Good day. Welcome to the trivago third quarter earnings 2018 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Elie Matta, Head of Investor Relations. Please go ahead.
Thank you. Good afternoon, everybody. Welcome to trivago N.V.'s financial results conference call for the third quarter ended September 30, 2018. I am pleased to be joined on the call today by Rolf Schrömgens, trivago CEO and Managing Director, and Axel Hefer, our CFO and Managing Director. The following discussion, including responses to your questions, reflects management's views as of today, October 24, 2018, only. We do not undertake any obligation to update or revise this information. Some of the statements made on today's call are forward-looking, typically preceded by words such as we expect, we believe, we anticipate, or similar statements. Please refer to today's press release and the company's filing to the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements.
You will find the reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release, which is posted on the company's IR website at ir.trivago.com. I encourage you to periodically visit our investor relations site for important content, including today's earnings release. Unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2017. With that, let me turn the call over to Rolf.
Welcome, everybody. Many thanks for joining our Q3 earnings call 2018. The last four quarters, and the last four quarter earnings calls have been quite a challenge. To remind you, in Q3 2017, we experienced a drop in our commercialization as our core advertisers adapted their performance targets. We received significantly less for every EUR booking volume that we generated for them. As this directly affected our bottom line, we were accepting losses for the first half of this year that summed up to nearly EUR 40 million. We were not able to keep up the growth trajectory compared to the very strong quarters that we had the years before. In Q2 this year, we concluded that the magnitude of these losses was not in line with our culture anymore.
We built this company with very little external funding and remained close to positive EBITDA through all these years. We were always maximizing our growth potential, yes, but we also aimed not to be dependent on external funding. This led to our decision to raise our marketing profitability targets during Q2. Our aim was to rebalance the business on a higher profitability level and start growing again after that. Clearly, I have to thank the team for following us like they did through these, at least for us, new challenges. It was not always easy, but we also learned a lot. The more I'm happy right now to say that the last quarter exceeded our expectations. The positive signs that we carefully talked about in the last earnings call turned into strong signals, but this time we will not leave it to strong signals alone.
This quarter also showed promising results. As a direct consequence of our significantly raised marketing targets and our decreased ad spend, our revenue ended up at EUR 253.7 million for the quarter, or down 12% year-on-year. This was mostly driven by declining qualified referrals, which reached 189.1 million in Q3, also down about 12% year-on-year. Our revenue per qualified referral stayed stable on a year-on-year comparison at a level of EUR 1.32. Please keep in mind, the trends in qualified referrals and revenue per qualified referral are still influenced by our continuing effort to focus on high-quality traffic on one side and the lower commercialization levels on the other side. Retail revenue by segment saw a continuing increasing share of the Rest of the World market, as well as a small shift from Americas towards Developed Europe.
Let's have a deeper look into the results of the rebalancing of our advertising spend that we started in the second quarter of this year. While we were still growing our ad spend in the first quarter, we now have adjusted our targets across all channels to reflect the changes in commercialization. By doing this, we reduced ad spend significantly by 28% in a year-on-year comparison to EUR 184.3 million. These measures have led to a significant improvement of ROAS, return on advertising spend, overall. The 136% return on advertising spend in Q3 is representing a 25 percentage points improvement compared to Q3 2017. Looking at the resulting total profitability, our first quarter still had seen a year-on-year EBITDA decline of EUR 41 million. We were able to reduce that decline to EUR 21 million in the second quarter.
In the third quarter, we turned this trend around and now see a EUR 34 million increase compared to the previous years. Despite the not very favorable changes in the market environment that we have seen in the last years, we are now able to announce a record quarter with EUR 26.6 million in EBITDA. This healthy profitability gives us the confidence to keep on focusing on the business and delivering the best possible experience for our users. Over the last two years, we have focused a lot on reshaping our major technology platforms to allow us a steeper learning curve in the future. We think we are now in a place where we can re-accelerate our product development and innovation. One of the examples which we are especially proud of is our new app, which we very recently launched both on iOS and Android.
These new apps are not only built on a new software infrastructure, but also come with completely redesigned user interfaces and improved functionality. Although just launched, we see that users stay significantly longer in our app and are consuming more content. Another topic which we have continuously kept you updated on is our ongoing effort to onboard alternative accommodation providers. While we are very excited about the opportunity, we are also approaching the project with a gradual increase. We are carefully scaling the exposure of alternative accommodation within our listings and see personalization of our results as a key lever for it. Still, we are proud to say that we now crossed the 1 million properties milestone, and we will continue on our path of a gradual increase of visibility. We have been also updating you continuously about our advertiser mix.
Traditionally, the advertiser mix varies per quarter due to different seasonalities per market. If you compare the current quarter with Q3 2017, you can see an overall stable development. Still, on the margin, Booking Holdings gained share in Americas, Expedia gained share in Developed Europe, and all other advertisers did very well in the rest-of-the-world market. Now I'll hand over to Axel who's got financial performance.
The revenue in the third quarter reached EUR 253.7 million, coming from EUR 287.9 million in the third quarter of 2017, which represents a 12% drop year-over-year. In the year-to-date numbers, we are, for 2018, at EUR 748 million compared to EUR 853.8 million in 2017, which represents a 12% drop year-over-year. Looking at the adjusted EBITDA, the minus EUR 7.1 million in the third quarter 2017 turned into EUR 26.6 million in 2018, which represents a 10.5% adjusted EBITDA margin as a % of total revenue. For the year to date, the adjusted EBITDA reached minus EUR 13 million, which represents a minus 1.7% adjusted EBITDA margin as a % of total revenue.
Coming to the net income, we have reached net income of EUR 10.1 million in the third quarter 2018, up from a EUR 7.7 million loss in the third quarter 2017, which represents this year a 4% net income margin as a percent of total revenue, up from a - 2.7% net income margin as a percent of total revenue. Looking at return on advertising spend, we saw a 25 percentage points increase from 111 percentage points in 2017 in the third quarter to 136% in the third quarter of 2018. For the year to date, we saw an increase of two percentage points up from 115% in 2017 to 117% in 2018. Looking at our global KPIs, we saw a decrease in qualified referrals of 12%, down from 214.2 million to 189.1 million in the third quarter, and a 5% drop year-to-date, down from 587.8 million to 555.6 million.
The main drivers of this development were the increased marketing and profitability targets that Rolf Schrömgens mentioned earlier, the impact of the attribution model, and the product optimizations. If we look at the RPQRs on a global level, we see in the third quarter a flat development at EUR 1.32, whereas the year-to-date number reached EUR 1.33 compared to EUR 1.43 in the same period, 2017. The main drivers influencing the RPQR were the drop in commercialization that Rolf Schrömgens mentioned earlier, the impact of the attribution model and the product optimizations, and also, to a lesser extent, foreign currency effects in our Americas and in our rest-of-the-world segment. Return on advertising spend went up 25 percentage points in the quarter. The main driver of that is obviously the increased marketing profitability targets and optimizations behind that on the positive side. On the negative side, the impact of the drop in commercialization.
Coming to our Developed Europe segment, the qualified referrals dropped 16% in the third quarter, down from 90.1 million to 75.8 million. Year-to-date, the qualified referrals dropped by 15%, down from 245.8 million to 209.4 million. The RPQR was up 13 percentage points in the third quarter from EUR 1.34 to EUR 1.51. Year-to-date, up 3% from EUR 1.44 to EUR 1.49. The main driver of these two metrics has been the significant improvement in traffic quality that impacted both the QRs and the RPQRs compared to the other segments. ROAS went up 21 basis points in Developed Europe, from 129% to 150% in the third quarter, and five percentage points year-to-date, from 130% to 135% for the year-to-date. In Americas, the qualified referrals dropped 19%, from 54.3 million in Q3 to 44.1 million in Q3.
Year-to-date, by 7%, from 161.8 million to 151 million. The RPQR in euros came down from EUR 1.99 to EUR 1.83 in Q3, and from EUR 2.01 to EUR 1.74 year-to-date, which represents a 13% drop. Key drivers in Americas have been the lower commercialization, having a negative impact on the RPQR, unfavorable foreign currency effects, in particular on the Latin American currencies, a shift towards lower RPQR locales, compensated partially by a slight improvement in traffic quality. The return on advertising spend went up 26 percentage points in Q3, from 110% to 136%, and year-to-date, flat at 115%. In Rest of the World, our qualified referrals were more or less flat at 69.7 million in 2017 in the third quarter, to 69.1 million in the same period 2018. Year-to-date, up by 8%, from 180.3 million to 195.3 million.
The RPQR in euros went up by 1%, from EUR 0.79 to EUR 0.80. Year-to-date, from EUR 0.90 to EUR 0.84, 7% down. Key drivers in Rest of the World, the lower commercialization, slight negative FX effect, and improved traffic quality compensating for that, leading overall to a slight increase in RPQR. On ROAS, we saw a 27% increase from 87% in Q3 2017 to 114% in Q3 2018. Year-to-date, a 91% in 2017 to 95% in 2018 as a 4% increase. Coming to our guidance for 2018. Based on the results of the rebalancing of our advertising, we are increasing our guidance and now expect adjusted EBITDA to be zero to minus EUR 10 million for 2018. Revenues will be down year-over-year. The key financial metrics are expected to trend in line with Q3 and Q4, with the exception of the following.
We expect QR growth to shift towards RPQR, given recent product changes, and OpEx and headcount are expected to be flat to slightly down year-over-year. With that, we hand over back to the operator so we can take questions.
Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for now for just a moment to allow everyone an opportunity to signal for questions. I'll take our first question from Douglas Anmuth of JPMorgan. Please go ahead.
Thanks for taking the questions. I wanted to ask two. First, you talked about improving traffic quality and getting back on track as you return to EBITDA profit. What does the future look like here? Is there a way that you can transform the business to be less dependent on those two large partners? Will your strategy be largely based on their views of growth going forward? Second, in terms of those large partners, you indicated that the ROI targets are higher now than a year ago, if they continue to ramp those ROI targets through the course of 2018, meaning have they gotten even higher on a sequential basis as well? Thanks.
Okay. On your first question, will we continue to depend on our two largest partners? I think for the foreseeable future, yes, we will. We talked about that on some of the past calls. We are obviously doing various things to overall decrease our dependency on our largest advertisers. In the short term, mid-term, we will continue to depend on them.
I think in generally what you have to conclude when you're looking at the overall trends is that we see a stabilization of commercialization in the last month. It's true that some of the trends, and we've spoken about it in the previous calls, I think in Q2, we have seen some of the trends continuing into the first quarter of this year. We have also seen a quite stable development since then. That is pretty much also in line with the change of strategy that we have seen from our large advertiser side. If you're looking at their strategy, I think there's always two different strategies. One strategy is maximizing for growth, then you're saying, "Okay, I reinvest basically everything that I earn into growth." The other strategy is to maximize profitability.
You maximize profitability, then you found a stable ground where it's basically not very smart to go even lower with your bids. What we see right now is that we think our advertisers are way closer to that point, where they are shifted completely from a growth strategy to a maximizing profitability strategy. I think the result of that is what we're seeing in the last month. I think, yes, I think Axel is right. There is still a dependency. I think we are trying to minimize it. We see also that our small and medium-sized advertisers gaining share. There will remain a dependency, we are still in a way more stable status right now.
Great. Thank you both for the color.
We will now take our next question from Kevin Kopelman of Cowen and Company. Please go ahead.
Hi. Great, thanks so much. Just to start, just to follow up on your previous comments, Rolf, if you think about your own strategy in the same kind of context between the maximizing growth versus maximizing profitability, where do you feel like you are, and what's your thought process on where you want to set your ROAS targets on paid traffic? I have a couple other ones. Thanks.
Yeah, I think we follow the market, of course, in this kind of strategy, right? I think we've seen this from our advertisers, we have also seen that it's super difficult to keep on with a growth strategy against that. I think that is also a conclusion we came to, that we have to focus more on profitability. Looking forward, I think what we said is that we want to remain a healthy margin of profitability. It's not all about profitability maximization. If we want to have a healthy margin of profitability, we think that we can then start growing upon that from there.
I think this healthy margin for us is extremely important because I think it really gives the organization the confidence, I think that was something that was also missing when you're looking at our first two quarters this year. It gives us also the strategic independence to take decision, that might have a short-term impact, but a long-term positive gain. We've seen that already, even in this quarter, us doing that is what we want to achieve. We want to be strategically independent. We want to have a healthy margin, we also want to start growing upon that.
Great. A follow-up on that, can you talk about what you're seeing so far for the fourth quarter along the lines of revenue and ad spend growth? It looks like the EBITDA forecast would be down Q-over-Q. If you could walk us through the near-term comps. Do you have any initial thoughts on how you're planning for 2019?
For the fourth quarter 2018, in general, as I said on the guidance, we expect the trend of Q3 to continue. The fourth quarter is slightly different to the third quarter in terms of spend structure, so that is something worth considering when modeling that comment. On 2019, we will not comment on yet. We are confident that what we've done in the third quarter, that is the right track to continue on. We would expect that to have positive impact in the first half of 2019 as well.
Okay, great. Just a couple of questions on some of the newer initiatives. Can you give us more color on the vacation rental work that you're doing and how the uptake has been from trivago shoppers so far?
Yeah, let me do that. I think we've shown the slide, which shows you that we onboard more and more inventory, and that is basically one work stream where we continuously put more inventory on a level that we can show it to our users. That does not always mean that we ramp up the visibility in the same manner. What we try to do is we try to increase visibility gradually. One effort that we're taking there is that we try to personalize more so that we really can show those users who are rather alternative accommodation bookers more inventory like this and the others rather less inventory. We think that is one strategy how you can make that work for an integrated search. We want to have an integrated search.
We don't want to show the different tabs as different entries into the product like other competitors do that. We see these needs as substitutable. We want also turn alternative accommodation users maybe into hotel users, hotel users into alternative accommodation users. We think we have the right product to do so. Yeah. We see a fully integrated approach, but this integrated approach also means that we have to increase gradually, and it will not just be one push. Yeah.
Yeah.
Just to add to what Rolf said. In the last year where we put significantly more focus on it, we have seen also on our side and through the usage of our users that there is a need for an integrated product and there is demand. There is an increasing user base that is crossing over from one category to the other, quite dynamically. That gives us confidence that we are on the right track.
Is that something that cookie data can help you with as you see this person has been searching for vacation rentals on other sites and things like that?
It's not only cookie data. Actually, it's quite interesting, you reveal a lot of your preferences when you're looking for a destination, right? When you're looking for a specific destination, that gives you already quite an insight. The dates that you're looking for how many days in advance are you looking? Are you searching for a single room or are you searching for two double rooms? That are all things that significantly can change your probability to be an alternative accommodation user. I only state the obvious ones. There are many more criteria. Yes, we get a better picture after you send your search request.
Great. Thanks a lot. I know I had a lot of questions, just one last one. Can you talk about your efforts to drive engagement and spend from the major hotel chains and any progress you can share there? Thanks.
We never commented on the share of individual advertisers other than the two large groups. We don't comment on that.
Thank you.
We'll now take our next question from Brian Nowak of Morgan Stanley. Please go ahead.
Hi, it's Alex along on for Brian. Thanks for taking the question. Just two. First, how are you thinking about the drivers of revenue growth into 2019? What are the maybe two or three KPIs that you think are important to execute on to re-accelerate revenue growth? Second, just following up on Rolf's earlier comment around the top line versus profitability. Maybe perhaps you can expand a bit on if there's been any philosophical change in how trivago is thinking about top line versus profitability, and if so, is there any new way we should think about the long-term profitability of the business, particularly relative to the 25% margin I think you've communicated in the past? Thanks.
Yes. I think your first question was about what kind of key growth drivers we see for the next year. I think when you're going into the different pillars of trivago, you can go through the different key drivers. I think what we see is that during the last year, we were really able to improve efficiencies of our marketing spend quite significantly. That was a driver of productivity, at least in the past, and that's also the reason why we were able also to raise profitability so much in the third quarter. We have seen these efficiencies coming along, and we see that we are still in that trajectory that we can improve efficiencies in our advertising spend in the next year. Looking at product, I talked about that during my presentation.
I think that we really heavily invested into building our platforms where we can have a new growth trajectory. The app is one example where we really have now the chance to iterate way faster than we have been in the past. This was an investment that we were taking, regarding the app specifically in the last year, where the continuous improvement of the app was basically stopped for, I think nearly nine months, and now we are iterating again and we improving continuously. We had to do this because when you are on an old technology platform, the incremental gain that you have gets smaller and smaller. There is one day when you have to decide to go back and then go to a new platform and then learning from there.
Actually, a very similar thing is true for our whole backend infrastructure that we revamped, and that we are about to launch right now. For our desktop and mobile website. These were investments. We think that there is more opportunity in the future to improve the product than we had in the past. Going to advertiser relations, I think, we believe that there is a way to also increase the efficiency of small and medium advertisers and drive more competition in the marketplace. That is definitely a key focus again next year to do that. Of course, we still see the largest growth opportunity when you're looking at the overall market. We see that in the rest-of-the-world market, where there is a lot of markets where we see that we are just at the beginning of our growth curve.
In general, this market is really still huge. Our share is quite small, and the clear idea is to gain share over time.
To come to your second question, how to think about the trade-off between top-line development and profitability. Let me start with the end of your question. Have we changed our view on our long-term profitability target? We have not. The 25% plus adjusted EBITDA margin that we talked about at the time of the IPO, we still believe is the right number. What we have changed, obviously, as you have seen in this quarter, is the balance between top-line push and profitability. There we really reacted to the developments in the market. I guess, what you're really asking is, okay, how should we think about that trade-off going forward? There has to be the right trade-off of really the overall growth and then the profitability increase.
We believe that overall absolute profit should go up, and I guess there will be a dynamic reassessment how profitable and how elastic additional spend in top-line development will be from that base that Rolf mentioned earlier. I think that will change with changing market dynamics and over time. Overall, we want to increase our profitability over time in absolute terms. On the relative terms, I think we will adapt to the market situation as it develops.
Thank you both.
We will now take our next question from Naved Khan of SunTrust. Please go ahead.
Yeah. Hi, thanks a lot. Two quick ones from me. Maybe, Rolf, you can maybe give us some more color on the changes by your large advertisers. Are both of them making the changes, or is it just one of them? I am saying that because I see that one of them actually increased share and the other one lost share. I had a quick follow-up.
Yeah. The changes that we are speaking about are award changes, mainly in the third quarter of last year. We are still seeing, of course, the results right now of that. You are thinking about the most recent changes in the share development. Yeah, I think what is underlying, what you are seeing, the global trends are quite stable on a year-on-year comparison. What you see is that in total, there is a very slight increase, I think, of Booking.com, a slight decrease of Expedia, and a slight increase of all other advertisers. Underlying that, there are very different developments in the different segments. What we can say is that Expedia is, in general, gaining more share in Developed Europe. Booking.com is gaining more share in Americas.
We were able, and that is one of the advertising where we have been really successful in ramping up the other advertisers in the rest-of-the-world market, where we still see also a more fragmented structure of advertisers. When you are looking at the Indian market, huge market, very fragmented structure of advertisers, yeah? There we were able to grow the rest of the other advertisers more strongly. Yeah.
Okay. That is very helpful. The follow-up question I had was about your advertising mix. As you reduce your own spending on TV and other brand channels as well as on performance channels, how is the mix looking? Is it pretty much even reduction across both performance and brand, or are you cutting back more on one versus the other?
No. We very consistently increased our targets. We're looking at all channels pretty much in the same way, looking for pockets where we see inefficient spend. That happens in performance marketing as well as in brand marketing. It's very consistent across the channels.
Great. Thank you.
I'll now take our next question from Lloyd Walmsley of Deutsche Bank. Please go ahead.
Thanks. Two, if I can. First, just the guidance at the high end implies, I think, about EUR 13 million in EBITDA in 4Q, which is traditionally seasonally the strong quarter. Just wondering if there's anything we should think about there in terms of signaling a plan to drive growth, investing in marketing or anything unusual beyond perhaps conservatism to keep in mind. The second question, wondering if you can just give us an update on your performance marketing spend within the Google Travel ecosystem, and their kind of meta search product. I guess just stepping back, this is also clearly a threat. Do you sense that they're moving any more quickly or aggressively within that business, in terms of product development or otherwise? Any comments you can share there would be great. Thanks.
Let me start with the first question on the guidance for the fourth quarter. You're right, the fourth quarter is historically our strongest quarter because the advertisement spend, and particularly the brand advertisement spend, is lowest because we are competing, obviously, in most of the markets with the Christmas season, where the advertisement spend is very expensive, and as a consequence, it's not as economical for us to spend aggressively as in other quarters. That's the reason why it is historically one of the strongest. On the other hand, in terms of optimizations, obviously that has an impact on how much you can optimize on that basis. I think you need to look at both levers at the same time to basically come up, or that's how we looked at it, to come up with the guidance that we've given.
On the second point, performance marketing, and there in particular, Google Hotel Ads. We said in the last couple of quarters, we currently see it as an opportunity. Why is it an opportunity? Because we are underrepresented globally in that channel because we only have recently started to engage and test and scale up the test. The test, and perhaps it's not right to talk anymore about tests. In the markets where we have tested, we're not fully scaled up, but we have reached significant scale already, and we are now scaling up still in those markets, also geographically. We are still benefiting from catch-up, if you want to say so. Strategically, Google has always been one of our competitors with that product, and they have recently made some changes to their product, as have we, as Rolf said earlier.
There, we don't see a significant change in the value proposition pace of them versus us recently. Overall, we still see it as an opportunity by increasing our share in the channel to reach our fair market share, if you want to say so.
All right. Thank you, guys.
Next question from James Lee of Mizuho Securities. Please go ahead.
Yeah, thanks for taking my question. Just want to dig a little bit deeper into your marketing spend. Any way you can give us some clarity, which channel are you cutting the most specifically? Maybe help us understand by geography where you're cutting the most. It seems like based on QR growth, it seems like U.S. more than other geo. I was wondering if that's right. Lastly, maybe can you update on your mix of paid traffic? I remember historically you said brand 50%, SEM 35%. I was wondering if there's any meaningful change to the mix. Thanks.
Yeah. As I said before, we have raised our targets consistently over the different channels, that is also resulting basically in a consistent reduction of spend. Also, it's actually resulting in a stable share per channel. Yeah. That said, you spoke about if you, on a geographical level, are the differences, and you mentioned U.S., and that's right. We reduced more in the U.S., but that is due to several effects. One of them that we generally historically have also more commitments in the Developed Europe markets than we have in the U.S. On the other side, you also have to keep in mind that we, or I'm telling you that we had a push last year, which was quite significant in the summer months, which was our record spend month last year in the U.S.
That is why we've significantly more reduced in the U.S. than in Europe. Yeah.
Any update on the mix of paid channel brand versus SEM?
As I said. Yeah. As I said, no, same. We consistently reduce targets, so according to that, the mix stays the same.
Okay. One more follow-up question on your largest advertising partners here. Looks like Booking.com, obviously, someone asked that question ramping up this quarter. Is that more of the seasonality, or is there anything above and beyond that indicating they're ramping up in terms of volume buy, assuming they're still bidding down at this point? Also, during the high season, I was curious to see Expedia actually pull back
Any specific reason why you're seeing them pulling back as soon they're pulling back in the U.S.? Just curious what is the dynamic there with the advertiser? Thanks.
Yeah, given that the numbers are global numbers, you have to be a bit careful not to read too much into them. There are two things that you need to consider, and I guess you don't have enough years to clearly see that trend. There's clearly a geographic mix effect. The market share of our large advertisers is not the same in the different regions. That's one effect, is there is change between the regions. The other effect is that there is also a seasonality effect that is not identical for every advertiser that you need to consider, and you can slightly see it in the global numbers. The trend is also not consistent, yeah. As Rolf said earlier, Expedia gain share in Developed Europe, Booking gain share in Americas, and the other advertisers gain share in the rest of the world.
The outcome of all these changes is that then what you see in the presentation. It's not the right conclusion to assume that there is a trend that goes across all the markets, and is consistent. There is a lot of mix effect in there.
Okay, great. Thanks.
We will now take our next question from Mark May of Citi. Please go ahead.
Thank you. Just a question, it is getting at the relationship between your marketing spend and qualified referral growth. As you continue to rationalize your marketing spend, how should we think about the impact that that has on QR growth? Meaning, will we see a pretty immediate and related negative impact on QR growth, or do you feel like you can maintain a decent level of QR growth despite continuing to rationalize your marketing spend?
If you talk about levels like the year-over-year effects that you have seen in Q3, there we had significant reduction in our marketing spend, and that is in that dimension leading to a negative QR development. I think when Rolf said we are rebalancing the business and from that basis, we will then grow again, this year-over-year effect you will see, or we expect you to see until Q2, which is at a degree that has had obviously a significant impact on QRs. The second effect that you need to consider, and that is what I said for Q4 and then going forward, in terms of changes to the trend in Q3, there is also a negative impact on QR growth with a positive impact on the RPQR development for certain product and marketing changes that can be quite significant. That is also worth considering.
To see the full picture, it is advisable to really look at all three metrics at the same time, QR, RPQR, and then ROAS, to really have traffic quality, commercialization, marketing efficiency, and fundamental growth all together, and each one of them impacting more than one of the KPIs.
Okay, thanks. In terms of product and maybe policy changes, what if any changes have you guys made or are you planning to make in terms of the product or even some of your advertising policies towards the advertisers that are sort of resulting in an improvement in return on investment by your advertisers? Are there a couple things that you can talk about?
When you're looking at the new app release, I think you can get a quite good idea of the direction we are heading. I really invite you to take a look and also compare it to the experience before, or our current mobile web experience. What you will see is that we're really investing a lot into improving the value depth of our product. We're really trying to let people take more decisions on trivago and really let them go deeper into the content, let them really compare the advertisers more directly than before. All of these efforts that we do there, I think that is something that you will also see happening across mobile web and desktop in the next months. You can expect us, like with the other platforms, going into that direction.
That will give you a good idea. I think that is in general something that we think that we have to do. We really want to increase the value depth of our product and let people really compare on trivago, before they go to the advertiser side. We want to give them an aligned consistent experience throughout the funnel. We want to make it as easy as possible to go through the funnel to the advertiser, which we think at the end is a win-win effect on our side and the advertiser side. Because you lose or you reduce basically the conflict and the distraction within the funnel. I think that is something that we're very focused work on in the next quarters, or we already started, and you will see more in the next quarters of that.
Thanks.
We will now take our next question from Tom White of D.A. Davidson. Please go ahead.
Great. Thanks for taking my question. I'm going to sort of piggyback on the last one. You guys have talked about sort of establishing or trying to establish a healthy margin and then finding ways to grow. Beyond finding pockets of marketing spend efficiency on the product innovation side, are there other things beyond these improvements to the app and some of the stuff you just mentioned? Are there new product innovations or new products, maybe it's alternative accommodations that maybe can help drive step function improvement in your traffic or conversions? I'm just trying to figure out whether any of those product innovations can be big traffic boosters or conversion rate boosters in a way that could sort of rival your ability to spend money on marketing. Just on RPQR, it was up in Europe, up slightly in rest of world, but down in Americas.
Can you just flesh out the dynamic there so I make sure I understand it? Thanks.
Okay. I think we've spoken about the strategic topics and where we are heading already a couple of times in the past. What we did over the last one or two years is that we not only changed the platform that we built our mobile app on, but we basically changed the whole infrastructure of search to create a search that can work as a learning system, that can continue to learn. I think that continuous learning is something that will differentiate in the future application from each other. That said, that is not coming with an initial strong effect. That is effect that will show its effect over time. I think that the big step change that from our side is really the new infrastructure that we have built. At the same time, it's maybe more technical, but we have a completely new database structure.
We are now running in the cloud. All those changes we did basically in the last one or two years. We think that this will allow us to develop further way quicker than we did in the past.
On the RPQR, there are obviously mixed effects within all the segments. It's a bit complicated. Let me just point out the main differences. In Developed Europe, we only saw year-over-year a slight decline in the commercialization, whereas in Americas and in rest of the world, we said there was a decline in commercialization. The trend in Developed Europe is more favorable than in the other regions. That's one very important factor to understand the difference in RPQR development. The other difference is that there has been a significant improvement in traffic quality through our marketing activities and also product activities, in Developed Europe and the rest of the world. Whereas in Americas, it has only been a slight improvement.
The last point that is more America-specific is there has been a shift from higher RPQR regions to lower RPQR regions, namely North America to South America. One driver of that obviously has been the difference in advertisement reduction given the different levels of commitment. I guess those three factors you need to keep in mind when understanding the different developments in the three regions.
Very helpful. Thank you.
We'll now take our next question from Heath Terry of Goldman Sachs. Please go ahead.
Great, thanks. I did want to follow up on the comment that you made earlier, around the increase that you're expecting in revenue per qualified referral because of some of the product changes that you're making. Can you, I guess, flesh that out a little bit more? Are these product changes that are driving higher conversion rates? Are they product changes that are resulting in higher commissions from your partners? Just any additional detail that you can provide there. Your commentary in response to one of the last questions around your belief that it's better or the intention to go back to more of the comparison and discovery being performed on trivago. As I recall, that was a big part of the issues that Booking had around this time last year was that specific flow.
Is there something that you've worked out that you believe allows you or will allow you to go in that direction? Or is there some reason that you have to believe that's no longer an issue for them? Just want to make sure that I'm understanding that specifically. Finally, can you update us on your hotel direct relationships, whether or not you've been able to move any further? Not looking for anything with regard to specific hotels, but just largely, as brands are pushing for more direct loyalty program, generally loyalty program-driven traffic, whether or not those are prices that you're able to show or whether or not you've seen any progress in building those channels. Thanks.
Let me start with your first question. Some more specifics around my comment on the guidance for Q4. Looking at the Q3 trends, there we expect in Q4 to have a more positive RPQR development than in Q3 and a negative impact on the QR that is coming from basically what Rolf was describing before, product changes where we increase the interaction with our own website. Which leads to a lower number of referrals and also qualified referrals without decreasing, with actually increasing the overall booking value, which mathematically reduces QRs and increasing the booking value obviously increases the RPQR. That is just something to keep in mind when building the assumptions for Q4. It's really a product design-driven impact on our financial metrics that I was referring to.
Just to add to that, we also do not expect, in our plans, again, an increase in commercialization. We expect an increase of traffic quality that we send to our advertisers. To your second point, it's actually, yes, it's true that this is something like improving the flow that we have from trivago to our advertisers and seeing trivago and our advertisers more like an integrated system. That was also one of the ideas behind our LPS core development, which also led to the situation last year. I can tell you that I think the discussions that we have today with our advertisers, especially with our large advertisers, are on a different level than we have seen them a year ago. I think we have found we are way more solution-oriented today than we have been one year ago.
We are way more in a cooperative mode right now, I think, than we have been in the past. I think from both sides, our large advertisers, we see a very strong interest to work together with us to really, at the end, optimize the sum of things and not only on one or the other side. I think that is something that we also see for us, like a good opportunity for us to develop our product faster forward in the future.
To come to your third question on the development of our hotel direct business, and there in particular on loyalty rates visible on the site. Overall, we continue to invest significantly into our relationships and into the support of individual hotels direct and also hotel chains direct. That definitely stays to be one of our focus areas. Having said that, it's not something that changes quarter-over-quarter, but it's more a long-term project and a long-term effort. We believe that it is the right direction and that it is overall successful, but quarter-over-quarter, there are no significant changes, and you wouldn't expect significant changes quarter-over-quarter. On loyalty rates, there is no significant change quarter-over-quarter either.
It is an interesting topic, and it is not that straightforward to solve, both for the hotel chains and for us as a meta search partner of theirs. It is something that we are working on.
We will take our next question from Peter Stabler of Wells Fargo Securities. Please go ahead.
Thank you. This is Rolf on the call for Peter. Wondering if you could talk just a little bit more about the environment in Europe, specifically in the quarter. Booking, you talked about some issues around weather and World Cup. I know you said commercialization was down just a bit year-over-year, wondering if you could talk maybe about commercialization and conversion development quarter-to-quarter. If there were any notable changes there, what you're seeing into Q4. Also looking at the internals on the RPQR growth, there were some pretty significant shifts in the quarter in terms of RPR versus click-out development. Wondering if you could talk through what was driving the scale of those changes in the quarter. Thank you.
On your first question, has there been a significant change quarter-over-quarter? I guess year-over-year, quarter-over-quarter, there has. We said in Q2 for the overall business that there was a double-digit impact on commercialization. I guess that is more trivago specific than for the overall market, because we benefited from the relevance assessment, and particularly in Q1 and Q2 2017. In our quarter-over-quarter trend, there is a positive development in Developed Europe. On the World Cup, has there been a significant impact of the World Cup on the seasonality on the overall volume of the market? Given the changes that we started to implement in the second half of the second quarter, for us, that is actually very difficult to see because the main trend that we are obviously seeing is the impact of our spend optimization on our volume.
That's difficult to comment on from our perspective.
Thank you. Anything on the RPR and the click-out rate, the scale of the changes there in the quarter? Thank you.
Yeah, on the RPR and the click-out rate, that is a difficult way to look at the business, and that's why we focus all our discussion on the RPQR, because the click-out rate is heavily influenced by changes in the product. The QRs are more stable given that they are unique click-outs. That's why I'm not sure that it is really that meaningful. Through small product changes, you can have a very significant impact on the RPR and the click-out rate, and the QR is more stable. Having said that, some of the changes obviously have an impact on the QRs as well, and that's what we are talking about earlier. We would advise everybody to really focus on the QRs because they are much more stable as a metric, and as a consequence, much more meaningful than just the referrals.
Got it. Thank you.
Reminder, it's star 1 to ask a question. I'll now take the last question from Shyam Patil of Susquehanna. Please go ahead.
Hi, it's Brendan on for Shyam. Going back to the RPQR discussion. In terms of the traffic quality improvements, improving trends in Developed Europe, how should we think about that beginning to show up in other geographies, and what are some of the puts and takes there? On your growth versus profit commentary, I guess, where do you guys feel you are in terms of, you referred to reestablishing the profit base to return to growth, how should we think about the timeline for that?
On the RPQR trend in Europe versus the other regions. It's not that the development in Europe is leading all other regions and that you would be able to convert the same trend one to one to the other regions. The trends are different, and we have at the same time, implemented the changes to the product. There are certain pockets where there is a bit of a time lag, and particularly where we have, on the branded advertising side, commitments, which tends to be the case in certain parts of Southern Americas and Europe, and very few other countries. There is some time lag there, but it's not that Europe has been the first where we implemented certain changes, and you could expect to see exactly the same development in the other regions.
The development in the regions is slightly different for the reasons that we discussed earlier. On the growth versus the profitability, we believe what we are currently doing is the right thing to find a solid base and to then from that base to start to show solid growth again. For now, we feel good with what we've done in the third quarter, and I guess once we have lapped that recalibration, we expect to see growth again.
I think from our, let's say midterm goals, we would say, okay, we think right now actually we feel like we have a comfortable base or a solid base of profitability. It will of course take a year basically to lap those effects. It's not that we are right now in the middle of the process, and you can expect the margins even growing now in the next quarters. I think that is now our new basis, where we think that we can start growing on then as soon as we lap the effects.
Operator, if we have no more questions, I think we can end the call.
We have no further questions at this time.
We would just like to have some closing remarks from Rolf.
Thank you. We are actually very happy that after some challenging quarters, we are now able to show again significant improvements to compare to the previous year. The new healthy level of profitability, as I said, helps us now to gain confidence in our business model and our organization, and we can go back to focus on producing value for our users and our advertisers. I want to repeat that our clear goal is to rebalance the business on a higher profitability level, and start growing again after that. Thanks a lot, everybody, for joining the call. See you next quarter.
This concludes today's call. Thank you for your participation. You may now disconnect.