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AWAY > SEC Filings for AWAY > Form 10-Q on 30-Apr-2014All Recent SEC Filings

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Form 10-Q for HOMEAWAY INC


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, 2013 and subsequent reports on Form 8-K, which discuss our business in greater detail.


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 the three months ended March 31, 2014, according to our internal metrics, our websites attracted approximately 245 million website visits, and as of March 31, 2014, our global marketplace included approximately 952,000 paid listings.

In the first quarter of 2014, consistent with our stated strategy, we focused our efforts on providing the largest selection of properties to travelers and the most qualified inquiries and bookings to property owners and managers. We added over 209,000 paid listings, net of non-renewals, to our network from March 31, 2013 to March 31, 2014, representing a 28.2% growth rate over the comparable prior year period.

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 82.6% and 84.2% for the three months ended March 31, 2014 and March 31, 2013, respectively. 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 subscription listing from $394 in the three months ended March 31, 2013 to $442 in the three months ended March 31, 2014. Excluding the impact of foreign exchange rates, average revenue per subscription listing increased by 10.7% in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. 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 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.

Enablement of e-commerce on our websites has been and will continue to be a focus for our Company. In the first quarter of 2014, we continued to see adoption of our online payments platform, called ReservationManager™, which is currently available on and in the United States, in the United Kingdom, in France and 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

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owners and managers can make value-added products available for purchase. We believe that adoption and increased use of our payments platform 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 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 March 31, 2014 include the following:

• Total revenue was $105.7 million compared to $79.5 million in the first quarter of 2013, or an increase of 33.0%;

• Percentage of total revenue from outside the United States was 42.5% in the first quarter, compared to 37.6% in the first quarter of 2013, and in the three months ended March 31, 2014 included 33.3% from Europe and 9.2% from Australia, Brazil and the Asia Pacific region;

• Listing revenue was $87.3 million compared to $66.9 million in the first quarter of 2013 and contributed 82.6% of total revenue compared to 84.2% in the first quarter of 2013;

• Net income attributable to HomeAway, Inc. was $4.4 million compared to $5.3 million in the first quarter of 2013, or a decrease of 16.1%;

• Cash from operating activities was $40.0 million compared to $37.5 million in the first quarter of 2013, or an increase of 6.6%, which includes a negative impact from an excess tax benefit as a result of stock-based compensation of $3.6 million compared to $1.4 million in the first quarter of 2013;

• Adjusted EBITDA was $26.2 million compared to $21.8 million in the first quarter of 2013, or an increase of 19.9%; as a percentage of revenue, Adjusted EBITDA was 24.8%, a decrease of approximately 260 basis points from 27.4% in the first quarter of 2013; excluding certain one-time expenses related to a reserve for operating taxes outside the United States, Adjusted EBITDA would have decreased by 90 basis points year-over-year;

• Free cash flow was $38.7 million compared to $33.3 million in the first quarter of 2013, or an increase of 16.2%; on a trailing twelve month basis, free cash flow increased 8.8% to $98.4 million from $90.4 million in the comparable trailing twelve month period for the prior year;

• Non-GAAP net income was $13.2 million, or $0.14 per diluted share, compared to non-GAAP net income of $12.2 million, or $0.14 per diluted share, in the first quarter of 2013; and

• Cash, cash equivalents and short-term investments as of March 31, 2014 were $770.5 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 "Discussion Regarding Adjusted EBITDA, Free Cash Flow and Pro Forma Net Income and Reconciliation to GAAP" in Item 2 of this Quarterly Report on Form 10-Q.


Since our inception, we have acquired 22 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 March 2014, when we acquired Glad to Have You, Inc. Glad to Have You is the creator of a mobile guest management solution that is designed for

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property managers and homeowners to improve the way they manage and communicate with guests during their vacation rental stay. This acquisition will enhance our travelers' experience of a vacation rental stay.

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.


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 both absolute dollars and as a percentage of revenue in 2014 for sales and marketing as we continue to build our sales team to address the professional property managers, increase our marketing activities to generate additional traveler demand to support both subscription and performance based listings and continue to build brand and category awareness. The level of increase related to demand driven marketing activities during 2014 will be determined based on the results. We expect to incur higher expenses in both 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.

                                                  Three Months ended March 31,
                                                   2014                  2013
   Paid listings, end of period                      951,843               742,299
   Average revenue per subscription listing   $          442        $          394
   Renewal rate, end of period                          73.1 %                73.6 %
   Visits to websites (in millions)                      245                   207

Following the migration of to our global technology platform in 2012, property owners and managers that have listings on both and 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 and 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 it has been over one year since the migration of to our global platform, a majority of customers who had listings on both and, have consolidated their listings. However, some customers still have listings on both websites. As a result, further consolidations will continue to impact the comparability of our results. Furthermore, we expect that there will be future platform migrations for certain of our websites, such as the future migrations of and to our global technology platform. When this occurs, property owners and managers who have purchased subscriptions on these websites in addition to other HomeAway websites will be given the opportunity to consolidate their listings through the purchase of a bundled listing. We expect these future migrations will also impact comparability of our operating

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metrics. We will disclose and discuss the trends of the business resulting from these consolidated listings when there is a significant impact to the operating metrics.

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 renew their subscriptions into a bundled listing, we will count these as one listing. 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.

Paid Listings. In the three months ended March 31, 2014 and 2013, 82.6% and 84.2%, 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 March 31, 2013 to March 31, 2014, paid listings increased by 28.2%, contributing to listing revenue growth of 30.5%. The growth in paid 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. From March 31, 2013 to March 31, 2014, 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 303.5% 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 69,000 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 approximately 31.8% from March 31, 2013 to March 31, 2014. 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. 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 888,000 as of March 31, 2014, as compared to approximately 661,000 as of March 31, 2013.

Average Revenue per Subscription Listing. We believe that trends in total 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. As the majority of our listing business is generated from subscriptions, we use trends in revenue per subscription 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 subscription listing may increase our earnings or may be leveraged for future investment. The average revenue per subscription 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 March 31, 2013 to March 31, 2014, average revenue per subscription listing grew 12.2% to $442. Excluding the impact of foreign exchange rates, average revenue per subscription listing would have been $436 in the first quarter of 2014, or an increase of 10.7% as compared to the first quarter of 2013.

Adjusting for the impact of consolidated listings and new bundled listings on the number of paid listings, our average revenue per subscription listing would have been $412 in the three months ended March 31, 2014, or an increase of 7.3%.

We compute average revenue per subscription listing as annualized subscription listing revenue divided by the average of paid subscription listings at the beginning and end of the period. Our paid listings included in the calculation only include subscription listings. The price of subscription 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 subscription 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 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 in the United States to the same tiered pricing structure. Also in 2012, we launched tiered pricing on in the United Kingdom, in France and in Germany. In 2013, tiered pricing was launched on in Spain, in Italy and 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.

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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 73.6% in the first quarter of 2013 to 73.1% in the first quarter of 2014. This decline of 0.5% is primarily due to the impact of consolidated listings in the United States. After adjusting for consolidated listings, our renewal rate as of March 31, 2014 is estimated to be 76.2%, or an increase of 1.3% as compared to the first quarter of 2013.

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,, and 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.

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 18.4% in the first quarter of 2014 as compared to the first quarter of 2013. 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.

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Key Components of Our Results of Operations


We derive most of our revenue from paid subscription listings. Our customers generally pay for their subscription listings at the beginning of the listing term, and revenue is recognized monthly over the term of the listing, which is generally one year. We offer pay-for-performance listings to property owners and . . .

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