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HomeAway (NASDAQ:AWAY)

Q4 2012 Earnings Call

February 20, 2013 4:30 pm ET

Executives

Courtney Hicks Dickey

Brian H. Sharples - Co-Founder, Chairman, Chief Executive Officer and President

Rebecca Lynn Atchison - Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

Nishant Verma - Morgan Stanley, Research Division

Douglas Anmuth - JP Morgan Chase & Co, Research Division

Lloyd Walmsley - Deutsche Bank AG, Research Division

Ralph Schackart - William Blair & Company L.L.C., Research Division

Stephen Ju - Crédit Suisse AG, Research Division

Mark May - Barclays Capital, Research Division

Aaron M. Kessler - Raymond James & Associates, Inc., Research Division

Chad Bartley - Pacific Crest Securities, Inc., Research Division

Operator

Greetings, and welcome to the HomeAway Incorporated Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being reported. It is now my pleasure to introduce your host, Courtney Dickey, HomeAway Legal. Thank you, Ms. Dickey, you may begin.

Courtney Hicks Dickey

Thank you, and welcome to HomeAway's Fourth Quarter and Full Year 2012 Financial Results Conference Call. By now, everyone should have access to the earnings release, which was distributed today at approximately 4:00 p.m. Eastern Time. If you've not received the release, it can be found on the Investor Relations tab of www.homeaway.com. This call is being webcast and is available for replay.

In our remarks today, we will include statements that are considered forward looking within the means of security laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current knowledge and expectations as of today, February 20, 2013, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.

A detailed discussion of such risks and uncertainties is contained in our most recent Form 10-Q filed with the SEC on November 7, 2012. HomeAway undertakes no obligation to update any forward-looking statement, except as required by law.

On this call, we will refer to non-GAAP measures, that were used in combination with GAAP results, provided with additional analytical tools to understand our operations. We have provided reconciliations of non-GAAP to GAAP measures in our earnings release distributed earlier today.

With that, I will hand the call over to HomeAway's Chief Executive Officer and Chairman, Brian Sharples. Brian?

Brian H. Sharples

Thanks, Courtney, and good afternoon, everyone. We appreciate your continued interest and support and look forward to sharing our fourth quarter and full year 2012 results with you today.

We had another terrific year, and you'll find that our 2012 results underline the fact that HomeAway continues to be an extraordinary business that benefits from our substantial leadership position in the vacation rental industry. With more vacation rental listings than any other company in the world, we offer the broadest selection for travelers, and our resulting leadership in traveler traffic continues to make us the most highly valued venue for owners and managers marketing vacation rental properties.

This leadership in both traveler traffic and paid listings allows us to take advantage of strong network effects, creating predictable business with very attractive profit and cash flow characteristics and due to the nature of travel, this network effect is global. So as we expand our footprint around the world, the opportunity to further monetize our marketplace only gets better.

Now jumping into the results. Total fourth quarter revenue was $72 million, increased 22% year-over-year, or 23% FX neutral. Within our core Subscription business, FX neutral listing revenue grew 24% year-over-year, the highest quarterly revenue growth rate we posted all year. Adjusted EBITDA of $21 million increased 28% over the same period, and free cash flow for the quarter was $22 million.

Importantly, the fourth quarter marks a continuation of the strong performance HomeAway delivered throughout 2012. We ended the year with total revenues of $280 million, representing growth of 22% year-over-year and adjusted EBITDA of $80 million or 20% growth year-over-year.

One of the unique aspects of HomeAway from an investment standpoint is our ability to generate significant free cash flow relative to both revenue and adjusted EBITDA due to the subscription nature of our business, leverage-able cost structure and low CapEx requirements. On a trailing 12-month basis, free cash flow was $85 million. That's an increase of 32% over the same period of last year, leaving us with $270 million in cash and short-term investments on the balance sheet at year end.

In addition to our strong free cash flow generation, we're pleased to deliver financial performance consistently in line to ahead of our expectations throughout 2012, while simultaneously making significant strides against our long-term strategy and mission. Perhaps one of the most significant endeavors accomplished during 2012 was the migration of VRBO to our common network platform.

Post migration, we achieved critical mass with 75% of our total listings now accessible on this common global platform, and this accomplishment paved the way for the introduction of a more robust tiered pricing system and new bundled products, the advancement of e-commerce and an overall improved user experience for property owners -- owners, managers and travelers.

By year end, our 2 primary U.S. websites, HomeAway.com and VRBO.com and 3 of our primary European websites, HomeAway UK, Abritel in France and FeWo-direkt in Germany, all offered new tiered pricing products and we're newly e-commerce enabled with online payments and booking. Our solid financial performance coupled with strong operational execution continues to solidify HomeAway's leadership within the online vacation rental marketplace, a category we started to define and consolidate over 8 years ago.

Today, our leadership in the category remained strong with approximately 712,000 global listings in 171 countries. And we remain the leading online destination for global vacation rentals from a traveler perspective and in particular with families. During 2012, traffic was up 20% year-over-year and serves as a strong validation of HomeAway's continued ability to drive adoption of vacation rentals worldwide.

Over the course of the year, we added approximately 71,000 listings net of nonrenewals, an increase of 11% over the prior year period. This is calculated based on our year-end paid listing count, which now reflects the consolidation of some U.S. listings following the VRBO migration, as well as the loss of would-be second listings as many new customers now opt for our U.S. and global bundles that sell at higher overall ASPs than a single listing.

Excluding the combined impact of these 2 factors, we estimate total listing growth would have been as high as 13%. We also substantially reduced our relationship with one very large U.K. account resulting in the removal of approximately 13,000 listings from the site during Q4 due to quality concerns associated with those listings. And while this negatively affected the listings growth metric by another additional 2 percentage points, it has had a negligible impact on revenue.

Based on the success of bundled pricing to date and more bundled pricing to come, our listing count metric will continue to face a headwind and will understate the true growth of the business. That said, we have initiatives underway, that we do believe will drive higher levels of listing growth by tapping into new market segments. Just as we made investments in 2011 and 2012, to grow our ASP aggressively without substantially raising base prices, we have begun and we'll continue to make substantial investments in 2013, to introduce a pay-per-booking pricing model, which we expect to have a large positive impact on our listing growth, and I'll provide more details on this offering in just a moment.

Also impacting net paid listings growth and renewals for the fourth quarter, when adjusting for the impact of consolidated U.S. listings our renewal rate was 74.4%, down from 76.8% in the prior year period. Of the 2.4% year-over-year decline the inclusion of Australia and the impact from the Abritel migration, which we've talked about before, accounted for slightly over 1%. The remainder of the decline is due to 3 factors. The first was general weakness in Europe and European renewal rates in 2012, primarily due to the economy, but also the aforementioned loss of the U.K. listings from that large single account.

But the good news is that net of that one deal, we saw renewal rates improve sequentially in virtually all of our European markets during Q4. The second reason is that we're running more promotions to drive trial and new listings in the business. We found these campaigns to be ROI positive as customers exhibit strong second-year renewal rates. So we plan to do more of them in 2013. But since promotions bring in customers at a substantial discount, the first year renewal rates tend to be lower. While good for the business in the long term, realize that these promotions can have a downward impact on the renewal rate metric.

The third contributing factor to the renewal rate decline during the quarter was related to the migration of VRBO to the new platform and pricing system. During 2012, VRBO customers were hit with a multitude of product changes. And while those changes have proven positive for our business especially from a financial perspective, some of the changes aren't welcomed by all customers. With the migration now complete, we're working hard to stabilize renewal rates in that business going forward.

As we've highlighted before, the best leading indicator of overall renewal health is traffic growth. And year-on-year traffic growth in all European regions continued to accelerate versus the third quarter, a continuation of the trend we first noted earlier in the year. In addition, travel levels in North America -- traffic levels in North America and the rest of the world remain healthy, with the total Global business attracting 124 million visits in the fourth quarter, an overall increase of 22% year-over-year.

Also on the bright side, though initiatives such as tiered pricing and geographic bundles -- through those initiatives, we continue to improve the monetization of our listing base as evidenced by the growth in our average revenue per listing. Adjusting for the impact of consolidated listings and new bundled offerings in VRBO and HomeAway.com, our average revenue per listing for the fourth quarter was $345, up from $321 in the prior year period. FX-neutral subscription revenue per listing increased nearly 10%.

Now I'd like to update you on the progress of some of our product initiatives. As highlighted last quarter, Q4 marked the rollout of tiered pricing to 3 of our European websites, HomeAway UK, Abritel in France and FeWo-direkt in Germany. This roll out has gone very well, so far outperforming our expectations. But I want to remind everyone that we're still in the very early days of adoption and the sales uplift attributed to tiered pricing in Europe will take a full year to completely flow through to the revenue based on our deferred revenue accounting, just as you saw in the U.S. last year. The same can be said for the performance of tiered pricing and network bundles in the U.S., where adoption rates continue to trend positively and similar to Europe, outperform our expectations.

One of the most significant and compelling long-term opportunities for HomeAway is enabling e-commerce. In addition to creating a much better and more efficient experience for travelers, enabling e-commerce also provides us the opportunity to generate additional revenues that we expect to contribute to our business growth longer term.

2012 saw the advancement of several important e-commerce initiatives, including the rollout of online payments and online booking. The fourth quarter, in particular, saw the rollout of our payments online booking platform to HomeAway UK, Abritel in France and FeWo-direkt in Germany as already mentioned. We expect to enable several additional sites worldwide in 2013 as well.

At year end, e-commerce enabled listings numbered approximately 53,000, a 140% plus increase over the prior year. We plan to continue to provide you with this metric going forward, to provide additional insight into the adoption of our e-commerce services, which once again remains very positive.

Another component of our e-commerce functionality is our value-added protection products. Adoption of these products in the U.S. has been extremely positive, and we look forward to introducing similar products to the checkout process at our 3 e-commerce enabled European websites in 2013.

As is evident, 2012 was a year of significant accomplishment for HomeAway. Our financial performance was matched equally by strong operational execution further solidifying our leadership in the vacation rental category. Our primary focus for 2013 will be the continued rollout of our e-commerce capabilities and particularly the introduction of our pay-per-booking pricing model and continued distribution of our value-added services backed by solid investments in product and development resources.

Pay-per-booking is on track and slated to launch in the summer of 2013 as an option for individual owners. And by year-end 2013, as an option for our property management customers as well. Pay-per-booking is expected to be additive to our business, attracting new segments of property owners, who are either new to the market or only need to rent their properties for a few weeks per year. And we also expect this capability to substantially improve our penetration with property managers who, in general, prefer a performance-driven model, because it's more consistent with how they operate their businesses.

So in summary, we're pleased that we delivered against our very robust 2012 product road map, while continuing to drive high growth in both EBITDA and free cash flow. Looking ahead, we feel very well positioned for 2013.

While Lynn will discuss our 2013 outlook in more detail momentarily, I'd like to highlight that 2013 will be a year in which we're just starting to realize the impact from the ground work and progress made in 2012. 2013 will reflect continued investments, but those that we're confident will pay dividends in the quarters and years to come.

So with that, I will hand the call over to Lynn to discuss our fourth quarter and full year results, as well as introduce our outlook for 2013. Lynn?

Rebecca Lynn Atchison

Thank you, Brian. I'd like to start by reiterating that we're pleased with our fourth quarter performance. The business as a whole largely performed in line to ahead of expectations despite anticipated pressure we had on certain aspects of our business, including pay-per-lead and online advertising.

For the fourth quarter, total revenue of $71.6 million was 22.4% higher than the comparable quarter last year, 23.4% FX neutral. Listing revenue, which remains the core of our business, was $62.4 million, an increase of 22.8% year-over-year, or 23.9% FX neutral. Notably, this marks a sequential acceleration in our FX-neutral year-on-year listing revenue growth rate, as compared to the third quarter of 2012.

I want to provide more details about other revenue, which is comprised of ancillary revenues from owners and travelers, advertising, software and other items, which totals $9.2 million or growth of 19.8% year-over-year. This increase primarily reflects the introduction and enhanced distribution of value-added owner, manager and traveler products. These products grew 48.1% year-over-year to 24.7% of other revenue, once again highlighting the strong adoption and uptake of these products in the U.S.

Our outlook assumes continued momentum of these products in the U.S. propelled by increasing adoption and usage and our reservation manager and payments platform by customers. Advertising revenue grew 13.6% and was slightly down from the prior year period as a percent of other revenue at 26.3%. The Advertising business continues to lag expectations due to our reorganization of the management team, increased use of mobile and our continued bias to prioritize site speeds and usability over maximizing ad real estate and format. Nevertheless, in the fourth quarter, we reorganized and our advertising team is now under the leadership of our newly hired VP of North American sales. So we're excited to get back on track.

Software revenue grew 11.1% year-over-year, to 28.4% of revenue. While not growing as much as other elements of the business, property management software continues to be strategically important to our overall company. And once our pay-per-booking model is in place, we expect many of our software customers will take advantage of this new pricing option.

For those new to the company, we are a global business. And during the fourth quarter, 62% of our revenue was generated in the United States, 36% in Europe and under 2% in South America and Australia.

Turning to expenses. Total operating expenses excluding amortization increased 19.3% year-over-year. As a percent of revenue, operating expenses declined 220 basis points year-over-year to 84.8% of revenue. Much of the year-over-year growth reflects increased compensation expenses due to increased headcount. We ended the quarter with 1,228 employees, up 31% over the course of the last 12 months, as we continue to invest in the business.

Compared to the prior quarter, headcount increased 5%, with the largest number of new employees being added in product and development, followed by sales and marketing and customer service. Cost of revenues increased 37% to $12.2 million. This increase is due to an increased number of customer service employees. Over the past year, we increased our staff in this area to support the launch of numerous new product enhancements on sites around the globe. Along with additional headcount, we incur higher occupancy and technology costs as well.

Product development expense increased 40% to $12.1 million. The increase reflects our continued investment in the global deployment of new numerous initiatives, including the European rollout of tiered pricing, online booking and payments, additional technology to support professional property managers and the development of pay-per-booking capabilities. We expect to continue to grow in this area in 2013 both in absolute terms, but also as a percent of revenue.

Sales and marketing expense increased 8% year-over-year to $22.1 million. The largest contributor to growth was stacking up our sales effort directed at professional managers. With respect to direct marketing in the fourth quarter, total expenses declined about 6% year-over-year led by a reduction in broad reach marketing.

As always, we continue to invest in PPC and SEO, aimed at driving demand on behalf of our property owners and managers. However, we planned for lower direct marketing expense in Q4, due to the seasonality of the business. And for the full year, our direct marketing expense was about 11% higher.

General, administrative expenses increased by 11% year-over-year to $14.3 million. This was due to growth in the number of personnel, primarily in our global shared services areas, such as accounting, finance and tax. And amortization expenses were up 26.8% year-over-year due to the amortization of intangible assets in 2012 that were previously designated with indefinite lives and the inclusion of amortization related to the acquisition of Top Rural.

Adjusted EBITDA increased 27.6% to $21.3 million. And as a percentage of total revenue, adjusted EBITDA margin was 29.8%, 120 basis point increase over the prior year period. The margin improvement reflects the benefit of our revenue growth coupled with improvement in operating expenses as a percent of our total revenue.

Our effective tax rate was 38% during the quarter to achieve an overall full rate of 46.8%. This compares to almost 67% for the full year in 2011. We continue our efforts to optimize our worldwide tax liability through our European consolidation in Geneva. However, due to the uncertainty in Europe, we anticipate that our expected long-term benefits will be reduced slightly due to pressure on Switzerland from other EU countries.

Net income attributable to common stockholders was $4.5 million or $0.05 per diluted share. This was compared to a net loss attributable to common stockholders of $256,000 or break even per share during the fourth quarter last year.

Turning to the calculation of key business metrics. It is important to reiterate for the next several quarters, there will be some noise within our metrics stemming from the introduction of our U.S. bundle and the impact of property owners and managers consolidating their U.S. listings or purchasing the U.S. bundle. To help you understand the impact of these changes, we'll continue to provide additional insight and information into these metrics as needed.

Specifically, as noted in today's earnings release, ending paid listing count and renewal rate will appear lower, and average revenue per listing will appear higher versus previous metrics on a going forward basis.

Moving on to our balance sheet and cash flow. At December 31, 2012, cash, cash equivalents and short-term investments totaled $269.8 million, and we remain debt-free. We ended the quarter with $129.2 million in deferred revenue, which is up 21.4% over December of last year on an FX-neutral basis excluding the impact of acquisition.

For the quarter, we generated free cash flow of $21.9 million, up 47.1% year-over-year and for the trailing 12 months, $85.3 million, which is 32.2% over the comparable trailing 12-month period last year. Capital expenditures, including costs associated with internally developed software, were $2.6 million for the fourth quarter, relatively low due to less office expansion.

And as presented in our earnings release today, we are providing our business outlook for the first quarter and full year of 2013. For the first quarter, we currently anticipate revenues in the range of $78 million to $79 million, representing year-over-year growth of 21.7% to 23.2%, or 21.5% to 23.1% FX neutral. And adjusted EBITDA in the range of $19 million to $20 million representing year-over-year growth of 36% to 43%.

For the year, we currently anticipate revenues in the range of $339 million to $343 million representing year-over-year growth of 20.9% to 22.3%, or 20% to 21.5% FX neutral and adjusted EBITDA in the range of $97.5 million to $105 million, representing year-over-year growth of 21.3% to 25.1%.

And other key model assumptions for the full year include, a foreign exchange rate for the euro of 1.33 for each U.S. dollar, an effective tax rate of approximately 37% to 41%, basic share count to be in the range of 84 million to 86 million and our fully diluted weighted average share count to be the range of 86 million to 88 million shares. Stock-based compensation is expected to be in the range of $34 million to $37 million. Amortization expense is expected to be the range of $11 million to $12 million, and capital expenditures are expected to be in the range of $18 million to $20 million.

That concludes our prepared remarks. Thank you again for your attention.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Scott Devitt of Morgan Stanley.

Nishant Verma - Morgan Stanley, Research Division

This is Nishant Verma for Scott Devitt. I just wanted to understand more on the pay-per-booking pricing model. Will the launch of the pay-per-booking increase your addressable market, and how actually will it be priced? And what makes you confident that the -- that existing subscription listings will not convert into pay-per-booking listings?

Brian H. Sharples

Yes. So that's a good question. We do -- we have a very capable market research department here at the company and do quite a bit of it. And in fact -- and we'll be studying it between now and the time we launch, but we've already done quite a few studies. As it turns out, we have recently conducted a study with our current owners and find a very small percentage, and I'm talking tiny, tiny like 3, 4 percentage points of them have a preference for pay-per-booking. So most of our customers, our subscription based customers, they love the model. They earn a lot of money with that model, and it's one of the reasons that I think competitively, our investors should feel pretty secure about our base. On the other hand, we also are able to measure people, for example, who every day they come to our sites, come to the listing section of our sites and then peel off and never subscribe. And so we've actually done a study against that group of people and what we find is that a much higher percentage of those people would be interested in working with us if there was a percentage-driven model. And one of the things that we feel very confident about is that there are a lot of potential renters out there in the world. Millions of homes in the U.S. and Europe where people don't have much experience with this business. So signing up for a subscription would be a barrier to them renting their property. But with a model that allows you to get on the sites for free, and only pay money if you've earned, in effect, 10x the amount that you're going to be charged, then we think that's going to really spur a lot of demand in the market. And I think Airbnb is a great example of someone that went into the whole city apartment market where no market existed before. These people weren't listing in newspapers or in classified sites. But when they made it free, all of a sudden, those floodgates open. So everything that we've been able to look at from our perspective tells us this will be additive to our business. Now to the extent it is cannibalistic, remember that the average customer generates over $13,000 in revenue for a subscription that currently averages between $350 and $400. We do expect the model to be somewhere in the range of 10% although we still got some research to do before we finalize the pricing. So if somebody did switch from a subscription customer to a pay-per-booking customer, on average that would be triple the revenue to us. So that's not necessarily a bad thing either.

Operator

Our next question is from Douglas Anmuth of JPMorgan.

Douglas Anmuth - JP Morgan Chase & Co, Research Division

You gave some numbers just showing the impact of bundles on paid listings growth and then also on the ARPU. Can you give us maybe some color on how you expect that impact to trend as you go through '13 and then perhaps how you think about the growth in listings and ARPU in 2013 relative to what they did in 2012? And also just curious if you have any thoughts on the free cash flow impact that you'd expect from a shift to more pay-per-booking pricing.

Brian H. Sharples

Yes. So taking the first one, which is with respect to the growth rates due to consolidation. So we actually expect that the delta between the old metric of listing growth and the one that now includes consolidation is going to continue to grow because we do see an acceleration in the purchase of bundles. They're very popular with our customers. We're going to continue to see consolidation. So that's obviously good for the business. That's what we want. But where we used to count, let's say 2 listings, we're now counting 1 listing. So I would expect that the metric you'll see in 2013 will be a lower listing growth metric for most of the year than what you saw in 2012 due to that effect. Now the one mitigating factor on that is that we do expect some time in the third quarter to introduce pay-per-booking. And if pay-per-booking goes well, we do internally feel like by the fourth quarter, you could see listing growth rates tick up again to something that looks more like historical growth rates that you've seen. Now coupled with that because we have those consolidations and people are buying higher ASP items, what you're also going to see in 2013 are high -- higher ASPs than you've seen historically. So those will really be the 2 trends: listing growth lower, ASP higher. The combination of the 2 still allows us to hit our growth objectives and make our numbers, and that's how we're managing the business internally. So the second question, which is around pay-per-booking. Pay-per-booking does change the deferred revenue characteristics of our business for sure, because in the subscription business, we get paid up front and then obviously, we run that revenue out over the next 12 months. In a pay-per-booking scenario, we will be holding money for a short period of time. I think we actually will be taking credit for it when the traveler stays at the house, so that could be a month later or a couple of months later but -- so the cash flow may be delayed by a month or 2 versus the previous model. But the flip side of that is that you also won't have to wait for sales to translate into revenue. So if we have let's say a big quarter from a sales perspective on PPV, that'll flow through to revenue immediately. Now as we sort of project the business out over the next couple of years, the subscription business is still the huge monster that really drives this business. And even if we're successful beyond our wildest dreams in pay-per-booking, it's still, for the next couple of years, going to be a moderate percentage of the business. So I don't think it's really going to change the characteristics of the company substantially in the next couple of years.

Douglas Anmuth - JP Morgan Chase & Co, Research Division

Great. If I could just ask one follow-up...

Brian H. Sharples

Yes, you want to add on to...

Rebecca Lynn Atchison

Doug, excuse me, this is Lynn. I just want to add on to that because there are other components of free cash flow that may have a bigger impact on free cash flow than the launch of pay-per-booking. And so that's the sort of thing where, like cash taxes growing by some amount and things like that. So those -- if you're partly trying to model free cash flow, I don't think it's so much a change of the business model, but some other element.

Brian H. Sharples

And certainly for '13, paper bookings are not going to have a big impact because even if we launch it towards the end of the year, the last quarter of the year isn't a high booking season. So let's say we add 30,000, 40,000, 50,000 listings at the end of the year, they're still not going to start generating a lot of revenue until the first quarter.

Rebecca Lynn Atchison

Right.

Douglas Anmuth - JP Morgan Chase & Co, Research Division

Could you also give us some color on how you're thinking about pricing, the pay-per-booking model?

Brian H. Sharples

It's -- right now it's going to be, sort of the base case, is roughly 8% to 10% model. We still got quite a bit of research to do with customers. We're also looking at competition and other things. And typically, we'll make that call in the weeks before we launch the product. But just roughly think of it, I think if you're trying to model it, as 8% to 10% of a bookings scenario.

Operator

Our next question is from Lloyd Walmsley of Deutsche Bank.

Lloyd Walmsley - Deutsche Bank AG, Research Division

Just wondering if you can talk about when you look at the early results on VRBO and the European sites on the new platform, did it seem to be following the trajectory more or less with what you saw on HomeAway in the U.S. when you transitioned it such that it's a good guide for what to expect. I know you talked about bracing yourselves for Europe being a little bit slower, just given the environment over there. But wondering what you're seeing, and then kind of as a follow-up to that, does having the bundles on top of the listing tiers seem to be an incremental up-sell opportunity? Or is the trajectory tracking more to kind of a certain dollar amount of up-sell, such that it's sort of cannibalistic of the tiers. Would love to hear your thoughts there.

Brian H. Sharples

Yes. So the answer to the first question is yes. We are seeing near equal levels of success with all of our sites that are on tiered pricing. We now have them on what we call internally the fat 5, which is HomeAway in the U.S., VRBO in the U.S., as well as our biggest sites in Germany, the U.K. and France. As it turns out as of today, the European sites from a penetration of tiered pricing listings perspective are actually running ahead of what the U.S. ran at, or the same number of months since launch. So I know we were really cautious when we said "Gee, the economy is slow in Europe. We don't know if people are going to want to buy tiers." It turns out that was overly conservative. We're actually seeing penetration rates slightly ahead of what we saw in the U.S., and so that's all a really good sign. The only negative we've really seen and I think this is more from product churn than anything else is that in VRBO, in the fourth quarter, we saw renewal rates that were lower than what we expected. And so that had a big effect on overall renewal rate in the company. And that's really indicative of just putting those customers through a ton of product change, not just the pricing change and the new way we bundle the tiers, but we gave them a whole new system to manage their listings and other things. And all that was done obviously for us to be more efficient. For most of the customers, it's a much better product. But there are a lot of people out there that have been on those sites for 15 years and people just don't like change period. Now I don't know where those customers are going to go. They may go off and try something else for a while. But VRBO continues to be one of the best performing sites in the world, the best performing site in the world. So I imagine, we'll get a lot of those customers back. In terms of incremental bundle. So when you look at, for example, international bundles, which we didn't have before, we're selling a lot of them, and that's all additive because very few people were buying multiple sites previously. And so we're seeing a lot of addition to ASP and revenue from our bundled offerings. When you look at somebody who was previously, let's say, already on HomeAway and VRBO and now they've bought a bundle. Obviously, they can do that as a discount. But one of the things that the team here has done, and it's been very clever and very successful is that we are managing what we call consolidations very hands-on. We actually have kind of a white glove process, where we're calling customers and walking them through that consolidation. And the reason we're doing that is so we can talk to them about keeping the amount of money that they're already spending but get higher performance out of it. And so, so far, we have been able to hold serve with that, which basically means those -- most people are spending as much as they spent before, they're just getting more out of it because we're showing them that they can either upgrade a tier or maybe add Europe. So that's what we set out to do, and it's going great. So at the moment, we're not really losing anything from the bundling process, and there's still a lot more consolidations to go. But I think the model's pretty good for that. Does that answer it?

Operator

The next question is from Ralph Schackart of William Blair.

Ralph Schackart - William Blair & Company L.L.C., Research Division

Brian, I think this is your first quarter for the HomeAway properties where you've lapped a true quarter of the tiered pricing lift. Just curious, is the performance, as you sort of anniversary that lift, is it performing in line with your expectations? And is there any parallels you could draw with the performance of those cohorts with what you may experience with the VRBO customers going forward?

Brian H. Sharples

I mean, so personally, it's ahead of my expectations. I don't think we expected to see the ASP growth rate to be close to the first year growth rate, but it is. It's almost the same. So, so far, the second year is trending up almost as much as it did in the first year, which is a great sign and obviously, no idea what year 3 will look like yet.

Ralph Schackart - William Blair & Company L.L.C., Research Division

Great. As we think about the renewal metric without the consolidated listing, it seems to sort of flatten out this quarter. What should -- or how should we think about that metric as we go forward with improvements in Europe and some of the other -- Australia coming off anniversary as well?

Brian H. Sharples

Yes, that's a good question. I mean, I think it's funny. I was just looking before the call at the last 3 years' worth of renewal rates in the company, and they go up and down by quarter, but they've averaged roughly 75 and change, 75.5, 75.6 over the last 3 years and as you adjust for consolidations and then we have this one big account that we really wanted off the sites in the U.K. We're actually at the 3-year average. So really renewal rate has been relatively steady in the business. I think that there are a couple plus ups and a couple of negatives going forward. One negative is that, and as we continue to learn as we get more into this business. We've only been doing it for 7 years. I think one of the things that we analyzed this quarter that we're coming to understand is that our second year renewal rates are much higher than our first year renewal rates, and one of the things we're starting to do more aggressively as a company is promotion. So now if you go back 2 years ago or 3 years ago, we didn't do any owner marketing. So everybody who came in as an owner was somebody who worked hard enough to find their way to us. And so those people were pretty sticky and had pretty high renewal rates. Well now, starting back 1 year ago, we started doing promotions. Things like anniversary campaigns and 50% off for a certain class of people for a period of time, and that's really good. We found it super ROI positive. It's great for the business. It brings in new listings, but the renewal rates on those classes of people are going to be structurally lower because we brought them in at a discount. Now the second year renewal rates are fantastic. So if we can hold these people for a couple of years, we're in really, really good shape but -- so that promotional activity's having an effect on renewal rate, and the promotions are working well enough that we're going to continue doing them in 2013. So that's probably going to keep renewal rates from floating up too much. Now the flip side to that is one we get into PPV, now this -- we're going to probably have to separate this out. Those listings, because they're on the site for free, probably are going to renew at something close to 100%, right? Because it's a vacation rental category. Most people own these properties for 10 years or more. And if they're not paying anything, we're going to see sort of different characteristics there. So, I think long term, we talked about, when we went public, a target of something like 80% over the long term. I think that's still a good long-term target. It probably -- given that we've been sort of flat in the 75% to 76% range, it seems like a hard target to achieve. But the thing that you should realize is that our second year renewal rate in this business -- so if you've been on our site for 2 years, it's still running, and has been for the last 3 years, at about 80%. And that's why we create that target, so as we get bigger and bigger and more mature as a business, we still think we can grow towards that number. But I would expect that in 2013 -- and by the way, our forecast and numbers are predicated on this, that you'll see lower renewal rates than you saw last year because of the promotional activity that we're doing.

Operator

[Operator Instructions] And the next question is from Stephen Ju of Crédit Suisse.

Stephen Ju - Crédit Suisse AG, Research Division

So Brian, online booking availability of about 8,400 properties as I'm looking on HomeAway.com right now and online payment acceptance of about 22,000, among 0.5 million properties, that's still a very small amount. Where do you think this penetration rate can approach over the longer term? And anything you can share in terms of the pickup of the velocity of bookings, those property owners who accept online bookings and payments experience versus those who have not? It seems like there's less friction there, so the velocity should pick up, enhance the value proposition as well? And, Lynn, building on Doug's question earlier. I guess the impact on the fourth quarter in terms of the listings that were consolidated away on bundled purchase was about 12,000 to 13,000 listings. So in terms of the cadence throughout 2013, do you think you've already passed the heaviest phase of renewal-driven consolidation? Or is there a heavier phase to come?

Brian H. Sharples

So let me start with your first question. So we are, as of end of the year, I don't know what you're counting, but we have 53,271 listings now enabled with payments and online booking. That's up 146% from last year. So the trends on growth in that number is actually really steep and ahead of our expectations. When you ask where do we think it can get to, well, on eBay, with PayPal they've got to about 80%. So that's going to be our target. We think that the first bogey for us is getting to something like 40% to 45%, where almost half of the site has it, we then think a lot of people will flip after that. Performance so far appears to be very, very good for the listings that are enabled with payments. That's in part though because payments does get you better search position, but it's a little bit hard for us to compare because if you don't have online payments, we're measuring inquiries. And if you do have online payments, we're measuring booking. So it's hard for us to directly compare between the 2, but all I can say at this point is we do have very high levels of satisfaction with our payment customers and realize that at 53,000, I mean, payments just launched in our European geographies in the fourth quarter of last year. It just recently launched on VRBO and again the take rates' very good. So we're pleased with it and we, again, over the long term, think it can get to 50%, 60%, 70%, hopefully 80%, before we're done with the growing penetration.

Rebecca Lynn Atchison

Okay. And the answer, Stephen, to the question about the consolidations. First as a reminder, we're trying to predict human behavior here with our customers. So we're not sure how many consolidations that will be in any particular month or quarter. That being said, we were slow rolling it a little bit in Q4. We really wanted high touch with our customers, and we're putting together the right procedures in the customer service group to walk our customers through this and make it easier for them. So we're picking up steam right now really in 2013. So actually, I think you'll see higher, higher levels of consolidation over the next several quarters than you did even in Q4, until we get through the system. And then, of course, our estimate for the people coming in the door that also just a rough estimate too around customers that might have come in and bought 2 listings before...

Brian H. Sharples

Based on historical data.

Rebecca Lynn Atchison

Yes, they're -- now they're going to buy a bundle. So I would factor in a higher rate in the next several quarters at least.

Operator

The next question is from Mark May of Barclays.

Mark May - Barclays Capital, Research Division

Just a quick one on your marketing plans. I think marketing spend is one of your larger OpEx line items. I know in the past, you had done some Super Bowl ads. I think last year, you changed it up a little bit, but we're still doing some big TV brand campaigns. I haven't really heard or seen much this year. What are your plans for 2013? How has your thinking changed, if at all, with regard to kind of the bigger brand-related marketing activities?

Brian H. Sharples

Yes, good question. It's actually changed a lot. So for the last 3 years, we've been doing quite a bit of television advertising, albeit very concentrated for a couple of years in the Super Bowl and then last year on some major events like the Oscars. We decided at the end of this year that we would shift virtually all of that spend into a combination of more PPC, as well as display advertising for the company. I think after 3 years of testing this stuff, we've come to the conclusion that we're better off driving brand while driving traffic rather than just driving brand. So what really makes this company tick for our customers is traffic, inquiry and bookings. Prior to this year, we've done, for example, no display advertising. We kind of skipped that step, right? So we're a huge PPC advertiser. We were doing a bunch of TV, but we weren't sort of going right down the middle of the pipe, which is display. So display is something we're going to really flex our muscles on this year. It gives us the ability to put a brand message out there into the marketplace so our brand will be seen by lots of people on computers everywhere, but it also drives traffic right into our sites in a targeted way, the way we want to do it. It's really not too dissimilar from the strategy that booking.com has employed. They don't do a whole lot of TV advertising. They are really about business performance, and so that's just a philosophical shift we've made. I think the other piece of it is that I came to the conclusion that our current size, we can't afford to spend enough to make a big enough dent in the universe with broad reach advertising. So it may be that 3 years from now, when we're a little bit bigger, and I can spend $20 million on that without it flowing up our financials, we'll add that to the mix. But, at the moment, we think this is the best use, and we think it's going to be a real net positive for the business this year. I mean, you think about -- I'll give you an example. In Australia, we've been relatively disappointed with the performance of that business over the last few quarters. While all of a sudden when we freed up that money, we were able to go to Australia and say here's a bunch of money to spend and start developing your market and developing the traffic. Well, traffic now in Australia has done a complete turnaround. I mean, it's growing 50%, 60%, and it's because of that reallocation of the budget. So I hope that answers your question.

Mark May - Barclays Capital, Research Division

Yes, it does and it seems to sync up well with as the models moving, you're introducing more transactional-based pricing opportunities that seems to sync up with that, makes sense. Other than search ranking, are there any other incentives that you're introducing to help accelerate the adoption of book it now, or booking online?

Brian H. Sharples

Yes, the biggest thing we're doing is investing heavily in customer service. We actually have created a white glove on-boarding process, where we are scheduling calls with customers to walk them through the process of getting enabled with payments. And it's working really, really well, but it takes a lot of people. So you will see customer service as a percentage of revenue in 2013 tick up by a couple of percentage points, and it's because of those kinds of things. Now there's only so much you can do in 1 day, 1 week, 1 month, et cetera but that is one of the tactics that we are employing for sure. Another thing that we're going to be adding to the sites are new filters. So travelers will be able to just go to the site, see a button that says I only want to deal with things I can buy online. As soon as those filters start to appear on the site, that's going to be an added incentive as well. And then the third thing is that, and this certainly is true in Europe and other geographies around the world, we are still working to expand the list of payment methods, the ease of on-boarding, as well as make the cost as efficient as possible. So even though today, we have one primary supplier that we use, there are lots of discussions underway that are going to be expanding our payment capabilities so that we can offer a whole bunch more options to people around the world. For example, in Germany, most people don't use credit cards. Most people are doing direct debit. So in Germany, until we really get that process nailed down and right, we're not going to see a huge amount of penetration in Germany. What I can tell you is that we're very, very excited about the progress we've made in that area. And so there are going to be some big changes coming in '13 that are going to really expand those options, and I think grow the business.

Operator

Our next question is from Aaron Kessler of Raymond James.

Aaron M. Kessler - Raymond James & Associates, Inc., Research Division

A couple of questions. Back to pay-per-booking a little bit. If you can discuss, maybe, in terms of sorting search results. If you do a pay-per-booking, how would you handle that, especially with more dynamic pricing? And also I think you discussed maybe you'd see some interest, more interest from property managers maybe just the discussions you've been having so far in pay-per-booking with property managers thus far as well.

Brian H. Sharples

Let me take the second one first. We expect a pretty significant influx of properties from property managers once we have pay-per-booking. That is something we know for sure we have a queue of property managers who are waiting for that product. That's exactly how they run their businesses on a percentage basis, and it's one of the things I'm the most excited about it. And again, that is additive to our business, and I think going to be probably the quickest win once we launch. Now we are launching with rent by owner customers first and property managers second. But -- a piece we're very excited about. In terms of how those listings get sorted on the sites, that is something that we are going to have to learn. So we've created a revenue management group within the company. OTAs are obviously very good at this, but they don't have the same constraints we do. OTA is really looking at performance, what's going to make them the most money. So they have a bunch of different hotels and those hotels have different price points. They have different levels of attractiveness to consumers. And they're just trying to sort properties based on what's going to maximize the revenue to them. We have the added constraint of a, wanting to do that, but b, making sure that our subscription customers, who are paying to be on the sites and now not just on the sites, but in specific tiers within our sites, are seeing adequate performance to make sure that they renew at the rates we need them to renew at. So the science of it is that we are going to be inserting pay-per-booking properties into search at various times of the day, times of the week, various nodes and various places in a way that balances renewal rate for our subscription customers against maximizing revenue for PPV. So it's a very tough mathematical problem. We've got some really brilliant minds on it. We still have half a year to get that right. So there's a ton of testing we'll be doing. And then of course, once we launch, we'll probably be 30% right. And then over the next few years, we'll hopefully get to 80% or 90% right on that stuff. But we are developing a system to do that. Again, it mathematically balances those 2 things. And it's not just something we can go out on the market and buy, even though lots of OTAs do this, because we just have this weird additional constraint of a subscription base within our business. So hoping that all goes well.

Operator

Our next question is from Chad Bartley of Pacific Crest.

Chad Bartley - Pacific Crest Securities, Inc., Research Division

Sorry if I missed this, but can you quantify the impact on the average revenue per listing on VRBO.com and in Europe from the new pricing tiers similar to what you did on HomeAway.com? And then similarly for customers that haven't purchased more than one site to go ahead and adopt a bundle, what's the rough increase in their spending that you're seeing?

Rebecca Lynn Atchison

So, Chad, you didn't -- this is Lynn. You didn't miss that. I think we talked about last quarter that we weren't going to start giving that brand by brand uplift information. We did that on HomeAway.com in the U.S. just because it was a brand-new thing that the company was doing. So we're not going to continue to do that because there are so many different factors that go into all the different brands with regard to the tiers, the base prices, et cetera. So you didn't miss it. I mean, I think what you'll see is in -- backing into kind of our revenue guidance this year, we're definitely seeing the ASP lift and the average revenue per listing lift in our numbers next year. And that's where you'll see that lift, rather than brand by brand.

Brian H. Sharples

Yes, what we talked about last quarter is now -- I mean, we're giving out the average revenue per listing stat, that obviously lags sales growth. So we're maybe shooting ourselves in the foot a little bit. But we know that, that stats' going to continue to grow. On our Fat 5 sites that have tier pricing, we are expecting acceleration in revenue in 2013 over 2012 because of it, and there was a question asked earlier, which was simply are you seeing sort of similar levels of uplift as you saw with HomeAway, which we had talked about during the summer. And the answer to that question was yes, we are. So you could extrapolate from that.

Chad Bartley - Pacific Crest Securities, Inc., Research Division

And then can you help at all on the bundles for a brand-new adopter, so to speak at the bundle, or are you going to stay away from that, as well?

Rebecca Lynn Atchison

Yes, I don't think we'll go there either. I mean, it's really dicing it up in terms of the total spend that a customer has with us. They have their base listing, they have multiple bundles, whether it's regional bundles or U.S. bundles. They have various tiers. They've got featured listings. I mean there are a lot different things that -- components and products that can be bought on top of that. So we really wanted to get away from trying to dice that up.

Brian H. Sharples

But it is absolutely true that the geographic bundles are additives to the tiers, in terms of growth. So tier pricing is what we spend most of our time talking about, but we also, in the middle of last year, started selling bundles in both Europe and the U.S. and that is additive to tier pricing. So it's all a really good story from a sales lift perspective. And again, you'll see that flow through to revenue. I should remind everybody that tiered pricing just got on our 3 European sites at the end of the year. So you're not seeing much of that in revenue right now. It's just like last year when we did HomeAway, it's going to take 12 months before you see the full effect. So the good news is that we're seeing a really good tick up in Europe. And of course, the bad news is that's hidden in revenue. We're not talking about sales anymore, even though we used to, but you're just going to have to trust us that, that's going to be reflected in the numbers as we go forward.

Operator

We have no further questions in the queue at this time. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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