ETFMG Travel Tech ETF
Q3 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Operator:]

Greetings, and welcome to the HomeAway, Inc. Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jen Ford, Director of Investor Relations. Thank you. Ms. Ford, you may begin.

[Jen Ford:]

Thank you, and welcome to HomeAway's third quarter 2013 financial results conference call. By now, everyone should have access to the earnings release, which was distributed today at approximately 4 p.m. Eastern Time. If you have not received the release, it can be found on the Investor Relations tab of www.homeaway.com. This call is being webcast and is available for replay. In addition, a brief presentation to accompany today's discussion will be accessible through the webcast. In our remarks today, we will include statements that are considered forward-looking within the meanings of securities laws. In addition, management may make forward-looking statements in response to your questions. Forward-looking statements are based on management's current knowledge and expectations as of today, November 6, 2013, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A detailed discussion of such risks and uncertainties is contained in our most recent Form 10-Q filed with the SEC on July 31, 2013. HomeAway undertakes no obligation to update any forward-looking statements, except as required by law. On this call, we'll refer to non-GAAP measures that, when used in combination with GAAP results, provide us with additional analytical tools to understand our operation. We have provided reconciliations of non-GAAP to GAAP measures in our earnings release distributed earlier today. Unless otherwise stated, all growth metrics provided are reported on a year-over-year basis. And with that, I will hand the call over to HomeAway's Chief Executive Officer and Chairman, Brian Sharples. Brian?

[Brian H. Sharples:]

Thank you, Jen. Good afternoon, everyone, and thanks for joining today's call. As you'll hear, the second half of 2013 is shaping up to be a very exciting time for HomeAway. In particular, the third quarter marked the achievement of several milestones that we believe will drive long-term growth in listings and revenue, while fortifying our already strong competitive position and extending our category leadership. But first, recapping a few financial highlights for the quarter. Total revenue of $90 million represented 23% growth overall and growth of 22%, FX neutral, for both total revenue and listing revenue. Adjusted EBITDA of $29 million grew 20% year-over-year, and for the trailing 12-month period, free cash flow grew 17% to $92 million. As a result, we ended the quarter with $352 million of cash. Turning to our operating metrics. Once again, we delivered solid growth in our core listings business with total paid listings of 773,000, up 7% year-on-year. However, due to our continued network consolidation and, in particular, the sale of network bundles, growth in this metric continues to be understated versus last year. After adjusting for these factors, listings growth would have been approximately 13%, a welcome acceleration from last quarter. Travelmob, which we acquired in July, accounted for approximately 1 point of this adjusted listings growth rate. In addition to growing our total listing count, we continue to improve monetization, year-on-year. On an adjusted basis, average revenue per listing increased 10% to $372. Renewal rate was flat with the prior quarter at 74%, also on an adjusted basis to account for network consolidations. During the quarter, HomeAway's global network of sites attracted nearly 200 million site visits, representing 19% growth in traffic, year-over-year. Now turning to our product initiatives and developments for the quarter. Monetization of our global network of listings continues to be a key priority for HomeAway. Our approach is multi-faceted, including the adoption of the tiered pricing model for subscription, the sale of network bundles and other value-added services and the rollout of our e-commerce and new pay-per-booking platform. With respect to tiered pricing, adoption rates continue to improve, and we enabled tiered pricing on 2 additional HomeAway sites, in Brazil and Italy, during the third quarter. To improve the value of our bundled offering in the U.S., we added VacationRentals.com to our core U.S. bundle right at quarter's end. Regarding our e-commerce efforts, we ended the quarter with over 82,000 listings, globally-enabled for payments and/or online booking. Of note, in the U.S., approximately 1/3 of our FRBO listings now utilize our payment platform. We also achieved a very significant milestone with the launch of pay-per-booking on HomeAway.com in the U.S. Now that pay-per-booking is live, we expect to see further acceleration in e-commerce-enabled listings from both new and existing customers, as we expect travelers to gravitate towards the listings, over time, that offer a secure and seamless booking process. Regarding pay-per-booking on HomeAway.com, the mid-October launch has gone very smoothly. For those of you on the webcast, the first slide shows our new product offering page, which, in addition to our subscription option, now offers a secondary option for PPB, pay-per-booking, and a third option for our partner referral network, which I'll discuss in a few minutes. Although it is still early, we're happy to report that, so far, our new multi-product offering has significantly increased the conversion rate of new owners coming to the site, leading to measurably higher rates of new listing growth when you include both subscriptions and pay-per-booking listings. I'm also pleased to report that, in addition to signing up, a significant number of new PPB listings, so far, there appears to be no cannibalization, or negative impact, on new subscription listings signing up on the site. In fact, the rate of new subscription sign-ups has been slightly higher since the launch. In other words, the new pay-per-booking listings we signed up so far, appear to be fully incremental to our business. And that is very good news. But since we've only had a few weeks of data, we'll be monitoring this carefully, and we'll refrain from giving specific metrics until we have an appropriate amount of time to fully evaluate the impact of this new product. As a result of our early success, we will proceed with our rollout of pay-per-booking to VRBO in the U.S. and our global portfolio of vacation rental brands. Regarding pay-per-booking for property managers, we are currently in pilot and expect to launch in the next few weeks. Some good news, we have a significant backlog of demand for this product. And based on this demand, we now believe we will end 2013 with an overall annual listing growth rate, including subscription, PPL and PPB listings of at least 15% for the entire year. This is consistent with our annual goals, and we're pleased that HomeAway will be back on track with respect to this important strategic objective. A quick note on PPB pricing. Property owners and managers will incur a 10% booking fee each time their property is rented. And unlike others, we've elected not to charge travelers a booking fee. We believe this will give us a long-term competitive advantage with travelers in the vacation rental market. As we have discussed, we're confident that PPB will drive incremental growth in both listings and revenue longer term. That said, we are committed to preserving the overall health and balance of our existing marketplace. And as such, we'll be taking a very measured approach regarding how pay-per-booking properties are highlighted in sort order until we can fully understand the impact on subscription listings and can learn to efficiently balance supply and demand for all listings. This means that PPB listings will not perform anywhere near their long-term potential in the first year and especially in early quarters. Based on our backlog, we now believe that we will likely add hundreds of thousands of new PPB listings in the next few years. And we are taking a long-term view in making sure that those listings are successful while continuing to provide increasing value to our subscriber base. As you can imagine, pay-per-booking has garnered significant mind share around here at HomeAway, and understandably so, but our excitement extends to several additional developments that have taken place in the last few months. One development of note is our recent distribution agreement with Expedia, where we jointly announced that HomeAway vacation rentals will be featured on Expedia.com. The initial test, set for early next year, will surface an estimated 12,000 properties. This is a small initial test, but a great opportunity to better understand how we can work with OTAs and Expedia, in particular, in the future. We want to congratulate Expedia as the first major U.S.-based OTA to take this major step on behalf of their customers. In addition, just last week, we launched Luxury Rentals from HomeAway, a HomeAway specialty site for top-tier vacation rentals. Those of you on webcast can see a view of this new site with a higher-end feel and larger photographs. Launched last week, this site already features more than 1,000 high-end vacation rental listings, all of which have been subjected to a rigorous screening process by Andrew Harper, a leading third-party luxury travel company. In addition to meeting Harper's requirements, inclusion in the site requires a platinum level listing. Over time, we expect Luxury Rentals from HomeAway to become the largest global resource for travelers seeking luxury rentals. So far, traffic to the new site has been trending ahead of our expectations. Finally, I'd like to spend just a few moments updating you on our property manager initiatives. At the end of the quarter, PMs represented approximately 28% of our total listings. As I mentioned earlier, we see considerable opportunity to grow this number with the launch of pay-per-booking, but also through the introduction of our professional rental network, recently unveiled at our RezFest conference and launched alongside PPB. As an aside, our RezFest conference in the third quarter represented the largest gathering of property managers, ever, in the vacation rental industry. With the launch of our new referral network, owners new to HomeAway will gain access through our website to PMs that offer services specifically for the region in which they own their property. And for those of you on the webcast, you can see how we've integrated this offering into our shopping experience, and it is proving to be a very attractive offering for PMs. To qualify, a PM must list a minimum percentage of their properties with HomeAway and guarantee that they will purchase subscriptions for all referred properties. Currently, over 50 professional management companies comprise the network, and we expect that number to continue to grow. We also believe the availability of such a network will further drive listing growth, as it eliminates one of the key concerns we hear from many of those prospects, we and other listing sites fail to convert today, mainly, a fear about the time commitment and the knowledge required to advertise and rent their property. As is evident, we continue to pursue multiple avenues to drive growth in our organic business, all of which are consistent with our mission of making every vacation rental available to every traveler in the world. Historically, we've also supplemented this growth with selective acquisitions and continue to do so. As announced earlier today, we just acquired Bookabach, a vacation rental site featuring approximately 8,000 listings, primarily in New Zealand. While relatively small, the rapidly growing Asia Pacific market remains a top priority for HomeAway, also evidenced by our acquisition of travelmob last quarter. So in closing, the second half of 2013 is proving to be a very busy time for HomeAway, and our team continues to execute successfully on our aggressive plan. We're very encouraged by the initial launch of PPB and believe listing growth rates will accelerate nicely in coming quarters. We're confident that all these efforts position HomeAway for continued long-term growth and a very exciting future. With that, I will turn the call over to our CFO, Lynn Atchison. Lynn?

[Rebecca Lynn Atchison:]

Thank you, Brian. For the third quarter, total revenue of $90.1 million was 23.3% higher than the comparable quarter last year with strong performance in both listing and other revenues. We enjoyed an uptick in exchange rates during the quarter compared to our expectations. Normalizing for FX, our total revenue growth of 22% was within our expected range. Listing revenue, which increased 23% year-over-year to $75.5 million, benefited from higher average revenue per listing, as well as an increase in the number of paid listings. We remain optimistic that tiered pricing and our network bundles will continue to contribute to pricing expansion. However, as mentioned in our Q2 earnings call, we do expect a deceleration in the growth rate of average revenue per listing in Q4 of this year due to the lapping of the base price increases in the U.S., the lapping of our highly successful U.S. network launch, as well as continued geographic expansion, which typically comes in at lower ASPs. Paid listings continue to grow and we're excited about launching pay-per-booking to accelerate our listings growth in Q4 and into next year. I'd like to further discuss pay-per-booking. We've been focused on the development of the product over the past year. And now we're turning our attention to the rollout and how most effectively we monetize the listings as they come on board. I'd like to take a few minutes to discuss 3 related areas

[Operator:]

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

[Bo Nam:]

This is Bo Nam on behalf of Doug. Can you give us a little better sense of what's included in your 4Q EBITDA guidance? Just maybe what the impact from travelmob may be from today's acquisition, some integration cost and then the rest from your business.

[Rebecca Lynn Atchison:]

Sure. I'll take that one. So as we talked about in last July, we had indicated we're going to spend about $2 million for the remainder of the year for travelmob as an investment there to get them going with their marketing activities, and a lot of that will still fall in Q4 because we didn't close travelmob actually until later in the quarter, in Q3. So that investment is still in there, and then, really, just as we always have, there are numerous projects on the bubble, projects in sales and marketing, product development and other areas, which we will turn on with the savings we had in Q3.

[Operator:]

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

[Lloyd Walmsley:]

Wondering if you guys can dig into that comment you made in terms of the bookings expectations for pay-per-booking. I think you said that you're expecting to drive, next year, 10% of the bookings that you've typically generated in the core. And so, I guess, the math I'm trying understand is, if your effective take rate was 3%, in the old model, your new take rate is 10%. 10% of bookings is actually 30% of the economics of the core model, which seems awfully high. I'm just wondering what else might be in there or how I might be thinking about it wrong, or if it is, in fact, that high. And then, as a follow-up, can you just give us some color on what you're seeing, in terms of the average bookings value per stay, and the number of bookings per listing that you're kind of seeing on an annualized basis? I know it's early, but anything you can say there on kind of insurance uptake on the PPB side would be really, really interesting.

[Brian H. Sharples:]

Yes. Lloyd, this is Brian. Thanks for the question. I think you might be a little confused about the 10% statement I made, so let me sort of clarify that. First of all, one of the things I was trying to communicate is that we do believe, based on the backlog we're seeing in PM and the results we're seeing on the platform, that we're going to have a lot of supply coming on in the next couple of years, which is fantastic. The issue that's going to drive revenue for our business isn't going to be driven by supply. It's going to be driven by how quickly we are willing to manage those listings up in search results. And the way it's going to work is there'll be some lag time. For example, we can't get every property manager who wants to get on the site immediately, but as they come on, they will go to the bottom of the search and then we'll manage them up. And the thing that I just -- we wanted to manage expectations on is that, if you have a listing that's at the bottom of search versus a listing that's, say, in our average search position, it's going to perform a lot worse than a typical listing. And we were trying to -- and this is, obviously, a forecast, we don't know, specifically, and we don't know even what our rate is going to be, at which we move listings up, until we get into it, but we're trying to say that we think, on average, in the first year, that a pay-per-booking listing will perform at a rate about 1/10, or 10%, of that of a subscription listing. I think we said in the past that an average subscription listing gets about 10 bookings per year. I don't think we've ever been specific about that. So if you really wanted to sort of boil it down, you'd say, well, 10% of that's one booking a year. So if you were creating a model, that's some guidance that we're throwing out. Now it could be better than that, but we're trying to be conservative, and that's what we feel, at the current point in time, about that particular stat. In terms of the properties that we're seeing, so far, what's been kind of neat is, just by manual observation, the properties coming on for PPB, they don't appear to be a whole lot different than the properties we have on a subscription basis, in terms of quality, in terms of pricing and other things. So we don't have any data right now to say, that average booking price will be a whole lot different than what it's been historically in our subscription business, which has been $1,200 to $1,500 a booking roughly.

[Rebecca Lynn Atchison:]

We did say in July, though, that if one of the propensities for those that book online is to book for a shorter stay or whatever, we were seeing, some other stats off of our Reservation Manager, that the average booking was closer to $1,100 than the $1,500. So we don't know, and so -- but we said that July. So I just wanted to put that out there also.

[Lloyd Walmsley:]

Okay. And then, I guess, just in terms of insurance uptake, I know it's early, but are you seeing a lot of people actually -- because this model is driving e-commerce, filling that shopping cart with insurance product at a higher rate of these listings?

[Brian H. Sharples:]

There's definitely not enough history on that yet. I don't think we've even analyzed that internally, because it's just been a few weeks. I don't expect take rates to be any different on those products because it's consumers who are buying the products, the consumer can't tell the difference between a PPB listing and a subscription listing that's e-commerce enabled. So I can't imagine that there would be much of a difference between the 2 on uptake of those products.

[Operator:]

Our next question comes from the line of Ralph Schackart with William Blair.

[Ralph Schackart:]

Brian, just curious what was the major driver of the re-acceleration of listings growth? Was it purely PPB? Were there some other factors? And then the 15% listings growth you talked about for 2013, how should we think about that as we head into 2014, as PPB ramps?

[Brian H. Sharples:]

PPB has almost nothing to do with it, because we launched PPB so late in the quarter that it was actually immaterial. So it was really just some good news, a little bit of acceleration in the subscription business, which we've seen over the last 3 quarters, and that's great. And I think, as I also mentioned on the call, once we launched pay-per-booking on HomeAway.com, and that's just one site in our portfolio, we actually saw an increase in the trend of subscription listings, while adding a bunch of PPB in. As we've talked about it internally, I think, part of it is that we have provided now 3 different alternatives to people. We have alternatives in the shopping cart, for people who are concerned about managing their property or concerned about taking phone calls. And so I think it's given people a good basis to evaluate our different options and probably less of a reason to leave our site. So conversion rate's up and that's going to certainly bode well for the next few quarters. And then, I think, I also mentioned on the call that just over 1 point of the growth rate came from travelmob, which is just simply an acquisition effect on the quarter, but it was still up...

[Rebecca Lynn Atchison:]

Yes.

[Brian H. Sharples:]

Quarter-to-quarter, without travelmob.

[Ralph Schackart:]

And then just in terms of the outlook, Brian, how should we think about that in 2014?

[Brian H. Sharples:]

About listings growth?

[Ralph Schackart:]

That's right.

[Brian H. Sharples:]

You're about to see a very big change in that metric, is all I can say, and you're going to see that starting in the fourth quarter. I don't want to predict exactly what it's going to be, but it's going to change pretty dramatically going forward. I did say on the call that I expect us to finish the entire year, year-on-year, at greater than 15% by the end of the year. So at a minimum, I think that's what we're going to do. So that implies, given that, that growth rate has been 9%, 10%, 12% on adjusted basis, that we think we're going to have a pretty good fourth quarter in terms of listing growth, because we will have PPB live for a quarter, only on HomeAway.com in the U.S., but we're also going to get our property management product live here in just the next 2 to 3 weeks. And there's a pretty good backlog there. So we're feeling very confident about listing growth. I know it's been a huge focus of investors over the last year, 1.5 years. I don't think that's going to be the focus anymore. I think the focus is going to be more on monetization, which is what we're really now kind of rolling up our sleeves to do in 2014 and learn how to do that well and hopefully get better and better at it, over time.

[Operator:]

Our next question comes from the line of Nishant Verma with Morgan Stanley.

[Scott W. Devitt:]

Brian, it's Scott. I just wanted to follow up on -- you had this period where listings -- where pricing was very strong and listings were weaker because of bundling being part of the reason. And now you're going to go through a period where listings are going to be looking to be really strong, and there's going to be an effect on pricing for a period of time. And I'm just wondering, as it relates to, say, 4Q and into 2014, I don't know if this is something you can answer, because you haven't quantified listings growth for '14, but how will you think about pricing over the next quarter and the next year. And then secondly, just any detail you can give around the Expedia relationship in terms of how the integration works, what the economics are in terms of what you share with them would be helpful.

[Brian H. Sharples:]

Yes. So on the first one, with respect to -- well, let me take, actually, Expedia first. So Expedia is really a test deal for us. I mean, we have -- Expedia's had a real interest in this market for a while. And we have, for years, been wanting to work with OTAs, but OTAs have had a very difficult time getting their heads around the concept of having a product that competes with hotels. So as I said in the call, we're really happy that Expedia has actually taken that step. We're initially going to have about 12,000 properties. It's a full integration that actually runs through our software platform. So one of the neat things about that acquisition a few years ago is that we do have a pretty sophisticated platform, now, to distribute listings. We already do it to other partners and competitors. We've distributed listings, for example, for FlipKey in the past. And so we're going to use that integration platform for Expedia. And essentially, it's a rev share deal where we're, essentially, taking a margin off that. I don't think we've disclosed what that margin is, and it's a piece of competitive data that we don't really want to give up. In terms of listings and pricing, so I think, as far as fourth quarter is concerned, the percentage of listings that are PPB, relative to the whole, isn't going to move the pricing per listing numbers too dramatically. But I think, going forward, we're going to have to provide you with some information on each segment to be able to look at those somewhat differently. So it is going to be our plan starting at the end of Q4 to, at least break out for you, the listings that are PPB performance listings versus the ones that are subscription only. And so then, you'll have a better sense of kind of where to throw some of the revenue dollars to one bucket or the other. I mean, I don't expect that we're going to see subscription listing growth go down dramatically. I mean, I think, Lynn did indicate that we're going to see some degradation in that, in particular, just because we're lapping last year where we...

[Rebecca Lynn Atchison:]

Yes, that's ARPL.

[Brian H. Sharples:]

Yes, in ARPL, where we had introduction of bundled products and other things that create a pretty tough comp. And then, I think, with respect to the PPB listings, as I said, we're going to start at pretty low revenue take rate per listing in the first few quarters, in the first year. And every year, we're going to get better and better at doing that. So we're just going to be at a percentage of potential. But the good news is, it's going to give us a very solid foundation to grow very consistently, I think, over the next few years.

[Operator:]

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

[Michael J. Olson:]

Just curious how are you guys marketing pay-per-booking? I guess, in the past, property owners have always known you as subscription, and many may have turned off the service in the past because of that. So are you able to market directly to some of those that have left the service and just for those additional properties, how are you going about that?

[Brian H. Sharples:]

Yes, we will be doing that. So the way we market pay-per-booking to new owners is pretty simple. If you come to the site, you now see the option presented to you, on HomeAway.com, soon on VRBO, soon on our major European sites, and there was a slide that was part of the prepared remarks that kind of shows you what that looks like. And then, when it comes to property managers, obviously, we got a sales force, and they just pick up the phone and call them. We do, per your comment, maintain a fairly healthy database of people who used to be on our sites and didn't renew for whatever reason. We also maintained a database of people who've come to our sites and signed up, what we call a partial. Maybe they gave us their e-mail, maybe they went halfway through the process and they never completed that. So that's a large proprietary database we have. And in the coming months, we're going to be generating e-mails out to certain subsets of those databases that we think would, potentially, make good candidates for pay-per-booking. And it will be our regular practice, going forward, that when somebody doesn't renew on the subscription side, that we will try to get in front of them and say, "Would you stick with us if you're able to do x?" Most of the time, people don't renew with us because their performance is relatively low and they can't justify a subscription. But of course, if it's free, we think a lot of those people may choose to stick with us. Other people leave our sites because they sell their homes or get out of the business and, obviously, it won't help for those cases.

[Michael J. Olson:]

And then, on the tax rate, I think you said fiscal year tax rate will be in the mid-30s. What are you expecting for 2014?

[Rebecca Lynn Atchison:]

I think depending on what happens with non-cash stock comp and ISOs, we set the biggest driver within the tax rate, which we can't completely control, I still think mid-30s. So I don't think that what you'll see is that -- it went down, actually, further this year than what we thought it was going to, because we had some discrete items, some really big pickup on the R&D credit, kudos to our tax teams for pulling that together. But it's still much better than it's been in the last several years. So I would probably model to a mid-30s, on a consolidated basis, which includes all the state taxes, everything.

[Operator:]

Our next question comes from the line of Nat Schindler with Bank of America.

[Nathaniel H. Schindler:]

Yes. I think, Brian, you just touched on this on the last question, or the last answer. As low-performing current subscribers and, by average, there has to be some that come at the bottom of the page and really get no -- don't get very much for their $300, why wouldn't they transition directly to pay-per-booking? And even then, it might be because of their own fault that they won't perform. But again, now, you'll be suddenly going from $300 of value from that customer to, functionally, nothing, if it was a low performing listing, and that's the reason why it will continue to low perform. And it's no change to the user, except they have now just paid less.

[Brian H. Sharples:]

I'm sorry. The question is why wouldn't they stick with us for a pay-per-booking listing rather than leave our sites?

[Nathaniel H. Schindler:]

No, why wouldn't you see, now that you have a pay-per-booking listing, an increase in cancellations of subscriptions in order to switch to pay-per-booking. Because if you're below average, if you're at the bottom of the page...

[Brian H. Sharples:]

Because the people who don't cancel with us are the ones who are earning a very positive ROI on their subscriptions today. So we run our renewal rate of about 75%. So some subset of that bottom 25% aren't getting performance today. And -- but in the 75%, in most of the cases, those people are much better off with a subscription. And in fact, I think we told you guys this, when we surveyed our customer base before launching this product, and we asked our customer base if they would be interested in a 10% product, it was literally like 93% of our subscribers said that they weren't interested in it. So the majority of people, when they make the calculation, get it. Now -- and even looking from the outside, at the moment, we're not seeing any cannibalization on new subscription listings coming into the site, too. Because people are coming in toward the purchase funnel and saying, "Eh, if I compare that 10% to what I'd probably pay in a subscription basis, we still see a much bigger market for subscriptions." And that's something I want to point out to everybody who gets excited about all these performance-based companies out there. Our core market is still a subscription market, first and foremost. But we are now bringing in, incrementally, a healthy chunk of PPB listings. And I think some of those people are people who are just looking for a free trial of the sites, because they've never used them before. Some of those are people who don't expect to get a lot of bookings, so when they make the calculation, maybe they think there'll only get 3 or 4. So on the margin, it's better for them to pay pay-per-booking. And then, of course, the big chunk of them will be property managers, who just like the cash flow characteristics of that kind of a model. But we did enough research, upfront, that we were not worried about a wholesale defection of our existing subscribers into pay-per-booking, and I believe we'll be proven right on that. We actually did have a concern that we might cannibalize some of the new listings coming into our site. So I'm telling you that was a surprise to us, that those numbers have actually gone up, not down a little bit. And that, to me, was one of the kind of the happiest moments in the launch of this product so far, was to see that.

[Operator:]

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

[Heath P. Terry:]

Great. As you look at the profile of users that are signing up on pay-per-booking, or for the pay-per-booking model, any sense as to whether there's a difference in the number of those that are property managers versus owners? I realize it's still extremely early, but just curious to what extent you feel like you're possibly reaching a bit of a different audience with pay-per-booking relative to the traditional subscription offering.

[Brian H. Sharples:]

You know what? So far, and again, I think, Lynn described these terminologies, we have platform pay-per-booking, which are the people who come in through the site. Those are primarily for both owners, that's still a very small component of those people are PMs that are coming in. And then the PMs, we're dealing directly through our sales force. The PM product is going to get launched here in the next few weeks. There is a sales backlog for it, I think, very quickly, and I'm talking about now, first quarter next year, second quarter next year, the PM listings are going to dwarf the FRBO listing simply because they're big contracts that are going to come in volume all over the world. And we have a fairly good sense for the size or some of the volumes that are there. So expect to see the mix be heavily towards PM, even though the sites, once we get it rolled out to all the sites, if the data holds true that we see in HomeAway, we're going to get a pretty good component there as well. But PM will be, by far and away, the majority, at least for the next year or so, I think.

[Heath P. Terry:]

And I realize it was a tiny change in terms of the decline in adjusted renewal rates quarter-over-quarter. But is there any sense as to whether or not that is a function of maybe some of those customers anticipating the switch to PPB and wanting to be able to sign up for that versus going ahead and signing a full-year subscription?

[Brian H. Sharples:]

Yes. I would say, no. Because, actually, the renewal issues are more isolated to very specific geographies, mainly in Europe, where we haven't announced pay-per-booking and nobody knows anything about it. I mean, we talked about -- France was a little bit soft, there are some specific issues there with Homelidays, where we canceled an 8-month product that affects some of those numbers. We've also been in the process of migrating that platform and actually taking some owners from certain countries in Homelidays and moving them to our other platforms prior to getting that site on the global template. So I would say, no. I mean, U.S. renewal rates are actually pretty solid right now, and I think that's where we would be seeing it, and we haven't.

[Heath P. Terry:]

Got you. And then, as you get more pay-per-booking, customers on to the platform, and there's, I guess, to some level, dilution of the existing traffic that's coming to the site, I mean, especially to the extent that you see hundreds of thousands of new properties over the next few years, is the way you mentioned, is there a pretty powerful incentive for you to want to spend more from a marketing perspective, especially since you're going to be able to convert a lot of that traffic into profitable transactions?

[Brian H. Sharples:]

Yes. I believe there is. And like everything we do here at HomeAway, we're going to intelligently test our way into that. Prior to last quarter, we didn't have any PPB properties to start doing that testing with. So in the coming quarters, we will be allocating money to start doing performance marketing to understand what we can go out and spend to get a booking on the other side. We obviously want to do that as profitably as we can. Our expectation, if you look at how we do performance marketing, it's inquiries today. Our cost per inquiry has gone down every quarter, I don't know, for the last 5 years that we've been doing this stuff. And I think the same is going to be true here where we'll probably start off at a relatively high cost per booking, and we'll get better and better and chip away, and every month, it'll get lower and lower. And the point at which, the margin is reasonable enough for us to sort of put our foot down on the gas pedal and start spending a lot of money, will be the point at which we feel like we've got the sort of profit equation right. So I don't know when that's going to be. I don't know if that's going to be the middle of next year, I don't know if it's going to be tail end of next year, or the year after, even. But we've got a lot cash. We have $352 million on the balance sheet. So we're kind of unconstrained in what we can spend. We just want to make sure we do it intelligently, and yes, that opportunity's absolutely there. I'll be hugely disappointed if it's not. It's been there for every other travel company that's in this business. It's just a new muscle for us to flex, and so we'll move into it as quickly as we can.

[Operator:]

Our next question comes from the line of Dean Prissman with Credit Suisse.

[Dean Prissman:]

So when you look at the adoption rates of your online booking and payment tools within individual geographies, are there any recognizable patterns that are emerging in terms of critical mass, where you begin to see accelerated momentum in uptake?

[Brian H. Sharples:]

We're at about -- in the U.S., so the U.S. is well ahead of Europe, in terms of when we launched this product, in the U.S., I think about 1/3 of our customers are now kind of online payment-enabled. We -- I think I've talk about this in the last 1.5 years and I've made some predictions that when we get to kind of 40%, 45%, and this is based on some observations of other companies, like eBay, when they did PayPal, that when we got to that 40%, 45% range, we would start to see an acceleration, because, now, you've got almost half the listings in the site that have it and half do not. I can tell you that the listings that do have payments enabled do perform better, through both the combination of the fact that we give them more credit in search, but also the fact that customers do prefer to deal with our owners in a safe and secure payment fashion. And so, that's really what we're targeting. Now what's about to happen is that, every pay-per-booking listing coming on the site is payment-enabled. And we made a pretty bold forecast that we think we're now going to see hundreds of thousands of listings in the next few years. So the accelerated rate of listing growth at HomeAway, over the next few quarters, is going to be mostly because of pay-per-booking, all those is going to be payment-enabled. So the site, very quickly, I think is going to get to a place where the have-nots are going to start feeling like they've got to jump on board because, now, consumers will be able to do things like, "I only want to look at listings that accept secure payments." And they're going to find a good chunk of listings in that kind of a sort, in that kind of a search, and people aren't going to want to be left out. So I think, in the U.S., anyway, we probably should, sometime next year, start to see that inflection point, probably in the second half of next year. And then Europe's may be about a year behind at this point, where we are in the U.S. Does that makes sense?

[Operator:]

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

[George I. Askew:]

Obviously, listings growth continue to be impacted by bundling and consolidation in the third quarter. Could you please tell us, roughly, what inning are you in with this listings impact? And is part of the fourth quarter ramp in listings growth a reduction in consolidation impact?

[Rebecca Lynn Atchison:]

Yes. Now George, I don't know -- we're probably about a little more than halfway through. I'm guessing right now. That being said, that when we get to the end of the year, we're going to stop having all these pro forma numbers, because it's driving everybody crazy. And we'll provide color to the extent that's still going on, but that's where we are. We officially launched that bundle in the beginning of Q4 last year, and it didn't quite really start ramping until January. So I think that's where we are.

[Brian H. Sharples:]

But by nature of the very statistic, which is an adjusted number, because it's increasing, it actually has nothing to do with consolidations because it's a post-consolidation number that we provide.

[Rebecca Lynn Atchison:]

Right. So the paid listings would have grown more, is what we're saying. Because in the past, people would have bought bundles instead of buying 2 listings, or now 2 listings went to one. So anyway, I know this provides a lot of noise for you guys and so -- but in the end, it's really the balance. So you could either look at the listing growth times ASP, or we can adjust both sides of them to really see what is the growth of the monetization of the marketplace. So that was the first question. I have already forgotten what the follow-up question was, into next year?

[George I. Askew:]

Well, I mean, is part of the fourth quarter ramp a reduction in the consolidation impact?

[Rebecca Lynn Atchison:]

Yes. No, I don't think so.

[Brian H. Sharples:]

No.

[George I. Askew:]

Okay. And then secondly...

[Brian H. Sharples:]

I was going to say the consolidation impact in the fourth -- in the third quarter was probably the highest we've seen. Really, the delta between the unadjusted and the adjusted numbers shows you the impact of this consolidation.

[George I. Askew:]

Exactly. Okay, and secondly, as you rollout the Expedia program early next year, will you be featuring pay-per-booking listings specifically, or all listings and related, as your listings supply increases in the coming quarters, should we expect you to add additional distribution channels like Expedia to sort of balance the network?

[Brian H. Sharples:]

So all the listings will be booking-enabled on Expedia, but it is a subset of 12,000 bookable listings that we have, today, through property management partners that use our software platform. There is, obviously, a much bigger opportunity for us to take everything that we're about to bring on with pay-per-booking and add it to that 12,000. And we'll do it when the time is right for us to do that. At least, for now, we're going to use that group of properties as a test. Expedia's a great partner to have in the U.S. They obviously have incredible traffic here, but there are other partners around the world that might make sense for us. It's not an exclusive deal. So there's no -- there's nothing that would prevent us in the future from working with other OTAs. But for now, they're the partner we're working with to make sure we get it right. And once we do that, then really, anything can happen.

[Operator:]

Our next question comes from the line of Bill Lennan with Monness, Crespi, Hardt.

[William Joseph Lennan:]

I have a two-parter about PPB and then a legislative question. On PPB, the only offering now doesn't charge travelers, and that's an important differentiator I would think. When you talk to PMs, any feedback from those who are using competing PPB products, whether or not travelers are rejecting it, surprised by it? That's part one. Part two is, do you have any plans to promote the differentiator? I don't know how -- it doesn't seem like -- the business yet can sustain a $25 million offline campaign to drive that home to travelers. But the short version, I guess, is it's important and how to teach people that it's there? And then the legislative question -- the legislative side, there's a lot of heat and light, I'm not sure how much is real action is going on, but in New York here, we read about the city going after Airbnb and rental owners. And just from 40,000 feet, does this come down to the power of hotel lobbies? Or is there something else that, I guess, the question is do you think it's a real threat? And does it come down to just how loud the hotel lobby shouts?

[Brian H. Sharples:]

Got it. Okay. So on the first question, no travelers fee, thank you for picking up on that. I think it's going to be a huge long-term advantage for HomeAway. We had to debate it pretty hard internally. If just took a traveler fee that our competitors have adopted and put that just on the listings that we have payment-enabled today, we'd do another hundred of million dollars revenue next year, just right off the bat. But we've chosen not to do that, but because we know, from reserving other traveler-related marketplaces that, long term, having no traveler fee is very important to travelers. And in our marketplace, where you're talking about ASPs of $1,500 a trip, that traveler fee is substantial. And I've said this before, in the OTA world, there use to be all kinds of fees, there were airline fees and booking fees and other things, and they were nowhere near that amount. They were $10 and $15 and stuff like that. And there are none today. And the reason they are none today is because it became a huge basis of competition among the OTAs, and even $10 was important to the consumer. So I don't have a specific feedback from PMs, I mean, our sales people may have it, or on other platforms, seeing people complain about booking fees. I do have many instances, that I know about, where people have found the properties, travelers on competitive sites that have booking fees, have then opened another browser, look to see if it's on HomeAway and then come and got it here so they didn't have to pay anything, and whether that person adjusted the price on our site versus theirs is kind of irrelevant because the traveler still doesn't want to be charged. So we are absolutely going to stick with that, thank you for asking. In terms of marketing it, we're in a bit of a box here because Airbnb, which is really the primary company doing this, that people talk, about is much smaller than us. They have less than 1/5 of our traffic. And from marketing perspective, the last thing you want to do, is go out and spend a lot of time positioning yourself against the competitor that has lower awareness than you do, in your marketplace. However, we will, on the site, we're about to make some changes to the site to make sure that travelers in the booking experience see that we are a no-fee company and are made aware that other companies have fees. And we may not call out those companies by name, but it is our plan to market that as aggressively as we can going forward. With respect to the legislation, I know this is getting a lot of press in cities, particularly because of Airbnb, whose business is really centered around cities, and -- but I should tell you, it's something HomeAway's dealt with, really, since our inception, kind of all over the world, there've always been these legislative issues. And we are firm believers that regulation is good for the industry, and we want to make sure people are paying their taxes and adhering to their local laws. And so we do get involved with these struggles in various geographies, including New York. It really isn't so much a hotel lobby issue in New York, as it is -- on one side of the equation, a tax issue. So cities want to get involved and make sure there are things called hotel and occupancy taxes, and they want to make sure those are getting paid. So there's a revenue part of the equation, but the other side of it, it's really a neighborhood part of the equation, too, where if you think about what somebody like Airbnb is doing, these are mostly people who are renting apartments that they don't own, that they already -- that they're renting from somebody else, in buildings where people who live there don't necessarily want sort of transient people coming in and out. And so that creates a lot of public friction and a lot of debate. And that, really, tends to be the center of the issue in a lot of these cities. We're in cities, too, but it's not a huge part of our business. I mean, New York is maybe 0.002% of our revenue versus somebody like a Airbnb, where maybe it's 20% of their revenue or something like that. In most of the vacation markets in which we operate, they're a lot more mature. The economies are dependent on this, the rules and regulations have been set up years ago. There's still lots of compliance issues, where we need to make sure people are paying their taxes and adhering to the laws. But you don't have the same kind of should-it-be-allowed-or-not controversy that you see in New York. So we've been dealing with it a long time, we have a government relations group. Even though New York, for example, is not a huge part of our business, we would certainly like to make sure that short-term rentals remain legal there. So we continue to fight the fight alongside many of our competitors who are trying to do that as well.

[Operator:]

Our next question comes from the line of Kevin Kopelman with Cowen and Company.

[Kevin Kopelman:]

Could you just talk a little bit about how you're thinking about the Asia Pacific opportunity with just having completed your second acquisition there. How big is that compared to the U.S. and Europe, over time?

[Brian H. Sharples:]

Well, over time, from a population standpoint, it seems like potentially a bigger opportunity because you've got a middle class there that's just absolutely huge and is poised in the next 5 to 7 years to sort of dwarf that of North America and even Europe. That said, it's a fairly new industry out there. There are lots of vacation properties across Thailand and Indonesia and Australia and other places. But we also expect that to satisfy that growing population in Asia, there's going to be a lot more constructed up and down the coast of Southeast Asia. So what we're trying to do, really, is just get in front of that, right now. This business is absolutely a marketplace supply-demand driven business. And the way we built our positions in North America and Europe, whereby going in, being pretty aggressive, looking for leading companies that had a good balance of supply and demand, adding them to our portfolio and then, ultimately, crafting a regional strategy out of that. So when we first got in the U.S., we had a diverse collection of companies. When we first got in Europe, we had a diverse collection of companies. Over the last few years, we created a European network. We created a U.S. network. We now have a global network, but I will tell you, the regional buys are probably the ones that are the most profitable for us now and generate the most revenues. So Asia's kind of a similar thing. When we buy a company in New Zealand, that has properties in New Zealand, it has properties in Australia, it has properties in some of the tropical markets in Southeast Asia that we then add to what we picked up with travelmob, that we add to what we picked up when we made an acquisition in Australia a couple of years ago, that we can add to our partner, Tujia, in China, that we have an investment in. And so what we're really trying to do is kind of craft together, ultimately, critical mass in Southeast Asia, of both properties and travelers, and then use our big platform, here in the U.S. and Europe, to start also driving international demand to those geographies. I mean, lots of people in the U.S. want to go to New Zealand. And now, overnight, we have a very robust New Zealand property listing section on our site that's going to appear. And I think that's going to benefit the company we just bought and also benefit the travelers here in the U.S. So just more of the same, I think, of what we've done in the U.S. and Europe.

[Kevin Kopelman:]

Okay. And then, just a quick question on pay-per-booking. Is all of that revenue related to pay-per-booking going to show up in listing revenue or is some of it show up in other revenue?

[Rebecca Lynn Atchison:]

It'll be a form of listing revenue. We're trying to, right now, figure out how exactly we're going to present that, if not on the income statement, in color, in calls next year. And so we'll be guided by how big this gets, as to the level of detail we provide.

[Operator:]

And the last question today comes from the line of Nat with Citigroup.

[Unknown Analyst:]

So just to follow up on an earlier one. So as the subscription, the 10 bookings per year, as you guys move PPB up the search results, I mean, how should we think about subscribers getting less than the 10 per year than turning off the platform or saying, "We're not getting the ROI that we did historically." How do you measure that against the increase of PPB? So should we think about some sort of churn rate going forward?

[Brian H. Sharples:]

So we have a bit of a commitment we've made to ourselves to not let that happen. Our objective with our marketplace management efforts is to make sure that our subscribers continue to see increases each year, in the number of inquiries and bookings they get, which they have for just about every year since we've been running this business. So it's not our intention to put a stop to that, at all. And that's one of the reasons we're being pretty cautious about how quickly we move PPB listings up. That does mean -- I should say, there are many regions around the world where we have an excess of demand over supply today. So part of that equation is just looking at various regions that we operate in and saying, "Where do we have excess demand versus supply?" Where we have excess demand, we're going to send our sales people in to get property managers and other people signed up for PPB in those regions, where we will target those regions because those are regions where we don't have to spend additional money. And we can probably move listings up a little quicker than we would in other places. In places where we have either perfect balance between supply and demand, or God help us, excess supply, then we're going to have to be intelligent about creating new traffic to those regions. And that was the question that was asked earlier, about performance marketing. We're absolutely gearing up to do that, to provide additional traffic. Now it could become the case -- so that's our objective. It could become the case in the future that there are certain listings, in certain markets, I don't know, think about a luxury market, maybe we're at 10%, for some reason, we're making a ridiculous amount of money where we might be willing to do a slight trade-off in renewal rate, in exchange for a massive revenue increase that we could get from moving PPB up. That's not our objective. But I would say, over the next few years, we'll experiment with some of that stuff. And I do -- I like the question because there's such a focus on renewal rate in this business. Even with our subscription business today, I will tell you, we make those trade-offs. You look at tiered pricing, where we have a very aggressive strategy to improve prices, there's no question that pricing and renewal rate are negatively correlated. So if you get too aggressive about price, you're going to have some impact on renewal rate, and we could take renewal rate, obviously, to 100%, if we didn't charge anything. And so, some of the slight declines that you've seen this year in renewal rate do have to do with the fact that we have consciously made a trade-off between total revenue and renewal rate because of pricing. And because we've pushed pricing on the margin, we've kind of ran that equation and we've figured out how to optimize it. So those are options for us. But please, know our objective, at least for this year, is to keep our subscribers extremely happy. And for us, that means delivering better performance for them, not the same, or worse.

[Operator:]

We have no further questions at this time. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.