HomeAway Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 1.12 | About: HomeAway, Inc. (AWAY)

HomeAway (NASDAQ:AWAY)

Q3 2012 Earnings Call

November 01, 2012 4:30 pm ET

Executives

Melissa Frugé

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

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

Analysts

Ralph Schackart - William Blair & Company L.L.C., Research Division

Lloyd Walmsley - Deutsche Bank AG, Research Division

Deepak Mathivanan - Susquehanna Financial Group, LLLP, Research Division

Nishant Verma - Morgan Stanley, Research Division

Dean Prissman - Crédit Suisse AG, Research Division

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the HomeAway, Inc. Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded November 1, 2012. I would now like to turn the conference over to Melissa Frugé, General Counsel. Please go ahead.

Melissa Frugé

Thank you, and welcome to HomeAway's third quarter 2012 financial results conference call. By now, everyone should have access to the third quarter earnings release, which was distributed today at approximately 4:00 p.m. Eastern Time. If you've not received 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, November 1, 2012, 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. 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 release distributed earlier today.

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

Brian H. Sharples

Thanks, Melissa, and good afternoon, everyone. We appreciate your continued interest and support, and look forward to sharing our third quarter results with you today.

Let's start with an overview of the financials. Total revenue of $73.1 million increased 20% year-over-year and 24% on an FX-neutral basis, in line with the outlook we provided last quarter. Listing revenue grew 17% year-over-year, although that figure is not fully representative of the growth we're seeing in our core business. On the heels of tiered pricing in the U.S. and the introduction of new product bundles, we've seen now 3 consecutive quarters of accelerating year-over-year FX-neutral sales growth in our Listings business. In short, pricing strategy in our base business has been successful, and positions us very well for 2013 and beyond.

Adjusted EBITDA for the quarter was $24 million, well ahead of our previously stated outlook. Free cash flow for the quarter was over $17 million. On a trailing 12-month basis, the cash flow was $78 million, an increase of 25% over the same trailing 12-month period last year. At the end of the quarter, we had $244 million in cash, cash equivalents and short-term investments on our balance sheet, representing $2.87 per diluted share.

We're still facing economic headwinds in Europe, and as such, we continue to feel some pressure from owners and managers who are likely more price-sensitive than they've been in prior years. In Q4, we plan to launch tiered pricing in Europe, and in fact, we've already successfully rolled it out in the U.K. during October. This will enable us to gain pricing leverage from those most willing to pay for it while avoiding broader-based price increases for new and existing customers. We have modest short-term expectations for the impact of tiered pricing due to the economy in Europe. That said, the early read on tiered pricing performance in the U.K. is positive and mostly in line with our expectations, and we'll have more of an informed view on this at the end of the year.

Foreign exchange still remains a headwind for the business compared to last year. However, we did achieve a modest benefit from FX versus our previous outlook towards the end of the quarter. So if exchange rates stay at comparable level, in the near term, we should see less of a headwind versus last year going forward.

More importantly, in Europe, we're continuing to see stronger and accelerating traffic trends in European travelers in every region in which we operate. Specifically, traffic growth year-on-year in all European regions accelerated versus the second quarter, which is a very good sign. In addition, traffic levels within North America and the rest of the world remain healthy, with total global business tracking 156 million visits, an overall increase of 21% year-over-year.

Now moving on to paid listing count. As we've seen in previous years, listing count decreases from Q2 to Q3 due to seasonality. So that's usual and happens every year. As such, we ended the quarter with approximately 720,000 global paid listings, a year-over-year increase of 15%. Also, you may recall that our highly successful U.S. anniversary campaign generated an unusually large number of new listings in the same quarter of last year, making this quarter a particularly tough comparison on the statistic of paid listings growth. Also impacting paid listings growth was a decline in our global renewal rate of 76.4% in Q3 of 2011, 74.5% this quarter.

Given the importance of this metric, I wanted to spend a bit more time discussing the underlying trends.

Approximately 1/3 of the renewal rate decline reflects the recent inclusion of Australia in our numbers. That's no different than what we reported last quarter. This will continue to weigh on our overall renewal rate until we lap a full year in April of 2013. The remainder of the decline is from our European business, also consistent with last quarter. However, in Q3, there was one exceptional item, and that was the steeper decline in renewal rate in our French subsidiary, Abritel, that explains almost 40% of the overall worldwide decline. This is primarily attributable to last year's migration of Abritel to our global platform, a shift which required a change in business policy that's unique to Abritel. We expect the brunt of this impact -- of this transition to be reflected between now and the end of the year, but do not expect a long-term impact on the business.

Consistent with last quarter, many of our other European brands were also down slightly year-over-year. But almost all of them improved their renewal rate growth sequentially from last quarter, thanks to improving traffic growth and increased generation in those businesses, as I previously mentioned. So, in short, we're seeing our current renewal rates in Europe stabilizing.

Also on the bright side, renewal rates for our U.S. brands, and Brazil, were up over last year, which is particularly notable in the U.S. given the higher average prices being paid by our customers due to tiered pricing and the lapping of the same highly discounted anniversary campaign listings that I mentioned earlier -- from last year. Average revenue per listing this quarter was up slightly year-over-year to $337 from $335 in the prior-year period. Meanwhile, FX-neutral subscription revenue per listing increased nearly 8% over the same period last year. As a reminder, this average revenue per listing metric still does not include revenue from payments, advertising and insurance products, 3 of the fastest-growing components of our business.

Turning to strategic initiatives. I want to focus the rest of my discussion on our longer-term roadmap and the execution of new product enhancements to date. The biggest news in Q3 was the successful migration of VRBO to our common platform. Following this migration, we now have 75% of our global inventory on our core platform and are now selling U.S. and worldwide bundles and also have VRBO on our new tiered pricing system. While this consolidation will optically lead to lower listing counts and renewal rates as many customers opt for bundles instead of individual subscriptions, we expect that our average revenue per listing will increase commensurately.

We'll know more as we ramp this up in the coming quarters, but for now, we could not be happier with the early sales results from tiered pricing and bundles, on both HomeAway.com and VRBO.

Most importantly, these improvements and product enhancements position us to better serve new and existing customers, and have added a new source of high-margin revenue growth to the business. A positive indicator of this growth is the ASP uplift we continue to see on HomeAway.com following the launch of tiered pricing. As compared to the third quarter of 2011, our ASP was up 16% year-over-year, due solely to tiered pricing, and an additional 6% added on top of that due to the inclusion of bundles that we launched late during the quarter. That said, with the addition of tiered price and bundles to other sites, we will no longer report this level of detail going forward for just HomeAway.com or other specific brands in our portfolio. Instead, from this point forward, we ask investors to focus on our FX-neutral subscription revenue per listing which will provide a good indicator of how our strategy is working across the world. And as I've already mentioned, the number was roughly 8% in Q3. That's up from 6% in Q2, which is up from 2% in Q1, so obviously heading in the right direction.

With respect to tiered pricing on VRBO.com, which launched late in the third quarter, the initial read has been positive, and frankly, ahead of our expectations. Through mid-October, we sold over 5,000 platinum listings on VRBO and have seen a meaningful increase in ASP since the network's launch in mid-September.

Next, a word on pricing changes in Europe. Just a few weeks ago we launched tiered pricing on HomeAway UK. We are now working actively to launch it on Abritel, and that is in site, in France, and has a goal of adding it to FeWo-direkt in Germany by the end of the year as well.

Now, moving onto e-Commerce, which is one of the most significant and compelling opportunities for HomeAway. Leading with payments for the past year to a secure and automated process, owners on both VRBO and HomeAway.com have the option to accept credit cards and eChecks on our payments platform. And during this past quarter, we launched online booking, which offers travelers the ability to have a book-it-now through the adoption of a book-it button on the listing, which is done at the choice of the owner. We're pleased to report that adoption of online payments within HomeAway.com and VRBO.com continue to accelerate, trending north of 22% as of the end of the quarter. And while the growth in adoptions slowed from Q2, note that this is a result of our focus on owner marketing and education on a successful launch of the VRBO migration and resulting network. Now that, that launch is behind us, we'll be reigniting the marketing of our payments platform in Q4.

We're also excited to announce that just a few weeks ago we introduced our payments and online booking platforms to HomeAway UK, and expect to roll out that same functionality also to Abritel and FeWo-direkt by the end of this year.

The second part of our e-Commerce functionality is our traveler products. Monetization from these products continued to increase this quarter, as penetration of our Property Damage Protection product held fairly steady, while at the same time we introduced a new cancellation protection product at checkout. We look forward to introducing similar products to the checkout process within our main European properties in mid-2013.

Finally, and most importantly, the introduction of online booking also sets the stage for the introduction of our pay-per-booking pricing model, where customers can list for free and pay a commission at the time of booking. As we indicated last quarter, we expect this model to help us serve a potentially large group of customers for whom our existing subscription model may not be appropriate. We expect to launch pay-per-booking in the U.S. during the summer of 2013 for individual owners, and the second half of 2013 for our property management customers. This is a key strategic priority at HomeAway, one we're very excited about, and we look forward to keeping you updated on our progress as we move forward.

In addition to all the product initiatives just mentioned, there were several other meaningful product launches during Q3. I'm extremely proud of the efforts being made by our product and development teams to position the company for continued success in 2013, and more importantly, to better serve our customers. Some examples of these additional product launches include a mobile site for Abritel; the redesign of VRBO's search and product -- property pages; as well as an upgrade of the VRBO filters, introducing quality, sort algorithms and additional brands in Europe,; launch of a new refer-a-friend program on HomeAway and improvements to our professional manager dashboard.

So in summary, we remain committed to our strategy, and everything we're seeing makes us optimistic about continued strong growth in the year ahead.

Before turn the call over to Lynn, I want to briefly say a few words about the disaster the Northeast suffered over the past several days with Hurricane Sandy. Obviously, our hearts go out to all of the people and families who are affected. And as with past catastrophes of this magnitude, HomeAway has quickly put a program in place to assist those in need by asking our community of homeowners to open their doors to those in need, and as always, we are seeing a very tremendous and quick response to that effort.

From a business standpoint, we do anticipate that Sandy may have an impact on both Q4 and 2013's results. Based on what we know today, and this is just a few days since this has happened, obviously, we estimate that we have between 10,000 and 13,000 properties that are close to the coastal areas that were most affected. While we're still in the process of understanding how this is going to affect our business, our investors should know that our intention is to do the right thing with respect to those customers, including those who may need time to rebuild for those who have lost their homes entirely.

So with that, I will now hand the call over to our CFO, Lynn Atchison, who will provide more detail on the financials and operating metrics in the business. Lynn?

Rebecca Lynn Atchison

Thank you, Brian. Total revenue for the quarter was $73.1 million, a 19.6% increase from $61.1 million in the comparable quarter last year, first with 23.9% on an FX-neutral basis.

Listing revenue for the quarter was $61.4 million compared to $52.5 million in the comparable quarter last year, an increase of 16.9% or 21.7% FX-neutral. Relative to expectations, listing revenues came in softer, primarily due to the timing of listings made during the quarter and an overall shortfall on revenue from our pay-per-lead product.

Other revenue, which is comprised of ancillary revenues from owners and travelers, advertising, software and other items, totaled $11.7 million for the quarter compared to $8.6 million in the prior-year period, reflecting growth of 36.1%.

I want to provide some additional insight into the elements of other revenue for the quarter.

Advertising was roughly 25% of other revenue, and grew 36% over last year. Despite solid year-over-year growth, advertising came in at the low-end of our quarterly expectations, through a combination of some organizational changes we made in the business, technology adjustments that alter how ads are being served on our sites, and increased usage of our mobile site. The effects have been a continuation of these challenges in our outlook for the remainder of the year. Software was roughly 20% of other revenue, and was flat with last year. And the remainder of other products in other revenue grew about 60%, which is very encouraging for the long-term outlook for traveler and owner ancillary revenues, as Brian has discussed.

During the third quarter, 62% of our revenue was generated in the United States, 37% in Europe, another 2% in South America and Australia. Within Europe, the majority of our revenues were denominated in euros. Despite a slight increase, sequentially from June 30, FX rates remain unfavorable when compared to the September quarter last year. As a result, revenue growth in the third quarter was negatively impacted by foreign currency translation of approximately $2.6 million.

Turning to expenses for the September quarter. Total operating expenses for the quarter, excluding amortization, increased 24.6% year-over-year. Much of the growth here relates to increased compensation expense due to a higher number of employees. We ended the quarter with 1,170 employees, up 29.3% from September year ago. The largest number of new employees were in customer service. We continue to make strides in efficiency, but with a large number of new product enhancements worldwide, we are committed to resourcing for great customer service. Great customer service is one of the primary levers we use to maintain renewal rates and accelerate adoption of our high-margin ancillary product. As a result, we'll continue to invest in customer service in the coming years.

We also continue to invest in product development, with total expenses of $11 million for the quarter, up 27.6% over the same quarter last year. With the VRBO migration complete, we are now investing in the global deployment of numerous initiatives, including the European rollout of tiered pricing and online booking and payment; additional technology to our professional property managers and the development of pay-per-booking capabilities.

Sales and marketing expense increased 26% year-over-year. In particular, the largest contributor to growth was staffing of our sales efforts and seeing it directed at professional managers. Compared to the June quarter, and consistent with prior years, we had lower direct marketing in Q3 due to seasonality. However, we did invest a bit more than what we'd planned in PPC and direct marketing to improve traffic in Europe. We are pleased that these efforts, along with our SEO focus, helped cause our traffic and inquiry growth in Europe to improve for the second consecutive quarter.

General and administrative expenses increased by 14.5% year-over-year for the quarter and amortization expenses were up by roughly 8% year-over-year. Adjusted EBITDA increased 12% to $24.2 million, ahead of our previous outlook of $21.6 million in the same period in 2011. As a percentage of total revenue, adjusted EBITDA margin was a healthy 33.1% for the quarter. Our effective tax rate was 52.5% during the quarter.

Net income attributable to common stockholders for the third quarter was $5.2 million or $0.06 per diluted share. This compared to a net loss attributable to common stockholders of $4.1 million or $0.05 per diluted share during the third quarter last year.

Turning to key business metrics. I will not repeat Brian's commentary on our business metrics, but wanted to elaborate on a few items. We ended the quarter with approximately 720,000 global paid listings, a year-over-year increase of 15% or 13% when excluding the impact of acquisition. In addition to the impact of the renewal rate and the anniversary campaign which Brian discussed, we also saw a sequential decline in the number of pay-per-lead listings on our site. Most of this drop came in the U.K., where approximately 6,000 pay-per-lead listings came off the site. These listings were not generating any material revenue for our business, but their removal did have a meaningful impact on our listing count.

Outside of the U.S., subscription listings in Europe, South American and Australia, all accelerated this quarter. Despite the drop in pay-per-lead listings, professional managers remained about 27% of our total listings, demonstrating that we're continuing to grow the PM business.

As Brian also mentioned, on a year-over-year basis, foreign exchange rate and increased pay-per-lead listings both negatively impacted our third quarter ARPU. When excluding these items, subscription revenues per listing increased 7.6% year-on-year, reflecting the increasing flow-through of our pricing initiative into the revenue line item.

Moving onto our balance sheet and cash flow. As of September 30, 2012, cash, cash equivalents and short-term investments totaled $244.2 million, and we remain debt-free. We ended the quarter with $127.5 million in deferred revenue, which is 21.2% higher than September of last year on an FX-neutral basis, excluding the impact of acquisition. For the quarter, we generated free cash flow of $17.2 million and for the trailing 12 months, $78.2 million, which resulted in 25.1% growth over the comparable trailing 12-month period last year.

Capital expenditures, including costs associated with the internally developed software, was $3.4 million for the third quarter, relatively low due to less office expansion.

Now turning to our outlook. As we approach the end of the year, we're timing our outlook on both top line and bottom line. In addition, we're adding some conservatism around 3 areas that we've already discussed. First, continued pressure on our pay-per-lead business in Q4; second, softness in online advertising; and third, potential revenue impact in the Listing business from Hurricane Sandy. With regard to the second point on advertising, we're really seeing impacts from Sandy, as several airlines have postponed advertising orders previously scheduled for Q4. Considering those 3 items, total revenue for the fourth quarter is expected to be in the range of $70.2 million to $71.2 million, reflecting FX-neutral growth of 21.1% to 22.8% over the prior-year period. This results in a full-year range of $279 million to $280 million or FX-neutral growth of 24.1% to 24.5%.

While we have continuously updated investors with our outlook based on changes in the business and FX, we now see that the year-over-year FX-neutral growth is landing within the range we provided in April. Adjusted EBITDA is expected to be in the range of $20.4 million to $21.4 million. This results in a full year range of $79.4 million to $80.4 million. This also results in an adjusted EBITDA margin of 28.5% to 28.7% for the full year. While this is a bit lower in the full year than we had originally planned, it is relatively flat with our updated outlook last summer, and reflects our ability to manage spending. Our current model assumptions include a foreign exchange rate, for the euro, of 1.29 to the dollar.

And to help you with your modeling, a few other estimates. We expect amortization expense to be in the range of $3.2 million to $3.4 million for the remainder of the year. We are currently forecasting an effective tax rate of approximately 54% to 56% for the remainder of the year. And as a reminder, our actual cash taxes are only expected to be approximately $9 million for the year. Consistent with our last call, we estimate our fully diluted weighted average share count for Q4 and for the full year to be in the range of 85 million to 87 million shares basic with the 82 million to 84 million. We expect stock-based compensation for the remainder of the year to be in the range of $8 million to $8.75 million. With the expansion of some offices in Spain along with our website development and growth of new employees, we expect capital spending for the remainder of the year to be in the range of $3.5 million to $3.7 million.

With that, I'll turn the call over to Brian for closing remarks

Brian H. Sharples

Thanks, Lynn. This is Brian. We will now take questions from anybody who has them. So who's up next?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Ralph Schackart with William Blair.

Ralph Schackart - William Blair & Company L.L.C., Research Division

First off, Brian, on the renewal metrics. It sounds like there's a few moving parts in there with the U.S. doing well and some other parts and continued weakness in Europe and the Australia sort of comps. If you sort of cut through all the puts and takes here, how should we think about that metric trending forward? And when will it sort of stabilize and sort of head back up?

Brian H. Sharples

Sure, Ralph. It's pretty much the same story as last quarter. I mean, the Australian thing is just a kind of numerical addition to that business into our numbers that we didn't have before. And it's just a mostly property managed business, which has lower renewal rates. And so until April of next year, we are certain to be stuck with that one, and that's roughly 1/3 of it. As far as the rest of Europe goes, we actually, and I'll talk about Abritel separately, have been seeing, lately in the last couple of months and quarter, an actual uptick in renewal rates. The renewal rate metric that you guys get is a little bit of a backward-looking metric, which actually looks at last year, a year ago versus properties that are on the site today. But we can also measure internally what's going on month-to-month. And so actually we're seeing some pretty encouraging signs in Europe, so we think that's going to be turning around pretty fast. The Arbitel issue is a, just to give a little more detail on it, it's a business policy issue. We switched to the new site. The old site that Abritel had, had some flaws in it. One of the flaws, for example, was that there were a lot of short-term subscribers at Abritel, and their old system actually used to leave people on the site far longer than their actual subscription, and it was sort of a technical issue from the past. And so when we came in with the new platform, we're pretty brutal about the fact that when you're short-term subscription's up, you're gone from the site. Now those people will come back again next year, but it's sort of changed the timing of renewals. And so it's something that we saw coming, and again, that'll be with us -- the team tells me that we'll probably see some impact from that still in the fourth quarter, but by the beginning next year that should iron itself out. So I think most of this, with the exception of Australia in April, should iron itself out by the beginning of next year and then by April, hopefully, it won't be an issue at all. And I think the other thing is, as you pointed out, U.S. is doing great on renewal as is rest of the world, and that's really satisfying for us given a lot of fear people had around tier pricing and was that going to increase or decrease renewal rate, and it did not. And then I think in the EU, we're really seeing good demand mostly from efforts that we've generated internally. Our team is doing a great job with respect to SEO. We're spending a little more money on marketing out there and that leads to more inquiries and more satisfaction. And our data always tells that us as long as we do that, then that renewal rates will improve along with it.

Ralph Schackart - William Blair & Company L.L.C., Research Division

And one more, Brian, if I could. You've, sort of -- on the tiered pricing for VRBOs being at $450, sort of average. I guess going into the tiered pricing, you weren't exactly sure on sort of the conversion of tiered pricing, but today you said about 5,000 platinum, I believe, sort of uptick. Can you give us a sense how that was versus your expectations? I know you said you were happy, but just maybe give us a little more color on VRBO tiered pricing [ph]?

Brian H. Sharples

Yes. It's been really, really good, Ralph. I mean, I think I've said it on the prepared remarks, I couldn't be happier, and that's the way I feel about it. But the -- I think the way to just think about it generally, we only had really 3 weeks of the VRBO migration during the quarter, so not enough data to really want to give you guys exact numbers on that. But the 5,000 platinums were -- came over that 3-week period basically. So that was 5,000 during Q3. And we essentially didn't have a Platinum level. Remember, the way we did VRBO was, we took the photos of tiers [ph] people were in, we map them to the new tier structure we had. And so the people who had already bought the maximum on VRBO were actually mapped into the Gold tier, right, which was about, I think, it was $650 price point roughly. And then the Platinum series is $999. So you have that many people just in 3 weeks that bought a product that didn't exist before, that was a pretty good ASP bump. So I think that's just going to give you some general sense for the positive momentum we've got there. And by the end of this quarter, we'll have a much stronger read, but the momentum seems to be continuing in this quarter as well, so we're pretty pleased with it.

Operator

Our next question comes from the line of Lloyd Walmsley with Deutsche Bank.

Lloyd Walmsley - Deutsche Bank AG, Research Division

A few related ones. Just as we look at the ARPU growth, you're already seeing what seems like pretty strong acceleration and FX-neutral ARPU growth. But looking at '13, it seems as though you'll have a bunch of things coming together. So I guess my question is, when you look at HomeAway U.S. anniversary-ing the premium tiers, do you expect that to continue to drive pricing hype -- pricing improvement next year as competition continues to build, or does that feel like that kind of step function is slowing? And then as you look at some of these other puts and takes, I guess, to make sure, I guess, we're thinking about it right, you'll have the VRBO transition, then you have the bundles with VRBO and HomeAway, and then you'll have I guess Global, and then maybe some bit of a headwind from the PM space, but are there any other major [indiscernible] that should be impacting ARPU next year?

Brian H. Sharples

No, I mean, that's so -- good question, and it actually allows me to highlight something that I didn't put specifically in the script and people may not realize is that HomeAway in the third quarter actually lapsed tiered pricing for a year. So we launched that at the end of the first month or in the first month of the first quarter last year. So we actually, for the first time...

Rebecca Lynn Atchison

First? No. It's the third quarter.

Brian H. Sharples

Of the third quarter, I'm sorry. So this is the first we've actually seen what happens after a year in terms of uplift from tiered pricing. So as I reported, the tiered pricing impact for HomeAway, and this is the last time we're going to report it, by the way, I want to get this out there, was 16%. So that's now a year 2 effect not a year 1 effect, which is actually pretty consistent with what we saw in year 1, right? Depending on the quarter, it was between 15% and 18% roughly. So that's really good news that we had projected that we would continue to see impacts from tiered pricing for several years. And so at least our first year or 2 example is real positive. Now on top of that, as we mentioned, we have bundled pricing. And the bundles were really only available for a small part of the quarter because we launched the network in the back half of Q3. But just the bundles alone added another 6% to subscription average -- the subscription price for HomeAway, bringing the grand total up to 22% in year 2 because we had that extra benefit. So even given penetration of PMs and other things, that's a pretty strong pricing headwind we've got. And certainly there are some things that will kick that back like PMs. But at the same time, in 2013, we're also pretty aggressively pursuing a strategy to get pay-per-booking out there in the marketplace. And if that all goes well and we can get it launched next year as we discussed on the call, then from a property management perspective, we'll be able to, hopefully on a percent of revenue basis, do better than we've done in the past on a subscription basis. That's not going to have a huge impact until 2014. But with the tiered pricing kind of flowing through a lot of our sites in 2013, I think we're going to be in great shape.

Lloyd Walmsley - Deutsche Bank AG, Research Division

As a follow-up, it looked like your deferred drawdown was better this year. And so if you look at kind of a subscription revenue plus change in deferred, it looks like the growth there accelerated from 19% last quarter to 30% this quarter. Is some of that just the 5,000 platinums kicking in and just the new things you're rolling out?

Rebecca Lynn Atchison

Lloyd, let me jump in. So the actual ending balance of differed when you take out kind of the increase from Top Rural, but then the decrease from FX impact, was up about 21.1%. But yes, that is definitely an acceleration over that same number, which was 17% or 18% last quarter. So yes, that is the result of increased sales, particularly those later in the quarter after the launch of VRBO.

Operator

Our next question comes from the line of Herman Leung with Susquehanna.

Deepak Mathivanan - Susquehanna Financial Group, LLLP, Research Division

This is Deepak sitting in for Herman. I just wanted to ask briefly about some of the pricing changes that you made. So basically, I wanted to hear about the feedback that the customers are -- you're mentioning about when your conversations -- when you have conversations with them. So what would you say are kind of like the top 3 challenges that they have at this time and kind of like what is the path for addressing them?

Brian H. Sharples

I'm sorry, which customers are you talking about? Are you talking about owners, travelers?

Deepak Mathivanan - Susquehanna Financial Group, LLLP, Research Division

Oh, the customers who have adopted the tier pricing after the new platform.

Brian H. Sharples

Oh, I mean the feedback has been phenomenal. Actually, our highest renewal rates right now are with customers who have adopted the tiers. So, a, renewal rates are slightly up in the U.S. which means tiered pricing is a happier story on balance for everybody; and, b, for those people who have adopted tiers, we are now -- because we've lapped [ph] it, we can now look and see that we have higher renewal rates for people who have adopted tiers. So the internal data that we look at is if people pay twice as much, do they get twice as much inquiries? If they pay 3x as much, do they get 3x as many inquiries? And it turns out that we actually priced the product pretty close to the pin. I mean we're finding that if you up your budget by a certain percentage, in general, you're going to see about that percentage increase in inquiries. So the product delivers value, and for people who want to drive more revenue in their businesses, which a lot of people obviously do, it's been a real winner. So there hasn't been tremendous negative impacts from it. I was just on the phone this morning with our team in the U.K. because we recently launched tiered pricing there, and of course, we were a little timid because of the economy in the U.K. and there's a lot of price competition out there. But these guys said to me, too, surprisingly, they've gotten very little negative feedback from customers, and we have thousands of customers who call in every day. And the people have great businesses in Europe and want to invest more money in marketing are jumping in and investing more money in marketing. So there's really -- if there was something negative to say about it, I would, but it's been a very positive story.

Deepak Mathivanan - Susquehanna Financial Group, LLLP, Research Division

Got it. Has it been consistent with the property managers and homeowners, would you say?

Brian H. Sharples

The property managers are actually adopting at higher rates and pretty significantly higher rates. So I think, in general, the way to think about it is the people who are more serious about their vacation rental businesses will invest more money if you give them the opportunity to do so. And of course, the property managers, this is all they do for a living and they can very quickly and easily calculate ROI across a set of properties, and so they seem to be equally satisfied as far as we can tell with the owners and adopting it at slightly higher sort of percentage penetration rates.

Operator

Our next question comes from the line of Scott Devitt with Morgan Stanley.

Nishant Verma - Morgan Stanley, Research Division

This is Nishant for Scott. I just had 2 questions. Just, one -- I'm sorry if I missed this, but could you talk about the reasons behind the decline in pay-per-lead listings in the U.K.?

Brian H. Sharples

Actually, we had 3 customers, in particular, that totaled roughly 9,000 listings.

Rebecca Lynn Atchison

I think we said 6,000 in the...

Brian H. Sharples

6,000, I'm sorry. And these customers were -- they were very low quality listings that our sales force sold, put on our sites because they were low quality. We have quality sort algorithms. They didn't perform well on our sites. So the revenue impact to our business was very, very low because these weren't generating money for us. And because they weren't generating money for us and they weren't generating money for those customers, we mutually agreed to take them off the sites. And so it was just -- sometimes with pay-per-lead, you'll bring things in big volumes, or you'll take them off in big volumes. This happened to be a quarter where we took off 3, but it's the right thing to do for the company.

Nishant Verma - Morgan Stanley, Research Division

Okay. And then the second question just, how do we think about the break-even adoption point in terms of the bundled VRBO HomeAway.com product referred to be accretive to -- what makes you confident that because there is an overlap between the 2 that -- I guess you mentioned the 5,000 platinum members, but how do we, I guess, model or think about the break-even point of adoption?

Brian H. Sharples

Well, I mean, there's certainly a discount if you buy both sites. And we actually have not had sort of a massive amount of kind of forced consolidations yet. But our teams here, as those consolidations occur, are going to be very focused on making sure that those customers, who were spending, let's say, $1,300 with us in the past for buying both sites individually, will spend that, if not more, when they consolidate their listing. So we're -- the research we did on this prior to launching the bundles suggested to us that these customers have budgets to spend, and when we give them additional tiers to buy up in, our hope is they're going to spend that budget and more. So really what it comes down to is how successful are we going to be at getting them to spend more money on a bundled subscription rather than less. So far, I can tell you that overall, even though we didn't give out the number because the timeframe is pretty small, so far, overall, the VRBO ASP numbers are up significantly. And that's kind of the net result of everything from new to renewal to those people who may choose to combine. So I feel pretty confident that we're going to be over that bar.

And then of course, the other thing that you have to model is the fact that only I think it was about 20% of the combined subset of VRBO and HomeAway customers were buying both sites. And so even if you do take it in a short -- on a slight discount between those people consolidating, we're betting, because of the discounted pricing, we're going to obviously increase that 20% to something far higher. And even the conservative modeling we do internally says that's going to be a net win.

Operator

[Operator Instructions] Our next question comes from the line of Stephen Ju with Credit Suisse.

Dean Prissman - Crédit Suisse AG, Research Division

This is Dean Prissman filling in for Stephen. Do you have any update in terms of the number of leads you are delivering into your subscribers on average? And any thoughts in terms of what percentage of those leads are being converted into actual bookings? I believe, historically, you've talked in terms of 70 leads a year with about a 10% conversion rate.

Brian H. Sharples

Yes, so we don't give out inquiry stats, but I have said in the past that one of the things we focus on is delivering more inquiries per listing every year, so we can increase value to our customers. And we continue to do that. So our inquiry growth continues to run ahead of traffic growth. It continues to run ahead of listings growth. And so when you have inquiry growth running ahead of listings growth, then you're delivering more to your customers in any given year. The only way we can measure conversion is through -- today is through surveys that we do. Those surveys pretty consistently show there's about a 15% conversion rate of an inquiry into a booking. On our payments platform, it's a bit higher because by the time somebody goes in and actually configures an order, they're pretty serious and pretty far down the funnel, so we see pretty -- much higher conversion rates on the payment platform. But the inquiry story is very good. It varies between brands. But virtually, all over the world, with maybe 1 or 2 exceptions, we are growing inquiries per customer consistently and did so in Q3. And as we do in just about every quarter since we've been in business, as well as been public because we just get better and better at converting traffic into inquiries.

Operator

Our next question comes from the line of Zim Yin with Stifel, Nicolaus.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

It's George Askew in for Zim Yin. Two questions. Is there a scenario where you limit the number of tiers available to certain customers? I mean, I was struck by your comments about the customer paying $1,300, you want to make sure they're paying that or more as they move to a tiered pricing. Is that something that the company has considered? Or is there a role where you offer only the top tiers to certain customers?

Brian H. Sharples

Yes. So -- yes, for sure. And our plan is -- I mean, in order to make a tiered pricing system work, there obviously has to be a benefit to buying in the tiers. So if 50% or more of the people, for example, bought Platinum, it would no longer be a privileged thing to be in a Platinum tier. But rather than just put a restriction on how many people can be in it, our long-term plan is actually to raise the prices in those markets or you wind up with too many people in the tier. So let's say that our objective -- and I'm not saying these are exact numbers -- we're luckily in early enough days that we don't have to figure this out yet, although there are a few markets that are getting close. If we said we wanted tiers to be roughly, say, 20% of the overall, as that ticks up to 20% or greater, we would start raising the price of the tiers to try to bring it back in line. And there's no doubt that over time, this company will transition to something which is more akin to market-based pricing because clearly there are markets that are much more competitive than others or have higher price point homes than others. Or maybe there are markets that have 52 weeks a year available versus in Nantucket that might only rent out for 10 to 12 weeks a year. And so people are willing to pay more. And so that's how we're going to adjust it with price. And for the most part, that should be upside to the business over the long term. It's not something that we're considering making adjustments to here in the next couple of quarters, but we're going to continue to monitor penetration in all the different markets. And as soon as we've got a handful, where we've got to start moving from marketplace pricing method, then we'll do that, and we'll let you guys know.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Got it. As then as a follow-up. Obviously, you have a lot on your plate with product cycles and innovation and everything you've been talking about. Is the appetite for acquisitions internationally, for example, as strong as ever, or is there [Audio Gap] looking out, say, the next 12 months?

Brian H. Sharples

I think that our criteria changed a little bit. The appetite is still strong, but in the past, we were willing to buy smaller companies that had technology that was somewhat in disrepair. And I would say today, with all we have going on, the last thing we need to do is add a bunch of small sites that involve a lot more migrations for our company. So we're focused on the M&A side, on larger opportunities, and there are fewer of those out there, obviously, but they're out there. So we continue to be very active on the M&A front. We obviously look at a ton more deals than we end up doing. So I just think we're more disciplined. Companies have to really add to the long-term strategic value of our business for us to consider them. Sometimes that might be entry into a marketplace or a new geography that's important to us. There are some we might look at for competitive reasons, and there are also some diversifications like we did with BedandBreakfast.com that might make sense over time. But our appetite's still strong. I mean, there hasn't been a year in our history, where we haven't added some growth points and certainly listing growth to the business through acquisition. And I can't imagine that we are going to back off of that. They'll just be -- they'll be fewer and more meaningful is my hope.

Operator

And I'm showing no further questions in the queue at this time. I would like to thank everyone for joining today's conference. This does conclude our call for today. Thank you again for your participation, and you may now disconnect.

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