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AWAY > SEC Filings for AWAY > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for HOMEAWAY INC


7-Nov-2013

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 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 our Annual Report on Form 10-K for the year ended December 31, 2012 and subsequent reports on Form 8-K, which discuss our business in greater detail.

Overview

We operate the world's largest online marketplace for the vacation rental industry. Our marketplace brings together millions of travelers seeking vacation rentals online with hundreds of thousands of property owners and managers of vacation rental properties located in 171 countries around the world. Our portfolio includes leading vacation rental websites in the United States, the United Kingdom, Germany, France, Spain, Brazil, Australia and Singapore. During the three and nine months ended September 30, 2013, our websites attracted approximately 198 million and 606 million website visits, respectively, and as of September 30, 2013, our global marketplace included more than 773,000 paid listings.

In the third quarter of 2013, we continued to focus our efforts on providing the largest selection of properties to travelers and the most qualified inquiries and bookings to property owners and managers, as we added over 53,000 paid listings, net of non-renewals, to our network from September 30, 2012 to September 30, 2013. We continue to acquire new paid listings through word-of-mouth referrals and marketing channel outreach, as well as through our inside sales organization that is primarily focused on adding new paid listings from professional property managers. In the third quarter of 2013, we acquired a controlling interest in travelmob Pte. Ltd. in Singapore, which expands our market presence in Asia Pacific. In addition, we recently added a new pay-per-booking commission based product in the U.S. This product allows owners and managers to list their property on our marketplace and pay a commission per booking in lieu of a pre-paid subscription fee. At the end of the third quarter, we had a limited number of customers signed up for this new pay-per-booking product as part of a controlled product launch that started in mid-September. The commission based model is available on HomeAway.com in the U.S. for all property owners and smaller property managers. During the fourth quarter, we plan to launch the commission based product to larger property managers. We believe over the long-term this will attract more listings which will be beneficial to travelers and will contribute to revenue growth for our business.

Historically, property owners and managers have paid us to list on our marketplace by paying for a subscription that generally is for an annual period. The subscription listing business comprises the majority of our revenues at 82.7% and 83.1% for the year-to-date periods ended September 30, 2013 and September 30, 2012, respectively. We continued to improve monetization of our subscription listing base from pricing and product changes through continued adoption of our tiered pricing structure and increase in purchases by property owners and managers of bundled listings products. This improved monetization can be seen in the increase of our average revenue per listing from $337 in the third quarter of 2012 to $390 in the third quarter of 2013. Tiered pricing is currently available to new and renewing property owners and managers on HomeAway.com and VRBO.com in the United States, HomeAway.co.uk in the United Kingdom, Abritel.fr in France, HomeAway.de in Germany, HomeAway.es in Spain, HomeAway.it in Italy and AlugueTemporada.com.br in Brazil. It allows owners and managers to improve their position in search results by purchasing a higher subscription level or tier. We believe property owners and managers increasingly will elect to purchase higher tiers, which would increase overall average revenue per listing in future periods. At the same time, by keeping base prices low, we believe the number of paid listings can continue to grow. Although we plan to launch tiered pricing on our other websites as well, we may use different strategies as we enter new markets and geographies or attempt to further penetrate the professional property manager market which could result in lower average revenue per listing.


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Enablement of e-commerce on our websites has been and will continue to be a focus for our Company. In the third quarter of 2013, we continued to see adoption of our online payments platform, called ReservationManager™, which is currently available on HomeAway.com and VRBO.com in the United States, HomeAway.co.uk in the United Kingdom, Abritel.fr in France and HomeAway.de in Germany. ReservationManager enables property owners and managers to respond to and manage inquiries, prepare and send rental quotes and payment invoices; allows travelers to book online, including the ability to enter into rental agreements online; and process online payments via credit card or eCheck. Additionally in some countries, through ReservationManager, property owners and managers can make value-added products such as property damage protection available for purchase. We believe that adoption of this product over time will allow us to earn more revenue from ancillary products while providing a more secure payment mechanism for travelers. We plan to introduce new products and services for travelers, property owners and managers, which we believe will provide further opportunities to generate revenue through our marketplace, including a pay-for-booking product for our property owners and managers.

We believe that bringing travelers to our online marketplace is necessary to attract and retain vacation rental owners and managers. It is also critical for us to increase the rate at which travelers book vacation rentals with our property owners and managers. To meet these challenges, we are focused on a combination of marketing tactics, including pay-per-click advertising, search engine optimization, and display advertising, with a goal of driving visits to our websites as well as increasing the exposure of the vacation rental category. We are also investing in product enhancements to make it easier for travelers visiting our websites to search and find the right property, to inquire and to book their stay. Online booking functionality is currently available on HomeAway.com and VRBO.com in the United States, HomeAway.co.uk in the United Kingdom, Abritel.fr in France and HomeAway.de in Germany. Online booking enables travelers to reserve a vacation rental directly on any of our listing websites that utilize our ReservationManager payments platform, rather than requiring correspondence with a property owner or manager to reserve a vacation rental.

Key Financial Highlights

We have achieved significant growth since our commercial launch in 2005. Our revenue growth is attributable to our acquisitions of other online listings businesses, the organic growth in the number of listings that property owners and managers purchase from us, increases in the average revenue we receive per listing due to additional features and price increases, and the introduction of additional products and services related to our marketplace. We view our market opportunity as global and have historically generated strong cash flows. Additionally, we have had predictable financial results because of our advance payment, subscription-based model and our high annual listing renewal rates.

Key financial highlights for the three months ended September 30, 2013 include the following:

• Total revenue was $90.1 million compared to $73.1 million in the third quarter of 2012, or an increase of 23.3%;

• Percentage of total revenue from outside the United States was 38.6% in the third quarter, compared to 38.2% in the third quarter of 2012, and in the three months ended September 30, 2013 included 37.1% from Europe and 1.5% from Brazil and Australia;

• Listing revenue was $75.5 million compared to $61.4 million in the third quarter of 2012 and contributed 83.7% of total revenue compared to 84.0% in the third quarter of 2012;

• Net income attributable to HomeAway, Inc. was $8.5 million compared to $5.2 million in the third quarter of 2012, or an increase of 64.5%;

• Cash from operating activities was $18.7 million compared to $15.7 million in the third quarter of 2012, or an increase of 19.0%;

• Adjusted EBITDA was $29.0 million compared to $24.2 million in the third quarter of 2012, or an increase of 19.8%; as a percentage of revenue, Adjusted EBITDA was 32.2%, a decrease of approximately 90 basis points from 33.1% in the third quarter of 2012;

• Free cash flow was $17.0 million compared to $17.2 million in the third quarter of 2012, or a decrease of 0.7%; on a trailing twelve month basis, free cash flow increased 16.9% to $91.5 million from $78.2 million in the comparable trailing twelve month period for the prior year;

• Non-GAAP net income was $16.7 million, or $0.19 per diluted share, compared to non-GAAP net income of $12.1 million, or $0.14 per diluted share, in the third quarter of 2012; and

• Cash, cash equivalents and short-term investments as of September 30, 2013 were $352.4 million.


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For further discussion regarding Adjusted EBITDA, free cash flow and non-GAAP net income, along with reconciliations of such numbers to the most directly comparable financial measures calculated and presented in accordance with GAAP, please see the information under the caption "Discussion Regarding Adjusted EBITDA, Free Cash Flow and Non-GAAP Net Income and Reconciliation to GAAP" in Item 2 of this Quarterly Report on Form 10-Q.

Acquisitions

Since our inception, we have acquired 19 businesses as part of our growth strategy. Each of these acquisitions has been accounted for using the acquisition method of accounting. Accordingly, the financial statements for these businesses have been included in our consolidated financial results since the applicable acquisition dates. The most recent acquisition was in August 2013, when we acquired a controlling interest in travelmob Pte. Ltd. in Singapore. This acquisition provides the Company the opportunity to address the growing market needs in Asia for the short-term vacation rental industry.

Our acquisitions have presented, and certain of them continue to present, significant integration challenges. They 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. Challenges of this nature are likely to arise if we acquire businesses in the future.

Growth Opportunities and Trends

Our ability to continue to grow our revenue will depend largely on increasing the number of paid listings, increasing revenue per listing and increasing revenue from other products and services through our marketplace. This includes our ability to successfully enable e-commerce transactions on our websites, including allowing for online payments and online booking, and commission-based revenue streams for vacation rental listings through the launch of pay-per-booking listings. We continually assess opportunities for strategic acquisitions. We also use direct and indirect marketing as well as telesales to reach owners and professional property managers. We believe that the growing awareness of vacation rentals, as a favorable alternative to hotels, has and will continue to support growth of our business.

We continue to monitor the weakened economic environment in Europe and the corresponding impact on our business. While growth rates in visits to our European websites were lower in the three months ended September 30, 2013 compared to the first two quarters of 2013, the overall growth in visits in Europe remains healthy. Additionally, we continue to monitor foreign exchange rates in Europe as declining foreign exchange rates will negatively impact our results given that 37.1% of our revenue was generated in Europe in the third quarter of 2013.

We monitor foreign exchange rates for our internationally focused websites, as fluctuations in currency exchange rates may cause our revenue and operating results to differ from our expectations. In addition to the exchange rates in Europe, we are currently monitoring the economic environment in Brazil. Revenues from Brazil and Australia represented 1.5% of our total revenue during the three months ended September 30, 2013.

Expenses

Our expenses are primarily composed of salaries and related expenses, marketing and professional fees. Our expenses from quarter to quarter and year to year may fluctuate due to timing of specific events or projects. We will continue to increase expenses across the organization on an annual basis to support our growth and expect our cost of revenue to grow in absolute dollars and remain flat as a percentage of revenue for the year ended December 31, 2013. We expect to incur higher expenses for product development as we record a full-year impact of personnel hired in 2012 and as we hire additional personnel to develop new features and products and expect product development expenses to increase as a percentage of revenue for the year ended December 31, 2013. We expect to incur higher expenses for sales and marketing as we continue to build our sales team to pursue professional property managers and continue to build brand and category awareness, but expect sales and marketing expenses to remain flat as a percentage of revenue for the year ended December 31, 2013. We expect to incur higher expenses for general and administrative expenses to support the growth of our business and the requirements of being a publicly traded company and expect general and administrative expenses to increase as a percentage of revenue for the year ended December 31, 2013. We plan for additional capital investments for the year ended December 31, 2013 to support the growth of our business, but expect our investment in capital expenditures to remain consistent as a percentage of revenue as compared to the year ended December 31, 2012. We believe that reorganizing our global corporate structure will lower our tax expense over the longer term.


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Key Business Metrics

In addition to common 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,
                                       2013           2012           2013           2012
  Paid listings, end of period         773,352        720,031        773,352        720,031
  Average revenue per listing        $     390      $     337      $     387      $     344
  Renewal rate, end of period             71.7 %         74.5 %         71.7 %         74.5 %
  Visits to websites (in millions)         198            156            606            475

Following the migration of VRBO.com to our global technology platform in 2012, property owners and managers that have listings on both HomeAway.com and VRBO.com are able to consolidate their listings into one listing that is displayed on both websites. Additionally, the platform consolidation allows property owners and managers to purchase bundled listings that include display on both HomeAway.com and VRBO.com. As a result, we now count these bundled listings as one listing. This impacts the comparability of our current period reported metrics to our previously reported historical metrics for paid listings, renewal rate and average revenue per listing.

As a result of consolidated listings and bundled listings, our paid listing counts will be lower since these listings previously would have been counted as two paid listings had they been purchased on both websites. In the future, as property owners and managers that have listings on both HomeAway.com and VRBO.com renew their subscriptions into a bundled listing, we will count these as one listing. We anticipate more bundled listings and consolidations of listings in the future, which we expect will lower our paid listing growth as compared to historical levels. The lower paid listing counts from consolidations and bundles will in turn increase our average revenue per listing and lower our reported renewal rate. Additionally, our bundled listing products generally have a higher base price and will increase our average revenue per listing.

Adjusting for the impact of our customers' ability to consolidate listings and to purchase network product bundles, we estimate our business metrics to be as follows:

                                    Three Months Ended        Nine Months Ended
                                    September 30, 2013        September 30, 2013
    Paid listings, end of period                815,241                   815,241
    Average revenue per listing    $                372      $                373
    Renewal rate, end of period                    74.2 %                    74.2 %

Paid Listings. In the three months ended September 30, 2013 and 2012, 83.7% and 84.0%, respectively, of our revenue was derived from paid listings. We regularly track paid listings as a key revenue growth indicator and to identify trends in our business and industry. From September 30, 2012 to September 30, 2013, paid listings increased by 7.4%, contributing to listing revenue growth of 23.0%. The growth in paid listings continued to be due to our marketing and selling new and additional subscription listings to professional property managers, as well as organic growth from property owners and managers who become aware of our websites and choose to market their properties. Growth in paid listings is also impacted by listings acquired in business combinations. Growth in new listings is partially offset by loss of listings through attrition.

Adjusting for the impact of consolidated listings and new bundled listings, we estimate that our paid listing growth would have been approximately 12.7% from September 30, 2012 to September 30, 2013. We do not expect these changes to have any negative impact on the number of unique properties on our websites.

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. We also provide tools to enable them to manage their listings and rental business. Most listings are sold on a subscription basis, and some listing packages may include listings on more than one of our websites. We also sell listings on a pay-for-performance basis. When purchased at the same time in one bundle, we count this as one paid listing.

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 approximately 712,000 as of September 30, 2013, as compared to approximately 634,000 as of September 30, 2012.


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Average Revenue per Listing. We believe that trends in revenue per listing, over an extended period, are important to understanding the value we bring to property 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. At a consolidated level, increases in revenue per listing may increase our earnings or may be leveraged for future investment. The average revenue per listing may fluctuate based on the timing and nature of acquisitions, changes in our pricing, uptake of listing enhancements, changes in the pricing of enhancements, changes in brand and listing type mix, and the impact of foreign exchange rates on our listing revenue outside of the United States.

For the three and nine months ended September 30, 2013, average revenue per listing was $390 and $387, respectively, an increase of 15.7% and 12.5% compared to the three and nine months ended September 30, 2012, respectively. For the third quarter, excluding the benefit of foreign exchange rates compared to the prior year, growth in average revenue per listing would have been 14.2%. Foreign exchange rates did not materially impact the average revenue per listing growth rate year over year for the nine months ended September 30, 2013. For the three and nine months ended September 30, 2013, average revenue per listing for subscriptions only, excluding the impact of foreign exchange rates and lower revenue per listing for pay-for-performance listings, grew 15.3% and 13.8% as compared to the three and nine months ended September 30, 2012, respectively.

Adjusting for the impact of consolidated listings and new bundled listings on the number of paid listings, our average revenue per listing would have been $372 and $373 in the three and nine months ended September 30, 2013, respectively, or an increase of 10.4% and 8.7%. Excluding the impact of foreign exchange rates and lower revenue per listing for pay-for-performance listings, and adjusting for the impact of consolidated listings and new bundled listings, our average revenue per subscription listing only would have been $401 and $405 in three and nine months ended September 30, 2013, respectively, or an increase of 9.6% and 9.8% as compared to the three and nine months ended September 30, 2012, respectively.

We compute average revenue per listing as annualized listing revenue divided by the average of paid listings at the beginning and end of the period. Our paid listings include both subscription listings and pay-for-performance listings to professional property managers. Average revenue per listing may be impacted by changes in mix between listing types, with pay-for-performance listings generally having a dilutive effect on average revenue per listing. The price of listings varies by website and can include various additional fees associated with listing enhancements.

We have traditionally relied on increases in base pricing to increase revenue per listing but are now focused on tiered pricing alternatives as well as bundled listings for our property owners and managers which may or may not include increases in our base price. We began offering tiered pricing on HomeAway.com in the United States in 2011, which allows our property owners and managers to purchase a higher subscription level to increase the position of their listings in search results. In 2012, we migrated VRBO.com in the United States to the same tiered pricing structure. Also in 2012, we launched tiered pricing on HomeAway.com.uk in the United Kingdom, Abritel.fr in France and HomeAway.de in Germany. In mid-2013, tiered pricing was launched on HomeAway.es in Spain, HomeAway.it in Italy and AlugueTemporada.com.br in Brazil. As we continue to implement tiered pricing on other websites, or change the prices or structure of tiered pricing, we may see an impact to listing sales in the current period with the impact on revenue seen over the length of the subscription period.

Renewal Rate. Renewal of paid subscription 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 property 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, listing consolidation, changes in our processes associated with renewal activity, such as the introduction of automatic renewal, and general market conditions. Our renewal rate decreased from 74.5% at September 30, 2012 to 71.7% at September 30, 2013. This decline of 2.8% is primarily due to the impact of consolidated listings in the United States. After adjusting for consolidated listings, our renewal rate as of September 30, 2013 was estimated to be 74.2%.

We expect continued product improvements, demand generation for property owners and managers and the resulting increases in customer satisfaction to result in long-term improvements to renewal rates. Our renewal rate will continue to be impacted by our property owners' and managers' ability to consolidate their listings in the U.S. and their ability to purchase geographic bundled listings and by use of promotional activities to attract new subscribers at a lower price who many renew at lower rates.

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. Unique property subscription listings that are removed from property managers' accounts and subsequently replaced with new subscription listings within the same property manager's account listings are not considered . . .

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