HomeAway's (AWAY) CEO Brian Sharples on Q2 2014 Results - Earnings Call Transcript

| About: HomeAway, Inc. (AWAY)

HomeAway's. (NASDAQ:AWAY)

Q2 2014 Results Earnings Conference Call

July 24, 2014, 04:30 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 second quarter 2014 earnings conference call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jen Ford, Director of Investor Relations. Thank you. You may begin.

Jen Ford

Thank you, and welcome to HomeAway's second quarter 2014 financial results conference call. By now, everyone should have access to the earnings release, which was distributed today at approximately 4 p.m. Eastern Time. 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 meanings 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, July 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-Q filed with the SEC on April 30, 2014 as well as in our earnings release.

HomeAway undertakes no obligation to update any forward-looking statements, except as required by law. On this call, we will refer to non-GAAP measures including adjusted EBITDA, free cash flow, non-GAAP net income and FX neutral revenue. These measures, when used in combination with GAAP results, provide us with additional analytical tools to understand our operation.

We have provided reconciliations of non-GAAP to GAAP measures in our earnings press release distributed earlier today which is also available on the Investor Relations tab of www.homeaway.com. Unless otherwise stated, all growth metrics provided are reported on a year-over-year basis.

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

Brian Sharples

Thank you, Jen. Good afternoon and thanks for joining us today. I’m pleased to report yet another great quarter, once again delivering financial results of over expectations. We also achieved the significant milestone in the first half of the year reaching one million live listings across our global network of sites.

Due to our industry leading breadth of vacation home inventory, it's now easier than ever for travelers to find and book vacation with HomeAway. This achievement not only highlights our exceptional growth and scale but also validates the health of the broader vacation rental category.

Turning now to our financial and operational results for the quarter, total revenue of $114 million was up 32% year-over-year and adjusted EBITDA of $33 million grew 33%. Other revenue which includes sales of traveler products through our e-commerce initiatives grew 50% year-over-year.

Free cash flow for the trailing 12 months was $114 million, up 25% and we ended the quarter with $793 million in cash and short-term investments. As mentioned we surpassed our one million live listing to end the quarter with approximately 1,040,000 listings up, an impressive 34% over the prior year and acceleration from the 28% growth reported last quarter.

Subscription renewals remains strong albeit it’s slightly down about a half point in the second quarter. Renewal rates in the U.S. are steady while Europe has seen some pressure in a few markets. We’ve seen a sharp increase in PPB properties in Europe while demand has not been growing at the same rate as supply and that is likely a contributing factor. I’ll discuss more about our plan to accelerate traffic growth in Europe momentarily.

As a result of our efforts to offer tiered pricing and network bundles to subscription customers, FX neutral subscription revenue per listing for the quarter was up 11.5% over the prior year. This is a reflection of increasing adoption of tiered pricing as well as strong sales of network bundles. HomeAway’s global network of sites attracted 230 million visits during the quarter, reflecting year-on-year growth of approximately 14%.

We continue to monitor demand closely and while the Americas region continues to be healthy, European demand during the second quarter is still lagging behind our internal targets. In light of this, during the second quarter we implemented additional demand generating activities including increased marketing efforts and have already seen early signs of success of hitting a low point in April, European traffic growth improved sequentially in each subsequent month and we continue to reserve the same trend in July.

As a reminder, we also believe one of the factors impacting our traffic growth is the 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 for them.

But despite that, we do believe increased marketing and features warranted especially given the significant increased in listing growth we’ve experience as of late and the corresponding revenue opportunity from pay-per-booking booking. So I’ll come back to that in a minute.

Now turning to product and operational developments for the quarter, in the second quarter we achieved the major product milestone when we integrated Homelidays, one of our largest brands in Europe on to our global platform. This accomplishment means that approximately 84% of all inventory companywide is now available on our global network. In addition it’s creating significant operating efficiencies in our organization. This migration creates the opportunity to offer tiered pricing now to tens of thousands of Homelidays customers in the coming quarters.

To advance our mission, to make 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 approximately 321,000 listings of e-commerce enabled at the end of June.

This addition of nearly 100,000 e-commerce enabled listings marks the single biggest quarterly increase of e-commerce enabled listings in our history. Once again the increase in adoption was driven by both the addition of online bookable PPB listings as well as continued strong adoption of online payments and booking by our subscription customers.

As always, we’ve had a lot of activity on the mobile front during the quarter. Today more than 80% of visitors to our sites globally experienced fully responsive design and it is an area of increasing focus given a greater percentage of visits from mobile and tablet devices.

In addition to Homelidays getting our fully responsive platform, in June we were named by the search agency is one of the top mobile experiences in the travel category and we’re the only non-hotel branded website to make the Top 10. We’re also very excited to be rolling our glad mobile guest management solution for our rent by owner customers very soon.

Turning to pay-per booking, we added approximately 70,000 new performance-based listings in the quarter. I’ll start first with our platform PPB product, which we rollout to three additional sites during the quarter. Our platform PPB product which is design for individual owners and small property managers is currently available on homeaway.com and VRBO in the U.S. as well as three sites in Europe including [Avatel], [indiscernible] and HomeAway UK and continues to out perform our expectations.

As we have seen in the U.S. European platform generated PPB listings appear to be similar in property type quality and availability to their subscription counter parts. In Europe we had plan for and have observed a slowdown in new subscriptions signups from owners following the introduction of the new free commission-based product.

However and also as expected total new listings from owners are up modestly relative to the trend prior to launch by any measure the PPB program has been a huge success that generating new listings in both Europe and the Americas regions. As the booking performance on our platform PPB listings, we continue to be very pleased with performance in the U.S. and although we’ve just launched in Europe the early results are also encouraging.

We’re very optimistic about the products long-term potential to generate profitable revenue from both existing traffic and performance marketing activities and we’re still on track to expand the PPB platforms to Homelidays, vacationrentals.com and some of our smaller European sites in the back half of this year.

I’ll turn now to our integrated PPB product which is design for large property managers and comprise the significant portion of the new PPB listings added in the past two quarters. As a result of the PPB program, overall PM penetration of total listings on HomeAway sites globally increased to 39% from 36% in the prior quarter.

We remained focused on booking conversion with test driven optimization programs and product enhancements to address the unique needs of these listings. In general U.S. integrated PPB appears to represent a more profitable opportunity in the short term and we’re already deploying marketing dollars against that inventory.

We remain optimistic about our ability to monetize European integrated PPB listings, but we’re planning to be cautious about spending meaningful performance marketing dollars against this group until we’ve optimized conversion beyond where it sits today.

Turning to our merging distribution strategy in particular our initial pilot of vacation rentals on Expedia, we’re encouraged by our progress and track this significantly increased vacation rental inventory shown on Expedia by year end which I think we talked about last quarter.

As a vacation rental category becomes more mainstream and its popularity increases we believe that interest from OTAs and other potential partners will only continue to grow. As a final item on the subject that has been a topic of much speculation by our investors and analysts over the past few months and that’s marketing.

I’d like to start by announcing the hiring of our new Chief Marketing Officer, Mariano Dima, Mariano joint us most recent from Visa where he was CMO of Visa Europe and responsible for strategic marketing, brand communications, advertising sponsorship, insights and analytics across about 22 countries.

Mariano seven year tenure with Visa Europe was punctuated by the company’s wildly popular 2012 Olympic-integrated marketing campaign “Life flows better with Visa” and features series of ads including "Running Man" with Usain Bolt. Under Mariano the company is also recognized BrandZ as one of the Top 10 most valuable brands in the world. In 2013, Mariano has consistently been recognized and Marketing Week’s Power 100 is the one of the top marketing professionals in the world.

Mariano is a season marketing leader, who understand the value of developing a consistent and impactful global integrated marketing program to enhanced traffic, brand awareness, and conversion including combination of brand advertising, performance marketing, [SCO], PR and database marketing.

He’s also highly experience globally and particularly in Europe which is one of our most important and certainly one of our most competitive market. Mariano will start in September and we’re looking forward to adding his tremendous experience insight and leadership to our senior team.

To be clear it is absolutely our intent to get more aggressive on the marketing front. Beyond just brining a new CMO that means we plan, allocate more working spend to marketing over the next several years. We intent for these increases in marketing expenditures to be across the board as we plan to invest in a fully-integrated approach to build our brand equity, improve conversion and drive more traffic profitably. Based on our testing to-date we now know that optimal tactics may differ by region or customer type.

In some regions and again some routes of our customer base performance marketing will provide the highest return. In other regions or with different segments of our customers we may get a better bang for buck out of brand advertising or database marketing.

With the hiring of Mariano, we expect to of our game substantially on the marketing front. And for competitive reasons we aren’t going to telegraph our specific strategies. And while we’re already in a path to increased expenditures in the second half of this year, it will take time under new leadership to craft the specifics of our multi-year plan.

However and because I know it’s very important to our investors, I want to provide some high level insight and to how we’re thinking about the impact of marketing on our financial model generally at a 100,000 foot level. Our belief is that we can create significant increases in our marketing budget and activities without having a major impact on margins and of course the goal of any increased marketing activity from our perspective is to increase absolute EBITDA dollars and drive higher revenue growth.

We’re able to do this because our business has very high gross margins and that provides a lot of cost leverage as we grow. For the past few years, we’ve been investing this operating leverage in product and technology in particularly because of the monumental task of integrating our global sites and developing an e-commerce platform and much of that work behind us we’re now planning to invest a good portion of that operating leverage in integrated marketing.

Over the coming years in addition to allocating more of our existing marketing budget to working spend, we expect the direct a higher percentage of our growth in overall expenses toward sales and marketing. It is our goal in general to stay the course on our pattern of EBITDA delivery to the street. And I hope you see this today in our outlook for the rest of 2014 which does include as I already mentioned a step up in integrated marketing for the second half of this year.

To provide even more clarity there maybe some temporary margin compression in 2015 much like our revised outlook for 2014, but to put it in perspective our expectation is that it would be no more than a point or two. And again we would only do this with the objective of raising revenue growth and delivering more absolute EBITDA dollars to our shareholders over the next few years.

Of course it is not our objectives to give 2015 outlook at this time and as is customary we will provide a more specific 2015 outlook on our Q4 earnings call in February. In closing I’d like to say that I am genuinely more excited than I’ve ever been about the future of the company.

We’ve got over one million listings worldwide and growing. We’ve completed the trickiest parts of our technology migrations and now have a true global network. Our e-commerce initiatives are accelerating nicely which improves our consumer value proposition daily.

And finally, we have a new leader and focus on marketing which will strive to make HomeAway one of the most recognized and respected travel brands in the world. I want to thank you as always for your support and I’ll now turn the call over to our CFO, Lynn Atchison. Lynn?

Lynn Atchison

Thank you, Brian. For the second quarter total revenue of $114.3 million was 31.9% higher than the comparable quarter last year with strong performance in both listing and other revenues. FX neutral total revenue was up 29.9%, excluding Stayz, Q2 revenue would have been 25.1%year-over-year.

Compared to our expectations, we had stronger performance primarily in other revenues including sales of e-commerce-related products as well as software and advertising. Listing revenue, up 28.7% year-over-year to $94.5 million benefited from an increase in the number of listings, higher average subscription revenue per listing and increased performance-based revenue

We ended the quarter with approximately 745,000 subscription listings and 296,000 performance-based listings. This reflects mix growth of 5.5% and subscriptions over last year. And as a reminder this metric continues to be impacted by consolidations. The adjusted subscription growth rate is approximately four percentage points higher.

Other revenue of 19.7% increased 49.7% over last year and was 17.3% of total revenue in the quarter. Growth in this category is driven largely by revenues from e-commerce as more transactions occurred on our platform. Software and advertising also contribute to growth and other revenue in the other revenue category.

Turning to expenses, total operating expenses increased 29.9% 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 1,705 employees, an increase of 297 employees year-over-year and an increase of 117 sequentially. The largest increase was in sales and marketing employees.

Adjusted EBITDA increased 32.7% to $33 million or 20.8% of total revenue. Other expenses included $2.5 million loss associated with our exposure to changes in foreign exchange primarily related to our intercompany debt structure. Beginning with the June quarter we incurred interest expense of $4.5 million related to our convertible debt.

As a reminder, 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 the relative fair values. Therefore while the interest coupon is not significant at 12.5 basis points we incurred fees and recorded a debt discount equal to the fair value of the equity component of the note both of which are been amortized to interest expense over the term of the note.

Our effective tax rate for the quarter was 43.8% compared to 2013 full rate of approximately 40%. Our book tax rate continues to be negatively impacted by options granted in countries where deductions are not allowed, increases in state taxes in the U.S. and nondeductible losses in travelmob among other items.

In addition increases in certain cost such as marketing, hedging cost are been attributed to our [indiscernible] which is one of the lowest rates in our structure. Finally, since our estimate of pretax income for the full-year had been reduced significantly due to additional interest expense, fluctuations in our book rate maybe more dramatic.

Also as a reminder, we have not factored in 2014 research and development credit since it has not been and may not be reinstated. We still expect that our cash tax payments for 2014 will be considerably lower than in 2013. For the quarter we had net income attributable to HomeAway of $3.9 million or $0.04 per share.

Moving on to our balance sheet and cash flow, at June 30, cash, cash equivalents and short-term investments totaled $792.5 million. For the quarter we generated free cash flow of $35 million resulting in $114.2 million of free cash flows on a trailing 12 month basis, 24.7% higher than the same period last year.

Cash was generated during the quarter from our operations as well as from proceeds from the exercise of employee stock option. Use of cash during the quarter included an additional investment of $9.4 million in order to maintain our non-controlling interest in Chinese vacation rental company.

In addition we had cash outflows to settle cash currency board contracts and for capital expenditures to facilitate growth of the business. We ended the quarter with $190.8 million in deferred revenue, which is up 21.2% over June of last year and up approximately 18% excluding the benefit of higher foreign exchange rates and the differed revenue acquired as part of our acquisitions over the last year.

Now I would like to take a few minutes to look forward. We’ve raised and tighten our revenue outlook for 2014 reflecting strength in the business performance as well as higher expectations for revenue as result of increased marketing activities.

Recently the Euro has been turning below the rate year previous outlook and the updated range reflects the impact of lower foreign exchange rates.

As our level of expenses and investment the uptick for the remainder of the year reflects a step up in our integrated marketing activities as Brian discussed earlier. The majority of the incremental marketing expense is plan for the third quarter as we target summer travelers.

Turning to our outlook as presented in the earnings release, the ranges reflect to revenue growth 25.2% to 27.4% for the September quarter and 26.5% to 28% for the full year, neutral to last year’s foreign exchange rates. We expect adjusted EBITDA to grow 6.7% to 11.2% in the September quarter and 22% to 27.2% for the full-year

And other assumptions to help you model, foreign exchange rate for the euro of 1.36 for each US dollar going forward, amortization of intangible is expected to be $13 million to $14 million for the full-year, interest expense associated with our convertible notes will approximately $9.1 million for the reminder of the year.

Our Full-year effective book tax rate is now expected to be in a range of 38% to 48% with an increase on high-end due to lower pretax income estimates. Basic share count to be in the range of $93 million to $95 million, and our fully diluted weighted average share count to be in the range of 96 million to 98 million shares. Capital expenditures is in the range of 34 million to 38 million and this is lower than our previous range as we expect some Austin office expansion to shift into 2015.

And for your cash modeling purposes, the remaining capital expenditures for the year we expect more than half to occur in the third quarter. As a reminder, the working capital nature of our business, third quarter is typically a lower cash generating quarter.

Foreign exchange hedging cost related to our inter-company debt structure will be in a range of $1 million to $2 million for the remainder of the year.

And that concludes our prepared remarks. Thank you again for your continued support to HomeAway.

Question-and-Answer Session


(Operator Instructions). Our first question comes from Lloyd Walmsley with Deutsche Bank. Please go ahead.

Lloyd Walmsley - Deutsche Bank

Thanks. Wondering if you can just talk a bit about the acceleration in the other revenue and help us understand how much of that segment reflects the payment and insurance product versus say the software product in advertising ballpark?

And then to what extend is this and should this line item become somewhat of a leading indicator for the pay per booking revenue given that you recognize some of these insurance products at booking and more of the pay per booking revenue at Stayz. And then, I guess as a follow-up, is this line items accelerations part of what’s driving the improvement in gross margins over the past couple of quarters?

Lynn Atchison

Hi, Lloyd, this is Lynn. Couple of questions there. First, you have it exactly right. The other revenue category includes our ancillary services. And those are -- for the most part, insurance – when travelers use our payments platform either through online booking or just through the payment platform. That particular category products, just all in ancillary products are growing at faster than the overall growth with that category.

And so there really is dramatic acceleration in growth in that piece. Nevertheless, we were still pleased with our advertising and software businesses. And you may recall that a year ago, we are [demeaning] a little bit the growth rates in advertising, but that business has really turned around as had software.

So I would say that those two smaller growth – growth, they grew at smaller percentages than ancillary product, so we’re still very pleased with them. So, your next question about, whether that’s an leading indicator for pay per booking revenues? Not really at all. I mean it could be in theory maybe years down the road whenever we are larger, but a lot of the payments point to our payments platform are really are subscribing customers that are using our payments platform.

So there’s not necessarily a co-relation between the pay per booking products. At least this revenue is coming from all the payments going to our payments platform, which includes all of the subscribers that have adopted payment platforms over the last couple of years. So I think it’s just the numbers are too small right now for you to look at that as a leading indicator for pay per booking one day.

Lloyd Walmsley - Deutsche Bank

Yeah, okay. That makes sense. And then is the ancillary service part of that segment, is that more than half of the segment kind of ballpark yet?

Lynn Atchison

Yeah, I mean it definitely is more than half.

Lloyd Walmsley - Deutsche Bank

Okay. Thanks a lot.

Lynn Atchison

Thank you.


Thank you. Our next question comes from the line of Mike Olson with Piper Jaffray. Please proceed with your question.

Mike Olson – Piper Jaffray

Hey good afternoon and congrats on a good quarter. I had a couple, I think TripAdvisor's said they now have like 600, a little over 600,000 properties that was up quite a bit year-over-year and I think somewhat surprised by how quickly they’ve grown their property count.

Can you just talk about why that kind of is or is not a competitive concern and maybe how some of the properties may or may not be different than some of the properties you have?

Brian Sharples

You know, Trip doesn’t seem to still be having much of a competitive impact on HomeAway in particular, because this is a marketplace business where you need both supply and demand. So its one thing to have properties, it’s another thing to get bookings against those properties.

Now we don’t you know to the extent that and I apologize we don’t have this analysis but to the extent that properties may overlap between TripAdvisor and HomeAway. I can tell you they are not coming off of HomeAway and going on a TripAdvisor. So people may list on multiple sites just like hotels are listed on multiple OTAs. But in the end, what really builds the business and your ability to monetize those listings is how well you performed for those customers.

And I can tell you that we do have plenty of internal data that says, on a head-to-head basis, nobody performs as well as HomeAway for these kinds of customers and I think TripAdvisor while the listing maybe impressive, I think what we would need as further data from them is to understand if they’re being able to monetize those is the revenue that they are driving out of that vacation rental segment which they don’t report. So obviously it’s not big enough yet to be material. And so, we really beyond seeing listing numbers I can just tell you that we don’t see any impact on HomeAway business.

Mike Olson – Piper Jaffray

Okay. Thanks for walking through that. And then the other one, I don’t know if you guys will have this, but can you say what percent of subscribers that have the ability to subscribe to premium tiers are doing so at this point?

Brian Sharples

Yes, worldwide I think last quarter we were about 39% that were adopting tiers above classic. Stayz is actually now 34%, but only because we just added tiers to a very large stat in Europe called Homelidays really just a few weeks ago. So that’s one is starting from zero penetration, so if you combine everything worldwide, it’s kind of reset that stat. I believe that if you took Homelidays out of the equation we would be at about 40% penetration that would be the similar stat to what we saw last quarter at 39.

Mike Olson – Piper Jaffray

That makes perfect sense. Alright, thanks.


Thank you. Our next question comes from the line of Doug Anmuth with JPMorgan. Please proceed with your question.

Andrew Connor – JPMorgan

Thanks for taking the question. This is Andrew Connor on for Doug. Just curious on your guys thoughts around the display of search results between pay per booking and subscription and what is your preference there, I guess how has that changed?

And then maybe you could address you know further the comments around the subscription signups in Europe maybe being affected by PPB and just curious on your efforts to improve that? Thanks guys.

Brian Sharples

Sure. So let me take the first one. So in terms of display of search results [indiscernible] yeah so we got every quarter since we started doing this as you know PPB listing is kind of start off at the bottom of sort order. So that’s sort of default where we place them. And then we have a marketplace management group here at the company and the technology we developed that can move those listings up in different markets on different sites at different times of the day, days of the week for as long or little as they please. And for the most part of this year we’re in what I would call testing mode, which is we’re trying to understand what the impact is of moving those listing up on our sites.

And every quarter we’ve gotten a little bit more aggressive about it. But I would tell you in total if you look at the percentage of listings that we’ve actually kind of moved up. It’s still fairly low number relative to the total. And some of things we’re looking for again are what’s the reaction of the subscribers, is it having any effect on renewal rate and lot of that will take about a year to work itself through the system, but we are getting some good intelligence about that.

I think we are learning that there are places where we can get more aggressive and then there are other places you know based on supply and demand in a different geography where we find the line where we’re going to hold this. So I think everything is going well there. We’re real happy with what the team is doing, we are real happy with the technology we’ve built there.

It is still absolutely our objective that when people buy a subscription and buy a tier, you know as they get their tier and we don’t want to swamp them with other listings that sort of take that privilege away that they have.

Now for time-to-time that might happen, but is by no means has it been overwhelming and it’s certainly we’ve been doing the most of this, a lot of it in the U.S. and it hasn’t really affected renewal rates yet one bit. So everything is going well there.

In terms of subscriptions signs up, so in Europe, we did launch PPB in Europe, but I think we telegraphed for the last couple of quarters that based on the research we had that PPB would be a more popular product in Europe, and is primarily because there are a lot of companies in Europe that do PPB for one thing. And so, we expected some decline in the number of subscriptions coming in. We have observed that, pretty much inline with what we expected. The good news is if you add the subscriptions plus the PPB listings that have come in you do get higher numbers and that was certainly the objective. So the business is better off because of it as long as those PPB listings from a revenue perspective performed well. Now in the U.S. we’ve had enough history to know that the platform PPB listings do perform pretty well because they look like subscription listings.

And in Europe, so far we haven’t seen anything that would lead us to believe that it would be much different there as well. But it’s super super early days. So I hope that answers your question.

Andrew Connor – JPMorgan

Okay, thanks.


Thank you. Our next question comes from the line of Chris Merwin of Barclays Capital. Please proceed with your question.

Chris Merwin – Barclays Capital

Thanks. Just wanted to clarify some of the comments on marketing if I could. Is there a way you can frame what the contribution margin is for pay per booking listings just as compared to your subscription listings that you get and when I say contribution margin its being like after the marketing expense applied towards booking those listings.

And then secondly, if you were to ramp up spending on SEM what do you expect, sorry when do you expect that EBITDA margins will return to pre-spend levels, is it 2016 I’m just trying to I guess get a sense of how it should be modeling the incremental revenue and EBITDA opportunity in 2015 and then also 2016 when you are overlapping a full year expense.

Brian Sharples

Yeah, well when you think about a subscription listing I mean subscription listing comes into us in year one, we’ve got some cost to get that listing up in running on the site. You know roughly 15% of revenue has historically been that number than in the second year, the cost were lot less. So subscription listings have incredibly high gross margins.

That will never be the case for pay per booking listings where you are going to have to be spending probably a higher percentage of that amount on marketing. We are not going to specifically say at this point in time the margin on PPB would be listing as ask. Its a little bit difficult, right, because we have PPB listings that have come on, we’re not spending any money against them and they’re getting bookings. So theoretically those are very high margin, there will then be some bookings that we drive through performance margin which will have a different margin.

On the performance marketing front, I have mentioned on the call that we started doing that in the U.S. that there are segments of PPB business where we have already achieved profitability and that projection seems to be getting better as we get better at conversion and especially with some of the brand marketing activities we’re going go see that’s going to make conversion run even higher and of course from the site we continue to do a ton of work.

But you know competitively it would be silly to sit here and give out margins on performance marketing when your competitors are also -- performance marketing and trying to understand at what levels are you willing to bid versus them.

Chris Merwin – Barclays Capital


Brian Sharples

Its enough for the next three years, that’s a good question, and as I said it wasn’t really our intent to make projection about 2015, but we did want to calm the fears and at least let people know that we’re super disciplined here. We might see a point or two of margin hit or at least we are willing to go to that, but what we’re really focused on here at the company is gross EBITDA dollars that we deliver because the fact of the matter is our street evaluation is a multiple of the EBITDA dollars we deliver, not margin.

That said, we do think that we can return to margins that are kind of free what they are today, within the next two to three years, hopefully by ’16 and certainly by ’17 when we just think about it. It just has to do with we’re going to ramp up. We got to start making a lot of investments. Some of those are going to be in the brand front, they take a little bit of time to pay off.

But internally it is absolutely our goal just to be clear, it’s our goal to over the next three years have higher margins than where we are today and certainly be delivering a lot more absolute EBITDA dollars and certainly higher revenue than we would have if we didn’t engage in these marketing activities. So I hope that helps.

Chris Merwin – Barclays Capital

Yes, very helpful. Thanks very much.


(Operator Instructions) And thank you. Our next question comes from the line of Aaron Kessler with Raymond James. Please proceed with your question.

Aaron Kessler – Raymond James

Yes good quarter, couple of questions. First I believe I know the answer, but have you built in the revenue upside potential from increased marketing in the second half and also did you give stock based comp guidance either for Q3 or you may have missed that one? Thank you.

Brian Sharples

I’ll take the first one and say, that we have. So we factored in what we think we are going to spend on the marketing front, and what we think the impact of that will be in H2 and then Lynn.

Lynn Atchison

You know I thought we do. We didn’t -- I’m looking right now to see if we did the stock based compensation. And we may not have -- we may not have changed that guidance. So we’re essentially on plan as to what we did for the beginning of the year. So we can go back and look at that.

Brian Sharples

I’ll just point out with respect to H2 and the marketing expenditures we have you know they come in two different forms as I said we’re doing a combination of brand marketing and performance marketing. On the brand marketing front, we do expect that to be – to have a cumulative affects, so we’re building a whole lot of increased revenue behind that in the early days. And then with respect to the performance marketing, a lot of it especially when you get into H2 you have an impact on sales but less of an impact on revenue because a portion of that revenue comes from Trip that they take in Q1 which I think we’ve described before.

Aaron Kessler – Raymond James

Yeah. And also from a competitive standpoint I think it’s obviously been talk about rentals.com this quarter as well, any thoughts on if you can tell us they’re getting some more attraction from a demand standpoint?

Brian Sharples

I have not seen that.

Aaron Kessler – Raymond James

Great. Thank you.

Lynn Atchison

Aaron just we look back on that, because we fully intended to kind of leave this the same. I think we probably said 50, 53 million last quarter for the full year and so this number should still be in that range. If anything it might be a little bit down, because we actually some of the new options being granted this year are at lower stock prices. So, no big changes there.

Aaron Kessler – Raymond James

Thank you.


Thank you. Our next question comes from the line of Chad Bartley with Pacific Crest. Please proceed with your questions.

Chad Bartley – Pacific Crest

Hi, thank you. Hoping you could break down the 296,000 performance listings across pay per lead and pay per book or give us any sort of commentary on pay per lead and maybe how those listings are trending up or down.

And then based on the first half results that you’ve seen in pay per book particularly in the U.S. market which is I guess a little bit more advanced. Do you still think one booking per year is a reasonable assumption or is there any evidence that perhaps that too conservative? Thanks.

Brian Sharples

You mean on that last question overall or in the U.S.

Chad Bartley – Pacific Crest

Just overall for pay per book as you think about kind of the longer term opportunity, I think where you guys initially said that, the assumptions are one booking per listing. I’m curious how you guys are thinking about it now?

Brian Sharples

I mean, it varies widely between whether its platform or integrated, whether it’s U.S. and Europe. But the one per was kind of the number we planned on internally and we performing far ahead of budget internally. So on average that is exactly -- we’re seeing a number that’s slightly better than that.

Chad Bartley – Pacific Crest


Brian Sharples

And then you ask the question about the 321.

Lynn Atchison

I’ve got that. So, good question. You are familiar with our pay per lead product. We’ve got about 15% of the performance-based listings are still pay per lead. And so, we don’t talk about that very much in more because it’s our intents and goal that these will turn into paper booking listings which are really better – it’s a better product for us and it’s a better product for our customers. But we have to work with our customer on a integration by integration to work them over to migrate over to the -- so but its still about 15%.

Chad Bartley – Pacific Crest

Got it. Okay. So that seems like it down pretty significantly from Q1, so are you having success…

Brian Sharples

Yeah, it’s on a path downward and that’s’ right, there was a significant decline PPL. So it’s happening.

Chad Bartley – Pacific Crest

Okay. All right. Thank you.

Brian Sharples

It’s essentially a tailwind.

Lynn Atchison

That’s I’m going to say.

Brian Sharples

It’s a tailwind against that.

Lynn Atchison

That’s a good thing. As a reminder, those pay per lead listings even their performance-based listings they’re not e-commerce based listings. They’re not online lookable for travelers. And so, we really want them to be pay per booking not just only for our revenue opportunities for us, but for a better traveler experience. So I think everyone is aligned to move to the new model.

Chad Bartley – Pacific Crest

Great. Okay. Thank you.


Thank you. Our next question comes from the line George Askew with Stifel. Please proceed with your questions.

George Askew - Stifel, Nicolaus

Yes. Good afternoon. Thank you. Question is simple. It’s about e-commerce enabled listings. You mentioned now 321,000 properties. Obviously all your PPB listings are e-commerce enabled. What trends are you seeing in your -- in the non-PPB listings so that core subscription listings with the e-commerce enabled, it sounds like it was about 30,000 properties in the quarter, is that kind of what you want to fix or is that disappointing?

Brian Sharples

Great question. Thank you for asking it. So, its gives me an opportunity to clarify detail on the metrics that significant. And what you’re looking at is, is you’re looking at 295,000 performance listings of which first of all 15% of PPL, so subtract those for a second. And you’re comparing into the 321 we report. There is inconsistency between those two numbers. Because historically what we have called e-commerce enabled within the company are listings that use our payments platform, the HomeAway payments platform. What is not included in that 321 are e-commerce enabled listings for some companies we acquired in particular Stayz, Book a Batch which in New Zealand and Travelmob in Asia.

And so if you wanted – my apologizes for the confusion here, but this we started with this metric purely based on HomeAway’s e-commerce platform and we’re probably going to need to modify it to incorporate all of our e-commerce listing. So, if you wanted to say, how many truly e-commerce listings company have enabled add about 45,000 to 50,000 listings to that 321 total. And then recognize it that though 45,000 to 50,000 listings are in the performance listing number as well or majority of those are in that number.

And so that paint more realistic picture. In terms of subscriptions, we continue to be accelerating in terms of subscription listing turning into e-commerce listings. So we’re in great shape there with respect to the momentum that we see in getting people over from the subscription side. It just going to take time, I mean, its obviously changing people’s behavior getting in on a platform, people have certain ways of doing things. But every quarter we add more of existing listings to that pole. So we’re feeling pretty good about it.


Okay. Super. Thanks for the clarification.


Thank you. Our next question comes from the line Dean Prissman with Credit Suisse. Please proceed with your question.

Dean Prissman - Credit Suisse

Thanks for taking my questions. So, Brian I wanted to clarify your comments regarding softer than expected demand in Europe. To what end you’ll tribute this to macro versus company’s specific factors. And then last quarter you discussed new initiatives to send you subscribers to maintain more accurate calendars. I think it was sort of scoring. Just I’m wondering if you had an update on progress and timing here? Thank you.

Brian Sharples

Yeah. Let me take that issue in Europe first. Yes, the demand softer than we like in Europe, it sort of three things and a couple of them are pretty subjective. One is that the more we add performance-based listings to the site, the less number of visits to take for somebody to secure booking on our sites, because they are now lot of listings we can generate with a click and find its available instantly etc cetera, and it’s really hard for us to quantify that impact, but I think part of it just has to do structurally, we’re doing a better job of getting people things quicker and in the past it took multiple visits. So, that’s sort of one component that’s an okay part of it.

I think the second component does have to do with some macro issues because when we look at obviously Europe’s geography we talk about, but it’s really a combination of several micro geographies and countries. And clearly traffic for us is lower in countries that are having some economic issues. France is one particular where we have a very big business in France. It’s the biggest vacation rental market is Europe.

In the French economy is not doing that great and we see that also reflecting on the traffic front. I think the third thing though and the one that’s very easily correctable by us is that going into 2014, we didn’t have a significant step up in marketing funding for Europe because we still had very much of technology focus, a lot of our resources were going into migrating Homelidays and platforms in Europe.

And so, I just -- I think we have under invested in marketing in Europe. So we started -- I made this comment in the second quarter stepping up the pace in Europe. And in the second half of this year we’re going to probably spend maybe $6 million to $8 million more than what we would have spent before we decided to make a bigger marketing push in H2. And a good chunk of that is going to go in Europe. And so we’re already seeing that it’s having a good effect on traffic as I mentioned.

So I do think, you can’t overcome sort of a macro economic tailwind, but you can certainly push it percentage points higher and I think we’re going to be able to do that.

In terms of accurate calendars, so that is a huge focus internally and one of the launches I’m very excited about, which is going to happen in Q3 is our new listing quality scorecards, the new version of our listing quality scorecards is going to come out and start measuring things like responsiveness and we’re going to start measuring things for our owners, to understand not only how quickly they respond, but how quickly they respond positively versus negatively.

And eventually we’re going to be putting that feedback right in the system for our travelers to see. So this is series of incentives that were really pushing to make that happen. And you know at the moment a lot of our efforts seem to be paying off.

I just got all of those stacked in front of me that 72% of our listings have had their calendars updated in the last 14 days, which is pretty monumental – given past stats on that and 80% of our customers have updated their calendars in the last 30 days. It’s still not a 100%, but that stat was a heck of a lot lower a year ago.

So we’re pushing hard in that direction. We know that its really important, obviously every time our penetration of PPB or e-commerce goes up, it creates higher levels of calendar accuracy and so that’s helping too and so we are going to continue as hard as we can to continue to just move the needle on e-commerce because its beneficial to everybody, but that’s a real good question. Thanks.

Dean Prissman - Credit Suisse

Great. Thanks.


Thank you. Our next question comes from the line of Tom White with Macquarie. Please proceed with your question.

Thomas White – Macquarie

Great, thanks for taking my question. Its on your technology spend and I guess your conversion rates and I guess I’m trying to reconcile your comments about sort of the role of your most meaningful tax spend versus comments about trying to get conversion rates up in Europe before kind of ramping ad spend there more aggressively. I mean are there other ways to get conversion up beyond sort of spending more on technology and sort of EUI and maybe if you can give us any sense of kind of what you think the delta for your sites over there are in terms of conversion relative to some of the competitors? Thanks.

Chad Bartley – Pacific Crest

Well we don’t know relative to competitors, that’s pretty hard for us to benchmark, but I think that we still have a long way to go in terms of conversion rates, because we have a portfolio size, we have different customer segments. We believe the difference is between where we are really doing it really well and where we are doing it poorly. And just overall for a company there is a pretty big delta. We also know that companies that are booking [indiscernible] hotel business have been steadily improving their conversion rates through AB testing over last ten years. And so I think that’s a job that’s never done.

Now – I’m not sure I quite understand your comment on tax spends. I mean we have a very very substantial technology staff here. We – there is the shift that is taking place from a lot of work that was going on to field our worldwide platform to build, to integrate these various sites we acquired to build our e-commerce platform. That’s a lot of headcount, and that headcount is still here. And so we’ll be deploying more of that headcount into things that do effect conversion and the user experience because we just feel we have a lot of people here. And so, we don’t have to grow that line item to still invest really heavily in those conversion rate activities. But I think the other big opportunity we have on the conversion front is also a brand opportunity, where still brand awareness of the company you know worldwide, its still relatively low for a leading company – role of doing something and I think the reason you see booking.com advertising so aggressively in the U.S. is because they need to do that to get their conversion rate in the U.S. because they don’t have brand awareness in U.S. And so, we believe that it’s a combination of working on the platform, AV testing, getting the conversion right there. And also it’s really conversion on the search page. When you’re buy keywords you also want to get very high delivery back to the site and that has a lot to do with awareness.

Lynn Atchison

Tom, this is Lynn. I want to add this. One of the things that we’ve been that and as Brian mentioned it has been a common global platform and moving a lot of our brands which were apart through acquisitions over the years is on to that same backend platform.

Those activities themselves set us for efficiencies going forward, so actually better situated now and in better position to do more AV testing to work on conversion all those things. So its under the hood work now has been – its never completely finished, but we’ve made so much progress in the last couple of years that that actually what position us to be more to spend and allocated time more effectively there.


That’s very helpful. Thank you.


Thank you. Our next question comes from the line of Kevin Kopelman with Cowen and Company. Please proceed with your questions.

Kevin Kopelman - Cowen and Company

Hi. Thanks a lot. So I just have a follow-up on the last question on the e-commerce questions. Can you help us understand how many of the e-commerce enabled listings are available with the book it now feature and how important is that for you inline with your – with the discussion at conversion rate and calendar available that you think?

Lynn Atchison

Right. So we haven’t disclosed that yet. So our metric then because our first [indiscernible] and highest goal really has been to enable listing from our website that have safe and secure payments. And we will be rotating that category and group customers that these alternative forms of payments. But first get them in safe and secure payments. What we believe will happen best – and in the next step for us is to push online booking or to book it but and so it is important to us, we think that’s important for the traveler experience, but what is most important is safe and secure payments. And as a reminder in this category, travelers do want to talk with -- managers before they are sent out with dollars many times on a vacation. And so the online booking button while it’s very very important to conversion and the traveler experience, we do find that even though its there we still find that travelers want to correspond with and talk to owners and managers. So that’s what we focus on for safe and secure payments as opposed to how many actually have the book at button.


Okay. Thank you.


Thank you. We have no further questions in queue at this time. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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