come from its 2Q bookings growth and other performance-based channels, but if TRIP is capturing an increasing share of hotel shopper traffic at TRVG's expense, then the natural implication is that TRIP's CBT revenue should increase proportionately.

Let us know if you have any questions or would like to discuss in more detail.

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet

Todd Jordan
Managing Director


@HedgeyeSnakeye 

Sean Jenkins
Associate