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AWAY > SEC Filings for AWAY > Form 10-Q on 4-Nov-2011All Recent SEC Filings

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Form 10-Q for HOMEAWAY INC


4-Nov-2011

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

Safe Harbor Cautionary Statement

This quarterly report on Form 10-Q contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to our management. The statements contained in this quarterly report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may be signified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified under the heading "Risks Relating to Our Business" below, and those discussed in other documents we file with the Securities and Exchange Commission. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this quarterly report on Form 10-Q. You should read this quarterly report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

The following discussion should be read in conjunction with our interim condensed consolidated financial statements contained elsewhere in this quarterly report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings including the audited consolidated financial statements included in our prospectus filed with the SEC pursuant to Rule 424(b) on June 28, 2011, relating to our initial public offering.

Overview

We operate the world's largest online marketplace for the vacation rental industry. Vacation rentals are fully furnished, privately owned residential properties, including homes, condominiums, villas and cabins that can be rented on a nightly or weekly basis. Our marketplace brings together millions of travelers seeking vacation rentals online with hundreds of thousands of owners and managers of vacation rental properties located in over 145 countries around the world. As of September 30, 2011, our global marketplace included more than 614,000 paid vacation rental listings.

We have achieved significant growth since our commercial launch in 2005. In 2010 we generated $167.9 million of revenue representing year-over-year growth of 39.6%. In the three and nine months ended September 30, 2011, we generated $61.1 million and $171.8 million of revenue, respectively, representing year-over-year growth of 36.9% and 40.3%, respectively. We view our market opportunity as global, and, in both the three and nine months ended September 30, 2011, 40.4% of our revenue came from outside the United States. We have historically generated strong cash flows and have had predictable financial results because of our advance payment, subscription-based model and our high annual listing renewal rate. Listings contributed 85.9% and 86.6% of our revenue in the three and nine month periods ended September 30, 2011. In the same periods, we generated Adjusted EBITDA of $21.6 million and $50.0 million, respectively, representing year-over-year increases of 36.5% and 46.6%, respectively, and we generated net income of $2.7 million and $6.4 million, respectively. In the three and nine months ended September 30, 2011, we generated free cash flow of $13.9 million and $48.6 million, respectively, representing year-over-year increases of 64.0% and 26.1%, respectively, and we generated cash from operating activities of $17.0 million and $57.5 million, respectively, representing year-over-year increases of 57.6% and 28.7%, respectively.

For further discussion regarding Adjusted EBITDA and free cash flow, see the table in the section of this quarterly report on Form 10-Q titled "Discussion Regarding Adjusted EBITDA and Free Cash Flow and Reconciliation to GAAP."

To date, we have derived substantially all of our revenue from the sale of paid listings on our websites to property owners and professional property managers. Typically, owners and managers purchase listings and pay for such listings in advance at the beginning of the listing term. We recognize revenue monthly over the term of the listing, which is generally one year. For some professional property managers, we offer pay-for-performance listings whereby the customer pays a fee based on the number of inquiries or bookings received. In the three and nine months ended September 30, 2011, pay-for-performance listings generated 1.1% and 1.4% of our total revenue, respectively. Renewals are important for our subscription


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business. For the twelve month period ended September 30, 2011, our renewal rate was 76.4% compared to 75.4% for the twelve month period ended September 30, 2010.

Our revenue increased from $8.4 million in 2005 to $167.9 million in 2010 and has increased from $44.6 million and $122.4 million in the three and nine month periods ended September 30, 2010 to $61.1 million and $171.8 million in the comparable periods in 2011. Our revenue growth over the past six years was attributable to our acquisitions of other online listings businesses, an increase in the number of listings that property owners and managers purchase from us, an increase in the average revenue we receive per listing due to additional features and price increases, as well as the introduction of related products and services. Since inception we have acquired 17 businesses, and while acquisitions have been integral to our revenue growth, we have also increased revenue organically 28.6% in 2010, 28.7% in the three months ended September 30, 2011 and 30.7% in the nine months ended September 30, 2011, respectively, as compared to the comparable prior year periods. We consider growth to be organic if generated from businesses that we have owned for at least 12 months.

In April 2011, we acquired the businesses of realholidays.com.au in Australia and Second Porch, Inc. in the United States. However, revenue related to these acquisitions did not significantly contribute to the $61.1 million and $171.8 million increases in revenue in the three and nine months ended September 30, 2011, respectively.

Our acquisitions have presented, and certain of them continue to present, significant integration challenges. These acquisitions have required us to integrate new operations, offices and employees and to formulate and execute on marketing, product and technology strategies associated with the acquired businesses. In some cases, we continue to manage multiple brands and technology platforms of the acquired businesses, which has increased our cost of operations. These challenges are likely to arise if we acquire businesses in the future.

Our ability to continue to grow our revenue will depend largely on increasing the number of paid listings and maintaining and introducing new revenue sources through our marketplace. Our number of paid listings grew from 338,396 as of December 31, 2008 to 527,535 as of December 31, 2010, a compound annual growth rate of 24.9%, and increased to 626,528 as of September 30, 2011. We will continue to offer more value and choice to property owners and managers by giving vacation rental owners and managers the option to pay more for increased distribution and placement in search results. We believe that this strategy will enhance our ability to increase average listing prices in future periods, while keeping base prices as low as possible. Another key driver of our revenue growth is our ability to retain existing and attract new property owners and managers. The fragmented nature of the vacation rental industry makes it challenging for us to acquire vacation rental listings, and we must therefore focus on a combination of direct and indirect marketing to add new listings.

We believe that attracting travelers to our online marketplace is necessary to attract and retain vacation rental owners and managers. In addition to increasing the number of visitors to our websites, it is critical to our future success for us to increase the likelihood that these visitors actually choose to book a vacation rental with the property owners and managers advertising through our websites. To meet these challenges, we are focused on a combination of marketing tactics, including pay-per-click advertising, search engine optimization, and broad reach marketing, to drive visits as well as increase the exposure of the vacation rental category. We are also investing in product enhancements to increase the number of travelers visiting our websites and encouraging them to make inquiries. We believe this will increase the satisfaction with our services for both travelers and vacation rental owners and managers, and will lead to strong renewal rates consistent with the level in 2010 and levels we are experiencing in 2011. We will continue to expand into adjacent markets which are highly fragmented, such as our 2010 entry into the bed and breakfast and property manager software markets. We plan to introduce new products and services for travelers, property owners and managers, which will provide further opportunities to generate revenue through our marketplace.

Our expenses are primarily composed of salaries and related expenses and marketing. We have invested significantly in broad reach marketing over the past few years to increase awareness of vacation rentals and our brands. We will continue to increase expenses across the organization to support our growth but expect our cost of revenue to remain relatively steady as a percentage of revenue. We expect to incur higher expenses for product development as a percent of revenue, while reducing sales and marketing, as well as general and administrative expenses as a percentage of revenue. We plan for our investment in capital expenditures to be consistent with 2010 spending as a percentage of revenue. We are in the early stages of reorganizing our corporate structure, which we believe will lower our tax expense over the longer term.

In the three and nine months ended September 30, 2011, we generated net income of $2.7 million and $6.4 million, respectively. After deemed dividends and preferred stock discount accretion of $6.8 million and $24.7 million in the same periods, we incurred net loss attributable to common stockholders of $4.1 million and $18.2 million, respectively.

On July 5, 2011, during the third quarter ended September 30, 2011, we completed our initial public offering ("IPO") of 9,200,000 shares of common stock, at $27.00 per share, before underwriting discounts and commissions. We sold 5,931,335 shares and existing stockholders sold an aggregate of 3,268,665 shares, including 1,200,000 shares as a result of


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the underwriters' exercise of their over-allotment option to purchase additional shares. The initial public offering generated net proceeds to us of approximately $146.3 million, after deducting underwriting discounts and other offering expenses incurred by us for the sale of common stock. We did not receive any proceeds from the sale of shares by the selling stockholders.

With the proceeds of the offering, we redeemed our outstanding shares of Series A and B preferred stock, including accrued but unpaid dividends, for $55.8 million and $9.2 million, respectively, as well as paid in full all accrued but unpaid dividends on its outstanding shares of Series C preferred stock, which totaled $32.9 million.

Historically, we have recorded preferred stock accretion on all series of preferred stock using an effective interest method to a value equal to a redemption value as of October 2014 determined pursuant to the terms of the preferred stock set forth in our certificate of incorporation. To reflect the final redemption value as of the IPO date of July 5, 2011, we recorded accelerated accretion charges of $6.8 million in July 2011. This amount was recorded as additional paid-in capital on our balance sheet and negatively impacted net loss attributable to common stockholders in the three and nine months ended September 30, 2011.

The outstanding shares of Series C and Series D convertible redeemable preferred stock converted on a one-to-one basis into shares of our common stock concurrent with the IPO. Series C and Series D convertible redeemable preferred stock converted into 19,140,633 and 15,305,217 shares, respectively of our common stock on July 5, 2011. Following the IPO, there were no shares of our preferred stock outstanding.

Concurrent with the IPO, we received proceeds of approximately $161,000 from the exercise of warrants to purchase shares of common stock.

Key Business Metrics

In addition to traditional financial and operational metrics, we use the
following business metrics to monitor and evaluate results:



                                         Three Months Ended            Nine Months Ended
                                           September 30,                 September 30,
                                        2011           2010           2011           2010
Key Business Metrics:
Adjusted EBITDA (in thousands)(1)     $  21,634      $  15,853      $  50,040      $  34,130
Free cash flow (in thousands)(2)      $  13,885      $   8,466      $  48,567      $  38,507
Paid listings, end of period            626,528        511,667        626,528        511,667
Average revenue per listing           $     335      $     314      $     344      $     318
Renewal rate, end of period                76.4 %         75.4 %         76.4 %         75.4 %
Visits to websites (in millions)(3)          57             58            173            183

(1) See Discussion Regarding Adjusted EBITDA and Free Cash Flow and Reconciliation to GAAP below for a further discussion of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

(2) See Discussion Regarding Adjusted EBITDA and Free Cash Flow and Reconciliation to GAAP below for a further discussion of free cash flow and a reconciliation of free cash flow to cash flows from operating activities.

(3) This figure represents the total visits received across the selected group of our websites, and is based on the comScore Media Metrix Media Trend report for the time periods shown. Total visits is defined as the total number of times during a report period that a unique person accessed content within a website with at least a 30 minute break in between times of access. The websites included were: homeaway.com, vrbo.com, homelidays.com, abritel.fr, alugetemporada.com.br, vacationrentals.com, fewo-direkt.de, holiday-rentals.co.uk, ownersdirect.co.uk, bedandbreakfast.com, realholidays.com.au, homeawayconnect.com, homeaway.es, villanao.com, homeaway.it, homelidays.es, cyberrentals.com, greatrentals.com, homeaway.nl, homelidays.co.uk, homeaway.pt, homelidays.de, homeaway.fr, a1vacations.com and homeawayrealestate.com. comScore's report did not include data for our remaining websites.

Adjusted EBITDA. We define this metric as net income (loss) plus depreciation, amortization of intangible assets; interest expense, net; income tax (expense) benefit; stock-based compensation expense, all net of any foreign exchange income or expense. We believe that the use of Adjusted EBITDA is useful in evaluating our operating performance because it excludes certain non-cash expenses, including depreciation, amortization and stock-based compensation. See "Discussion Regarding Adjusted EBITDA and Free Cash Flow and Reconciliation to GAAP" below for a further discussion of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.


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For the three months ended September 30, 2011, Adjusted EBITDA was $21.6 million, or 35.4% of revenue. This compares to $15.9 million, or 35.5% of revenue, for the same period in 2010. For the nine months ended September 30, 2011, Adjusted EBITDA was $50.0 million, or 29.1% of revenue. This compares to $34.1 million, or 27.9% of revenue, for the same period in 2010. Adjusted EBITDA as a percentage of revenue increased in the nine month period ended September 30, 2011, as compared to the same period in 2010 as revenue growth outpaced increased expenses for the same period in 2010 primarily as a result of higher organic revenue growth in 2011 and as a result of our acquisitions of BedandBreakfast.com and AlugueTemporada.com in March 2010, Instant Software and Escapia in October 2010 and realholidays.com.au in April 2011.

Free Cash Flow. We view free cash flow as an additional measure of our operating performance. We define free cash flow as our cash provided by operating activities, adjusted for cash interest expense and income, and subtracting capital expenditures. For the three months ended September 30, 2011, our cash provided by operating activities was $17.0 million and capital expenditures were $3.1 million, resulting in free cash flow of $13.9 million. This compares to $10.8 million in cash provided by operating activities and $2.3 million in capital expenditures, resulting in free cash flow of $8.5 million for the same period in 2010. For the nine months ended September 30, 2011, our cash provided by operating activities was $57.5 million and capital expenditures were $8.9 million, resulting in free cash flow of $48.6 million. This compares to $44.7 million in cash provided by operating activities and capital expenditures of $6.2 million, resulting in free cash flow of $38.5 million for the same period in 2010. We experience seasonality in our listing business as a greater number of listing additions and renewals occur in the first half of each year as property owners and managers desire to advertise to travelers during this travel planning period, resulting in higher cash flows during that period since most listings are annual and fully paid at the time the listing is purchased or renewed. See "Discussion Regarding Adjusted EBITDA and Free Cash Flow and Reconciliation to GAAP" below for a further discussion of free cash flow and a reconciliation of free cash flow to cash flows from operating activities.

Paid Listings. In the first nine months of 2011, 86.6% of our revenue was derived from paid listings. We regularly track paid listings as a key revenue growth driver and to identify trends in our business and industry. We believe the number of paid listings is a key indicator of the growth of our marketplace and the vacation rental industry. As the number of paid listings increases, we believe that we will generate additional revenue while also expanding the value of the marketplace to travelers, thus increasing the likelihood that travelers will find a property that is suitable to their needs. We define a paid listing as a fee to list a property advertisement on one or more websites in our marketplace. A paid listing allows a property owner or manager to include a description of the property, along with location, pricing, availability, a specified number of photos and contact information. Most listings are sold on a subscription basis, and some listing packages may include listings on more than one of our websites. When purchased at the same time in one bundle, we count this as one paid listing. As of September 30, 2011, our global marketplace included more than 614,000 paid listings of vacation rentals. Including paid listings from BedandBreakfast.com, we had a total of 626,528 paid listings as of September 30, 2011. Paid listings increased 22.4% year-over-year and were consistent with the second quarter of 2011, reflecting the expected seasonality. It is possible that a specific property may be listed on more than one of our websites without indicating that the multiple listings refer to the same property. We have used various technologies to estimate the number of unique properties and are implementing systems and processes to identify the number of unique properties that comprise our paid listings, which we estimate was 531,000 as of September 30, 2011. We experience seasonality in our paid listings as described further below under the heading "Seasonality and Quarterly Results."

Average Revenue per Listing. We believe that trends in revenue per listing are important to understanding the price sensitivity of our listings, the value we bring to owners and managers, and the overall health of our marketplace. We use trends in revenue per listing, as well as trends in paid listings, in order to formulate financial projections and make strategic business decisions. Increases in revenue per listing may increase our earnings or may be leveraged for future investment. Average revenue per listing for the three and nine months ended September 30, 2011 increased 6.7% and 8.2%, respectively as compared to the three and nine months ended September 30, 2010. We compute average revenue per listing as listing revenue divided by the average of paid listings at the beginning and end of the period, then annualizing the result. The price of listings varies by website and can include various additional fees associated with listing enhancements. The average revenue per listing may fluctuate based on the timing and nature of acquisitions, impacting the number of average paid listings for a given period; changes in our base pricing; uptake and timing of listing enhancements; changes in the pricing of enhancements; changes in brand mix; and the impact of foreign exchange rates on our listing revenue outside of the United States. Average revenue per listing for only those brands that we owned for each of the full comparative three and nine month periods ended September 30, 2010 and September 30, 2011, increased by 9.6% and 11.2% during the three and nine months ended September 30, 2011, as compared to the three and nine months ended September 30, 2010 due to higher base prices, additional listing enhancements, and changes in brand mix. The growth rate decreased in the three and nine months ended September 30, 2011 as compared to the three and nine months ended September 30, 2010 by 2.9% and 3.0%, respectively, primarily as a result of the acquisition of realholidays.com.au in Australia in April 2011. Foreign exchange rates positively impacted the average revenue per listing growth rate for both the three and nine month periods ended September 30, 2011, in


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each case, by less than 10%. The growth rate in annual revenue per listing may decrease in the future if owners and managers become dissatisfied with increases in our base prices or prices for listing enhancements or with the effectiveness of listing enhancements. The growth rate may also increase or decrease depending on our mix of revenue. Additionally, our average annual revenue per listing is impacted by fluctuations in foreign exchange rates. If we are not able to successfully increase our base prices or prices for listing enhancements, increase adoption of listing enhancements, or if foreign exchange rates decline, our average revenue per listing may suffer.

Renewal Rate. Renewal of paid listings is a key driver of revenue for our business. Also, we track renewal rate in order to understand and improve upon the satisfaction of our owners and managers and to help us more accurately estimate our future revenue and cash flows. Renewal rates vary among our websites and can fluctuate due to a variety of factors, including customer satisfaction, changes in our processes associated with renewal activity, such as the introduction of automatic renewal, and general market conditions. The renewal rate for our subscription listings at the end of any period is defined as the percentage of those paid listings that were active at the end of the period ended twelve months prior that are still active as of the end of the reported period. We do not include all brands in our calculation of renewal rate. Brands included in our calculation of renewal rate for 2010 were HomeAway.com, VRBO.com, VacationRentals.com, FeWo-Direkt.de, Holiday-Rentals.co.uk, OwnersDirect and Abritel. Homelidays.com was added to the calculation of renewal rate as of June 30, 2011, and Aluguatemporada.com.br was added to the calculation of renewal rate as of September 30, 2011.
BedandBreakfast.com and realholidays.com.au remain excluded until we can further develop our database system. However, based on our review of other internal renewal rate data, we do not believe that the exclusion of this brand from the renewal rate calculation would materially impact the result. Customers' satisfaction with our solutions is the primary driver of our renewal rate. We believe that property owners and managers measure their satisfaction with our websites based largely on the number of inquiries and rental bookings that they receive from travelers. When the underlying vacation properties are sold or taken off the market, the owner or manager has no further need for the listings, and this attrition is a natural and ongoing component of non-renewal of listings. In addition, some properties may not be appealing to travelers due to factors such as their location, condition or availability. For these properties, owners and managers may not generate sufficient interest and therefore may not renew their subscription listing. Our renewal rate for 2010 and the twelve months ended September 30, 2011, was 75.9% and 76.4%, respectively.

Visits to Websites. We view visits to websites as a key indicator of growth in our brand awareness among users and our ability to provide our property owners and managers with inquiries from travelers. Growth in visits to websites will be driven by our marketing strategies and has an indirect impact on our financial performance.

We use a variety of tools to measure visits to our websites. These tools include solutions from third parties such as Omniture, Google Analytics and eStat. We also use third-party published reports to measure our results against comparable companies. According to comScore's Media Metrix Media Trend reports for the applicable time periods, visits to our websites increased annually by 35.4% and 21.9% in 2009 and 2010, respectively. The increase in 2010 is attributable to our overall global brand-building and marketing activities, such as spending on pay-per-click advertising, our broad reach marketing campaign and our ongoing search engine optimization, or SEO, activities. For the three and nine months ended September 30, 2011, according to comScore's Media Metrix Media Trend report for the applicable periods, visits to our websites decreased by 1.3% and 5.3%, respectively, compared to the same periods in 2010. However, according to our internal measurements, visits to our websites have increased by 23.2% and 25.0% for the three and nine months ended September 30, 2011, compared to the three and nine months ended September 30, 2010. Historically, trends in our visits data reported by comScore have been consistent with trends reflected in our internal data, although the number of visits to our websites reported by comScore has been consistently lower than the number of visits according to our internal measures. However, according to our internal measurements, visits to . . .

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