Hostelworld : Preliminary Results - Year ended 31 December 2018

P r e l i m i n a r y R e s u l t s ‐ Y e a r e n d e d 3 1 D e c e m b e r 2 0 1 8

Released : 02 Apr 2019 07:00

RNS Number : 7580U

Hostelworld Group PLC

02 April 2019

LEI:213800OC94PF2D675H41

Hostelworld Group plc

("Hostelworld" or the "Group")

Preliminary Results for the Year ended 31 December 2018

Continued growth in core Hostelworld brand gross bookings of 4% 'Roadmap for Growth' programme developed post strategic review

2 April 2019: Hostelworld, the global hostel‐focussed online booking platform, is pleased to announce its preliminary results for the year ended 31 December 2018.

Operational & Financial Highlights

∙Continued growth in core Hostelworld brand gross bookings

oHostelworld brand bookings growth of 4%, total Group bookings growth flat reflecting the managed decline in supporting brands.

∙22% increase in bookings from the app (from 33% of bookings in 2017 to 40% of bookings in 2018).

∙The Group generated revenue of €82.1m in the year (2017: €86.7m) plus an additional €2.9m of deferred revenue which will be recognised in 2019. Excluding the impact of deferred revenue, Group revenue grew by 1% on a constant currency basis.

oDeferred revenue is the result of the successful rollout of our free cancellation booking option in 2018, which was a key

product release to broaden our customer offering. €2.9m of revenue collected from customers will be recognised in 2019, net of any future cancellations, once the option to cancel the booking has passed.

oAverage Booking Value ("ABV") (gross) of €11.9 (2017: €11.6), a 3% increase on 2017, 6% increase on a constant currency basis.

∙Adjusted EBITDA of €21.4m, a 19% decrease, or an 8% decrease when excluding the impact of deferred revenue (2017: €26.4m).

∙Adjusted Earnings per Share of 18.33 euro cent (2017: 22.73 euro cent).

∙Strong cash flow generation with cash conversion of 97% and free cash flow of €20.7m (2017: €21.5m).

∙Proposed final dividend of 9.0 euro cent per share (2017: 12.0 euro cent), resulting in full year dividend of 13.8 euro cent per share, in line with stated dividend policy.

Strategic Developments

∙ New 'Roadmap for Growth' programme developed and implemented by CEO, Gary Morrison following the completion of a strategic review in Q4 2018.

∙Strategic review highlighted the opportunity for significant long‐term growth in the business.

∙Strengthened management team now in place to deliver the growth plans.

∙Key area of focus in 2019 is strengthening the capability of our core platform to improve its flexibility and the experience for our customers.

∙Plans in place to utilise and leverage our rich data sources to target and grow the most profitable customer segments.

∙Marketing activity and investment now focussed on driving core customer acquisition, a move away from category advertising.

Gary Morrison, Chief Executive Officer, commented:

"We are pleased to have reported continued growth in our core Hostelworld brand gross bookings of 4% during the year and to have successfully developed the 'Roadmap for Growth' programme.

Hostelworld is operating in a highly competitive market, which is growing. We have a very relevant brand which is trusted by a loyal and engaged customer base. Following the completion of our strategic review, we identified and developed a 'Roadmap for Growth' programme to allow the Group to capitalise on these significant opportunities available and to return the business to growth. We started work on a number of initiatives during the second half of 2018 and we look to 2019 as a year of investment to fund the growth drivers for 2020 and beyond. We anticipate that organic growth will be self‐funded from our existing cash resources and cash generated from the business.

Trading in the first quarter of 2019 is in line with the Board's expectations. We remain committed to delivering value to shareholders and continue to assess our capital allocation approach in line with investment choices and priorities."

Analyst Presentation

Ap r e s e n t a t i o n w i l l b e m a d e t o a n a l y s t s t o d a y a t 9 . 0 0 a m , a c o p y o f w h i c h w i l l b e a v a i l a b l e o n o u r G r o u p w e b s i t ehttp://www.hostelworldgroup.com. If you would like to attend or dial into the presentation, please contact Powerscourt on the contact details provided below:

For further information please contact:
Hostelworld Group plc
Gary Morrison, Chief Executive Officer	[phone]
TJ Kelly, Chief Financial Officer	[phone]
Powerscourt	hostelworld@powerscourt‐group.com
Lisa Kavanagh/Jana Tsiligiannis	[phone]
Jack Hickey	[phone]

About Hostelworld Group

Hostelworld Group is the leading 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 16,500 hostel properties globally, in addition to 20,000 other forms of budget accommodation.

Our customers have access to an extensive database of more than 11.5 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.

This announcement contains forward‐looking statements. These statements relate to the future prospects, developments and business strategies of Hostelworld. Forward‐looking statements are identified by the use of such terms as "believe", "could", "envisage", "estimate", "potential", "intend", "may", "plan", "will" or variations or similar expressions, or the negative thereof. Any forward‐looking statements contained in this announcement are based on current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. If one or more of these risks or uncertainties materialise, or if underlying assumptions prove incorrect, Hostelworld's actual results may vary materially from those expected, estimated or projected. Any forward‐looking statements speak only as at the date of this announcement. Except as required by law, Hostelworld undertakes no obligation to publicly release any update or revisions to any forward‐looking statements contained in this announcement to reflect any change in events, conditions or circumstances on which any such statements are based after the time they are made.

Chairman's Statement

2018 was a year of significant activity and change for the Hostelworld Group. Despite experiencing challenging industry conditions during the summer months, we are pleased to report continued growth in gross bookings from our core Hostelworld brand of 4%, although the managed decline in our supporting brands resulted in flat overall Group bookings. In response to customer demand and following a pilot launch, in July we successfully rolled out our free cancellation booking option globally, which further enhanced and broadened our customer product offering.

In June 2018 Gary Morrison joined Hostelworld as Chief Executive Officer, following the departure of Feargal Mooney from the Group. Gary worked for Expedia for over seven years and brings a wealth of experience and knowledge of the Online Travel Agent ("OTA") marketplace. Following his arrival, Gary undertook a detailed strategic review of the Group which he completed in November 2018. As outlined in more detail in his Chief Executive's review, this confirmed the significant growth opportunity for Hostelworld and the strengths and continuing relevance of our brand, in addition to highlighting areas that require future investment.

Results and Financial Position

Gross bookings for the year were flat given the managed decline in our supporting brands which offset the growth of 4% in the Hostelworld brand. As indicated at the time, the peak summer months were impacted by unseasonably hot weather in Europe and the timing of the World Cup. The Group's core brand, Hostelworld, currently represents 96% of total Group bookings (2017: 93%) with this percentage likely to increase further during 2019 as per our strategy. The successful rollout of the free cancellation booking option during the year led to a deferral of revenue recognition, which has impacted reported earnings in 2018, however this has not had an impact on cash receipts. At 31 December 2018, €2.9m of revenue from free cancellation bookings was collected from customers and deferred and will be recognised, net of any future cancellations, in 2019 when the last cancellation date has passed.

Revenue for the year was €82.1m (2017: €86.7m) a decrease of 5%, primarily due to the impact of the deferred revenue. Adjusted EBITDA (as

defined in the Financial Review) for the year was €21.4m (2017: €26.4m) and operating profit for the year was €6.7m (2017: €11.9m). Both were also impacted by the deferred revenue.

The business continues to be strongly cash generative, with Adjusted Free Cash Flow (as defined in the Financial Review) of €20.7m (2017: €21.5m). Cash balances at year end were €26.0m (2017: €21.3m), after payment of €16.1m of dividends during the year (2017: €24.8m).

Dividend and Capital Structure

The Board is recommending a full year final dividend of 9.0 euro cent per share which together with the interim dividend of 4.8 euro cent per share brings the total dividend for 2018 to 13.8 euro cent. This reflects a distribution of 75% of the Adjusted Profit after Taxation for the year and is in line with our stated dividend policy. The Board continues to review its approach to returning capital to shareholders, whilst retaining flexibility to enable us to stabilise and strengthen our core platform.

Board Composition

The composition of the Board is fully compliant with the UK Corporate Governance Code as applied to small companies. The Board has undertaken an appraisal of the Directors, as well as of the Board and each sub‐committee, which concluded that the Board is functioning effectively.

There was significant change to the Board during 2018. In May 2018, we announced that Feargal Mooney who had been with Hostelworld for 16 years would be leaving the Board in June and would be succeeded by Gary Morrison.

Earlier in 2018, Mari Hurley who had been with the Group for 11 years as Chief Financial Officer, resigned from the Board. In August 2018 we announced that TJ Kelly would be taking up the position of Chief Financial Officer and would be joining the Group and the Board in November 2018. TJ was formerly Chief Financial Officer of Glanbia plc's Performance Nutrition division and brings a wealth of financial experience in international consumer‐focussed businesses and a proven track record in financial leadership.

Pursuant to changes to the composition of the audit committee as set out in the 2018 Corporate Governance Code, I stepped down as a member of the Audit Committee in December 2018. In February 2018 Éimear Moloney was appointed as a member of both the Nomination Committee and Remuneration Committee. There were no other changes to the Audit Committee, Remuneration Committee and Nomination Committee during the year.

Colleagues, Customers and Shareholders

On behalf of the Board, I would like to thank all members of the Hostelworld team for their commitment and hard work during the year. I would like to particularly acknowledge the dedication of our product and technology development teams based in Dublin and Porto. Our expanded in‐house capability is key to our plans to leverage Hostelworld's data assets and native app development strengths and reaffirm our competitive position as a leading hostel focussed online booking platform.

Following Gary Morrison's appointment as Chief Executive Officer, he developed a 'Roadmap for Growth' programme and strengthened the management team to better resource us to deliver the significant future growth opportunities in the business. In addition to the appointment of TJ Kelly as Chief Financial Officer, a number of key appointments and internal promotions have been made across the business in areas including Product, Technology, and Analytics and Insights in order to deliver our ambitious growth objectives.

I would also like to thank our customers and hostel partners, whom we continue to place at the heart of our business, for their loyalty and support.

Finally, to our shareholders for their confidence and commitment, we look forward to returning our business to growth and continuing to return value to our shareholders.

Michael Cawley

Chairman

1 April 2019

Chief Executive's Statement

Since its foundation twenty years ago, Hostelworld has grown into a global business focussed on facilitating a social travelling experience for young and independent travellers and others seeking a sense of adventure, community and interaction with like‐minded international travellers. Since joining the business in June I have completed my strategic review, which has confirmed why I decided to join the Group. Hostelworld has a very relevant brand which is trusted by a loyal and engaged customer base and has access to exclusive inventory of high quality hostels. By leveraging our significant accumulated data assets and native app development skills to exploit our unique and focussed position in the hostel ecosystem, we are not just well positioned in a growing market, but as a market leading category specialist we can compete effectively with the generalist lodging online travel agents ("OTAs").

It is also clear that in recent years, while Hostelworld has had a strong track record of EBITDA delivery, this has not been matched by consistent top line growth. Furthermore the reliance on, and significant investment in category advertising to drive customer acquisition has not accelerated the core business and translated into bookings growth, despite operating in a growing market. My strategic review, announced in November, also identified a number of areas where there has been a lack of investment, most notably in our core platform, that need to be addressed to ensure that we remain competitive in our marketplace. These will be the main focus of our attention in the coming year. At the same time, I have identified and developed a 'Roadmap for Growth' programme in order to capitalise on the significant opportunities for the business and to return it to a proper growth trajectory. In order to deliver this, I have taken steps to strengthen the management team with a number of significant hires and internal promotions.

The main elements of our 'Roadmap for Growth' programme have now been agreed, with a number of initiatives started during the second half of 2018. As we look to 2019 as a year of investment to fund the 'return to growth drivers' in 2020, there will be a number of key focus areas for the management team as described in more detail below. It is anticipated that organic growth will be self‐funded from our existing cash resources and cash generated from the business. Appropriate deployment of capital against organic and inorganic growth opportunities will be subject to continual assessment and appraisal by the Board.

Returning to Growth

Gross bookings were flat year on year (2017: 6% growth) with modest growth of 4% in the Hostelworld brand, which now accounts for 96% of total bookings, being offset by the managed decline in our supporting brands. As announced in August at the time of our half year results, bookings growth in 2018 was impacted by some softness in trading seen during the peak Summer months as a result of the hot weather in Europe and the timing of the World Cup.

Our focus is on the hostel market and we are operating in a growing market: the total value of hostel revenue is forecast to grow from

US$5.5bn in 2017 to US$6.4bn in 2020 (Source: Phocuswright's "The Global Hostel Market Place Second Edition", March 2018). The market is highly fragmented, but with a growing supply base of high quality accommodation. We are seeing significant investment and some modest consolidation by the top chains within the hostel segment and the share of bookings made through OTAs, such as Hostelworld, is forecast to grow at a faster rate than the traditional hostel market. We also have a strong and trusted brand that provides relevant and valuable customers to the hostel sector. It is therefore imperative that we are correctly positioned to take advantage of the growth opportunities in our marketplace and that we appropriately invest in our core product, platform, technological capabilities and marketing in order to achieve this.

Our Strategy

The strategic review has highlighted the opportunity for significant growth for the business. The positive market dynamics showcase the potential pace for growth, which a purely hostel focussed business can exploit. We have identified a number of key focus areas as our strategic objectives for 2019. These are as follows:

∙Investing in our Platform

One of the key areas of our focus in 2019 will be on strengthening the core platform in order to improve its flexibility and the experience of our customers bringing it up to competitive parity. Since 2015 there was underinvestment in the total product and engineering headcount, which was insufficient to maintain our platform competitiveness against other OTAs. I have identified closing this technological gap as a key priority for my management team.

During 2018 we rolled out our free cancellation option for customers which has now been successfully embedded, with cancellation rates performing in line with our expectations. We plan to make further improvements to the range of booking options we offer our customers which will result in greater flexibility to make online changes and a wider range of payment options, including different currencies and different payment methods.

We plan to improve the search experience for our customers in order to present the right hostels to the right customers at the right time through more dynamically optimised search functions. This will involve expanding and improving the hostels available to our customers with unique experiences and improved site and hostel content localisation.

We are also investing in our current platform to upgrade connectivity for hostel owners and to offer improved and more flexible rate plan configurations. Hostelworld has significant exclusive inventory and in order to retain this position we need to invest and ensure that our platform is as flexible and convenient as possible for hostel owners to use. In recent years the use of third party platforms has increased with these platforms typically providing connections to multiple OTAs, including Hostelworld. This has allowed more competitors to gain access to the hostel market. Therefore upgrading our third party platform connectivity is a key priority in order to defend our competitive position, ensuring we have the best access to inventory for our customers.

∙Best‐in‐Class App Technology

Hostelworld launched its first app in 2010 and this has been one of the key factors in our success over the past few years with continued growth in bookings via our app every year. In 2018 40% of all bookings were made via the app up from 33% in 2017. Since we launched our iOS and Android apps in 2014, they have won industry awards and recognition. However, in an increasingly competitive market where our customers have more choice and options, we need to ensure that our app has the best functionality with the most relevant content, together with the appropriate inventory for our chosen segment. We expect to see app usage continue to grow in the future and this will continue to drive marketing efficiencies by lowering our customer acquisition and transaction costs.

One of Hostelworld's key strengths is our experience and expertise in native app development. Our software development office in Porto which we opened in 2017 has been significantly expanded during 2018. As at 31 December 2018 we had 53 people employed in Porto compared to 24 at the end of 2017. During 2019 our Dublin and Porto product and development teams will continue to update and expand our app capability. The native app development skills that Hostelworld has developed are a key source of competitive advantage for our business.

∙Leveraging our Data Assets

Hostelworld has millions of stored anonymised itineraries which provide a rich data source and have historically been under‐utilised by the Group. We can use this data to better understand the preferences of different types of customer: for example, a single destination trip customer will typically have different requirements and be looking for different features in their hostel stay compared to a multi destination t r i p t r a v e l l e r w h o i s s e e k i n g a d i f f e r e n t t y p e o f h o s t e l e x p e r i e n c e . B y u s i n g t h i s d a t a w e c a n g e n e r a t e h i g h l y r e l e v a n t b e s p o k e recommendations and suggestions for our customers. For Hostelworld, leveraging our data will allow us to target and grow the most profitable customer segments, such as multi destination customers.

∙Driving Customer Acquisition

In recent years Hostelworld has invested in category advertising through some high profile celebrity advertising campaigns. However, whilst these generated strong interest on social media, it is difficult to measure the related core business growth and associated returns. The conclusions of the recent strategic review are that in 2019 these resources would be more productively deployed in investing in our products and systems as previously outlined and that marketing activities will be focussed on core customer acquisition.

We know that our most engaged customer base who book for four or more destinations per trip is significantly more valuable than those who book two or three destinations per trip, both for Hostelworld and for our hostel partners. Providing the right customer to the right hostel at the right time not only increases the chances of repeat bookings through Hostelworld, but it also delivers the most valuable customers for the hostels. These are customers who understand the hostel experience and who are most likely to leave positive reviews. Hostelworld customers are also best known for contributing to the atmosphere in the hostel, by participating most fully in the activities of the hostel and using in‐ house food and beverage facilities during their stay.

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. Debt collection and invoicing overheads are all minimised.

During 2018, we rolled out a global free cancellation model to further broaden our product offering. 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. Underlying cancellation rates are performing in line with our expectations.

The Market

The second independent study of the global hostel market ("Second Edition") was published by Phocuswright in 2018.

The topline findings of the Second Edition include:

∙Phocuswright estimates total property count globally of approximately 18,200 in 2016, increasing significantly from 15,700 properties in 2014.

∙Phocuswright projects 5% hostel revenue growth per year through 2020 for the global hostel market (on pace with the global hotel industry), when it estimates that total hostel revenue will reach nearly US$6.4 billion in revenue.

∙Online channels accounted for 62% of global hostel revenue in 2016. OTAs are the fastest‐growing channel, processing 46% of global hostel bookings in 2016, and estimated to rise to 54% by 2020.

Phocuswright's conclusions provide us with additional confidence in the strength of our target market and the long term growth opportunities it offers the Group as a leading provider of bookings into this niche market.

Investing in People

In order to deliver our 'Roadmap for Growth' programme, since my appointment in June I have made a number of important changes to strengthen the management team. In November, TJ Kelly joined Hostelworld from Glanbia as our Chief Financial Officer.

In addition, I have made a number of internal promotions: Breffni Horgan to Chief Product Officer, Noel Maher to Chief Technology Officer and Catriona Flood to Chief Analytics Officer. As previously described, these key areas represent clear priorities for the Group in 2019 and beyond and I am delighted to be working with a talented young team. This leaves us well placed to deliver the ambitious growth objectives that I have set for the business.

We will continue to invest in talent across the business especially in product, technology and in our Porto office. We are fortunate to have an excellent and diverse pool of talented individuals working across our organisation who are critical to our future success. I would like to thank the entire team, in Dublin, London, Porto, Shanghai and Sydney for their hard work in 2018.

Optimising Capital Allocation

After our people, capital is our most important resource and it is critical that we invest it wisely. My strategic review has highlighted insufficient investment in our core platform and product suite in recent years. Therefore my priorities for future capital allocation are on focussed marketing programmes that will drive growth in core customer acquisition and re‐investment in our core platform in order to reaffirm and strengthen our position as a leading hostel‐focussed online booking platform. Most of our existing growth plans can be delivered organically using the existing resources and experience of the Group, including more effective leveraging of our under‐utilised existing data assets. However, we will continue to appraise complementary target acquisitions that would accelerate our growth or provide us with a unique capability to improve our offering to our customers or hostel partners.

2019 will be a year of investment for Hostelworld to fund the 'return to growth' drivers for 2020 and beyond. It is anticipated that organic growth will be self‐funded through our existing cash resources and the strong cashflows generated from the business.

Outlook

Hostelworld is operating in a highly competitive market, which is growing. We have a very relevant brand which is trusted by a loyal and engaged customer base. Trading in the first quarter of 2019 is in line with the Board's expectations. We remain committed to delivering value to shareholders and continue to assess our capital allocation approach in line with investment choices and priorities.

Gary Morrison

Chief Executive

1 April 2019