HomeAway's CEO Presents at Barclays Internet Connect Conference (Transcript)

Mar. 6.13 | About: HomeAway, Inc. (AWAY)

HomeAway Inc. (NASDAQ:AWAY)

Barclays Internet Connect Conference

March 06, 2013 10:20 am ET

Executives

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

Analysts

Mark May - Barclays Capital, Research Division

Mark May - Barclays Capital, Research Division

All right. Is this on? It's a pretty small room, so I probably don't need it, anyway. I'm Mark May. I'm one of the Internet analysts here at Barclays, and it's my pleasure to have Brian Sharples, the Co-Founder and CEO of HomeAway, with us. So thanks for coming.

Brian H. Sharples

Thank you for having me.

Mark May - Barclays Capital, Research Division

Hopefully, you're able to get back to Texas.

Brian H. Sharples

Looking doubtful, but I don't know...

Question-and-Answer Session

Mark May - Barclays Capital, Research Division

All right. Maybe a few in the audience. Would you mind just giving us the quick overview of what HomeAway does? And then we'll get into questions, if you don't mind.

Brian H. Sharples

Sure. For those who don't know the company, probably the best way to think about it is we're the Expedia of the vacation rental world. We started the company in 2005 with the objective of creating the world's biggest marketplace for vacation rentals. We connect owners with travelers. We have more owners than anybody else in this business by orders of magnitude. We have about 711,000 properties, and we add tens of thousands every quarter. We also have more traveler traffic that anyone in the world. We're the #1 player in the U.S., U.K., France Germany, Spain, Italy, Brazil and some other geographies. We view this as a very unique and independent market. It contains on the seller side mostly individual owners, about 60% of the market are just people who own second homes and want to rent them. And then about 40% are professional managers who do that for independent owners. And that it to itself is a cottage industry. There are really no big players or no big brands. We've attacked it on a global basis because we believe travel is global and people want to travel. Whether they want to rent houses or stay in hotels, they want to look everywhere in the world. So we do have rentals now in about 171 countries but still some big chunks of the earth to penetrate, Southeast Asia, Eastern Europe. We're just getting going in China. We're in Brazil but a lot of South America is still left to penetrate. So it's a big market. Just in the U.S. and Europe alone there are about 7 million properties being rented, so we have 711,000, only about 10% of that today. And the business historically has been subscription-based, but there are a lot of changes that are happening now where we're adding commission-based products. We're also adding a new payments platform to the business to try to make it a safer experience for consumers, and those are revenue opportunities for us as well. And I'm sure you'll get into some of those.

Mark May - Barclays Capital, Research Division

Yes, let's do that now. It feels like starting this year but going for a long time, you're now in a real interesting kind of product and business model innovation period. And a lot of that maybe was -- is being catalyzed by the global platform, and that it was, for the most part, kind of finalized last year. You've got some interesting product innovations happening this year like online booking. You've got some interesting new business model or pricing innovations like the pay-per-booking. I think they're very different. Some people kind of tie them together, but they seem to be fairly different. On the pay-per-booking side, what's the -- when you think -- if we think of it in terms of the addressable market of listings that are out there, what portion of the market does that sort of open you up to that maybe you haven't in the past because you didn't have that kind of...

Brian H. Sharples

Sure. We think it's quite big. And just for context for people who don't know, historically, HomeAway has been a subscription business, so virtually, all of our revenue comes from owners and property managers who pay a fixed fee every year to be on our sites. One of the things we're going to add in the third quarter this year is essentially a free option. So you're going to have the option to come on, not pay a subscription fee, but you'll have to pay us 10% of revenue. Now our average customer does about $15,000 worth of revenue on the sites today, and the average subscription price is about $359. So they're getting a pretty good deal today. At 10%, in theory, we'd make a lot more than that. But the 10% product, we think, addresses a couple of big segments in the market. So the first is the professional segment of the market. So we do pretty well with professional managers today, but professional managers typically charge homeowners about 30% to 40% for managing the rental of their property. And because they're in a percentage-driven business, they would like to time their marketing cash flows along with how they earn money. So for a property manager to pay us 10%, even though that's more than they would pay on a subscription, is actually a more preferred option. So we know because we have a sales force and a lot of property management customers that when we launch that 10% product, we will get a pretty big influx of property-managed properties onto our site. We have about just in the U.S. and Europe about 10% share of the property management business. So we have about a couple hundred thousand listings, but that's only about 10% of the market. So that other 90%, I think, would prefer to pay in a percentage basis. So that's one big segment. The second is that with individual owners, there's no question that our existing customers would rather pay subscription fees. When we survey our current customers and we tell them that we're coming with this commission-based product, most of our customers shrug their shoulders and say, "I'm not going to switch." And the reason they don't want to switch is because they know they will end up paying more than what they're paying today. However, we do believe that there's a very large segment of the market out there that wants to try our sites, that wants to even try renting their vacation home. So in the U.S. and Europe, you've got 7 million people who rent today. Well, there are 14 million second-home properties that are barely used that people don't rent today. And when you come to our sites to sign up, let's say, you want to give it a go, even though our subscription prices are low relative to what you earn on the site, you don't know that if you're new to the business or even if you're new to our site, you just don't know. And, really, our prices are actually the steepest in every market we're in for subscription because we're the best of what we do, so we do charge the most. And so that is a barrier. I mean, for every 100 people that come in our purchase funnel to purchase a listing, only about 20 come out the other end. And so when we actually survey the people who don't end up -- who come and look but don't subscribe, we see a very high percentage of them say, "If you had a 10% model, I'd do that." So I really view that model as the ultimate trial product, if you will. And I do think it's going to bend the curve on listing growth up substantially. And in terms of numbers, it's hundreds of thousands, if not millions, of properties potentially over the long term that I think will go this route. Personally, I still want to move those properties from pay-per-booking to subscription eventually. In fact, we're going to be pretty aggressive about that. When somebody hits a point where they're better off as a subscriber, we're going to encourage them to move over. And one of the reasons that we like to do that is because from an investment standpoint, maybe if it was a private company, I wouldn't do it. But as a public company, the predictability of HomeAway has a lot to do with the subscription nature of the company, and it's the reason we're able to so accurately forecast our numbers. So the more we have in the subscription bucket, I think the better off we are long-term.

Mark May - Barclays Capital, Research Division

And one of the things that struck me when you talked about the 10% fee is that it's meaningfully above the 3% that some of your competitors charge. What gives you the confidence that you'll be able to come in to the market at a premium fee? Or am I looking at -- am I not considering some important factors?

Brian H. Sharples

Yes, I mean, the part -- I assume you're referring to Airbnb, which is going after a different type of inventory for the most part. But let's say they clash long-term, Airbnb is actually charging owners 3%, but they're charging travelers 6% to 12%. So they're averaging about a 12% total take rate. And so you have a choice. And, in fact, in any competitive business, the rates are going to be about 10% to 12%. So there's nothing sort of out of line about that number. The only difference is that we're deciding to put that fee on the owner, not on the traveler. And there's a specific reason for that. And I do think it's a -- potentially, a mistake in Airbnb's long-term strategy is that you need to run a business like this successfully as kind of a marketplace. You need 10x the number of travelers than you need suppliers, and you've got to bring in travelers by the millions and millions. And there are very few businesses in travel. In fact, if you look at all the major OTAs as an example that have ever been able to successfully charge fees to the traveler over the long term. Back in the day, Priceline and Expedia and Orbitz and all those guys have things like airline booking fees, you may remember. And Priceline a few years ago said, "You know that $15 fee? We're going to get rid of it." And the day they did that, it created complete turmoil in the industry. In fact, within 24 hours, Expedia dropped their fee and Orbitz dropped their fee. And now there are no more booking fees in that industry, and that's because consumers are really sensitive to being charged. So our bet is that we're better off making it free for consumers because that's what really drives the business and makes it work.

Mark May - Barclays Capital, Research Division

Maybe with the exception of something like a Ticketmaster, which controls the market all the way around.

Brian H. Sharples

That's correct, yes.

Mark May - Barclays Capital, Research Division

So a lot of the focus has been on ARPL growth, it seems like, since you -- since the company went public. But one of the questions that we've been hearing of late is more on the listings growth side. I think your target is 10 to 15 percentage growth. It's been in that range for the last few quarters. What is -- could that number be higher? What is -- there's a trade-off, it seems, that you're making between growth and profitability. Part of that is reflected in your listings growth number. Can you talk a little bit about some of -- the way that you manage the business, some of the decisions you make in terms of investments that drive listings growth and just overall growth of the business versus the profitability of...

Brian H. Sharples

There are actually 2 trade-offs we make. One is the trade-off between profitability and pushing growth too fast, and then the second is that we can make our numbers either by moving ASP or listing growth. And if you get aggressive about pricing, supply and demand, that's going to depress listings growth, just as if you want to grow listings growth very quickly. You could do that by discounting and other things, but you're going to -- and so we play with those 2 levers to make our numbers, so that's a trade-off. But in terms of could we grow faster? We absolutely could. We could -- we don't do a whole lot of marketing to get supply today. For example, someone like Airbnb has sales forces out in cities, throwing parties and spending all kinds of money to get folks. And they're doing advertising to get supply. We don't do that. We concentrate on making sure our suppliers are successful, and we know they'll tell their friends if they are. And so most of the growth that we get is fairly organic. We do have a sales force now on the property management side. We could potentially double that sales force if we wanted to and make those expenditures, but that's where we get into the trade-off between profitability and growth. And I often tell people, and maybe this disappoints some people, but I think on balance, it's a good thing, is that we're not that typical Silicon Valley company that doesn't care about making money. And it's just going to put the pedal to the metal and then wind up like Groupon going down in flames. We are a company that's always been free cash flow positive. We're trying to deliver a little bit more margin every year to our investors. And the reality is we're not feeling any competitive pressure from anybody to move this stuff quicker. So we're trying to balance really good above average growth with really great profitability. And so, yes, we make trade-offs every year. I'd love to have a sales force that's 3x as big, and we could do it. And we can probably hire them in a month, and that would move the top line and move listings growth. But in the short term, it would create wackiness with our numbers, and I don't think it's the right thing for our shareholders. And then there are other -- there are some other things, too, like when you're running a marketplace business, you have to make sure that supply and demand in your business is in balance. So if we have too much supply, for example, then our suppliers are going to be upset because their listings aren't performing. And if we have too much demand, then a lot of travelers are going to come to the sites, and they're not going to be finding things available. So we're constantly trying to play that game. So there's only so much supply you can actually put into the system. One of the things that is -- so our biggest effort underway from a listing growth standpoint is this pay-per-booking essentially a free trial. My prediction is that what's going to happen is we're going to get more people wanting to come on the sites than we can accommodate, that we will ultimately be a gatekeeper. And the way that product is going to work is we're going to say to people, "Look, you need to pay the subscription. You're guaranteed to be on the site, and you're guaranteed to have a position on the site, depending on what you pay for." If you come in under the free model, it's going to be up to us whether you're on the site. We're just a retailer, and you're giving us the right to sell your product. And we're going to decide whether you're there or not. But if 100,000 listings come streaming in and our marketplace can only handle 20,000 in the first quarter, then we're only going to put 20,000 of them on. And so you're also -- even though...

Mark May - Barclays Capital, Research Division

You still have those subscription-paying listings that you still need to deliver value to.

Brian H. Sharples

That's right. So if you actually push listing growth too far, it's funny, there have been a ton of competitors, Mark, over the years who've ventured back, who tried to get in the HomeAway business, and a tough business to crack because of the network effects. But almost all of them have focused exclusively on supply growth, and they built supply and built...

Mark May - Barclays Capital, Research Division

[indiscernible].

Brian H. Sharples

But they had no demiss. So the market got so out of whack that, ultimately, they collapsed and died. So there's a lot of sophistication and math and art as well to running this business.

Mark May - Barclays Capital, Research Division

I know the first time I met with Carl, that was -- he talked that it's something he's very passionate about, the market building. Okay. Can you give us an update, this very question you get all the time, on the adoption levels of the relatively new -- still relatively new subscription tiers on maybe even HomeAway and now VRBO and the other sites? And maybe any behavioral differences by geography or between FRBOs and PMs in terms of their adoption of higher tiers.

Brian H. Sharples

Yes. So a tiered pricing, for those who don't know, is just us going from a model where we only had 1 subscription price applied to everybody as an annual fee. And then we decided that we were going to -- we were so cheaply priced that we would create different tiers of the subscriptions because on a site like ours, if you're at the top of search results, you do a lot better than if you're at the bottom. So you now pay higher if you want to be placed higher on the sites. So we started rolling that out about a year ago first for a while on just 1 site, and then we added a bunch at the end of the year in the third quarter and the fourth quarter. And when we first launched it on HomeAway.com in the U.S., we were reporting an instant about 15% uplift on ASP, and then we start -- stopped reporting that metric because now we have it on 5 sites, we call the Fat 5 at HomeAway. And we didn't want to start reporting by site, but one of the things I did say on the fourth quarter call is, virtually every site we've launched on looks exactly the same as the first one we've launched it on. So most people can figure out what that means. So it's been a huge success in the site.

Mark May - Barclays Capital, Research Division

That means also -- sorry to cut you off, but that means that included in the Fat 5 are some sites outside the U.S.?

Brian H. Sharples

Yes. Our biggest sites in France, Germany and U.K. are now in the system but only as of the fourth quarter. So you have to bear that in mind [indiscernible] getting started.

Mark May - Barclays Capital, Research Division

[indiscernible] do you have data?

Brian H. Sharples

But already, as of now, sitting here today, 1/3 of the customers across those 5 sites are already buying at least 1 tier up already, and it's a relatively new product. The ASP uplift is the same by geography. We're finding that property managers are more aggressive than individual owners at tiering up in every geography, and that makes sense because property managers, they're in -- this is what they do for a living. They're in the businesses driving more business, and so they're going to be much more active at buying new products and services that we have, of course. And so -- and then the other stat that we talked about on the fourth quarter call was that HomeAway itself is now in its second year of tier pricing, and the second year ASP lift didn't look much different than the first year. So we always told people that we were going to see, we thought, a very long tail from this, that it's essentially going to let the market continue to set pricing. And the markets, it's going from something very cheap, 3%, to something that's probably in the end going to look like any other online marketplace, 8% to 10%. It going to take a period of years to get there. But the good news, it's not going to be us raising prices, it's going to be the consumers making a decision to continuously pay more. And so I think we've really solved the ASP problem for a long time. Not there was ever a problem, but we've -- let's say it's not something we have to spend a whole lot of time thinking about going forward.

Mark May - Barclays Capital, Research Division

On the raising pricing issue, I think though at the -- about a year after you introduced tier onto HomeAway.com, you did raise all the tiers by, what, 5% or something? Is that -- like what was the thought process...

Brian H. Sharples

It was because that was the time we were bringing VRBO out of the system, and we also at that time introduced bundles where you can buy both at the same time. So we actually just had to make the prices levels set so that you couldn't game the system by coming in 1 door or the other.

Mark May - Barclays Capital, Research Division

Okay. Got it. All right. I thought I had you caught there on price increases.

Brian H. Sharples

And by the way, so Mark, we won't be -- you won't see us increasing prices on our sites that have a tiered pricing. We still have some sites that aren't. So 25% of our revenue in listings run on sites that don't yet have that system so that we may take some modest price increases on.

Mark May - Barclays Capital, Research Division

Okay. One of the brilliant moves I thought that you guys did right before the IPO were the 2 property managers CRM platforms that you since integrated and rebranded. What role do those play -- what sort of -- in helping to penetrate that property managers segment? Talk to us about...

Brian H. Sharples

Yes, this is -- property managers use software platforms, just like this hotel uses its own reservation platform to run its business. And those are inventory -- they do everything from managed housecleaning to do accounting. But they're also the inventory management system for everything they do, and they're managing guests coming in and out and all the property information. And so if you want to work with property managers in bulk, you've got to get access to those systems. And there were 2 leading companies in the market. There are several, but there were 2 companies that had about 50% of the market in the U.S. And we didn't really want to be in that business. For years, we tried to get them to integrate, and they had to make a lot of changes to their platforms. But they weren't companies that had the capital to really invest in it nor the capability. And so, ultimately, we decided to acquire these businesses, so we could win. And so we are now the leading software provider to property managers in the U.S. and have spent the last couple of years cleaning those companies up. Believe it or not, at the time we bought them, over half their customers were still using OS/2 and DOS-based systems. I mean, these were companies that really had to go through some radical changes. We've made a ton of progress in the last year. Now for those customers who use those platforms, we have a very quick on-boarding path onto our sites and even better when we launch pay-per-booking in the fall, it's going to just flow right into their accounting systems, right into their credit card merchants they already use. Everything is going to be fully integrated, and that's going to be great. And so that's part of getting ready for that launch of pay-per-booking. The thing that was really exciting in Q4, and I talked about in the call and nobody really picked up on this, is that we also in Q4 started integrating with our competitors. So we integrated with 8 of our top 10 competitors in the software business in Q4 because -- and they all have thousands of listings, but their clients are saying, "Well, I'm going to switch to HomeAway software unless you guys can get me automatically on HomeAway." So our competitors have now integrated with our distribution platform. We're doing 3 more this quarter. So -- and that's good news. So we don't have to buy the rest of the software players because that's not a great business. Actually, this is -- the software companies themselves, the licensing fees they charge, are in our other revenue line item. And that is almost a 0 growth business. So we bought it for -- now it wouldn't be 0 growth if you counted all the listings coming in because of it. And the reason that it's 0 growth is that even though we're adding accounts to that business, we're making the products cheaper and cheaper. It maybe someday we just give the platform away for free because it's effectively...

Mark May - Barclays Capital, Research Division

Trojan horse.

Brian H. Sharples

A Trojan horse to get people involved in distribution. Yes.

Mark May - Barclays Capital, Research Division

What about -- have you been so focused on the product development there that you've not rolled it out internationally? What sort of progress...

Brian H. Sharples

Correct. And internationally is another whole kettle of fish because there are no property managers or software companies in the U.S. that have international capabilities, and there is actually no leading player in Europe right now. It's hundreds of different homegrown systems. So there's a greenfield opportunity to create a system for Europe. What we're doing right now though is we're developing -- and I think we finally can say we now have the XML standard for this industry. So one of the things we've been pushing this year, as we've been getting ready for these integrations, is delivering to the market a really complete spec, XML spec, for how you need to organize your data in this industry. And so in the U.S. now, I think we're there. We're now the standard. In Europe, we're the biggest in Europe, so I think quite quickly, we're going to make that the standard. And there's a couple of very big property management players in Europe that actually have systems that they built internally with SAP for millions of dollars. We're in discussions with them right now to all coalesce around the standard so that -- again, I think what I'd rather than build a software company out there, I'd rather have every little software company just build to our spec or modify their products so that they can distribute through our site.

Mark May - Barclays Capital, Research Division

And this platform is different than the platform used by FRBOs for the manager dashboard?

Brian H. Sharples

It is, yes. Yes. So we also launched in the fourth quarter a new dashboard for property managers because most of the sites we have are really built for a unit of 1. So if you wanted to list a property or change a photo or something, it was 2 for 1 property. And it's one of the reasons that, to this day, most property managers who have 200 or 300 properties only list 10 or 15 with us is because they've had to go in one at a time and do all the stuff. So in the fourth quarter, we actually released a new platform for property managers. It's a bulk management tool. It allows them to go into all their listings and select 10 of them and change the photos out on those 10. And that's getting more sophisticated...

Mark May - Barclays Capital, Research Division

[indiscernible] because they're gaming your system, but do you think it has much to do with ease of use?

Brian H. Sharples

It's a little bit of both. There are definitely people who game the system, which means they'll put some listings up, make them look super attractive and then do the lead gen on that. But what the math says internally is that if you take 10 properties that you have and go to 100, you are going to get 10x the volume of inquiries from us. So I think over the long term, that gaming will go away because they'll just realize they can build a much bigger business. And once we have pay-per-booking, there's really not the same incentive to game because you're better off putting all your inventory on so that people can find what they're looking for and book it. So I think we'll see some big changes in the next couple of years.

Mark May - Barclays Capital, Research Division

Right. As you introduce online booking to the platform and that becomes more heavily adopted, hopefully, it's hard to imagine that most wouldn't. But I'd love to hear your thoughts on how quickly you think FRBO and PMs will -- particularly, the FRBO side of the market, will adopt online booking. And then when we think out to a period where majority are, what other things can you start to introduce or sell on the site as you actually have the payment processing happening? I'm thinking, are rental cars or air other things in the future?

Brian H. Sharples

So most sophisticated property managers on their own sites are doing some form of online booking. In fact, the software companies we bought are the ones that enable them to do that. So I don't think we're going to have a big issue with those guys. On the FRBO side our rent-by-owner side, we're going to be pushing and dragging them kicking and screaming. It's -- we believe that e-commerce online booking is really good for the traveler. It's what the travelers want. They want to be able to use a credit card. They want to be able to go back and find a receipt for what they've done, see what payments they've made. They want to feel safe. They don't like having a transaction with somebody in another country that they don't know and can't even pronounce their name. It's just -- so we want to push this with our customers. And it's very much, I think, the same situation eBay was in 15 years ago when they brought in PayPal, is that penetration takes time. So we have launched online booking capabilities already in the U.S. and Europe. And penetration is going great. It's going according to plan. We've got 53,000 listings already who have adopted the payments platform and the payments system, and we expect to add to that total every month and every quarter. But I think for us, the tough slog is getting from 0% to about 35% to 40%. And once you get to about 40% penetration, and this is a trick out of eBay's playbook, you can then start making it really easy for consumers to only look at those properties. Because if that's what consumers want, you give them a big fat button that says, "I just want properties where I can pay securely online." And then they hit that button. And then the owners who are in the 60%, who aren't in those searches, very quickly come over the other side. So eBay saw a very slow ramp to 35%, 40% and then a very quick ramp to 80%. And so that's -- we have a lot of ex-eBay execs in the company, and we're sort of tracking against that benchmark and so far are ahead of it, what eBay did. We should be a few years later, and we have the benefit of their experience. But it is going to take time. I think it's going to take probably 3 years before you see over 50% of the listings on our sites enabled with payments. We also like it because of these ancillary services, that once the invoices are running through our sites, we now have the ability -- yes, we make a little bit of spread on the payment, but we have the ability now to know where millions of people are traveling, with big groups, typically. Those -- the data says that the average family going on a vacation, rental vacation, spends $1,500 on the accommodations. That's the piece we take a chunk out of today, but they spend $5,200 on the total vacation. So there are a lot of things you can provide them with, whether it's tickets to Disney World or airfare or cars or other things, but you have to be in the transaction first to do that. And then we also have a number of insurance products that we currently do sell against those transactions, too, that are doing quite well. One of them is a product we've created called PDP. It's a substitute for one of the points of friction in our marketplace, which is deposits. When you stay in a hotel like this, you don't have to put up a deposit. But when you stay in a vacation rental, you have to put up a deposit, and nobody trusts that, that person is going to give them back the deposit. So we created an insurance product that says instead of putting up a $500 deposit or $1,000 deposit, you just pay $35 now, and it's done. It's part of the shopping cart, and that's insurance. And if something does break or get damaged, the insurance will pay for it. And so that's a very higher-margin product for us. We're selling a lot of it right now against those 53,000 that are enabled with payments. And then we also sell traditional travel insurance as well, which a percentage of the market buys because they're afraid they might get caught in the storm or a family member might die or something like that. It's actually a good product for a lot of people.

Mark May - Barclays Capital, Research Division

Great. Maybe I'll just check and see if there are any questions out in the audience. We've got about 10 minutes left. Any questions?

Unknown Analyst

Can you comment on the recent renewal rate trends at VRBO?

Brian H. Sharples

Yes, so VRBO saw about a 1 point year-on-year decline in the fourth quarter. And sort of a bit of history here is instructional. So renewal rates are something that we analyze to death at the company because the point of renewal rate is worth a lot of money, now upside or downside to us. Renewal rates have historically fluctuated in our business between 74% and 76% for the last 7 years. And so in any given quarter, you might see it at 74.5%, you might see it at 75.5%. So when we see something in a quarter, we don't usually get that upset about it. Analytically, when we model what factors influence renewal rates, it's always the exact same thing. It's almost a perfect mathematical equation between inquiry delivery, which is the number of leads somebody is getting, and renewal rates. So we know on the margin exactly what we need to deliver. So this is actually with VRBO, the first time that we've seen a renewal rate decline that wasn't tied to that mathematical calculation of inquiries because, actually, people are doing really well on the site. But what has happened is that in 2012, we took VRBO, which is a 15-year-old business that's been operating for owners on the exact same back-end platform for 15 years, and we moved it to our global platform. That means every single thing that owners have ever done is different. Every system they use is different. Sort position on the site is different. We introduced tiered pricing on them, which was a whole new way of -- and the VRBO never had a quality score algorithm that affected where they were in the sites. So we changed everything for those customers this year. And believe me, we had to staff up in customer service because we were getting tens and tens of thousands of calls a month from people. Some of our customers are in their 60s or they -- and they're just like, "I've been doing it this way for years." So you create some dissatisfaction with change. Now the good news was from a revenue and business standpoint, it was huge. VRBO is doing great as a business because of all these changes, the right thing to do. But anytime you introduce that change, you're going to lower renewal rate. So what I believe is that it's a temporary thing. I think we'll probably see it for another quarter or 2, and then we won't see it anymore. And by the way, VRBO is still one of our highest renewal rate businesses that we operate around the world, so it's not something that we're tremendously worried about.

Mark May - Barclays Capital, Research Division

Any other questions? I had a question on just marketing, in general, maybe search marketing, specifically. It seems like given the company's focus on kind of load balancing supply and demand and then especially as you move towards more transactional-based revenue, probably, it will never be the majority but certainly an increasing amount from transactional. That intelligent -- clearly, intelligent sorting of your search results has always been -- and you're improving now, it sounds like. But what about intelligent search engine marketing? And how much of that are you doing -- have you done historically? Maybe just not search but just in general of outbound marketing, could you actually increase that going forward?

Brian H. Sharples

Yes. So we're about -- I mean, we're going to be doing a lot more of it because when you get -- it's funny. We spend probably 15% of our revenue on search marketing activities and things of that nature, but we don't spend more because in a subscription business, what we have to make sure is that the traffic growth is outpacing the listing growth so that people every year do a little bit better. We want people to feel better every year. And so we run our traffic growth, let's say, in the mid-20s right now, roughly. If we were to spend more money to bump it up to, let's say, 35% or 40%, we wouldn't really get a return on that because the business wouldn't change, we don't make money on transactions. But once you get in a transaction business, so take booking.com as an example, booking.com built its brand and its business in Europe by realizing that if they are making $100 on a transaction and they could bring something to the door for $50, that the more they pull that lever, the more money they're going to make and, ultimately, in the process, sort of built their brand. And so we are actually now getting ready for a world where we'll finally be able to do that. We'll be able to arbitrage SEM and display marketing as many companies do, they're in the transactional business. To prepare for that, luckily, we had -- without affecting our margins, I had a pretty big pool of money to play with because for the last 3 years, I've been doing brand marketing at HomeAway. And we did 2 Super Bowls. We did a Super Bowl the year before last and the year before that. Last year, we did the Oscars and the Emmys and a bunch of things. So we've been doing these big offline brand campaigns. And I've been spending about $10 million a year on that but not that efficiently, I must admit, because to spend $10 million in Super Bowl advertising, you first have to have an agency which costs you about $1.5 million to $2 million a year. The production is about $3 million. And so in the end, you'll spend about $5 million in media. So going in the fourth quarter this year, I decided in preparation for pay-per-booking that I was just going to cut that budget completely, not cut it, so you're not going to see their margin, take it all and move it into display and SEM. We've never done any display marketing. We just hired a woman who was running display marketing for eBay, has just come over to us and we're going to build a big display capability at the company. And we are going to start experimenting this year with how we can do that arbitrage marketing. So I think by the time we get into that business in the fourth quarter, we'll be in really good shape, and we'll have a vastly increased budget to do it without affecting margins of the business.

Mark May - Barclays Capital, Research Division

I would imagine, does the timing of when that happens throughout the year change when you would do branding versus when you would be doing more the transactional marketing?

Brian H. Sharples

Yes, it does. I mean, in our business, there is a seasonality component to it where the majority of people are booking vacations in the first and second quarter of the year. I mean, you'll get an influx of ski stuff in the third quarter or something like that. But really, this is -- we have typically concentrated all our brand marketing in the first and second quarters. And, in fact, one of the reasons that I decided to get out of that business is after 3 years of doing it, doing a lot of research on it, what I determined was you can't -- with only $5 million in media, so you're taking $10 million, but you got to spend $5 million just to produce it, it's not enough to create sustained gains and awareness because you do need to be doing it every month of the year. And we couldn't afford it every month of the year. We've only been in a couple of quarters. So my guess is, as long as we can keep on the growth trajectory we're on, 3 years from now, we'll be a brand -- big brand marketer again, but right now, the most efficient thing for us to do is drive traffic.

Mark May - Barclays Capital, Research Division

During this period, when you're pulling back on the TV, was there -- some of that must have also benefited FRGO, the listing side of the business too, right? How do you -- if it did, how do you compensate for some of that?

Brian H. Sharples

It's hard to say, but one of the ways we're going to compensate for it is that some of that display marketing budget that we're now creating that's new, we are, for the first time, going to target specifically at owner acquisition. So we've never done that before either. So good thinking, that's exactly the way we looked at it is we probably did get a halo from some of that stuff. But -- so now we're going to kind of search and destroy. I know we have been trying to find...

Mark May - Barclays Capital, Research Division

Do some trade as well.

Brian H. Sharples

Listings, yes, which we've never done before.

Mark May - Barclays Capital, Research Division

Are there any questions out there?

Unknown Analyst

Just a quick clarification. You said 1/3 of the customers are tiering up across the sites where tiered pricing was available, right?

Brian H. Sharples

At the moment, 1/3 of the customers on the sites that are enabled have tiered up, now realize that -- I mean, it just got introduced in the fourth quarter to our 3 European sites, so it's going to be quite a bit higher now, I think.

Mark May - Barclays Capital, Research Division

And that's probably of the customers that have gone through either a renewal -- gone through a renewal process?

Brian H. Sharples

My understanding is that it's not.

Mark May - Barclays Capital, Research Division

Okay. Okay, all right. I'll ask a question on ARPL. There's obviously a lot of noise in the reported blended number, but at the same time, in Q4, the number was quite strong. It goes up 9% year-on-year?

Brian H. Sharples

Yes. The last 4 quarters [ph] is down from 3% to 5%, to 7% to 9%.

Mark May - Barclays Capital, Research Division

To 9%. What are some of the major drivers behind that? And how sustainable is that sort of high single digit, maybe even low double digit growth in ARPL?

Brian H. Sharples

Well, it will get better. And we've been saying this for a few quarters, it's just the difference between revenue recognition and sales within our company. So we see sales growth internally. We don't report it externally. But when we're telling people that we're getting double-digit ASP lists from tiered pricing, we are -- but you're not going to see that in revenue fully for 12 months because every subscriber, when they pay, that money gets gapped out over 12 months going forward. So we've already known for the last 3 quarters that it was going to be 9%. We just see the math. So I can sit here confidently and say, "We are going to see that for a while because tiered pricing in the U.S. is working very well." It's new in Europe, so you haven't even seen the impact of that. I mean, there's no impact in that 9% number from Europe, so that's going to start kicking in. So I think -- and I think it's the reason that the stocks had a bit of a run here is that people finally get the math behind that and understand from the trend line.

Mark May - Barclays Capital, Research Division

Maybe over the last 12, 18 months, while you didn't have the tailwind of that, you did have other tailwinds, but they were offset by other headwinds, be it [indiscernible] FX or PPL or whatever. Are there any of those things that we should be thinking about over the next 12 to 18 months that would be meaningful?

Brian H. Sharples

On ARPL?

Mark May - Barclays Capital, Research Division

Yes.

Brian H. Sharples

Probably not. I think the biggest one will be...

Mark May - Barclays Capital, Research Division

You're predicting FX, I assume.

Brian H. Sharples

When we -- well, you can't -- you got to just take FX out of the equation. That's a tough one. But I think the only one would be, when pay-per-booking comes online, the day -- if we sign up 50,000 customers on the first day, they haven't generated any revenue yet. So technically, I'd say...

Mark May - Barclays Capital, Research Division

[indiscernible].

Brian H. Sharples

Yes, we're going to keep it separate. So we will -- once that's introduced, we're going to start just saying subscription customers, subscription ARPL, transaction customers, transaction revenue to kind of keep those 2 clean.

Mark May - Barclays Capital, Research Division

Makes sense.

Unknown Analyst

Maybe mark some [indiscernible] the market for the rental income for vacations at $85 billion a year. And roughly, 10% of that is spent on bookings and just travel agent things, I guess. So that's $8.5 billion of revenue, and you're involved with about 12% of the overall listings, which would mean that you're kind of in there with $1 billion of revenue, and you're at $300 million. So who's getting that revenue now? And who are you going to take it away from, that $8.5 billion of revenue, which is potentially the ultimate market for you when you've got $300 million. Who are you going to take that away from first?

Brian H. Sharples

Actually, so we estimate that there's about $10 billion of transactions going through HomeAway today. We're just taking a very small slice of that because we're really only about 3% right now in our subscription business, so 3% of our market share of -- but -- so there's probably about $10 billion of the $85 billion that we're touching today. So we do survey this. But -- and by the way, I agree with the number, but that number is mostly a European/U.S. number. There's still a whole rest of the world left that's pretty tough to estimate, which we're also going after. So -- but I think to say that there's an $8 billion to $10 billion opportunity for the company is fair. And as the clear market leader, long term for us to get 30% of that or 40% of that is fair. So a lot of that, where it's going today, there's still amazingly a huge offline component to the business. So there are a lot of people that just aren't online yet, and those numbers and the research we do are 40% or 50%. These are people who either use local networks or bulletin boards or advertising newspapers and things like that, so that's 1 class of customer. There are no real big competitors that we have globally in the business. TripAdvisor would be the closest, but they're so small in the business, they don't even report it in their financials. And -- but what there are, are thousands and thousands of local websites. So we're sort of a global Expedia type of player, but you can go to almost any market. If you want to go to Myrtle Beach, you'll find 3 or 4 local Myrtle Beach sites that just average -- advertise Myrtle Beach properties in those markets. And so people are spending money on all those little thousands of sites that are out there today. And so what I think our job is, is to get all those customers to continue spending with those local sites because there are some people who know where they want to go, they go to Myrtle Beach every year. It's about 10% to 15% of the market are like this. You're out to the Hamptons every year. So you just maybe have the site you use in the Hamptons, and that's what you care about. But we'd like to get those people to also say, "Hey, it's also a global market." For the 85% that might be choosing Myrtle Beach for the one time in their lives, you're going to find them through our sites. And so I think that's where the biggest transition is going to come. It's not supplanting those local sites but getting people to supplant their marketing with a combination of local and national/international.

Unknown Analyst

[indiscernible] dollar amount [indiscernible].

Brian H. Sharples

Maybe. Most of them are -- yes, sure.

Mark May - Barclays Capital, Research Division

I think we've unfortunately run over, but I'd like to thank Brian again for joining us. And next up in this room is Michael Lazzaro and salesforce.com. Thanks, Brian.

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