ETFMG Travel Tech ETF
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Greetings, and welcome to the HomeAway, Inc. Second 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. Ms. Dickey, you may begin.

[Courtney Hicks Dickey:]

Thank you, and welcome to HomeAway's Second 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, and good afternoon, everyone. Thank you for joining us today as we discuss our 2013 second quarter results. We delivered another strong quarter financially, with both revenue and adjusted EBITDA topping the high end of our expectations. Total revenues of $87 million represented FX-neutral growth of 21%. And within our core subscription business, FX-neutral listing growth was slightly higher at 22%. Adjusted EBITDA of $25 million during Q2 grew 19% and free cash flow for the trailing 12-month period to $92 million, an increase of 21%. As a result, we ended the quarter with cash and short-term investments of approximately $336 million. This continued strong performance highlights not only the advantages of our core subscription business, but also demonstrates the powerful network effects created from our position as the world's leading and largest vacation rental marketplace. Year after year, HomeAway leads the market in both online vacation rental listings and travelers seeking the specific types of accommodations we offer. Q2 is another busy quarter for HomeAway, highlighted by continued investment in innovations aimed at sustaining our track record of long-term growth. Subsequent to quarter end, particularly notable was last week's announcement of our agreement to acquire a majority stake of a company called travelmob. travelmob is an exciting new short-term rental marketplace based in Singapore that currently serves 8 major markets of interest to HomeAway in the Asia Pacific region. We believe expansion into this region is an extremely compelling opportunity for HomeAway as we are seeing increased demand for travel and second-home purchases driven by a burgeoning middle class. We anticipate these economic developments to drive attractive long-term growth and alternative accommodations, such as vacation rentals. An early indication of this demand is highlighted by the exceptional growth in travelmob's listings, which, in its first year alone, grew from 0 to more than 14,000. travelmob is particularly unique within the HomeAway portfolio because of the types of inventory represented on its site. Travel accommodations in Asia Pacific are vast and varied, and as such, travelmob offers shared spaces in primary homes in addition to the traditional vacation rental second-home inventory that's found on our leading sites. What also makes travelmob compelling to HomeAway is its transaction-based model, whereby it currently charges a percentage fee to both owners and travelers booking through its site. With the upcoming launch of pay-per-booking this year, we expect to garner many important learnings from travelmob's experience. We plan to invest in an aggressive growth for our new Asian business. This investment, aimed at growing both listings and traffic, highlights our confidence in this region's potential and our belief in the long-term value that it will create for our shareholders. This investment comes following our acquisition of a vacation rental business in Australia, a minority investment in China-based Tujia and our recently signed distribution partnerships with Wego.com and Tripvillas. We're also investing in double-byte technology to allow us to expand our existing sites into Asian languages. Lynn will provide more details in the financial section, but expect this planned acquisition to reduce EBITDA by roughly $2 million in 2013 or approximately 2% of our anticipated full year adjusted EBITDA. Turning back to the core business. Total listing growth appears modest at 5% for the quarter. But as discussed previously, it's impacted significantly by the consolidation of multiple listings and offering of network bundles. Adjusting for these factors, we estimate listing growth would have been approximately 10%. This actually represents a slight acceleration from last quarter and is particularly notable given that growth acquired from Top Rural's listings in Spain are no longer providing a benefit to listing growth rate as that acquisition has now lapped 1 year. On another positive note, listings growth among property managers also accelerated, with HomeAway adding over 14,000 PM listings in the second quarter. It is also particularly notable in light of the fact that PMs have been made aware of our pending launch of pay-per-booking, which would obviously allow them to get on the sites for free. This growth in PM listings reflects our position as the leading distribution channel for vacation rentals, as well as the success and continued development of our integration and management platform for PMs. Turning to renewal rates. They have remain roughly flat with the prior quarter at 74.5%, when adjusting for the impact of consolidated U.S. listings. Similar to the first quarter, we continue to see renewal rates stabilize in the U.S. However, renewal rates in Europe were slightly down from last quarter primarily due to promotional activity last year, which, I'll remind you, particularly leads to lower first year renewal rates. Turning to traveler demand. We have attracted approximately 200 million site visits during the quarter, and inquiries, in particular, remain strong. This level of traffic marks a 19% increase over the prior year period. And while we don't report inquiry numbers, I should note for you that they accelerated during Q2 and are growing faster than visits, thanks to continued improvements in traffic conversion. Some of these improvements include new search and property pages on several sites and also a more compelling mobile experience on our platform and also, that you can download through iTunes. Average revenue per listing, when adjusted for the impact of consolidated listings and new bundled offerings, increased nearly 11% to $372. FX-neutral subscription revenue per listing, which excludes PPL and makes the same adjustments for consolidated listings and new bundled offerings, increased by 9% to $400. As a reminder, there are a lot of things that can affect ARPL over the course of the year. ARPL growth for the last 4 quarters, for example, has benefited from the first year of consolidation of Top Rural, which sells at significantly higher ASPs than our base business. So when adjusting for the fact that Top Rural has now lapped its first year, it's important to note that FX-neutral subscription ARPL slightly accelerated versus first quarter for the rest of our business. Again, we're not including that effective Top Rural. Growth in these metrics continue to benefit from our modernization initiatives, including tiered pricing and network bundles, which remain robust in the U.S. Similarly, in Europe, adoption of tiered pricing continues to perform ahead of expectations. However, now after 2 quarters of observation, European ASP growth is lower than what we've observed in the U.S. primarily because of the existing penetration of network bundles which have already been offered for over 2 years in the European region. As well, be aware that our continued aggressive investment in new geographies will provide higher listing growth, coupled with lower ASPs, that may have a dilutive impact on ARPL in future quarters. Turning to our e-commerce and pay-per-booking initiatives. Over the course of the quarter, we added over 11,000 new e-commerce-enabled listings, ending June 30 with nearly 74,000 listings now enabled for payment or online booking. With respect to our major strategic initiative around pay-per-booking, the first phase is still slated to be made available through selected U.S. property managers and owners in beta version by the end of the third quarter. As such, we remain on track with this effort, and super excited for the potential in this new line of business in 2014 and beyond. As we've stated before, we'll be diligent in our initial deployment, remaining thoughtful about managing supply and demand in our individual vacation markets and ensuring that we can continue to drive exceptional value to our subscription-based listings. We also remain confident that pay-per-booking will not materially impact our existing subscription business, appealing to a distinct customer set not immediately served by HomeAway's subscription-based platform. To wrap things up, the first half of 2013 is off to a strong start, with HomeAway diligently executing against our financial plan, as well as our products plan and our international expansion strategy. So with that, I will hand the call over to Lynn Atchison, our CFO, to discuss our second quarter results in greater detail. Lynn?

[Rebecca Lynn Atchison:]

Thank you, Brian. For the second quarter, total revenue of $86.6 million was 20.9% higher than the comparable quarter last year, with strong performance in both listing and other revenues. Listing revenue, which increased 21.6% year-over-year to $73.3 million, benefited from higher average revenue per listing, as well as a higher number of paid listings. We remain optimistic that tiered pricing and our network bundles will continue to contribute to pricing expansion. We expect our Q3 subscription ARPL growth rate to be roughly in line with Q2 but expect a somewhat lower growth rate in Q4 due to some of the factors Brian mentioned, such as investment in new geographies, as well as lapping the base price increases in HomeAway.com and VRBO.com from 2012. With respect to paid listing growth, as Brian discussed, we are excited about the impending U.S. launch of pay-per-booking this year, as well as our new investment in Asia and believe both will be key drivers of new listings over the coming years. The future of the PPB business will be based on the number of new listings and the monetization of those listings. In addition to the commission rate, revenue will be driven by the number of weeks available for our PPB listing, coupled with our ability to drive bookings to that listing. We believe availability in bookings for these properties will be less than our core subscription listing. For instance, PPB customer base includes event-based and short-season listings. And we've also observed that online bookings tend to be for shorter duration. With respect to driving bookings to these listings, as Brian mentioned, we're going to be thoughtful in terms of how aggressively we integrate PPB listings into search results. We also expect that, over time, many customers who pay substantially more in commissions will naturally move to a subscription model, which we believe remains the best value in the vacation rental industry. Other revenue, which is 15.4% of the business, is comprised of ancillary revenues from owners and travelers, advertising, software and other items. This category grew 17.3% year-over-year and benefited from higher growth in ancillary products, offset by our traditionally lower-growth software business and a decrease in advertising revenue. During the second quarter, 61% of our revenue was generated in the United States, 37% in Europe and about 2% in South America and Australia. Turning to expenses. Total operating expenses, excluding amortization, increased 24.7% year-over-year. Most of the growth year-over-year reflects increased compensation expenses due to increased headcount. We ended the quarter with 1,408 employees, up 26% over the course of the last 12 months as we continue to invest. Cost of revenues totaled $13.8 million or 16% of revenue, up 20 basis points from the prior year period and increased slightly ahead of revenue growth at 22.6%. Over the last year, we added 84 employees in this area, mostly in customer service, to support the launch of numerous new product enhancements on-site 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 and remain consistent as a percentage of revenues on an annual basis. Product development expense increased 39.9% to $14.4 million due to our investment in personnel and higher levels of noncash stock compensation. Over the last year, we added 85 employees in this area. The additional personnel 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 as an absolute term and as a percentage of revenues on an annual basis. Sales and marketing expense increased 19.9% year-over-year to $28.9 million due to increased salaries and other personnel-related costs. Over the last year, of the 86 employees added, almost half were in the area of sales and related sales operations, with the remaining added in marketing and business intelligence. Compared to the second quarter of last year, direct spend was up 7.8% year-over-year primarily in pay-per-click and display advertising. Overall, we expect growth to continue in sales and marketing, but to be slightly lower as a percentage of revenues on an annual basis. General and administrative expenses increased by 23.3% year-over-year to $18.1 million due to an increase in the number of employees, as well as higher noncash stock compensation. Over the last year, we added 37 employees in the areas of information technology, accounting, finance, tax and legal. Increases have been necessary to support our global growth initiatives, including M&A. For these reasons, we expect continued growth in general and administrative expenses as an absolute dollar and as a percentage of revenues on an annual basis. Amortization expense of $3 million was down 8.7% year-over-year, reflecting certain intangible assets from prior acquisitions that can be fully amortized. Adjusted EBITDA increased 19.3% to $24.8 million. As a percentage of total revenue, adjusted EBITDA margin was 28.7%, a 40-basis-point decrease over the prior year period due to our growth in operating expenses. Our effective tax rate was 37.5% during the quarter. We continue to be impacted by our noncash stock compensation expense, which is not deductible for tax purposes, somewhat offset by the actual option exercises during the quarter, which include ISO disqualifying dispositions. We are benefiting from the U.S. R&D credit, which was renewed by Congress earlier this year, as well as from the lower tax rates of our European structure, offset by certain valuation reserves. For the full year, we expect to land in the low-40s compared to a 2012 full year effective tax rate of approximately 47%. Before I leave the discussion of taxes, I want to mention the impact of cash tax payment. As expected, we had large cash tax payments in Europe in the second quarter as a result of onetime gains incurred in our structuring changes there in 2012. Total cash taxes of $10.3 million included the European taxes paid and reduced our free cash flow for the quarter. Net income was $5.5 million or $0.06 per diluted share. This compares to $2.9 million or $0.03 per diluted share in the second quarter of last year. Moving on to our balance sheet and cash flow. At June 30, 2013, cash, cash equivalents and short-term investments totaled $336.3 million, and we remain debt-free. We ended the quarter with $157.5 million in deferred revenue, which is up 19.3% over June of last year on an FX-neutral basis. For the quarter, we generated free cash flow of $19.2 million, an increase of 6.4% over the second quarter of last year. This includes the impact of the large cash tax payment I previously discussed. Capital expenditures, including costs associated with internally developed software, were $5.5 million for the quarter. Most of our forecasted capital expenditures are for equipment, software purchases, internally developed software and planned office expansions to support our growth. Before I provide outlook, let me take a few minutes to talk about the accounting for the pending acquisition of travelmob. Because we'll have a controlling interest of 63%, we're required to consolidate revenue and expenses. Given the early stage of the business, we are expecting this to be a net investment and thus, reduce our adjusted EBITDA and net income. However, this will be offset by the elimination of the 37% operational gains and losses attributable to the noncontrolling travelmob shareholders, which will be reported as a separate line item below our net income. Therefore, the negative impact to net income available to common stockholders will be less than the negative impact to adjusted EBITDA. And finally, while the deal does not require full disclosure of the agreement, we do desire to share some terms. We will pay $11.5 million to buy out certain existing stockholders for 52% HomeAway ownership, and then we'll make an additional investment into the business to increase our ownership to 63%. Given the early stage of the business, we expect most of the purchase price to increase our goodwill and intangibles on the balance sheet. We expect to purchase the remainder of the stock based on the performance formula by 2017. Because of this option, we will record the fair value of the future transaction upon the closing of the 62% -- 63%. It will be shown as equity on our balance sheet and accretive to future value over time. This accretion will impact EPS to common stockholders but will have no impact on net income available to common stockholders or adjusted EBITDA. In summary, though the transaction will add some complexity in our financials, we believe that HomeAway and travelmob are best positioned for success with this arrangement. Now turning to outlook. As compared to the outlook we provided in April, we're tightening our range by raising our revenue estimate on the low end, increasing our annual FX-neutral revenue growth rate to reflect Q2 overperformance. However, as is our practice, we have adjusted our outlook to reflect recent average declines in the euro. After expenses, as we've done historically, we plan to utilize savings earned in Q2 in the later part of the year as we accelerate other projects. Finally, as discussed, we have reflected the estimated investment in travelmob into our outlook. With that as background, for the September quarter, we currently anticipate revenues to be in the range of $88.6 million to $89.6 million, representing year-over-year FX-neutral growth of 21.2% to 22.5% and adjusted EBITDA to be in the range of $26.6 million to $27.1 million, representing year-over-year growth of 9.7% to 11.8%. For the full year, we currently anticipate revenues to be in the range of $339 million to $341 million, representing year-over-year FX-neutral growth of 21.2% to 22% and adjusted EBITDA to be in the range of $96.5 million to $98 million, representing year-over-year growth of 20.1% to 22%. Other key modeled assumptions for the year include a foreign exchange rate for the euro of EUR 1.29 for each U.S. dollar. This compares to our prior estimate for the euro of EUR 1.30 for each U.S. dollar. As discussed earlier, we plan for a full year effective booked tax rate of approximately 37% to 44%, basic share count to be in the range of 85 million to 87 million and our fully diluted weighted average share count to be in the range of 88 million to 90 million shares. Stock-based compensation is expected to be in the range of $37 million to $39 million, up slightly from last quarter's estimate. Amortization expense is expected to be in the range of $11 million to $12 million, capital expenditures in the range of $20 million to $21 million. That concludes our prepared remarks. Thank you again 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 Scott Devitt with Morgan Stanley.

[Scott W. Devitt:]

I have 2, please. Brian, it seems like there's 2 questions that come up most often when we talk to investors about the company. The first of which is the listings growth normalized, the 10%, given where you are relative to the size of the market. There are always questions around why that doesn't grow faster. You did 10% this quarter. Pay-per-booking, I suppose, is something that can bring more listings to the site. But I was wondering if you just could address that again. And then separately, in terms of competition, Flipkey noted some increase in their transaction business in the quarter. There's always activity with Airbnb. You've articulated, I think, very well the segmentation of the market as it existed. And I was wondering if you can just give an updated view on both of those competitors.

[Brian H. Sharples:]

Yes, sure, Scott. So let me take listings growth first. I think we've said before pretty consistently that our aspiration is to be close to the range of 15% growth in listings. So as you look at 10%, that's not where we'd like it to be, and it hasn't been for a couple of quarters. We believe, as you indicated, that moving to pay-per-booking is going to dramatically change those numbers. So in terms of internal efforts underway make a change, that's the biggest. When you get to size of the market, I mean, look, we continue to study this market. It's very big. I think it happens to be the case today that -- at our current size, with 775,000 listings and looking at turnover in this business, that, that 10% is actually a very,very big number and a lot of properties to be adding on an organic basis every year. So as we get bigger, just law of large numbers makes that a tougher number to hit, so we've got to do some extra curricular things. Pay-per-booking is obviously the biggest one we're doing. But I think moves like what you saw in Asia are also going to be important contributors to that number. I mean, Asia represents a very, very large market space. I mean, we just effectively jumped into -- we're already in China, but into India, Japan, Korea, Indonesia, Vietnam, Thailand and Malaysia. That's one move, and there are a lot of houses in those property -- in those various locations. So you'll see us continuing to do those kinds of things. There are still so many parts of the world in which we don't operate. And then in a bunch of new geos, even places in Europe like Spain, where we've recently made a big effort; Italy, we're about to open an office; markets in South America is where we're seeing some of our fastest growth. So I think if you take sort of the net combo of all the things we're doing to really move that metric, internally, we feel very confident that you'll continue to see it grow at a very good rate and hopefully, a higher rate than what it's been growing at for the last couple of quarters. In terms of competition, there haven't been too many big changes. I know that Stephen Kaufer talked a little bit about the business on the call, which he hasn't done too much previously. It sounds to me like FlipKey and TripAdvisor in particular, has more or less given up on the subscription business. I'm not sure if that's wholly true, but what he sort of stated was that they were moving to much more of a pay-per-booking model as a company. The way I look at it, there's a couple of things. One is that I think we've been very hard to compete with in the subscription business. This core subscription business is really the model that organically won in countries all over the world over the last 10 years, and the reason it won is because the majority of the listings in this business do come from average owners, what we call FRBO owners, who do prefer that kind of a subscription model. Those individual owners have a pretty tough time listing on multiple sites because they've got to manage calendars in 2 places and have 2 different operating systems. And so I don't think FlipKey was ever that successful cracking that market. So what they seem to be signaling is they're going after the other 40%, which are mainly the property managers, who are willing to pay a percentage fee. As we signaled, we do think that PPB is very attractive to property managers, and there aren't going to be very many property managers, Scott, that are exclusive with anybody. So that's an opportunity really for the sites that generate the most targeted vacation rental traffic, which is what we do. So I think the way to look at those guys is they probably just shrunk their market a bit. They will be competing in 1 segment. We'll be competing very aggressively in that segment as well. So I don't see any reason to be less optimistic competitively relative to those guys. I think with Airbnb, there hasn't been a whole lot of activity or much that's changed during the quarter. We still don't see, from any of our operating business units around the world, any losses in customers that are attributable to that company. We still study very closely the differences in the types of traffic that go to their sites versus our sites, and there are still remarkably different people that are using the 2 different businesses. I think with respect to our new Asian acquisition, we could say, in Asia, that we probably have a property that's a little bit closer to what they do because our new business, travelmob, does have shared rooms and does have some primary homes. But as Asia is developing, one of the things we're finding is there's actually less of a demand for the traditional Airbnb-type property and more of a demand for the kinds of stuff that HomeAway does. In fact, this particular company, travelmob, was really started more as an Airbnb competitor and kind of morphed itself more towards HomeAway as it found the inventory looked a lot more like our traditional vacation rental business. And from what we can tell from Airbnb is that, similarly, in Asia, they're a little more heavily weighted to some of the things we do. So again, there, competitively, we feel very good because our global network of consumers and families are the kinds of people who are appropriate for that type of inventory. In fact, we've had partnership already for a few months with travelmob. And in just a few short months, we are already -- our customers from HomeAway, where we've taken listings and put them on our sites, are already accounting for a very substantial portion of their bookings, which shows us a very nice sort of consistent matchup between the types of customers that are out there in Asia and what we currently find in our business. So sorry for the long-winded answer, but hopefully that addresses your 2 questions.

[Operator:]

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

[Lloyd Walmsley:]

Wondering if you can just give us a little bit more color on the go-to-market strategy around pay-per-booking. It was definitely helpful to get a little bit of the color on the call. But if sounds like you will be favoring, philosophically, your subscription listings. But when we kind of looked historically, you've always driven a lot of excess traffic growth ahead of listings growth. So it would seem there may be some level of traffic you could funnel off to these pay-per-booking listings without irreparably harming the subscription side. But if you can just give us some help thinking about what to expect. Should we expect you guys to invest in SEM to drive traffic into the rollouts so that you can really activate some of these new listings? It would seem like you wouldn't want to disappoint new customers signing up for the first time and then not really servicing the listings. But it would be really helpful to get a little color on how you're thinking about that.

[Brian H. Sharples:]

Yes. That's a great question, Lloyd. So let me address it. It's probably -- particularly in light of the fact that I saw some of Steve's comments at TripAdvisor saying how they were decidedly going to put their pay-per-booking listings up at the top of search results. We obviously have a huge subscription business. So as we said in the past, we do want to protect those customers. Now all that said, we're in a pretty good position right now to launch pay-per-booking. For one thing -- and on the call, we don't report inquiry numbers. I will tell you that our year-on-year inquiry per listing growth is running at levels that are higher year-on-year than I've seen in 2 years. I mean, we are in a very good position right now in terms of inquiry delivery to our customers. So per your statement, there is excess demand out there that we can use to funnel to pay-per-booking listings. So that's the first thing. The second thing is, and I've said this before, our business has never been in a position where we've been able to go out and increase marketing spend to directly drive people to listings that generate additional revenue for HomeAway based on that particular click or that transaction. And once we have pay-per-booking, we're going to be able to do that, just like TripAdvisor can do it in their core business, just like Priceline can do it in their core business. And so yes, you asked about SEM. We absolutely do expect to get a lot more sophisticated about our SEM capabilities, to invest more money in it and to create opportunities to drive additional traffic, so new traffic that doesn't affect the subscription business directly into those pay-per-booking listings. I can tell you that we are in the process of testing that stuff right now, and I can't give you any numbers. But as a teaser, what I can simply tell you is that we're starting to see some pretty attractive signs that, that's going to be a good strategy for us, which makes sense because it seems to be a good strategy for every other travel company out there. So yes, that will be part of the launch. We -- I want to caution everybody that third quarter we're going to be in beta. We're going to have some of that beta for PMs, some for FRBO. We then need to, if the product is right, get people on boarded. That takes some time. So every one of these PMs we bring on does require integration and on boarding period. And so -- then once we have a significant amount of supply in there, that's when we'll start turning the flywheel. And I do think we're going to be able to because we're doing a lot of work on this right now to manage both the subscription side and the pay-per-booking side, to keep both customer sets happy. As you described, it is probably critical for our business.

[Lloyd Walmsley:]

And just a quick follow-up, if I may. You did give a little helpful color just talking about online bookings that you're seeing today tending to be lower in duration. Maybe if you could share a little bit in terms of what else you might be learning as you ramp up your online penetration of bookings. Are you seeing, like, differences in pricing or take rates on insurance? And I guess, if I heard you correctly, it sounds like you're going to be doing both consumer and PMs in the third quarter, so maybe a little ahead of schedule on the PM side.

[Brian H. Sharples:]

That last statement is true, should we deliver on schedule, which we plan to. So we are feeling good about just the general rollout. When it comes to that OLB pricing and sort of average booking prices, the reason we threw that out there, I'll be really transparent about this, is because there are some people potentially who would take data that we provided in the past, where we said the average person on our site does 10 bookings at $1,600-plus per year. And while we haven't said exactly what the pricing is, I think we've given a range on that. And so if people were just to sort of take those numbers and apply them to what we have today, we do think that's going to overstate the opportunity for pay-per-booking. Now it's not like we have a lot of experience in the business yet, but we have done enough testing to know that properties that are booked online well, a, they typically happen a lot closer to this day than properties that aren't booked online. So it tends to be -- last minute is probably overstating it, but more of a last-minute business. Because of that, some of the trips tend to be of shorter duration. So it's our expectation that while we may have a 7-day average in our core subscription business, the online bookable properties could be something lower than that amount. And then the third thing is that we are -- still, our subscription customers do have the opportunity to be at the very top of our search results. So I don't expect to see us, in the fashion that Steve Kaufer described, taking our pay-per-booking listings and throwing them at the top of our search results. So they won't perform as well as some of our subscription-based listings. So all that to say I can't give you a specific set of numbers, but we wanted to make sure we communicated to people that this is going to be -- it probably is going to be a lower number of bookings and a lower average booking rate as you try to model these things. I wish I knew the exact number. We don't. I think the other thing you have to bear in mind is that because we have a subscription model, there's sort of a theoretical cap on how much more people are going to be willing to pay. Like, we all believe here that the pay-per-booking business certainly has the opportunity to drive higher annual revenue per listing over time than subscription because it's logical that people don't have to pay upfront, they're going to be willing to pay some kind of a premium over subscription to do that. But if the average customer over time is paying double the subscription price, I think we have to believe internally that, logically, they're going to move into the subscription world. So that also puts a bit of a cap on it. So again, I don't think that our average investors are assuming that these numbers are going to be crazy or several times our subscription rates, but we've heard that some people have modeled it that way. So during this call, we just wanted to say, "Hey, a little bit of caution on that." It's also going to grow over time as we get better at the business. We do think it can perform better than subscription listings, but it won't be multiples of subscription revenue. And then keep in mind, the subscription revenue is going to continue to grow every year because tiered pricing is certainly showing us what we've always known, which is that we're underpriced in that business. So subscriptions will continue to go up, and that'll just provide a great opportunity and air cover for both parts of the business.

[Operator:]

Next question comes from the line of George Askew with Stifel.

[George I. Askew:]

Two questions. First, you mentioned the 14,000 new property manager listings in the second quarter, suggesting that those PMs obviously have made the move to a listing even though the pay per transaction is coming in the third quarter. What is the mindset of those PMs? Are they less interested in the pay per transaction? Are they going to do that as well with other properties? How do they approach that product launch? And then second -- sorry, secondly, the 11,000 new payment-enabled listings in the quarter, is that the right pace for future quarters?

[Brian H. Sharples:]

Okay. So on the first one, I think the simple answer is these are businesses that are up and running and trying to make money right now today. And HomeAway is the #1 distribution channel in the world for vacation rentals, and they're not going to wait 2 quarters to sign up. I mean, these guys are trying to drive revenue now, and so they're advertising with us. So yes, I mean, a lot of these customers do probably know that pay-per-booking is coming, and some of them probably even want the product. But because our platform is so powerful, they're not going to wait around for that to happen. And so we still continue to drive very good volume and very good business with new property management subscribers. And I think, as I said in the call, we're a little surprised with the growth. It was that good. We actually did expect that we probably would see a little bit of a slowdown. But I think the simple answer is we're in the high season for these businesses. We generate lots of bookings. They're going to come on the platform. In terms of payment-enabled, so we continue to do better every quarter. I forgot what the number was last quarter, but 11,000 was a few thousand more than we added in the last quarter, which is a few thousand more than we added in the quarter before that. And so, sure, would I love to be adding 100,000 a quarter? I would, but remember that a, this product still isn't available to everybody around the world; b, even in the European countries, there are still several restrictions on who can accept payments and who can't, based on what country of property might be in or where people live. So there's a lot of work we're doing to actually expand the footprint of the program, expand the number of payment options that we take as well. And I think the last thing is that, again, our customers are super happy. When we run customer satisfaction studies against our owners, they're really happy with the way things are. And so we're asking them to change and to adopt payments because we believe it's good for the marketplace, we believe it's good for consumers, especially because it provides safety. But an owner that's used to making a lot of money and doing it the old-fashioned way doesn't have a huge incentive to move until they can really see a demonstrated difference between those who accept payments and those who don't. So I think, as we've always said, we believe that the pace is going to run at a very steady, accelerating rate over the next couple of years. We believe it will get to a point where there's then going to be a substantial amount of people on our sites who accept payments. Consumers are then going to start selecting between the 2 types of properties, and it will start to become very obvious to people who don't accept payments that they're losing business because there are enough other properties that do that consumers feel safe going to that other group of properties. And so it's the experience eBay had with PayPal. We are on the same pace roughly that eBay was on, probably a little bit ahead, based on the data that we have. And so yes, while that might seem like a number that could be bigger, at least in terms of our own internal modeling, it's running ahead of what we expected and pretty much on pace with what our 3- to 5-year plan is for that business.

[Operator:]

Your next question comes from the line of Douglas Anmuth with JP Morgan Chase.

[Bo Nam:]

This is Bo on for Doug. What success are you having in keeping communications within the HomeAway walls? And what are you learning from the increased data that this engagement provides? And then what value does the increased functionality, such as prepackaged tools with templates and auto responses, what does that add for property managers? And how is that being used? And then secondly, just any commentary on European macro trends, if you have.

[Brian H. Sharples:]

Yes, so just to be clear in terms of keeping conversations within the HomeAway walls, we still have not launched our HomeAway secured communications platform that we have discussed launching, which eventually is going to take all communications...

[Rebecca Lynn Atchison:]

Maybe talk about payments.

[Brian H. Sharples:]

Onto our platform. Right. So we have -- and that, by the way, is slated -- we don't -- we never want to introduce something that big in the first quarter, so it's probably going to be closer to second quarter of next year that we'll ultimately roll that out. So there's a lot of communication still taking place on e-mail outside of our sites. Now for the people who are payment-enabled on our sites, virtually all of those communications do take place in our platform. There are lots of prepackaged tools that both our property managers and our owners are using. I mean, really the property managers, their biggest prepackaged tools are the property management software systems that we give them. And I think the only way to describe those is they can't live without them. I mean, they run their businesses, soup to nuts entirely, including all their tax and accounting and housekeeping and everything else. But for our typical FRBO customers, the ones who are in payment, what we get back in terms of our research are glowing reports in terms of the usability of that platform. I think people, before they jump into the payments platform, are very concerned about paying a percentage. They were happy doing it the old way, as I said to George's question, but once they get on the platform, we get lots of feedback from people who say, "Wow, this is just really easy. Everything is taken care of in one place. The calendar is updated. I have a place I can go to see every transaction I've done with people. I can see every product I've sold to someone, what money I need to collect, what money I've already collected." And so it has truly changed people's lives. So all of our feedback internally says it's a great product. People love using it. You've got to get people over that hurdle of doing things the old way, but all those tools, I think, are going to be very, very sticky as we get more and more customers to adopt them. Yes, Bo, you also asked about -- just you asked about EU macro trends, Bo. I mean, from a demand perspective, in terms of both inquiries and traffic, actually Europe is looking okay. I mean, the only real kind of negative Europe versus U.S. stat that we talked about was the fact that renewal rate was down slightly in Europe. It was pretty slight. When we sort of dug into that one, it really had more to do with the fact that we did a lot of promotions last year, there's a little more competition in Europe, and obviously, the market wasn't so hot last year. And when you do promotions, you bring people in at lower prices, and so when you try to renew them at full prices, typically, those renewal rates are going to be a bit lower. And so that seems to be the explanation in Europe, which isn't so much of a macro issue. So we haven't seen much of a change there really. I mean things are still doing pretty well.

[Operator:]

Our next question comes from the line of Michael Graham with Canaccord.

[Michael Graham:]

I just wanted to ask a question about tiering. Just going back to a somewhat old-fashioned topic for you guys with all you've been doing. But just can you give us an update on when people take higher tiers, which one they're taking? I think you offer 4 or 5 of them. Are the ones who sort of upgrade going all the way to the top of the list mostly? And then given that it's mostly a sort order sort of purchase, how can we think about what portion of the overall listings base is sort of eligible in a fair way to take a higher tier because, clearly, everyone can't be at, sort of, the top of the sort order. And I'm just trying to kind of get a feel for where the ARPL might sort of term out on the upside of...

[Brian H. Sharples:]

That's a good question, and it really isn't an old-fashioned topic. It's actually big story, obviously, for this year and we still think for years to come in the business. A short answer is there's still a tremendous opportunity left for tiering. We've got about 35% of the listings who have the ability to tier have tiered up at least one tier. And then because we don't have tiering on all of our sites, that number's about 20% of our total listings. So 80% of all of our listings worldwide still have the opportunity to tier up. You do find -- we have actually a pretty even distribution between Platinum, Gold, Silver and Bronze. We're seeing -- as tiering is getting a little bit older and more understood, we're actually seeing the highest growth rates right now in Platinum, meaning that satisfaction among people who have jumped to the upper tier is so high that they're telling their friends, and we're seeing a bit of an acceleration there. But still, if I look globally at the number of listings that have bought Platinum, I mean, it's pretty small. I mean, it's a sub-10% number. So if you think about the fact that Platinum is our best-performing, highest-valued product that seems to be now the word is getting out and we're seeing a lot more acceleration in that product, and it's still one that's very under penetrated, far less than 10%. There is still a big, big opportunity there. Against that backdrop, though, I was just handed some data before this call, where we were looking at different markets where penetration of Platinum is already getting to a level where there may be too many of them in the market, and there are several. I mean, I'm looking here at Savannah, Georgia, where we've got almost 40% of the listings on Platinum; Santa Barbara, almost 30%; Fort Lauderdale, almost 30%; Captiva, Florida, almost 38%; a part of New York City, where we have 99% of listings on Platinum. So there is a secondary opportunity, which is to, over time, and this is part of our strategy, also by market, raise the price of the tiers as we get penetrated in certain subsegments, where competition is very high. I will tell you that, that particular project for us to create market-based pricing will be one of the many projects that, in the fall, competes for funding in 2014, and I don't know if we're going to fund it in '14 or not. Yet -- but again, the combination of the low penetration with the acceleration we're seeing towards the high end with the fact that, in many markets, we're seeing people are probably willing to pay a lot more, all should still bode very, very well for tiered pricing to be not an old news story but a current news story for at least the next couple of years.

[Operator:]

[Operator Instructions] Our next question comes from the line of Nat Schindler with Bank of America.

[Nathaniel H. Schindler:]

Just 2 quick questions. One, I'm trying to figure out your guidance. You mentioned the $2 million impact of travelmob on your EBITDA side. How much impact will it have on the revenue side? And then on a secondary question, you make a good case that you're -- that tiered pricing suggests that your overall prices are too low. But on the other side, someone could say that your roughly 10% market penetration as a market -- and as the market leader with fairly low listings growth still suggests that maybe prices are too high. Is there just a very bifurcated market in which a small number will pay a lot and a large number won't pay even what you're suggesting -- your low-end price?

[Brian H. Sharples:]

Yes, let me take the second question first, and I'll throw the guidance question over to Lynn. The market is somewhat bifurcated, in that you've got millions of people who are renting their properties in the U.S. and Europe, but there's a core group of people that really do this for a living, and that are professionals and are renting 20, 30 weeks or more a year. Those are the people for whom our subscription prices are very low because, if you look at the total revenue they generate on an annual basis, its many, many multiples of what they pay. That said, there are millions and millions of people who also rent their homes just to maybe pay some taxes or pay their mortgage every year, and so maybe they're interested in renting 5 weeks or 10 weeks or 15 weeks a year. And so for those people, you're correct, prices are actually quite high. So in the early days of HomeAway, really what we were going after was the low-hanging fruit, which is the people that are in this market relatively full time. And for most of our history, up until recently, we had phenomenal growth rates in properties going after that marketplace. Our new moves into pay-per-booking is going to shift our marketing strategy for us to, in addition, go after those millions of properties that I would call casual renters. It's another reason, by the way, to Lloyd's early question, why you may see a lot of those pay-per-booking properties having lower booking rates than others because they're going to have less weeks available in many cases than our core customers do today. But there is still millions of them out there, and so I think that's one of the reasons -- again, you have to sometimes go through 2- to 3-year shifts, where you, as a business, go after a new segment. We've made a big investment here, it's a multiyear investment, and I do think it's going to pay off in terms of getting that growth rate up again for the reasons I described. Now going back to travelmob and guidance, Lynn you want to take....

[Rebecca Lynn Atchison:]

Yes, right, right. So we did include a small amount of revenue in the total. I mean, we're talking in the couple of hundred thousands of dollars. We're not talking about millions at all. This is a very early stage organization. The strategic investment into the team and the knowledge and the platform is really what we're focused on here and are very excited to start seeing it accelerate next year. So there is a little bit in there. And as we said, we added some, but we also took down for some FX. I didn't list all the puts and takes that go into it, and I noted that we took RB [ph] for Q2 to the top line and then took down the euro. We also took down some other currencies, too, which I just don't go into that level of granular detail of everything that goes back and forth.

[Operator:]

There are no further questions at this time. So with that, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.