Hostelworld : Interim Results

I n t e r i m R e s u l t s

Released : 21 Aug 2019 07:00

RNS Number : 6999J

Hostelworld Group PLC

21 August 2019

Hostelworld Group plc

("Hostelworld" or the "Group") 2019 Interim Results Announcement

Roadmap for Growth progressing well

21 August 2019: Hostelworld, the global hostel-focussed online booking platform, is pleased to announce its interim results for the period ended 30 June 2019.

Operational & Financial Summary

• The Group delivered revenue of €38.8m in H1 2019 (H1 2018: €42.6m). Excluding the impact of deferred revenue1, Group revenue was €43.2m (H1 2018: €46.8m)
• Hostelworld brand gross bookings of 3.7m in H1 2019 (H1 2018: 3.8m). Group total gross bookings of 3.8m (H1 2018: 4.0m) reflecting the continued managed decline in supporting brands
• Net of cancellations Hostelworld brand bookings of 3.4m (H1 2018: 3.7m). Total Group bookings of 3.5m (H1 2018: 3.9m)

∙ Average Booking Value ("ABV") of €12.8 (H1 2018: €12.2), a 6% increase on H1 2018, 2% increase on a constant currency basis

• 7% increase in net bookings from the app (from 36% of net bookings in H1 2018 to 43% of net bookings in H1 2019)

∙ The Group delivered Adjusted EBITDA2 of €8.9m in H1 2019 (H1 2018: €10.4m), a 15% decrease (9% decrease when excluding the impact of deferred revenue)

• Adjusted Earnings per Share2 of 6.44 euro cent (H1 2018: 7.93 euro cent)

∙	Strong cash flow generation with adjusted free cash conversion of 108% (H1 2018: 131%) and adjusted free cash flow2 of €9.6m (H1 2018:
	€13.6m)
∙	Interim dividend of 4.2 euro cent per share (H1 2018: 4.8 euro cent), in line with stated dividend policy. We continue to review all options on how
	we return capital to shareholders

Strategic Highlights

• 'Roadmap for Growth' strategy to invest in our core platform is progressing well, with investment in key elements including core search experience, payments, customer booking experience, rate plans, 3rd party connectivity and supplier facing platforms
• Strategic investment of US$3m announced in Tipi Pty Ltd ("Tipi"), an innovative hostel focussed technology company which will complement our product offering benefiting our customers and hostel partners
• Strengthened management team with appointment of new Chief Supply Officer, Chief Marketing Officer and Chief Human Resources Officer.

Gary Morrison, Chief Executive Officer, commented:

"While we are pleased with overall progress made during H1, particularly with regards to our 'Roadmap for Growth' strategy, booking demand over the peak summer period has been somewhat lower than anticipated. The first half financial performance was also significantly impacted by higher than anticipated inflation in performance marketing channels and the effect of the full global roll out of the free cancellation product being included for the whole period for the first time.

As noted, we have made good progress on our 'Roadmap for Growth' strategy during the first half of the year, including improving the core search experience and adding unique hostel content, in addition to initial steps to improve our connectivity with our hostel partners and suppliers. We have also announced a strategic investment in Tipi, an innovative hostel focussed technology company, which will enhance our product offering for both our customers and hostel partners.

The market remains highly competitive and as noted in our AGM statement, this continued into the peak summer period. Coupled with higher than anticipated inflation in performance marketing channels and the financial effect of increased investment in our 'Roadmap for Growth' during the second half of the year, means that EBITDA for the full year is likely to be below 2018.

We continue to operate in an attractive and growing market, and I remain confident about the opportunity to capitalise on the significant growth opportunities we have identified. I believe the operational and strategic improvements we have put in place in the first half, should enable us to return the business to volume growth during 2020 and we continue to assess opportunities, both organic and inorganic, which could enable us to accelerate that growth. "

Analyst Presentation

A presentation will be made to analysts today at 9.00am, a copy of which will be available on our Group website http://www.hostelworldgroup.com. If you would like to attend or dial into the presentation, please contact Powerscourt on the contact details provided below.

A copy of the presentation will be available on our Group website www.hostelworldgroup.com

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

Notes

1 Deferred revenue is the result of the rollout of our free cancellation booking option in 2018, which was a key product release to broaden our customer offering. €4.4m (H1 2018: €4.2m) of revenue collected from customers will be recognised, net of any future cancellations, once the option to cancel the booking has passed.

2 The Group has adopted IFRS 16 Leases from 1 January 2019, as disclosed in note 2 to the condensed consolidated financial statements. The Group has applied the modified retrospective approach, and as a result it has not restated prior periods on adoption in its financial statements. For comparative purposes several H1 2018 comparatives have been restated in this announcement to reflect the impact of adopting IFRS 16, in order to give a true and fair comparative of underlying performance.

For further information please contact:
Hostelworld Group plc
Gary Morrison, Chief Executive Officer	[phone]
TJ Kelly, Chief Financial Officer	[phone]
Powerscourt	[e-mail]
Lisa Kavanagh/ Jack Hickey	[phone]

About Hostelworld Group

Hostelworld Group is a global hostel-focussed online booking platform, sparking social experiences for young and independent travellers.

Our customers are not your average tourists; they crave unique experiences that we facilitate with the best choice of hostels around the world offered in 19 languages across the website and 13 languages on our app of our core brand Hostelworld.

We have 20 years' experience as the hostel Online Travel Agent ("OTA") experts, and today we work with over 17,400 hostel properties globally, in addition to 20,000 other forms of budget accommodation.

Our customers have access to an extensive database of more than 12 million customer reviews which allows them to choose the hostel that's right for them.

Since 1999 we've partnered with hostels worldwide, enabling them to manage and distribute their inventory to our highly engaged and valuable global customer base.

HOSTELWORLD GROUP PLC

INTERIM MANAGEMENT REPORT

To the members of Hostelworld Group plc

Cautionary statement

This Interim Management Report (IMR) has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The IMR should not be relied on by any other party or for any other purpose.

The IMR contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report but such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

This interim management report has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to Hostelworld Group plc and its subsidiary undertakings when viewed as a whole.

Chief Executive's Review

Operational review

While we are pleased with overall progress made during H1, particularly with regards to our 'Roadmap for Growth' strategy, the softness in booking demand noted in our AGM statement continued over the peak summer period resulting in overall bookings being somewhat lower than anticipated. The first half financial performance was also significantly impacted by higher than anticipated inflation in performance marketing channels and the effect of the full global roll out of the free cancellation product being included for the whole period for the first time.

Strategic update

In our most recent annual report, we detailed the Group's 'Roadmap for Growth' programme which was developed in order to capitalise on the significant

growth opportunities for the business that we have identified, and to return the Group to volume growth during 2020. This programme will strengthen our core platform, enhance the experience for all our customers and close the competitive and technological deficits which we had previously identified. As we also indicated, we continue to appraise complementary acquisitions and partnerships that could accelerate our growth or provide us with a unique capability to improve our offering to our customers or hostel partners.

• Strategic investment

We are delighted to announce today a strategic investment made in July 2019 in an innovative hostel focussed technology company Tipi Pty Ltd ("Tipi"), based in Sydney Australia, which provides technology solutions to the hostel market, enabling guests to check-in and download their digital key prior to arrival. For hostel owners, this streamlines check-in, lowers staff overheads and creates a mobile community to engage more effectively with their guests. During their stay, guests can meet other people staying at the same time, see what's on at the hostel and browse local experiences, increasing ancillary revenue and improving guest satisfaction scores.

Hostelworld will pay US$3m for a minority shareholding in Tipi. This investment will enable Tipi to embark on its ambitious growth plans over the next three years and to provide smart technology solutions to hostels which will complement our product offering. This solution provides a significantly enhanced customer experience while positioning Hostelworld to play a more active and central role in the hostel ecosystem. Existing Tipi management will continue to develop and grow the business. The investment required for this year will be funded out of Hostelworld's existing cash resources. The Tipi website can be found at www.tipi.travel.

• Enhancing the core search experience and creating unique hostel content

As we invest in our core product roadmap, we are significantly enhancing the core search experience for our customers. Development is largely complete on delivering a foundational platform which optimises search results across property rankings and our Elevate and Featured Listings products, with early test results indicating positive conversion uplift potential. Our focus will remain on further optimising this during the second half of the year and into 2020. We have also invested in delivering unique hostel content across a subset of our hostel supply base, where initial tests results have also been positive, and we will continue to rollout this unique hostel content and other content types during the second half of this year.

• Improving the booking experience

We have been focusing on improving the customer booking experience through a range of initiatives including the ability to add and remove nights to existing bookings online. We also expect the rollout of our improved payments platform at the end of the year, with our first customers and hostels using this platform in Q1 2020. Over time this platform will feature a range of additional payment types and bank transfer methods with additional booking currencies available shortly afterwards. This has taken longer than previously anticipated due to the complexity of the engineering work involved and our decision to recruit a specialist payments expert who joined the Group in May to provide the experience and leadership to deliver this important programme.

To enhance our customers' experience, we are in the process of migrating our website to a progressive Web App platform. This will improve site speed and enable a more modern app-like experience, whilst further reducing our technical debt. We anticipate that this migration will be largely complete by the end of the current year.

• Developing our supplier facing platform

We have rolled out a number of enhancements to our supplier facing platforms in H1 2019, with additional improvements due during the second half of the year across both our extranet and Backpacker Online ("PMS") platforms. We are also actively pursuing additional opportunities to strengthen our PMS position in the industry across organic, partnership and inorganic means. We are also actively increasing the breadth of rate plan configurations we offer hostels and improving the connectivity to hostels that connect to our platform via 3rd party platforms. We have launched a number of new rate plan features during H1 2019 with more due later this year, which will further strengthen our inventory competitiveness.

• Continued investment in our senior management team

In order to ensure continued delivery against our 'Roadmap for Growth', we have continued to invest in our management team with a number of significant hires during the period. In April 2019, Fabrizio Giulio joined Hostelworld as Chief Supply Officer, having previously worked with Expedia Group. Yale Varty has joined the Group as Chief Marketing Officer in August 2019, having most recently led the marketing organisation at ASOS. Jody Jordan will join us as Chief Human Resources Officer from Kerry Group, having previously worked at Paddy Power and Vodafone. We are also actively recruiting for a Chief Product Officer.

With the new management team now in place, the focus during the second half of the year will be on the continued delivery of the Group's strategic plan and driving the operational benefits from the investments and enhancements that we have recently made to return the business to volume growth during 2020.

Business Model

In operating a global hostel-focussed online booking platform, we offer a simple and comprehensive online mechanism that gives providers of hostels and other budget accommodation a shop window to show their accommodation to young and independent travellers. We provide the technology solution to facilitate bookings between the hostel and traveller, offering a high-quality booking experience that provides us with commission based revenue. At the time of booking, hostel travellers pay a deposit directly to us, and the remainder of the cost of their stay directly to the hostel at the time of their visit.

The deposit equates to our revenue from the transaction. This efficient business model has favourable working capital attributes and strong cash conversion.

In early 2018 we rolled out a global free cancellation model to further broaden our product offering. This booking option was initially rolled out on a phased basis during the first six months of the year before the full global rollout commenced in July. This has impacted on comparative figures for H1 2019. As with the other deposit models, at the time of booking, hostel travellers pay a deposit directly to us, and the remainder of the cost of their stay directly to the hostel at the time of their visit. If the hostel traveller cancels their free cancellation booking, within a specified period, we will refund their deposit. The introduction of the free cancellation booking option has resulted in a portion of gross bookings being cancelled and the deposits refunded to customers. The free cancellation product is working well with underlying cancellation rates remaining within our expected range.

Summary

I believe that the operational and strategic improvements that we have made during the first half of this year, combined with a stronger leadership team, will set the business on a solid path to return to volume growth during 2020. I outlined my strategy in the 'Roadmap for Growth' in November 2018 and I am pleased to report that we are making good progress on implementing the key elements of that strategy. Inevitably when implementing a big programme of change management, some elements take longer to execute than originally anticipated and whilst we are ahead of schedule in some parts of the strategy, some of our planned improvements have taken longer to implement. Accelerating these changes through additional investment and management focus will be our key priority during the second half.

I am particularly encouraged that we have also identified a number of additional opportunities for product enhancements and diversification beyond those

originally anticipated last November. The early indications from the improvements already made are positive and I am confident that once we have implemented the changes and enhancements targeted in the 'Roadmap to Growth', the business will be significantly competitively strengthened and well- positioned to capitalise on the growth opportunities we have identified.

After one year at Hostelworld, I continue to see significant opportunities for future growth beyond an OTA for hostel accommodation. As we progress our strategy and assess the opportunity to monetise the "other 16 hours of the day," there are clear areas of potential opportunity such as in ancillary products on our own booking platform and in partnership with hostels and other businesses to market their products to a wider group of our customers when they have arrived at their destinations.

Outlook

The market remains highly competitive and as noted in our AGM statement, this continued into the peak summer period. Coupled with higher than anticipated inflation in performance marketing channels and the financial effect of increased investment in our 'Roadmap for Growth' during the second half of the year, means that EBITDA for the full year is likely to be below 2018.

Hostelworld continues to operate in an attractive and growing market and remains confident about the opportunity to capitalise on the significant growth opportunities we have identified. We believe the operational and strategic improvements we have put in place in the first half, should enable us to return the business to volume growth during 2020 and we continue to assess opportunities, both organic and inorganic, which could enable us to accelerate that growth.

Gary Morrison

Chief Executive

20 August 2019

Financial Review

Key Performance Indicators

				%
				Change
			%	Constant
	H1 2019	H1 2018	Change	Currency	FY 2018
Gross Bookings
Bookings - Hostelworld brand (m)	3.66	3.80	(4%)		7.27
Bookings - supporting brands and channels
(m)	0.09	0.16	(44%)		0.28
Total Booking Volume (m)	3.75	3.96	(5%)		7.55
Net Bookings
Net Bookings - Hostelworld brand (m)	3.41	3.71	(8%)		6.96
Total Net Group Bookings Volume (m)	3.50	3.87	(10%)		7.24
Average Booking Value ("ABV") (gross) (€)	12.84	12.15	6%	2%	11.89
Revenue (€m)	38.8	42.6	(9%)	(12%)	82.1
Deferred Free Cancellation Revenue
(€m)	4.4	4.2	5%	2%	2.9
Adjusted EBITDA (€m) (1)	8.9	10.4	(15%)	(17%)	22.5

1. H1 2018 and Financial Year 2018 Adjusted EBITDA have been adjusted for the impact of the Group adopting IFRS 16 Leases. Refer to Note 2 to the Condensed Consolidated Financial Statements for further details.

The Group believes that both gross booking volume ("Gross Bookings", "Bookings") and booking volume net of cancellations ("Net Bookings") are key performance indicators and are critical in assessing the operational performance of the business.

The Hostelworld brand continues to operate in a highly competitive market, which has also been combined with some recent weaker consumer demand. The business also continues to invest in its core platform in order to improve its flexibility and improve the experience of our customers bringing it up to competitive parity. As a result, the Group's gross booking volumes declined by 5% in the six months ended 30 June 2019 (2018: 2% growth) driven by a decline in performance in our core Hostelworld brand in the period which fell by 4% compared to the same period last year (2018: 6% growth).

There was strong growth from net bookings generated in the Hostelworld app which grew by 7% during the period to 43% of net bookings (2018: 36% of

net bookings). Net bookings generated from the app and mobile web channels represented 61% of Group net bookings (2018: 55%). The Group's booking volumes and revenue recognition are seasonal and peak between May and August during the summer travel period in the northern hemisphere.

The Group's core brand, Hostelworld, now represents 98% of Group bookings compared to 96% in the six months ended 30 June 2018. The Group has continued to deliberately focus its marketing initiatives and technology investments on this core brand, whilst continuing the managed decline in bookings of the Group's supporting brands which was 44% in the six months ended 30 June 2019 (2018: 47% decline).

In 2018 in response to customer demand, the Group rolled out a free cancellation booking option, to further broaden our product offering. This led to a

deferral of revenue recognition, which has had an impact on reported earnings during H1 2019 of €4.4m (2018: €4.2m), however this has not had an

impact on cash receipts. At 30 June 2019, €7.3m represents the total deferred revenue balance (30 June 2018: €4.2m) from free cancellation bookings that has been collected from customers and will be recognised in future periods, net of any future cancellations, when the last cancellation date has passed. Any cancellations that were processed by customers up to and including 30 June 2019 have been refunded and are not included in this deferred revenue balance.

The introduction of the free cancellation booking option has resulted in a portion of gross bookings being cancelled and refunded to customers. Total Group bookings, net of any cancellations processed by 30 June 2019, have declined by 10% in H1 2019 (2018: 1% decline), with Hostelworld brand net bookings declining by 8% (2018: 3% growth). Underlying cancellation rates continue to perform in line with our expectations.

Group revenue decreased by 9% for the six month period ended 30 June 2019 to €38.8m (2018: €42.6m), which corresponds to a 12% decrease on a constant currency basis. This is partially as a result of the impact of the free cancellation booking option with cancelled bookings increasing to 0.25m bookings (2018: 0.09m bookings). The increase in cancellation numbers is driven by timing of the full global rollout which was in July 2018. All of the marketing costs in relation to these bookings have been recognised in the six month period ended 30 June 2019.

Average Booking Value ("ABV") is the average value paid by a customer for a gross booking. ABV increased by 6% during the period (2018: flat), and on a constant currency basis grew by 2% for the six months. The average commission rate in the six months ended 30 June 2019 increased to 16.0% (2018: 15.3%), primarily driven by the effects of base commission increases in February 2018 and January 2019. These commission increases and the positive impact of exchange rates were partially offset by the continued decline in the number of bed nights per booking with the continued shift to mobile bookings and a slight reduction in the underlying base price per bed.

The Group continues to actively manage its marketing mix with marketing investment as a percentage of revenue of 42% in the six months ended 30 June 2019 as compared to 43% in the same period in 2018. Excluding the impact of deferred free cancellation revenue in the period, marketing investment would be 37% of revenue (2018: 39%). This has reduced due to a planned reduction in category advertising, offset by higher than anticipated cost inflation in performance marketing channels, and increased cancellations in H1 2019 relative to H1 2018 due to the phased launch of the free cancellation product in H1 2018.

Adjusted EBITDA

The Group uses Earnings before Interest, Tax, Depreciation and Amortisation, excluding exceptional and non-cash items ("Adjusted EBITDA") as a key performance indicator when measuring the outcome in the business from one period to the next, and against budget. Exceptional items by their nature and size can make interpretation of the underlying trends in the business more difficult. We believe this alternative performance measure reflects the key drivers of profitability for the Group and removes those items which do not impact underlying trading performance.

The Group has adopted IFRS 16 Leases from 1 January 2019, as disclosed in note 2 to the condensed consolidated financial statements. The Group has applied the modified retrospective approach, and as a result it has not restated prior periods on adoption in its financial statements. For comparative purposes Adjusted EBITDA for prior periods has been restated to reflect the impact of adopting IFRS 16, in order to give a true and fair comparative of underlying performance.

		Financial
Restated Comparatives (€m)	H1 2018	Year 2018
Adjusted EBITDA- as previously reported	9.8	21.4
Impact of IFRS 16 Leases if applied retrospectively(2)	0.6	1.1
Adjusted EBITDA - including the impact of IFRS 16 Leases	10.4	22.5

1. Refer to Note 2 to the Condensed Consolidated Financial Statements for further details.

Adjusted EBITDA of €8.9m (2018: €10.4m) has decreased by €1.5m (14%) in the six months to 30 June 2018 and by 17% on a constant currency basis.

Adjusted EBITDA as a percentage of revenue declined to 23% (2018: 24%). Adjusted EBITDA has been impacted by the reduction in bookings during the period and by the rollout of the free cancellation product, which has resulted in increased cancellations numbers in H1 2019.

Administration expenses decreased by €1.8m (6%) to €31.4m in the six months ended 30 June 2019. A contributory factor in this was the refocussing of the marketing strategy away from high profile brand advertising campaigns towards marketing activities that focussed on core customer acquisition.

Gross staff costs (excluding share based payment expense and before the impact of capitalised development labour) decreased from €9.5m to €8.9m. Average headcount increased by 7% from 281 in the six months ended 30 June 2018 to 300 in the six months ended 30 June 2019, as the Group continues to invest in a technology development centre in Portugal which will further increase the development capacity of the Group.

Excluding the impact of the level of development labour capitalised in accordance with IFRS standards (2019: €0.5m; 2018: €0.8m), share based payment expense and the impact of a bonus accrual, staff costs increased by 2% on a constant currency basis, reflecting the increasing headcount in the Group at a lower base cost per employee.

Reconciliation between Operating Profit and Adjusted EBITDA:

			Adjusted		Reported
€m		Adjusted H1	Financial
	Reported H1	Financial
	H1 2019	2018 (3)	Year 2018 (3)	2018	Year 2018
Operating profit	0.5	3.0	6.8	2.9	6.7
Depreciation	1.1	1.1	2.2	0.6	1.2
Amortisation of development costs	0.8	0.9	1.9	0.9	1.9
Amortisation of acquired intangible
assets	5.1	5.0	10.3	5.0	10.3
Exceptional items	1.3	0.0	1.6	0.0	1.6
Share based payment expense / (credit)	0.1	0.4	(0.3)	0.4	(0.3)
Adjusted EBITDA	8.9	10.4	22.5	9.8	21.4