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KYAK > SEC Filings for KYAK > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for KAYAK SOFTWARE CORP

Form 10-Q for KAYAK SOFTWARE CORP


14-Nov-2012

Quarterly Report


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

Overview

We are a technology-driven company committed to improving online travel. Cofounders of Expedia, Travelocity and Orbitz started KAYAK in 2004 to take a better approach to finding travel online. Our websites and mobile applications enable people to easily research and compare accurate and relevant information from hundreds of other travel websites in one comprehensive, fast and intuitive display. We also provide multiple filtering and sorting options, travel management tools and services such as flight status updates, pricing alerts and itinerary management. Once travelers find their desired flight, hotel or other travel products, KAYAK sends them to their preferred travel supplier or online travel agency website to complete their purchase, and in many cases, travelers may now complete bookings directly through our websites and mobile applications.

KAYAK's services are free for travelers. We offer travel suppliers and online travel agencies, or OTAs, an efficient channel to sell their products and services to a highly targeted audience focused on purchasing travel. We earn revenues by sending referrals to travel suppliers and OTAs and from a variety of advertising placements on our websites and mobile applications.

During the three months ended September 30, 2012, we experienced the following growth:

For the three months ended September 30, 2012, we generated $78.6 million of revenues, representing growth of 28.5% over the three months ended September 30, 2011.

For the three months ended September 30, 2012, we generated income from operations of $14.9 million representing growth of 17.9% over the three months ended September 30, 2011.

For the three months ended September 30, 2012, we had Adjusted EBITDA of $21.1 million representing growth of 19.2% over the three months ended September 30, 2011. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or Adjusted EBITDA, is a non-generally accepted accounting principle metric used by management to measure our operating performance. See "-Adjusted EBITDA Reconciliation" below for an additional description of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to income from operations.

For the three months ended September 30, 2012, we processed 302 million user queries for travel information, representing growth of 31.0% over the three months ended September 30, 2011.

KAYAK mobile applications have been downloaded nearly 20 million times since their introduction in March 2009. For the three months ended September 30, 2012, we had approximately 3.1 million downloads, representing growth of 94.8% over the three months ended September 30, 2011.

As of September 30, 2012, we had 193 employees, and we had local websites in 18 countries, including U.S., Germany, Spain, the United Kingdom, Austria, France and Italy.

Adjusted EBITDA Reconciliation

Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, is a metric used by management to measure operating performance. Adjusted EBITDA represents EBITDA excluding the impact of stock-based compensation expense and other income (expense), net. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting other income (expense), net), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation of fixed assets (affecting relative depreciation expense), the impact of acquisitions and the impact of stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of operating performance on a more consistent basis, we also use Adjusted EBITDA in measuring our performance relative to that of our competitors. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our profitability or liquidity. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;


Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

            although depreciation is a non-cash charge, the assets being
             depreciated will often have to be replaced in the future, and
             Adjusted EBITDA does not reflect any cash requirements for such
             replacements; and



            other companies in our industry may calculate Adjusted EBITDA
             differently than we do, limiting its usefulness as a comparative
             measure.

The following table reconciles income from operations to Adjusted EBITDA for the periods presented and is unaudited:

                   KAYAK Software Corporation and Subsidiaries

                          Adjusted EBITDA Reconciliation
                                  (In thousands)

                                   Three months ended         Nine months ended
                                     September 30,              September 30,
                                   2012          2011         2012         2011
Income from operations          $  14,927     $ 12,657     $ 38,787     $  6,371
Other income (expense), net          (831 )       (449 )     (1,640 )        468
Depreciation and amortization       2,078        1,935        6,178        6,337
Impairment of intangible assets         -            -            -       14,980
EBITDA                             16,174       14,143       43,325       28,156
Stock-based compensation            4,112        3,121        9,952        9,312
Other (income) expense, net           831          449        1,640         (468 )
Adjusted EBITDA                 $  21,117     $ 17,713     $ 54,917     $ 37,000

Non-GAAP Net Income and Diluted Earnings Per Share

We use the non-GAAP measures of non-GAAP net income and diluted earnings per share to provide an additional view of operational performance by excluding non-cash expenses that are not directly related to performance in any particular period. We believe that these non-GAAP measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude certain expenses. These certain expenses are excluded because the decisions which gave rise to these expenses are not made to increase revenue in a particular period, but are made for our long-term benefit over multiple periods and we are not able to change or affect these items in any particular period.

We define non-GAAP net income as our total net income excluding the components listed below, which we believe are not reflective of our ongoing operational expenses. In each case, for the reasons set forth below, we believe that excluding the component provides useful information to investors and others in understanding and evaluating the impact of certain non-cash items to our operating results and future prospects in the same manner as us, in comparing financial results across accounting periods and to those of peer companies and to better understand the impact of these non-cash items on our gross margin and operating performance. Additionally, as significant, unusual or discrete events occur, the results may be excluded in the period in which the events occur.


            Stock-based compensation. We exclude stock-based compensation
             because it is non-cash in nature and because we believe that the
             non-GAAP financial measures excluding this item provide meaningful
             supplemental information regarding operational performance and
             liquidity. Due to varying available valuation methodologies,
             subjective assumptions and the variety of award types we can use
             under Financial Accounting Standards Board (FASB) Accounting
             Standards Codification (ASC) Topic 718, our management believes that
             providing non-GAAP financial measure that excludes stock-based
             compensation allows investors to make meaningful comparisons between
             our recurring core business operating results and those of other
             companies. We further believe this measure is useful to investors in
             that it allows for greater transparency to certain line items in our
             financial statements and facilitates comparisons to competitors'
             operating results.



            Amortization and impairment of acquired intangible assets and
             amortization and depreciation of tangible assets. We exclude
             amortization and impairment of acquired intangible assets because
             they are non-cash in nature and because we believe that the non-GAAP
             financial measures excluding these items provide meaningful
             supplemental information regarding operational performance and
             liquidity. In addition, excluding these items from various non-GAAP
             measures facilitates internal comparisons to historical operating
             results and comparisons to competitors' operating results.



            Income tax effect of non-GAAP adjustments. We adjust non-GAAP net
             income by including the income tax effects of excluding stock-based
             compensation and the amortization and impairment of acquired
             intangible assets. We believe that the inclusion of the income tax
             effect provides additional transparency to the overall or "after
             tax" effects of excluding these items from non-GAAP net income.



            Dilutive shares under the treasury stock method. For the nine months
             ended September 30, 2011, we excluded certain potential common
             shares from our GAAP diluted shares because their effect would have
             been anti-dilutive. On a non-GAAP basis, these shares would have
             been dilutive. As a result, we have included the impact of these
             shares in the calculation of our non-GAAP diluted net income per
             share under the treasury stock method.




                                  KAYAK Software Corporation and Subsidiaries

                              Non-GAAP Net Income and Diluted Earnings Per Share
   (Unaudited, in thousands except Basic and Diluted Weighted Average Common Shares and Earnings Per Share)

                                                  Three months ended                   Nine months ended
                                                    September 30,                        September 30,
                                               2012               2011               2012             2011
GAAP net income                           $      7,954       $      6,968       $     19,387     $      3,830
Amortization of intangibles                      1,388              1,472              4,203            5,006
Impairment of intangibles                            -                  -                  -           14,980
Stock-based compensation                         4,112              3,121              9,952            9,312
Tax impact                                      (2,167 )           (1,951 )           (5,441 )        (12,776 )
Non-GAAP net income                       $     11,287       $      9,610       $     28,101     $     20,352

Diluted weighted average common shares      42,746,507         37,669,803         40,289,192       37,229,282

Non-GAAP Diluted EPS                      $       0.26       $       0.26       $       0.70     $       0.55

Our Revenue Platforms

KAYAK's services are free for travelers. We earn revenues by sending referrals to travel suppliers and OTAs after a traveler selects a specific itinerary (distribution revenues), and through advertising placements on our websites and mobile applications (advertising revenues).


Distribution Revenues

We earn distribution revenues by sending qualified leads to travel suppliers and OTAs and by facilitating bookings directly through our websites and mobile applications. After a traveler has entered a query on our website or mobile applications, reviewed the results, and decided upon a specific itinerary, we send the user directly into the travel supplier's or OTA's purchase process to complete the transaction. In many cases, users may now complete bookings with the travel supplier or OTA without leaving our websites and mobile applications. Travel suppliers and OTAs have the flexibility to pay us either when these qualified leads click on a query result at a set cost per click, or CPC basis, or when they purchase a travel product through us or on the travel supplier or OTA website which we refer to as cost per acquisition, or CPA, basis. We separately negotiate and enter into our distribution agreements, and these agreements set forth the payment terms for the applicable travel supplier or OTA.

Advertising Revenues

Advertising revenues primarily come from payments for compare units, text-based sponsored links and display advertisements. A "compare unit" is an advertising placement that, if selected by a KAYAK user, launches the advertiser's website and initiates a query based on the same travel parameters provided on the KAYAK website. The major types of advertisers on our websites consist of OTAs, third party sponsored link providers, hotels, airlines and vacation package providers. Generally, our advertisers pay us on a CPC basis, which means advertisers pay us only when someone clicks on one of their advertisements, or on a cost per thousand impression basis, or CPM. Paying on a CPM basis means that advertisers pay us based on the number of times their advertisements appear on our websites or mobile applications.

We have a proprietary advertising platform called the KAYAK Network, or KN. KN allows advertisers to target the placement and message of their advertisements to the search parameters entered by our traveler, such as the traveler's origin, destination and desired travel dates. This technology allows advertisers to target their advertisements better, create more effective messages and to transfer people to their websites more efficiently. Our platform allows advertisers to limit placements to instances when the advertiser has an offer that is relevant to a traveler's query. For example, an airline can ensure it only advertises when a traveler searches for a route offered by such airline, and a hotelier can ensure it only advertises to travelers who have searched for dates when the hotelier has low occupancy. We also enable advertisers to use a traveler's search parameters to dynamically create targeted messages, and after the traveler clicks on an advertisement, we can pass the same search information through to the advertiser, thus increasing the likelihood of a purchase on their website.

Technology and Infrastructure

KAYAK is a technology-driven company. Our technology platform powers our websites and mobile applications by rapidly searching through the complex and fragmented range of travel industry data and presenting comprehensive and relevant travel query results to the user in a clear and intuitive manner.

Search Capabilities

Our software and systems are designed to handle significant growth in users and queries, without requiring significant re-engineering or major capital expenditures. In the third quarter of 2012, we received and processed 302 million queries for travel information.

When a travel query is entered on one of our websites or mobile applications, our technology platform analyzes the travel parameters, determines which websites and other travel databases have relevant travel information and then queries those multiple sources in parallel. Many of those sources operate with differing protocols, and therefore return results in slightly different ways and in differing time frames. Our platform gathers, prioritizes and standardizes this travel data. Our proprietary software then detects and eliminates inaccurate prices or results in this data, and our ranking software then determines which results are likely to be the most relevant and useful. Our technology platform completes these processes and returns a comprehensive and relevant set of results within moments of receiving the travel query.


Website Design and Hosting

Reliability, speed and integrity are important to us. We have designed our websites and mobile applications using a combination of our own proprietary software and a variety of open source or other public domain technologies. Where appropriate, we have chosen to use public domain technologies to develop and maintain our websites and mobile applications because we believe they are widely used and well proven by the engineering community and end-users, and, therefore, offer us a reliable and efficient development environment and infrastructure. Such technologies also enable us to provide our users with a stable web or mobile experience and are often free. Our limited and selective use of commercially available software means that as the number of people that visit our websites and download our mobile applications continues to grow, we do not incur significant additional software costs or software licensing fees.

Our websites are hosted on hardware and software located at third-party facilities in Medford and Somerville, Massachusetts and Freiburg, Germany. We also use content delivery networks and third-party domain name system, or DNS, services to optimize routing and increase the speed of our website pages. We are committed to ensuring that our websites are highly available. Our use of multiple secured hosting facilities provides us with power redundancy and expandable and redundant bandwidth, and we believe these facilities are well suited to fit our current and planned business needs.

Mobile Applications and Platforms

We offer mobile applications for the iPhone, iPad, Android, Windows Phone 7 and 8 and other platforms. These applications combine the speed and comprehensiveness found in our website experience with the convenience and portability offered by today's smartphones and tablets. To enhance the mobile experience, we have also implemented mobile-specific functionality in these applications, such as trip itinerary management, visual flight status, airport guides and location-based features.

As some smartphone users prefer to use the web browser on their phones rather than download a separate application, we also offer a mobile-optimized website. These users are automatically redirected to m.KAYAK.com, where we provide an "application-like" experience, including a streamlined interface, touch screen functionality and assisted input based on the person's location.

Focus on Innovation

We strive to continually improve the user-experience on our websites and mobile applications. For example, we routinely work to improve our software and algorithms to further reduce the time required to return query results. We review the feature sets and design of our websites and mobile applications on a regular basis to identify areas for improvement. To aid in our review, we conduct regular formal usability testing, focus groups and comparison testing of new features. We release new code to our websites on a nearly weekly basis. Some examples of our past innovations include a user interface capable of updating page elements without reloading the entire page and "sliding bars" and other tools to filter query results based on relevant criteria, such as specific departure and arrival times for flights, and enabling people to purchase travel without leaving our website.

Our Brands - KAYAK, swoodoo, and checkfelix.com

We operate our websites and mobile applications under three brands: KAYAK, swoodoo and checkfelix.com. Each of these brands provides the same core set of free services including flight, hotel and other travel search, flight status updates, pricing alerts and itinerary management.

Our registered trademarks include: KAYAK, KAYAK.com, KAYAK Network, Search One and Done, SideStep, checkfelix.com and swoodoo. All of these trademarks, other than swoodoo and checkfelix.com, are registered in the U.S. and many of them are also registered in other jurisdictions.

Marketing

We believe that continued investment in marketing is important to attracting new users to our websites and mobile services. We balance our marketing investments between brand marketing, such as television and online display campaigns, designed to grow brand awareness and consideration and online marketing, such as search engine marketing, designed to directly attract people who are actively engaged in travel planning.


Brand Marketing

To grow brand awareness and consideration, we advertise in broad reach media including television, outdoor signage, and online display media. During the third quarter of 2012, we spent $18.9 million on KAYAK, swoodoo and checkfelix.com brand marketing compared to $14.6 million during the third quarter of 2011. We measure the return on investment of our brand marketing through brand tracking studies and self-directed query growth. We view the costs of our brand marketing as relatively fixed in each market once the brand reaches scale, and we believe that these costs will decrease as a percentage of our total revenues over time.

Online Marketing

We also market our services and directly acquire traffic to our websites by purchasing travel-related keywords from general search engines and through other online marketing channels. The purchase of travel-related keywords consists of anticipating what words and terms consumers will use to search for travel on general search engines and then bidding on those words and terms in the applicable search engine's auction system. As a result, we bid against other advertisers for preferred placement on the applicable general search engine's results page. We spent $19.8 million on online marketing during the third quarter of 2012 compared to $12.4 million during the third quarter of 2011.


Highlights and Trends

Revenue Growth

Our revenue for the three months ended September 30, 2012 was $78.6 million, a 28.5% increase over the three months ended September 30, 2011. Revenue for the nine months ended September 30, 2012 was $228.9 million, a 34.2% increase over the nine months ended September 30, 2011. These increases in revenue were primarily due to increased travel queries on our websites and mobile applications, which increased 31.0% and 35.3% for the three and nine months ended September 30, 2012, respectively. We believe that traffic and queries on our websites and mobile applications will continue to increase as more people learn about our websites and our brand.

Brand Marketing

We began investing in brand advertising including television, outdoor signage, and online display media, in late 2009. For the nine months ended September 30, 2012 and September 30, 2011, we spent $59.0 million and $45.6 million on these activities, respectively. We believe that these investments contributed significantly to our revenue growth. Increasing brand awareness and consideration is an important part of our growth strategy and we expect to continue to invest at this level or above in brand marketing for the foreseeable future.

International Expansion

Our revenues from international operations accounted for approximately 20.3% and 17.4% of our total revenue for the nine months ended September 30, 2012 and September 30, 2011, respectively. We acquired checkfelix.com in April 2011. As a result of this acquisition, and organic growth of the KAYAK and swoodoo brand, our international revenues grew to approximately $46.5 million during the first nine months of 2012 from approximately $29.7 million during the first nine months of 2011. We believe that this strategic acquisition, along with the establishment of our European headquarters in Zurich, Switzerland, have strengthened our presence and team in Europe, and we plan to continue to invest in our international team and brands. We expect our revenues from international operations to increase at a rate faster than revenues from our U.S. operations.

Mobile Products

We offer several mobile applications that allow people to use our services from smartphones such as the iPhone, Windows Phone 7 and 8 and phones running on the Android operating system and tablet devices such as the iPad. These applications extend the availability of our services beyond traditional computers and allow users greater access to KAYAK's services. Queries conducted on our mobile applications accounted for 16.7% and 11.6% of our total queries for the nine months ended September 30, 2012 and 2011, respectively; however, we estimate that revenues from mobile applications were 3.4% and 1.7%, of total revenues during the nine months ended September 30, 2012 and 2011, respectively. While revenues per thousand queries on mobile devices increased from $37 to $52 during this time frame, mobile query monetization significantly lags that of the websites. We believe mobile applications will continue to gain popularity, and we expect to continue to commit resources to improve the features, functionality and commercialization of our mobile applications. We also believe that over time mobile applications will begin to contribute meaningful revenue to our business.

Cash and Debt

We had cash and cash equivalents and marketable securities of $178.4 million and $46.3 million as of September 30, 2012 and December 31, 2011, respectively, and no outstanding long- or short-term debt. Given the recent financial turmoil and low interest rates, we hold most of our funds as cash and cash equivalents or marketable securities, and the rest is invested in highly rated money market funds and commercial paper.

Results of Operations

Our results of operations as a percentage of revenue and period-over-period variances are discussed below. All dollars and query amounts are presented in thousands, except RPM's.

Operating Metrics

Our operating results are affected by certain key metrics. These metrics help us to predict financial results and evaluate our business. These metrics consist of queries and revenue per thousand queries.


Queries and Revenue per Thousand Queries

Queries refer to requests for travel information we process through our websites and mobile applications. We count a separate query each time a person requests travel information through one of our websites or mobile applications. Therefore, a user visit to one of our websites may result in no queries being . . .

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