Earnings Call: Q1 2018

Apr 25, 2018

Good day, and welcome to the Q1 Earnings Release 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Matthias Tillman. Please go ahead. Thank you. Good afternoon, everybody. Welcome to trivago NV's financial results conference call for the Q1 ended March 31, 2018. I'm pleased to be joined on the call today by Rolf Schremgren, trivago's CEO and Managing Director and Axel Heffer, our CFO and Managing Director. The following discussion, including responses to your questions, reflects management views as of today, April 25, 2018 only. We do not undertake any obligation to update or revise this information. As always, 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 filings with the SEC for information about factors, which could cause our actual results to differ materially from these forward looking statements. You will find 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. Finally, 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 Ralf. Welcome, everybody. Many thanks for joining our Q1 earnings call for 2018. It's the 3rd of 4 challenging quarters that we had expected in our guidance mid of last year. Just to remind everybody, we grew revenue of nearly 70 percent in the beginning of 2017. And competing with these numbers with a way lower commercialization this year was not an easy task. A new challenge comes also with new experiences and learnings. For the organization, the last quarter meant to show a lot of discipline to use our resources even more wisely than we did. It's impressive to see how fast everybody adapted to that mentality, while the overall culture of the company did not change. We have seen a lot of ups and downs in the history of trivago, but we believe value is created over longer time frames. And for that, it's important to stay focused and to consequently execute on our mission. As a 2 sided marketplace, we have 2 customer groups that we want to make happy. On one side, we have our travelers that we want to give the best overview and lead them to their ideal hotel. And despite the strong comps that made it difficult for us to ramp up our appetite and spend, like in the previous years, we were growing globally our brand recognition and significantly increasing our visitor base on a year over year basis. Our tech team worked hard to rebuild the infrastructure of our search to make a real matching between user needs and hotel profiles possible and to build a basis for continuous improvement of personalization through machine learning. We are proud that we were able to bring initial test of that new back end live on our web platform during this quarter. The second group of our customers are advertisers. We want to be a profitable channel for them to reach their target group. Looking at the last 9 months, we have to conclude that our commercialization did suffer. But this also has an upside because on the other side, that means that our advertisers can, on average, be significantly more profitable on the lead volume that we provide to them. Looking forward, we will always stay committed to both, deliver great value to our users and to our advertisers. So let's have a look at the overall numbers. With €259,400,000 our total revenues stayed relatively stable compared to a super strong quarter with 68% year on year growth beginning of 2017. We see this as a success, keeping in mind that we estimate a double digit percent lower commercialization. Additionally, we had to face major headwinds in terms of euro exchange rates. We estimate that the strengthening of the euro had an approximately 15% negative impact on our revenues in Americas and a 10% negative impact on the revenues in our Rest of the World markets in Q1. Against all these trends and although we have focused on improving our traffic quality, we were still able to grow our qualified referrals by 7% to €189,500,000 compared to €177,200,000 in the same quarter last year. Revenue per qualified referral went overall down commercialization and the exchange rate effects. The trend to a more equal distribution of revenues between the 3 segments continues. In the Q1 of the rest sorry, in the Q1, the rest of the world segments already contributed 21% of overall revenues. To provide some more color on what happened mid of 2017, we want to show you the quarter over quarter revenue growth rate developments for the last 3 years. For 2015 and 2,002 sorry, for 2015 2016, that's the blue and the red line in the chart, you can see that the seasonal development of revenues was pretty comparable throughout the year. For 2017, when you see a way weaker growth rate between Q2 and Q3, where most of the drop in commercialization appeared. On the other side, you can also see that for the last two quarters, we are back to the normal seasonal pattern. Next slide. Looking at the share development of our asset classes. We had seen a lot of volatility in Q4. For the current quarter, the development remains relatively stable and the share of smaller advertisers remains strong. So let's take a deeper dive into the development in brand marketing. We have to consider that we already established a very high brand awareness globally. This is not only but specifically true across our most established European markets. Our new ad creatives are now more focused on advancing the user's understanding of our product features in order to further increase usage. In nearly all European markets, we are the 2nd strongest brand in terms of regular usage. We aim to even continuously improve our position in the European markets on this KPI over time. In newer markets like the U. S, there is still a lot of headroom to grow. To illustrate this, we want to show you here the development of the unaided brand awareness and top of mind share. For unaided brand awareness, the independent panel is asked to actively name a site where you can research or book a hotel. The Trivago brand is recalled in 28% of all answers. This is an extremely good value for any brand. In 15% of all cases, trivago is even named first. This represents a strong increase to the previous year with 22 aided brand awareness and 11% top of mind share in March 2017. Nearly doubling our numbers over the last 2 years in one of the most established and competitive markets represent a substantial increase of our brand value. Thanks for listening. I will now hand over to Axel for a more detailed look on the financials. Good. Thanks, Rolf. Our overall total revenue was broadly stable, as Rolf mentioned, at €259,400,000 down from €267,600,000 facing significant headwinds through the strong euro and the drop in commercialization. As our key focus for the quarter has been our top line development, we, to a large extent, absorbed the negative effects of the drop in commercialization, resulting in a drop in profitability. Our adjusted EBITDA came down from a positive €19,300,000 in the Q1 2017 to a loss of €21,900,000 in 2018. Net income turning from a €5,200,000 gain to a €21,800,000 loss. As a percent of revenue, our adjusted EBITDA margin came down from 7.2% to a negative 8.4%, while the net income as a percent of total revenue came down from 1.9% positive to minus 8.4% negative. Our return on advertisement spend reduced from 121 percent to 108% on a global basis, driven by the lower commercialization. If you look at our KPIs on a global level, we managed to grow our qualified referrals by 7%, while at the same time, we improved our traffic quality through our marketing and product initiatives. The RPQR in euros came down from €1.49 to €1.35 which represents a 9% drop. Key drivers of this drop have been the significant currency effects, the significant drop in commercialization, while on the positive side, the traffic quality has improved and partially offset those negative effects. The ROAS dropped from 121% to 108%, again driven by the lower commercialization. If we look at Developed Europe, qualified referrals came down from 73,600,000 to 70,100,000 while at the same time traffic quality improved. And the RPQR in euros was slightly down from €1.54 to €1.49 driven by lower commercialization and positively impacted by the improved traffic quality that did not fully compensate the drop in commercialization. On return on advertisement spend, we saw a change from 139% to 128%, again driven by the lower commercialization. In Americas, we managed to grow our qualified referrals against a very strong Q1 in 2017 by 8%, up from €55,500,000 to €59,900,000 The revenue per qualified referral in euros was down 12%, negatively impacted by the currency and the commercialization and partially compensated through positive traffic quality development. Translated into U. S. Dollars, the RPQR was up by 2% from $1.96 to $1.99 Looking at the return on advertisement spend, we saw a decline from 118 percent to 104% through the significant drop in commercialization compared to the Q1 in 2017. Rest of the world experienced healthy growth in qualified referrals of 23%, coming up from €48,200,000 to €59,500,000 The RPQR in euros decreased by 10%, again driven by strong currency movements and the drop in commercialization and partially offset by the improved traffic quality. Looking at the RPQR translated into U. S. Dollars. Also in Rest of the World, we saw a positive development, up 4% from 1 point $8 to $1.12 The ROAS came down from 96% to 87%, again, driven by the significant drop in commercialization compared to the Q1 of 2017. Looking at our overhead costs, we had our total cost and expenses increased from €30,900,000 in the Q1 2017 to €46,300,000 in the Q1 2018 or a 50% increase. The biggest driver of this increase has been the increase in the overall headcount, which has increased by 338. This happened across the board as we invested into our hotel relations team, our technological expertise and our G and A function, at the same time successfully mitigating our material weakness and becoming SOX compliant within the 1st year as a public company. In addition to the increase in headcount, we had significant increases of our investments into TV spot production, which are part of the other selling and marketing expenses. In Q1 2018, our headcount only grew slightly by 11 talents, and we do not expect a significant increase in the course of 2018. Coming to guidance. Despite the positive revenue development, considering the difficult comps in the Q1, we expect the overall year to show stable revenues. We expect to continue to experience negative currency effects and lower commercialization in the first half of the year, as we already mentioned on our last earnings call. We believe that since then, our largest advertisers may have increased their profitability on our platform even further, a development that would have a direct negative impact on our commercialization. Although this development may or may not change in the course of the year, we have assumed in our guidance that this change will persist. As a consequence, we expect the revenue per qualified referral to decline significantly in the first half of twenty eighteen and to remain slightly negative in the second half of twenty eighteen. However, we continue to expect a return to our growth trajectory in the second half of the year. In addition, we believe that ROAS will improve compared to the second half of twenty seventeen and the second half of twenty eighteen and that the adjusted EBITDA in the second half of twenty eighteen will be positive. For the full year, we continue to expect a negative adjusted EBITDA ranging between a €25,000,000 loss €50,000,000 loss. Thanks, Sach. So with that, we are ready to take your questions now. Thank We will take our first question from Douglas Anmuth from JPMorgan. Please go ahead. Hello. This is Bailey on for Doug. I just have two questions. First one, could you you mentioned one of your largest advertisers have changed their profitability target. Is this a 2Q development that's not being shown in your, I guess, 1Q number? And in addition to that, it seems like your RPQR outlook was lower versus what you had at 4Q earnings. Could you explain what changed there? And then secondly, could you give us more color on the change in the leadership structure that you guys announced during the quarter? Why and how things will change from that? Good. So on the timing of the change in profitability targets, that is correct. So there the Q1 has only to a very limited extent been affected by that, and we expect a significantly stronger effect in the Q2. Okay. Regarding the leadership structure, so Peter and Marta are with the company for 13 years. They're super loyal to the company. They want to stay on board. But on the other side, they also want to take a step back. And we use that opportunity to basically simplify the structure of the MD structure of trivago to keep only 3 MDs, but that doesn't mean that the leadership team as a whole changes. We want just to be more flexible in the future to also promote new members into the leadership team and to be able to have more flexibility there. But Peter and Marte will remain with the company. They will go into other roles and not stay part of the leadership team. Got it. Thank you. We will now take our next question from Lloyd Walmsley from Deutsche Bank. Please go ahead. Thanks for the question. This is actually Seth on for Lloyd. I was just wondering if you could talk about what's happening to profitability in your oldest markets and how this might affect any geographical expansion going forward? And then also a question on short term rental supply. I realize it's early days, but I was wondering if you could talk about bringing on the short term rental supply to the platform and how is the advertiser and customer feedback been for the 350,000 units now on the platform? And also the Okay. So on the development of the profitability of individual markets, I mean, we do not comment on individual countries. Broadly speaking, I mean, the drop in commercialization has not been in certain markets, but across the whole platform. So the drop in profitability was widely across most of the markets or all of the markets. To come to your second question in terms of alternative accommodation, I mean, as we said in the past, I mean, we think it is a very big opportunity. But what is also very important is to be disciplined and not make radical changes to the overall mix on our platform. So we are exactly on track in terms of testing and gradually increasing the visibility of alternative accommodation. And that also answers your third question. At the right point in time, we will obviously onboard more and more advertisers, but we think that it is important that you don't rush into it, but that you gradually make the changes on the platform that you need to make in terms of marketing, in terms of marketplace algorithms, because there is a significant difference in terms of inventory between alternative accommodation and hotel inventory. Let me just also comment on that because we really see that there is a great chance for us in this segment. But what you have to also keep in mind is that there is, of course, like difference in the commercialization of alternative accommodations and hotels just because of the structure of the offerings. And that is that's why you have to be careful. What we did basically during the last year is that we revamped our whole back end infrastructure to make it possible that we have very personalized search results and these personalized live search results give us a chance to show to users who are more likely to book alternative accommodation to show them more office and have and commercialize well on them, while we have left office to those people who would never book an alternative accommodation. So I think that is something that's very important. So basically, the exposure on Trivago or alternative accommodation goes hand in hand with the personalization approaches that we have done. We will now take our next question from Naved Khan from SunTrust. Please go ahead. Yes. Thank you very much. Can you comment on the impact of changes you were making to the marketing attribution model? Any changes that you've seen in terms of your mix between TV and other channels? And then in terms of just the traffic quality, I think you talked about how the quality has improved. Are you seeing any increased usage, repeat usage by the consumer base? And also are you seeing higher conversions? And then I had a quick question on GDPR. Are you making in any kind of impact on your 2nd quarter performance from as a result of GDPR rollout? Okay. So on the attribution model, we are progressing as planned. So the majority of the on the DEA channel, we rolled out the new attribution in July last year. So that has been on the new attribution for a long time. And that is part of the effect when we say we improved our traffic quality. We see a significant increase improved traffic quality in that channel for quite some time already. In SEM, we see the majority of the effect of the new attribution in Q1, but to have it 100% rolled out will take some time. So we are gradually working on that. And also there, you see an improved traffic quality and obviously a negative effect on the overall volume compensated by the higher quality. In terms of repeat usage, we have limited visibility because we don't have a high share of locked in users like I guess any search business. And that's why it's difficult to comment on that. And on your last question, GPR, we don't expect a significant impact on the business and we are obviously working on being compliant in time. Great. Thank you. We will now take our next question from Brian Nowak from Morgan Stanley. Please go ahead. Hi, this is Matt Cost on for Brian. Thanks for taking my questions. I have 2. So what are the biggest changes that you'd point to in the business that led to the decrease in the guidance? You mentioned lower commercialization and positive traffic quality on the positive side. I'm wondering if you can give some more color on that. And then how do you think about the long term scalability of the model? What drivers do you think are needed to get to the long term margin set at the IPO? So when you look at our current guidance versus the guidance last quarter, The obvious impact is obviously the development of the Q1 and also the recent developments of the Q2. So we see that the first half will come out more negative than we originally thought. And we assume that the more recent change in advertiser profitability targets will persist for the second half. So we also see the growth in the second half slightly lower than we originally would have seen it. Those are basically this is the main update in terms of guidance. So as I said, we continue to be positive on the growth momentum in the second half, but to a slightly lower level than we originally thought through a lower revenue per qualified referral assumption. Yes, I think also we want to be cautious for the second half of the year. And looking at the long term margin development, I think that the question is like several questions. First question is like how much is the current level of commercialization sustainable? Will it go up or will it go down? So but there, it's not about short term trends and short term kind of like reactions of our advertisers, but it's rather the long term market structure. And there we see actually some very positive signs. So there are global, global advertisers going into the market. We see that the different accommodation types will probably melt into each other. So there will be more players in the marketplace and we introduce alternative accommodation in our marketplace and that will play hopefully also in a more important role. So I think in the long term development, I think it's quite hard to see where it will be in 2 or 3 years, but there are some positive signs about that. In addition, I think when you're looking at long term profitability, I think that we showed in the past and I think we also showed it this year and this quarter, we showed that we are able to improve our profitability and improve our mechanisms, improve our marketing, improve our product. The problem is that it's currently really hardly visible and I can totally understand that when you're looking at the total numbers because basically you're looking because significantly diluted by FX and by this onetime drop, yes? But there is an underlying model where we have been improving and we have been improving over the last years and also during the current year. And I think that is the question like how much of this even if it would stay on this level, how much would we again be able to overcompensate or contemplate over the last over the next years. Great. Thanks. We will now take our next question from Mark May from Citi. Please go ahead. Mark, if you can speak. Okay. Hopefully, you can hear me. Sorry about that. Can you speak as you questions around the new attribution model? I know you're still early in this process, but what impact we haven't seen to have seen a big impact on qualified referrals yet. Can you speak to kind of the timing and magnitude of when you would expect attribution model really to get rolling and what sort of impact we should expect on QRs? Thanks. No, I think what Axel said is right. So we have basically 2 channels majorly affected by that, the display channel and the FDM channel. And the display area, it was like last year already where we have seen the full effect of that. And we have seen the majority effect on the SEM channel already. So it's always like you're going from like high traffic keywords to low traffic keywords. So the majority of the effect is already in the numbers. But you cannot see it in the qualified referral if basically that we overcompensated it. So what you would expect is with the change of the attribution model, you would expect the revenue per qualified referrals going up and the qualified referrals going down. This effect is happening. So when looking at our numbers, you would always have to really like factor that in, right? So the qualified referrals, the effect is in, they are going down, they are not growing as strong as basically our user base or visitor base growth. And on the other side, you're having the qualified referral revenue per qualified referrals also because of that reason sorry, revenue of qualified referrals going up. You don't see that because of the commercialization dip and because of the FX effects, yes. So that is basically the scheme that you should think in. We will now take our next question from Heath Terry from Goldman Sachs. Please go ahead. Great, thanks. A couple of questions. Ralph, on the last earnings call, you talked about a tendency among hotels or some hotels developing around, undercutting OTAs on price or using that as a strategy of of pricing below OTAs in the metasearch to generate clicks. Curious if you're still seeing that or to what degree that has evolved? And then, Axl, as we look at the increase in advertising as a percentage of sales this quarter. Is there a level where you feel like that begins to flatten out? And how much of that would you attribute to, like for like increases in advertising or ad unit costs, whether in search or other performance based channels? So I think it's on a quarter by quarter level, it's really, really hard to comment on your first question regarding like how hotels do undercut if it's more or less. I think that is a development that usually like takes years rather than quarters. So looking at it from a quarter on quarter level, yes, I think there is no like significant change, yes? And I think the tendency still holds to be true, yes? So on your second question on the increasing advertising expenses as percent of revenues, I mean, by deciding to not adjust the bidding and fully absorb the drop in commercialization, that is something that we had expected. So because for the same qualified referral, obviously, we generate a lot less revenues. And that is definitely the main effect that you see on the advertisement side. On the increase of costs on the spot or keywords, etcetera, that in the Q1 has not a big is not a big driver. Ralph, just to follow-up on that. Is there a way that you would look at the hotel direct opportunity, what you're seeing with these direct booking initiatives from the hotels in terms of an opportunity for trivago both to diversify revenue and or your revenue sources and then also potentially create some opportunities for the company within that metasearch model to use those direct booking prices? I mean, we see this as a big opportunity. It's a really big opportunity, but it's a long term opportunity. So I think that's the issue here. So it's definitely a big opportunity. And if you're looking at like a time horizon for the next couple of years, yes, there will be definitely, there will be a change, and we see this change coming. But just the base is still quite low. And so the majority of this effect, it will not happen in the next couple of months. But it will have a significant effect in the long term view. And that is basically also kicking in when I speak about like a long term where is it long term commercialization? Where is it long term margin of this business? I think these are all long term effects that will kick in, but it takes time. I think we have been very early in like approaching hotels directly. We are also very consequent now in exploring this opportunity, yes? So we also we shifted a lot of resources that we had in our hotel relations team from our product that you know from our pro product, where we which we basically where we get a monthly revenue to onboarding would help directly into our price comparison, yes? So that was also significant change that we did where we again said, no, we want to go for the long term opportunity. So we're working on it, and we definitely make progress on it. And it's a very significant progress, But the base is still quite low, and we're growing continuously, yes? And I think the effect that you will see an impact on the marketplace, they will be in effect this year, yes? But the majority of those effects, they will kick in over the next couple of years. Great. Thank you very much. We will now take our next question from Kevin Kopelman from Cowen and Company. Please go ahead. Hi, thanks a lot for taking my questions. So I just had some follow ups on the RPQR decline, the recent development. Did you say if that was can you say if that was 1 major advertiser or both major advertisers? And then can you quantify the size of the impact on revenue growth from those recent developments for the immediate impact, so how it's going to impact the 2nd quarter? Yes. So I think that we are currently in a situation of very limited visibility, also because you know that there was at the end of the quarter, there was the Easter break, and it was also the end of the quarter. So and also, advertisers adjusted might be for them a reason to adjust their profitability targets. So the visibility on our side is quite low right now. That's why we rather assumed a rather conservative approach for the rest of the year. And I think that is something that we had to do cautiously right now. And I think it's really hard for us to really quantify the effect, but we would rather like saying, okay, we just assume whatever happens, it will stay. And we think that is rather conservative, but that's what that's our assumption. That's why we adapted our guidance. Yes. Just to add to that. So underlying our guidance, we assume a significantly weaker revenue development in the Q2 compared to the Q1, driven by significantly lower year over year RPQR trend Q2 over Q2 2017 compared to the Q1 that we just reported. Yes, so the Q quarter I don't know, it was both major advertisers? No. So I guess if you have a significant impact on the overall marketplace, then that, I guess, answers your question. There is a significant impact on the overall performance. Okay. And then on TV commitments, do you feel that like you over committed on your TV buys for the year given the recent RPQR developments? No. I mean, I guess we will see at the end of the year, yes. But from what we are currently planning for, we don't see an over commitment. We even in the markets where you need to commit for the full year, we always leave some buffer in there. So I guess what you are referring to is the situation that we are facing end of last year. As of today, we don't expect that Q4 situation to come back in Q4 2018. Okay, great. And then just one clarification on the guidance slide. For the second half of twenty eighteen on EBITDA, are you expecting that to be positive EBITDA in the second half of the year? Or are you expecting it to be better year over year than the second half of twenty seventeen? Both positive and then by being positive better than last year. Okay. So not EBITDA losses, but EBITDA profits in the second half twenty eighteen? That is correct, yes. Greater than 0. Okay. Thanks, Axel. Thanks, Rolf. We will now take our next question from James Lee from Mizuho. Please go ahead. Yes. Thanks for taking my questions. My first question is a follow-up on the new attribution model on search specifically. Can you just explain maybe conceptually how you target keywords differently than before? And what have you learned so far? And which region specifically do you expect the most improvement and why? And my second question is about landing page assessment. You guys have done it for a year already. Just curious what kind of improvement in conversion are you seeing here? Is it worthwhile for you to continue to make that initiative specifically? Thanks. So the first question was on the attribution model. So first of all, looking at the markets, we don't distinguish between markets so far. So I think there is no expectation that through the change in distribution model, there will be a change in the profile of the market. That will definitely not happen, not an overall volume or profitability. That's not what we're expecting. And conceptually, what we're doing there is that in the past, you have to assume that what we looked at revenue at our revenue that we generated. So when you look we're looking at profitability of campaigns, we looked at the revenue that we were generating to measure profitability of those campaigns. And with us getting more and more visibility on the overall value that is created, e. G, through a booking at the end of the time at the advertiser side, we are able not to optimize for our revenue, but we are able to optimize for the value that we generate to our advertisers. And that gives us potential to optimize. Yes? And this is resulting into better traffic quality because traffic quality is defined by value that we generate to our advertisers. That means that we generate usually would generate or we would expect you to generate less qualified referrals with a higher quality. Yes, that's conceptually what we changed there. So in total, we have potential to optimize our marketing and to create more value with the same budget. Basically, that's what we did over the last year. To come to your second question on the experience so far with the relevance assessment, so overall, we think that it was positive to introduce the relevance assessment end of 2016, and we are continuously optimizing the algorithm. I mean, we went to an automated version end of 2017, and now they're really focused on making it better and better. So overall, we think very positive experience. On your question, how much the relevance assessment has improved conversion? I mean, as I said, we think it's overall positive, but it is not possible to quantify the exact effect because it is basically live on the overall platform. And as we've said, we had significant improvements in traffic quality. And to isolate the effect coming from the relevant assessment is not possible. If I could ask a follow-up question on OpEx specifically, it looks like G and A and tech and content is a little bit higher than expected. Is that the kind of new base we should model going forward, number 1? And number 2 is when can we start seeing leverage of these 2 items specifically? Yes. I mean so in G and A, I would say broadly speaking, we the level that we are having right now is a level that I mean, that shouldn't significantly change during the year. There's obviously always some seasonality in it, particularly in the TV creative expenses. But broadly speaking, the level, I think, is a good level. There are in the G and A, there are expenses in there that we would hope over time to get rid of. I mean, I commented on the SOX implementation and generally our 1st year as a public company and the mitigation of our material weakness. And that incurred significant expenses that I would hope over time we can internalize and reduce. But broadly speaking for this year, the level that you are seeing right now is more or less what you would need. Let me just give some comments on the overall overhead development there. Because I think what you can see there is that we showed you one slide where we showed them the development of headcount. And basically, the headcount is the major driver for our overhead costs. So when you're looking at our overhead costs, basically, the headcount, it's a little bit the creative for our brand marketing. But that is that are basically the main drivers. All other costs are somehow related to that. And what you can see there is that during the last year, we still grew our headcount because, of course, we were going with into the year with 70% growth, 2nd quarter 70% growth and so on or close to 70% growth. So we were going into this quarter and so basically we've grown the headcount, But now you can see that from Q4 to Q1, there's also no headcount development anymore. So it's basically perfectly stable. So we were able to bring that down. Now that we also didn't expect through the work commercialization, we expect not that strong growth in the first or negative growth in the first half of the year. So we expect the overhead cost to be relatively stable over the year besides the seasonal effect that we have in there. And I think then the I think the leverage that you can see then is probably then in the second half of the year when we're going back to growth and you can see a leverage of these costs. And then in 2019, you will automatically see a leverage because you will not directly ramp up our overhead costs there. So you will see it leverage in 2019. I also noticed that you're doing and currently doing a cloud migration. Can you help us understand what the OpEx cost is maybe for this year? Is that a headwind that we should model into our financial forecast at this point in time? And when should we expect any some sort of synergies in the future? Yes. So we moved already parts of our infrastructure into the cloud, and we did that over the years. We now also did do it with our core application. We don't think that there will be a significant cost involved that will really likely significant for the overall business. We don't expect that. We also we see on one hand, of course, cloud is more expensive. On the other hand, it's way more efficient. So we don't expect that we see like a significant cost factor coming in there. Great. Thanks. We will now take our next question from Tom White from D. A. Davidson. Please go ahead. Great. Thanks for taking my question. Just one for me, a follow-up on revenue diversification. Last couple of quarters, you guys have talked about trying to reengage kind of the hotel direct advertiser and some of the smaller OTAs globally. It didn't look like your other advertisers as a percentage of revenue, I think it ticked down in 1Q. I guess just long term, how should we think about the ability of those other partners to monetize relative to the large global OTAs? So for a given property on your site, how do those 2 different kind of groups monetize? Obviously, the Hotel Direct has kind of more margin to work with, but maybe suffers on kind of the conversion rate side. Just trying to understand how to think about about how that plays out. Thanks. Yes. So I guess when you look at the comparison Q1 versus Q4, you need to be a bit careful because the Q4 has had very different trends in the first half of Q4 and the second half. And one interim data point we disclosed when we disclosed the quarter to date numbers in October on our earnings call. So that gives you more detail, more granularity on the trends. But generally speaking, there is I would say there is a lot of room to improve and increasing the share of the all others and the competitiveness of all others. And we I think we talked about on the last earnings calls as well. I mean, we've got various tools that empower our advertisers to become competitive on us as a marketplace. We have automated bidding, which mitigates the different size in terms of bidding. We've got Express Booking, which offers an optimized checkout process to, in particular, smaller advertisers. And we are continuously working with them to really improve on the platform. Having said that, there are a lot of so, it is really something that you would see, as Rolf said earlier, that you will see over years and not over months. And the problem is also not the problem, but it's an adoption rate because basically what it always sounds like you empower the small advertisers, but we want to empower all the advertisers, right, at the same time. So and when we introduce a new tool and we introduce like a new way to use our traffic and so on. So we usually, we open it up to everyone. And the adoption rate the adaption rate of the large advertisers is higher than of the small ones. The effect for the large advertisers though is smaller. So and that is always that you have to keep in mind. So adaption rates after effect is smaller. And that's why it's always hard to basically see the overall effect because if you're going into the long tail of advertisers, these initiatives have a quite large effect, but the adaption rate is lower. So I think that is how you have to think about it. So and that is also why you cannot like we don't want to avoid we want to make all our advertisers better, the large ones and the small ones. Okay. Thanks for the color. We will now take our next question from Peter Stabler from Wells Fargo Securities. Please go ahead. This is Rob on the call for Peter. Thanks for taking our questions. I think last quarter we asked about the strength of commercial the commercialization headwind. I think you said it was high singles, maybe low double digits, balanced by roughly equal tailwind from conversion. It sounds like the headwind from commercialization became stronger. Just wanted to ask if you could give us any sense of scale there? And also the trend in conversion, was it consistent versus last quarter better or worse? And then I also wanted to just follow-up on the hotel direct opportunity. I had a couple of questions there. In general, we think about it as being a positive for commercialization in terms of improving bid density, but just wanted to ask, is that always the case? It seems like hotels could gain share through the blue placement winning champions position with the lower price versus a higher bid. Just wondering if you could talk us through some of the dynamics there as well. Thank you. Yes. So first take your first question on commercialization. So Q1 versus Q4, we based on I mean, just to recap, we have approximately 50% visibility and coverage of the overall conversion of our traffic. So the rest, we do estimate. But from the data that we see and that's the way we estimate the overall impact, we think that Q1 drop in commercialization versus Q1 'seventeen has been greater than Q4 over Q4, which was expected because the relevance assessment and the positive impact last year was particularly in Q1 and Q2 and to a very limited extent in Q4. In Q2, we see a further drop in the year over year trend. But then, as I said, in Q3 and Q4, we are lapping the relevance assessment impact in 2017 and have a smaller drop in commercialization factored into our guidance. So I think if I would repeat the question, I think it was about like what do you see when like small or like hotels put in lower rates? Isn't that also a threat for commercialization? Actually, that's not what we see. So when a hotel like puts in really a lower rate and advertised with that rate and it ranks up in our algorithm, usually it goes up, which means basically our commercialization is also better. And what we see there is that users just appreciate that you have like an offer with a cheaper rate. And they have a higher conversion because they see, oh, there is a hotel offering a cheaper rate than the compensating the effect of that we might see on in the bidding. So usually what we see there is rather success stories of that. Okay. Thank you. As there are no further questions in the queue, that will conclude today's question and answer session. I will now turn the call back to your host for any additional or closing remarks. Thank you. Rolf, any closing remarks? Yes. So first of all, many thanks for joining the call. So we knew mid of last year already that we would have 4 challenging quarters ahead of us. This was a third of them. The last 9 months, but specifically the last quarter, we had very difficult comps, negative impact of exchange rate and a significant drop in commercialization to compensate. We still were able to grow our user base through improving our product and our marketing continuously. So we know that there will be another difficult quarter, but we are also very confident about the second half of the year. So thanks a lot, everybody, for joining the call, and see you next time. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now