Last week, as part of its Q3 2016 earnings call, Expedia CEO Dara Khosrowshahi and CFO Mark Okerstrom provided an update on HomeAway’s recent activity.

“Our listing count continues to increase at close to 20%,” said CEO Dara Khosrowshahi. “So the engagement of the supplier communities, so to speak, within the HomeAway marketplace continues to be very healthy. So we’re pretty happy to see that.”

Mark Okerstrom added, “In terms of owners and managers adopting online bookings and online payments, listen, we’re really happy with what we’re seeing so far. We’ve got now nicely north of 1 million properties who are signed up and online bookable.”

Here are 10 key takeaways related to HomeAway’s performance.

• Q3 Revenue Growth
• Increase in Number of Listings
• New HomeAway CEO: John Kim
• The Impact of the Traveler Fee
• Subscription Revenue to Drop as Transactional Revenue Increases
• Integrating HomeAway Inventory onto the Expedia Platform
• Online Booking
• On the Competition (and it is not TripAdvisor)
• Drop in Google Free and Paid Search
• Looking to the Future

 

1. Q3 HomeAway Revenue Growth

Mark D. Okerstrom: On a standalone basis, HomeAway revenue grew 61% and adjusted EBITDA grew 85% in Q3. We were quite pleased with these results and as such continue ramping up investments in selling and marketing and in product and technology as we move forward into 2017. Looking forward, these investments combined with the phasing out of tiered subscription fees and lapping the rollout of the consumer fee next year will result in slower adjusted EBITDA growth for HomeAway beginning in Q4 compared to what you saw here in Q3. Progress to date combined with the investments we are making give us continued confidence in our ability to deliver our targeted $350 million of adjusted EBITDA at HomeAway in 2018.

 

2. Increase in Number of Listings

Dara Khosrowshahi: Our listing count continues to increase at close to 20%. So the engagement of the supplier communities, so to speak, within the HomeAway marketplace continues to be very healthy. So we’re pretty happy to see that.

 

3. New HomeAway President: John Kim

Dara Khosrowshahi: A special thanks to co-founder, Brian Sharples, who recently stepped away from his role as CEO, while remaining chairman of HomeAway to continue to help us navigate through a complex transformation. Brian and team created a terrific company that we plan to build on with long-time Expedia executive, John Kim, who has been at HomeAway since early 2016, now stepping into the role of company president. We’re focused on hitting our long-term growth goals, while aggressively ramping up our investment in product, technology, marketing and customer service to build a very best marketplace for homeowners, property managers and travelers alike. And though we’re pleased with the progress, we’re still early in HomeAway’s transition into scale global leader in the alternative accommodation market.

 

4. The Impact of the Traveler Fee

Dara Khosrowshahi: As far as HomeAway goes, the transactional revenue has been very strong in Q3 as we’ve rolled it out on a global basis and as the teams now are optimizing much more aggressively on the conversion front. And so while the transactional fee initially caused a dip in conversion, the teams there are really building out their e-commerce capabilities and muscles, and conversion is a very nice positive factor for us.

 

5. Subscription Revenue to Drop as Transactional Revenue Increases

Dara Khosrowshahi: I think that as you move into Q4 and especially next year, you’re going to see some of the subscription premium revenue that we have stopped selling start coming down. So the transactional revenue essentially has to scale up faster in order to make up for some of the subscription revenue growth coming down. It’s something that we expected.

…Generally the subscription renewals are spread throughout the year. As a reminder, we basically eliminated the tiers last quarter, the beginning of last quarter; grandfathered in a number of the premium players. And those subscriptions that were at premium will essentially start rolling off here on a go-forward basis. And once they roll off, they will either reset at the close to $500 per year subscription or the lower price we’ve set for online bookable properties. And so you’ll essentially see the subscription revenue start to become a more negative headwind as we move through Q4, and then Q1 and Q2, and then you’ll really start to annualize it in Q3 of next year.

Mark D. Okerstrom: I absolutely meant to say that top line growth rates will slow down from this point forward. And really the driver here, particularly in Q4, is that the subscription revenue will start to be a drag as essentially the monetization model shifts over to either pay per booking or online booking fees and also as we start to roll off some of the premium tiered subscription revenue. And then there will be additional factors that will kick in towards the end of Q1 and then again at the end of Q2 of next year as we lap over the booking fee implementation that we had this year.

 

6. Integrating HomeAway Inventory onto the Expedia Platform

Dara Khosrowshahi: The engineering teams are hard at work doing it. As a reminder, we have tested with HomeAway previously. There’s a vacation rental tab on Expedia, for example, now, but that wasn’t a full integration. That was essentially a link off into HomeAway search results. And what we are talking about is a much more fundamental integrated experience where someone who comes to an Expedia or Hotels.com and is searching for hotels, depending on length of stay, depending on weekday, weekend, et cetera, they are going to get a complementary mix of hotel search results and/or vacation rental results based on a number of different presentations and logic. We expect to be piloting that experience sometime in Q4, and based on the results of those pilots, I think we will be making it a bigger part of our experience late this year and certainly going to next year.

And I think it’s a great benefit both for Expedia and Hotels.com consumers because they’re going to get more breadth and depth of inventory in market, especially in some of the markets where HomeAway is very strong. And then I think for HomeAway, our partner is there, the homeowners, the property managers, they are going to get a significant boost of demand from these terrific travel brands, especially in urban destinations. So we think it’s a win for the consumer, and it’s a win for our marketplace, and we’re pretty excited about the potential here.

 

7. Online Booking and Online Payments  

Mark D. Okerstrom: We’re not going to disclose the online gross bookings number at this point. It is something we were thinking about disclosing in the future. We’re not going to disclose it at this point. I will tell you that booked transactional revenue for the quarter was up north of 250% year over year. Again, it’s pretty easy comps. So that’s the number. And on a sales basis as opposed to recognized revenue, subscription revenues started to decline double digits. So I would expect that to continue and accelerate a bit as we move here into 2017.

Mark D. Okerstrom: To be honest, we’re not too focused on looking at what the total platform derived bookings are at this point. What we’re very focused on is taking the booking number that is actually happening on platform and growing it as fast as we possibly can. To do that, of course we’re getting properties online and we’re now well over a million properties that are online bookable. Then we’re very much focused next on making sure that the online bookable listings are actually driving transactions on the platform as opposed to off the platform. And so far, results have been very good. Conversion rates are up pretty nicely year over year. Progress is pretty good.

Mark D. Okerstrom: In terms of owners and managers adopting online bookings and online payments, listen, we’re really happy with what we’re seeing so far. We’ve got now nicely north of 1 million properties who are signed up and online bookable. A lot of them are taking advantage of the online payment platform that we’ve got. We’re actually looking at ways that we can possibly leverage some of the payments capabilities that we have here at the mothership of Expedia, Inc., which could potentially add some more different payment options than they’re offering right now. So, so far we’re happy with the traction. Again, it’s still early and there’s lots of work to do, but so far so good.

 

8. On the Competition (and it is not TripAdvisor)

Dara Khosrowshahi: And I think I just want to make sure that our investors understand the perspective that there are two big players in this space, and arguably a third coming with Booking.com and their activity. But the big player, Airbnb, has a private market cap of over $30 billion. And so we see this HomeAway opportunity as a very, very large opportunity, and we are going to invest behind it as that kind of an opportunity. This is not an incremental project for us. This is a big project for us.

 

9. Performance in Google Free and Paid Search

Dara Khosrowshahi: Traffic continues to build, although Google free search continues to be weak. But on balance, we like what we’re seeing, and you see it in the results.

Also note that as we integrate the HomeAway inventory into Expedia and Hotels.com, Expedia and Hotels.com and Orbitz and Travelocity will also be able to bid more effectively for the vacation rental keywords as well. Who will be the winner, will it be more efficient for HomeAway to bid on those keywords or Hotels.com, that remains to be seen, and we will be testing and learning our way there. But I think it will be a bigger factor next year versus any time in the next couple of quarters.

 

10. Looking to the Future

Dara Khosrowshahi: And then of course some of the investments that we’re making in marketing and technology, et cetera, are also going to show. So I think the team on HomeAway likes where we are, but we know that we’ve got a big lift ahead of us and the slope is going to get a little tougher, but I think the teams are up for it.

Mark D. Okerstrom: 2017 I will just tell you is not a year where we will be as focused on adjusted EBITDA growth as we are in just building the capability, and that’s for HomeAway specifically. And we expect that once we build up particularly the product and tech team to where the size we want it to be, we’ll be able to leverage that nicely as revenue growth and ultimately marketing contribution growth continues into 2018. And again, we feel very comfortable with our $350 million adjusted EBITDA number for 2018, but the path there will be one of investment in 2017 and realization in 2018 from a bottom line perspective.