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trivago N.V.(TRVG) - 2023 Q4 - Annual Report

PART I Item 3: Key information This section details trivago's significant business, operational, and financial risks, including reliance on Google and major advertisers, and the impact of its new brand marketing strategy Risk Factors The company highlights risks from its new brand marketing strategy, heavy reliance on Google and key advertisers, potential asset impairment, and its relationship with Expedia Group - A new strategy to increase brand marketing investments is expected to negatively impact profitability in the short-to-medium term, with no guarantee of long-term revenue growth3032 - The company relies heavily on search engines, particularly Google, which promotes its own competing products (Google Hotel Ads) at the expense of traditional search results, negatively impacting trivago's traffic acquisition353738 - A very large portion of revenue is derived from a small number of advertisers, primarily brands affiliated with Booking Holdings and Expedia Group, where reduced spending or changes in bidding strategies could significantly harm business3941 - The company recorded a cumulative impairment charge of €196.1 million in 2023 on intangible assets and goodwill, driven by a revised profitability outlook, a decline in share price, and economic uncertainty47 - Expedia Group holds 60.0% of issued shares and 84.1% of voting power, giving it control over corporate actions, which may create conflicts of interest with other shareholders109111 Item 4: Information on the company This section describes trivago's history, global accommodation search platform business model, organizational structure, and headquarters History and development of the company Founded in 2005 in Düsseldorf, Germany, trivago grew into a leading global hotel search platform, with Expedia Group acquiring a majority stake in 2013, followed by its Nasdaq IPO in December 2016 - Expedia Group acquired a 63.0% equity ownership in trivago in 2013 for €477 million164 - The company completed its Initial Public Offering (IPO) on the Nasdaq Stock Exchange on December 16, 2016, and is incorporated as trivago N.V. under Dutch law165 Business overview trivago operates a global accommodation search platform, generating CPC revenue from over 5.0 million properties, with significant revenue concentration from key advertisers and seasonal patterns - The platform provides access to over 5.0 million hotels and other accommodations, including 3.8 million alternative accommodations like vacation rentals171175 - The company's four strategic priorities are: reigniting the brand, enhancing the hotel search experience, delivering the best deal discovery, and empowering advertising partners194195196 FY2023 Revenue Concentration | Advertiser Group | % of Referral Revenue | | :--- | :--- | | Expedia Group and affiliates | 36% | | Booking Holdings and affiliates | 43% | - The business is seasonal, with revenues generally highest in the first three quarters due to holiday travel planning, and typically decreasing in the fourth quarter204 Organizational structure trivago N.V. is a holding company for its subsidiaries, with Expedia Group holding 84.1% of the voting power as of December 31, 2023, establishing it as the controlling shareholder - As of December 31, 2023, Expedia Group holds Class B shares representing 60.0% of issued shares and 84.1% of the voting power in trivago N.V109221222 Operating and financial review and prospects In FY2023, trivago's revenue decreased by 9% to €485.0 million, resulting in a net loss of €164.5 million due to lower revenue, increased competition, and a €196.1 million impairment charge Operating results FY2023 total revenue decreased 9% to €485.0 million, leading to a €164.5 million net loss, driven by lower Referral Revenue in Americas and Developed Europe, and a significant impairment charge Consolidated Statement of Operations Highlights (FY2023 vs. FY2022) | Metric | 2023 (€ millions) | 2022 (€ millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | 485.0 | 535.0 | (9)% | | Operating Loss | (156.6) | (120.3) | 30% | | Net Loss | (164.5) | (127.2) | 29% | | Adjusted EBITDA | 54.1 | 107.5 | (50)% | Referral Revenue by Segment (FY2023 vs. FY2022) | Segment | 2023 (€ millions) | 2022 (€ millions) | % Change | | :--- | :--- | :--- | :--- | | Americas | 176.4 | 216.4 | (19)% | | Developed Europe | 215.7 | 237.7 | (9)% | | Rest of World | 84.7 | 67.7 | 25% | | Total | 476.8 | 521.8 | (9)% | Return on Advertising Spend (ROAS) by Segment | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Americas | 148.3% | 164.4% | | Developed Europe | 146.0% | 158.6% | | Rest of World | 150.1% | 188.8% | | Consolidated | 147.6% | 164.4% | - The company recorded cumulative impairment charges of €196.1 million in 2023, compared to €184.6 million in 2022, related to intangible assets and goodwill287 Liquidity and capital resources As of December 31, 2023, trivago's total cash, cash equivalents, and restricted cash decreased by €146.7 million to €102.2 million, primarily driven by a €190.4 million cash outflow from financing activities, including a €184.4 million extraordinary dividend payment Cash Flow Summary (FY2023 vs. FY2022) | Cash Flow Activity | 2023 (€ millions) | 2022 (€ millions) | | :--- | :--- | :--- | | Cash from Operating Activities | 27.8 | 66.3 | | Cash from/(used in) Investing Activities | 16.3 | (54.9) | | Cash used in Financing Activities | (190.4) | (19.6) | - Cash used in financing activities was €190.4 million, primarily driven by a one-time extraordinary dividend payment of €184.4 million to shareholders in the fourth quarter of 2023308 Critical Accounting Policies and Estimates The company's critical accounting policies and estimates involve significant judgment, particularly concerning leases, the recoverability of goodwill and indefinite-lived intangible assets, income taxes, and share-based compensation, leading to a €196.1 million impairment charge in 2023 - Key critical accounting estimates include leases, recoverability of goodwill and indefinite-lived intangible assets, income taxes, and share-based compensation310311 - The annual impairment test for goodwill and indefinite-lived assets as of September 30, 2023, resulted in a quantitative assessment and an impairment charge of €196.1 million315 - The impairment test for goodwill used a blended analysis of discounted cash flows and a market valuation approach, while the test for indefinite-lived assets used the relief-from-royalty method317320 Item 6: Directors, senior management and employees This section details trivago's management and supervisory boards, including compensation and employee headcount, which decreased to 651 in 2023 Directors and senior management As of the report date, trivago's management board consists of Johannes Thomas (CEO), Jasmine Ezz (CMO), and Andrej Lehnert (CPO), with Kevin Hu serving as interim CFO, and the supervisory board comprises eight members, chaired by Eric M. Hart - Significant changes occurred in the Management Board in 2023: Axel Hefer resigned as CEO and was replaced by Johannes Thomas, while Matthias Tillmann resigned as CFO at year-end, with Kevin Hu appointed as interim CFO346 - The Supervisory Board consists of eight members, chaired by Eric M. Hart, and co-founder Rolf Schrömgens was re-appointed to the supervisory board in June 2023347358 Compensation Management board compensation for 2023 consisted of base salaries, signing bonuses for new members, and benefits in kind, with no cash bonus component, while significant equity awards were granted to new management members with vesting tied to service and performance conditions - Management board cash compensation for 2023 did not include a bonus portion but did include signing bonuses for new members Johannes Thomas (€250k), Jasmine Ezz (€100k), and Andrej Lehnert (€250k)361363 - New management members received substantial stock option grants in May 2023, with vesting periods extending to 2027 and performance conditions tied to the company's adjusted share price364366 - The trivago N.V. 2016 Omnibus Incentive Plan is the primary vehicle for equity awards, with a maximum of 59,635,698 Class A shares available for issuance381 Employees The company's total number of employees decreased from 709 at the end of 2022 to 651 at the end of 2023, with the majority based in Germany and the largest group working in Technology and content Employee Headcount by Function | Function | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Cost of revenue | 54 | 58 | 57 | | Selling and marketing | 119 | 111 | 133 | | Technology and content | 338 | 380 | 444 | | General and administrative | 140 | 160 | 175 | | Total | 651 | 709 | 809 | Item 7: Major shareholders and related party transactions This section outlines trivago's ownership structure, with Expedia Group as the controlling shareholder, and details significant related party transactions, including 36% of 2023 revenue from Expedia Major Shareholders As of February 26, 2024, Expedia Group, Inc. is the largest shareholder with 84.1% of the total voting power, while co-founder Rolf Schrömgens holds 12.8% of the voting power Beneficial Ownership (as of Feb 26, 2024) | Name of Beneficial Owner | Class A Shares % | Class B Shares % | % Voting Power | | :--- | :--- | :--- | :--- | | Expedia Group, Inc. | — | 88.0% | 84.1% | | Rolf Schrömgens | 31.1% | 12.0% | 12.8% | | PAR Investment Partners, L.P. | 5.4% | — | <1% | Related party transactions trivago has extensive related party transactions, primarily with Expedia Group, which accounted for 36% of total revenue in 2023, and received €110.6 million of a €184.4 million extraordinary dividend paid in 2023 - Revenue from related party Expedia Group and its brands was €172.5 million in 2023, accounting for 36% of total revenue453 - A one-time extraordinary dividend of €184.4 million was paid in 2023, with €110.6 million going to Expedia Group and €15.1 million to founder Rolf Schrömgens452456 - The Amended and Restated Shareholders' Agreement with Expedia and the Founders governs board composition, registration rights, and share transfer restrictions, with the Founders' right to designate board members terminating in November 2022 when their collective shareholding fell below a 15% threshold438440 Item 8: Financial information This section references the main financial statements and provides details on legal proceedings, including purported class action lawsuits in Israel and Canada following a 2022 Australian judgment where the company paid a penalty of AUD 44.7 million - Following a judgment by the Australian Federal Court, the company paid a penalty of AUD 44.7 million in 2022 for breaches of the Australian Consumer Law467 - The company is facing two purported class action lawsuits in Israel and Ontario, Canada, with similar allegations regarding advertising and display practices, where the Ontario action's class certification was denied but is under appeal468 Item 10: Additional information This section details material contracts, exchange controls, and complex taxation implications for ADS holders, noting the company's German tax residency and potential PFIC status for U.S. tax purposes Taxation The company is a tax resident of Germany, despite being incorporated in the Netherlands, with dividends subject to German withholding tax of 26.375%, and a risk of Passive Foreign Investment Company (PFIC) classification for U.S. Holders - The company is considered a tax resident of Germany due to its effective place of management being in Germany, despite its incorporation in the Netherlands487570 - Dividends are subject to a German withholding tax of 26.375% (25% plus solidarity surcharge), which may be reduced for non-German residents under applicable double taxation treaties502 - For U.S. federal income tax purposes, the company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2023 taxable year, but this is a factual determination made annually and no assurance can be given for future years150607 Item 12: Description of securities other than equity securities This section describes the American Depositary Shares (ADSs), where each ADS represents five Class A shares and is registered by Deutsche Bank Trust Company Americas, outlining the deposit agreement and various service fees payable by ADS holders - Each American Depositary Share (ADS) represents five Class A shares of the company628 - ADS holders are required to pay fees for services such as issuance (up to $0.05 per ADS), cancellation (up to $0.05 per ADS), and cash dividend distributions (up to $0.02 per ADS)630 PART II Item 15: Control and procedures This section confirms the effectiveness of trivago's disclosure controls and internal control over financial reporting as of December 31, 2023, as concluded by management and affirmed by the independent auditor - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective635 - Management concluded that as of December 31, 2023, the company's internal control over financial reporting was effective, based on the COSO 2013 framework638 - The independent auditor, EY GmbH & Co. KG, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023642 Item 16: Other Information This section covers governance, principal accountant fees, and cybersecurity, detailing deviations from Nasdaq rules and the Dutch Corporate Governance Code, and outlining the company's cybersecurity risk management program Principal accountant fees and services For fiscal year 2023, trivago's independent auditor, EY GmbH & Co. KG, billed a total of €2.46 million, with 99.1% attributed to audit fees Accountant Fees (FY2023 vs. FY2022) | Fee Category | 2023 (€ thousands) | 2022 (€ thousands) | | :--- | :--- | :--- | | Audit Fees | 2,437 | 2,347 | | Tax Fees | 12 | 8 | | All Other Fees | 10 | 6 | | Total | 2,459 | 2,361 | Corporate governance As a foreign private issuer and controlled company, trivago follows home country practices, leading to deviations from certain Nasdaq rules and non-compliance with some Dutch Corporate Governance Code provisions - The company follows home country (Dutch) corporate governance practices in lieu of certain Nasdaq rules, permitted as a foreign private issuer661 - Deviations from Nasdaq rules include not having a board comprised of a majority of independent directors and not having a compensation committee composed solely of independent directors, due to its status as a 'controlled company'140665 - The company does not comply with all provisions of the Dutch Corporate Governance Code (DCGC), citing conflicts with U.S. securities laws and practices of global companies664 Cybersecurity trivago maintains a cybersecurity risk management program, overseen by the Management and Supervisory Boards, based on industry frameworks, with no material incidents reported in the past year - The company's cybersecurity program is overseen by the Management Board and Supervisory Board, with processes based on frameworks like NIST and ISO/IEC 27001679 - The Chief Product Officer also serves as the Chief Information Security Officer (CISO), with extensive experience in technology and risk management684 - The company states that cybersecurity threats or incidents have not materially affected its business, operations, or financial condition over the past financial year685 PART III Item 18: Financial statements This section presents trivago's audited consolidated financial statements for the three years ended December 31, 2023, prepared under U.S. GAAP, detailing key accounting policies, significant impairments, and related-party transactions Consolidated statements of operations The consolidated statement of operations shows a 9% decrease in total revenue to €485.0 million in 2023, with the net loss widening to €164.5 million, heavily impacted by a €196.1 million impairment charge Key Financial Results (in € thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total revenue | 485,031 | 535,004 | 361,465 | | Operating income/(loss) | (156,587) | (120,262) | 10,051 | | Net income/(loss) | (164,476) | (127,218) | 10,704 | | Basic EPS (€) | (0.48) | (0.36) | 0.03 | | Diluted EPS (€) | (0.48) | (0.36) | 0.03 | Consolidated balance sheets The consolidated balance sheet as of December 31, 2023, shows total assets decreased to €325.1 million, primarily due to reduced cash and the complete impairment of goodwill Key Balance Sheet Items (in € thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | 101,847 | 248,584 | | Goodwill | — | 181,927 | | Total Assets | 325,069 | 691,592 | | Total Liabilities | 110,045 | 129,856 | | Total stockholders' equity | 215,024 | 561,736 | Consolidated statements of cash flows Net cash provided by operating activities decreased to €27.8 million in 2023, while net cash used in financing activities significantly increased to €190.4 million due to a €184.4 million extraordinary dividend Cash Flow Summary (in € thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 27,801 | 66,268 | 32,536 | | Net cash provided by/(used in) investing activities | 16,289 | (54,910) | 10,018 | | Net cash provided by/(used in) financing activities | (190,442) | (19,621) | 1,053 | | Net increase/(decrease) in cash | (146,737) | (7,793) | 45,948 | Note 8. Goodwill and intangible assets, net This note details the €196.1 million cumulative impairment charge recorded in 2023, which fully eliminated goodwill and reduced indefinite-lived intangible assets, driven by a revised profitability outlook and share price decline - A cumulative impairment charge of €196.1 million was recorded in 2023 for goodwill and indefinite-lived intangible assets823 - Goodwill impairment charges of €95.5 million (Developed Europe) and €86.5 million (Americas) completely eliminated the company's goodwill balance, which stood at €181.9 million at the start of the year823827 - The carrying value of indefinite-lived intangible assets decreased from €89.5 million at year-end 2022 to €75.3 million at year-end 2023 due to a €14.2 million impairment charge822823