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AWAY > SEC Filings for AWAY > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for HOMEAWAY INC

Form 10-K for HOMEAWAY INC


26-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this filing. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. These statements involve risks and uncertainties and our actual results could differ materially from those discussed below. See the "Forward Looking Statements" disclosure above for a discussion of the uncertainties, risks and assumptions associated with these statements. See also the "Risk Factors" disclosure above for additional discussion of such risks.

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 190 countries around the world. Our portfolio includes leading vacation rental websites in the United States, the United Kingdom, Germany, France, Spain, Brazil, Australia, Singapore and New Zealand. During 2013, according to our internal metrics, our websites attracted approximately 750 million website visits, and as of December 31, 2013, our global marketplace included approximately 890,000 paid listings.

In 2013, consistent with our stated strategy, we focused our efforts on providing the largest selection of properties to travelers and the most qualified inquiries to property owners and managers. Including acquisitions, we added 178,244 paid listings, net of non-renewals, to our network during 2013, representing a 25.0% growth rate over the prior year. Consistent with providing the largest selection of properties to travelers, we also expanded our network during 2013 as a result of our acquisition of travelmob Pte. Ltd. ("travelmob") in Singapore, Bookabach Limited ("Bookabach") in New Zealand and Stayz Pty Limited ("Stayz") in Australia. Travelmob, Bookabach and Stayz added approximately 62,000 paid listings to our network, further solidifying our market presence in the Asia Pacific region. In addition, in the fourth quarter of 2013, we launched a performance-based pay-per-booking commission product in the U.S. that 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 2013, this pay-per-booking product was available on HomeAway.com in the U.S. and to larger property managers on select HomeAway websites in Europe and contributed to our acceleration of paid listings growth during 2013. 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. Our listing business, which is made up largely of subscription listings, comprises the majority of our revenues at 85.0% for each of the years ended December 31, 2013 and December 31, 2012. We continued to improve monetization of our paid listing base from pricing and product changes through continued adoption of our tiered pricing structure, where available, and from an 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 $353 in 2012 to $368 in 2013. Average revenue per subscription listing, excluding the impact of foreign exchange rates and lower revenue per listing for pay-for-performance listings, also accelerated during 2013 and increased by 12.4% in 2013 compared to 2012 and by 6.8% in 2012 compared to 2011. Tiered pricing allows property owners and managers with paid subscriptions 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 average subscription revenue per subscription 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 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 and efficient 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.

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, which are even more important with the increase in performance-based listings, 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 more travelers and bookings 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 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 2013 include the following:

• Total revenue was $346.5 million compared to $280.4 million in 2012, or an increase of 23.6%, excluding the impact of foreign exchange rates, total revenue increased by 23.0%;

• Percentage of total revenue from outside the United States was 39.0% in 2013, compared to 38.3% in 2012, and in 2013 included 36.5% from Europe, 2.4% from Brazil and Australia and 0.1% from the Asia Pacific region;

• Listing revenue was $294.7 million compared to $238.4 million in 2012, or an increase of 23.6%, and contributed 85.0% of total revenue in both 2013 and 2012;

• Net income attributable to HomeAway, Inc. was $17.7 million, or $0.20 per diluted share, compared to $15.0 million, or $0.18 per diluted share, in 2012, or an increase of 18.2%;

• Cash from operating activities was $104.4 million compared to $95.4 million in 2012, or an increase of 9.4%, which includes a negative impact from an excess tax benefit as a result of stock-based compensation of $8.2 million in 2013, compared to $7.1 million in 2012;


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• Adjusted EBITDA was $96.7 million compared to $80.3 million in 2012, or an increase of 20.4%; as a percentage of revenue, Adjusted EBITDA was 27.9%; excluding one-time expenses related to the acquisition of Stayz in the fourth quarter of 2013, Adjusted EBITDA would have increased 25.1% year-over-year;

• Free cash flow was $93.0 million compared to $85.3 million in 2012, or an increase of 9.0%;

• Non-GAAP net income was $49.8 million, or $0.56 per diluted share, compared to non-GAAP net income of $40.6 million, or $0.48 per diluted share in 2012; and

• Cash, cash equivalents and short-term investments as of December 31, 2013 were $391.4 million.

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 "Selected Financial Data" in Item 6 of this Annual Report on Form 10-K.

Acquisitions

Since our inception, we have acquired 21 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 acquisitions were travelmob Pte. Ltd. in Singapore, Bookabach Limited in New Zealand and Stayz Pty Limited in Australia during August 2013, November 2013 and December 2013, respectively. These acquisitions further provide the Company the opportunity to address the growing market needs in the Asia Pacific region 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 including 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.

Expenses

Our expenses are primarily composed of salaries and related expenses, marketing and professional fees. Our expenses from 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 but remain consistent as a percentage of revenue in 2014. We expect to incur higher expenses for product development as we record a full year impact of personnel hired in 2013 and as we hire additional personnel to develop new features and products and expect product development expenses to increase as a percentage of revenue in 2014. We expect to incur higher expenses in absolute dollars and as a


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percentage of revenue in 2014 for sales and marketing as we continue to build our sales team to address the professional property managers and continue to build brand and category awareness. We expect to incur higher expenses in absolute dollars and as a percentage of revenue in 2014 for general and administrative expenses to support the growth of our business internationally and the requirements of being a publicly traded company. We plan for additional capital investments in 2014 to support the growth of our business and expect our investment in capital expenditures to increase as a percentage of revenue as compared to 2013, primarily due to the expansion of our office facilities in Austin, Texas. We believe that the reorganization of our global corporate structure will lower our tax expense over the longer term and we are continuously seeking to optimize in line with our global expansion plans.

Key Business Metrics

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



                                                  Year Ended December 31,
                                            2013           2012           2011
       Paid listings, end of period         889,875        711,631        640,925
       Average revenue per listing        $     368      $     353      $     341
       Renewal rate, end of period             72.5 %         73.8 %         76.8 %
       Visits to websites (in millions)         752            600            496

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, including the migration of Homelidays.com and Stayz.com.au to our global technology platform, which we expect will lower our paid subscription listing growth. The lower paid listing counts from consolidations and bundles will in turn lower our reported renewal rate. Additionally, our bundled listing products generally have a higher overall 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:

                                                Year Ended December 31,
                                          2013           2012           2011
         Paid listings, end of period     938,385        724,357        640,925
         Average revenue per listing    $     354      $     349      $     341
         Renewal rate, end of period         75.3 %         74.4 %         76.8 %

Paid Listings. In 2013, 2012 and 2011, 85.0%, 85.0% and 86.6%, 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 2012 to 2013 and from 2011 to 2012, ending paid listings increased by 25.0% and 11.0%, respectively, contributing to listing revenue growth of 23.6% and 19.5%, respectively. The growth in paid


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listings is due to our marketing and selling new and additional listings to property owners and managers, the introduction of pay-per-booking listings, listings acquired in acquisitions and organic growth from property owners and managers who become aware of our websites and choose to market their properties. For the year, we reduced the number of pay-per-lead listings and added a significant number of pay-per-booking listings, resulting in a net impact of 225.4% ending listing growth from performance-based listings. A portion of the growth in listings came from 2013 acquisitions of Travelmob, Bookabach and Stayz, which added approximately 62,000 paid listings to our network, most of which are performance-based listings. Growth in new listings is partially offset by loss of listings through attrition and through consolidations.

Adjusting for the impact of consolidated listings and new bundled listings, we estimate that our paid listing growth would have been 29.5% in 2013 compared to 2012 and 13.0% in 2012 compared to 2011. We do not expect these changes to have any negative impact on the number of unique properties on our websites.

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 property owners and managers 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.

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. 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 vacation rental listings, which we estimate was approximately 824,000 as of December 31, 2013, as compared to approximately 630,000 as of December 31, 2012.

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, the impact of consolidated and bundled listing products, uptake of listing enhancements, changes in the pricing of enhancements, seasonality, changes in brand and listing type mix, and the impact of foreign exchange rates on our listing revenue outside of the United States.

From 2012 to 2013 and from 2011 to 2012, average revenue per listing increased by 4.2% and 3.5%, respectively, which contributed to our overall listing revenue growth. Average revenue per listing for paid subscriptions only, excluding the impact of foreign exchange rates and lower revenue per listing for pay-for-performance listings, grew 12.4% to $425 in 2013 as compared to $378 in 2012.

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 $354 in 2013 and $349 in 2012, or an increase of 1.4% in 2013 compared to 2012 and 2.3% in 2012 compared to 2011. Making the same adjustments, average revenue per listing for paid subscriptions only, excluding the impact of foreign exchange rates and lower revenue per listing for pay-for-performance listings, grew 8.8% to $407 in 2013 as compared to $374 in 2012.


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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. 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. Given such impacts together with the recent and significant growth in pay-for-performance listings, we plan to stop reporting average revenue per all types of listings and instead report on average subscription revenue per subscription listing.

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 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. Our overall renewal rate decreased from 73.8% in 2012 to 72.5% in 2013 following a decrease in our renewal rates from 76.8% in 2011 to 73.8% in 2012. This decline of 1.3% in 2013 is primarily due to the impact of consolidated listings in the United States. After adjusting for consolidated listings, our renewal rate as of December 31, 2013 is estimated to be 75.3%, or consistent with the same adjusted renewal rate in 2012.

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 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. Additionally, our paid subscription listing renewal rate could be impacted by property owners and managers who elect to list their properties on our recently launched pay-per-booking commission-based model, rather than paying a subscription fee.

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 as renewals in our renewal rate calculation. We include most brands in our calculation of renewal rate. However, subscriptions to BedandBreakfast.com and Toprural.com 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 these brands from the renewal rate calculation materially impacts the result. Property owners' and managers' 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. We exclude pay-for-performance listings from our renewal rate analysis since they are not sold on a subscription basis.


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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 and bookings from travelers. Growth in visits to websites will be driven by our marketing strategies and has a direct 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 and Google Analytics. We also review third-party published reports to measure our results against comparable companies; however, these reports are not consistent with our internal measurements.

Growth in visits was 25.6% in 2013 as compared to 2012 and was 20.9% in 2012 as compared to 2011. During the fourth quarter of 2012, we began using a different tool for the measurement of visits for certain of our websites. On a comparable basis, we estimate that visits would have increased by 19.1% in 2013 compared to 2012 and 20.0% in 2012 compared to 2011, if we had been using the same tools during both reporting periods.

We believe that certain quality initiatives aimed at reducing the number of visits required to secure a booking may have an impact on growth in visits. These initiatives include online booking, quotable rates, and continuous improvements to our search functionality to help travelers locate appropriate properties more quickly.

Key Components of Our Results of Operations

Revenue

We derive most of our revenue from paid subscription listings. Our customers generally pay for their subscription listings at the beginning of the listing . . .

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