ETFMG Travel Tech ETF
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Greetings and welcome to the HomeAway Incorporated third quarter 2014 earnings conference call. At this time all participants are in a 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 third quarter 2014 financial results conference call. By now, everyone should have access to the earnings press release, which was distributed today at approximately 4 PM Eastern Time. 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 4, 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 July 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 affect neutral revenue. These measures when used in combination with GAAP results provide us with additional analytical tools to understand our operations. We have provided reconciliations of non-GAAP to GAAP measures in our earnings press release distributed earlier today, 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. 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; we’ve had another great quarter both financially and operationally. During the quarter, we welcome Mariano Dima, our new CMO to the leadership team. Mariano brings more than 20 years’ experience across all aspects of marketing and I was thrilled that he is taking the reins of our marketing organization. We also announced two other notable additions to our leadership team including Dan Lynn, who joined the team in September is the new head of Asia Pacific and the promotion of Marcello Mastioni, to head of Europe. As you know Europe is a significant quotient of HomeAway’s business and Asia Pacific is of course is critical to our future growth. Despite the fact that we incurred some significant one-time cost associated with making these changes, we are looking forward to the leadership that Mariano, Dan and Marcello will provide to HomeAway and we already have of course a great team. Since our last call, we completed several important product releases bringing increased functionality to owners and managers and enhanced booking experience to travelers. We also announced our expanded partnership with Expedia and that just in time for its one year anniversary luxury rentals from HomeAway now boasts the largest collection of high-end vacation rentals available anywhere. Turning now to our financial and operational results for the quarter. Despite FX headwinds laid in the quarter, revenue of $117 million was up 30% year-over-year and ahead of our expectations. Adjusted EBITDA was also subject to the effects of FX and was $31.6 million in line with our expectations. Free cash flow for the trailing 12 months was $117 million, which is up 28% and we ended the quarter with $800 million in cash and short term investments. We closed the quarter with approximately $1.35 million listings up 34% over the prior year and property managers now comprise approximately 40% of our listings, which roughly meres the overall market. FX neutral subscription revenue per listing for the quarter was up nearly 12% over the prior year. This is a reflection of increasing adoption of tier pricing as well as strong sales and network bundles across our sites. Tiered option was up approximately two percentage points compared to the prior quarter, thanks to continued momentum and penetration on our international sites. Overall renewal rate trends were stable in the U.S. and negative in Europe, renewal rate declines in Europe was driven by three factors. First, although European traffic growth did accelerate in the third quarter, absolute demand in Europe as you know as been slow and below our expectations for the last few quarters. Second, you did a major migration of Homelidays to our global platform in the previous quarter and as with our other major migrations we intend to absorb temporary disruptions and renewal rate. And the third factor is that we do have a greater percentage of property managers relative to the total subscription listings on our sites and PMs carry structurally lower renewal rates than individual owners. And this is because, when PM swaps properties within their account, we actually consider this a non-renewal based on our system accounts renewals today. Given our PM penetration is increased significantly over the past couple of years. We’d expect this headwind to persist in the U.S. and Europe against that specific metric. But, because demand was probably the most significant driver of renewal rate decline in Europe, let me now turn to traffic and how we’re addressing this. During the third quarter, HomeAway’s global network of sites attracted 232 million visits that was up 17% year-over-year, which is a welcome acceleration from the growth rate in the prior quarter. We continue to absorb healthy traffic growth rates in the Americas and in the third quarter we saw improvement in European traffic too, thanks in part to our marketing investment in that region. In addition, we absorbed improvement in other indicators of travel engagements such as unique shoppers. As we previously discussed, we are planning to significantly increase marketing spend over the coming years to increase demand for our customers and support our brands globally. Now turning to product and operational developments for the quarter. First, an update on our mobile guest management product, which we previously referred to in these calls as Glad, which is already available to property managers and started rolling out during the quarter to individual U.S. owners in August. Mobile hospitality manager allows owners to share helpful information from entry instructions, the Wi-Fi codes and an easily accessible mobile app. Shopper response has been very positive to-date and with the rollout just getting started only a small percentage of owners are using the product today and we have a tremendous opportunity to delight more travelers and enhance the HomeAway brand as we expand coverage and penetration of this service within our owner base. In other product news it’s worth noting that during the quarter, Vacationrentals.com which is third site that we own in the U.S. was migrated to our global platform following which we now have 86% of all our listings on our global network. This milestone drives important product and operational efficiencies for HomeAway and also opens up tiers, paper booking and e-commerce tools to owners and managers who use Vacationrentals.com. Traveler experience is also enhanced with an expanded selection of properties from the network and the ability to book online and a fully responsible mobile experience. We continue to make progress on paper booking, which is now available on all of our U.S. sites as well as our major European brands. We will continue to rollout the product to some of our smaller and European brands during the fourth quarter and into early 2015. Our platform PPB product which is designed primarily for individual owners continues to perform above our expectations. The launch of platform PPB has generated new listings which are additive to the business and monetization even without significant marketplace management or performance marketing activities is already approaching levels pretty similar to subscriptions. We have found pockets of opportunity to spend marketing dollars profitably against these listings and we’ll continue to do so where it makes sense, particularly as we get more scale and specific geographies which impacts conversion rates. We expect that activities focused on conversion will continue to drive improvements in bookings and monetization as well, we’re quite optimistic about the products long-term potential to generate revenue from existing traffic, performance marketing and our expanded distribution network which I’ll speak to in a minute. But first an update on our integrated PPB product, which is designed for a large property managers and represents the majority of performance listings as you know that we’ve added to-date. Our focus remains on test driven optimization and product enhancements to improve conversion, but it continues to yield slow but, steady results. We are cautious about spending significant marketing dollars against these listings and so conversion has been optimized further, but we remain optimistic that we are not being able to achieve conversion improvements that makes sense for the business over the long run. Expanding distribution provides an opportunity to increase exposure of all our PPB listings travels that otherwise may have not considered the Vacationrentals and is an important strategic step in taking Vacationrentals mainstream. As mentioned, we announced our expanded partnership with Expedia in September and that program is currently available its PPB listings and includes more than a 115,000 HomeAway vacationalrentals on Expedia.com. While we expect in times that our expanded distribution network will be a contributor to growth and PPB revenue. We anticipate it will take time for the program to ramp and be a meaningful contributor to revenue. We are still in the very early stages with Expedia; in terms of both the listings we provide them and the exposure that we’re giving the listings on their site today. Now I would like to discuss some of the ways we’re evolving as a company. We started HomeAway just about 10 years ago; we will celebrate that anniversary in February. And when we started this business as many of you know, we were a listing service where we brought buyers and sellers together. And now as we developed into a true marketplace, it has become increasingly important that we balance the needs of both suppliers and travelers. We’ve made it very clear recently that we are placing emphasizes on a multi-year marketing strategy that much of our efforts focused on driving demand and efficiencies that increased bookings and saved time for our owners and managers. We’re also equally committed to elevating the traveler experience on our sites. The most impactful change we can make to enhance traveler experience is to drive adoption of online booking. And so I want to make it very clear that we have set a goal and it is our intention to require the vast majority of our listings to be online bookable by the end of 2016. What this means is that travelers will see an online booking button will listing, know the calendar and rates are correct and have the option to send a booking request and be confident that they will receive a prompt response. It’s important for you understand what this means for our owners and managers, first, the online booking system will accommodate both subscription and PPB as we believe this flexibility gives us the competitive advantage in the marketplace. We will also by the way continue to be free for travelers. For subscription customers there will no charge from HomeAway to adopt online booking and for PPB customers online booking is already a requirement on most of our platforms. Second, we will expand the programs to support multiple payment options including those that may be unique to an owner or manager and not provided by HomeAway. These changes over the next two years will require that owners and managers maintain their calendars publish rates that accurately reflect all fees and respond the booking request as quickly as possible and within 24-hours certainly to be competitive on our sites. All of these items are important elements of listing quality and in the shorter term will be faced into our sort algorithm which determines where listings appear with sort order. Starting in the fourth quarter, we will also make responsiveness scores visible to travelers and while we’re aware that there may be some owners and managers who initially are uncomfortable with these changes, lack of response outdated calendars and confusion over rates creates poor traveler experience and is not consistent with the experience that we want to deliver and that we believe we have to deliver going forward in the future. We believe that increasing traveler confidence in all aspects of our booking process will increase usage of our sites and we’ll ultimately benefit individual owners and managers who list with us. In closing, as we approach the company’s 10 year anniversary, I’m excited as ever about the next 10 years of the company. In addition to the product goals that I just outlined, we remain committed to the accelerated marketing strategy and margin objectives we outlined last quarter. And we’re poised to make HomeAway an iconic global traveler brand in the process. With that, I thank you for your support and I will now turn the call over to our CFO Lynn Atchison. Lynn?

[Lynn Atchison:]

Thank you, Brian. For the third quarter, total revenue of $117.1 million was 29.9% higher than the comparable quarter last year with strong performance in both listing and other revenues. On a year-over-year basis, foreign exchange was relatively stable and that FX neutral revenue growth was 29.7%, excluding Stayz Q3 revenue growth would have been 23.9% year-over-year. Compared to foreign exchange rates in July, the dollar has strengthened in the year, where many other currencies have weakened. As more than 40% of our revenues were generated outside of the U.S, this impacted our results particularly late in the quarter. During the quarter, we incurred one-time cost associated with the leadership changes Brian discussed. While portion of these expenses were included in our July outlook than came in higher than expected. We also do not capitalize in that internal development cost as planned, which resulted in slightly higher OpEx to lower capital expenditures. We are pleased that despite these expenses and the FX headwinds, we were able to deliver EBITDA within our previously stated range. Listing revenue up 27.2% year-over-year it’s $96.6 million, benefited from an increased in the number of listings higher average subscription revenue per listing and increased performance based revenue. We ended the quarter with 716,000 subscription listings, reflecting growth of 3.5% in subscriptions over last year. As in previous years, we offer a three month subscription product in France, which is purchased primarily in the summer and thus we experienced and expected sequential decline in subscription listings from Q2 to Q3 as the short season listings expire. Outside of normal seasonality, we’ve absorbed slower growth in subscriptions in Europe in the third quarter primarily due to the renewal rate softness Brian discussed earlier. We have 319,000 performance listings as of the end of September. PPB additions during the third quarter were lower than prior quarters. We purposely slowed down acquisition at new integrated PM PPB listings in Q3 to focus on improving conversion for the large number of customers we signed up earlier in the year. In the fourth quarter, additions of property manager listings are expected to be higher than they were in Q3, so understand that we will lap our introduction of paper booking and thus expect the year-on-year listing growth to slow. Brian also discussed the, our increased focus around online bookings, given its importance to travelers. Let me clarify that this is a traveler facing metric as opposed to financial metric. Historically, we provided regular updates on our progress towards e-commerce adoption on our network sites. As Brian described, we’re evolving and expanding the concept of online booking to include all listings across all of our brands. Last quarter, we reported 321,000 e-commerce enabled listing, comparatively that number would be approximately 351,000 this quarter, an increase we’re pleased with. Going forward, we will report against the new definition of online bookable listings. This definition includes listings with a book now button, but not online payment. It excludes listings signed up for our payments platform though without enabled the book now button. Therefore under this new definition of online bookable listings, we would exclude 57,000 listings that except online payments that do not have the book now button. Conversely, we are adding 44,000 listings from our acquisitions that are currently online bookable set up to this point have been excluded. This results an approximately 338,000 traveler facing online bookable listings at the end of the third quarter. Other revenue of $20.5 million increased 44.2% over last year. Growth in this revenue category continues to be driven largely by increased sales in ancillary products consistent with last quarter, software and advertising also contributed to growth in the other revenue category. With respect to our advertising outlook, we’re making policy changes that will enhance the traveler experience in conversion. So, we reduced potential advertising revenue. There will continue to be advertisement of complimentary services on our site that we will limit outside advertising on our homepage, as well as advertising on premium subscription property pages. So, advertising will continue to be a profitable source of revenue, this change will impact our advertising revenues from Q4 onwards. Turning to the expenses. Total operating expenses increased 36.8% year-over-year an acceleration from Q1 to Q2 of this year. As communicated in July much of the expense acceleration was due to higher direct marketing, quitted $18 million was about 60% higher than last year normalizing for acquisition. In other categories, much of the year-over-year increase reflects to increased compensation expenses due to higher numbers of employees. We ended the quarter with 1,737 employees an increase of 276 employees’ year-over-year and an increase of 32 from the second quarter. Adjusted EBITDA increased 8.8% to $31.6 million or 27% of total revenue. Beginning with the June quarter, we incurred interest expense related to our convertible debt. While the cash coupon on the debt is low at 12.5 basis points, we’re recording interest expense each period associated with the amortization at the in period debt discount and debt issuance cost incurred. These non-cash items were $4.4 million for the quarter and will be relatively consistent on a quarterly basis over the near term with amounts increasing over the term of the debt under the affected interest calculation method. Consistent with last quarter, other expenses of $1.4 million relates to the cost of hedging our exposure to changes in foreign exchange primarily related to our intercompany debt structure. Our effective tax rate for the quarter was 13.9%, compared to a 2013 full year effective rate of approximately 40%. The slower effective rate in Q3 was due to a discrete tax benefit of $2.5 million related to the merger of our Spanish subsidiaries. We restructured our Spanish entities and had a more favorable than expected outcome. For the full year, we expect our rate to be 33% to 40% and improvement of our earlier estimate. For the quarter, net income attributable to the HomeAway was $4.9 or $0.05 per diluted share and was negatively impacted by an increase in the value of our non-controlling interest and book badge. That’s one negatively impacting our results; the increase in the value of our non-controlling interest is reflective of the investment creating higher shareholder value. Earnings per share was lower than the comparable period last year, primarily due to the interest expense associated with our convertible debt, increased marketing expenses, higher share count offset somewhat by lower tax expense. Non-GAAP net income reflects the operating result of our business, after excluding non-cash expenses. As mentioned, starting in Q2 our GAAP results are impacted by non-cash interest expense related to our convertible debt. Beginning in Q3, we’re adding back non-cash interest arrive at non-GAAP net income in order to provide a more accurate year-over-year comparison of our results and to align with comparable disclosures that other filers. Moving on to our balance sheet and cash flow. At September 30th, cash, cash equivalents and short-term investments totaled $802 million. For the quarter, we generated free cash flow of $20 million resulting in a $117.2 million of free cash flow on a trailing 12 months basis, 28.1% higher than the same period last year. Cash was generated during the quarter from our operations and the primary use of cash and investments in the quarter were from capital expenditures to facilitate the growth of the business. We had some delays related to our office expansion in Austin resulting in a shift is in capital spending from September to October, a outlook for the remainder of the year reflects this. We ended the quarter with $175 million in start revenue, which is up 15.4% over September of last year and up approximately 18% FX neutral. Now I would like to take a few minutes to look forward. We are tightening our full year revenue range and on an FX neutral basis slightly increasing the high-end of our revenue outlook. However, due to the FX headwinds I discussed earlier, the net effect is a reduction on high-end of our revenue range for the full year. The new range of $444 million to $446 million reflects FX neutral growth of approximately 28%. The negative FX impact on the top-line is somewhat mitigated by our foreign operating expenses. But nevertheless there is still an impact on adjusted EBITDA and thus we’ve lowered our full year adjusted EBITDA range to $116 million to $119 million. The primary component of this change is foreign exchange, but also reflects discrete cost associated with leadership changes that occurred in the third quarter along with future lower capitalization rates and internal development cost and some where we had 2015 marketing activities. The new ranges reflects adjusted EBITDA margins of 26.1% to 26.7%. And some other assumptions there are few models. Foreign exchange rate of the euro of 1.26 for each U.S. dollar going forward and consistent with our ranges communicated earlier in the year, amortization and intangibles is expected to be $3 million to $4 million for the fourth quarter. Interest expense associated with our convertible notes will be approximately $4.5 million in the fourth quarter. Full year effective tax rate is now expected to be in the range of 33% to 40%. Stock compensation expense for the fourth quarter to be in the range of $12.5 million to $14.5 million. Basic share count to be in the range of $94 million to $95 million and our fully diluted average share count to be in the range of $96 million to $98 million shares. Capital expenditure is in the range of $13 million to $14 million for the fourth quarter. In consistent with our previous expectation, foreign exchange hedging cost related to our intercompany debt structure are projected to be just less than $1 million for the fourth quarter. This includes our prepared remarks, thank you again for your continued support at HomeAway.

[Operator:]

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Lloyd Walmsley with Deutsche Bank. Please proceed with your question.

[Lloyd Walmsley:]

Thanks, wondering if you can just give us a little bit more color on the conversions around paper booking and to what extent are the conversions once the user as seen them as an option. Are the conversions pretty good as most, and other words as most of the weakness in conversions, because of where they are showing up in search results or is there also work to be done even when they are surfaced? And then if you can just give us an overview on what are the key drivers to improve that conversion as you move forward?

[Brian Sharples:]

Yes sure Lloyd, so remember there was two different kinds of PPB. There is the platform PPB that comes in and signs up through our platform and then we’ve got a big chunk what we call integrated PPB which are historically the ones we’ve added have been property managers in Europe. The platform PPB stuff is converting great, it’s already doing on balance pretty close to what subscriptions do in terms of annual revenue and they are still fairly low in sort orders. So, those are ones where we don’t have a conversion problem, the numbers we are going to get a lot better as we move them up as I’ve said before, traffic that’s gaining factor on that. But and the U.S. traffic is healthy, so we do have the ability to get more aggressive. With the integrated property manager listings that has been a challenge, those are lower converting listings for whole bunch of reasons. Some of them have to do with the complexity integrations and the systems they have and the quality of data that we get. Some of them have to do with the fact that those listings are marketed in a lot of different places, some of them have to do with the fact that some of those listings aren’t as price competitive, as the ones that we have that come in through the platform. And that’s regardless of where they sit on the sites. Now we are keeping those listings pretty low, because until we see a high conversion rates, we don’t want to replace our subscription listings with those listings. And so until that happens, once we get conversion up and some of things are working on, some of them are technology oriented, some of them are have to do with, specifically how they are marketed on the sites and then have to do with many of those IPMs. For example today, we haven’t reported over the reviews yet and once we get the reviews asking help with conversion. And so there will be a double whammy once we get to the place where the conversion is adequate for us, then we will be incented to move them higher and you will get a combination of both effects. I think, probably if you’re thinking about some of the long-term of HomeAway we’re going to be very steadily adding platform PPB listings, for the rest of our history and those are really going to start adding up. And that’s clearly the goal then the business, are those listings. It’s just that, we can’t go out with the sales force and grab a 100,000 of those overnight like we can with IPM, but we are bringing them in every day, every week. So, we remain just super optimistic about PPB in general, because of the performance we’ve seen with that segment.

[Lloyd Walmsley:]

And I guess following up on those comments, I think you’ve said in the past that with platform PPB there were some things you could do to grow that, marketing around certain events like the Super Bowl, et cetera to get more of this high quality PPB listings, like any update there on what you may be planning to do to grow those ones?

[Brian Sharples:]

So, what I would tell you is that we do plan to get more aggressive with different types of supply that will fit into that category. We talked about this before the call, unfortunately its competitive information we really don’t want to talk about right now. But, in 2015 yes there are some things we’re going to do, to surface new pockets of those kinds of listings that we think will be very high performing for us.

[Lloyd Walmsley:]

Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Scott Devitt with Stifel. Please proceed with your question.

[Scott Devitt:]

Hey Brian, I guess just following on that question. You’ve been historically, I think trying to determine the type of visibility of that PPB would get relative to listings and in terms you commented a little bit in relation to Lloyd’s question. But as it relates to, Google search driving traffic to PPB, the visibility on the side as well as Expedia. Do you have an update in terms of your holistic view of PPB in managing that relative to the listing inventory? Thanks.

[Brian Sharples:]

Yes, I mean I think Scott, in a very short amount of time internally we’ve got pretty darn sophisticated at that. I mean the data that we can see internally with our marketplace management system is very, very good. I can tell you that in terms of conversion rates for all PPB properties, we’re working on conversion and so we see slow steady improvements and those occur that we can look out into the future and we can use that to model, of all the things you talked about search physician on our site is the biggest lever, it is the biggest lever. I mean even if you include SEM and the mix, or if you include distribution partners who we can’t control. So, I can’t control whether Expedia exposes a 100% or 10% from our, but we can certainly control exposure on our sites. And we’ve done enough experimentation to know that that is, a big slider bar for us, and so where we are today is, we’re doing that for the listings that convert well and we’re holding back on that for the ones that don’t, because it’s like using valuable real estate on something that doesn’t give you enough of the payback to justify doing it. And so, all the trends are in a positive direction, yes we can, I think we’re pretty decent at modeling that internally. We’ve been fairly accurate, I mean certainly in this quarter I’m looking, and obviously there has been, a reaction today with the stock, but the reality this quarter, we beat our numbers despite FX headwinds. And virtually every category of our business were still pretty darn good of projecting how we’re going to do as a company. I can’t control FX, but with respect to e-commerce and PPB we’re fairly accurate at that internally, I know it’s a really complex thing for you guys to model, because you don’t have all the data we have and you don’t have insight into what percentage of the listings we’re going to move up by what amount next month or next quarter. But we actually do now manage that very carefully inside the company.

[Scott Devitt:]

Thanks Brian.

[Operator:]

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

[Unidentified Analyst:]

Hi it’s Dan [indiscernible] on for Doug. I got two quick questions, one on the changes that you are making for owners to require more online bookings, have you gotten the sense that you expect any amount of turn from that over time? And then also just wanted to add on macros that you talked about FX, but if you could talk about some of the macro impacts if any you’re seeing in European? Thanks.

[Brian Sharples:]

So, I’m glad you asked the question about online booking, because that was sort of in the middle of my script. But it’s a pretty big deal for us, just as a preface a little bit, we’re in February we’re going to be ten years old as a company. And that’s a kind of a milestone for us and we’ve just enhanced our team, with a new very senior marketing guys and all of us have spent a lot of time in the last few months really looking ahead for the next 10 years. And I think as a team we’ve decided that we’ve got a huge opportunity in this business and we’re going to start getting a bit more aggressive when it comes to making sure our product is as good for travelers as it can possibly be. I think one of the realizations we have, and it’s the reason Lynn actually made a swap on a metric is that we’ve been very focused on e-commerce. But e-commerce itself really has two components for us, one component is the traveler facing component, where the traveler can go in, know that the data is correct hit a button, get a quote and put a booking request into the system. And there is a second component of e-commerce which is the payment part of it, which we have a payment product, but people use just like booking our commerce universe, payments are up and handled by other people. We have really, I think refined our thinking to now as we look forward over the next few years, we believe that the biggest change we can make in our business to really drive in experience that, our customers rave about is to get the vast majority of our properties online booking enabled. Now from a payment’s perspective, one of the tricks of doing that is that we’re going to be developing systems, very shortly here that we’re going to allow us to accept multiple forms of payment however, the owner wants to get paid and still have that work through invoice online booking experience. So, on the churn question, obviously we could do that with policy. So, we could say tomorrow, everyone has to go online booking for your offer site, if we did that tomorrow there is no question we could have a much of churn, because number one we don’t support a bunch of payment methods that we need to support and so we’re going to get up to sniff on that. And number two, we do have to give our customers time to make this change, because our customers aren’t used to it and we wanted to give them a heads up. So we are now publicly saying not just to you guys, but to our customers who are about to build a micro-site for owners. So, they can understand that, that they have two years. We have if you look at our new online booking metric taking online bookings from 5% 12 months ago was 5.4% of our customers to 32.6% one year later today. So, our objective of getting that to a 100%, we are actually arguing on pace to do that, I think we’re going to bend the curve up, because of some policies decisions and other things we’re doing. But we’re giving the customers enough of heads up that I actually don’t believe, we’ll see a lot of churn and I think the other reason is that where they are customers going to go, I mean trip now, airbnb now the most is the competitors are online booking based. There really aren’t any major sites that deliver the kind of traffic we do that don’t have that kind of an experience. So, I think we’re going to be able to manage that very effectively. In terms of macro trends, I mean FX is definitely the one that’s affecting the numbers in our guidance, if you look at our projections for the end of the year, where the top-end of our range we took down $3 million bucks where we actually took it down $4 million for FX and then we boosted it up $1 million and actually on an FX neutral basis, it’s actually a raise, but I know it looks like we’ve lowered then almost got the FX, so that’s a big trend. In terms of Europe itself, I mean the traffic headwind in Europe, clearly is indicative of the fact that the economy especially in Southern Europe is still, has not yet recovered. So, we now know how to affect traffic and we have, I think we told you on last quarter, that we were going to take the leverage of our business and move it into marketings that we can spend a lot more on marketing going forward without having a big impact on margins. We are still in the planning process for next year, but we’ve gone through enough of it, where, I can now tell you confidently that we are going to be increasing our marketing budgets next year over 50%, over 50% and still hit that margin objective we told you last year, because of the great leverage we have in our business. We have to do some of that to compensate for the fact that in Europe it’s not just coming like pennies from heaven like it is in the U.S. We can clearly feel that the U.S. economy is strong and European economy is still pretty week. And if we can spend a lot more on marketing and Europe recovers in a big way then, we’ll see double goodness. But right now, I think we’ve got to work a little bit harder in that geography, okay.

[Unidentified Analyst:]

Thank you. Thanks, that’s helpful.

[Operator:]

Thank you. Our next question comes from line of Eric Sheridan with UBS. Please proceed with your question.

[Eric Sheridan:]

Thanks for taking the question. And Brian, I really appreciate the color on online booking. It feeds into my question which is, how do you see sort of the industry develop longer term? It’s sort of a big, sort of 30,000 foot type question. But you referenced the lot of things in there with respect to Airbnb and trip advisor and obviously, price line also making a bigger push in the space. How do you see that all sort of evolve and sort of where HomeAway is fitting in today and how you think that evolves longer term, as well on back of sort of your comments on online booking in general? Thanks so much.

[Brian Sharples:]

Well, I mean I think – it’s funny, because I told you guys over the years, and it’s absolutely true. Our owners have resisted online booking historically. And even two years ago, when we surveyed our owners, 90 plus percent said they had no interest in online booking. And that’s because, our owners make tons of money and they are doing it in a certain way and they are happy doing it that way. But I think traveler expectations are changing in part, because of competition. But in a larger part, there is actually a presentation I’ll do it focused right next year where we’re just looking at the next generation of travelers in the Millennials and people who grew up with technology. I mean, our kids grew up with cellphones in their hands and they are used to getting things done instantly online, not talking on the phone, not negotiating with people. And so, if you’re going to be a player in this business from an owner perspective or property manager, the word we’re putting out is you’re going to have to adapt over the next few years. We are thankfully in a position where we deliver so much revenue for our customers that I think we can now take a leadership role and say to them, we’re done trying to just convince you, we’re now going to say you’ve got to make this happen in the next couple of years. And we’re going to – we’ll develop tools and all these other of things to make it easy for you. But in the long run, our belief is that we will capture more business and get more travelers staying in Vacationrentals versus hotels by creating that experience. Now, competitively, there are still a number of differences that will exist as the market evolves. So, I think all the major competitors will have online bookable inventory. However, what will be different on HomeAway? Online bookable doesn’t mean we’ll get out of the subscription business. Our customers love subscriptions, they love it. They don’t want to be paying. The vast majority of customers don’t want to be paying commissions to somebody. So, we are going to keep to that as a differentiator in our business, no question about it. We are going to be free to travelers. Trip advisor and Airbnb have chosen to charge big fees to travelers. Well, we’re going to have a pretty sizeable marketing budget in the next few years. And we’re going to be letting everybody know, when you come to our platform and you don’t pay a fee and we think that’s a big deal, because if you look historically at the travel industry, those competitors who adopted no traveler fees first are the ones that ended up being the big winners in that business. And so, differentiators will clearly exist, there will be differentiation in terms of the properties themselves, there is a lawsuit you may have seen that we field in San Francisco, that has a lot to do with how San Francisco is no treating different classes of lenders differently. They are allowing tenants to actually rent but not the owners of the properties themselves. Why is that happening? Well, that’s happening because there is a competitor in San Francisco that deals mostly with tenants who run out primary homes. And we as a business mostly deal with owners who rent out second homes and that’s the business that we really want to be in and stay in. And we are going to stay focused on. So competitively, I don’t think everybody is smashing together. But on that one point of online booking and e-commerce, I do think that’s where the industry winds up. And so we have just decided we are going to get there fast and not let that be a competitive advantage that somebody else has over us.

[Eric Sheridan:]

Great, thanks Brian.

[Operator:]

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

[Mike Olson:]

Hey good afternoon. Earlier when you were just talking about lack of interest in online payments by owners, you mentioned that part of it is that those owners make tons of money. So, why would they change off the platform? And in calculating the effective take ride of HomeAway, it appears materially lower than your competitors when you include those traveler fees that you were just talking about. So your customers do make tons of money off your platform. In other words, there seems to be room to potentially move pricing higher. I guess, I’m curious how you think about that and may be that [indiscernible].

[Brian Sharples:]

Yep good question. So absolutely, well, let me say first and foremost, we love to be the company that delivers the most value, because that’s a much better position to be in. There is no doubt that we can charge higher prices, we have said that consistently. But there is a limit. If you look at right now naturally, what’s happening in our subscription prices, I mean was up 12% year-on-year this quarter and that’s been – I mean it’s been virtually every year, been in the business it’s between 12% and 14%, compounded every single year. So prices are going up pretty rapidly. I think they will continue to go up pretty rapidly. Now, we have opportunities. Lot of people asks this, well, when are you going to do geographic pricing? We are not working on geographic pricing right now, that’s potentially a long-term opportunity. People ask us, well, when you’re going to raise the high-end, because the value of being a platinum subscriber in your site is really high. And the answer of that is, yep that’s a huge opportunity we have too. And we may do a little bit of that in 2015. But as long as the pricing is going up naturally, that’s a level we can save, if we need that in the future. And we really like to be the company that continues to deliver good value. Because if we take the value away that we deliver then we’re just the same as everybody else. And so, that’s also why I say the subscription business is a huge competitive advantage for us, because once somebody is a high performing customer in one of these businesses they have a preference for that, because it’s a better value and that makes them very sticky customers for us. And I am not sure everybody quite appreciates how important that is.

[Mike Olson:]

All right. Thanks very much.

[Operator:]

Thank you. Our next question comes from line of Heath Terry with Goldman Sachs. Please proceed with your question.

[Heath Terry:]

Great, thanks. I was wondering, if you could give us a sense of what you feel like there is that you can do to drive more adoption of some of the higher value features that you’ve been rolling out over the last year, things like online payments and online calendar and even within the existing subscription, subscription framework just given the impact that those would seem to have on the user experience?

[Brian Sharples:]

Well, so it’s – I mean, its search physician, really search physician is the currency we have on our sites that we use when we want to incent behavior. And some of the things – when I said, we’re going to make policy decisions over the next two years to accelerate these things, part of that does have to do with how do we weight sort order. Because, sort order is worth even within [this year] [ph] – is worth by count of money to a customer and it really hits them in a wallet. And so, when we want a reward behavior, that’s how we do it. But I think the other part of the heat is that, you’ve also got to make it easy and simple. So when it comes for example, to online payments, an on boarding process that takes 5 minutes versus on boarding process that takes 15 minutes is going to make a huge difference too. So there is big focus internally on the product side of it as well to do whatever we can to make it simpler. I think on the payment side, one other things you are going to see us doing in the next few quarters is moving to a more flexible structure for accepting payments. One of the reasons that we really want to get everybody in our payment platform, looking so much to make money of the spread on payments, it was A; for trust and safety, because we can really back those up. And then, B because we had invoices tied to them and we can put insurance products and those kinds of things. We now have a roadmap internally that’s going to allow us to accept other forms of payment that might be easier for owners, while still providing trust and security. And I’m not going to go into the details of what that product is for competitive reasons. But I think we have that nut cracked and that’s something we’ll be rolling out in the coming quarters. And we also believe that we can attach a full online booking experience with invoices no matter how the customer actually accepts payment and that allows us to sell the ancillary products and get sort of 99% of the financial goodness even if they’re not using our payment platform, because we’re earning a pretty low margin on payments anyway as it was.

[Heath Terry:]

Got you. Now, that makes sense. I mean, can you give us a sense of what you see from a conversion perspective on listings that offer, online payments that offer an updated booking calendar relative to the sites or the sites that darn I mean. How much of an impact on conversion could improving the – the adoption of those two things have on the, on the business or on total bookings how you could look at it?

[Brian Sharples:]

The last time we looked at it, the listings that were, fully online booking and payment enables we’re doing about 50% better than the ones that weren’t. But it’s a little bit of a circular thing where we do actually grant those people, because they have those services, a slightly higher physician and so whatever. So to some extent, we are making a true by rewarding them for that behavior. But, even if you factor that out, it does appear to create a significant and non-trivial increase in business for people. The people didn’t care about in the past will want to go shape do their thing, but lot of these people now get bookings in the middle and heightened from foreign countries when they couldn’t pick up the phone before and so it’s clearly additive to their businesses.

[Heath Terry:]

Great, thanks.

[Operator:]

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

[Chris Merwin:]

Thanks. So, is the softness in demand that you see in Europe is that just a function of macro or is there some aspect of increased competition there. And then you also talked about how you planned to spend a bit more on marketing to improve demand for SEM spend in particular, how the ROIs in Europe been impacted at all by people bidding up the price, there is [indiscernible] investment that you’re planning to make there more brand focused? Thanks.

[Brian Sharples:]

It’s going to be a bit about Mariano is relatively new here, he is been here for a month. We’re very hard at work at planning for 2015, we’re going to we will be announcing a new agency relationship by the end of this year. And so, it’s actually a fairly tall order for this guy to get that together for next year, but we’re working very hard on it. There is no doubt that, SEM prices in Europe have gone up and it’s not, even so much booking.com and Airbnb, there are lot of local competitors in these markets too. And what’s kind of happened is there are number of businesses, they are startups even that are out in Europe that have absolutely no competitive advantage whatsoever from an SEO perspective. So HomeAway is a business, we get a ton of traffic by SEO, because we have the best content with the older site, we have the most. And so if you start up in Europe, say there is a company whether trip homes or say there is a number of companies that they have done this. And they have no free traffic, so all they can do is spend money on SEM. And what those companies are actually finding, you’re going to see a ton of them lot of business and I know that is for a fact, [indiscernible] and others, because you can’t actually make it in this business, if you don’t have a brand, if you don’t have branded traffic, if you don’t have free traffic by SEO, it’s almost impossible to make it work with SEM alone. And so, a lot of these people have been spending crazy money at the moment. I think some of that is going to call out, as far as how it impacts our business, I would say our cost of SEM has gone up marginally, the percentage of traffic we get from SEM and Europe is actually not that high. So, it hasn’t had a huge impact on our cost structure out there and it’s still for us, it’s been on the margin say, hey we’re going to spend more money on marketing let’s throw it in the SEM. It is going to deliver more traffic and more bookings, which amortized with all the other marketing activities we have is still a hell of return on marketing effect, it makes sense. We are advantaged in that way, which is terrific, but we will be pursuing both grand marketing and SEM is absolutely true that has we’ve looked at different markets in Europe, they all have different characteristics. There were some markets in Europe that, where SEM has become, I would say almost cost prohibited. And brand marketing is actually achieved. There are other markets where brand marketing is very expensive, just because of the cost structure of offline advertising in those markets and SEM is relatively cheap. And so, we are doing this in a country-by-country basis, we’re pretty blessed to have a guy like Mariano who came from Europe. So, he has a lot of insight and he was running 22 countries, the first thing he told me was, he got to look at every one of them separate, the characteristics are completely different in every market. And so that’s our approaching and the effort to how to make a generic statement other than, we’re going to be applying the right mix where it needs to be applied. And overall our marketing is quite profitable for us, because we’re highly advantaged versus competitors with free traffic and branded traffic.

[Chris Merwin:]

Very helpful, thanks.

[Operator:]

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Aaron Kessler with Raymond James. Please proceed with your question.

[Aaron Kessler with Raymond James:]

Hi guys couple of questions, first on the subscription listings, I believe they declined I may have missed it, but they declined about 29,000 sequentially, I think why should they decline about 15,000, I just want to see if there is anything specific on that. And also in terms of Europe, pricing kind of noted that thing started, so we kind of get it going into Q4, anything you would know kind of going into October early November, in terms of Europe demand environment changing that you’ve seen so far? Thank you.

[Brian Sharples:]

No I mean, I’ll take the last one first, which is we had a welcome acceleration from Q2 to Q3 and we haven’t seen anything change really since the time we closed the quarter. So, things are still okay from a momentum perspective. In terms of sub-listings then you probably more familiar with the numbers it’s absolutely seasonality which has a lot to do with short season listings in France.

[Lynn Atchison:]

Yes.

[Brian Sharples:]

And then a little bit of renewal rate, because you’ve got renewal rate was, couple of points off in Europe. So that’s going to affect those numbers for sure.

[Lynn Atchison:]

That’s right Brian.

[Aaron Kessler with Raymond James:]

Got it, great. And just to clarify, I mean it seems like there is more stock download afterwards on the guidance, is that, is the complete revenue revision FX or some of it like from the color, just want to clarify that?

[Brian Sharples:]

It’s actually, yeah just to be really clear about it. We took our range, we took we left the bottom of the range of saying, the high-end of the range we took down by $3 million, because just on a pure FX calculation, it’s down by $4 million and then we took it up $1 million for better than expected performance. So, on an FX neutral basis the top of the range is actually higher, but in a press release that went out people obviously saw it is lower and didn’t look at those details, I suppose. But that’s, but that’s the fact around the change in top-line.

[Aaron Kessler with Raymond James:]

Great, thanks for clarifying.

[Operator:]

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

[Kevin Kopelman:]

Hi thanks, just a few questions. So, first on did you give the, did you give us the Stayz contribution in the quarter?

[Lynn Atchison:]

Yes Kevin, what we said was, we didn’t give you the dollar amount, but we indicated that the year-over-year growth rate would have been about 24% without Stayz.

[Kevin Kopelman:]

Okay. And then, okay will check that out.

[Lynn Atchison:]

I mean that were to be about $5 million.

[Kevin Kopelman:]

Okay. And then on the guidance and I apologize if you already addressed this, but clearly a top-line was 100% due to FX or more than 100%, but on the EBITDA guidance revision it sounds like there were some other elements in the area can you just go over this again?

[Lynn Atchison:]

Sure, so about half of the EBITDA is FX, but then the other things what we did have some one-time cost in Q3 associated with some leadership changes. And we decided that, we really, still wanted to do the things we wanted to do in Q3 and Q4. So, we are not adjusting for that, so that is going to be additional expense for the full year. And then the other two elements were, coming in little bit lower on the amount of capitalizing for internally developed software cost. The good thing about that is that’s really cash neutral, it reduces our EBITDA but increases our free cash flow. And then there is a little bit of marketing run ahead, it’s not a lot, but Mariano got here and wanted to roll the fleets and get going on some things which we didn’t have forecasted in July.

[Brian Sharples:]

Yes let me address it, essentially we’re developing trading for 2015. And so, we had a budget for that that we stuck in for the fourth quarter before he got here. He is bringing top like that agencies and this is going to, it’s going to cost a little bit more, but that’s not the biggest impact is FX, the leadership changes from last quarter that roll to the end of the year. Some software cap which is just the calculation that we make an estimate on and we’re little bit off and so with those are the four factors.

[Kevin Kopelman:]

Yes. And so different question, thanks for that detail. On the expanded distribution network, could you give any color on your progress of adding new partners or is that something that that’s really like a 2015 project?

[Brian Sharples:]

No, we didn’t put anything in the – in the splits, all I would say is, in coming quarters we certainly do expect to announce other partnerships with other companies dealing with distribution, but we don’t have anything specific to say this quarter about it.

[Kevin Kopelman:]

Okay. And then lastly, can you, just on the whole San Francisco legislation, can you give us any more color around, what that means or how you expect that to play out?

[Brian Sharples:]

Sure, for those of you who don’t know, we did file a lawsuit against the city of San Francisco. The first thing I will say, is – it’s not terribly material of the business, we have 1,200 listings in San Francisco versus over a million worldwide. However, we decided to engage in this lawsuit on behalf of our homeowners who now in San Francisco according to a new law have less rights to rent their own properties when their tenants do open. So if you are tenant who is living in your apartment in San Francisco you can rent it, but if you are an owner that’s renting long-term to a tenant, you actually can’t which is really hard its turning down, it’s also unconstitutional and not what we consider to be fair regulation. So, believe we have very strong case there, I guess I leave it to you, the attorneys in the city to solve that. But that’s really all it’s about, and it’s not and people say this is something we’re trying to do against here at B&B, I will tell you. If we win this lawsuit, it will actually be good for your B&B, because it needs a more different classes of people can rent within the city. We just think it was very poorly constructed law and this was the best way for us to address it.

[Kevin Kopelman:]

All right, thanks a lot.

[Operator:]

Thank you. That is all the time we have for question. This concludes today’s conference. You may disconnect your lines at this time. And thank you for your participation.