|TRIVAGO N.V. filed this Form 6-K on 07/25/2018|
In addition, changes in foreign exchange rates can amplify or mute changes in these underlying trends in our revenues and RPQR. Although we denominate our CPCs in euro and have relatively little direct foreign currency translation with respect to our revenue, we believe that our advertisers’ decisions on the share of their booking revenues they are willing to pay to us are based on the currency in which the hotels being booked are priced. Accordingly, we have observed that advertisers tend to adjust their CPC bidding based on the relative strengthening or weakening of the euro as compared to the local functional currency in which the booking with our advertisers is denominated.
During the second quarter of 2018, we continued to experience lower levels of commercialization as our largest advertisers reduced their CPC bids and appeared to have increased their return on investment targets for their spend on our marketplace compared to the second quarter of 2017. This in turn had a negative effect on our share of the overall booking revenues generated from referrals on our platform (commercialization), and was evidenced in our RPQR, which declined, even as the optimizations we have been making to our platform and product and our attribution model appeared to continue to improve the traffic quality we generated for our advertisers. The decline in commercialization was particularly pronounced in the first half of 2018 compared to a strong first half of 2017, which benefited from positive revenue effects from the introduction of the relevance assessment.
Against this backdrop and with the aim of improving profitability in the second half of 2018, we began implementing significant reductions in our advertising spend during the second half of the second quarter of 2018 across markets, by increasing return on investment targets in our performance marketing campaigns, and by making reductions in brand marketing expenditure. These reductions are part of a shift to focus more on profitability in the second half of 2018, and we are already seeing the first signs of profitability improvement. While these reductions began to stabilize our ROAS, they also had a negative impact on traffic to our platform attributable to all marketing channels and reduced qualified referrals. Although we expect these reductions to improve our profitability in the second half of 2018, should the trend of lower levels of our commercialization continue, we may experience further revenue declines and experience negative impacts on our profitability.
In addition, as we have focused on improving the profitability of our performance marketing campaigns in particular, we also continue to rely on the trivago brand to attract and expand the number of users of our websites and apps. Although we continue to invest in new creative concepts in our advertisements, we may nevertheless see declines in the marginal returns on our brand marketing advertisements as we continue to experience intense competition and many of our competitors continue to spend heavily on advertising their brands and services, which may further contribute to a decline in our revenues and have a negative impact on our profitability.
In the second quarter of 2018, we continued to experience negative impacts on our referral revenues and RPQR from foreign exchange rate effects, in particular due to the relative weakening of the U.S. dollar and certain currencies in the Asia Pacific region to the euro. (The average exchange rate of U.S. dollars to euros increased 8.1% in the second quarter of 2018 as compared to the second quarter of 2017, calculated using the average for the particular period of the daily foreign exchange reference rates published by the European Central Bank.)
In the first half of 2018, we continued to implement measures aimed at optimizing our platforms and product, with the intention of increasing user retention and booking conversion, while reducing the number of click-outs required to ultimately make a booking. These are relatively small, incremental changes to our product that we believe, when considered together, will result in improvements to our product and platforms. Since we make these changes by optimizing for traffic quality instead of volume, these changes will tend to have a negative impact on Qualified Referrals (in addition to the effect of declining advertising spend), but we believe they will have a long-term positive impact on RPQR.