Can investors who checked in at Hostelworld finally sleep more easily?

Gary Morrison, the chief executive of Hostelworld who spends his days flogging the company's hostel-booking services to millennial and Gen-Z backpackers around the world, may have forgotten to tailor his words for the audience he was pitching to on Thursday.

The 54-year-old told financial analysts on a call that he was “super-excited” about the company’s trading so far in 2022, after it racked up almost €83 million of losses over the past two years.

At least it was millennial-speak the number crunchers could understand. And investors lapped it up, too – with Hostelworld’s shares soaring 11 per cent in Dublin on the day, to value the company at €106 million. Still, the shares remain about 50 per cent off where they were changing hands before Covid-19 shut down global travel in early 2020, and two-thirds lower than their initial public offering (IPO) price of 2015.

The 2021 results for Hostelworld, which was founded in 1999 by serial tech-entrepreneur Ray Nolan, make for grim reading in themselves for investors that resolved not to check out during the worst of the pandemic.

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The company recorded 1.5 million net bookings through its platform, level with the outturn for 2020 – but only 21 per cent of the figure for 2019 – as a steady recovery in business over the course of much of 2021 was torpedoed by the spread of the Omicron variant of the virus towards the end of the year.

While new revenues picked up by 10 per cent last year to €16.9 million, they remained well off the 2019 level of almost €81 million. Hostelworld ended 2021 with a net loss of €36 million, adding to the almost €47 million shortfall recorded for the previous year.

Current trends

However, Morrison, a former head of retail operations with global travel giant Expedia who joined Hostelworld four years ago, said that current trends suggest net bookings "will continue to recover towards 2019 levels, in the absence of any further escalation of the conflict in the Ukraine or other unforeseen events".

The company, which has 16,500 hostels on its books across 180 countries, is currently seeing weekly net bookings for beds in central America run at almost twice the level of 2019. And while overall continental European figures are running at 80 per cent of where they were before the pandemic, they are closer to 100 per cent in southern countries. On the other end of the spectrum, bookings across the Asia and Oceania regions remain at less than 20 per cent of 2019.

“Until we get a better sense of where Asia and Oceania end up, it’s a bit difficult to call the year,” said Morrison, who also cautioned that while it is hoped that Covid “is a thing of the past”, there have been plenty of “false dawns” over the past two years.

Morrison was openly critical when he took charge four years ago of how Hostelworld had lost its way, concluding that the company had been too reliant on increasing commissions rates than growing business volumes.

He also took a dim view of its penchant for splashing cash on star-studded advertising campaigns, rather than on technology and figuring out ways to get the most out of its customers. While ads featuring the likes of actor Charlie Sheen, singer Mariah Carey, former boxer Chris Eubank and US rapper 50 Cent got plenty of views on YouTube, they did little to bump up bookings.

Morrison has used the pandemic to spruce up the inn. It has cut down on brand marketing to focus on direct marketing to go after “higher value customers” that its data shows are more likely to use Hostelworld repeatedly and avail of its growing adventure tour products.

The holy grail is getting young customers in – say, a gap year between school and university – and who go on to use Hostelworld every summer while at college and into the early years of their working lives.

Marketing spend

Hostelworld now reckons its marketing spend “sweet spot” is at the equivalent of 50 per cent of revenue.

Invest too much over that level and the company may get more people booking on its platform, but “customer lifetime profit” – or how much it can squeeze out of them over a number of years – starts to fall, according to Morrison. “If you don’t invest enough, then you might be getting more customer lifetime profit, but the issue is you’re not buying enough customers,” he says.

The company has also used the pandemic to rein in costs and reduce its headcount by a third to 215 employees.

And it is hoping that a new version of its mobile app, launched earlier this week, with new social features for like-minded travellers (about 60 per cent of its customers travel solo) to meet up in hostels on its platform, will prove a hit and drive growth.

Hostelworld raised £13.8 million (€16.4 million) through a share sale in mid-2020 to help it navigate the Covid-19 shock. It managed to secure a five-year €30 million debt facility from New York-based specialist lender HPS Investment Partners early last year, at a time of heightened restrictions when it was burning through an estimated €1.7 million of cash a month.

Refinance

That facility has come at a cost: an effective minimum 9.25 per cent rate and the awarding of stock warrants to HPS that can be converted into 3.32 million shares – or a 2.85 per cent stake – at a nominal price of 1c each.

Hostelworld should be seeking to refinance this expensive debt at the earliest opportunity. It may take a year of solid trading, though, before it can get much better terms.