ETFMG Travel Tech ETF
Q1 2013 Earnings Call Transcript

Published: 24 Apr 2013

[Operator:]

Greetings, and welcome to the HomeAway, Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Courtney Dickey, HomeAway Legal. Thank you, Ms. Dickey, you may begin.

[Courtney Hicks Dickey:]

Thank you, and welcome to HomeAway's first quarter 2013 financial results conference call. By now, everyone should have access to the earnings release, which was distributed today at approximately 4

[Brian H. Sharples:]

Thanks, Courtney. Good afternoon, everyone, and thanks for joining us today as we discuss our 2013 first quarter results. We're thrilled with our start to the year and, once again, our ability to deliver financial results ahead of our expectations, even with FX headwinds late in the quarter. As always, due to the subscription nature of our business, we reported a high degree of revenue visibility in addition to our attractive profitability and free cash flow characteristics. Total revenues is $79.5 million, exceeded the high-end of our outlook and represented 24% growth year-over-year. Within our core subscription business, FX neutral listing revenue also grew 24% year-over-year. Adjusted EBITDA of $22 million exceeded the high-end of our outlook, increasing 56% over the prior-year period. And, as anticipated, year-on-year growth benefited from a more balanced distribution of our marketing expenses across quarters in 2013. Consistent with strengthening our category leadership and driving profit innovation, we plan to use these excess profits to invest more aggressively around our upcoming pay-per-booking product launch, display marketing, and other initiatives supporting long-term growth of the business. Free cash flow for the trailing 12-month period was $90 million, an increase of 21% over the same period last year. As a result, we ended the quarter with cash and short-term investments of approximately $314 million. The start to 2013's travel planning season in Q1 continues to reflect the power of the substantial network effects in our business. During the quarter, traffic was up 22% over the prior year, with strength in inquiries in all regions, including Europe, with the total business attracting over 207 million visits, a new record for HomeAway. Overall reported listing growth versus last year was a modest 6%. However, this was significantly impacted by the consolidation of multiple listings and the sale of network bundles to our U.S. customers, both of which started in September of last year. Adjusting for these factors, we estimate listing growth would have been approximately 9.5%. The difference in listings growth rate from Q4 of 2012 to Q1 was entirely attributable to softness in our pay-per-lead business, which we refer to as PPL. We've made a strategic decision not to focus on PPL listings and, in some cases, have proactively removed the listings due to quality concerns. As a result, and as communicated last quarter, we expect our listing growth metric will remain under pressure from consolidations in PPL for most of the year until our pay-per-booking product, which we call PPB, is available later in the year. Fortunately, because of the low revenue contribution of PPL listings, this decline does not have a material impact in our financial results. The good news is our growth rate in subscription listings remained consistent with last quarter, which is particularly notable given the large ASP increases, continued experience from tiered pricing, and our popular network bundles. Furthermore, we remain optimistic about the potential for PPB to bend the listing growth curve upwards towards the end this year. On another positive note, renewal rate, when adjusting for the impact of consolidated U.S. listings, improved on a 60 basis point, sequentially 74.9%. We're especially proud of the improvement in Europe where we've seen sequential increases in renewal rates in almost every geography. We've also seen renewal rates in the U.S. stabilize between Q4 and Q1, also good news. However, in comparison to last year, you'll continue to see some decline as discussed in previous calls, which relates to the inclusion of Australia, impact from the Abritel migration, the loss of one large U.K. account, which we talked about last quarter and will affect us the rest of the year, and downward pressure in the U.S. caused by product changes and increased promotional activity. In the long-term, we believe our global renewal rates will continue to improve as traffic and inquiries are best-leading indicator of renewal rate are quite strong at the moment in all geographies. Another highlight of the quarter, average revenue per listing when adjusted for the impact of consolidated listings and new bundled offerings increased 11.5% to $359. FX neutral subscription revenue per listing, which excludes PPL and makes the same adjustments for consolidated listings and new bundled offerings, increased 60 basis points to over 10%. Growth in ARPL reflects the continued success of monetization initiatives, such as tiered pricing and network bundles. We continue to see strong uplift in ASPs in our brands with tiered pricing. And for the 3 European sites currently enabled to the tiered pricing, early adoption levels continue to exceed our expectations and outperform the U.S. brands, if you measure as of the same point in time following launch. We continue to believe that our pricing strategies will support ongoing growth of the business. For example, we're still in the early days of driving adoption of tiered pricing. At quarter end, for all the sites where tiered pricing is currently offered, about 1/3 of our subscription listings include at least 1 tier. Additionally, we believe there'll be continued growth in bundled adoption as our bundled product makes it easy for owners to list on multiple websites and get more distribution. Keep in mind that not all websites offer tiered pricing and our consolidated ARPL will be further impacted by higher growth and emerging markets where prices tend to be lower and promotional activities that we continue to run. Turning to our product initiatives. The team has been focused on the deployment of our e-commerce platform and the development of our PPB product. Starting with our e-commerce platform. Over the course of the quarter, we added approximately 9,000 new e-commerce enabled listings, ending March 31st, with nearly 62,000 listings now enabled for payments and/or online booking. Following the rollout of our payments and online booking platforms to 3 of our European properties late in 2012, we're seeing positive early signs of adoption and we look forward to adding certain travel insurance products in Europe later this year. Importantly, e-commerce paves the way for the introduction of our pay-per-booking product, set to launch in the second half this year. Specifically, that product will appear in beta for the first customer segment, which are individually U.S. owners, FRBO owners, by the end of the third quarter. And we'll see subsequently it rollouts other customer segments in the following quarters. Although, as I said, in previous calls, due to the timing of the rollout, we expect PPB to have a negligible impact on our 2013 financial results. But all in all, it is expected to be a very exciting future growth lever for our business. To wrap things up, we are extremely pleased with our start to the year and our continued ability to deliver against our financial and operational objectives. This is a very busy time for HomeAway and the team is intensely focused on progressing our product and business roadmap, which we are confident will pay off in the quarters and years to come. We look forward, of course, to keeping you abreast of our progress. And so with that, I will hand the call over to Lynn Atchison, our CFO, to discuss our first quarter results in greater detail. Lynn?

[Rebecca Lynn Atchison:]

Thank you, Brian. For the first quarter, total revenue is $79.5 million, with 24% higher than the comparable quarter last year, with strong performance in both listings and other revenue. Listing revenue, which increased 23.8% year-over-year to $66.8 million benefited from higher average revenue per listing, primarily related to the success of our tiered pricing model and bundled pricing introduced over the past year, as well as the higher number of total paid listing. Other revenue, which is comprised of ancillary revenues from owners and travelers, advertising, software, and other items grew 24.6% year-over-year. This category benefited from increased revenue from various value-added products and services we're selling to travelers. The 37.5% sequential increase in this category is due to greater advertising revenue and the seasonality of our value-added product revenue, which are generally recognized as sold during the travel planning season. Our outlook, which I'll discuss momentarily, assumes continued momentum of these products in the U.S., propelled by increasing adoption and usage of our reservation manager and payments platform by customers. This promotes easier attachment of these products upon customer checkout. However, consistent with our remarks in February, we continue to face some headwinds and operational inefficiencies in our advertising business in 2013. Nevertheless, this business will continue to grow and contribute to our profitability. But as new to the company, we're a global business. In the first quarter, 62% of our revenue is generated in the United States, 36% in Europe and 2% in South America and Australia. Now turning to expenses. Total operating expenses, excluding amortization, increased 17.8% year-over-year. As a percent of revenue, operating expenses, excluding amortization, declined 450 basis points year-over-year to 85.7% of revenue. Much of the year-over-year growth in absolute dollars reflects increased compensation expenses due to increased headcount. We ended the quarter with approximately 1,300 employees, a 29.5% over the course of the last 12 months, as we continue to invest in the business. The largest number of new employees being added within sales and marketing and the largest percentage increase within product development. Cost of revenues increased 26.1% to $13.3 million. The increase is due to an increased number of customer service employee. Over the last year, we increased our staff in this area to support the launch of numerous new product enhancements on sites around the globe. Along with the additional headcount, we incurred higher occupancy and technology costs as well. We expect cost of revenues to continue to grow in absolute dollars, with a slight growth as a percentage of revenue on an annual basis. Product development expense increased 27.8% to $12.4 million. The increase reflects our continued investment in the global deployment of numerous initiatives, including the continued rollout of tiered pricing and ongoing platform migration, online booking and payment, additional technology to support professional property managers and the development of pay-per-booking capability. We expect growth to continue in this area in 2013, both in absolute term and as a percentage of revenues on an annual basis. Sales and marketing increased 6.6% year-over-year to $26.4 million. This is due to increased headcount in sales consistent with our focus on professional managers, sales operations, as well as marketing staff. The cost associated with increased personnel more than offset lower marketing expenditures. Compared to the first quarter last year, our direct spend was 13% down year-over-year. And while pay-per-click and other areas were up, it was not enough to offset the broad reach marketing spend we incurred last year. As previously discussed, we're re-purposing the Broadridge spend, traditionally incurred in previous year to display and other types of non-television-focused marketing. And as Brian mentioned, the timing will be spread throughout the year. On a sequential basis, all types of marketing are up in the first quarter, consistent with historical trends and the seasonality of our business. General and administrative expenses increased by 25% year-over-year to $16 million. This was due to growth in the number of personnel, primarily in our global shared services such as information technology, accounting, finance, tax and legal. Amortization expense of $3.2 million was up 29.9% year-over-year due to the amortization of intangible assets that were previously designated with an indefinite life, as well as the inclusion of amortization, as well as with the acquisition of Top Rural to complete it early in the second quarter of last year. Adjusted EBITDA increased 56.1% to $21.8 million. As a percentage of total revenue, adjusted EBITDA margin was 27.4%, a 565 basis point increase over the prior-year period. The margin improvement reflects the benefit of our revenue growth, coupled primarily with the lower broad reach marketing expenses, as compared to the prior-year period. Our effective tax rate was 22.6% during the quarter, due to the impact of 2 key areas. First, we had a large number of option exercises during the quarter, including ISO disqualifying disposition. This resulted in a large benefit in GAAP tax expense. Additionally, in January, congress retroactively extended the R&D credit for 2012. Our Q1 2013 expense includes the entire benefit of our 2012 R&D credit. These 2 factors, net of a few other items, resulted in a onetime or discrete benefit of approximately 25 percentage points in our effective tax rate. We don't expect the same volume of ISO-disqualifying disposition to repeat each quarter. Therefore, we're planning for the right to land in the high-40s for the remaining quarters of the year and the low-40s for the full year. This compares to a 2012 full year effective tax rate of approximately 47%. As a reminder, we continue our efforts to optimize our worldwide cash tax liability to our European Consolidation in Geneva. However, the impact of stock option grants and exercises can create fluctuation in our annual estimate. And before I leave the discussion of taxes, I want to mention the impact of cash tax payment. We've been making expected, large cash tax payments in Europe in the second quarter, as a result of onetime gain incurred during our structuring changes there in 2012. This, along with fewer NOLs available worldwide, will resort in higher cash taxes paid in 2013 than in previous year. Cash taxes were $9.1 million in 2012, and we expect to pay between $14 million and $17 million in 2013, of which approximately $10 million to $11 million were paid during the second quarter. Net income was $5.3 million or $0.06 per diluted share. This compares to $2.4 million or $0.03 per diluted share in the first quarter of last year. Brian has discussed our quarterly results for our key business metrics. However, for those new to our company, it's important to reiterate that for the next several quarters, there will be some noise within our key metrics, stemming from the introduction of our U.S. bundle and the impact of property owners and managers consolidating their U.S. listings by purchasing a U.S. bundle. To help you understand the impact of these changes, we have and will continue to provide additional insight and information into these metrics as needed. Specifically, as noted in today's earnings release, ending paid listing count and renewal rate will appear lower and average revenue per listing will appear higher versus previous metrics on a go-forward basis. Moving on to our balance sheet and cash flow. At March 31, 2013, cash, cash equivalents and short-term investments totaled $314.4 million and we remain debt-free. We ended the quarter with $149.7 million in deferred revenue, which is up 19.5% over March of last year on an FX-neutral basis and excluding the impact of Top Rural. For the quarter, we generated free cash flow of $33.3 million, up 18.4% year-over-year, and for the trailing 12 month, $90.4 million, which is up 21.3% over the comparable trailing 12-month period last year. Capital expenditures, including costs associated with internally developed software, were $5.5 million for the first quarter. Most of our forecast at capital expenditures are for equipment, software purchases, internally developed software and planned office expansion to support our growth. As presented in our earnings release today, we're providing our business outlook for the second quarter and full year of 2013. As compared to our outlook provided in February, we're tightening our range and increasing our annual FX-neutral growth rate to reflect Q1 over performance. However, we've adjusted our outlook to reflect the recent declines of the euro. Now while we have exposure to the pound and other currencies, due to the significant amount of business outside the U.S, the euro has provided most of the volatility in our results and estimates. With that as background, for the June quarter, we currently anticipate revenues to be in the range of $85 million to $86 million, representing year-over-year growth at 18.7% to 20.1% or 19% to 20.4% FX neutral. And adjusted EBITDA to be in the range of $22.5 million to $23 million, representing year-over-year growth of 8.1% to 10.5%. As noted earlier, compared to last year, sales and marketing expenses will be more significant in Q2, creating an unusual comparison against last year. For the full year, we currently anticipate revenues to be in the range of the $338 million to $341 million, representing year-over-year growth of 20.5% to 21.6% or 20.6% to 21.7% FX neutral. Adjusted EBITDA to be in the range of $97.5 million to $100 million, representing year-over-year growth of 21.4% to 24.5%. In other key modeled assumptions for the first -- full year include a foreign exchange rate for the euro of EUR 1.30 for each U.S. dollar, and this compare to our prior estimate for the euro of EUR 1.33 for each U.S. dollar. As discussed earlier, we plan for a full year effective book tax rate of approximately 40% to 43%. Basic share count to be in the range of $85 million to $87 million, and our fully diluted weighted average share count to be 87 million to 89 million shares. Stock-based compensation is expected to be in the range of $35 million to $38 million, amortization expense is expected to be in the range of $11 million to $12 million and capital expenditures in the range of $19 million to $21 million. That concludes our prepared remark. Thank you for your continued support of HomeAway. Operator, you may now open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Douglas Anmuth with JPMorgan.

[Bo Nam:]

This is a Bo Nam on behalf of Doug. We just had 2 questions. One, can you talk a little bit more about your guidance and how you're incorporating from the concern for the euro? Can you talk about the overall euro macro situation, the industry there and if there's any conservatism attributed to that? And then secondly, just a housekeeping one, can you provide the ARPL x FX growth percentage? Not the -- I know you provided the 1x FX and pay-per-lead listings, but if you can just provide an x FX one?

[Brian H. Sharples:]

Let me take the first 2 and then Lynn can take that last one. Just in terms of the method for the forecast, all we did was took the numbers we had for the year, we added the B [ph] for Q1 and then we ratchet it back for the euro, and that was it. So we just changed the original model, I think -- was it 1 33 [ph]? And we moved it to 1 30 [ph]. So essentially it's same plan but incorporating the B [ph] from Q1. In terms of macro and euro, I have to say for our business, in particular, and I can't make a statement for the rest of the economy, things are going very well there. We're seeing a very good listing growth in Europe. We're seeing very good traffic trends in Europe, inquiry per property is up. So as far as the vacation rental business is concerned, things look very good and we don't see any signals that causes to be negative about it for the rest of the year. And then, Lynn, on that last one?

[Rebecca Lynn Atchison:]

Yes. So, I mean, I want to make sure I understood what you're asking for. We did give the FX-neutral subscription ARPL number, but we don't -- there shouldn't have been that big of difference FX-neutral between regular ARPL and what it would be FX-neutral, but I don't have that calculation right in front of me.

[Operator:]

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

[Nishant Verma:]

This is Nishant Verma for Scott Devitt. I just had one question. You've previously mentioned an organic paid listing growth target of around 15%. This quarter, excluding listing consolidation, the paid listing growth was around 9.5%. Do you think that you could get back to the 15% growth when, I guess later, when you launch the pay-per-booking product? And also just as a follow-up to that is also how many of pay-per-lead listings do you currently have? Can you disclose that or not?

[Brian H. Sharples:]

Sure. Yes. We have roughly 60,000 on the pay-per-lead front. And related to your question, it is -- has always been, we stated this, our goal and our objective is to maintain a listings growth rate of about 15%, and that does still remain our goal. What I talked about on the last call last week, is that, that's going to be a difficult goal for the next 3 quarters until we get to pay-per-booking. Our subscription growth rate is running pretty steady for the last few quarters, it's been running about 10% to 11%, and so some of the noise we have is related to PPL, which provided us with a lot of growth in the last couple of years. But in hindsight, it wasn't a great business for us, didn't contribute meaningfully to revenue and we believe those listings are all better off on PPB. So for the moment, we're not growing that base. And so we're off the 15% objective, and again, you should expect to see that for the next few quarters. Pay-per-booking, we believe, will meaningfully turn our growth numbers upward and, based on our current schedule, we should be able to start adding properties in significant numbers, hopefully, starting in about Q4 this year.

[Operator:]

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

[Lloyd Walmsley:]

I had 2, if I may. First just on the European sites that are on the premium tiers now, are you continuing to see the adoption, kind of, track in line to better than the U.S. HomeAway sites when you made that switch per your comments last quarter? And then, secondly, as we kind of anticipate the impending release of the pay-per-booking product, should we expect similar metrics on those listings to the core subscription listings? Or should we assume lower room nights per listing, bookings per listing, just given some of them maybe lighter renters trying out the rental option and/or primary residences? How should we think about that?

[Brian H. Sharples:]

Lynn, do you want to start with that one? I guess you're asking about when we start reporting, are we going to -- what are our metrics going to be around that business, Lloyd?

[Lloyd Walmsley:]

Well that will be helpful too. But I was more just curious, conceptually, do you think that the listings you'll be bringing into your pay-per-booking product will be coming from users who won't be renting quite as much? And therefore, kind of thinking through how to model it going forward, should we be anticipating the same $14,000 per listing in bookings value? Or something well light of that just because it may be a different end market?

[Brian H. Sharples:]

Yes. I -- okay, I got where you're coming from. So let me answer the first one. In terms of tiered pricing in Europe, we absolutely are seeing adoption rates ahead of the U.S., pretty dramatically actually, meaning that if you take the same point in time, I think we're 90 days in or something like that, you compare it to what adoption was in the U.S. Adoption is substantially higher in Europe. Now when we rack our brains and say, "Well why is that?" Because, I think, a few quarters ago we were wondering if it was going to be at the rate of the U.S. I think, part of it is just because we learned a lot about how to market the product. In the U.S. we launched there first, so we've probably done a better job of launching and marketing that product. And so -- and then the other part is that it seems to be an attractive product in Europe. Those are very competitive markets and so people are willing to tier up relatively quickly.

[Rebecca Lynn Atchison:]

Yes. And one of the other -- certainly, the -- one of the target markets for pay-per-booking will be those that have a shorter season to rent. And so, I think, for those customers, you might expect that they wouldn't have as much in annual revenue. Of course it depends on where the property is and what they're able to charge. So we don't know that. However, we also think pay-per-booking will be a great way for people to enter into the market. And so they may end up with $14,000 or a much higher average bookings per year. And then those, over the long-term, may make decisions to move to subscription. And on the PM side, I'm not sure. I'm not sure, Brian, if you have a point of view? But I think there will be a mixture there. Some will be filling out their shoulder season, so we may see less, but others may just like the model better, pay-per-booking, and they will have a large summer of bookings.

[Brian H. Sharples:]

Yes. I mean, I think, in general, Lloyd, it's a true statement that it's going to be less than what our -- our average actually happens to be greater than $14,000 on the other side of the business. But if you look at it, it will certainly be lower. I mean, PMs have -- they distribute through a number of channels, they have their own websites. And so their availability, when they're on our sites, is going to be less, by definition. So they're not going to hit the average of our FRBOs who use us for the majority of their businesses. And again on the FRBO side, we're trying to hit some French markets, the big ones are people who rent for 10 weeks or less a year. So we don't know exactly what those numbers are going to be yet, we've certainly done some research on that, but until we're in a live environment, who knows? I think if you do the math, you recognize that we can be well, well, south of $14,000 and still be able to hit ASPs for the business on an annual basis that hit our subscription targets, if not, well above that and that's certainly what we're counting on.

[Operator:]

Our next question comes from the line of Heath Terry with Goldman Sachs.

[Heath P. Terry:]

I was wondering if you could clarify one of the numbers that you gave. The 62,000, is that users or listings that are taking advantage of online payments or online bookings? And, I guess, whichever one that is to the extent that you can give us a little bit more color around the adoption that you're seeing for online -- for the online payment and online booking offering so far, that would be extremely helpful.

[Brian H. Sharples:]

So the 62,000 are people who have adopted the payment platform. They are then given the options, something very recently, to be able to add a book it now button on their listing. And so there's a subset of those guys that have a book it now functionality on their listings. At the moment, that number is sub-15,000 listings. And one of the reasons that some of those people are going to be dependent upon that is because a lot of people equate online bookings with somebody they don't know, coming in the middle of the night, hitting that button and renting their property. When in actual fact, the way the product is structured, is it does give people 24 hours to be able to vet somebody. But we find that when talk to people on the phone, there's a lot of confusion about that, still. And, again, remember this is an industry which works very well on a classified basis, mainly because owners are very concerned about who stays in their properties. So it's going to take some education. The online booking piece is certainly going to lag the e-commerce piece. Our goal right now is to get people payment enabled, that's what we're really working hard on. All the programs we have in place are really to improve adoption of that and then we take that base and go to work and get them on online booking. I think online booking is something to -- that's going to be kind of a momentum play for us once you start to see in your particular area, those buttons appearing more and more, then more and more owners are going to feel disadvantaged if they don't have them. So I think we're quite confident that we're going to get that penetration way up. But again, it's something we just launched recently, and at the moment, at least versus our own expectations, it's running right in line with what we expected.

[Heath P. Terry:]

And from what you're seeing in the -- and obviously it's extremely early, but from what you're seeing in the metrics, are listings that are offering online payments, online bookings, are they seeing better conversion, more clicks, more, kind of, value coming from the -- from being able to offer those in terms of the -- what they are actually getting out of their listings?

[Brian H. Sharples:]

So they do better and they get more page views, but it's a bit of a self-fulfilling prophecy because they have a quality score on the site and one of the factors in that quality score is whether or not somebody is payment enabled. So if you have e-commerce, by definition, you're higher up in search results, which, by definition, allows you to perform better. So whether that's because customers prefer those kinds of listings or it's just that they're higher in search order is a little bit tougher for us to tease out. But, by definition, yes, if you buy that product, you're going to do better on the sites.

[Unknown Analyst:]

And then -- and, Brian, maybe I'm just reading too much into this, but you did sort of sound more optimistic about the impact that pay-per-booking could have on the business. I guess, first, am I reading that the right way? And if I am, is there anything that you -- anything specific that you can share with us, either from conversations with property managers or some of the early survey works that you've done with your users that is driving that enthusiasm?

[Brian H. Sharples:]

Well I mentioned some of it last quarter. We did survey work, and that survey work showed that our subscribers are really happy being subscribers but we also surveyed what we call partials on our sites, which are people who come into our purchase funnel, get a bit of the way down the pipes that are actually real people who want to list properties, not competitors or people doing searches for other reasons, and they ultimately don't list. And when we survey that group of people, we actually find a very significant degree of interest in a product that's free, where they pay a percentage. So effectively, they're saying I would have listed on the site if you have something like this, so I think that's the reason that -- that's one reason from an adoption standpoint that we feel pretty optimistic about it. I guess the other piece is as we get closer to it, it's becoming more real and there are lots of development challenges and a lot of systems and accounting systems this has to flow through, so it's been a pretty complex project. But the project is staying on track now, so maybe if you hear a little more enthusiasm in my voice it's because we're getting a couple quarters away. And -- but I've always been excited about it and continue to be. I mean, I think whenever you can offer something with an entry price that's effectively 0, you're going to see a meaningful uptick in growth rate in properties on the site. And if you look at this particular release, I mean, everything looks wonderful,except for that property growth number. I mean the financials are very strong, renewal rates are headed in the right direction and that's one where I'm waiting for PPB to be able to get back to those 15-percent-plus levels and I hope we get there pretty quickly after we launch it.

[Operator:]

Our next question comes from the line of George Askew with Stifel.

[George I. Askew:]

On bundling, you mentioned that one of the impacts -- or excuse me, not bundling, on the renewal rates, you mentioned that one of the impacts was -- were the new product changes, obviously, in the U.S. Can you give us a little more color around that? Are you -- are some customers just confused by what's happening and not renewing?

[Brian H. Sharples:]

No. It was almost entirely due -- so we talked about this last quarter, and thankfully it has now stabilized, but that was particular to VRBO. So on VRBO, if you look at the things we did in 2012, there were some pricing things. So we increased the base price by $50 in 2012. We moved from photo-based tiers to this 12-level system. Then we took the 12-level system to our 5-level tiering system. So they actually had 2 big changes in how pricing was done on the site. We gave them a new shopping cart. We gave them a new listing manager, so the whole system that they used to edit every bit of their listings that they interact with on a weekly basis, we changed out completely because we gave them a HomeAway system. They have a whole new dashboard to manage things. We changed the calculation of how sort order works in VRBO. So for example, in the old days, you used to buy a photo, and that was factor one, and factor 2, was just how long you've been on the site. So people who are on the site for 20 years, whether their property is high-quality or not, have an advantage over somebody who might only be on the site for 5 years. We introduced a variety of quality scores as well. So essentially, think of it this way, you're used to using a certain kind of a product, you interacted with it everyday, you're familiar with it, you know how it works and then everything changes on you over the course of 6 to 7 months. Well, there is some people who can't deal with those changes, not a lot, but that had an impact on renewal rates of about a percentage point on VRBO. And of course, the concern last quarter was is it going to get worse? And luckily, it didn't. Those renewal rates have stabilized and we fully expect that we'll probably get most of those customers back over time. But when we had all those changes, you can imagine, along with that you've also got tens of thousands of people calling customer service because they -- it's different and they need to know how to use it, and they used to do something some way, and now they have to do it another, and then because customer service is getting lots of calls, some of the people might be waiting for 20 minutes to get the phone answered. So all that stuff combined is the kind of churn you get when you move a company to a new platform. And we've seen it every time we've moved a company to a new platform. Someday, when we move HomeAway onto the global platform, those customers will go through the same thing and we'll see some dissatisfaction and some decline for a small period of time. And that's always been the case every time we've done this. And so when I look at the VRBO change, was it a good idea? Absolutely. We've got -- our business in VRBO is doing great. Our ASPs are way up. Our satisfaction is now doing extraordinary well and we can either be in the game of renewal rate maximization or in the game of moving the product forward and making it better for our user. So in the long term, they're better off and that's what we've chosen to do. And again, I think, now with this quarter behind us, we're no longer concerned about that being any kind of a deteriorating condition.

[George I. Askew:]

Okay. Great. You mentioned in the release that you're now using a different tool for the measurement of visits. I'm curious, is it -- is this like a third-party tool? Is it internally developed? And what is it about the new tool that's changing that measurement?

[Rebecca Lynn Atchison:]

So, George, I'll chime in here. This actually started last quarter, and it's moving from Omniture to Google Analytics. And so it's my understanding, and I'm looking across the table right now to our BI folks to make sure that we say this correctly, but it has to do with how quickly it counts the visits. And so we felt like that if you just took the actual visits number we have now and compare that to last year's visit number, it would show like a 29% growth. But we went in and kind of factored that really, apples-to-apples, it was closer to the 22%. So that's all it is, and we feel like it's a very accurate tool. We're happy with the result. It's better off actually for us, and we just wanted to give what we thought was a truer figure.

[Brian H. Sharples:]

Yes. I mean, you'll find some Internet companies using one and some using the other. We just felt, all things considered, that Google analytics was a more accurate product for us. Again, we've been dual tracking both of them now for well over a year and made the switch last quarter to Google Analytics. But as Lynn said, if anything, we factored conservatively and brought the number -- the growth numbers down from what we've seen with Google Analytics versus the way we used to measure it.

[George I. Askew:]

Okay. Great. And then just one quick clarification, on the pay-per-booking listings, 100% of those will be payment-enabled and have book now buttons, is that correct?

[Brian H. Sharples:]

That's exactly right. So if you want to be a free subscriber on our site, you're going to need to do whole kitten caboodle. You're going to need to make sure that your rates are fully quotable, that you have an online booking button and that you accept payments on our sites. So in a way, the bar to get on our site for free is going to be pretty high. You're going to have to build what we would consider to be a very high-quality listing in order to do it.

[Operator:]

Our next question comes from the line of Chad Bartley with Pacific Crest.

[Chad Bartley:]

I wanted to ask a question on the pay-per-book solution when you introduced that. So when you begin to add those listings in Q3 and Q4, how will you integrate those into the website and display those listings? And can you talk about how it could potentially, kind of, overwhelm or dilute the customer listings on your subscription model?

[Brian H. Sharples:]

What I can tell you is we spent actually several hours on this topic yesterday. We have a whole team here working on something called marketplace management, which is both a set of algorithms, some philosophy and some technology that is going to manage all this. And without giving away the store here to our competitors, I can tell you that our goal is to make sure that our subscription customers remain extraordinarily happy. And so what is factored into that algorithm is continuously looking at the performance of our subscription customers and only inserting listings in cases where we don't believe we're going to heavily impact renewal rate. The flip side is, just like any OTA, we're developing algorithms that will maximize our revenue from the pay-per-booking site. So we have old customers, and this is a choice customer is going to have to make, if you're a subscriber on the site, you can pick where you are on the site and what site you subscribe to and you're on all the time. If you're a pay-per-booking customer, we're making no guarantees. That's up to us. You're our inventory that we have as a retailer, and we're going to choose to put you in our store when and where we deem appropriate. Now as it turns out in all these markets, we've got supply and demand fluctuations by day, by week, by fees and sometimes even by time of day or hour. And so what we're developing is a system that takes advantage of those supply-demand opportunities to make sure that we can get those pay-per-booking listings as high up as we can without disrupting our subscribers. The other thing that you need to realize is that once we have pay-per-booking inventory, we can now get a little more clever about how we go about buying advertising online. So, for example, if we add another 50,000 pay-per-booking listings, we are going to want to boost traffic to make sure we can keep everybody happy. But if we actually buy against those pay-per-booking listings, those now convert in real dollars to a transaction. So much like booking.com has built its business by arbitraging search to go directly and, let's say, buy a customer for $50 that then yield $150 transaction, we'll be able to do the same thing. So another thing, in addition to the marketplace management algorithms that we're working on and spending money on and, by the way, I think in Q2, a lot of analysts modeled Q2 a bit differently than we did internally. We've never given Q2 numbers until now. But we've got some marketing spend in Q2 that we've never had before and that is a little bit different than what The Street modeled in terms of consensus. Well a big part of that is us taking money and starting to work on displaying SEM to get ready. We're going to be doing a bunch of testing to get ready for when we launch PPB so that we're pretty good out of the shoot at doing that kind of arbitrage. So all I can tell you is a tremendous amount of effort is being put into that. We understand how valuable and how treasured our subscription business is. It is a great business, and we don't want to affect it with PPB and so we're going to very great lengths to do that in a very thoughtful and sophisticated way.

[Operator:]

Our next question comes from the line of Mike Olson with Piper Jaffray.

[Michael J. Olson:]

You mentioned that 1/3 of subscription listings for those sites offering tiered pricing incorporated at least one tier. Can you take a stab at just how quickly you expect that 1/3 to grow? Like where will that be a year from now?

[Brian H. Sharples:]

Yes. So it's about 1/3 for the sites that has tiered pricing. It's about 20% for our company, overall. And eventually we want to get the whole company on tiered pricing, and we will. So just take that 20% for a second and let's talk about where that can get to over the next few years. The only site that has been big, and we've managed for a long time that had something resembling tiers, and I remember talking about this about a year ago, was VRBO, which had this photo-based system. And VRBO got up to about 60% penetration at the time that we then switched it over to this new system, which is actually adding penetration on top of the 60% that they already have. So I think something like 60% probably is a reasonable thing for us to shoot for over the next few years and we're sitting at 20% today, so I think it still got a pretty good runway in front of it.

[Rebecca Lynn Atchison:]

Yes. I mean, I'll just add. We don't know because we didn't count it in the early years how quickly VRBO got up to that 60%. And so -- but we're very pleased with the 1/3 and where we are right now.

[Michael J. Olson:]

Okay. And then you talked about the mix of lower ARPL in new geographies. Would you be willing to give us an indication of which markets are, kind of, materially below the company average ARPL?

[Brian H. Sharples:]

Sure. Yes. So Spain is a huge opportunity market for us, and we're about to launch in Italy, which is going to be pretty similar. And so in Spain, we're being pretty aggressive about trying to grow listings there. It's actually one of our fastest-growing listing sites around the world. The price point there, just to give you an idea, I think, is running at about EUR 119 right now. So times 1.3 roughly under 1/2 of our actual total ARPL. Australia is a very similar situation. Remember, last year, Australia was actually kind of hurting our growth rates because we bought that company and there were a lot of PMs in the site and we switched it from one company to another and we lost a lot of people and that was affecting our numbers. Well actually, in this quarter, Australia is now doing extremely well. I mean, we have made some big investments in that market. We've really boosted traffic on the site. It's actually our fastest-growing traffic site right now. And it's one of our fastest-growing listing sites. But again, in Australia, the numbers are in the 100 -- what's the price there roughly? $150, something like the sub-150. And again, we'll move those price points up as performance increases for those customers and those markets. But look, as we look to new markets like Southeast Asia, we're about to launch in Latin-speaking South America, so we're getting set to launch in Colombia and Argentina. Because those are new markets for us and we're sort of starting from scratch, in some of those cases we'll start with pricing that's close to 0; we did that in Spain by the way, and then we'll move them up aggressively year by year. So we'll always have that downward drag on ARPL depending on how aggressive we are in new markets. A new markets is just one of those things that you invest today because 3 or 4 years from now you're going to happy you did. So we're trying to strike the right balance, but doing that pretty aggressively.

[Operator:]

Our next question is from the line of Stephen Ju with Credit Suisse.

[Stephen Ju:]

Brian, I guess this is a longer-term product question, and maybe I'm putting the cart before the horse a little bit here. But as you position the e-commerce platform rollout, are you engineering it so that you can layer on other ancillary services on top of payments and PPB, for instance, property maintenance or repair services? And, secondarily, as VRBO inventory continues to be integrated onto HomeAway.com and they should present better selections to the consumer, and hence a better shopping experience. So are you able to call out if you are seeing any benefit in terms of your position in organic search results, as a result of the increased inventory and selection?

[Brian H. Sharples:]

So we continue to perform really well in organic search. It's a bit hard to top where we are right now. I mean we have such a strong position in organic. I think I gave you guys a stat a few quarters ago that something -- Google came in and told us it's something like 87% of all Google searches for vacation rental terms wind up on one of our sites. So it's a pretty tough standard to be, although we continue to grow our organic search traffic ahead of the growth in search terms. And whether that's because of the super sizing we're doing or not, I don't know, but we are actually starting to see a good uplift in conversion on all of our sites. And I think that's because we're adding more inventory, that was always the hypothesis for doing it. It, I think, only improves the network effects of our business and so there's nothing we've seen so far that says that hypothesis isn't correct. And then the cart-before-the-horse question had to do with add-on products. So we do -- today, our e-commerce platform actually does have the ability to sell add-on products. We're selling insurance products, for example. So we have a cart built that enables us to do that. And so it's not that far-fetched for us to think about selling other products in the future, whether they're in the shopping cart or whether it's just something we can provide either through the inquiry or booking process. For example, something like, I don't know, selling tickets to a traveler, might be something you better market to somebody a week before the trip is taken than right on the site when they're booking it. I think in terms of owner services, we've looked at that. We're always looking at options to provide that more broadly, but we -- there's also a pretty vibrant property management community out there and they're our customers too. And part of what we allow property managers to do who participate heavily with us, that means for property managers who list more than 50% of our inventory, we actually allow them to market their services to our individual owners within our platform. And so owners do have access to some of those services today, but it is something we could get more aggressive about in the future but, frankly, the product plate is pretty full with the stuff that we're working on at the moment.

[Stephen Ju:]

And, Lynn, will you give us the U.S. versus international revenue for the quarter?

[Rebecca Lynn Atchison:]

For the quarter it was 62% in the U.S. and then 36% Europe and 2% rest of the world, which is Brazil and Australia.

[Operator:]

Our next question comes from the line of Aaron Kessler with Raymond James.

[Aaron M. Kessler:]

I have couple of questions. First in the market sizing, I think you -- Brian, you talked about, kind of, the large number of properties that have majority or that list basically less than 10 weeks per year. How big do you think that market sizing is if you think about the $6 million properties available? I think roughly -- you have roughly 12% today. And just the second question is -- if you can give us an update maybe on some of the penetrations of your auxilliary products today?

[Brian H. Sharples:]

I think it's probably $2 million to $3 million. That $6 million, $7 million number you referenced is just U.S. and Europe. So we're in South America obviously and making pushes in Asia, so those numbers could be bigger, but it's in the millions. So I think it's a very, very big -- if you think about all the people who have vacation homes and actually use them but they can't quite afford them and they want to pay the bills, they're not people renting them full-time but they are people who might rent them 6, 8, 10 weeks a year. So I think those are some pretty substantial numbers.

[Aaron M. Kessler:]

Do you think a very few of those are on those sites today or...

[Brian H. Sharples:]

You know what? When we poll the users on our sites, what we find is that we've got a pretty heavy component of power users, so the majority of our users are people who rent 13 weeks or more. And stats that are being put in front of me right now, yes, I mean, indicate that close to 40% to 45% of all listings may fall into that 10-and-under category. This stat that's in front of me is about a 12-and-under but -- so pretty -- it's a pretty substantial opportunity that we are not tapping today just because our subscription pricing is pretty cost prohibited.

[Aaron M. Kessler:]

Great. And so my second question...

[Brian H. Sharples:]

Oh, I'm sorry, you asked another question.

[Rebecca Lynn Atchison:]

I think it was a question on ancillary products. I'm not sure...

[Brian H. Sharples:]

Yes. On value-added services, I don't have those percentages in front of me.

[Rebecca Lynn Atchison:]

Yes. I don't think we provide specific numbers there. You can see through the growth of other revenues that it's definitely ticking up and that we're finding that people are attaching products in the U.S. at a solid rate. One of the things that you may recall is that we haven't really attached product to our Europe Reservation Manager product and we'll be doing that beginning in 2013. So that opportunity for revenue we'll see later on this year and into next year.

[Brian H. Sharples:]

What I can tell you is that, I think we said this before, our most popular product right now is our Property Damage Protection product and the take rates on that are actually very, very strong. And we're going to see that will be the first product we'll introduce in Europe. It's actually going to happen fairly soon.

[Operator:]

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.