The worst volatility is behind it. That’s the spin executives at Trivago put on their hotel search company’s fortunes during a fourth-quarter earnings call on Wednesday.

In the second half of 2017, Priceline Group experimented with significantly reduced spending on Trivago as a marketing channel. That dented the revenues of the company.

As context, Priceline Group rival Expedia Inc. owns a majority of the equity and the voting rights at Trivago. So competitive motives may partly explain the move.

Chief executive Rolf Schrömgens told investment analysts that Trivago would face “difficult quarters financially” in the coming year. But he said the unpleasant surprises of 2017 — and the accompanying “full bandwidth of emotions” — are over.

“Extreme Testing”

Schrömgens said that the major advertisers on Trivago appear to have settled upon “a baseline.”

A new “stability” at which they spend on Trivago has appeared at the end of a fourth quarter in which some advertisers conducted some “extreme testing.”

Research analysts at Deutsche Bank believe that Europe’s biggest online travel agency brand, Booking.com, was “essentially off” Trivago in Germany and Italy in December. In our own random checks today, the brand was back, though at a modest level, in those markets.

“Partners like Booking.com seem to have reduced their bids [to advertise on our platform],” Schrömgens said.

“Share is taken over by other market participants,” he explained. “In this situation, [share] was taken over even more by smaller advertisers [such as independent hotels, small chains, and small online travel companies] than by the Expedia group.”

He did not otherwise comment on the actions of individual advertisers other than to confirm that Priceline Group brands had a lower share of referrals by the end of the year than earlier.

Due to advertisers paying less per click-through to their sites, Trivago “has been deriving less booking revenue for the same booking amount it has transferred to advertisers,” said CFO Axel Hefer.

The change comes in a year in which Trivago said it has become better at persuading visitors to its website and mobile app to click through to advertisers. This trend means that, since September, companies like Booking.com have been able to make more money off of the customers referred to from Trivago while spending less on advertising on it.

In the fourth quarter, some advertisers tried to see how low they could go in bids for the chance to appear high in Trivago’s search listings while not losing too much business to competitors.

“You can see from the testing activity of some of the large advertisers, there was a level at which they lost too much share compared to their profitability,” Schrömgens said. The advertisers “tested out the bottom.”

The bidding behavior “stabilized” at the end of the quarter, executives said, though they would not provide data on trends in January. The giant advertisers are unlikely to increase their marketing spend in Trivago significantly over the current base in 2018, executives predicted.

Subdued Forecast

In the first six months of 2018, the Düsseldorf-based travel company anticipates it will see a decline in revenues compared to the first half of 2017.

But in the second half of the year, it predicts a return to year-on-year growth.

For all of 2018, it is forecasting year-over-year total revenue growth of between 5 and 10 percent, compared to 2017. That’s well below the 37 percent year-over-year growth it saw in 2017. In 2017, total revenue was $1.275 billion, or €1.035 billion.

In the fourth quarter, the company suffered a net loss of $11.8 million, or €9.6 million, compared to a profit of approximately $120,000, or €100,000, in the same period a year prior.

Some analysts seemed puzzled at why Trivago is anticipating significant revenue growth in the second half of 2018 relative to the prior year.

Hefer explained that, after much volatility in its marketplace, the company said it can now make plans with more certainty. He said the company bases its plans on “normalizing” what the average trend has been over the past decade and projecting that as a trend to continue.

Executives have reduced their planned spending on television brand advertising for 2018, which they said they buy in typically year-long contracts, accordingly.

Over the next half-year, the return on advertising spending will be negative, compared with the first half of 2017, the company predicts. But this negative forecast is primarily about a decline in the money it makes per referred customer rather than a rise in the cost of advertising.

Executives anticipated the effectiveness of their current TV brand campaigns would continue through this year. But they acknowledged, in response to investor questions, that eventually they must change the content of the TV campaigns before the effectiveness “wears out.”

Trivago also announced a new corporate brand mark today. But it will continue to use its recent logo in its branding campaigns in print and television campaigns. Here’s a look:

Long-Term Plan

Hefer said the fourth quarter drop in booking revenue has been in the “high single digits or more” percentage-wise, year-over-year, per qualified referral, which is a single visitor’s clicks per day. If a visitor clicks on multiple hotel offers in its search results in a given day, Trivago still counts that as one qualified referral.

Before the recent volatility, the Priceline Group and Expedia Inc. accounted for about 80 percent of Trivago’s revenue. The company wants to reduce its dependence on those two conglomerates.

One step is to diversify its supply, it said. In November, the company began adding alternative accommodation, starting with inventory from HomeAway, which now stands at more than 250,000.

The company had said in media reports that it is in talks “with almost all providers” of alternative accommodations.

But in an interview, Hefer said, “We will aim to integrate more players when the timing is right. It will take some time to adapt our platform to facilitate the needs of alternative accommodation sites and generate benefits to our users.”

On international expansion, Trivago currently operates on 55 live international platforms in 33 languages. As for the coming year, Hefer said: “Generally, there is still room to grow in our current markets, particularly in the shift from offline to online. There will, of course, be opportunities to expand into new markets, but we do not have any specific plans in this respect right now.”

The company’s biggest, long-term bet is on personalization. Executives believe that if it provides the best user experience for consumers, it will have power in generating demand that it will be able to eventually hold over the larger advertising groups.

It is investing in data collection and analysis to understand what any given customer is looking for when searching for a property. Last autumn Trivago created a subsidiary to sell software services to hoteliers. Schrömgens said that effort is “ramping up massively.”

It has about 400,000 hotels using its services to manage their businesses. It hopes to persuade these properties to also use Trivago as a way to market their hotels.

Schrömgens, descended from six generations of hotel owners and innkeepers, said that he had seen some examples of independent hotels — not just chains that have loyalty rates and major TV direct booking campaigns — using Trivago to drive direct bookings by undercutting the prices available for their rooms on the online travel agency brands.

But he was vague on details, besides acknowledging that “the absolute number” of such examples is “small.” He said independent hotels have begun to “add to their repertoire of strategies” the practice of undercutting the online travel agencies on price via Trivago.

On this front, Trivago competes with Google, which since October has done more outreach to sign up independent hotels to use it for a similar purpose,.

Trivago also competes with price-comparison giants Kayak and Skyscanner and other players, such as HotelsCombined.

Priceline’s Tough Stance

The Priceline Group’s apparent attempt to kneecap Trivago may remind some industry veterans of when Ctrip, the largest online travel agent in China, battered its smaller competitor Qunar.

In early fall 2014, Ctrip yanked its hotel listings from Qunar, which had listed them in its search results along with inventory from suppliers and other online travel agencies.

Ctrip made up for the dip in traffic from Qunar by relying on wholesalers, who buy hotel supply in bulk at volume discounts. It gambled that Qunar wouldn’t be able to afford a price war on hotels, and it was right.

By 2015 Qunar capitulated, and Ctrip acquired 45 percent of its shares and got favorable business terms. Qunar was subsequently taken private.

Priceline Group may similarly be playing hardball with Trivago, though there is no risk of Expedia ceding control of the company.

The calculations for forecasts are private and complex. That said, Trivago’s growth forecast for the second half of 2018 seems to be driven primarily by assuming that Priceline Group will change its mind and spend somewhat more than it currently is by the end of 2018.

Otherwise, Trivago is assuming that its efficiency at persuading consumers to click its links will jump by remarkable amounts. It’s unclear how else the company could achieve its forecasted gains.

Perhaps it is assuming that Expedia will eventually ramp up its spending on Trivago given that it is getting more value per dollar spent without Priceline’s competition in the auctions. That share gain may eventually annoy Priceline.

On the call, Schrömgens said, “For some advertisers, we have some visibility and can see improved commercialization on their side and improved return on investment.” Does that mean Expedia provides data to Trivago on how well it is working as a channel?

Hefer said in an interview, “We estimate booking conversion and booking value from data voluntarily provided to us by certain advertisers to better understand the drivers in our marketplace. We cannot comment on individual advertisers due to our commercial agreements with them. The business we do with Expedia and other advertisers is conducted on an arm’s length basis.”

Beyond Priceline

It seems unlikely that increased competition from smaller online travel agencies and by hotel chains would substantially change the math for Priceline Group and give it a reason to come back into Trivago in a significant way throughout 2018.

Some other external factor, such as a decline in effectiveness of its other marketing channels, might instead be needed to prompt the online travel behemoth to change its mind.

One other shark in the water is that a U.K. watchdog authority has also launched an investigation of the company’s practices.

The British Competition and Markets Authority cited concerns about the clarity, accuracy, and presentation of information on Trivago, such as whether the way it ranks hotels in its search results has been influenced by how much commission a hotel paid rather than the customer’s requirements in a way the company may not have not adequately disclosed.

The company did not discuss these matters during its investor call, suggesting that analysts may be sanguine about them. That said, Trivago’s share price was $8, down from its $11 debut in its December 2016 initial public offering, and valuing the company at about $2.87 billion

Still, it is not completely clear that the worst volatility is over for the company, despite assurances from its executives.

Trivago is talking optimistically, though. It has no changes to its plan to move to new offices in Düsseldorf that can accommodate about 2,000 workers.

Photo Credit: The hotel search company released a new corporate brand-mark on February 7, 2018. Pictured are employees looking at the design. Trivago