ETFMG Travel Tech ETF
Q4 2014 Earnings Call Transcript

Published: 25 Feb 2015

[Operator:]

Greetings and welcome to the HomeAway Inc. Fourth Quarter and Full Year 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. I would now like to turn the conference over to your host Jen Ford, Director of Investor Relations. Please go ahead, ma’am.

[Jen Ford:]

Thank you and welcome to HomeAway’s fourth quarter and full year 2014 financial results conference call. By now, everyone should have access to the earnings press release, which was distributed today at approximately 4

[Brian Sharples:]

Thank you, Jen. Good afternoon and thank you for joining us today. February marks HomeAway’s 10th anniversary and I’m incredibly proud of what our extraordinary team has accomplished over the past decade. During that period, HomeAway has experienced consistent and impressive growth in both revenue and free cash flow doing what we do best bringing friends and families together in whole houses all over the globe. To kick-off the next 10 years, yesterday we introduced some elements of our new global integrated marketing campaign, which brings to life the joy and spirit of what makes the HomeAway product offering so unique and special. At the center of the campaign is our new brand platform, the whole house, the whole family, a whole vacation. These words embody the core benefits upon which HomeAway and the Vacation Rental category were built. And they were carefully chosen to differentiate and highlight what we do best at HomeAway. We’re very excited about this milestone and I’ll elaborate on our marketing efforts in more detail in just a few minutes. But first, let me update you on our financial results for this year. Both revenue and adjusted EBITDA exceeded our expectations despite significant FX headwinds late in the year, revenue of $447 million grew 29% year-over-year and adjusted EBITDA of just over $119 million grew 23%. We continue to generate strong free cash flow which totaled $117 million for the trailing 12 months up 26% over last year. As a result, we ended the year with a healthy balance sheet that included $813 million in cash and short-term investments. Turning to our operating metrics for the fourth quarter. At year-end, we had approximately 1,043,000 listings in our family of websites, up 17% year-over-year. We intentionally slowed listing growth during the quarter to absorb the high volume of listings we’ve taken on in 2014 and to focus on conversion and that’s been a good story which I’ll talk about in a minute. FX neutral subscription revenue per listing was up nearly 14% year-over-year reflecting continued strong adoption of tiers and bundles. Renewal rates were stable in the fourth quarter at approximately 73% on an adjusted basis. During the fourth quarter, HomeAway’s global network of sites attracted 178 million visits, an increase of 22% year-over-year. Organic traffic grew 17% year-over-year. While growth in traffic has accelerated the past two quarters, we continue to see slow growth in Europe offset by stronger growth in the U.S. and other geographies. We remain focused on this critical area of our business particularly in Europe, where traffic is still not as robust as we would like. As such, much of our integrated marketing will be directed at increasing demand to the top of the funnel especially in Europe as well as increasing engagement in conversion of visitors to our sites. And now an update on pay-per-booking. Our commission based pay-per-booking product is now available as an option on all of our U.S. sites and most of our sites in Europe and Asia Pacific, or more than 80% of our global network. Unlike in the prior quarter the majority of new pay-per-booking listings added in the quarter, were listings from individual owners. And as we have assessed previously, monetization of these listings continue to track above our initial expectations and approaching that of a subscription listing when annualized. We see opportunity for further improvement through conversion enhancements and increased demand. After a year in the pay-per-booking business, we’ve learned that conversion is just as, if not more important than property counts in driving revenue from performance based listings. Therefore in the fourth quarter, we continue to focus our energy on conversion rather than on additional pay-per-booking supply from large property managers. And I’m pleased to report that our efforts led to a meaningful improvement in conversion in both the U.S. and Europe property manager pay-per-booking listings during the fourth quarter. So, with conversion running now at a good pace and a property managed pipeline that is still strong are off to a good start in Q1 at adding new property managed listings to HomeAway. And now I’d like to turn to an update on our marketplace. Even efficiency of Vacation Rental bookings is critically important, especially given the increase in new travelers to our websites. To that end, I’m pleased to report that at year-end 377,000 listings on our site were online bookable, up 165% over last year and that number continues to grow rapidly. As we have said previously, we’re committed to driving the adoption of online booking to nearly all listings by the end of 2016 and expect to make significant progress towards that goal during 2015. Midyear we will decouple a requirement to use HomeAway’s payment platform from the ability to have a book-it button. Our new online booking strategy will support multiple payment methods including offline payments. This flexibility will allow all suppliers to adopt and use online booking enabling us to achieve the aggressive milestone we set to dramatically improve customer experience for our travelers. While online booking remains the single-most impactful initiative to improve traveler experience, our listing quality initiatives are also delivering meaningful results. For example, measuring and reporting owner responsiveness has made a significant impact on response time, a recent analysis of the vast majority of our U.S. suppliers suggest that travelers who receive a response within 24 hours is up nearly 50% year-over-year. In addition to improving listing quality and ease of booking, we’re focused on maximizing trust and minimizing fraud within our marketplace. During the fourth quarter, we implemented security improvements such as two-factor authentication and a new risk engine which have led to significant reductions in fraud so far in 2015. And on the mobile front, HomeAway continues to invest aggressively to improve both the experience and conversion rates of travelers and owners using mobile devices to access our sites. This includes a recent redesign of our mobile application, the integration of Gogobot content with our mobile hospitality app and improvements to the online booking experience for owners and travelers. With significant improvements to the traveler experience, the time is right to attract and engage deeply with more travelers. The opportunity in front of us is clear, Vacation Rentals are a high-growth category but there is still relatively low awareness and consideration relative to long-term potential. In the U.S. for example, just 22% of travelers’ surveyed say they would definitely consider Vacation Rental when booking their next vacation. And yet, we know from our internal data that those who staying at Vacation Rental have very high levels of satisfaction, in fact 80% of travelers if had a rental on HomeAway say they would book with us again. Therefore, it’s not only our objective to bring more travelers to the category and also to capitalize in the loyalty of those who use HomeAway to book their vacations. Our global integrated marketing campaign is designed to increase consideration of Vacation Rentals and bring more travelers to the top of our funnel but also to bring more suppliers to HomeAway’s network of websites. The campaign will launch globally in mid-March. The whole vacation campaign focuses on the functional and emotional benefits that HomeAway provides, the ability to travel with the whole family and stay together in the whole house. It evangelizes the importance of disconnecting from everyday life and spending a precious vacation time reconnecting with those you love the most. Vacation Rental is at the heart of a whole vacation experience and we want HomeAway to be synonymous with both vacations and family travel for all kinds of modern families, whether that’s your immediate family, an extended one or one that includes both friends and family. The campaign will reach consumers with a digital first approach that incorporates multiple channels including performance marketing, social media, online video and television. The digital creative is already live on the homepage of many of our websites around the world, and our social channels as well as our mobile app. The campaign will compliment and leverage our existing best-in-class SEO and PPC capabilities creating a seamless experience across all customer touch-points. We will enhance our effort on conversion through focus on two primary areas, increasing customer engagement and making the user experience simpler, more secure and more exciting. We have a tremendous opportunity to better understand our customer’s needs, understanding to enhance conversion through segmentation, retargeting and customer relationship management. We’ll also improve the experience for owners, managers and travelers through the marketplace enhancements we’ve already discussed along with new design elements, personalization, emphasis on online booking and a greater focus on mobile. With that I’ll now turn it over to Lynn, to discuss our fourth quarter financial results in more detail as well as our 2015 outlook. Lynn?

[Lynn Atchison:]

Thank you, Brian. For the fourth quarter, total revenue of $109.7 million was 25.3% higher than the comparable quarter last year on FX neutral basis with strong performance in both listing and other revenues. Listing revenue for the quarter of 23.5% FX neutral year-over-year to $93.5 million benefited from higher average subscription revenue per listing and increased performance based revenue. We ended the quarter with approximately 1,043,000 listings, this reflects growth of 2.3% year-over-year in subscriptions and growth of 70.9% in performance based listing. As of last quarter, we observed a deceleration compared to the prior quarter in subscription listing growth in Europe, and an accelerating in subscription listing growth in the U.S. The primary reason for slower growth in Europe is the popularity of the new pay-per-booking product for new owners and managers adding new listings to our sites. For this reason, we expect pressure on subscription growth rate in the coming quarters. We are pleased with the growth in performance based listings. However, as Brian discussed, at times we may slow unit growth to focus more on conversion. As well, pay-per-booking listings from large property managers may require integrations. And for both of these reasons on-boarding would be lumpy in nature. Other revenue of $16.2 million for the quarter increased 36.3% over last year driven largely by revenues from ancillary products as more transactions occurred on our platform. As discussed last quarter, to improve the traveler experience, we’ve made policy changes regarding advertising on our sites which impacted our advertising revenue in the fourth quarter. While advertising will continue to be a profitable source of revenue, this change will be a headwind to growth in the advertising business for the first three quarters of 2015. Turning to expenses, total operating expenses for the quarter increased 19.5% compared to the same quarter last year. Much of the year-over-year increase reflects increased compensation expenses due to higher number of employees and to higher direct marketing expenses. We ended the year with 1,780 employees, an increase of 238 employees year-over-year and an increase of 43 sequentially. The largest increases were in field, marketing and customer service. In order to leverage the business to allow for more marketing investment in 2015, we’re planning to slow employee growth modestly in most areas. For the fourth quarter, our direct marketing spend was 55% higher than Q4 of 2013 reflecting our focus in this area. Adjusted EBITDA in the fourth quarter increased 36% year-over-year to $28.6 million or 26.1% of total revenue. Other expense of $4.6 million for the quarter was comprised primarily of the non-cash amortization as an imputed debt discount associated with our convertible debt. Our effective tax rate for the quarter was 54.7% resulting in a full-year rate of 34.2%. The full year rate was at the low-end of our projected range of 33% to 40% provided in the prior quarter, due mainly to the reinstatement of the U.S. R&D tax credit which occurred late in the quarter. We optimize around our cash tax obligations and for the full year we paid out only $1.4 million in cash taxes, net of approximately $3 million refinance related to earlier years. For the quarter we had net income attributable to HomeAway of $162,000 or zero cents per share. For the full year we generated earnings of $0.14 per share. Moving on to our balance sheet and cash flow. At December 31, cash, cash equivalents and short-term investments totaled $813.2 million. For the quarter we generated free cash flow of $23.3 million resulting in $117.1 million of free cash flows on a trailing 12-month basis, 25.9% higher than the same period last year. Cash was generated during the quarter from our operations and from the net settlement of our foreign currency forward contracts. As to important cash outflows, we made a cost base investment in a private company Gogobot during the quarter. We ended the quarter with $173.7 million deferred revenue, which is up 17.6% over last year FX neutral. Now, I would like to take a few minutes to look forward. Our full year 2015 revenue outlook of $510 million to $520 million reflects FX neutral growth of approximately 21% to 23%. The midpoint of the range reflects an acceleration in FX neutral organic revenue growth compared to 2014. I’ll remind you that stay in our other 2013 acquisitions positively impacted 2014 growth rate by more than 7 percentage points. At actual FX, growth rates are 14% to 16% reflecting approximately $30 million in topline headwind due to the strengthening dollar. For the year, we expect growth in subscription revenue to be driven predominantly by increases in revenue per listing. For performance revenue, we anticipate growth coming primarily from booking volume. And for other revenue, we expect strong growth in our ancillary products partially offset by lower growth in our advertising and software businesses. Our full year adjusted EBITDA outlook of $122 million to $130 million reflects adjusted EBITDA margins of approximately 24.5% at the mid-point. As we’ve been discussing over the last several quarters, this reflects approximately 100 basis points of EBITDA margin compression associated with our additional marketing investment in 2015. FX headwinds due to the strengthening dollar caused an additional 100 basis points of de-leverage. Our 2015 outlook reflects the Euro rate of 1.13 per each U.S. dollar going forward. This rate is down approximately 15% from the prior year average and down 10% from the 1.26 used in our fourth quarter outlook. Given the rapid pace of the decline of the Euro exchange rate just since our third quarter call in early November, some analysts’ estimates may not fully reflect this deterioration. For the first quarter of 2015, our revenue range of $119 million to $120.5 million reflects FX neutral growth of approximately 20.5% at the midpoint. Based on current rates, FX headwinds will exist throughout 2015 but we expect that most, it will be most pronounced in the first three quarters. Our adjusted EBITDA range of $22.5 million to $23.5 million for Q1 of 2015 reflects EBITDA margin of 19.2% at the midpoint. Our outlook includes an increase in marketing as a percentage of revenue compared to the prior year and is somewhat front-end loaded in the first half of the year due to production costs and the seasonality of the business. In other assumptions to help you model. Amortization of intangibles is expected to be $11.5 million to $12.5 million for the full year. Depreciation is expected to be $21 million to $23 million for the full year and $4.5 million to $5.5 million for the first quarter. Interest expense associated with our convertible notes would be approximately $4.5 million per quarter and $19 million for the full year. Our full year book effective tax rate is expected to be in the range of 55% to 60%. And as a reminder, our book tax rate continues to be negatively impacted by options granted in countries where deductions are not allowed, increases in state taxes in the U.S. and non-deductible losses in travelmob among other items. We are not assuming any R&D credit and are expecting to generate lower profits in the jurisdictions where we have a low tax rate. Cash taxes in the range of $4 million to $6 million are approximately 15% to 25%, consistent with 2014 before refund. Non-cash stock compensation expense for the full year to be in the range of $57 million to $62 million, basic share count for the full year to be in the range of $95 million to $98 million for the first quarter, 94 million to 96 million. Our fully diluted weighted average share count for the full year is to be in the range of 97 million to 100 million and for the first quarter 96 million to 98 million shares. Capital expenditures are to be in the range of $33 million to $36 million for the full year. And lastly foreign exchange hedging cost related to our inner-company debt structure and other related items are projected to be approximately $500,000 to $1.5 million for the full year. And with that, I’ll turn it back to Brian to share some final thoughts.

[Brian Sharples:]

Great, thanks Lynn. Before we get started with questions, I just wanted to acknowledge that our success over the past 10 years would not be possible without our amazing employees, and I want to just take a moment to thank them for their contributions and credible efforts as well as their enthusiasm and passion as we transition to the next chapter in our story. I’m thrilled with the team we’ve got and really looking forward to our 11th year and beyond. And finally, I also want to say thank you to all the suppliers and travelers that we’ve partnered with over the last 10 years in helping us build the Vacation Rental category into one of the most exciting markets in travel today. And I’m more excited than ever about our future. So, with that, Lynn and I will now take the first question.

[Operator:]

[Operator Instructions]. Our first question comes from Lloyd Walmsley from Deutsche Bank.

[Lloyd Walmsley:]

Thanks guys. It sounds like conversion is improving nicely on the pay-per-booking side per your comments. But we’re not seeing a lot of that in the revenue this quarter. Is that largely booked to stay such that we should start to see that recognized as revenue heading into the first quarter and beyond? And I guess, related to that can you give us any sense of breakdown between subscription and performance revenue contribution for the guidance for this year?

[Lynn Atchison:]

Yes, so, Lloyd, I’ll jump in on that. Yes, some of it clearly is that bookings take place during one period of time but the revenue recognition for the performance based listings that fall upon us to stay. And so, we will see some of that going to the normal either shifting into Q1 or even into the summer, so some of that is a timing shift. And we’re not at this point going to break out the different types of listing revenues between the subscription revenue but instead we’ll just based on the size of it, just let you do what you’re doing right now, we’re just kind of backing into the part of the business which is performance based listing revenue.

[Brian Sharples:]

Yes. I think Lloyd also one of the things we’ve talked about in the past is that our MPM capabilities are ability to move listings up in sort has a pretty big impact on revenue. And so, we did actually do quite a nice job last quarter moving conversion up. But conversions for those IPM listings which is historically even low, still hasn’t gotten a whole lot of movement upward in our sites. And so, we feel it gets to a point that the ROI is really good to do that. We’ve been doing it pretty aggressively with our platform PPB listings but not yet with the IPM listings. So there is still a lot of growth to come in that area.

[Lloyd Walmsley:]

And I guess, as a follow-up, I guess where are you in terms of using marketing to try to drive traffic specifically to these types of listings that you can monetize with incremental traffic? Is that a big part of the marketing plan or is that more of an after-thought with the big ramp-up this year in marketing?

[Brian Sharples:]

Well, you know what? Performance marketing overall is a big part of the marketing plan. I think a lot of people have this great feel they’re going to spend the majority of their money on TV advertising and branding when in actual fact the majority of it is going to be spent on performance marketing. But I do think that one of the things we’ve learned over the last year, remember we talked about this 12 months ago that we’re really looking for that kind of lever on the performance marketing front to target directly at PPB listings. I think we’ve learned is, the bigger lever that we have in the business is in fact search position on our sites. And so, when we go forward with the marketing campaign, our integrated marketing approach is really not going to be differentiating too much between PPB listings and subscription listings. In other words, the marketing campaign is all about an integrated approach to improving the top of the funnel. We can then differentiate between certain types of listings based on how we place them on our sites. And we obviously have that discretion with PPB and that’s just the better lever we found.

[Lloyd Walmsley:]

Yes, okay, that’s helpful. Thanks guys.

[Operator:]

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

[Heath Terry:]

Great, thanks. I was wondering if you could give us a sense of how the conversions on bookable listings is comparing to the conversion rates that you’ve assumed for the traditional subscription business in the past? And then, Lynn, I think the comment that you made was that the ARPU for or average revenue per listing per subscription listings is beginning to approach what you see or sorry, for performance listings is beginning to hurt what you see on subscription listings on an annualized basis? Can you just help us a little bit with the math around that? And then just last question adoption of the payments platform as you moved to sort of unbundling the payment from the booking button. How do you expect that that’s going to impact adoption of your own payment solution? What do you want to see there?

[Brian Sharples:]

Let me take one and three, and then Lynn can jump back on number two. Just in terms of the conversion rate of PPB versus sub and let’s talk about platform because those are the listings that are kind of the most similar, they come to our sites in the same way. Where we can measure it, number of bookings? We see, let’s just call it ballpark, maybe about two thirds of the conversion rate on PPB that you see with sub. And there is a couple of reasons for that. One of the reasons is that PPB often doesn’t have the same search position at least yet as our subs do. But also I think there is a bit of self-selection right, if you’re a subscriber and you’re willing to pay via subscriber, it’s probably because you have a pretty high bookings rate and you save a lot of money doing that, versus on the other side, people who come on the sites for free and are willing to pay 10%, a lot of those people maybe just don’t have the availability of other listings and book a little bit less. So, we’re not really surprised by seeing that. And the good news is that 10% of two thirds is the equivalent of if not potentially more in the future than a sub listing pays us today. So, it’s kind of in a place that we like, where we don’t have a huge preference for one over the other, we’re really at this point really looking to grow total listings on the platform. And let the market allocate between the two, and having the two products is just better because we appeal to more owners and we get a lot of flexibility for them and how they work with us. On the question number three, the adoption of payments because we’re decoupling it, I think we’ve said this publicly but we still have a good hold of getting to very high adoption of our payments platform. We just don’t think we can get to 100% on that in two years, we’re really focused right now on getting as many listings as we can online bookable. But we have a separate goal like goes out a little bit beyond that to still make our payment platform the preferred payment method of choice on our site. So we don’t think there is still going to be lots of benefits for our customer’s travelers especially for paying securely online through our platform. And we’ll be able to over time differentiate the experience a bit with different levels of guarantees and products and services that make that more attractive. So, we haven’t given up on that by any means. And we continue to see growth in adoption of people using the payment platform and we expect that that growth will continue through this period where we’re also pushing just OLB really hard on our sites. And then Lynn, the second one.

[Lynn Atchison:]

Great, yes. And Heath, just to clarify, so as a reminder, we have different flavors of our performance based listings. We have that or the platform listings which come in through to lift your property through the normal funnel. Those are the ones very specifically that just look and feel to us much like a subscription customer in terms of listing quality, in terms of how they convert and particularly in the U.S. So those are the ones that have as a category the strongest ARPU. The integrated PM, particularly those in Europe, we’ve been very excited about the conversion improvements we’ve made over the last year but those are the category just are not where they need to be and they convert at a much lower rate. And so those are not approaching subscription base listing at this point. But we’re making progress there so we’re looking forward to continuing to increase the core ARPU from those listings in the future.

[Heath Terry:]

Great. Thank you both.

[Operator:]

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

[Mike Olson:]

Hi, good afternoon. You’re making progress on online bookability to I think you said 377,000 listings. What kind of pushback if any from the move towards all listings being online bookable in the next couple of years that you’re getting? And how are owners responding to some of the metrics that you might be sharing with them, the increased conversion that they can experience online bookability? That’s one. And then the other is, it sounds like villas.com is about to start trying to add individual owner properties in addition to the property manager, properties that they’ve had so far. Do you see that as a more direct competitive kind of threat and maybe what you saw at villas.com previously? Thanks.

[Brian Sharples:]

Yes, I mean, I’ll start with villas.com, I mean, I don’t have any particular insight into what they’ve planned to do. I think we do have experience with TripAdvisor attempting to do this many years ago. It’s a very, very different and very difficult business compared to just going out and booking up to GDSs or hotel distribution system is that, amount of customer service that’s required and detailed care and feeding of these customers, is just something that I don’t think any of these OTEs have experienced. So, it’s one thing to say as it will be interesting to see how they do it and how well they pull it off, I still think that without a doubt our very strong global turbo travel base is a huge competitive advantage for this company. And then the first question was…

[Lynn Atchison:]

Well, it was just a pushback on the online bookings.

[Brian Sharples:]

Yes, we get a little of it. It’s mostly due to confusion, that’s the number one reason that owners call us with concerns about this two year goal that we have is because they incorrectly interpret online booking as meaning somebody can book their house without them ever getting to bet that traveler. And so it’s just, we’re having to educate them so they understand that our online booking system will allow somebody to generate a price quote, know something is available, reserve it online but they as the owner can still control that 24-hour period to accept the reservation. And so, I think in every case, I talk to customers all the time, I get e-mails directly from customers. Whenever I call them up and then explain that to them, then they say, okay, I get it. As long as you’re continuing to do that then we’re fine. So, I think it’s just going to be an educational process. I mean, there are some people who are lazy and might not want to fill-out their rates or fill-out their calendars. And they maybe people who wind up not being on our site someday. But if you look at what our competitors are doing, they’re going to have to do it if they go to our competitors too. So, this is just how the industry is evolving. And I think we feel very confident at this point that we’re going to be able to achieve that objective by the end of 2015.

[Mike Olson:]

All right, thank you.

[Operator:]

Our next question comes from Chris Merwin from Barclays.

[Chris Merwin:]

Great, thank you. So you talked a bit about the increase in marketing spend this year, which I’m sure is obviously going to help accelerate traffic growth both to the subscription and PPB business. But you’re competing in some big players within some cases very large marketing budget. So how did you get comfortable with the amount of money that you’re spending this year on marketing, is it the right number is it enough? And looking forward, I mean, is this just a one-year campaign or should we expect continued increases in the size of the campaign to the extent that it’s successful that meets the payback hurdle that you have in place? Thanks.

[Brian Sharples:]

Yes, well, it’s certainly not a one-time thing. I mean, this is the new HomeAway from this point forward is that we’re a consumer marketing company. And we’re going to get aggressive about it. And I think the answer to how much we’re spending is have as much as we can without deteriorating our margins significantly. And so the exercise we went through at the end of last year was to look at all the other groups within our company to say how can, we get as much leverage out as possible to put behind marketing because here are competitors who are big and are going to continue to spend a lot of money. Now a lot of those competitors are in other businesses too. So the amount of money they spend directly on this category is something that we don’t know for certain, obviously we’re trying to get that intelligence. But as the largest player in this category, we should be able to spend our fair share. And so, we’ve done as much as we could this year to keep margins in line, to put a lot more cash behind the many investments we want to make this year. And the next year, we’re going to do the same thing. I mean, there is going to be more leverage in the business that comes from growth and we’re going to continue funneling at this way. And so, I do think that as a percentage of revenue it’s my goal for the next several years to see higher and higher amounts spend on marketing but we’re just not the kind of company that’s just going to take that away from margin, we’re just going to be disciplined about finding another places. And so, this year the budget is what it is because we worked as hard as we could to put as much money behind the efforts and this is where we wound up.

[Lynn Atchison:]

I’ll add to this. The way we run the business and this has been consistent forever, and certainly in the last four years since we’re public that if we see over performance during the year, you’re going to see this management team put that money back into the business as opposed to taking that to the bottom line. So I think that’s consistent with the way you’ve seen that in the past. And so to this, we start seeing things working that we’re going to reinvest that money.

[Chris Merwin:]

All right, thank you.

[Operator:]

Our next question comes from Douglas Anmuth from JPMorgan.

[Unidentified Analyst:]

Hi, good afternoon everyone, this is [indiscernible] for Doug, thanks for taking the question. I just wanted to ask about Europe and the FX impact. I guess you’ve called out the popularity of PPB in Europe hurting overall listings growth and this year you have the FX noise in your side. I just want to get a better sense of the net-net FX impact on the business as I understand clearly the translation impact is hurting you? But on the other hand from a demand perspective, the commentary on, I guess tiers generally suggest that net neutral as more Europeans choose to same Europe and spend just as much instead of traveling to the U.S. So, I wanted to see what you’re seeing so far and what do you expect?

[Lynn Atchison:]

Well, so let me clarify. So for our business which is, still substantially a subscription based business. The impact of FX on our business is that we translate those revenues and expenses over at different exchange rate. So we’re translating those same dollars we collected in a Euro last year, we’re going to translate that into revenue at a lower rate going into ‘15. So, for our business the impact of FX is on our stated profit and loss statements. So it’s not, we’re not saying that FX is the reason why we’re getting more pay-per-booking listings versus subscription. So I want to clarify that what’s going in Europe in terms of our unit growth and maybe a customer activity, that’s not related to FX. So I wanted to clarify that right off the bat. So, we really have a natural hedge in the business and that we operate overseas also. So our revenues would be lower in a period of a stronger dollar. Our expenses are lower also, but we can also at times have a little bit of a mismatch which is why you saw 100 basis points of impact on EBITDA, but we still have some expenses in jurisdictions in Europe such as the pound and the Swiss Franc which move a little differently than the Euro. So that’s the impact on FX. I believe the commentary, and Brian you can jump in, the commentary on, in Europe many of our customers choosing pay-per-booking as opposed to subscription base. It’s really more of a business model that our customers are choosing. And we are happy to allow them the flexibility to try our network on a performance based model and see if that works before they dive in.

[Brian Sharples:]

Yes, I mean, we launched that product in Europe during tough economic times in Europe, but I don’t know if it would have been any different if we launched it during great economic times in Europe, unfortunately we don’t really have that benchmark to know.

[Unidentified Analyst:]

Great. Thanks very much.

[Operator:]

Our next question comes from Eric Sheridan from UBS.

[Tim Chiodo:]

Hi, Tim Chiodo in for Eric here. I just wanted to see if you could give a little more color on the January 6 price increases or changes should I say that went through some of the incentives related thereto online booking and to some of the response you’re getting from owners and managers? Thanks.

[Brian Sharples:]

Yes, so we did increase prices around the world, not everywhere mostly at the higher end from a tier perspective. So, up in the platinum tiers and the gold tiers just because we’ve had a lot of demand for those products. And that demand continues. And one of the things I can tell you just based on an early look at it, is that we haven’t seen any impacts on renewal rate. In fact, renewal rates in the upper tiers are our strongest renewal rates in the company which is fantastic.

[Lynn Atchison:]

Yes. And on the promotion that we did, you get a slight discount if select online booking, not really was it a win-win in terms of a business decision to get, we had people from that elected to do that. And so that helped us meet our long-term goal of increasing the number of bookable properties. And it’s the same condos that didn’t, we achieved the price index. So we are using that as another lever to get people to perhaps go ahead and if you’re on the bubble about online booking or not, it helps some people get out of the house.

[Brian Sharples:]

I mean, I think if we had our offline payments products out, which isn’t going to be out until end of the second quarter, and then we combine that with an option to get $50 off, we probably would have seen a lot more people take us up on it. And so we’re still waiting for half of that happen, we still think that’s the biggest friction point in getting deeper online booking enabled.

[Tim Chiodo:]

All right, thank you. That’s very helpful.

[Operator:]

Thank you. Our next question comes from Kevin Kopelman from Cowen & Company.

[Kevin Kopelman:]

Hi, thanks. I was just wondering if you could give us an update on the Expedia partnership and also on the standard distribution network initiative more broadly. Thanks.

[Brian Sharples:]

Yes, I mean, they’ve about it in their call, they’re still they’re heavy testing and learning organization. So I think we’re up to about 200,000 properties with them now. We do now have some U.S. properties on our U.S. sites but it’s still primarily European properties on their U.S. sites. We’re planning to expand shortly into some of their European sites which we’re very excited about. So that’s kind of the next big step for our distribution network. I would tell you, we are in negotiations with a lot of other distribution partners a couple of them have been now acquired by Expedia. So those discussions that used to take place with a couple of third parties are now taking place with Expedia. And then we have some relationships that we’re looking at over in Europe as well, nothing to announce yet, but we still feel very positive on the opportunity.

[Kevin Kopelman:]

Okay, and then just a follow-up on the previous question. Could you give us any color on how the - what the price changes that you implemented and how that’s going to look on subscription revenue per listing going into 2015?

[Brian Sharples:]

Yes, I mean, I could tell you that I think, I mean, in terms of subscription ARPU, we’re going to have a pretty good year. We have pretty high number here in Q4, I would expect that we’re going to be at, at least that if not north of that through a combination of continued adoption of tiers plus a price increase which we hadn’t done in the last couple of years. And the momentum that we’re getting in the lift that we continue to get through bundles and tiers is still significant, so you put that on top. I think we’re going to have a very, very good year from a pricing perspective.

[Kevin Kopelman:]

And, I’m sorry if I missed. Did you give the penetration of premium tiers this quarter?

[Brian Sharples:]

No, but I can give that to you, it’s roughly 40% right, yes, it was like 39. something, but it’s about 40%. So that’s up again.

[Kevin Kopelman:]

Okay, and then just kind of one last one on pricing, just given where your competitors are charging on the commission model. Do you think that, do you feel at your undercharging your subscription customers kind of generally?

[Brian Sharples:]

I still would like to see, I think we’ve got a huge opportunity at monetization of the company. So, yes, overall that’s probably the case, now it’s more PPB comes online that’s certainly changing its prices are going up naturally. I mean, look, 14% natural increase in Q4 from people tiering up. So, it’s getting there, so it’s maybe a slower ride and some of our investors would like. But I think it’s headed in the right direction and I think it’s a competitive advantage for monetization to be low. I mean, we still have a huge amount of listings on the subscription side. And we now offer a free product and our subscriber is not taking us up on that. And that means that they don’t want to pay commission to anybody really, that’s not what they want to do. So, it remains unique in the industry I think if the pricing got too high then maybe that would be at risk, but we’re still in a place where because we continue to up the performance levels, maybe we’ve gone from a couple of years at 3% monetization to 4% for subscription customers with that still a hell of a deal. We’d like to see it higher, it’s a great opportunity. We’ve spent a lot of time focusing on it here internally and more will come on that hopefully in the next year or two.

[Kevin Kopelman:]

Great, thanks Brian.

[Operator:]

Thank you. Our next question comes from Aaron Kessler from Raymond James.

[Aaron Kessler:]

Yes, hi guys. Three questions, first, can you just comment on auxiliary services, what type of attach rates are you seeing, there and then made outlook for 2015. Also on the acceleration and FX mutual growth, you noted for 2015 interest that if you can talk about some of the drivers there. And finally, as we look at the EBITDA guidance, can you just maybe give us some thoughts what the growth would be or the absolute number x-FX. Thank you.

[Lynn Atchison:]

So, let me take at least the second two. So, the acceleration in the FX neutral growth into next year is really coming from increased performance on pay-per-booking listings. So, we have more of those, we’re going to do better at monetizing those going into ‘15 as well as increases and ancillary products. I don’t have the tax rate right here in front of me but it’s still very strong and PDP is still the main driver there of our ancillary products.

[Brian Sharples:]

Yes, somebody just slipped me a note. There’s been no change in attach rate this significant, talking about since last quarter. And I think our best product does about 30% attach rate.

[Lynn Atchison:]

Yes.

[Aaron Kessler:]

But the increase in online bookables that you mentioned, also that should help drive the ancillary product growth?

[Lynn Atchison:]

Yes, it does.

[Brian Sharples:]

It does, it is doing.

[Lynn Atchison:]

Right. So the attach-rate to be the same, that if we get more and more people on our payment platform we have more of an opportunity to sell travelers that’s the various products. So that’s absolutely true. And then the clarification on the EBITDA guidance, we think that about 100 basis points of the EBITDA deceleration was due to FX and I alluded to that earlier when I was in for another question, there is a bit of a mismatch with our foreign exchange where we’re still paying some expenses in Swiss Franc and in the pound and those didn’t go down as much as the Euro did. So, there we don’t have a perfect hedge with regard to FX.

[Aaron Kessler:]

Great. And are there any final thoughts on platform? I guess what is left to be done at this point? Are you pretty much done with all the platforming efforts?

[Brian Sharples:]

No, we got, we still got some big ones to go we get all the HR which is a pretty significant save in the U.K. that will happen next. And then we still do plan to migrate eventually the Stayz platform in Australia, which is a big chunk of revenue and a big part of our business. But that will not happen this year.

[Aaron Kessler:]

Great, thank you.

[Operator:]

[Operator Instructions]. Our next question comes from Jason Mitchell from Bank of America Merrill Lynch.

[Nat Schindler:]

Hi, this is Nat Schindler actually. I wanted to just ask a little bit about what you said about the traffic level growth in Europe, and it seems to be somewhat contradictory with what’s happening for price-line with villas.com and their commentary on their call. So I was wondering what you could - if you could point to anything that would have caused that to change, or is competition actually part of the equation?

[Brian Sharples:]

Well, I mean, villas.com is starting from virtually a dead star I think in terms of traffic size and scale are so much bigger than that business that it’s pretty easy to grow a site that you’re just starting. So, overall we’ve been in Europe a very long time. Traffic in Europe is growing and if it’s not growing I mean, we’ve had lot of properties in Europe over the last year, so it’s not growing to our satisfaction. Now we are going to be focusing a lot of our energies in this new marketing campaign towards Europe. And I should remind everybody that’s going to start in the second quarter and not the first quarter. We did some increased marketing, to help out with traffic in the third quarter and the fourth quarter of last year. But we’re in a bit of a limbo here in there first quarter where we’re transitioning to a new marketing program. And so, hopefully in the second quarter and beyond we’ll be able to give that an injection. I mean, there is a lot of competition in Europe, but I got to tell you, when we go country by country, and we analyze this. Now I’ve told you guys this before in the call, typically the leading competitor we have in the European geography is somebody that none of us talk about on these calls, they’re either people you haven’t heard of or they’re companies in France like Tsuleje [ph] or so they’re just different competitors in every market that we compete with. And bookings there obviously Airbnb is there as well but there is a heck of a lot of other companies out there that we’re gunning against. And we’re still the biggest and we’re doing fine. We just want to be better.

[Nat Schindler:]

Great, thanks. And just one little clarification for Lynn. You said just earlier in the Q&A that you translate your, I would call it your deferred revenue that you are recognizing over the course of the year, into back into dollars over the course of the year. You don’t do it at the time of getting the chunk of money for the annual subscription or am I, understanding you wrong?

[Lynn Atchison:]

No, that is absolutely correct because the balance sheet gets revalued and effectively that would be the number that would be amortized into the future.

[Nat Schindler:]

So your cash flow impact will be, at least, you’ll have a much better cash flow in certainly in a year like last year where you had a very late hit, and then that will erase over time?

[Lynn Atchison:]

Yes.

[Nat Schindler:]

The differential will erase.

[Lynn Atchison:]

Yes, you’re right.

[Nat Schindler:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Rohit Kulkarni from RBC.

[Rohit Kulkarni:]

Great, thank you. Can you talk about non-Europe, international geographies, any particular profits or strength or weakness that you are seeing perhaps in Asia-Pacific or any other geographies? And on the mobile side of things, any initial learnings from how feedback from particularly from property owners and managers needs to be incorporated in the overall user experience of increasing their engagement with travelers?

[Brian Sharples:]

Yes, sure. So I mean, first of all, I mean, we’re certainly seeing our highest growth levels in a company in Asia-Pacific in particular and the Asian geographies, and where also Brazil is a very fast growing marketplace too. But they start from pretty small basis. So they’re growing fast but still a relatively small part of the business but we’ve made a lot of investments there in the last couple of years. And we still believe the opportunity there is quite, quite large but it’s going to take many years for that to play out. And some of these areas were still in that investment mode and probably will be for some time. On the mobile front, we’re doing a ton of work mobiley, we have about 42% of our traffic is ‘mobile’ at this point although if you take out tablet, it’s about 25%, tablet seems to convert right now almost dead-on with desktops. So we put that in a bit of a different category. But mobile is something that we’re going to have to get better and better at. We have been doing a lot of work on the mobile app. As you know, we added Hospitality Manager we added deals like Instacart and Uber and others that were bringing to the fold there. And so far it’s been very well received. I mean, not all of our owners are putting content on the app yet, I mean it’s growing every week and every month. But it’s still pile of work that our owners have to do, they got to log-in when you dashboard and they’ve got to populate it with information. But that’s happening very steadily. The travelers seem to love it. Engagement is very high. So, and somebody has populated the app with things to do and how to get into the house, how to use the stereo and that kind of stuff. It’s still used it looks like an average about 15 times on a trip. And travelers really do love it. So, we’re just going to continue to feed that back to owners so they understand that it creates much more satisfaction for them it will probably lead to better and higher reviews, I don’t know, I haven’t seen data that suggests that’s true yet. But my guess is it’s probably there. I just haven’t seen it. And then the mobile app just in general we’re doing a lot of work on, we’re adopting a mobile first mentality here at the company if you go download the app today, it’s different than it was a week ago, it’s actually kind of a true level feature you should see on the homepage when you fire it up. And we’re hoping to get more aggressive about putting it in the hands of people as well. But realized too, it’s still mobile web is the majority of our mobile traffic. And so, our biggest initiative has been to make sure that that we have all, of our sites fully mobile web enabled. Certainly anything using the mobile at the HomeAway platform now globally is doing that very efficiently. And as we migrate, more sites of that form we’ll get to 100% soon.

[Rohit Kulkarni:]

Okay. I had just one quick follow-up on FX. The hedging costs, is that a new program that you have introduced, or did you always have an FX hedging program?

[Lynn Atchison:]

Yes, yes, actually we’ve always had the program. I’ve just never given any kind of outlook or modeling help on it. So, I thought it jumped around a lot last year. The only things that we formally hedge are inner-company balances that are in different denominations. So, we’re trying to do that just not have large swings on the bottom of the P&L. And we’ve actually made improvements to that program and so that line item will actually be a lot lower in 2015 than it was in ‘13, so the team did a great job on that. But I just never gave any guidance, that just kind of came out in our quarterly results every quarter. And so this time, I thought I would be more proactive and get it out there to help you with your model.

[Rohit Kulkarni:]

Okay. Thanks, Lynn. Thanks, Brian.

[Operator:]

Thank you. Our next question comes from Rodney Hall from SunTrust.

[Rodney Hall:]

Yes, guys. Thanks for getting me in. I wondered, Lynn, if you could just help us understand, I know you talked about some of the display changes, and obviously it is a smaller piece of the revenue. But if you can help us understand what the impact might be to some of the display advertising changes throughout the course of the year, and what the impact, therefore, might be on the EBITDA line? Thanks.

[Lynn Atchison:]

Right. So essentially I mean, this past year our advertising line, which is, it’s not very much and it’s combined in other revenue. It grew about 25% this past year that is going to be up flat next year. So, think of that as a business that’s going to stay flat instead of growing the way it grew this year. And of course we did that as we talked about earlier, to give a better traveler experience in terms of the - in terms of where the ad displays are showing up on some of the pages. So, we think we’re doing this long-term for better conversation and for better traveler experience. We don’t give any specific margin information around that business, but it’s a very small part of the whole business. I mean, it’s around math - you could probably figure it out through our 10-Ks that are around $15 million business. And so, it’s just not going to be that big of a hit -on on EBITDA to have made those changes.

[Rodney Hall:]

All right, that’s helpful. I appreciate that. And then just one follow-up, if I could, sort of relating back to mobile. As you guys think about the tiering process and the addition of pay-per-booking listings increasing throughout the year. Has there any differentiation between how you’re going to use the search or sort algorithm rather between mobile and desktop?

[Brian Sharples:]

There could be. It is something we’re looking at. At the moment, there isn’t a lot of that. But it’s certainly up for analysis and debate in as part of our MPM program we’re looking at mobile and desktop and whether we should do that differently.

[Rodney Hall:]

Thanks.

[Operator:]

Thank you. Our next question comes from Tom White from Macquarie.

[Tom White:]

Hi, great. Thanks. So two, if I may. Subscription listings growth slowed a bit. Can you maybe just elaborate a bit on the drivers there, and can we think about that potentially picking up on the back of some of the advertising initiatives? And then just quickly, in the guidance is there any revenue uplift sort of from the advertising contemplated in the full-year topline outlook? Thanks.

[Lynn Atchison:]

Right. So, on the subscription growth business, so we talked about how that particularly in Europe the new listings that are coming through the door are increasingly selecting the performance based model. And so what you get is, you get the new customers come-in the door or leaning towards, we think over time some percentage of them will go to subscription. And some of them will stay in the performance based model. So that’s going to impact the overall growth in the subscription listing.

[Brian Sharples:]

And I don’t see that changing.

[Lynn Atchison:]

Yes, I don’t see that changing. I talked about that in my prepared remarks. So I think next year will be a growth in ARPU and not so much in units. I again, over a longer period of time as we start to study this, I think that that becomes a funnel for growth in subscription listings to be able to advertise or offer a performance based product. And in terms of a revenue uplift, we really ran the projections more holistically, looking at everything we were doing and marketing and opposed to trying to save, we’re going to send this dollar marketing and that’s going to drive this dollar in revenue. And so we looked at that in a combination of everything we were doing. Of course of that is broad-based marketing which there is no direct correlation. A lot of it is still performance a lot of it is to - for the overall health of the marketplace.

[Brian Sharples:]

Yes, I mean, look, listen we have especially with brand-related pieces we haven’t been doing a lot of that for the last few years. So, we’re probably not going to build in huge forthy projections for that because it’s new to us. And we’re going to be relatively conservative with it. And it takes time for that stuff to ramp. You build brand awareness over time, it’s a long-term investment. So hopefully there is an opportunity to be pleasantly surprised to the upside. But we’ve put in, we’ve put in dollars for the things we know well and we’ve been conservative over the things we know.

[Tom White:]

Thank you.

[Operator:]

Thank you. That is all the time we have for questions. This does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.