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HomeAway, Inc. (NASDAQ:AWAY)

Q4 2013 Earnings Conference Call

February 19, 2014 04:30 PM ET

Executives

Jen Ford – Director-Investor Relations

Brian H. Sharples – President and Chief Executive Officer

Lynn Atchison – Secretary and Chief Financial Officer

Analysts

Lloyd Walmsley – Deutsche Bank Securities, Inc.

Bo H. Nam – JPMorgan Securities, LLC

Nishant Verma – Morgan Stanley & Co. LLC

Heath P. Terry – Goldman Sachs & Co.

Mike J. Olson – Piper Jaffray & Co.

Dean J. Prissman – Credit Suisse Securities LLC

George Askew – Stifel, Nicolaus & Co., Inc.

Chris Merwin – Barclays Capital, Inc.

Chad W. Bartley – Pacific Crest Securities LLC

Operator

Greetings and welcome to the HomeAway, Inc. Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

I’d now like to turn the conference over to your host, Jen Ford, Director of Investor Relations with HomeAway, Inc. Thank you. Ms. Ford, you may now begin.

Jen Ford

Thank you and welcome to HomeAway's fourth quarter and full year 2013 financial results conference call. By now, everyone should have access to the earnings press release, which was distributed today at approximately 4 PM Eastern Time. If you have yet to receive 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 meaning of securities 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 19, 2014 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, 2013.

HomeAway undertakes no obligation to update any forward-looking statements, except as required by law. On this call, we'll refer to non-GAAP measures that, when used in combination with GAAP results, provide us with additional analytical tools to understand our operations.

We have provided reconciliations of non-GAAP to GAAP measures in our earnings press release distributed earlier today. Unless otherwise stated, all growth metrics provided are reported on a year-over-year basis.

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

Brian H. Sharples

Thank you, Jen. Good afternoon and thanks for joining us today as we discuss our fourth quarter and full year results. Let me start by saying that I extremely proud of the team’s accomplishments over the past year. We finished 2013 on a high note with several significant achievements in the fourth quarter including the rollout of pay-per-booking and accelerated penetration of e-commerce across our global network.

We also reignited listings growth that HomeAway delivering nearly 30% adjusted growth in total listings, which is well ahead of our objective. And finally, part of this listing growth from our acquisition of Stayz, which along will travelmob, Bookabach and our investment in Tujia further strengthens of leadership position in Asia-Pacific.

Recapping a few financial highlights for 2013, total revenue of $346.5 million was up 24% year-over-year and adjusted EBITDA of $97 million grew 20%. Excluding one time deal cost associated with the acquisition of Stayz, adjusted EBITDA would have been over $100 million for the full year. We delivered nearly $93 million in free cash flow and ended the year with $391 million in cash and cash equivalents. We also appreciate the confidence our investors have in our business which will add us to complete a successful $195 million stock offering on December 17.

Turning to our operating metrics for the fourth quarter, again I am thrilled to report that we ended the year with approximately 890,000 listings or nearly 30% year-over-year growth when adjusting for the impact of consolidations and network bundles. This must have welcomed a significant acceleration of listings growth, largely field by robust and pent-up supplier demand for our new pay-per-booking offering.

Listing growth also benefited from the acquisition of Stayz, which added approximately 40,000 listings during the quarter. Most importantly, the health of our current subscription business remained strong with renewal rates up from 74% in the prior quarter to 75% on an adjusted basis led by improvements in both the U.S. and Europe.

FX neutral subscription revenue per listing for the quarter was up 8% on an adjusted basis. This metric continues to benefit from network bundles as well as tiered pricing with tiered option rates now reaching 37% of subscription listings on sites where tiered pricing is offered and enabled.

Traffic to HomeAway’s global network of sites attracted $146 million business during the quarter, growing 16% year-over-year. Although we deserved a Google search traffic to the broader vacation rental category slowed in the fourth quarter, our ongoing strength in FCO [ph] and various marketing initiatives allowed us to outperform the market in all regions.

I should add that while this traffic growth is bit slower than we have seen in recent quarters, we believe much of it has been from quality initiatives at HomeAway in the reducing the number of visits required to secure a booking. These initiatives include online booking, affordable rates, and continuous improvements to our search functionality to get people quickly to the right properties. Because of these quality and targeting initiatives, we also analyzed a number of unique inquirers, bookings made through our sites and other internal measures that service a proxy for active shoppers and the quality of overall traffic that comes to our sites, but we won’t share these details publicly. We believe demand is healthy and the quality of traffic will be an ongoing focus of our efforts particularly with the addition of our PPB business.

Now turning to our operational developments for the quarter; most notable achievement for the quarter was the rollout of our pay-per-booking products as we expected. Supplier demand was strong and we added 71,000 pay-per-booking listings during the quarter and of course that does not include Stayz.

Our platform PPB product, which is designed for individual owners was made available on homeaway.com on October and launched VRBO in mid January. So far, these platform generated PPB listings appeared to be similar in property type, quality and availability to their subscription counterparts.

In fact, our early indications are that PPB listings coming through our platform from individual owners are performing significantly higher than those from large PMs through integrated pay-per-booking which I’ll touch on in a moment. We certainly successfully look forward to making our platform PPB product available on our largest European sites in Q2 of this year.

Turning now to our integrated pay-per-booking product, which is designed specifically for large property managers, as anticipated a vast majority of new pay-per-booking listings were generated by our integrated pay-per-booking product, which launched the large property managers in both Europe and the U.S. in the fourth quarter. As a result, property manager penetration increased significantly to 35% of total listings at HomeAway, up from 28% in the third quarter.

The influx so many listings combined with our desire to proceed cautiously with PPB, while maintaining the health of our subscriber business has led to most of these new pay-per-booking listings appearing relatively low for the time being in sort order, also recall that some PM listings typically appear on multiple sites including those of our competitors, there is less availability on their calendars compared to those of individual owners who rely on us for the majority of their bookings.

There are so many data quality in process issues that are associated with integrating large quantities of listings through a variety of property management platforms. For all of these reasons, we do not expect the PPB listings as a whole especially integrated PPB listing that comprise much of the volume today to monetize anywhere near their full potential in the near term and of course we have talked about that last quarter as well.

We expect to continue adding a significant number of new PPB listings over the balance of 2014, but given the popularity of this offering with large PMs, we will begin to focus more on listing quality than on pure volume. In other words, it is our priority to prioritize the end partners with properties and locations that we expect to perform well on our sites in are of high quality.

We also began formally testing the ROI of using search engine marketing to drive bookings to these PPB properties and we are in the early days there. So please be aware that the outlook Lynn will provide does not include a significant step-up in SEM expenditure during 2014. However we may consider an increase in the back half of this year as result of this tests are positive.

Finally, we continue to see strength in new subscription listings. As we mentioned earlier, the uptick in U.S. renewal rates is an encouraging sign regarding the negligible impact of PPB on our existing subscription business at least so far.

I’ll now turn to e-commerce which remains a critical component of our mission to make booking a vacation rental as easy as booking a hotel.

Reservation Manager, our online payment platform more than doubled its transaction volumes in 2013 and e-commerce adoption has picked up momentum with now 169,000 listings that were e-commerce enabled by the end of the year.

Driving this increase in adoption was both the addition of online bookable PPB listings as well as an acceleration and adoption of payments in online booking from our subscription customers.

We are also pleased to report that we launched our pilot with Expedia and are working closely with them to learn what works best with consumers. It’s still early days, but we have a near term plan to expand our testing and hope to know more in the next few quarters.

Expedia has proved to be a terrific partner and the working relationship has been quite productive so far. And outside of Expedia, we also continue to make product investments to enable broader distribution of our listings in the future should this program prove to be successful.

In addition to our focus on listing quality with integrated pay-per-booking, we are also quite focused on listening quality overall and enhancing the traveler experiences much as possible on our size. Listing quality is critical to the travelers’ experience and plays an important role in the conversion or booking of a property.

There are many different facets to listing quality, such as response time from owners and mangers, our access to reviews, our high quality and quantity of photos as well as the ability to pay seamlessly and securely and safely online.

While PPB has helped in our effort to accelerate the adoption of e-commerce, we are making progress in other fronts as well. For example, in the fourth quarter, we rolled out our Secure Communications Platform for owners on HomeAway.com and VRBO.com. In addition to its primary purpose of security and a reduction of phishing, our communications platform now gives us the ability to measure owner responsiveness and create stronger incentives for owners to respond to travelers in a timely fashion.

Finally, I’ll comment briefly on geographic expansion, which remains a strategic priority for HomeAway. In December, we welcomed Australia’s leading vacation rental website Stayz to the HomeAway family. Since that acquisition, we’ve been focused on financial and production integration and ensuring the business continues to execute as Australia’s market leader.

We do expect 2014 to be a year of heavy investment as we integrate the business and execute our goal of ensuring they are well positioned for the long run with the most competitive technology, pricing and marketing resources.

And as we said before, we believe we will learn from Stayz long and successful experience with their commission based model. We also plan to drive upside in their business in 2015 and beyond through access to our global network.

In closing, we are very pleased with our execution over this past year financially, operationally as well as strategically. We have an aggressive product roadmap and our team once again delivered. And I thank them for that. 2014 will be a year in which we focus in driving incremental traveler demand and bookings to all our customers, increasing the adoption of e-commerce on our sites and continue providing the greatest depths and breadth of vacation rental choice to travelers all over the world.

With that, I will now turn the call over to our CFO, Lynn Atchison. Lynn?

Lynn Atchison

Thank you, Brian. For the fourth quarter, total revenue of $90.3 million were 26.1% higher than the comparable quarter last year with strong performance in other listing and other revenue. FX neutral total revenue was up 24.9% for the quarter. Compared to our expectations, we had better performance in listings and advertising. We enjoyed an uptick in exchange rate and we closed our acquisition of Stayz, which contributed $2 million of total revenue.

Listing revenue which increased 25.5% year-over-year to $78.4 million, benefited from higher average revenue per listings and increase in the number of paid subscription listings and improvement in our renewal rates.

Total average revenue for listing inclusive of all listing types have become less meaningful this quarter with significant increase in performance based listings which are part of the average in the denominator. Therefore, I’ll point you to FX neutral subscription ARPU, which is adjusted increased 7.8% in Q4 compared to 9.6% last quarter. We remain optimistic at tier pricing in our network bundles will continue to contribute at pricing expansion and continued growth in this metric.

As we discussed last quarter, we did expect a deceleration in growth rate of subscription ARPU, these are the tougher comps in the fourth quarter of last year. Although we expect consolidation headwinds on subscription growth in 2014, beginning in the first quarter, we will provide as a supplemental metric of listing growth and average revenue per listing metrics on an unadjusted basis only. We estimate that the impact of consolidations in network bundles will add roughly a 46% impact on subscription growth at 2014 which are similar to effects in 2013.

With the launch of pay-per-bookings, we will begin to share composition of ending paid listing is between subscription listings and performance based listings. At December 31, 78% of our listings were subscription based representing unadjusted growth of 6.9%. And just for reference, the unadjusted number of 12.1% did accelerate over Q3, the remainder were performance based, either pay-per-booking or paper lead, representing growth of 225%.

As Brian mentioned, the dramatic increase in inventory came primarily from integrated pay-per-booking listings. These properties went live late in the quarter and therefore have little time to generate bookings for revenue in 2013. The performance of these listings have been off to a relatively slow start and we are focused on increasing demand and conversion in order to get a monetized based listings.

Other revenue at 13.2% of total revenue in the fourth quarter is comprised of ancillary revenues from owners and travelers, advertising, software and other items, increased 30.8% year-over-year. Our value-added service of products which include insurance products and revenue share from payment processing are key area of focus and continue to demonstrate robust growth.

Advertising and software almost grew right lower than the overall company. However, we are pleased to report that the advertising business have returned to positive growth this quarter and the software business continues to play an important and strategic role with HomeAway’s property manager business.

Turning to expenses, total operating expenses excluding amortization increased 36.9% year-over-year. Most of the year-over-year increase reflects increased compensation expenses due to a higher number of employees. We ended the quarter with 1,542 employees, up 314 since last year. Of the 81 higher since September 30, 41 were part of the Stayz acquisition.

Also during the fourth quarter, our expenses were significantly impacted by the inclusion of about $4.6 million in Stayz operational and deal related expenses, specifically, included in G&A expense of $23.5 million is approximately $3.8 million of deal related fees.

In addition to professional fees, we also incurred contingent commission and stamp duty expenses which we explicitly did not factor into our outlook last fall as the outcome of the acquisition was uncertain.

Excluding acquisitions, the increase in G&A was due to an increase in the number of employees and higher non-cash stock compensation. Since last year, we added 55 employees with half of those in IT and the remainder in finance and accounting, human resources, tax and legal. The additional headcount has been necessary to support our global growth initiatives including M&A as well as systems investments.

Also included in G&A is expense associated with claims made under our basic Carefree Guarantee and as Brian discussed, we’re taking steps to reduce exposure to lawsuits from phishing as a launch of the secured communications in the U.S.

As to the other expense categories, we didn't see much change in our trend versus our expectation. Expenses were up due to higher headcount resulting in higher compensation and facilities that are expensive were also left, which has been the case all year. The higher headcount in customer service have been to support new products and product enhancements on our sites around the globe.

Throughout the year, additional products and development personnel reflected our continued investment in the global deployment of numerous initiatives, including the continued rollout of tiered pricing and ongoing platform migration, online booking and payments, additional technologies for professional property managers and the development of our pay-per-booking capabilities.

In sales and marketing over the last year, 121 employees added, about half were in the area of sales and related sales operations with the remaining added in marketing and business intelligence.

While we’ve not turned on a significant amount of new direct marketing, we continue our testing of SEM strategy as Brian discussed. Compared to the same quarter last year, our direct spend was up 21% year-over-year, mainly in pay-per-click and display advertising.

Adjusted EBITDA in the fourth quarter decreased 1.4% to $21 million or 23.3% of total revenue. Note that if we excluded everything Stayz related, those are positive margins that brought us and the negative impact of the deal expenses, Q4 adjusted EBITDA would have been up approximately 11% year-over-year.

Amortization expense of $2.8 million was down 19% year-over-year, reflecting certain intangible assets from prior acquisitions becoming fully amortized, somewhat offset by an increase in amortization related to intangibles and acquired in the travelmob, Bookabach and Stayz acquisition.

Continuing down the income statement, you’ll note that during the quarter we incurred a large non-cash FX loss of $4 million. This too was primarily connected to the Stayz in that we established an inter-company loan as part of our overall strategy to fund the acquisition. While the structure is secure, we did not enter into a forward contract that heads that inter-company loan up with the period between the Stayz closing date of December 4 and the end of the year.

We have added this inter-company loans to our FX program going forward, but the combination of the shear size of the loan as well as the unexpected movement in the Australian dollar resulted in a non-cash charge to reflect the lower value at December 31.

Our effective tax rate for the full year was 40% compared to 2012 full rate of approximately 47%. While the overall tax expense estimate did not change by much, the book rate did vary from my commentary last fall. It’s because we ended the year with lower pre-tax income due to the unrealized FX loss in the Stayz deal related expenses.

We expect to lower our rate again in 2014 as we see the benefit of our international structure. That said, our book tax rate continues to be negatively impacted by option stranded in countries for deductions that are not allowed, increases in state taxes in the U.S. and nondeductible losses in travelmob among other items.

For the quarter, we had a net loss attributable to HomeAway of $1.6 million for a loss of $0.02 per share. For the full year, we generated $17.7 million of net income compared to $15 million last year, resulting in a diluted EPS increase of 11.1%.

Moving on to our balance sheet and cash flow, at December 31, cash, cash equivalents and short-term investments totaled $391.4 million and we have remained debt free. During the quarter, we used existing cash and investments to fund our acquisition of Stayz and subsequently raised $195 million from a follow on offering in December.

We ended the quarter with $155 million in deferred revenue which is up 19.9% over the December of last year and up 16.4% excluding the benefits of higher FX compared to last year as well as deferred revenue associated with our acquisition of Stayz.

For the quarter, we generated free cash flow of $23.4 million, resulting in $93 million on a trailing 12 months basis, 9% that last year. This growth takes into consideration to $13.8 million paid in cash taxes this year. We plan to the level of cash taxes to be cut in half next year.

Capital expenditures for $5 million for the quarter; most of our capital expenditures are for equipment and software purchases, internally developed software and of this expansion to support our growth.

I’d like to take a few minutest to look forward. We are expanding to grow the business in the U.S. and Europe while also focusing on expansion in Asia-Pacific and other geographies. Our revenue outlook reflects the growth in subscription listing and associated average revenue per subscription listing albeit at a rate slightly below 2013 level. While we are bullish in our ability to add supply, we remain conservative on our expectations for monetization of pay-per-booking listings in 2014.

Our outlook also reflects continued focus on value added services associated with our e-commerce initiatives. And finally our outlook, our revenue outlook for Stayz which is relatively flat allows us flexibility to position the business for the long-term growth.

And to expenses and investments; our philosophy of evolving with respect to how we manage profitability of the business, when we went mean public, we described the leverage in our subscription model and our ability should be achieved to expand margins naturally at a rate of about 100 basis points per year.

Looking back adjusted EBITDA increase for approximately 26% in 2010 to 29% in 2012, in both 2013 and into our 2014 plan we have seen leverage in our core business. However our expansion into Asia and other geographies has and we’ll continue to our core investments as well as vacation rental market develops in growth, travelers, owners, and professional managers to a new and better product and services including e-commerce in mobile which we are committed to delivery as the category later.

With that in mind, considering our outlook for adjusted projected EBITDA are the following assumptions; our investment in Asia will continue to be a net investment, the addition of Stayz which enjoys healthy margins were required additional investments, bringing our margin to a corporate level. We don’t expect significant leverage in products and technology as we expect new opportunities for product enhancements and will arrive. We are now built into our outlook of significant stet up in SEM but we are excited to get in to a place where this will make sense once we have got a more solid understanding of conversion and the impact on top and bottom line.

And finally, we are evaluating a potential cash reserve that relates our international customers buying our U.S. products and therefore while we are not sure about the outcome, we have built this possibility specifically in our Q1 outlook. With all this, our full year outlook assumes an EBITDA margin range of about 28% in line with 2013.

We expect another year a strong free cash flow conversion. Our subscription model had a positive impact on working capital and we expect seeing much lower cash taxes. However that will be offset by higher than normal amount of capital expenditures related to opening an additional new office in Austin, Texas. the new lease, our largest to date, was signed last July in a 15 year plus term, so the outlay will have listening benefit for the business.

Turning to our outlook as presented in the press release, the ranges reflect revenue growth of 28.1% to 29.4% for the March quarter and 23.4% and 25.4% for the full year FX neutral. We expect adjusted EBITDA to grow in the range of 9.4% to 12.9% in the March quarter to grow in the range of 23% to 29.3% for the full year.

In other assumptions to help you model, our foreign exchange rate for the euro of €1.35 for each U.S. dollar. Amortization of intangibles is expected to be $12 million to $13 million for the full year reflecting a full year of amortization for the 2013 acquisitions net of other intangibles becoming fully amortized.

Full year effective book tax rate of 37% to 39% continuing to improve as discussed earlier. Stock compensation expense for the year to be in the range of $60 million to $63 million. Basic share count to be in a range of $93 million to $94 million and our fully diluted weighted average share count to be in the range of 96 million to 98 million shares. And capital expenditures in the range of $39 million to $40 million, again reflecting our new office in Austin.

That concludes our prepared remarks. Thank you again for your continued support of HomeAway. Operator, you may open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Lloyd Walmsley from Deutsche Bank.

Lloyd Walmsley – Deutsche Bank Securities, Inc.

Great. Thanks for taking this question. If I may a couple of housekeeping and then more substantive question; first, just on the listings number per subscription, I think you said 78% of total listings are subscription separate from both pay-per-booking and pay-per-lead. Can you give us and maybe this was the growth rate you gave us, the apples-to-apples number with I guess the former subscription listings number you’ve traditionally given and I think also included pay-per-lead. And then also on housekeeping I guess then should we assume that the kind of run rate that you gave for Stayz for the year ending, mid-year 2013 is kind of what we should expect for the 2014 from Stayz, or was there some growth there.

And then if I may more so specifically, curious if you started to re-market to historical base of current subscribers, I think it’s probably your number is comparable to today’s subscription listing subscribers. Have you started re-marketing to them to offer the pay-per-list of PPB product and what kind of results have you seen from that. Thanks.

Lynn Atchison

Hello Lloyd, thanks. Yes the growth rate I gave was the apples-to-apple numbers, so if you back-end with the math there that would mean that, that we had in Q4 of 2012 about 650,000 subscription listings at that point. So you can tie back into it and then the balance of what we had last year was the pay-per-lead product which we’d always had in our portfolio. So we’ll start building that pay-per-use so that you can see going forward kind of what our subscriptions are doing and then what the type of performance is doing.

And then on the Stayz, you’re right in your assumption, I think we are looking at that business flat year-over-year to give ourselves ultimate flexibility around what the product lines in the websites that they have existing right now and then the only other thing just to point out with just a bit of house-keeping also is it Stayz that have the opposite seasonality that we have.

So we don’t see the – they have a big Q1. So just I’ll let you know that Stayz as a layers in our business is a little bit more heavily right into Q1. And I’ll let Brian answer the question about marketing type of bookings to the…

Brian H. Sharples

Sure Lynn. So as I think you already know, so we added a lot of pay-per-booking customers through our integrated PM products. We have had great success with people coming into our list of property page on the platform and we are also having success free marketing to subscription customers who do not renew. Now in that renewal rates just to be clear that increase does not include those people because if somebody leased over subscription customers, they are treated as a non-renewal and then they come into the PPB bucket.

Right now without going into much more detail about 15% of the platform, PPB listings were adding at the company right now were actually coming from last subscriptions that we have called and our coming back into the fold under PPB. So that’s a good new story.

Lloyd Walmsley – Deutsche Bank Securities, Inc.

And then, just as a follow-up are you seeing some of those people come back in and do the math you lay out on the website and decide to renew their subscriptions on a subscription basis?

Brian H. Sharples

We have definitely had people come in on PPB and then quickly one or two months later switch to subscriptions. I don’t know specifically if we had people from subscriptions go to PPB and then switch back again. I just don’t know that at the moment, now and I’m sure the sample sizes are low enough that we wouldn’t want to make a big conclusion about that yet.

Lloyd Walmsley – Deutsche Bank Securities, Inc.

Okay thanks for – I asked so many.

Operator

Thank you our next question comes from Doug Anmuth from JPMorgan.

Bo H. Nam – JPMorgan Securities, LLC

Hi this is Bo Nam on behalf of Doug Anmuth. Thanks for taking my questions. Can you rank order some of your priorities for investments in 2014 and maybe just a little bit more detail on the commentary about the sales and marketing spend and things that you are testing and how it could, what would lead you to increase that in the second half, or would you would have to see, rate increase on the second half? And then secondly, any update on the competitive landscape, thanks.

Brian H. Sharples

Okay so, in terms of priorities for next year so obviously, we made a big push to get PPB out the door in 2013. We want to continue obviously rolling that out, so we are seeing great success in the platform side and we want to get that rolled out in Europe. We are clearly in a position now where we believe we can add a lot of properties to the side especially in the PM overall, in fact I would say we’re not really constrained by supplier demand at this point.

And we won’t add everything we can add because we now have to develop a muscle of generating bookings for those listings and so well, we added I think from our listings than anybody expected in Q4 that does give us the burden of having to deliver for those customers.

So one of our biggest priorities is really focusing on convergence for those customers in 2014. Now some of that and I’ll get to the marketing piece may involve marketing, but that’s more about volume, a lot of it really does come down to conversion because when we do these integrations with big property managers they are not necessarily as cleaners, you might expect, they’ve got a lot of data that we have to massage and work with. There might be a number of new locations that we don’t market in that come across with those deals and so we’ve got to buildup such position and other things.

And so I think we’re going to spend a lot of resources in 2014 just getting better and better, add conversion, marketplace management all of the things that go along with that, we do also have a big investment area in listing quality not just for the PPB listings, but for all our listings on the site.

We’ve done a lot of work here in the last 12 months to understand how listing quality does affect conversion, happiness of our travelers, ability for them to go out and recommend us to other people and we still have a very long way to go. And we took a major, major step forward in one area in Q4, I’m not sure we talked about this in the prepared script where a lot of customers on our site especially historic VRBO customers didn’t have what we call quotable rates meaning our customers have always had the option between using our very detailed rates database which can actually generate a quote or an online booking or stick to our old method of kind of just writing it in very subjectively on the sites.

We tried to give customers the option to do both and encourage them and move towards e-commerce, but in the fourth quarter we actually made a decision and we now made it mandatory for customers to adopt quotable rates. And that has been a big, big improvement in quality. It also is one of the reasons why our subscribing customers moving to e-commerce and payments actually jumped about 46% between Q3 and Q4 because now once you have quotable rates in place then it’s very to sort of take that next step.

Our third investment area, I should talk about is mobile. So there is a lot going on in mobile, about 30% of our traffic is in the mobile area., half tablet, half phone, conversion rates in the phone are lot lower than they are with desktop, the pad, it’s pretty close to desktop but still little below and so we’ve got a number of efforts underway around the world to develop what we call a responsive UI, which is just rolling out the ability for our platform to flex depending on screen size and device type. And then there are also some pretty interesting investments, I think to come, some we don't want to talk about today in the mobile area where we can simply take advantage of mobile to create a better experience for our customers.

You will continue to see as a priority us expanding around the globe. We made a lot of investments in APAC last year. And so now we’ve got a pay-off on those. So we’ve got a lot of work going on restructuring all of the operations in APAC and as Lynn touched on we’re making some big investments in Australia. We got a lot of activity going on in South America. We have a big presence in Brazil.

We just opened an office in Columbia. We are just getting started in Argentina which we believe is going to be pretty big. And the Eastern Europe is going to be bit of focus for us this year too and that we are looking at some Eastern European markets in particular, we are now staring – have started the process of moving our platform into a Unicode environment, so we can handle double bite move into markets like Russia as well as other Asian markets that aren't served by the companies we have today.

So that’s the sum total of everything and then the last one, is one you specifically asked about which is really trying to get as good as we can at understanding how to use SEM to leverage traffic and turn it into bookings on our sites, and it isn’t something we’ve had to a lot of in the past because we’ve got an extraordinary SEO position which by the way continues to get even better by all measures that we’ve looked at here, but we know with volumes of listings now coming on our sites, we are going to have to get better at performance marketing.

And so, we are in the process right now of doing that testing and starting that – and what we are looking for is, is a little bit of certainty for you guys before we go out and start spending in terms of money. I mean there are some other internet companies just in the last few weeks that have announced one in particular, that announced a big step up in SEM marketing and when asked what they thought that was going to do to revenue and EBITDA, they said well, we’re not really sure and the stock that hit pretty hard because of it. We don’t operate that way, we want to operate as a business that can give at least some guidance and if we think we’re going to step up our expenditures we want to know how that’s going to affect revenue and EBITDA.

So it’s going to take us a couple of quarters to look at that and as we said in the fourth quarter and it still remains true that in the back half of this year, we may come back and announce a step up in marketing we may now, we certainly want to understand first the performance of that.

On the competitive side, not much has really changed in the last quarter or so. Our competitors haven’t had any big news announcements as far as I know I mean, is clearly been a lot of news about Airbnb and regulatory in various places and we continue to monitor all of that, but I think again, our renewal rates speak themselves, when renewals rates are getting better that means we’re retaining customers more.

So we still don’t see in our business any loss of customers to any of the major competitors that you guys would know the names of and with the PPB product now in the platform I think we’ve really tapped into a new market that may have been going elsewhere, because it was pretty less than other size and thankfully that appears to be additives to our business and now taking the way substantially from the great subscription business we already have.

Bo H. Nam – JPMorgan Securities, LLC

Okay, great. Thank you so much.

Operator

Thank you. Our next question comes from Scott Devitt from Morgan Stanley.

Nishant Verma – Morgan Stanley & Co. LLC

Hi, this is Nishant for Scott Devitt. I have two housekeeping questions and then a question on OTA distribution. Just on the first, how should we think about how much revenue is baked in 2014 guidance for pay-per-booking? And then on Stayz, I know that’s a hybrid monetization between subscription and pay-per-booking, what are you classifying those listings as right now when you give that 78% subscription number, does that include Stayz or not?

And then just on the OTA distribution, if you could provide any additional color just on the progress of Expedia partnership and you mentioned something about potential, additional distribution in the future through other OTAs as well any more color on that would be great?

Lynn Atchison

Right, thank you. I’ll take the first two. No, we’re not going to give an exact dollar amount of how much is put into pay-per-bookings for next year. We’ve given a little bit of color around the edges with regards to the component that is Stayz and so when you take that out you kind of get everything else. We’ve talked about the listing business which is released, still have healthy growth both in listings and in ARPU, but it raised a little bit under what were compared to 2013.

So it kind of back in that all of breadth is a combination of not just pay-per-bookings, but other e-commerce initiatives, so it’s not just commissions on pay-per-booking but it’s value-added services and royalties and payments all other things connected to e-commerce. So we kind of look at all that together internally and until it becomes bigger, we really aren’t breaking it out any further.

And on this question on the Stayz listings, probably should have thought to mention that, going forward, we think there is notion of hybrid listings may exist for a long time, we’re not sure Stayz had listings that both had subscription components as well as the performance Stayz components. What we’ll do and we always tell you where they are, but in this case we’re putting them with performance-based listings, because we look at them and they are predominantly performance-based listing and those case of the subscription piece of that is very small and we’re not sure exactly long-term how that pans out in terms of the business model, but in this particular case that’s in the performance…

Brian H. Sharples

It will likely get smaller.

Lynn Atchison

Right.

Brian H. Sharples

Yes.

Lynn Atchison

I think when I talked about …

Brian H. Sharples

Sure on the OTA side and I’m sorry not trying to be evasive about this but for competitive reasons, we do have an agreement with Expedia not to talk about any specifics, yet and metrics and things like that. But what I can tell you is that, so we are in testing with Expedia. We are looking at a number of things. I mean the first one is just traveler engagement to people on Expedia, actually click and go through and look at these properties and are interested in that and I can tell you that so far we are happy with that, they are happy with that.

We are looking at cannibalization at least on their end, is it cannibalized hotel bookings or is there something additive to their business. So far I think everybody is pretty happy with the results there as well, and so based on that encouragement, we are sort of – we are expanding the testing. So it started off very limited to a few markets, if you sort of would track it on the sites you will see that, that’s going to get expanded a bit. Now in terms of broader distribution for HomeAway there is really two things that we’re looking at. One is whether we expand to other OTAs and the other is frankly getting more properties enabled for distribution.

Now I think as we told you guys last quarter there is only a handful of properties about 12,000 better part of this task. And that’s not because we just magically picked the number of 12,000, that’s because we have about 12,000 properties that are fully enabled to be distributed through a platform like Expedia. So there actually is some tech development that we have to deal to enable all of our e-commerce enabled listings and all of our PPB listings to be distributed through a third-party.

So we are – that is part of our priority that – I forgot to mention on the last question for this year as well where we are putting together that distribution platform and rather about the end of the year, I think we’ll be in a position to do that. So we are already looking at 2014 as a test year with our partner Expedia and more to come on that, but clearly our hope is that, we can’t engage in distribution deals with several parties not just OTAs but also other kinds of companies in local market participants and chambers of commerce and other people that might be able to add traffic to HomeAway and make some money while we can make some money as well.

Nishant Verma - Morgan Stanley & Co. LLC

All right. Thank you.

Lynn Atchison

Thanks.

Operator

Thank you. Our next question comes from Heath Terry from Goldman Sachs.

Heath P. Terry – Goldman Sachs & Co.

Great, thanks. I realize it's probably still way too early for this, but curious as to serve your initial thoughts around the idea. Have you seen much of an impact on as you've added listings particularly in some of these markets where you've added a lot of, what it sounds like might not be sort of the highest quality listings or the kind of listings that you would have immediately sought out from some of the property Managers. Have you seen any impact on conversion, overall conversion either positively or negatively within those geographies or more specifically maybe even just impact on the number of leads that are being generated to your subscriber base?

And then on the – Lynn I heard you say that payments was an area where you guys saw a significant growth in the quarter. I was wondering if you could maybe quantify that for us and maybe even more interestingly, give us an idea of what percentage of listings on the site are now enabled for online payments through your system?

Lynn Atchison

Okay. Yes I thought we gave that number it was like 169,000 is the total that was enabled for payments. So now they may not be all be online bookables just to clarify for that, but they are at least enabled for our Manager products. And in the quarter, that component of other revenue, but it’s still kind of where we are putting now, it grew about 30%, for of all those miscellaneous parts, so definitely is a great growth area for the business, its also will be somewhat seasonal, because we are on those revenues during the booking season predominantly.

So we are very excited about that and excited about the momentum of that, we actually added putting aside the pay-per-booking for a minute, we actually added more in Q4 than we had in Q3, our subscription customers moving over to the payment platform. I’ll tie that back into one of the reasons what Brian mentioned was adding affordable rates which made it easier for them to do that and what was your first question?

Brian H. Sharples

As far as the first question, there has been impact kind of overall in a market of adding listings in a positive way which actually might seem like in not a question but he feels right that what we found over time is that when you provide more choice for consumers, you actually do get higher levels of conversion. I don’t think we’ve had enough experience yet to understand remember that these listings most of the listings we added were added right at the tail-end of Q4.

So we’ll typically go back after Q1 and we’ll do a pretty hard analysis of everything that happened during the quarter, but in real time right now we are just trying to manage those listings and manage the quality of them.

I should say that you are not going to see a huge impact on subscription and we haven’t because most of those listings are at the bottom sorts as they are effectively being added to the bottom of the pile in markets where we already had listings, but I’m also told that if you look across some of the deals that we’ve done in Europe, a lot of the listings we’ve brought on are in new geos where we didn’t have a lot of listings.

Interhome for example, we announced that deal has a lot of listings up in the Nordics and places like Finland where we didn't have a lot of listings before, so again we're going to have to over time really build a presence in a number of those geos and there's not going to be a big impact because we didn't have a huge presence there anyway, but so far nothing negative as far as we can tell with respect to either conversion or renewal rate or subscriber happiness which I think is step one.

Heath P. Terry – Goldman Sachs & Co.

Great, now that's really interesting. Thank you.

Operator

Thank you. Our next question comes from Mike Olson from Piper Jaffray.

Mike J. Olson – Piper Jaffray & Co.

Hi good afternoon. A couple quick ones here; so on Expedia you mentioned you're kind of still in the evaluation or testing mode on that, but ultimately I was just curious wouldn't you want as many kind of points of presence as possible? In other words what would you see on your end that would make you not interested in pursuing that kind of distribution or other kinds of distribution like that that would broaden your presence?

And then second unrelated question is can you just talk about how Stayz generates 20 some million in revenue with only 30 or so thousand listings, sorry I don't have the exact numbers I'm walking through the airport but I know some of those are subscription, but the majority are performance based and why those listings have such a higher revenue contribution than your PPB listings are expected to have? Thanks.

Brian H. Sharples

Yes, so just on the distribution question, so PPB listings that come directly through us right now are in 10%, so if we have a partner we'll have to split that 10%, somehow some way so call it even for a second, five and five, really the biggest thing is just to make sure that those bookings are additive to what we would have generated. I mean one thing that's different about a hotel and house is a hotel might have 300 rooms that can be booked whereas house, they got one Thanksgiving week, they got one Christmas week, they got one summer break, and so all things equal we would rather book them on our sites because we just make more money doing it and so that's really the big question that we're trying to answer there.

With respect to Stayz, there's two numbers in Stayz. One is the number of listings that they added to our business, because we did have quite a bit of duplication with our Australian business, so they actually had at time of acquisition if you just look to them as standalone company I think it was about 62,000 listings. There’s something in the low 60s, would be the base that you then play off against their revenue to say that that sound reasonable.

So Stayz by the way, did have a very high revenue per property, I mean much higher than any business we had because virtually all of their customers pay a base subscription fee that’s pretty low and then they charge basically a percentage on nightly rate within the business. And because of that and because they’re so good at booking those properties they actually outperform with their PPB model any subscription business that we have anywhere around the world.

So it really is a very attractive business and I think it is a very attractive lesson in how much we can monetize long-term other PPB listings around the world because they’ve been so good at it.

Mike J. Olson – Piper Jaffray & Co.

Okay. Thank you very much.

Operator

Thank you. Your next question comes from Dean Prissman from Credit Suisse.

Dean J. Prissman – Credit Suisse Securities LLC

Thanks for taking my questions. So I was wondering if you could update us on the depth of the consumer review content on your side, specifically what portion of listings have reviews, how important are all these reviews in terms of driving inquiries or both conversions now and what initiatives do you have in place to draw further reviews? Thanks.

Brian H. Sharples

When I talk about the focus on listing quality this year review is certainly one of those areas we’re going to have quite a bit of focus as a company because it’s pretty clear that properties that have reviews convert dramatically higher rates than properties that do not have reviews and not all our properties have reviews. I mean, when you think about we do add hundreds of thousands of listings a year and a lot of them are renting for the first time or renting for us for the first time and they start off kind of zero. At the moment, I think if you look total at the 890,000 listings we have around the world, about 55, 53, I think the exact number of percent have reviews.

So we’ve got a long way to go in terms of driving reviews. Now the problem we’ve had historically is that we have been part of the booking process because in a pure subscription business without any kind of close loop communication we have no way of knowing who is booking the property when and the best way to get reviews is to have that data and then be able to drive an e-mail, drive a phone call to get somebody to review that.

Now the good news is we have – a higher percentage of our property is now using our online reservation platform and for those properties we have that content and so we’re able to drive a more holistic review process. And as I mentioned in the script and something we didn’t do a press release on and didn’t talk about is, we had a very big release in Q4, which was our HomeAway Secure Communications platform where now we have effectively taken communications outside of e-mail and now brought those in-house.

We did it for security reasons for the most part, because it really stemmed the problem of phishing. It has almost instantly taken the growth of phishing down to zero. That’s the good news and that saved us some money. But it’s also going to allow us to now have a close loop where we’ll be able to analyze that back and forth and be able to see also even for customers who don’t need the payment platform when a booking takes place.

There are some other things we’re working that hopefully we talk about later in the year related to mobile that we think are going to really help the review process as well. So stay tuned for that, but it is a good focus this year because it’s really, really important to see performance of properties in our sites.

Dean J. Prissman – Credit Suisse Securities LLC

Great. Thanks.

Operator

Thank you. Our next question comes from George Askew from Stifel.

George Askew – Stifel, Nicolaus & Co., Inc.

Question again. Congrats on the strong quarter. If I heard correctly individual pay-per-booking listings are performing better than the property manager listings and I obviously returned to early days, but would you kind of explain what you’re seeing there? You mentioned before the property manager listings have maybe some clean data issues, location differences and what not, but is there more going there that we could kind of try to understand that?

Brian H. Sharples

Yes, I mean, so it’s funny. It always has been the case that listings that come from individual owners, at least initially without some work, come in at a pretty dramatically higher quality rate than things that come from property managers. Not because property managers don’t have the content, but because their systems when you acquire that content in bulk don’t create the same kinds of listings that a person who has a property that’s their own will create.

They’ll take the pictures themselves, they’ll create captions for all the pictures, they’ll write really detailed loving descriptions of their properties and so those listings just, as always, tended to do better individual owner versus PM and so that’s no different with PPB. But I think the other big thing that you didn’t mention is availability that when an individual owner comes to us and signs up on our sites, they’re typically relying on us to drive most if not all of their business.

A handful of them might also be on TripAdvisor or try another site, but the majority of them are sole sourced to us and so their calendar is effectively there for us to sell versus a property manager and especially in Europe who: a, has their own book of business; b, has their own very active website and marketing program against it; c, will distribute on lots of other companies, you take Interhome for example. So Interhome is now on our platform. That’s great. They are also on TripAdvisor, they’re also with booking.com, they’re also with 20 other sites in Europe you’ve never heard of that do this on a regional basis. And so it’s much more difficult to – there’s a cap on how many bookings you can drive because there’s just less availability there to do it with. And so, we know that will always exist.

Now the situation we’re in today is we knew that the individual listings would do better. They’re actually doing better than we thought at the moment. I mean, without a whole lot of work we’re seeing really great conversion in that area and the good news is that while those listings will come in slower because they come in every day, every week, every month we’ll have tens of thousands by the end of this year, I mean they’re coming in at a pretty decent rate and that’s great.

On the property manager side we still believe we’ll have a great business there and that we will be a fantastic distribution channel for these companies, but realize if they do, let’s say, 10 bookings per year per property they’ll be thrilled if we get them an average of one or two bookings a year. I mean that’s literally boosting their business by 10% to 20% and so we have different goals for those properties. Higher quantities, less bookings, but still a very good business for us, but still much work to do to get the conversion right.

George Askew – Stifel, Nicolaus & Co., Inc.

Got it. Thank you.

Operator

Thank you. Our next question comes from Chris Merwin from Barclays.

Chris Merwin – Barclays Capital, Inc.

Thanks for taking my question. So as you continue to grow your pay-per-book listings,

how do you prioritize getting traffic and bookings through Expedia and I guess potentially other OTAs where I believe you get the total rent [ph] share as opposed to just paying for the traffic through SEM and then keeping all of the revenue? And then also in the last three years obviously you’ve started to broaden your portfolio brands in Asia-Pac including the Stayz acquisition this past quarter. So I know there’s a very large and growing class of travelers in the region, but can you help us quantify the opportunity there either in terms of listings of their revenue? Thanks.

Brian H. Sharples

Yes, so on the traffic side, I would say at the moment we don’t even necessarily have the option, because as I said, we are developing distribution platform right now, that will handle the majority of our bookable percentage driven listings and that’s not going to be complete till the end of this year. So, in the meantime we're in test mode. We're going to test the SEM and we're going to test the ROI of that. We're going to hopefully know the ROI of the OTA piece at least with Expedia as a proxy for that.

And by the time we get to the point where that's really an option for us to decide whether to spend money on SEM or do it through distribution, I just think we’ll have better data on that and we're pretty data-driven people as the ROI of distributing through OTAs is better than us hauling off and doing a bunch of advertising, and we’ll do what's most efficient for our shareholders.

Now, we also though have to keep in account that there is a brand building element that also comes into play with advertising. So nearly someone like Booking.com for the first X years of existence, especially in Europe, it was just so heavy on SEM. Well, they got a real branding benefit from that. I mean, there is something that does come from being the number one or two paid search position on Google every time somebody looks for traffic. And so, we've got to incorporate that into the thinking as well.

When you're using OTA, you're obviously enabling another brand to be associated with the category and while that may be good for us financially there are some things we have to consider that might be negative about that as well. And I already talked about the margin piece.

In terms of Asia Pacific, unfortunately I think we're serving a similar position as you where we know it's really big. We see all of the travel stats where we’re expecting and the Asia Pacific market is expected to be the world's biggest traveler market within the next five years and growing tremendously fast, but unfortunately nobody in our category has done any significant research to really understand how many properties are there, what percentage of the people prefer this kind of travel. This kind of travel really hasn't been widely available. So, it's even a tough question to ask people because you're asking about future behavior based on availability that doesn't exist today that hopefully will in the future.

I mean, we do believe that Asia Pacific, I guess generally over the long-term and I would say five to 10 years is what I'm talking in terms of this range has the potential to be as big as Europe as the market for us, it’s just stays on geography, coast line, how many second homes are in those market and certainly travelers, but we just don't have the kind of data that we have in the U.S. and Europe to try to pinpoint exact numbers there. Yes, I mean I assume we’ll be the first to fund something there and do that fairly soon.

Chris Merwin – Barclays Capital, Inc.

Thank you.

Operator

Thank you. Our next question comes from Chad Bartley from Pacific Crest.

Chad W. Bartley – Pacific Crest Securities LLC

Hi, thanks. Two questions around listings. First, in terms of the quarter, if you back out the 71,000 pay-per-book and 40,000 paid listings, you get a number about 779. So is that the comparable number compared to the 712 in Q4 of 2012? And then looking forward, can you give us any sort of thought or kind of range in terms of maybe subscription listings growth or total listings growth that you might be targeting for 2014? Thanks.

Brian H. Sharples

Yes. So you’re right on the first part of the equation.

Chad W. Bartley – Pacific Crest Securities LLC

Okay.

Brian H. Sharples

On the second part, subscription growth actually is doing okay and kind of on par with last year. I think the biggest question mark we had is that when we launched platform PPB in Europe, we don't know if that's going to affect subscription growth more than the U.S. We had some data that suggest it could slightly and I’ll just give you that data for the fun of it. I think, we told you guys before we launch PPB because there are lot of concerns about cannibalization and subscription that we have done a survey of our U.S. customers and only about 3% of our existing customers had said they would be interested in switching to that type of a product.

When we do the same research in Europe we do get higher numbers, so depending on the country it’s anywhere between 6% to 7% of the post 3% still or really low number that’s a good news, but that we double, the interest level let’s say that we seen in the U.S. so for that’s one sort of delta on subscription growth.

The great news is that we’re seeing in the U.S. that it’s almost irrelevant because the number of PPB adds that are coming in are really significant so the growth in listings through our platform has truly been reignited and the good news is the listings have come to the platform are these owner driven listings they are refining or performing really well and I think we absolutely based on what we are seeing today have the potential for those listings over time to perform, as well as subscription listings do financially, and so that’s really, really good news, since for us internally the kind of rate of cannibalization was may be a bit of a non-issue.

The other wild card for next year I think is how many PM listings we allow in the site as I said earlier the constrain is not demand at this point the constrain is, that we really want to focus on listing quality, we really want to focus on driving, booking cities listings.

I can tell you that you should not expect to see we added $71,000 in literally six weeks of the fourth quarter and you don’t want to roll that forward because we are not going to be that aggressive. We moved very aggressively in the fourth quarter to get listings on for the first quarter which is the high booking season until the numbers will be lower than that, but there will be significant for the year.

I think probably the best way to look at it a very high level is we’ve always targeted 15% listing growth in the business we were shorter than that for the last four or five quarters. We are now clearly in the zone, where we will be to clear that hurdle very comfortably for the next several quarters. In fact the only quarter that I would worry probably the fourth quarter of next year because we had such an increase – such a dramatic increase in the fourth this year that’s a pretty high bar jump over. But, other than that we will easily clear 15% I don’t think it’s going to be much beyond 20%, so somewhere in that range is probably where we are going to wind up.

Chad W. Bartley – Pacific Crest Securities LLC

Okay, thanks Brian.

Operator

Thank you. Ladies and gentlemen at this time that’s all the time we have for questions. We do appreciate your participation. You may now disconnect.

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