As AllThingsD reported in September, travel search engine Kayak has put its IPO on hold until market conditions improve. Kayak filed its S-1 for a public offering nearly a year ago. Today, the company just filed a new S-1 with its revenue numbers from the third quarter ended September 30, 2011.
During the most recent quarter, Kayak posted $61.16 million in revenue, up 28 percent from the same quarter in 2010. The company also increased revenue slightly from the second quarter 2011, which came in at $56.7 million.
Net income for the third quarter 2011 was $12.7 million, up 44 percent from the same quarter in 2010, in which net income was $8.7 million. Profits were up from $5.7 million in the second quarter of 2011.
In the nine months ended September 30, 2011, Kayak processed 679 million user queries for travel information, which is up 45% over the nine months ended September 30, 2010.
It’s a good sign for Kayak that revenues and profits are increasing both yearly and quarter over quarter considering the intense competition the site faces in the online travel space. Google just launched its flight bookings and search portal, which is powered by the recent acquisition of ITA Software.
Of course, it’s important to note that in the filing itself Kayak says that the most ‘significant portion’ of its revenues is earned in the second and third quarters, with revenue declining in the fourth quarter.
These positive numbers could bode well for Kayak’s pending IPO. With Yelp, ExactTarget, Zyngaand perhaps even Facebook in the mix, the IPO market for tech companies hasn’t dried up.
COMMENTARY: Kayak is one of the first IPO startups that I can say without any qualification know what they are doing. They have experienced consistent revenue and profitability growth for the last five years ending December 31, 2010 and nine months period ending September 30, 2011.
Kayak does have potential exposure with Google, which acquired ITA, the airline reservation service in April 2011. That acquisition has been approved by regulators and has now become finanalized. This is what their S-1 (Amendment No 8) says about Google:
On April 8, 2011, Google, Inc., or Google, entered into a consent decree agreeing to conditions on Google’s acquisition of ITA, and Google subsequently completed its acquisition of ITA. The consent decree stated Google’s intent to offer an online travel search product and Google has recently launched hotel and flight search tools and services that directly compete with the tools and services we offer. Google’s flight search offering appears to include significantly increased speed on return of search results and, in the future, may include other enhancements or improvements in performance of the ITA software which may not be made available to us. Although the consent decree will provide us with the right to renew our existing ITA agreement on the same terms for up to five years from the date the court approves the decree, if ITA or Google limit our access to the ITA software or any improvements to the software, separately develop replacement software to which they claim we are not entitled or increase the price we pay for any improvements or replacement software and we are unable to replace ITA’s software with a comparable technology, we may be unable to operate our business effectively and our financial performance may suffer.
Kayak claims that their top ten travel suppliers and OTAs accounted for approximately 62% of their total revenues. In particular, for the nine months ended September 30, 2011, two customers accounted for 37% of their total revenues:
- Expedia and its affiliates, including its Hotels.com and Hotwire subsidiaries, accounted for 25% of their total revenues.
- Orbitz and its affiliates, including its CheapTickets, HotelClub and ebookers subsidiaries, accounted for 12% of their total revenues.
If Kayak's relationship with any of their top travel suppliers or OTAs were to end or otherwise be materially reduced, their revenues and operating results could experience a significant decline.
Business Overview
Kayak is a technology-driven company committed to improving online travel. Co-founders of Expedia, Travelocity and Orbitz started KAYAK in 2004 to take a better approach to online travel. Kayak's websites and mobile applications enable people to easily research and compare accurate and relevant information, including pricing and availability, in one comprehensive, fast and intuitive display. Kayak's software gathers information from multiple sources, including third party providers, travel suppliers and OTAs, and allows users to compare travel information from hundreds of websites. Kayak requests information from their data sources based on a user’s travel criteria, and displays query results with the broadest set of websites that are relevant to the users travel criteria. Once users find their desired flight, hotel or other travel product, Kayak sends them to their preferred travel supplier or OTA website to complete their purchase, and in many cases, users may now complete hotel bookings directly through Kayak's websites and mobile applications. Kayak also provides travel management tools and services such as flight status updates, pricing alerts and itinerary management.
Revenue Model
Kayak’s services are free for travelers. Kayak earns distribution revenues by sending referrals to travel suppliers and OTAs and by facilitating bookings through their websites and mobile applications, and they earn advertising revenues from advertising placements on its websites and mobile applications. On the distribution side, travel suppliers and OTAs either pay Kayak at the time of referral on a set cost per click, or CPC, basis or after a user completes a transaction on a supplier or OTA website or through the Kayak booking feature on a fixed cost per acquisition, or CPA, basis or as a percentage of the transaction value.
Advertising revenues primarily come from payments for text-based sponsored links, display advertisements and compare units. 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 its websites consist of OTAs, third party sponsored link providers, hotels, airlines and vacation package providers. Generally, their advertisers pay them on a CPC basis, which means advertisers pay them 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 pays them based on the number of times their advertisements appear on its websites. Kayak believes that offering advertisers the ability to pay on a CPC or CPM basis provides advertisers the ability to choose the method of payment that best suits their needs and ultimately results in more advertisers choosing to advertise with us.
Kayak generates a significant portion of its revenues from a few large customers. Expedia and its affiliated brands, including Hotels.com and Hotwire, together accounted for 24.9% of its total revenues for the nine months ended September 30, 2011. Kayak has separate contracts with respect to Expedia and each of its affiliated brands, each of which have varying terms and expiration dates. Orbitz accounted for 12.4% of total revenues for the nine months ended September 30, 2011. Kayak contract with Orbitz expires on December 31, 2013.
Revenue Growth
Kayak's revenue for the nine months ended September 30, 2011 was $170.6 million, a 33.0% increase over the first nine months of 2010 and its revenue for the year ended December 31, 2010 was $170.7 million, a 51.5% increase over 2009. This increase in revenue is primarily due to increased travel queries on its websites and mobile applications, which increased 44.7% and 38.3% for the first nine months of 2011 and the full year 2010, respectively, over the comparable periods in 2010 and 2009. Kayak believes that traffic and queries on its websites and mobile applications will continue to increase in 2011 and 2012 as more people learn about its websites and our brand.
Key Operating Metrics
Kayak's operating results are affected by certain key operating metrics. These metrics help them to predict financial results and evaluate our business. These metrics consist of queries and revenue per thousand queries.
- Number of Queries - Queries refer to user queries for travel information we process through our websites and mobile applications. Kayak counts a separate query each time a user requests travel information through one of it websites or mobile applications. Therefore, a user visit to one of its websites may result in no queries being counted, or in multiple queries being counted, depending on the activity of the user during that visit. On average, approximately 1.1 queries have historically been conducted during a typical user visit to our websites.
- Revenue Per Thousand Queries - Kayak uses revenue per thousand queries, or RPM, to measure how effectively they convert user queries to revenues. RPM is calculated as total revenues divided by total thousand queries.
Kayak uses query metrics to understand historical revenue performance, and to help in forecasting future revenues. In particular, RPM is a key operating statistic that they use in their analysis of past performance and in connection with our evaluation of potential changes to their business model and operating activities.
Revenues for the nine months ended September 30, 2011 increased $42.3 million over the same period in 2010 primarily due to a 44.7% increase in query volume. Kayak attributes the increase in query volume to a variety of factors including its investment in marketing activities, the acquisition of swoodoo in May 2010 and checkfelix.com in April 2011, and its partnership with Bing Travel which began in March 2011. The increase in query volume was partially offset by a reduction in RPM due to an increase in mobile queries, for which we earn revenue at a lower rate. Mobile queries were 13.2% of total queries in the first nine months of 2011, as compared to 7.0% in the same period in 2010.
Revenues, Queries and RPM - Nine Months Ending September 30, 2010 and 2011
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Revenues, Queries and RPM - Years Ending December 30, 2008, 2009 and 2010
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Shareholders of 5% or More of Total Shares Outstanding
Fimancial Statements
Income Statement
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Balance Sheet
Althought they do have a lot of their "eggs in one basket" with ITA, and their top ten accounts represent 62% of their revenues, I like Kayak's IPO. They have developed a very successful and predictable revenue model and their key operating metrics with the exception of revenue per query are experienced continued growth.
Kayak will use the proceeds from the IPO for working capital and execute their growth initiatives, especially their international expansion. Kayak is only now just starting to expand internationally, and recently opened an office in Zurich, Switzerland, and if the exchange rate for the EURO should continue to drop versus the dollar, this will help their revenues, making travel to Europe cheaper.
Kayak's management team is very experienced and are executing their business plan very well, and that experience is reflected in their consistent trackrecord of revenue and earnings growth.
Kayak has not announced their IPO stock price per share, but they have done internal computations and the price will probably range somewhere between $20 and $25 per share.
Courtesy of an article dated November 23, 2011 appearing in TechCrunch
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