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KAYAK SOFTWARE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 June 30, 2012, we experienced the following growth: • For the three months ended June 30, 2012, we generated $76.9 million of revenues, representing growth of 35.6% over the three months ended June 30, 2011; • For the three months ended June 30, 2012, we generated income from operations of $15.8 million representing growth of 174.5% over the three months ended June 30, 2011. • For the three months ended June 30, 2012, we had Adjusted EBITDA of $20.6 million representing growth of 85.4% over the three months ended June 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 (loss) from operations. • For the three months ended June 30, 2012, we processed 304 million user queries for travel information, representing growth of 32.9% over the three months ended June 30, 2011; and • KAYAK mobile applications have been downloaded nearly 17 million times since their introduction in March 2009. For the three months ended June 30, 2012, we had approximately 2.3 million downloads, representing growth of 40.1% over the three months ended June 30, 2011. As of August 15, 2012, we had 189 employees, and we had local websites in 18 countries, including U.S., Germany, Spain, the United Kingdom, Austria, France and Italy. 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 contractualcommitments; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; 24-------------------------------------------------------------------------------- • 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 (loss) 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 Six months ended June 30, June 30, 2012 2011 2012 2011 Income (loss) from operations $ 15,751 $ 5,739 $ 23,860 $ (6,286 ) Other income (expense), net (613 ) 306 (809 ) 917Depreciation and amortization 2,050 2,341 4,100 4,402 Impairment of intangible assets - - - 14,980 EBITDA 17,188 8,386 27,151 14,013 Stock-based compensation 2,842 3,054 5,840 6,191 Other (income) expense, net 613 (306 ) 809 (917 ) Adjusted EBITDA $ 20,643 $ 11,134 $ 33,800 $ 19,287 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, 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 (CPC basis) or when they purchase a travel product on the travel supplier or OTA website (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. 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 25 -------------------------------------------------------------------------------- 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 second quarter of 2012, we received and processed 304 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 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 26 -------------------------------------------------------------------------------- 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 second quarter of 2012, we spent $19.1 million on KAYAK, swoodoo and checkfelix.com brand marketing. 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 $18.7 million on online marketing during the second quarter of 2012. 27-------------------------------------------------------------------------------- Highlights and Trends Revenue Growth Our revenue for the three months ended June 30, 2012 was $76.9 million, a 35.6% increase over the three months ended June 30, 2011. Revenue for the six months ended June 30, 2012 was $150.3 million, a 37.3% increase over the six months ended June 30, 2011. These increases in revenue were primarily due to increased travel queries on our websites and mobile applications, which increased 32.9% and 38.7% for the three and six months ended June 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 six months ended June 30, 2012 and June 30, 2011, we spent $40.0 million and $31.0 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 19.4% and 15.8% of our total revenue for the six months ended June 30, 2012 and June 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 $29.2 million during the first six months of 2012 from approximately $17.3 million during the first six 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 smart phones such as the iPhone, Windows Phone 7 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 17.8% and 12.3% of our total queries for the six months ended June 30, 2012 and 2011, respectively; however, we estimate that revenues from mobile applications were 2.9% and 1.6%, of total revenues during the six months ended June 30, 2012 and 2011 respectively. While revenues per thousand queries on mobile devices increased from $31 to $40 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 $65.5 million and $46.3 million as of June 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 28 -------------------------------------------------------------------------------- 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 counted, or in multiple queries being counted, depending on the activity of the traveler during that visit. On average, a traveler performs approximately 1.1 queries per visit to our websites. We use revenue per thousand queries, or RPM, to measure how effectively we convert user queries to revenues. RPM is calculated as total revenues divided by total thousand queries. We use query metrics to understand the performance of our marketing activities , while we use RPM to analyze the performance of our services and partnerships. Revenues Three Months ended June 30, (Amounts in thousands (except RPM)) % increase 2012 2011 (decrease) Revenues $ 76,938 $ 56,753 35.6 % Queries 304,039 228,748 32.9 % RPM $ 253 $ 248 2.0 % Revenues for the three months ended June 30, 2012 increased $20.2 million over the same period in 2011 primarily due to a 32.9% increase in query volume. We attribute the increase in query volume to a variety of factors, including our investment in marketing activities and increase in downloads of our mobile applications Three Months ended June 30, (Amounts in thousands (except RPM)) % increase 2012 2011 (decrease) Mobile Queries 57,103 29,291 95.0 % Estimated Mobile RPM $ 46 $ 33 42.0 % Website Queries 246,936 199,457 23.8 % Estimated Website RPM $ 301 $ 280 7.5 % Mobile and website RPM figures are estimated based on data provided by those travel partners that differentiate between mobile and website travel bookings. Mobile queries for the three months ended June 30, 2012 increased by 95.0% over the same period in 2011 primarily due to an increase of 8.5 million of downloads of our mobile applications between June 30, 2011 and June 30, 2012 bringing downloads as of June 30, 2012 to approximately 17 million. Mobile RPM for the three months ended June 30, 2012 increased by $13 over the same period in 2011 due to a higher percentage of completed transactions, especially on hotels, and the addition of new advertising products on our mobile application. Website queries for the three months ended June 30, 2012 increased by 23.8% over the same period in 2011 due primarily to our investment in marketing activities. Website RPM for the three months ended June 30, 2012 increased by $21 over the same period in 2011 due primarily to increased RPM in our international business, improvement in our advertising rates, and increased adoption of KAYAK's booking path. 29-------------------------------------------------------------------------------- Six Months ended June 30, (Amounts in thousands (except RPM)) % increase 2012 2011 (decrease) Revenues $ 150,276 $ 109,427 37.3 % Queries 614,354 442,967 38.7 % RPM $ 245 $ 247 (1.0 )% Revenues for the six months ended June 30, 2012 increased $40.8 million over the same period in 2011 primarily due to a 38.7% increase in query volume. We attribute the increase in query volume to a variety of factors including our investment in marketing activities, our partnership with Bing Travel which began in March 2011 and the acquisition of checkfelix.com in April 2011. Six Months ended June 30, (Amounts in thousands (except RPM)) % increase 2012 2011 (decrease) Mobile Queries 109,464 54,697 100.1 % Estimated Mobile RPM $ 40 $ 31 26.8 % Website Queries 504,890 388,270 30.0 % Estimated Website RPM $ 289 $ 277 4.2 % Mobile and website RPM figures are estimated based on data provided by those travel partners that differentiate between mobile and website travel bookings. Mobile queries for the six months ended June 30, 2012 increased by 100.1% over the same period in 2011 primarily due to an increase of 8.5 million of downloads of our mobile applications between June 30, 2011 and June 30, 2012 bringing downloads as of June 30, 2012 to approximately 17 million. Mobile RPM for the six months ended June 30, 2012 increased by $9 over the same period in 2011 due to a higher percentage of completed transactions, especially on hotels, and the addition of new advertising products on our mobile application. Website queries for the six months ended June 30, 2012 increased by 30.0% over the same period in 2011 and is attributed primarily to our investment in marketing activities and our partnership with Bing Travel, which began in March 2011. Website RPM for the six months ended June 30, 2012 increased by $12 over the same period in 2011 due primarily to increased RPM in our international business, improvement in our advertising rates, and increased adoption of KAYAK's booking path. Cost of revenues (excludes depreciation and amortization) Cost of revenues consists of fees we pay to third parties to process airfare queries and expenses associated with operating and maintaining our data centers. Three Months ended June 30, % (Dollar amounts in thousands) increase 2012 2011 (decrease) Cost of revenues $ 4,807 $ 4,684 2.6 % % of total revenues 6.2 % 8.3 % Our cost of revenues increased $0.1 million for the three months ended June 30, 2012 compared to the same period in 2011 due to higher air query fees partially offset by a decrease in data center costs. Air query fees increased $0.4 million in the three months ended June 30, 2012 compared to the same period in 2011 due to increased query volume. Data center costs decreased $0.4 million in the three months ended June 30, 2012 compared to the same period in 2011 due to improved server efficiency. 30-------------------------------------------------------------------------------- Six Months ended June 30, % (Dollar amounts in thousands) increase 2012 2011 (decrease) Cost of revenues $ 9,992 $ 9,629 3.8 % % of total revenues 6.6 % 8.8 % Our cost of revenues increased $0.4 million for the six months ended June of 2012 compared to the same period in 2011 due to higher air query fees partially offset by a decrease in data center costs. Air query fees increased $0.9 million in the six months ended June 30, 2012 compared to the same period in 2011 due to increased query volume. Data center costs decreased $0.7 million in the six months ended June 30, 2012 compared to the same period in 2011 due to improved server efficiency. Selling, general and administrative expenses (excludes depreciation and amortization) Selling, general and administrative expenses consist of marketing, technology, personnel and other costs, which are more fully described below. Marketing Marketing consists of online marketing, brand marketing and other marketing expenses. Online marketing includes search engine fees and advertising placements on other travel search services. Search engine fees are fees we pay to Google and Yahoo! for our advertisements to appear on their result pages when users search certain travel-related keywords on the search engine's website. We pay advertisement fees to advertise on other travel-related websites. These advertisements generally consist of the placement of a KAYAK logo or a check-box next to the KAYAK name and often allow users who click on our advertisements to launch a query on KAYAK using previously entered search parameters. Brand marketing expense includes television, outdoor, and online display advertisement, creative development and research costs. Other marketing includes affiliate marketing, public relations, and other general marketing costs. Affiliate marketing refers to revenue sharing fees we pay to other travel-related websites that drive traffic to KAYAK through use of their own marketing resources. Under our affiliate marketing program, we provide our services through third party websites and pay them a percentage of any revenues received from these services. Three Months ended June 30, (Dollar amounts in thousands) % increase 2012 2011 (decrease) Brand marketing $ 19,146 $ 16,096 18.9 % % of total revenues 24.9 % 28.4 % Online marketing fees $ 18,731 $ 12,047 55.5 % % of total revenues 24.3 % 21.2 % Other marketing $ 1,532 $ 1,882 (18.6 )% % of total revenues 2.0 % 3.3 % Total marketing expense $ 39,409 $ 30,025 31.3 % % of total revenues 51.2 % 52.9 % Marketing expenses for the three months ended June 30, 2012 increased $9.4 million compared to the same period in 2011. The increase is primarily due to a $6.7 million increase in online marketing of which $2.4 million relates to Europe online marketing. Additionally there was a $3.1 million increase in brand marketing which relates primarily to a $3.0 million incremental increase in Europe brand marketing expense. We believe these marketing investments were the primary contributor to our 32.9% increase in query growth in the three months ended June 30, 2012 as compared to the same period in 2011. 31 -------------------------------------------------------------------------------- Six Months ended June 30, (Dollar amounts in thousands) % increase 2012 2011 (decrease) Brand marketing $ 40,044 $ 31,023 29.1 % % of total revenues 26.6 % 28.4 % Online marketing fees $ 37,250 $ 23,545 58.2 % % of total revenues 24.8 % 21.5 % Other marketing $ 3,364 $ 3,914 (14.1 )% % of total revenues 2.2 % 3.6 % Total marketing expense $ 80,658 $ 58,482 37.9 % % of total revenues 53.7 % 53.4 % Marketing expenses for the six months ended June 30, 2012 increased $22.2 million compared to the same period in 2011. The increase is primarily due to a $13.7 million increase in online marketing of which $4.7 million relates to Europe online marketing. Additionally there was a $9.0 million increase in brand marketing which relates primarily to a $6.4 million incremental increase in Europe brand marketing expense. We believe these marketing investments were the primary contributor to our 38.7% increase in query growth in the six months ended June 30, 2012 as compared to the same period in 2011. Personnel Personnel costs consist of wages and benefits paid to our employees, stock-based compensation charges and payroll taxes. Stock-based compensation is a significant portion of our wage and benefit structure which is impacted by many factors including, but not limited to, the strike price, volatility and expected life of the options. Please see the notes to our consolidated financial statements included elsewhere in this prospectus for more information on our stock options. Three Months ended June 30, (Dollar amounts in thousands) % increase 2012 2011 (decrease)Salaries, benefits and taxes $ 8,637 $ 6,746 28.0 % % of total revenues 11.2 % 11.9 % Stock-based compensation $ 2,669 $ 3,054 (12.6 )% % of total revenues 3.5 % 5.4 % Total personnel $ 11,306 $ 9,800 15.4 % % of total revenues 14.7 % 17.3 % Our salaries, benefits and taxes increased for the three months ended June 30, 2012 from the same period in 2011. This increase is primarily due to a net increase of 40 employees, or 27.6%, as of June 30, 2012 compared to 2011. Stock compensation expense decreased in the three months ended June 30, 2012 compared to the same period in 2011 due to options granted in prior years becoming fully vested. Six Months ended June 30, (Dollar amounts in thousands) % increase 2012 2011 (decrease) Salaries, benefits and taxes $ 17,552 $ 13,648 28.6 % % of total revenues 11.7 % 12.5 % Stock-based compensation $ 5,667 $ 6,191 (8.5 )% % of total revenues 3.8 % 5.7 % Total personnel $ 23,219 $ 19,839 17.0 % % of total revenues 15.5 % 18.1 % Our salaries, benefits and taxes increased for the six months ended June 30, 2012 from the same period in 2011. This increase is primarily due to a net increase of 40 employees, or 27.6%, as of June 30, 2012 compared to 2011. Stock compensation expense decreased in the six months ended June 30, 2012 compared to the same period in 2011 due to options granted in prior years becoming fully vested. 32 --------------------------------------------------------------------------------Other general and administrative expenses All other operating costs are classified as other general and administrative expenses. The largest items in this category of expenses are technology costs, legal and accounting fees, provision for doubtful accounts, and facilities expenses. Three Months ended June 30, (Dollar amounts in thousands) % increase 2012 2011 (decrease)Other general and administrative expenses $ 3,615 $ 4,164 (13.2 )% % of total revenues 4.7 % 7.3 % Other general and administrative expenses decreased $0.5 million for the three months ended June 30, 2012, compared to the same period in 2011, primarily due to a decrease in the allowance for doubtful accounts of $1.2 million offset by an increase in travel costs of $0.3 million, legal settlement costs of $0.3 million and stock compensation expense of $0.2 million related to contractors granted during the quarter. The decrease in the allowance for doubtful accounts was due to collections of long overdue accounts during the quarter, along with write-offs of certain accounts deemed to be uncollectible. Six Months ended June 30, (Dollar amounts in thousands) % increase 2012 2011 (decrease)Other general and administrative expenses $ 8,447 $ 8,381 0.8 % % of total revenues 5.6 % 7.7 % Other general and administrative expenses increased $0.1 million for the six months ended June 30, 2012, compared to the same period in 2011 primarily due to a decrease in the allowance for doubtful accounts of $1.0 million offset by an increase in travel costs of $0.6 million, legal settlement costs of $0.3 million and stock compensation expense of $0.2 million related to contractors granted during the second quarter. The decrease in the allowance for doubtful accounts was due to collections of long overdue accounts during the quarter, along with write-offs of certain accounts deemed to be uncollectible. Depreciation and amortization Depreciation and amortization consists primarily of depreciation of computer equipment, software and website development and amortization of our trade names, customer relationships and other intangible assets. Three Months ended June 30, (Dollar amounts in thousands) % increase 2012 2011 (decrease) Amortization $ 1,400 $ 1,900 (26.3 )% % of total revenues 1.8 % 3.3 % Depreciation $ 650 $ 441 47.4 % % of total revenues 0.8 % 0.8 %Total depreciation and amortization $ 2,050 $ 2,341 (12.4 )% % of total revenues 2.7 % 4.1 % Depreciation and amortization decreased $0.3 million during the three months ended June 30, 2012, compared to the same period in 2011. Amortization decreased by $0.5 million, which is primarily due to a $0.8 million decrease in tradename amortization related to the discontinuation of our SideStep brand, partially offset by a $0.3 million increase in technology amortization due to the acceleration of amortization of swoodoo's technology. Depreciation increased by $0.2 million, primarily due to additions within computer equipment, website development, and leasehold improvements. 33 -------------------------------------------------------------------------------- Six Months ended June 30, (Dollar amounts in thousands) % increase 2012 2011 (decrease) Amortization $ 2,815 $ 3,535 (20.4 )% % of total revenues 1.9 % 3.2 % Depreciation $ 1,285 $ 867 48.2 % % of total revenues 0.9 % 0.8 %Total depreciation and amortization $ 4,100 $ 4,402 (6.9 )% % of total revenues 2.7 % 4.0 % Depreciation and amortization decreased $0.3 million during the six months ended June 30, 2012 compared to the same period in 2011. Amortization decreased by $0.7 million, which is primarily due to a $1.7 million decrease in tradename amortization related to the discontinuation of our SideStep brand, partially offset by a $0.7 million increase in technology amortization due to the acceleration of amortization of swoodoo's technology. Depreciation increased by $0.4 million, primarily due to additions within computer equipment, website development, and leasehold improvements. Impairment of intangible assets In January 2011, we determined that we would no longer support two brand names and URLs in the United States and decided to migrate all traffic from SideStep to KAYAK.com, resulting in a $15.0 million impairment charge for the six months ended June 30, 2011. Other income (expense) For the three and six months ended June 30, 2012, we recorded a loss of $0.6 million and $0.7 million as compared to a gain of $0.3 million and $1.0 million for the same period in 2011. These decreases are primarily related to no longer being obligated to buy back shares of common stock issued as part of the Swoodoo acquisition. Income tax expense (benefit) Our effective tax rate was 52.0% and 37.8% for the three months ended June 30, 2012 and 2011. The increase in the effective tax rate for the three months ended June 30, 2012 as compared to the same period in 2011 was primarily due to losses in Europe for which no benefit was recognized. We expect that our investments in the European business will eventually drive profitability there and result in a lower effective income tax rate. The projected effective tax rate for 2012 is higher than the federal statutory tax rate of 35% due to state taxes, the European losses for which no benefit was taken and the disallowance of a portion of stock compensation expense related to Incentive Stock Options. In 2011, the full year effective tax rate was higher than the federal statutory rate of 35% primarily due to state taxes and the disallowance of stock compensation expense related to Incentive Stock Options. Quarterly Financial Data/Seasonality The following table presents unaudited consolidated financial data for the trailing eight quarters ended June 30, 2012. The operating results are not necessarily indicative of the results for any subsequent quarter. 34 -------------------------------------------------------------------------------- 2010 2011 2012 Quarters ended Quarters ended Quarters ended Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Revenues $ 47,814 $ 42,418 $ 52,674 $ 56,753 $ 61,160 $ 53,947 $ 73,338 $ 76,938 Cost of revenues (excludes depreciation and amortization) 3,810 4,000 4,945 4,684 4,151 4,818 5,185 4,807 Selling, general, and administrative Marketing 23,368 22,582 28,457 30,025 28,935 23,601 41,249 39,409 Personnel 7,271 8,777 10,039 9,800 10,286 10,660 11,913 11,306 Other general and administrative expenses 2,728 3,436 4,217 4,164 3,196 4,823 4,832 3,615 Total selling, general and administrative expenses (excludes depreciation and amortization) 33,367 34,795 42,713 43,989 42,417 39,084 57,994 54,330 Depreciation and amortization 1,896 1,898 2,061 2,341 1,935 2,149 2,050 2,050 Impairment of intangible assets - - 14,980 - - - - - Income (loss) from operations $ 8,741 $ 1,725 $ (12,025 ) $ 5,739 $ 12,657 $ 7,896 $ 8,109 $ 15,751 Seasonal and other factors cause our profitability to fluctuate from quarter to quarter. Typically, our highest revenue quarters are the second and third quarters due to the fact that high travel seasons fall in these quarters. Additionally, our brand marketing expense fluctuates by quarter, causing our operating income to increase or decrease in any given quarter depending on the level of investment. In January 2011, we determined that we would not support two brand names and URLs in the United States and decided that we would migrate all traffic from sidestep.com to KAYAK.com. As a result, our SideStep brand name and URL intangible assets were impaired and we incurred a related impairment charge of $15.0 million in the first three months of 2011. Liquidity and Capital Resources We have primarily funded our operations through the issuance of equity securities and cash flows from operations. Early in our history, we relied on cash provided from the sale of shares of our redeemable convertible preferred stock to fund our operations and raised $29.8 million prior to 2007. In 2007, we raised another $165.7 million through the sale of preferred stock and entered into $30.0 million of term loans to fund our acquisition of SideStep. We began to generate cash flows from operations in late 2007 and have not required any additional financing to fund our operations. We use our cash to fund operations, make capital expenditures and acquire complementary businesses from time to time. As of June 30, 2012, we had cash and cash equivalents and marketable securities of $65.5 million. Included in this amount is $2.2 million of cash held by foreign subsidiaries that is not available to fund domestic operations and obligations without paying taxes upon its repatriation. We also have not recorded U.S. income and foreign withholding taxes on the earnings of our foreign subsidiaries at June 30, 2012, because we intend to permanently reinvest those earnings. On July 25, 2012, we completed our IPO which generated $93.5 million after deducting underwriting discounts and commissions and other expenses incurred for the sale of our common stock. In addition, on August 1, 2012, certain eligible stockholders elected to purchase shares of our Class A common stock for $6.0 million. We believe that cash from operations and our IPO, together with our cash and short-term investment balance are sufficient to meet our ongoing capital expenditures, working capital requirements and other capital needs for at least the next twelve months. Our liquidity could be negatively affected by a decrease in demand for our products and services. In addition, we may make acquisitions complementary to our business and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions. Additional financing may not be available at all or on terms favorable to us. The following table presents cash flow information for the stated periods and exclude the net cash received from our initial public offering, which was completed on July 25, 2012: 35-------------------------------------------------------------------------------- |