HomeAway's Management Presents at Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference (Transcript)

| About: HomeAway, Inc. (AWAY)

HomeAway Inc. (NASDAQ:AWAY)

Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference

March 05, 2013 2:45 pm ET

Executives

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

Brent Bellm - Chief Operating Officer

Analysts

Lloyd Walmsley - Deutsche Bank AG, Research Division

Lloyd Walmsley - Deutsche Bank AG, Research Division

All right. We'll get started now. Very excited to have with us today from HomeAway, Lynn Atchison, the CFO; and Brent Bellm, COO. I think it's particularly exciting time to be hearing about HomeAway, now that they've moved most of the platform on to the -- most of the sites onto the new platform.

Question-and-Answer Session

Lloyd Walmsley - Deutsche Bank AG, Research Division

And I'll ask you guys to just start by talking a little bit probably about this big moment in the platform shift, what you've been seeing and what you kind of expect to see going forward, and then I'll jump in with the hard questions.

Rebecca Lynn Atchison

Okay.

Brent Bellm

Great. So good afternoon, everybody. Our aspiration really is to become the world's marketplace for vacation home rentals. And I imagine most of you are familiar with what we do because you've taken a vacation before with friends or family and chosen to rent a house somewhere rather than stay in a hotel in separate rooms. The network strategy that Lloyd is referring to is really our effort to take the many sites that we have acquired around the world and link them together into a single marketplace. The reason we have so many sites is because HomeAway, the company, came into existence in 2005. And already, at that point in the Internet, there were national leaders in most countries for vacation rentals. It's a network effects business, rather than trying to start from scratch and compete against them, which would've been a losing battle. We raised a lot of money, bought the leaders in various countries and we've been systematically migrating each of those platforms into our network. The biggest one we bought was VRBO, the leader in the United States. That stands for vacation rentals by owner. And Lloyd is referencing the fact that in late last year, we completed the migration of VRBO on the back end into the system and that brought a total of 75% of our global 711,000 listings, all onto the same platform. And it will soon be the case that you can go to any one of our sites that are in the network, do a search and have access to some or all of those 75% of the network properties.

Lloyd Walmsley - Deutsche Bank AG, Research Division

All right . Well, diving right in, you've seen a nice acceleration in the revenue per listing growth over the last 4 quarters, really, but it seems as though there's probably plenty of room left, given that after having made this transition of several big properties late last year, I would anticipate, as more of these customers come up for renewal, you can see continued improvement in price tiers to get -- your take on how much room there is to see further acceleration in that pricing growth.

Brent Bellm

Yes, we're in the early days of driving adoption of what we call premium tiers for our customers around the world. Historically, all of our sites, other than VRBO, would sell just a single annual subscription. Every single customer on the site would have paid the same amount for that same annual subscription. And then what we did about 18 months ago is started introducing premium tiers: bronze, silver, gold and platinum, which let people pay more to rise above other people in the sort results. It's essentially a pay for placement type model. That model has been live, like I said, for about 18 months in the United States, but it was only in late last year that we introduced tiered pricing to our leading sites in the U.K., France and Germany. As customers come up for their annual renewal, we're exposing them to this option to upgrade to bronze, silver, gold and platinum. And when they do that, our ASP goes up by a lot. But the nice thing about this is that for investors in the company, you will see this reflect in our revenue gradually over the next several years, because it's only as people renew that for the most part they upgrade. Then at the time of that upgrade, the higher amount they pay gets amortized over 12 months of the subscription. People come up for the second renewal, they see that their competition in their market also upgraded to bronze and then maybe somebody with bronze goes to silver or gold, and so that keeps playing on itself for several years. And it's our aspiration to see our ASP, therefore, growing at attractive rates for several years without having to rely on any kind of base price increases.

Lloyd Walmsley - Deutsche Bank AG, Research Division

So on your fourth quarter call, you said kind of an early view into what's going on, on the European sites that are now able to see upgrades, that you are actually seeing, despite a cautious approach heading into that, given the macro environment, you were seeing them actually upgrade at a faster rate than what you saw when you did this migration on the HomeAway sites in the U.S. about 1.5 years ago. Curious if you're doing things differently that are helping that or whether you think it's just a natural propensity to upgrade given competitive dynamics in the vacation rental industry. What do you think is driving that faster adoption in Europe?

Brent Bellm

I mean, financially, they are adopting faster, but they are going to lower levels than in the U.S. So they're starting at bronze because the first person to go to bronze is still going to be ahead of everybody who was at the old classic level. And it kind of evens out. And I think one of the reasons why they're adopting it a little bit faster is because fewer of them are on auto renewal with their credit cards than in the U.S. And if you're not on auto renewal, then you, as an owner, have to actively come back to the site and go back through a credit card flow to resubscribe. And that process forces you to make a decision about whether or not you want to upgrade. But somebody who's on auto renewal just gets renewed at whatever they were at before. We still market to the people on auto renewal, but they are less likely to come back and actively choose to upgrade than the folks who aren't. So that helps. We're also a couple years more experienced in the targeting and the lifecycle communications to our customers about tiered pricing. I think that's helping. Any other thoughts, Lynn?

Rebecca Lynn Atchison

No, I think that's it.

Lloyd Walmsley - Deutsche Bank AG, Research Division

And kind of staying on that topic, but going back to the U.S., as you're well past a year into it, that tiered pricing dynamic is still driving a nice ASP growth. Do you think -- can you just talk about kind of how you're seeing that play out and what you're doing to keep that dynamic growing?

Brent Bellm

Yes, I mean we knew, coming into this 2 years ago, at the time of IPO, that it was a long runway for a potential growth, and we knew that from VRBO. VRBO was the one site of ours that had a tier-like system based on photos. You could buy up to 12 incremental photos and how many photos you bought determined where you placed in sort results. And at the time of the IPO 2 years ago, VRBO had 60% of all its listings with at least 1 incremental photo, and that led to an ASP that was 40% higher than the base price. So if you think that those numbers are representative of what all the other sites could be like, well then, we have a long way to go, because we're nowhere near 60% penetration of premium tiers and 40% ASP lift across all of the other sites. Obviously, Europe just began late last year. So that's what the long-term potential is, and yes, the dynamics are still good on HomeAway. They're also still good on VRBO. The 2 things that are driving further ASP increases, even on VRBO, which is converted from that photo-based system to bronze, silver, gold, platinum. One is that platinum is new for them. Up until the migration in October, the most you could buy was the gold equivalent of 12 photos on VRBO. That was priced at about $670. Platinum is at $999. So in those markets like Orlando and Maui where a lot of our customers had already maxed out in the old VRBO system, they can now go that much higher to platinum at $999. And the other thing are global bundles where we'll see VRBO customers now upgrading and buying a packaged deal that includes HomeAway in the U.S. and our international sites. That's driving a lot of ASP increases.

Lloyd Walmsley - Deutsche Bank AG, Research Division

Yes. And then on top of that, curious, I think that Brian had said on our 4Q call that the bundles -- the global bundles' impact on the U.S. HomeAway sites was adding in another, I think he said, 6% ASP lift. Can you talk about -- is that on top of, I think, the 16% number?

Rebecca Lynn Atchison

Yes. And I think that was a Q3 number because we were giving a little bit more of a breakdown in Q3 about the different components of uplift in terms of -- and that was on ASP, not necessarily average revenue per listing.

Brent Bellm

Right. It takes a while.

Rebecca Lynn Atchison

Right. I mean, the bundles are still doing fine. I mean, they're very well received in the U.S. For the first time in the U.S., it's easy for owners to make that decision to be on both websites instead having to go to the trouble to go in through 2 completely separate paths, manage 2 completely separate listings, et cetera. And so we're very excited about the U.S. bundle. And then surprisingly, a lot of U.S. listings also selected the upsell to the global bundle, too. And the way to think about that is it depends on where your property is. If your property is in Florida, and we have a lot of properties in Florida, there's a large draw from outside the U.S. to Florida. If your property is someplace else that is not necessarily that interesting, you might be less likely to go global.

Lloyd Walmsley - Deutsche Bank AG, Research Division

So staying for a little bit longer on the pricing theme, Brian has talked about in the past this notion of adding even higher-priced tiers on certain geographies like Orlando, where clearly, the market clearing price is higher than other markets, given the number of properties and the usage of vacation rentals. I think you guys have said now that's more of a fourth -- 2014. But how much of your footprint do you think would really see a benefit from yet another premium tier? And kind of how can you see that unfolding over time to more market-based pricing?

Brent Bellm

Yes. I'd emphasize the point you made, which is that we have no plans to introduce something like that this year. In any market where more than 50% of the listings gravitate towards the highest tier of platinum, that's where we would have that kind of opportunity. I don't know off the top of my head how many of our listings are in geographic nodes where that's the case right now. Conceivably, we can introduce a fourth or a fifth tier like diamond. That is priced above $1,000. Alternatively, we could make the price of the platinum tier vary based on an individual market's demand characteristics. Those are all options. Frankly, the thing I care most about is in a market where we have a lot more demand than supply, I want to bring in more supply. And to me, that's the bigger opportunity than trying to raise price on those customers.

Lloyd Walmsley - Deutsche Bank AG, Research Division

Okay. Well, let's turn it to supply growth. You guys, I guess, have been seeing -- there's some noise in the metrics from pay per lead listings that are coming on and off the site. But where is kind of the core subscription listing growth rate? And then, talk a little bit about some of the discounting you've been doing to try to increase that growth and what you're seeing on renewal rates around that strategy.

Brent Bellm

Yes. The reported listing growth rate last quarter was 11% and that was a couple points lower than the real growth rate, because we were consolidating listings between VRBO and HomeAway. Before, there were customers who had bought one listing on VRBO, a separate listing on HomeAway, because they were separate platforms. Once we integrated the platforms, they consolidate down to one. That's a lost listing. One of the two would go away, that's a lost renewal, which hurts our renewal rate. But now we have a higher ASP on the one surviving listing that's consolidated. So it's revenue neutral more or less. So the real growth rate was about 13%. It's our aspiration to try to grow at around 15% sustainably. And the big catalyst that's going to help us toward that in the second half of this year will be the introduction of a pay-per-booking model. Pay-per-booking is going to be a complement to subscriptions, where we have, for example, a flat 10% commission fee and nothing upfront. That model is going to appeal, in particular, to a lot of property managers who have hundreds and hundreds of properties, but don't have the cash flow to buy 300 listings at the start of the year. A property manager only makes money when reservations happen for their property. They don't have that cash upfront. And so they like the idea of pay-per-booking even if it costs them more because they get to time their expenses with their cash receipts. We've talked to quite a few property managers in this area of Florida, for example. Hundreds and hundreds of properties, who have none of them on our site, who have said look, "when you guys have pay-per-bookings, I don't see a reason not to put all of my listings on your site." So that's a big opportunity for us. In addition, For Rent by Owner, there are a lot of people who are interested in using our site, but the $350 base subscription price is now just too high for them. So alternatively, they're already using a bunch of marketing channels, they want to try us, and that's too much incremental for a trial. They want to get started on something that is only going to cost them money when and if we produce. And so it's going to help us start serving a number of segments in For Rent by Owner, the people that only rent for a couple weeks a year, et cetera, and we think that the potential of listings growth for the next several years is very attractive by virtue of adding on this new commission-based model.

Lloyd Walmsley - Deutsche Bank AG, Research Division

Yes, and I'd be curious to understand on the technology side, do you think you'll have the full implementation in terms of porting listings from the software that property managers use to manage their inventory on your site. It's one of the things we've heard from just speaking to property managers that they love the traffic you all drive and would be more than willing to pay a handsome take rate for a pay-per-booking model, but that right now, it's very hard for them to port listings en masse to the VRBO and HomeAway sites, even the ones using the software companies you guys own. Is that the key roadblock to getting that product?

Brent Bellm

Yes, you're exactly right. We have actually have to build 2 versions of this product. One version is for property managers who use enterprise software, maybe one of our enterprise software suites or it may be one of the competitive ones. We're integrating with all of the competitive property management software companies so that they will be able to, in essence, integrate their software with our listings, calendars are synced, rates are synced, reservations flow straight into their PMFC. We might collect the credit number on our site. We don't process it, we're not agent. We pass it securely into their software, it goes through their gateway, their acquirer. That's how we need to work to serve property managers. In essence, they get to stay within their environment, their enterprise software, but the transactions are occurring on our site. That is something that is happening later this year. And then independently of that, we have to release a version of this product for what we call the platform or For Rent by Owner customers, small property managers, who instead using enterprise software, are using our site and our web services to create their listings. And for those customers, they'll be signing up on the website, they'll be processing the transaction through our site and we'll release that separately from the property manager version of this.

Lloyd Walmsley - Deutsche Bank AG, Research Division

Great. Now when you look at the specifics of revenue management, I guess, where you have to figure out where to place somebody who's on a subscription product and a pay-per-booking product, where are you guys in the development -- or I guess, what's necessary there? Where are you in that development? And maybe, how does your experience in the pay-per-lead side of the business today help you manage that?

Brent Bellm

Yes. So all of the online travel agencies have had to build up strong revenue management functions that, in essence, determine where different hotel properties fit in search results to maximize revenue for the OTAs. We're going to need to do something similar to that. We call it marketplace management, where we're trying to balance demand and supply with a particular emphasis toward long-term revenue maximization, not short-term. Short-term maximization would lead you to put all the price pay-per-booking listings ahead of the subscription listings because then you make incremental revenue on top of it. But then the subscribers don't renew. It is our priority to make sure we continue to give a great return to our subscribers at each of the tier levels. Platinum gets a great return, gold gets a great return, et cetera. And we will bring -- we will use modeling to determine in a given note how many extra listings we can bring in that are pay-per-booking, but we're going to preference the subscribers first as we do that. Now I'll give you an example. Let's say in Orlando, these numbers are hypothetical, we might have 4,000 properties on the site today and estimate that there's a big excess of demand. There's demand for 5,000 properties. We go out and sell 3,000 incremental PM listings. That means we can only put one of the 3,000 up in the site at any one time. So marketplace management will determine which of those -- which 1,000 of those 3,000 to put on the site for any given search, and may differ from search to search -- if somebody searches on dates, they may get a different group than if they don't put in a date range. And then where -- to thread those in between the different tier levels is also something that the models will determine. The one thing that we will emphasize to any person listing on our site, if you buy a subscription, we're going to guarantee where you go. If you buy gold, you're going to be at gold, and you're always going to be on the site. If you're on pay-per-booking with us, you haven't paid us for anything yet, and so we determine when and where to put you, and we'll optimize based on what we think is best for meeting traveler demand and long-term revenue.

Lloyd Walmsley - Deutsche Bank AG, Research Division

Great. So staying on kind of listings, in the fourth quarter, you guys noted that renewal rates were a little bit lower, and specifically pointed to VRBO, given the complexity of all the changes going on. Curious, what are you seeing today and can you just elaborate on how you think that renewal rate will improve over time? What sort of things are you doing to try to improve that retention, given all the complexity of the changes?

Brent Bellm

You want me to take that?

Rebecca Lynn Atchison

Yes, I'm happy to. So over the last 6 years, I mean, our renewal rates have hovered around 75%. And so at different points in time, we've seen a little fluctuation from that, and we have said we aspire to achieve an 80% renewal rate. And that's closer to what people renew on our site if they've been on the site already for a year. So we think that is a long-term stable rate for customers that have already experienced their first year. What we're seeing is that as we introduce more promotions, anniversary campaigns, which we did 1.5 years ago, we did a Black Friday flash sale, things like that, we find that the first year renewal rate, specifically, for those where we offered a deep pricing promotion is lower, so that brings it down. So for that reason, I think we're kind of more realistic right now that maybe the renewal rates should hover around where they are right now. But at the same time, once customers have been on our site and renewed already one time, if they are keeping their property, staying in it, not moving, selling the property, et cetera, they're renewing at much higher rates.

Brent Bellm

Yes, there are 3 things that have depressed renewal rate over the last year, that I think were cycling through the system, and give us -- reasonably that's going to go up in the future. Number one is, we've commented on this repeatedly over the last year, we bought a site in Australia that had 20,000 property manager listings. And during that transition of ownership and transition of site and model, we've seen reasonably big segments of that 20,000 come off the site. Now we're more or less flat from where we started, so we've replaced them with other listings, but that's hurt renewal rate. That's issue number one. Issue number two is the migration we did in France. There was disruption to the model -- I won't go into the intricacies there, but we replaced their 4- and 8-month models that they had in France with new versions of it, that forced people to either switch to 12 months or have a gap in their renewals. That's also cost us a number of points. And then the last one, I think this one's quite important. Last year, we increased the base price on VRBO and HomeAway, each by $50, which is a pretty big price increase. The days of base price increases are mostly over for the foreseeable future. But anytime you take a big base price increase like that, there's the chance that you're going to lose a couple points of volume. It's price based price elasticity. And when we look at the verbatims from customers who have chosen not to renew, it's not infrequent that they say that was the reason they chose not to renew. The 2 reasons why that won't happen going forward: a, we've already cycled through a year. The base price increase on VRBO is now more than a year ago and we didn't take one this year on VRBO, nor most of our European brands either. And then number two, when we have pay-per-booking, anybody who cites price as a reason not to renew can switch over to that product, the pay-per-booking product, where there's 0 upfront costs and they only pay us if and when they get reservations. So I'm very optimistic that a couple of things that depressed renewal rate last year are sort of cycling out of the system, either entirely at this point or mostly at this point, and we ought to see that metric stabilize and start increasing again.

Lloyd Walmsley - Deutsche Bank AG, Research Division

Great. Now another question, kind of taking a step back when you look at kind of the bigger picture travel landscape. Brent, I've seen you give a great presentation at industry events, but maybe you can just give us a little color on the macro forces driving both the listing of second homes, as well as the increasing use of vacation homes for travel. What is kind of driving this secular trend?

Brent Bellm

Yes, on the supply side, our research says that there are, today, about 19 million households in the U.S. that have a second property of some type. And 6.3 million of those properties are technically vacation rentals or short-term rentals, but only 3 million meet our strict definition of something that's available to public market vacationers that you don't know for at least 2 weeks a year rented on a short-term basis. And so I go through that math because it says the market size in the U.S. of 3.3 million plus another 3 million in Europe is half the market size of properties that could be renting. Because they are rented to somebody, they just don't classify today as short-term vacation rentals, and there are many millions more properties on top of that, that could come in. The other thing that's hurt the market from the supply standpoint is that back in '05, '06, before the housing market crash, the U.S. was chugging along at a very hot rate of about 1 million vacation home purchases per year and then the market collapsed. And in '08, '09, '10, '11, that number has been 500,000 or less. In essence, the number of vacation homes purchases per year in the U.S. is half what it was before. So that's bad for us. But on the flip side, when those home purchasers are asked, what is your primary reason for buying this, is it to rent? That number has almost doubled. It went from the range of around 14% when we first started surveying it to a high of 27% for a few of those years. So awareness within the United States about the option of renting out a vacation home has gone up very dramatically in the last several years and people saying that I intend to rent it, my home, has gone up a lot too. Then on the demand side, the fundamental issue is that the United States vacation home rentals as an option available to travelers has much lower awareness in mind share than it does in Europe or than it could have in this country. Only 40% of people say they've ever even stayed in a vacation rental when they're surveyed about that. And within our target market, which are families and groups of 3 or more people taking a long stay vacation, 4 or more nights, the category only has about 17% share, whereas in Europe, that share is about 30%. Plus, Europe's also better penetrated, couples taking vacations as well. The point being that we think that and all of our surveys suggest that when people try the category, they love it, they prefer it for a family or group vacation oftentimes over hotels, but most people haven't tried it yet. Most people just haven't tried it and it's that word of mouth, it's that viral momentum that makes us one of the bigger trends in travel. Arthur Frommer, about 2 years ago this time, named the growth of vacation rentals as the single biggest trend in global travel, largely because it has such a great value proposition relative to hotels; that it's coming from a point of relatively low awareness before the Internet and services like ours helped to make it popular.

Lloyd Walmsley - Deutsche Bank AG, Research Division

Great. Now I wanted to just talk a little bit about product. How do you guys feel about the current state of the product? And to what extent do you think of the product as simply the website and to what extent do you think of the product as the whole experience? And kind of are there any big product changes aside from the pricing model that you guys are working on, that's particularly interesting, I guess?

Brent Bellm

Yes, I mean we could talk for hours about all the things that are potential improvements and enhancements and extensions to the product. I think the most important things on the traveler's side, number one is driving e-commerce availability and adoption on our sites. Two years ago, you couldn't pay by credit card on our website for any properties. We were like eBay back in 2000, before PayPal was integrated, we were almost like a pre-internet dinosaur. People were taking checks in the mail predominantly. We started rolling out integrated checkout, integrated payments in the United States a little less than 2 years ago. We've now extended that into Europe as of the end of last year in France, Germany and the U.K., more to come this year, of our marketplaces. And that availability of credit card payment checkout, that means we can also cross-sell things like insurance products, which are great for monetizing the transaction on the traveler side of things. But just as importantly, as owners adopt payments and they -- credit cards available to customers, we're also encouraging them to adopt true online booking, which is an owner saying, "I will let somebody come in and just book my property without talking to them first." That only happens if your calendar's up-to-date, your rates table is up-to-date and accurate, you take credit cards, you got an integrated electronic contract. And those are the prerequisites for having a world class and competitive customer experience. Absent those things, we are still not competitive with hotels and OTAs. I mean, even if -- 92% of all travelers in our category say they want the availability of instant online booking, not because they want to use it. Only about 1/3 say they'll use it. The other 2/3 of that 92% say I want it there because if it's there, I know I'm not wasting my time inquiring. I still want to talk to the owner, find out if my pet's acceptable, if I -- how close they are to the beach, stuff like that. I want to talk to him first, but I know I'm not wasting my time because the rates and calendar are up-to-date et cetera. That's the single biggest one. Very quickly, the other things for travelers, user experience on HomeAway.com is pretty good. I've rated an 8 out of 10. User experience, visual design on VRBO is a fair amount less than that. We have work to do. Our focus last year was on back end of VRBO and migrating it. We now have to get to the front end of VRBO, that's very important. And then there's also lifecycle experience for the traveler. Today, the experience stops when you make a reservation, which is often 6 -- 3 to 6 months in advance of when the actual vacation occurs. There's the opportunity for us to extend services, especially web-based, leading up to the time of vacation, services for check-in, picking up the keys, policies, locations of interest near the house, these are all things that we can facilitate on behalf of owners to travelers for each individual booking. On the owner side of things, the transition to e-commerce is equally important and they're actually the adoption barrier. Very few travelers aren't going to pay by credit card if it's available to them. But it's the owners we have convince to start accepting credit card when they're used to taking checks in the same way that eBay did with PayPal over time. We need to do it in our marketplace. We run -- we own and manage the 2 leading enterprise software platforms in the United States for property managers. There's a long list of things that we're working on for property managers to make those products even better and serve more of their needs, things like lead management systems, housekeeping modules, stuff like that. The integration platform between our websites and property management systems is something that we spend a lot of time and effort on in the last year. We're now systematically going through and taking all of the property managers who used to have a legacy integration into our system that was sort of hardcoded by us and migrating them over to this new very advanced integration system with Metalware [ph] that's going well, and our customers are raving about how much better that platform is than the way we used to integrate with them. So a bunch of services on the owner side that we can still roll out. Reporting in analytics is something that is not full-featured within our environment. When we get to that, it's something our customers want. Long story short is there are years worth of great things we can do to keep extending the services that we offer, and then there's ultimately a platform opportunity, too, which lets third parties develop and integrate services into our environment.

Lloyd Walmsley - Deutsche Bank AG, Research Division

Well, thank you for being here. I think we're out of time, but this was really, really helpful and hopefully, it was helpful to the audience. Thank you.

Brent Bellm

Thanks.

Rebecca Lynn Atchison

Thanks, Lloyd.

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