HomeAway, Inc. (NASDAQ:AWAY)
Q1 2014 Earnings Conference Call
April 24, 2014 4:30 p.m. ET
Jen Ford – Director-Investor Relations
Brian Sharples – President and Chief Executive Officer
Lynn Atchison – Secretary and Chief Financial Officer
Lloyd Walmsley – Deutsche Bank
Doug Anmuth - JPMorgan
Heath Terry – Goldman Sachs
Chris Merwin – Barclays Capital
Chad Bartley – Pacific Crest
Mike Olson – Piper Jaffray
Jason Mitchell - BofA Merrill Lynch
Dean Prissman - Credit Suisse
Kevin Kopelman - Cowen and Company
Greetings and welcome to the HomeAway Incorporated first quarter 2014 earnings conference call. (Operator Instructions) I would now like to turn the call over to Jen Ford, Director of Investor Relations for HomeAway Incorporated. Thank you, Ms, Ford, you may begin.
Thank you and welcome to HomeAway first quarter 2014 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, April 24, 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-K filed with the SEC on February 26, 2014.
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?
Thank you, Jen. Good afternoon and thanks for joining us today. I'm very pleased to inform you that we've had a terrific start to the year and I want to begin by thanking our team for their continued focus and execution which has once again allowed us to deliver financial results ahead of our expectations.
Notably total revenue of $106 million was up 33% year-over-year and adjusted EBITDA of 26 million grew approximately 20%. Free cash flow for the trailing 12 months was approximately $98 million, up 9%. In March we completed a convertible debt offering with net proceeds of $344 million bringing cash and short-term investments to $770 million at quarter end. The convertible offering was very well received and we were delighted with exceptional terms of the deal. Having built HomeAway by both selective acquisitions and strategic investments along with a focus on the organic growth of the company the primary purpose of this financing was to provide firepower for additional acquisitions and investments we may wish to make in the coming years.
While we don't discuss specific targets, it is reasonable for investors to assume that our past behavior informs our choices future and target businesses that can open up new markets and geographies or provide us with complementary products and services to enhance our marketplace remain attractive to us.
Turning to our operating metrics for the first quarter. For the second quarter in a row we saw an acceleration in year-on-year listings growth. Our global websites now boast approximately 952,000 listings which is growth of approximately 28%, up from 25% reported year on year growth last quarter.
The health of our subscription business remains strong with renewal rate increasing to 76% from approximately 75% in the prior quarter on an adjusted basis, led mainly by significant improvements in the US where we’re currently operating at an all-time high. This uptick in renewal rate for second consecutive quarter on the heels of a successful pay per booking launch is extremely encouraging and reflects the negligible impact of pay per booking on our existing subscription business so far and little observable impact from outside competition.
FX neutral subscription revenue per listing for the quarter was up 11% worldwide as monetization of subscription listings continues to benefit from network bundles and tiered pricing with tier adoption rates reaching 39% of subscription listings on sites where tiered pricing is enabled.
HomeAway’s global network of sites attracted 245 million visits during the quarter, a growth of 18%. As discussed previously traffic growth is being impacted by our ongoing quality initiatives aimed at reducing the number of visits required to secure a booking. These initiatives include online booking quotable rates and continuous improvements to our search functionality to get people quickly to the right properties. We are monitoring demand closely, including proxies for things like active shoppers, mobile trends and booking activity on a site by site basis.
Based on our holistic view of relevant demand the Americas is healthy while European demand is not as robust as we would like particularly in France where the market appears to remain weak as evidenced by our tracking of overall Google searches in the vacation rental category. However we are comforted by the sequential uptick in our renewal rate in both the US and Europe which we view as a key indicator of customer satisfaction among our vacation rental owners and managers.
That said, particularly with the launch of pay per booking our team is intensely focused on driving incremental demand and bookings to all customers and to ensuring a healthy balance in the marketplace. As such it is our plan to use some of the over performance in Q1 to free up additional budget for testing the performance advertising in selected European markets over the coming quarters and this will be reflected in our revised annual outlook.
Now turning to our operational developments for the quarter. To advance our mission of making booking a vacation rental as easy as booking a hotel we continue to drive e-commerce, mobile and listing quality initiatives. With respect to the first of these initiatives, e-commerce adoption continues to gain momentum with nearly 224,000 listings that were e-commerce enabled at the end of March. Once again driving this increase in adoption was both the addition of online bookable PPB listings as well as continued adoption of payments and online booking on subscription listings.
Notably Q1s are the highest conversion of subscription customers to e-commerce enabled listings in our history. To further improve the user experience approximately 60% of all visits to our sites now experience our new fully responsive design that delivers and optimize the page format regardless of the device the page is viewed on or the device size. This is an area of increasing focus given the greater percentage of visits from mobile and tablet devices and we plan to roll out this enhancement to seven additional sites in Q2 bringing our coverage to approximately 80% of the traffic on all of our sites worldwide.
Continuing on the topic of mobile, during the quarter we announced our acquisition of Glad to Have You, the creator of the vacation rental industry's leading mobile guest management solution designed for property managers and homeowners to improve the way they manage and communicate with guests during their stay. This offering enhances the experience of staying in vacation rentals and pairs very nicely with our existing mobile product suite.
And now an update on pay per booking. I will start first with our integrated PPB product which is designed for property managers. In the first quarter we added approximately 35,000 performance-based listings with the majority being PPB listings from large property managers, increasing our PM penetration of total listings to 36% from 35% in the prior quarter. We continue to see strong interest or stronger interest than we currently accommodate for the integrated PPB product but as we discussed we’ve shifted our focus to improving the quality and conversion rate of existing PPB listings before getting too far ahead of ourselves on supply volume.
Much of our effort in the first quarter has been focused on test driven optimization to improve performance and functionality of integrated PPB listings and we have seen an improvement in conversion rates as a result. We’ve also identified distinct requirements to make these listings successful on our websites and have implemented initiatives aimed at improving these attributes, many rolling out as we speak. For example, many property managers have fairly rigid rules regarding check-in and checkout dates and we can improve conversion and traveler satisfaction by modifying our platforms to prominently display and utilize this information.
We’re still early in the launch of our integrated PM PPB product but are pleased with the initial wins on conversion and the team is firing on all cylinders to drive further improvement in the coming quarters. Keep in mind though that in general our expectation is that these listings will have less calendar availability compared to listings from individual owners and that combined with their still relatively low placement and sort order will mean they will not perform at the same level as their platform counterparts which I will touch on now.
Our platform PPB product which is designed mostly for individual owners or very small property managers and currently available on HomeAway and VRBO in the US continues to outpace our expectations. These platform generated PPB listings appear to be similar in property type, quality and availability to their subscription counterparts and generally average reservation amount is somewhat lower than that of our subscribers which is as we predicted but we are very pleased with booking performance to date and are optimistic about the long-term potential for platform PPB customers and for this business segment in general.
We’re on track now for a Q2 rollout of our platform PPB product to our largest European sites and look forward to expanding platform PPB to Homelidays and Vacationrentals.com in the back half of the year as those sites migrate to our global platform and as a reminder, this migration will also allow us to start selling tiered pricing to Homelidays and Vacation Rental subscription customers which will have a nice impact.
We continue to test targeted search engine marketing and have had early successes particularly in the US on our platform PPB product. As the reach of our PPB inventory increases we will continue to build out our performance marketing capabilities to drive incremental booking activity on our sites. We plan to expand our testing but as Lynn will discuss, we have not yet built a significant step up in SEM expenditures into our outlook.
Turning now to our efforts around OTA and broader distribution of our listings, our team continues to work together collaboratively with Expedia the optimize this initial pilot. Both HomeAway and Expedia would like to add greater volume of listings to this program, so we are accelerating internal development work to enable this sooner than we had originally planned and outside of Expedia we continue to make product investments to enable broader distribution of our listings in the future.
In closing, we’re feeling great about our start to the year and our continued ability to deliver against their financial and operating objectives. We’re excited about the opportunity within our category bolstered by continued growth in vacation rental inventory and awareness. A recent study conducted by HomeAway and the National Association of Realtors reported growth in US vacation home sales of 47% between 2011 and 2013. Equally exciting is 89% of vacation homebuyers indicate that they plan to eventually rent their homes.
These developments coupled with increased awareness and selection of vacation rentals by groups and families traveling together are quite encouraging. We're excited about what we can accomplish in the years ahead and confident that HomeAway is well-positioned to remain the market leader in this extraordinary category.
With that I will turn the call over to our CFO Lynn Atchison. Lynn?
Thank you, Brian. For the first quarter total revenue of 105.7 million was 33% higher than the comparable quarter last year with strong performance in both listing and other revenues.
FX neutral total revenue was up 31.8%. Excluding Stayz, Q1 revenue would have been 98.5 million, up 23.9% year-over-year.
Compared to our expectations, we had better performance in sales of e-commerce related products and listing revenue as well as a slight uptick in exchange rate. Listing revenue which increased 30.5% year-over-year to 87.3 million benefitted from an increase in the number of listings, higher average subscription revenue per listing and improvement in our subscription renewal rate.
We had approximately 952,000 listings at quarter end, or 28.2% year-over-year increase from 742,000 listings a year ago. As of March 31, 2014, 76% of our listings were subscription based representing an adjusted growth of 5.6%.
As a reminder, this metric continues to be impacted by consolidation and an adjusted growth rate would have been approximately 5 points higher.
Momentum continued with pay per booking listings. We ended the quarter with approximately 227,000 performance-based listings either pay per booking or pay per lead and inclusive of acquisition adding approximately 35,000 listings from the end of December.
In the first quarter our average revenue per subscription listing, excluding the impacts of exchange rate increased 10.7% year-over-year and we remain optimistic that tiered pricing and our network bundles will continue to contribute to pricing expansion and growth for the foreseeable future.
Other revenue at 17.4% of total revenue in the first quarter is comprised of ancillary revenues from owners and travellers, advertising, software and other items and grew 46.8% year-over-year. Our value-added services product which include insurance, product and revenue share for payment processing are key area of focus and continues to demonstrate robust growth. We are also pleased that both advertising and software contributed to the growth of the business.
Turning to expenses, total operating expenses increased 35.8% year-over-year. Much of the year-over-year increase reflects increased compensation expenses due to a higher number of employee as well as higher direct marketing expenses. We ended the quarter with 1588 employees, an increase of 280 employees year-over-year.
Expenses in G&A also include a one-time reserve of 1.8 million related to operating taxes outside the US. We expected this when we provided our initial outlook for Q1. Adjusted EBITDA increased 19.9% to 26.2 million or 24.8% of total revenue.
Our effective tax rate for the quarter was 36.5% compared to 2013 full-year rate of approximately 40%. Our book tax rate continued to be negatively impacted by options granted in countries where deductions are not allowed. Increases in state taxes in the US and nondeductible losses in travel mom [ph] among other items.
Since our estimate of pretax income for the full-year had been reduced significantly due to additional interest expense related to our convertible debt financing, fluctuations in our book rate may become more dramatic. Also noteworthy is that we have not factored in our research and development credit since it has not been and may not be reinstated. Last year our rate and overall tax liability was positively impacted due to this credit. We still expect that our cash tax payments for 2014 will be considerably lower than in 2013.
Other expenses include a 2.5 million loss associated with our exposure to changes in foreign exchange primarily related to our intercompany debt structure. For the March quarter we did not incur interest expense related to our convertible debt offering since the transaction closes the last day of the quarter. However going forward the term of the convertible notes we will record interest expense. For the quarter we had net income attributable to HomeAway of 4.4 million or $0.05 per share.
Moving on to our balance sheet and cash flow. At March 31, cash, cash equivalents and short-term investments totaled 770.5 million. For the quarter we generated free cash flow of 38.7 million resulting in 98.4 million of free cash flows on a trailing 12 month basis, 8.8% higher than the same period last year.
During the quarter we issued 402.5 million of senior convertible debt securities. Net proceeds received were 391.4 million. On the balance sheet we allocated the par value of the debt and the related deal cost to both liability and equity components based on their relative fair values. In addition, while the interest coupon is not significant at 12.5 basis points, we recorded a debt discount which equaled to the fair value of the equity component of the note which will be amortized to interest expense over the term of the note.
With the proceeds of the notes, we also paid 85.9 million to purchase a convertible note hedge which is expected to reduce potential dilution of our shareholders upon conversion of the noes. We offset some of this cost through the issuance of warrants to purchase shares of our common stock to 38.3 million in proceeds.
We are pleased with the outcome of the overall transaction when we consider the impact of the purchase hedge as well as the warrants, we achieved an effective conversion price for the convertible notes of $81.14 per share. The net impact to cash at the end of the quarter was an increase of 343.9 million.
Cash was also generated during the quarter from our operations as well as from proceeds through an exercise of employee stock option. Usage of cash during the quarter included our acquisition of Glad to Have You and capital expenditures to facilitate growth of the business.
We ended the quarter with 182.5 million in deferred revenue which is up 21.9% over March last year and up about 17.7% excluding the benefit of higher exchange rates compared to last year as well as deferred revenue associated with our acquisition of Stayz.
Now I would like to take a few minutes to look forward. We’ve raised our revenue outlook for 2014 reflecting strengthened business performance as well as higher foreign-exchange rates. As our level of expenses and investment the slight uptick for the remainder of the year is due to our net investment in Glad to Have You, also higher foreign-exchange rates and additional marketing spend to both accelerate the testing and performance marketing and support overall demand primarily in Europe.
As Brian noted, we’ve still not built into our outlook a significant step-up in search engine marketing to support the performance based listings but we are excited to get to a place where this will make sense. Once we have a more solid understanding of the impact on top and bottom line.
Turning to our outlook as presented in the press release, the ranges reflect revenue growth 24.2% to 26.4% for the June quarter and 24.5% to 26.6% for the full year, neutral to last year’s exchange rates. We expect adjusted EBITDA to grow 12.7% to 16.8% in the June quarter and grow 21% to 26.7% for the full-year.
And other assumptions to help you model, our foreign exchange rate for the euro of 1.37 for each US dollar going forward, amortization of intangible is expected to be 13 million to 14 million for the full-year, slightly higher than our outlook in February due to the addition of Glad to Have You.
Interest expense associated with our convertible notes will be approximately 13.9 million for the remainder of the year, of that approximately 250,000 will be paid in cash on October 1. Through the term of the notes, interest expense will increase modestly each full year until the debt discounts are fully amortized during the first quarter 2019.
Full-year effective book tax rate is now expected to be in a range of 38% to 40% with an increase on high-end due to lower pretax income estimates. Basic share count to be in the range of 93 million to 94 million and our fully diluted weighted average share count to be in a range of 96 million to 98 million shares. Capital expenditures in the range of 39 million to 40 million reflecting office expansion in Austin.
That concludes our prepared remarks. Thank you again for your continued support of homeAway. Operator may now open it up for questions.
(Operator Instructions) Our first question comes from Lloyd Walmsley with Deutsche Bank.
Lloyd Walmsley – Deutsche Bank
Wondering if you guys can give us a little bit color on the plans to ramp SEM spend, I know there's not a lot of that in guidance. But can you just talk about any color you’ve gotten from your tests there and then just stepping back, and looking at the structure of how you're spending, when you look at an OTA like price fine [ph], they are spending about 4.5% of gross bookings or just over 30% of gross profit in online advertising. When you look at your business, your ASPs are probably to be higher because longer stays and the keyword pricing is probably lower than the hotel side but the conversion rates are probably lower as well. Can you just give us some color on how we should be thinking about from a big picture?
Certainly, so this is Brian. So we have started doing some testing in 2014, because we now have some properties to test with, most of that’s being done in the US. We’re seeing positive results from that, as a result as I mentioned in the script we did choose to take some additional money for the second half of this year to get more aggressive about testing in Europe. All I can say at this point I'm certainly for competitive reasons not going to talk about things like what our cost per action is, or what our average booking amount is. But I would just simply say that the results are encouraging and we certainly expect that at some point over the next several quarters we will significantly ramp up that activity, it is not our plan to do that in Q2, so it’s not baked into the Q2 numbers and it’s not baked into the annual numbers either.
When we start doing it we want to make sure that it’s additive to both topline and bottom line and really as I said last call two things have to come together. One is every day we’re doing a better job with conversions. You want to get conversion to a point where the return on investment is very good and then everyday we’re also getting better at understanding where we need to advertise. There is no question that somebody like booking.com spends a lot more money in SEM than we do. Now we are also highly advantaged in our category and that we are the SEO leader by far. But so we may not have to spend as much as a percentage as competitors might have to in the category. But you'll certainly see us ramp up that spending over the next several years, it’s certainly our plan and I don't see anything right now that tells me it will be otherwise. But unfortunately we’re not prepared at this time to make any other statements about when we’re going to ramp it and by how much we’re just going to have to wait until we are ready to do that.
Lloyd Walmsley – Deutsche Bank
And then I guess just operationally can you -- are you guys continuing to add people to those marketing groups and then are you bringing in people with a lot of expertise or mostly just building out through internal people?
No, you bet, we continue to hire somebody, we actually did just bring in a very strong new resource into that SEM group and the big part of our marketing investment this year to be honest is a lot of headcount and that we’ve really beefed up that organization and beefed that up enough that in the coming years it won’t be about headcount, it will be about direct productive marketing spend.
Our next question comes from Doug Anmuth with JPMorgan.
Doug Anmuth - JPMorgan
Just two things guys, first you talked about using some of the 1Q outperformance investing more in some international markets and in pay per booking, can you talk a little bit more about, how you’re looking to do that over the coming months and then also how much more upside you think in terms of tiered pricing and network bundle benefit on the core subscription business?
Yes, so in terms of marketing investments the comment was related the fact that we had a certain SEM testing budget baked into our numbers this year. We operate in a whole bunch of different countries, so every time you test in another country, I think independent and added expense, so we started off with that budget in our biggest country which is the United States. And we’re seeing enough success there that we want to accelerate some of the testing that we might have planned to do later in the year in Europe and get to that a little more quickly and hopefully if we can get it more quickly then we will be able to get into that performance marketing game quicker. So that’s really all it is, it’s just expanding our testing effort into some additional countries.
In terms of tiered pricing, as we look at it internally I have to say we continue to be really pleasantly surprised at how well that continues to perform for the company. I mean the sites, if you take the average ASP growth rate of the sites that have tiered pricing that growth rate is still pretty similar to the original numbers we gave you guys when we launched tiered pricing for our first site, HomeAway in its first year. And so that's a great thing. Tiered pricing still isn’t in all of our sites and coming very very soon, we have the launch of tiered pricing our Homelidays European network and a tiered pricing on the vacationrentals.com subsidiary as well. And so we’re going to have now a higher percentage of our volume exposed to tiered pricing as well.
As far as looking at data there, our customers continue to get a tremendous value and the people who tier up are getting even better value than the people who didn't. And if you look at that value equation it continues to be 30, 40X return dependent on the customer and because of that, we continue to see people just buying a little bit more every year and based on that value equation without having to raise prices, we see tiered pricing benefiting the company for the foreseeable future. And then at that point we obviously have the opportunity to raise prices if that’s what we need to do if those tiers get fully penetrated, so still a very good new story for the company.
Our next question comes from Heath Terry from Goldman Sachs.
Heath Terry – Goldman Sachs
I am wondering if you can give us a sense beyond just the pay per bookings side of things, what kind of adoption you're seeing in your existing subscription business for the value-added services whether it's online booking, online payments, the interim side of things, both on the listings side as well as on the renter side?
Yeah, it's been a very good story over the last couple quarters. So if you sort of build from a baseline of, we had a bunch of subscribers who weren’t e-commerce enabled, then our first-order of business was to get them on payment so that we had this opportunity and that moves fairly sluggishly at first because there weren’t a lot of people on the sites who had payments enabled and so the incentive wasn't quite what we predicted it would be once momentum built in that category. And sure enough over the last couple of quarters we have seen an acceleration in adoption of payments but then beyond that people who choose payments then have a choice to make their properties online bookable or not, and we’re seeing even steeper curve now in the last quarter and the quarter before that, and people that are moving from payment enabled to online bookable on the site. In fact, I heard a stat this morning I hadn't heard before about the percentage of our payment enabled transactions that are now going through our online booking button. And while that isn’t a stat, we want to give out surprisingly large, it is a very, very high percentage right now and that's great.
In terms of attach rates of products we’re doing good there, it continues to accelerate but there's a lot of upside as well. I think – so we have three potential products that we can attach right now to the transaction. The average online transaction has something like 0.36 of those products attached to it if you will. So to get to a hundred percent penetration it would be going from 0.36 to 3 and so that gives you a sense of the upside. But that 0.36 is up from last quarter which is up from the quarter before. So we continue to run ahead of our own expectations for both payment enabled people who are grabbing book at buttons and the attach rates for those products.
Our next question comes from Chris Merwin with Barclays.
Chris Merwin – Barclays Capital
For the pay per booking, since you have that on a platform today, could you help us please just quantify the split between property managers and by owner? I know the by owner listings tend to convert better and a bit stickier, so just trying to get a sense of what the mix is today and where that may be going longer-term? And also from a competitive standpoint, how you think about targeting both of those markets just given what I imagine is, is more competition on the property manager side of the business. Ad just a second question on the regulatory environment, I know there has been some news out there about governments like San Francisco suing sites that offer short-term rentals and obviously that mainly affects a very, very small percentage of your inventory as compared to [indiscernible] for instance. But just curious how you see this playing out over time and what implications if any are there for HomeAway?
So let me start with the pay per booking question, so we actually aren’t providing a split today but I will tell you the majority of the listings are property managed simply because we have been driving some big, big property management deals. And I think for the next let’s call it four to five quarters, the number of property management listings coming on the site are going to dwarf the number that are coming into the platform. But long term that probably will not be the case because there are substantial numbers of new properties coming in now every quarter, the platform, it’s just that when you're turning on 10,000 property deals and 30,000 property deals, there is going to be a big difference between the two.
So again, while we don't give those numbers just a majority of them are certainly property managed today. In terms of targeting, attention question, I am at on – also, if I think of the management front the reality is today that we have more interest from suppliers than we have the ability to put them on our site. So the pipeline is very good and we can add probably as many or as little properties as we want to add per quarter for the next several quarters. And that will depend and everything from the timing – and these integration as the property manager have a lot of things they have to do as well. So you have a lot of things in process but sometimes you’re dependent on those guys, sometimes it depends on the markets they are in, and whether or not we want to put those properties on the sites. And sometimes it's pricing raising [ph] a big deal over a little deal or European deal over US deal. But you will continue to see every quarter very impressive numbers coming in for the foreseeable future on the PM side.
On the owner side, there is really -- in terms of targeting what we've done is we now have a marketing page on our sites that says, you can either pay as a subscription or you can sign up for free. And we have a general traffic marketing funnel that comes into our company that’s quite large and there is just a good percentage of those people that now convert on PPV who seem to be incremental to people who convert on a subscription basis. And so there's not really much more to do there other than just to continue to perform well and then more people come to our sites and more people sign up. One specific thing that we’re certainly doing is launching platform PPV on other platforms where it doesn’t exist today. So at the moment we’re only bringing in properties in the US and VRBO ad HomeAway, that’s the only place it is. In Q2 we will be adding to two or three biggest sites in Europe and beyond that over the course of the year we will be adding it to other sites as well. So I think we’re being sufficiently aggressive on both fronts. And when you see on an adjusted basis our listing growth right now year on year is running about 31%. We don’t need to push it much higher than that because that’s how you screw up the marketplace like this is by pumping in too supply and outperforming your existing customer. So I think we’re in really good shape from that perspective.
And your question was about regulations, obviously the regulation today seems to be far more prominent in cities around the world, so yes it affects and [indiscernible] more than us because our business isn’t as dependent on cities as they are, so it’s a big part of the model. That said that we are very engaged in government relations activities in most of the cities and we certainly want to make sure that our customers have the ability to operate legally, our company has slightly different liability profile than BNB [ph] because we're are an agent, not the merchant, meaning we don't collect money on behalf of our customers, our customers collect that money directly even if they are payment platform customers, whereas B&B does directly sell the products. So they have some other things that they have to think about that that we don't have to think about as hard. But we all have the same goal which is obviously to make sure that cities promote fair regulations that allow people to continue to operate and make money off of their real estate investments, and I think in most parts of the world that sentiment will prevail. But in certain places like San Francisco, New York and Paris, it's very contentious right now and we can't necessarily predict what the outcome is going to be.
Our next question comes from Chad Bartley with Pacific Crest.
Chad Bartley – Pacific Crest
I was hoping to get a little bit more color on the performance listings breakdown, going back Q4 I think you talked about pay per book being around 111,000, can you be more specific what that number was for Q1?
Didn’t we include the chart and I just want to make sure we included a chart in the press release.
Total performance listings were 227,144, that does include some pay per lead that we had before that. And I don’t know if you provided a breakout Lynn without pay per leads?
Not usually except there is a pay per lead has been running about 7% or 8% of total listings generally but we don’t break it down separately.
Chad Bartley – Pacific Crest
I guess I will ask in other way, Brian, I think you said the majority of the roughly 35,000 performance-based listings increase sequentially was pay per book but again I was just trying to get a specific number.
That’s right. Just to echo that, I think you will see that the pay per lead will gradually move over the pay per book. So that’s why we are managing the business, we are not really focused on increasing the pay per lead listings.
Chad Bartley – Pacific Crest
In terms of kind of traffic growth or visitor growth trailing listings growth, should that be temporary and if anything corrects itself in Q4 of this year because of comps and certainly with your marketing efforts?
What’s more important to us is our measures of kind of unique shopper growth, because as I alluded to in the script, traffic growth is getting to be a bit of tricky metric for us. Historically it took about 10 visits for somebody to get a booking on one of our sites, because of the inquiry process, because the information wasn’t right, because we didn’t have book it buttons and those kind of things. So as we make the sites easier to use for customers it’s going to require less visits for somebody to book. I mean 10 is not a good number historically, that’s not a number to be proud of, we would like somebody to be able to secure a booking with an average of 2 visits or 3 visits to the site or something like that.
So on one hand we have a bunch of improvements we’re making to our business that on a year-on-year basis are decreasing the number of visits because people don’t have to come as often and then on the other hand we’re making all these conversion improvements too. So what we’re starting to focus on internally are looking at shoppers, people who are unique shoppers on the site and that metric is actually quite a bit healthier than the traffic metric that we currently report. Some day we may report it, we’re just starting to compile this data internally and unfortunately we don't have good comps to last year and the year before and sort of the day we do, then I think we will introduce that. But that’s – so what we believe have to continue is that that unique shopper growth does have to keep up with the listings that we’re putting on our sites. And that equation is far more imbalanced than what you see if you look at the traffic number.
Our next question comes from Mike Olson with Piper Jaffray.
Mike Olson – Piper Jaffray
Couple of quick ones here, when we look at the change in the deferred revenue for Q1 it appears that year over year bookings growth may have exceeded 30% which looks like maybe a level you haven't seen for a couple years. Does this sound like in the ballpark and is there any Improvement in my travel planning activity in general, or something like that that you're seeing that might be driving that? And then the second thing, is when you mentioned that you're seeing more challenges in Europe relative to the US, were you saying that the market in general is softer that you're seeing more competition there or is it the combination of the two?
Let me take the second one, Lynn, you can try to take a stab at the first one. We’re seeing weaker traffic growth in Europe than the US but a lot of blame can depend on France in particular, so France is particularly weak within Europe. I was there four, five weeks ago for several days and there is no question that the French economy is struggling compared to other EU countries like Spain and Germany would seem to be in recovery mode. In France, I remember I met with several reporters, I did a TV interview and a couple of magazine interviews and the first question was inevitably how is your company faring through the current French financial crisis? And I didn't realizing being back here in the US that it was as big a deal as it was when I was out there. But that's in particular one of the issues that I think we face out there is France and then generally the EU is a bit weaker than the US. I don't think it's competition, one of the great shade of this quarter was full point increase in renewal rate from last quarter. And I think as I mentioned in the script in the US, the renewal rate is actually the highest ever which is a competitive stat to be aware of but in Europe renewal rates were actually up too.
And so when we see renewal rates trending up, that’s typically an indication that there is really not a big competitive issues, because what a competitive issue would do is it would actually take bookings away from our customers and that has not happened.
So the calculations that we did, we split that deferred revenue year over year which also backs out the impact of FX which can be confusing since we are reevaluating the balance sheet each time as well as taking out the impact of Stayz and acquisitions which get put in. That number year over year is 17.2% increase and that is a slight bit higher than it was at the same number apples to apples last year. So we are seeing some recovery in our subscription business there.
Now just let you know from a seasonality standpoint, we do have higher levels of deferred revenue in the March quarter, because we are collecting a lot of renewals and new listings at this time of the year. But year over year the increase was 17.2% and it was 16.4% at December, so we are pleased with that.
Our next question comes from George Askew with Stifel.
George Askew – Stifel, Nicolaus
Would you please characterize for us in a little more detail the travel bookings that you're seeing from pay-per-booking listings, both what you actually saw in the first quarter, which would drive recognized revenue; and then how you -- what you're seeing in the pipeline going forward, please?
Right now, we are still – we brought on a lot of supply, I mean we are still very, very early days on conversion and so what we are seeing is that for the platform pay per booking listings that come on in the US, that’s converting very nicely and as Brian mentioned in his commentary, very pleased with those. Those, they came on at the very end of last year the integrated PM booking particularly in Europe, because we are being very careful and cautious about where we put them in search results and other factors, they’re really not converting where we want them to convert yet, which all ties back to why we are waiting to get that conversion where we need it to be before we turn on significant SEM spend. So the numbers aren’t real big enough for us to break them out.
But the momentum is strong, so conversion is going up across all three types, conversion of properties that come in through the platform is way ahead of what we thought they would ever be honestly. Conversion as Lynn said, PMs in the US, IPMs has been better than Europe but that’s much more a function of the size of the PMs. So in Europe it’s important those guys that we integrated in the fourth quarter are the big companies that are on everybody site, they are on booking.com, they are integrated with 10 other different online booking companies in Europe and so they just have less availability.
In the US doesn’t have that dynamics, and we bring on PMs in the US we see much higher conversion rates, but that will also be true in Europe when we bring on property managers that aren’t those top 5 companies that are sophisticated enough to distribute their listings in a bunch of places, and really where we benefit the most is where we either have exclusivity or near exclusivity, somebody sitting on two or three other competitive sites, no big deal. But if they are in 10 or 20 other places the opportunity for us to earn revenue from them is lower. But all trends in the business Q to Q are upward in terms of conversion and in terms of dollars books, gross merchandise value, net to HomeAway, we’re just not breaking those out yet. But it's all fantastic.
George Askew – Stifel, Nicolaus
The pipeline looking ahead to here in the second quarter and beyond, is that above what you were looking for or expecting?
It’s more than we can handle, so yes, it’s very good.
Our next question comes from Nat Schindler with Bank of America.
Jason Mitchell - BofA Merrill Lynch
This is Jason Mitchell here for Nat Schindler. I just wanted to ask what was the impact of the Stayz acquisition on your increased visitor traffic. And then outside of the Stayz acquisition, what are the drivers behind your traffic growth right now?
So I think it’s consistent with last quarter, I think our traffic growth without Stayz was around 12% and – I am sorry, what was the second question about?
Jason Mitchell - BofA Merrill Lynch
Outside of Stayz acquisition, what's kind of the drivers behind your traffic growth right now?
Well, again what I discussed a few minutes ago is that the headwind on taffic growth has a lot to do with site improvements that make it easier for people to find and secure booking on our sites with less visits. Again the average person historically had taken 10 visits to secure a booking on our site. So as we continue to improve our sites that is going to affect visit growth, the traffic metric is not unique visitors, it is visits that’s what we report. Internally we look at unique visitors, unique shoppers, unique inquiries and other metrics that are far healthier than that number you see, we don't report them. But that's why in terms of talking about that specific traffic number it’s not something that I want to go into much detail about because in the US, as I said our demand is more than sufficient, in Europe there are pockets of places where it's not. But on balance our customers in both the US and Europe are renewing in higher rates and that is because they are seeing their pipeline filled and then from an inquiry per listing and a booking per listing perspective we’re doing a terrific job and that’s what we’re in business to do, not manipulate visit numbers which should be pretty easy to manipulative if we wanted to, but we’re just doing the right things for the business and sometimes that has a negative impact on a stat that you guys look at.
Our next question comes from Dean Prissman with Credit Suisse.
Dean Prissman - Credit Suisse
Thanks for taking my questions. So with Glad To Have You I realize it's early, but do you see a broader commercial opportunity to integrate legion features, or third-party marketplaces that provide, say, restaurant reservation through delivery and transportation services? Then given that PPB is likely to continue driving significant listing growth, when you think about the property search and discovery features of your sites, how much room for further improvement do you think still exists, and can you talk about some of the leverage here?
Yes so two great questions, on Glad to Have You, I mean right now we're focused on getting it integrated into the HomeAway app and we’re going to try to use it to create an awesome experience for travelers when they're in market primarily so that we can embed our brand into their brain for the next time and they go to purchase vacation rental travel. That said the platform is absolutely built to accommodate those kind of things, it already allows for owners to put in reviews of restaurants and recommend things and places to do. So yes, at some point it’s a natural bridge to your offering coupons or simply distributing other services, maybe with some kind of percentage take rates, that capability doesn’t fully exist today but it's in the long-term plan for sure.
In terms of room for improvement, oh my gosh, there’s so much room for improvements still, probably the biggest single thing with HomeAway from, I’d say from even the competitive perspective is that we do such a good job for our owners that that frankly a lot of our owners are booked a lot of time and that means that often owners that are not on our payment platform will get inquiries for times when they are book ed. And there is no economic benefit for them to respond and they don’t often. And so response rate is one of the biggest things that does affect our customers. If our customers – if our travelers could go to the sites and know that every calendar on our site was fully up-to-date and accurate, then the number of visits to secure a booking would go down by orders of magnitude which would look really crappy on the traffic front but would be 100% the right thing to do for our business. So we are in fact very hard at work to make that a reality and in the end what we really got to do is create an incentive for our customers to keep their calendars up to date and create an incentive for them to respond quickly to travellers. So we are getting said in the coming quarters to rollout a new measurement system that does in fact measure and report owner responsiveness on our site so that travelers will be able to see specifically not only how quickly somebody responds but how accurate their calendar is. So if somebody consistently when their calendar says they are open, responds and says they are not open, that’s a negative thing that we’re going to start measuring and I think very quickly we’re going to create an incentive system that improves that experience dramatically and that’s going to be a very big deal and we’re excited about it.
And this is -- we didn’t have that capability last year, this capability comes from us taking all the communications and bringing them in-house with our HomeAway secure communications platform. You may recall we did that primarily as a trust and safety measure to help stave off phishing but the real benefit of us now being able to monitor all communications is that we can now track these things, report these things, create an incentive structure, so people fix these things and it’s going to be a vast, vast improvements to our sites and the last thing I would mention is just the penetration of pay per bookings keeps going up every week, every month, every quarter. And when listings are booking enabled on our sites, all that stuff happens automatically, the calendars are automatically updated and when people come to the site they can hit the button and know when it’s available, when it's not. So that sites will just naturally get better and better over time as that penetration goes up, and the good news is that, penetration rate is accelerating and we don’t see any -- insight to that too. I don’t know if we reached a tipping point but we certainly reached an inflection point where we've now got enough listings enabled on our sites with the pay per booking that it is causing, the people who don't have it to sign-up in greater volumes than they have in the past. It’s something we predicted a couple years ago and it seems to be coming through.
Our next question comes from Kevin Kopelman with Cowen and Company.
Kevin Kopelman - Cowen and Company
Couple of questions on expenses. First on gross margin, you guys have had some expansion there. Are there any key drivers behind that? On the other hand, R&D you're clearly investing a lot. Can you just talk about what your plans are for R&D investment as you go through the year?
Sure, we have seen some expansion of gross margin, that’s really been a function of the our business model and the revenue growth, whenever we increase revenues from subscriptions and from pay per booking it doesn’t automatically require additional cost of revenues and so – that’s kind of more of a step function –
The strong renewal rates helped too because there is no investment required.
Right, so cost of revenue is the biggest component and -- customer service and so you will occasionally see us take that kind of step it up to be ready for new product development, new enhancements coming up but it doesn’t necessarily, then you can stay at that rate and really leverage it for a long time. So it’s really the beauty of our model which is creating that leverage.
In terms of product and technology, it is the continuation of everything that we are really doing in terms of our investment. There are investments to continue to migrate some of our websites to the network, continuously enhancing features of the pay per booking, rolling out platform pay per booking in Europe and other places and enhancing reservation manager in our payments platform. I mean we could go on and on, so we’ve got a very, very full roadmap of items to invest in around the world.
That said, so this year, as a percentage of revenue and it has been true for the last couple of years, R&D or technology spending, has been going up. I will tell you that we feel pretty adequately staffed, and we also are now on the backside of all these customer migrations to our platform that consume a ton of resources, and it is definitely our expectation 2015 and beyond that we are going to start leveraging that category and in putting a good deal of that money in the marketing, I think the area where we need to grow going forward which is Lloyd’s original question at the beginning of this, was to grow marketing as a percent of sales. But technology has in some ways prevented us from going that for the last few years, because it was more important for us to get the products right and once we get products right, then you go out and market the heck out of it. That’s the strategy of the business going forward.
There are no further questions in queue at this time. This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.
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