XNAS:KYAK Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-35604 
 
KAYAK SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
54-2139807
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
55 North Water Street, Suite 1
Norwalk, CT 06854
(Address of principal executive offices, including zip code)
(203) 899-3100
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer  ¨
Accelerated Filer ¨
Non-accelerated filer (Do not check if a smaller reporting company)  x
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
At August 15, 2012, there were 4,577,170 shares of KAYAK's Class A common stock outstanding and 33,937,749 shares of KAYAK's Class B common stock outstanding.




KAYAK SOFTWARE CORPORATION

TABLE OF CONTENTS
 
  
Page
 
 
 
 
 
 
 
 
 
 


2



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to our management. The statements contained in this quarterly report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by words such as “aim,” “anticipate,” “assume,” “believe,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “positioned,” “predict,” “should,” “target,” “will,” “would” and other similar expressions or words that convey uncertainty of future events or outcomes to identify these forward-looking statements. These statements include the ability of our software and hardware systems to handle user and query growth, the ability of our hosting facilities to suit our business needs, the additional costs relating to our growth, our advertising costs at an absolute level and as a percentage of total revenue, the volume of customer use of our products and travel queries, investment in international brand development and its effect on our brand strength internationally, changes in revenue and costs from our international brands, the growth of mobile applications and the corresponding changes to our revenue sources and product offerings, the effect of past results on future results, the ability of our business to fund itself from ongoing operations, the effects of market conditions on our liquidity and capital position and our ability to raise additional capital if needed, the effects of accounting policies on our reported results, our expectations of future profitability and taxable income, our intention to reinvest the earnings of our foreign subsidiaries and the corresponding effects on tax liability, the impact of goodwill impairments on our consolidated financial statements, the impact of our amortization of intangible assets on our consolidated financial statements, our ability to attract advertisers by offering advertisements on a cost per click or cost per view basis, our ability to increase the likelihood of a purchase on our advertisers' websites through targeted advertisements the role of marketing in attracting new users to our websites and mobile applications, the costs of our offline brand marketing, the impact of a loss or disruption in our airfare query results on non-air travel queries, our ability to remain an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and our foreign exchange and interest rate risk and our ability to hedge these risks.. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Factors that may cause such differences include, but are not limited to, the risks described under “Risk Factors” in this Form 10-Q.
 
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this quarterly report on Form 10-Q. You should read this quarterly report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. This Form 10-Q should also should be read in conjunction with our other Securities and Exchange Commission, or SEC, filings including the audited consolidated financial statements included in our prospectus filed with the SEC pursuant to Rule 424(b) on July 20, 2012, relating to our initial public offering. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.


3



PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
KAYAK Software Corporation and Subsidiaries 

Consolidated Balance Sheets
(unaudited)
(In thousands, except share and per share amounts)
 
June 30,
 
Pro forma at June 30, (1)
 
December 31,
 
2012
 
2012
 
2011
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
54,550

 
$
54,550

 
$
35,127

Marketable securities
10,912

 
10,912

 
11,198

Accounts receivable, net of allowance for doubtful accounts of $3,354 and $3,581 at June 30, 2012, and December 31, 2011 respectively
50,247

 
50,247

 
37,332

Deferred tax asset
2,212

 
2,212

 
2,212

Prepaid expenses and other current assets
5,826

 
5,826

 
5,425

Total current assets
123,747

 
123,747

 
91,294

Property and equipment, net
5,268

 
5,268

 
5,474

Intangible assets, net
14,563

 
14,563

 
17,684

Goodwill
155,244

 
155,244

 
155,677

Deferred tax asset
9,441

 
9,441

 
7,488

Other assets
248

 
248

 
331

Total assets
$
308,511

 
$
308,511

 
$
277,948

Liabilities and stockholders’ equity (deficit)
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
16,212

 
$
16,212

 
$
9,514

Accrued expenses and other current liabilities
24,760

 
24,760

 
16,220

Total current liabilities
40,972

 
40,972

 
25,734

Warrant liability
1,319

 
1,319

 
1,150

Deferred tax liability
3,241

 
3,241

 
4,202

Other long-term liabilities
799

 
799

 
1,092

Total liabilities
46,331

 
46,331

 
32,178

Redeemable convertible preferred stock
 
 
 
 
 
Series A Redeemable Convertible Preferred Stock, $0.001 par value (liquidation preference of $13,200 at June 30, 2012); 6,600,000 shares authorized, issued and outstanding
7,154

 

 
9,702

Series A-1 Redeemable Convertible Preferred Stock, $0.001 par value; (liquidation preference of $3,228 at June 30, 2012); 1,176,051 shares authorized, issued and outstanding
1,915

 

 
2,355

Series B Redeemable Convertible Preferred Stock, $0.001 par value; (liquidation preference of $13,598 at June 30, 2012); 4,989,308 shares authorized, issued and outstanding
8,023

 

 
9,888

Series B-1 Redeemable Convertible Preferred Stock, $0.001 par value (liquidation preference of $5,616 at June 30, 2012); 2,138,275 shares authorized, issued and outstanding
3,226

 

 
4,026

Series C Redeemable Convertible Preferred Stock, $0.001 par value (liquidation preference of $21,467 at June 30, 2012); 3,897,084 shares authorized and 3,855,180 shares issued and outstanding
14,113

 

 
15,372

Series D Redeemable Convertible Preferred Stock, $.001 par value (liquidation preference of $294,115 at June 30, 2012); 8,075,666 shares authorized and 8,008,842 shares issued and outstanding
221,864

 

 
206,151

Total redeemable convertible preferred stock
256,295

 

 
247,494

Commitments and contingencies (Note 10)


 


 


Stockholders’ equity (deficit)
 
 
 
 
 
Common stock, $0.001 par value; 50,000,000 shares authorized; 7,096,909 shares issued and outstanding at June 30, 2012; 45,000,000 shares authorized, 7,025,467 shares issued and outstanding at December 31, 2011
7

 

 
7

Class A common stock, $0.001 par value: no shares authorized, issued and outstanding, on an actual and pro forma basis(2)

 

 

Class B common stock, par value $0.001: no shares authorized, issued and outstanding on an actual basis; 50,000,000 shares authorized, 33,864,565 issued and outstanding, on a pro forma basis

 
34

 

Additional paid-in capital
6,575

 
262,843

 
3,296

Cumulative translation adjustment
(2,215
)
 
(2,215
)
 
(977
)
Accumulated earnings (deficit)
1,518

 
1,518

 
(4,050
)
Total stockholders’ equity (deficit)
5,885

 
262,180

 
(1,724
)
Total liabilities and stockholders’ equity
$
308,511

 
$
308,511

 
$
277,948

 
(1)
The unaudited pro forma balance sheet gives effect to the conversion of all outstanding shares of our common stock and our redeemable convertible preferred stock into 33,864,565 shares of Class B common stock upon the completion of an initial public offering.
(2)
Upon the completion of an initial public offering, we will have two classes of common stock. All existing shares will convert into Class B common stock and shares sold in the initial public offering will be Class A common stock. The rights of the holders of our common stock are identical except with respect to voting and conversion rights.
See notes to consolidated financial statements

4



KAYAK Software Corporation and Subsidiaries
 
Consolidated Statements of Operations
(unaudited)
(In thousands, except share and per share amounts)
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$
76,938

 
$
56,753

 
$
150,276

 
$
109,427

Cost of revenues (excludes depreciation and amortization)
4,807

 
4,684

 
9,992

 
9,629

Selling, general and administrative expenses:

 

 

 

Marketing
39,409

 
30,025

 
80,658

 
58,482

Personnel
11,306

 
9,800

 
23,219

 
19,839

Other general and administrative expenses
3,615

 
4,164

 
8,447

 
8,381

Total selling, general and administrative expenses (excludes depreciation and amortization)
54,330

 
43,989

 
112,324

 
86,702

Depreciation and amortization
2,050

 
2,341

 
4,100

 
4,402

Impairment of intangible assets

 

 

 
14,980

Income (loss) from operations
15,751

 
5,739

 
23,860

 
(6,286
)
Other income (expense)

 

 

 

Interest income
47

 
24

 
68

 
45

Other income (expense)
(613
)
 
306

 
(809
)
 
917

Total other income (expense)
(566
)
 
330

 
(741
)
 
962

Income (loss) before taxes
15,185

 
6,069

 
23,119

 
(5,324
)
Income tax expense (benefit)
7,897

 
2,293

 
11,686

 
(2,186
)
Net income (loss)
7,288

 
3,776

 
11,433

 
(3,138
)
Redeemable convertible preferred stock dividends
(2,936
)
 
(2,936
)
 
(5,872
)
 
(5,872
)
Deemed dividend resulting from modification of redeemable convertible preferred stock
(2,929
)
 

 
(2,929
)
 

Net income (loss) attributed to common stockholders
$
1,423

 
$
840

 
$
2,632

 
$
(9,010
)
Net income (loss) per common share

 

 

 

Basic
$
0.20

 
$
0.11

 
$
0.37

 
$
(1.21
)
Diluted
$
0.19

 
$
0.10

 
$
0.30

 
$
(1.21
)
Weighted average common shares

 

 

 

Basic
7,049,863

 
7,505,505

 
7,043,571

 
7,451,737

Diluted
38,620,694

 
37,391,530

 
37,959,369

 
7,451,737

 
.
See notes to consolidated financial statements

5



KAYAK Software Corporation and Subsidiaries
 
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(In thousands)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net Income (loss)
$
7,288

 
$
3,776

 
$
11,433

 
$
(3,138
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2,392
)
 
898

 
(1,238
)
 
2,484

Other comprehensive income (loss)
(2,392
)
 
898

 
(1,238
)
 
2,484

Total comprehensive income (loss)
$
4,896

 
$
4,674

 
$
10,195

 
$
(654
)
 
 
 
 
 
See notes to consolidated financial statements

6



KAYAK Software Corporation and Subsidiaries
 
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(unaudited)
(In thousands, except share amounts)

 
 
Common Stock
 
Additional
Paid-In
Capital
 
Other
Comprehensive
Income (Loss)
 
Accumulated
Equity
(Deficit)
 
Total
Stockholders’
Equity
(Deficit)
 
Shares
 
Amount
 
Balance, December 31, 2011
7,025,467

 
$
7

 
$
3,296

 
$
(977
)
 
$
(4,050
)
 
$
(1,724
)
Stock option expense

 

 
5,840

 

 

 
$
5,840

Issuance of common stock
71,442

 

 
302

 

 

 
$
302

Excess tax benefits from stock-based compensation

 

 
73

 

 

 
$
73

Dividends on preferred stock

 

 
(2,936
)
 

 
(2,936
)
 
$
(5,872
)
Deemed dividend resulting from modification of redeemable convertible preferred stock

 

 

 

 
(2,929
)
 
$
(2,929
)
Other comprehensive income (loss)

 

 

 
(1,238
)
 

 
$
(1,238
)
Net income

 

 

 

 
11,433

 
$
11,433

Balance, June 30, 2012
7,096,909

 
$
7

 
$
6,575

 
$
(2,215
)
 
$
1,518

 
$
5,885

 
See notes to consolidated financial statements

7



KAYAK Software Corporation and Subsidiaries
 
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)

 
Six Months Ended June 30,
 
2012
 
2011
Cash flows from operating activities
 
 
 
Net income (loss)
$
11,433

 
$
(3,138
)
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
4,100

 
4,402

Stock-based compensation expense
5,840

 
6,191

Excess tax benefits from exercise of stock options
(73
)
 
(226
)
Deferred taxes
(2,819
)
 
(9,811
)
Mark to market adjustments
169

 
(916
)
Impairment of intangible assets

 
14,980

Other

 
121

Changes in assets and liabilities, net of effect of acquisitions:
 
 
 
Accounts receivable, net
(13,277
)
 
(8,901
)
Prepaid expenses and other current assets
461

 
2,989

Accounts payable
6,871

 
5,870

Accrued liabilities and other liabilities
8,171

 
(3,061
)
Net cash from operating activities
20,876

 
8,500

Cash flows from investing activities
 
 
 
Capital expenditures
(1,162
)
 
(1,068
)
Purchase of marketable securities
(7,481
)
 
(18,182
)
Maturities of marketable securities
7,651

 
6,699

Cash paid for business combinations, net of cash acquired

 
(9,194
)
Net cash from investing activities
(992
)
 
(21,745
)
Cash flows from financing activities
 
 
 
Proceeds from exercise of stock options
302

 
682

Tax benefits realized from exercise of stock options
73

 
226

Cash paid for expenses in connection with initial public offering
(411
)
 
(1,118
)
Net cash from financing activities
(36
)
 
(210
)
Effect of exchange rate changes on cash and cash equivalents
(425
)
 
465

Increase (decrease) in cash and cash equivalents
19,423

 
(12,990
)
Cash and cash equivalents, beginning of period
35,127

 
34,966

Cash and cash equivalents, end of period
$
54,550

 
$
21,976

Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$

 
$

Income taxes
$
11,040

 
$
7,331

See notes to consolidated financial statements

8



KAYAK Software Corporation and Subsidiaries
 
Notes to Consolidated Financial Statements
(unaudited)
(In thousands, except share and per share amounts)
 
1. Organization
 
The Company was incorporated in Delaware on January 14, 2004 under the name of Travel Search Company, Inc. On August 17, 2004, we officially changed our name to KAYAK Software Corporation (the Company). We operate KAYAK.com and other travel websites and mobile applications that allow people to search for rates and availability for airline tickets, hotel rooms, rental cars, and other travel-related services across hundreds of websites and provide choices on where to book. As used in this report, the terms “we,” “us,” “our,” and the “Company” mean KAYAK Software Corporation and its subsidiaries, unless the context indicates another meaning.


2. Summary of Significant Accounting Policies
 
Significant Estimates and Judgments
 
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates relied upon in preparing these financial statements include the provision for uncollectible accounts, estimates used to determine the fair value of our common stock, preferred stock, put option, stock-based compensation and preferred stock warrants, recoverability of our net deferred tax assets and the fair value of long lived assets and goodwill. Changes in estimates are recorded in the period in which they become known. We base estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America. Operating results of acquired businesses are included in the consolidated statements of operations from the date of acquisition. All intercompany accounts and transactions have been eliminated. We have reclassified certain prior period amounts  to conform to our current period presentation.
 
The interim financial statements and footnotes are unaudited. In the opinion of our management, these statements include all adjustments, which are of a normal recurring nature, necessary to present a fair statement of the Company’s results of operations, financial position and cash flows. Interim results are not necessarily indicative of financial results for a full year. The interim information included in this Form 10-Q should be read in conjunction with our prospectus filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424 (b) on July 20, 2012 relating to our initial public offering, or IPO.
 
Foreign Currency Translation
 
Assets and liabilities for our international operations are translated to U.S. dollars at current exchange rates in effect at the balance sheet date. Income and expense accounts are translated at average exchange rates in effect during the year. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income.
 
Segments
 
We have one operating segment for financial reporting purposes: travel search.


9



Revenue Recognition

KAYAK’s services are free for travelers. We earn revenues by sending referrals to travel suppliers and Online Travel Agents, OTAs after a traveler selects a specific itinerary (distribution revenues), and through advertising placements on our websites and mobile applications (advertising revenues).
    
We recognize distribution revenue upon completion of the referral, provided that our fees are fixed and determinable, there is persuasive evidence of an arrangement and collection is reasonably assured. Advertising revenues are recognized when a traveler clicks on an advertisement that a customer has placed on our website or when we display an advertisement.


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, or CPC basis, or when they purchase a travel product on the travel supplier or OTA website which we refer to as a 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.

 
Concentrations of Credit Risk
 
Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. The Company’s cash and cash equivalents and marketable securities are primarily held in one financial institution that we believe to be of high credit quality.
 
Significant customers accounted for the following percentages of total revenues:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Customer A
26%
 
24%
 
24%
 
25%
Customer B
9%
 
8%
 
10%
 
8%
Customer C
8%
 
12%
 
9%
 
13%
 
Amounts due from these significant customers were:
 
 
 
June 30,
 
December 31,
 
 
2012
 
2011
Customer A
 
$
11,438

 
$
7,354

Customer B
 
3,259

 
1,511

Customer C
 
4,070

 
4,242

 
We believe significant customer amounts outstanding at June 30, 2012 and December 31, 2011 are collectible.

10



 
Cost of Revenues
 
Cost of revenues consists primarily of expenses incurred related to airfare query costs, data center costs and related bandwidth charges. All costs of revenues are expensed as incurred.
 
Marketing
Marketing expenses are comprised primarily of costs of search engine and other digital marketing, brand advertising, affiliate referral fees, and public relations. All marketing costs are expensed as incurred.

Stock-Based Compensation
 
We estimate the value of stock option awards on the date of grant using the Black-Scholes option-pricing model (the Black-Scholes model). The determination of the fair value of stock option awards on the date of grant is affected by our estimated stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected term, risk-free interest rate, expected dividends and expected forfeiture rates. The forfeiture rate is estimated using historical option cancellation information, adjusted for anticipated changes in exercise and employment termination behavior. Outstanding awards do not contain market or performance conditions and therefore, we recognize stock-based compensation expense on a straight-line basis over the requisite service period.

We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes option-pricing model. Our management believes that the fair value of stock options is more reliably measured than the fair value of the services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase or decrease in value, if any, is recognized during the period the related services are rendered. The fair value of each non-employee stock-based compensation award is re-measured each period until a commitment date is reached, which is generally the vesting date.

 
Fair Value of Financial Instruments
 
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their short maturities.
 
Cash Equivalents and Marketable Securities
 
Cash equivalents include all highly liquid investments maturing within 90 days from the date of purchase.
 
Marketable securities are classified as held-to-maturity as we have the intent and ability to hold these investments to maturity. Marketable securities are reported at amortized cost. Cash equivalents and marketable securities are invested in instruments we believe to be of high-quality, primarily money market funds, U.S. Government obligations, State and Municipality obligations and corporate bonds with remaining contractual maturities of less than one year.
 
Accounts Receivable and Allowance for Doubtful Accounts
 
We review accounts receivable on a regular basis and estimate an amount of losses for uncollectible accounts based on our historical collections experience, age of the receivable and knowledge of the customer. We record changes in our estimate to the allowance for doubtful accounts through bad debt expense and relieve the allowance when accounts are ultimately collected or determined to be uncollectible.
 
Deferred Financing Costs Related to Initial Public Offering
 
As of June 30, 2012 and December 31, 2011 we had incurred $3,314 and $2,173, respectively, of legal and accounting costs related to our IPO. We capitalize such costs in prepaid expense and other current assets and will net these costs against the proceeds received from the IPO which occurred on July 25, 2012.
 
Property and Equipment
 
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed on a straight-line basis over the estimated useful lives of the assets or, when applicable, the life of the lease, whichever is shorter.

11



 
Software and Website Development Costs
 
Certain costs to develop internal use computer software are capitalized provided these costs are expected to be recoverable. These costs are included in property and equipment and are amortized over three years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs are expensed as incurred. We capitalized $248 million and $278 million of software development costs and amortized $267 million and $213 million in the three months ended June 30, 2012 and June 30, 2011, respectively, and capitalized $470 million and $475 million and amortized $527 million and $413 million in the six months ended June 30, 2012 and June 30, 2011, respectively.
 
Impairment of Long-Lived Assets
 
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When such events occur, we compare the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison indicates that there is impairment, the amount of the impairment is calculated as the difference between the carrying value and fair value. During the six months ended June 30, 2011 we recorded an impairment charge of $15.0 million on trade and domain name assets related to our decision to discontinue the sidestep.com URL. See “—Note 6—Intangible Assets” for additional description of our impairment charge.
 
Goodwill
 
Goodwill represents the excess of the cost of acquired business over the fair value of the assets acquired at the date of acquisition. Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that goodwill may be impaired. Goodwill is not deductible for tax purposes.
 
We assess goodwill for possible impairment using a two-step process. The first step identifies if there is potential goodwill impairment. If step one indicates that an impairment may exist, a second step is performed to measure the amount of the goodwill impairment, if any. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge in our consolidated statements of operations.
 
For purposes of goodwill impairment testing, we estimate the fair value of the Company using generally accepted valuation methodologies, including market and income based approaches, and relevant data available through and as of the testing date. The market approach is a valuation method in which fair value is estimated based on observed prices in actual transactions and on asking prices for similar assets. Under the market approach, the valuation process is essentially that of comparison and correlation between the subject asset and other similar assets. The income approach is a method in which fair value is estimated based on the cash flows that an asset could be expected to generate over its useful life, including residual value cash flows. These cash flows are then discounted to their present value using a rate of return that accounts for the relative risk of not realizing the estimated annual cash flows and for the time value of money.
 
Warrant liability
 
Warrants to purchase redeemable convertible preferred stock are accounted for on the balance sheets at fair value as liabilities. Changes in fair value are recognized in earnings in the period of change.
 
 
Accumulated Other Comprehensive Income
 
Accumulated other comprehensive income consists of foreign currency translation adjustments. The financial statements of non-U.S. entities are translated from their functional currencies into U.S. dollars. Assets and liabilities are translated at period end rates of exchange and revenue and expenses are translated using average rates of exchange. The resulting gain or loss is included in accumulated other comprehensive income on the balance sheet.
 
Income Taxes
 
We record income taxes under the liability method. Interest and penalties related to income tax liabilities, if any, are included in income tax expense. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider many factors when

12



assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.
 
Effective January 1, 2007, we adopted the authoritative guidance for uncertainty in income taxes. This guidance requires that we recognize a tax benefit from an uncertain position only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. If this threshold is met, we would measure the tax benefit as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The adoption of this guidance did not have a material impact on our financial statements. Penalties and interest on uncertain tax positions are included in income tax expense.
 
Recent Accounting Pronouncements
 
In June 2011, the FASB issued amended disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. We adopted these changes effective January 1, 2012 and applied retrospectively for all periods presented. There was no impact to the consolidated results as the amendments related only to changes in financial statement presentation.
 
In September 2011, the FASB issued amended guidance that will simplify how entities test goodwill for impairment. After an assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test becomes optional. The guidance is effective January 1, 2012, with early adoption permitted. We elected to adopt this guidance for the 2011 goodwill impairment test performed in the fourth quarter. Goodwill impairment testing did not result in any impact to our financial results.
 
3. Acquisitions
 
On April 1, 2011, the Company acquired 100% of the outstanding share capital in JaBo Vertrieb-und Entwicklung GmbH, or JaBo Software, a leading Austrian travel search company, for a total cash purchase price of $9,160, net.
 
The table below sets forth the final purchase price allocation:
 
Assets acquired:

Accounts receivable and other assets
$
983

Contingent asset
230

Identifiable intangible assets (1)

Customer relationships (useful life—7 years)
3,200

Trade & domain names (useful life—10 years)
2,600

Current technology (useful life—2 years)
700

Non-compete agreements (useful life—2 years)
300

Goodwill
4,138

Total assets
12,151

Liabilities assumed:
 
Deferred tax liability
1,700

Other liabilities
1,291

Total net assets acquired
$
9,160

 
(1)
The weighted average useful life of the identifiable intangible assets acquired is 7 years.

The primary elements that generated goodwill are the value of the acquired assembled workforce, specialized processes and procedures and operating synergies, none of which qualify as separate intangible assets.
 
The pro forma impact of this acquisition on revenues and net income was immaterial.

13



 
4. Marketable Securities
 
The following tables summarize the investments in marketable securities all of which are classified as held to maturity:
 
 
June 30, 2012
 
December 31, 2011
 
Amortized
Cost
 
Level  1(1)
Fair
Value
 
Amortized
Cost
 
Level  1(1)
Fair
Value
Agency bonds
$
1,001

 
$
1,001

 
$
2,605

 
$
2,605

Certificate of deposit
900

 
900

 
900

 
899

Commercial paper
3,594

 
3,595

 
3,097

 
3,096

Corporate debentures/ bonds
5,417

 
5,414

 
4,596

 
4,591

Marketable securities
$
10,912

 
$
10,910

 
$
11,198

 
$
11,191

 
(1)
Level 1 fair values are defined as observable inputs such as quoted prices in active markets.

5. Property and Equipment
 
Property and equipment consisted of the following:
 
 
Estimated
Life
 
June 30,

December 31,
 
2012
2011
Website development
3 years
 
$
6,022

 
$
5,552

Computer equipment
3 years
 
4,669

 
4,172

Leasehold improvements
Life of lease
 
2,310

 
2,283

Furniture and fixtures
5 years
 
793

 
749

Software
3 years
 
305

 
266

Vehicles
5 years
 
53

 
53

Office equipment
5 years
 
40

 
40

Property and equipment
 
 
14,192

 
13,115

Accumulated depreciation
 
 
(8,924
)
 
(7,641
)
Property and equipment, net
 
 
$
5,268

 
$
5,474

 
Depreciation expense was $650 and $441 for the three months ended June 30, 2012 and 2011 respectively and $1,285 and $867 for the six months ended June 30, 2012 and 2011 respectively.

6. Intangible Assets
 
The following tables detail our intangible asset balances by major asset class:
 
 
June 30, 2012
 
December 31, 2011
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Impairment
 
Net
Carrying
Amount
Intangible asset class
 
 
 
 
 
 
 
 
 
 
 
 
 
Domain and trade names
$
33,345

 
$
(26,628
)
 
$
6,717

 
$
33,505

 
$
(11,255
)
 
$
(14,980
)
 
$
7,270

Customer relationships
10,651

 
(4,569
)
 
6,082

 
10,878

 
(3,826
)
 

 
7,052

Technology
4,141

 
(2,672
)
 
1,469

 
4,160

 
(1,287
)
 

 
2,873

Non-compete agreements
954

 
(659
)
 
295

 
982

 
(493
)
 

 
489

Intangible assets, net
$
49,091

 
$
(34,528
)
 
$
14,563

 
$
49,525

 
$
(16,861
)
 
$
(14,980
)
 
$
17,684

 
Amortization expense was $1,400 and $1,900 for the three months ended June 30, 2012, and June 30, 2011 respectively,

14



and $2,815 and $3,535 for the six months ended June 30, 2012 and June 30, 2011 respectively. Intangible assets are amortized on a straight-line basis over their estimated economic lives. We believe that the straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained.
 
In January 2011, we determined that we would not support two brand names and URLs in the United States and decided that we would begin to migrate all traffic from sidestep.com to KAYAK.com. As a result of this triggering event, we prepared an analysis comparing expected future discounted cash flows to be generated by the SideStep domain and trade name asset to the carrying value of the asset. Our analysis resulted in:
 
A charge of $14,980 due to the impairment of the value of the SideStep brand name and URL,
A change in estimate that resulted in acceleration of amortization based on the estimated decline in queries directed from our SideStep URL through December 2013 to reflect the gradual transition of users to the KAYAK URL.

To determine fair value of the SideStep brand name and URL, we used an income approach, which utilized Level 3 fair value inputs as described in "-Note 15 - Fair Value Measurements", and discounted the expected cash flows of the intangible assets. We calculated expected cash flows, using an estimate of future revenue to be generated from the SideStep URL offset by estimated future expenses. We applied a discount rate of 17% representing the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in the respective operations and the rate of return an outside investor could expect to earn. 

7. Goodwill
 
Changes in the carrying amount of goodwill for the year ended December 31, 2011 and six months ended June 30, 2012 were as follows:
 
Balance, December 31, 2011
$
155,677

Foreign currency translation
(433
)
Balance, June 30, 2012
$
155,244

 
8. Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities consisted of the following:
 
 
June 30, 2012
 
December 31, 2011
Accrued bonus
$
3,475

 
$
5,792

Income taxes payable
5,939

 
2,515

Accrued marketing
7,812

 
1,141

Other accrued expenses
7,534

 
6,772

Accrued expenses and other current liabilities
$
24,760

 
$
16,220


9. Income Taxes
 
Our effective tax rates were 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.
Our effective tax rates were 50.5% and 41.0% for the six months ended June 30, 2012 and 2011. The increase in the effective tax rate for the six 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.
10. Commitments and Contingencies
 
Operating Leases
 
We lease our office and data center facilities under noncancelable leases that expire at various points between May 2013 and April 2025. We are also responsible for certain real estate taxes, utilities and maintenance costs on our office facilities. Rent expense was approximately $332 and $426 for the three months ended June 30, 2012 and 2011 respectively and $671 and $897 for the six months ended June 30, 2012 and 2011 respectively.

15




 
Other Commitments
 
We have a content licensing agreement that as of June 30, 2012, obligates us to make minimum future payments of $3,500 for the remainder of 2012. During 2013, we will be obligated to make minimum payments based on the number of queries performed in 2012, and as a result, we are unable to estimate our calendar year 2013 minimum commitment at this time. If not renewed, this agreement expires in December 2013.

On April 3, 2012, we entered into a Products and Services Agreement with a technology provider. This agreement obligates us to make minimum future payments of $1,600 per year for the next four years. As of June 30, 2012, our remaining obligation for 2012 is $800 .

 Legal Matters
 
We are involved in various legal proceedings, including but not limited to the matters described below that involve claims for substantial amounts of money or for other relief or that might necessitate changes to our business or operations.
 
In April 2009, Parallel Networks, LLC filed a complaint against us for patent infringement in the U.S. District Court for the Eastern District of Texas. The complaint alleged, among other things, that our website technology infringes a patent owned by Parallel Networks purporting to cover a “Method And Apparatus For Client-Server Communication Using a Limited Capability Client Over A Low-Speed Communications Link” (U.S. Patent No. 6,446,111 B1) and sought injunctive relief, monetary damages, costs and attorneys fees. The complaint was dismissed without prejudice in February 2010, but the plaintiff filed a new complaint against us on March 29, 2010 containing similar allegations. The case was set for trial on September 10, 2012. The court has since stayed proceedings in the district court pending resolution of plaintiff’s appeal of certain rulings by the court, which granted summary judgment on several claims in favor of us and other defendants. At this time we are unable to estimate any potential damages associated with this matter. As such, we have not recorded any accrual for potential loss as of December 31, 2011 or June 30, 2012.
 
 
In addition, from time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Such proceedings, even if not meritorious, could result in the expenditure of significant financial and managerial resources. If any legal proceedings were to result in an unfavorable outcome, it could have a material adverse effect on our business, financial position and results of operations; however, at this time, we are unable to estimate the potential range of loss, if any, and it is too early to determine the likelihood of whether or not any of these claims will ultimately result in a loss. As such, we have not recorded any material accrual for potential loss as of December 31, 2011 or June 30, 2012.

11. Redeemable Convertible Preferred Stock
 
The Company had authorized 26,876,384 shares of redeemable convertible preferred stock, and had designated six series as of June 30, 2012 and December 31, 2011: 6,600,000 shares of Series A Preferred, 1,176,051 shares of Series A-1 Preferred, 4,989,308 shares of Series B Preferred, 2,138,275 shares of Series B-1 Preferred, 3,897,084 shares of Series C Preferred and 8,075,666 Series D Preferred.
 
Series A Preferred
 
In March and June 2004, the Company issued an aggregate of 6,600,000 shares of Series A Preferred at $1.00 per share for gross proceeds of $6,600.
 
Series A-1 Preferred
 
In November 2004, the Company issued an aggregate of 825,000 shares of Series A-1 Preferred at $2.00 per share for gross proceeds of $1,650. The purchase price of the shares was subject to adjustment based on any dilution occurring as a result of any subsequent stock offering that occurred prior to February 1, 2006 at a price per share lower than $2.00. Consequently, in March 2005, an additional 351,051 shares were issued to Series A-1 holders to adjust the stock purchase price to $1.403 per share, the per-share price of the Series B Preferred Stock.
 
Series B Preferred
 
In February 2005, the Company issued 4,989,308 shares of its Series B Preferred at $1.403 per share for gross proceeds of $7,000.
 

16



Series B-1 Preferred
 
In April 2006, the Company issued 2,138,275 shares of its Series B-1 Preferred at $1.403 per share for gross proceeds of $3,000.
 
Series C Preferred
 
In May 2006, the Company issued 3,855,180 shares of its Series C Preferred at $2.983 per share for gross proceeds of $11,500.
 
Series D Preferred
 
In December 2007, the Company issued 8,008,842 shares of its Series D Preferred at $20.727 per share for gross proceeds of $166,000 and $278 in issuance costs.
 
A summary of the rights and preferences of the Series A, A-1, B, B-1, C and D Preferred, as of June 30, 2012, are as follows:
 
Voting
 
Series A, A-1, B, B-1, C and D Preferred stockholders are entitled to one vote per common share equivalent on all matters voted on by holders of common stock.
 
Dividends
 
Series A, A-1, B, B-1, C and D Preferred stockholders are entitled to receive dividends that are paid on common stock of the Company equal to an amount of the largest number of whole shares of common stock into which the shares of preferred stock are convertible. In addition, Series A, A-1, B, B-1, C and D preferred stockholders are entitled to receive, out of funds legally available, dividends at the rate of 6% per annum of the adjusted original issue price per share and are accumulated regardless if declared. Accumulated and unpaid dividends totaled $57,617 and $51,745 as of June 30, 2012, and December 31, 2011 respectively. Dividends are payable upon a liquidation event, redemption or if declared by the Board of Directors.

In April 2012, the Company executed an Election and Amendment Agreement with certain existing stockholders, or eligible holders, pursuant to which we granted certain eligible holders the right to purchase from us 352,178 shares of common stock at the IPO price of $26.00. We refer to these as the private placement purchase rights. The private placement purchase rights must be exercised, if at all within five business days after the closing of our IPO.

Pursuant to the Election and Amendment Agreement, if our IPO price was below $27.00 per share, we agreed that we would issue to the eligible holders additional shares of Class A common stock for no additional consideration pursuant to an automatic adjustment. As a result of the revision in the terms due to the Election and Amendment Agreement, we recognized a charge of $2,929 as a deemed dividend at the modification date. This charge impacts net income (loss) attributable to our common stockholders and basic net income (loss) per share attributable to common stockholders.

Liquidation Rights
 
In the event of a liquidation, dissolution or winding up of the Company, a sale of all or substantially all of the Company’s assets, and certain mergers, before any distribution payments to common stockholders, the holders of Series A, A-1, B, B-1, C and D Preferred are entitled to an amount equal to the liquidation preference payment. The liquidation preference payment is equal to the original stock price paid per share multiplied by 1.5 for the Series A holders ($1.50 per share), Series A-1 holders ($2.104 per share), Series B holders ($2.104 per share), Series B-1 holders ($2.104 per share), Series C holders ($4.475 per share) and Series D holders ($31.09 per share) plus unpaid dividends (whether or not declared).
 
Conversion
 
Each share of Series A, A-1, B, B-1, C and D preferred is convertible into one share of common stock, adjusted for certain anti-dilutive events. Conversion is at the option of the holder but becomes automatic upon (i) the completion of an IPO involving gross proceeds of at least $25,000 at a price per share that equals or exceeds $31.09 per share, subject to certain adjustments, or (ii) upon the election of the holders of shares of preferred stock representing 58% of the votes applicable to such preferred stock (Requisite Holders), provided that with respect to Series D Preferred, such election must also include holders of at least two-thirds of the Series D preferred. Upon a conversion event holders are not entitled to receive any previously accumulated and unpaid dividends.
 

17



Redemption
 
At any time on or after December 21, 2012, upon the written request of the Requisite Holders, the Company shall redeem, in three equal annual installments, all outstanding Series A, A-1, B, B-1, C and D Preferred, in cash, at an amount equal to the adjusted original issue price plus unpaid dividends. In February 2012, we obtained waivers from more than the Requisite Holders agreeing not to elect any such redemption until after January 2, 2013.
 
Preferred Stock Warrants
 
In connection with the issuance of subordinated term loans in 2007, the lender received warrants to purchase 62,000 shares of Series D preferred stock at an exercise price of $20.73 per share. The warrants expire on the tenth anniversary of the loan closing date (December 2017). In connection with the transaction the Company recorded a separate warrant liability based on the estimated fair value at the issuance date by allocating proceeds first to the warrants and the remaining to the loans (the residual method). Warrants are valued at each reporting period with changes recorded as other income (expense) in the statement of operations. The fair value of these warrants was $489 and $426 at June 30, 2012 and December 31, 2011 respectively, based on the following assumptions using the Black-Scholes model:
 
 
June 30, 2012
 
December 31, 2011
Risk free interest rate
0.4
%
 
0.4
%
Expected volatility
41.2
%
 
42.9
%
Expected life (in years)
3

 
3

Dividend yield
%
 
%

The mark-to-market expense on these warrants was $(84) and $(183) for the three months ended June 30, 2012 and June 30, 2011 respectively and $(63) and $(66) for the six months ended June 30, 2012 and June 30, 2011 respectively.
 
In November 2006, under the terms of a loan and security agreement, the Company issued warrants for the purchase of 41,904 shares of Series C preferred. The warrants are exercisable at $2.983 per share and expire on November 22, 2016. The Company recorded a warrant liability based on the fair value of the warrants at the issuance date. The fair value of these warrants was $830 and $724 as of June 30, 2012 and December 31, 2011, respectively, based on the following assumptions using the Black-Scholes model:
 
 
June 30, 2012
 
December 31, 2011
Risk free interest rate
0.3
%
 
0.3
%
Expected volatility
42.0
%
 
41.0
%
Expected life (in years)
2

 
2

Dividend yield
%
 
%
 
The mark-to-market expense on these warrants was $(106) and $(55) for the three months ended June 30, 2012 and June 30, 2011 respectively and $(106) and $(143) for the six months ended June 30, 2012 and June 30, 2011 respectively.
 
12. Stockholders’ Equity
 
Common Stock
 
A summary of the rights and preferences of common stock as of June 30, 2012 are as follows:
 
Voting
 
Common stockholders are entitled to one vote per share of common stock held on all matters on which such common stockholder is entitled to vote.
 
Dividends
 
Common stockholders are eligible to receive dividends on common stock held when funds are available and as approved by the Board of Directors.
 
Liquidation Rights
 

18



In the event of liquidation, dissolution or winding up of the Company, a sale of all or substantially all of the Company’s assets, and certain mergers, common stockholders are entitled to receive all assets of the Company available for distribution, subject to the preferential rights of any outstanding shares of preferred stock.
 

13. Stock Options and Restricted Stock
 
The board of directors adopted the 2004 Stock Option Plan, or the 2004 Plan, and the Third Amended and Restated 2005 Equity Incentive Plan, or the 2005 Plan, which permits the sale or award of restricted common stock or grant of incentive and nonqualified stock options for the purchase of common stock to employees, directors and consultants up to a maximum aggregate of 13,000,000 shares and 12,000,000 shares at June 30, 2012 and December 31, 2011, respectively. At June 30, 2012 and December 31, 2011, 933,098 shares and 159,946 shares, respectively, were available under the 2005 Plan for future issuances of restricted common stock or grants of stock options.

Restricted Stock
 
The Company has issued shares of restricted common stock to employees, directors and consultants, which are subject to repurchase agreements and generally either vest over a four-year period from date of grant or immediately at the time of the grant. If the holder ceases to have a business relationship with the Company, the Company may repurchase any unvested shares of restricted common stock held by these individuals at their original purchase price. There were no unvested shares at June 30, 2012 or December 31, 2011.
 
Restricted stock is subject to transfer restrictions and contains the same rights and privileges as unrestricted shares of common stock. Shares of restricted stock are presented as outstanding as of the date of issuance. Grants made during 2010 and 2011 all vested immediately as of the date of the grant. There were no restricted stock grants between January 1, 2012 and June 30, 2012.
 
Stock Options
 
Stock options generally have terms of ten years. Stock options granted under the stock plans will typically vest 25% after the first year of service and ratably each month over the remaining 36-month period contingent upon employment with the Company on the date of vesting.
 
The Company utilizes the Black-Scholes model to determine the fair value of stock options. Management is required to make certain assumptions with respect to selected model inputs, including anticipated changes in the underlying stock price (i.e., expected volatility) and option exercise activity (i.e., expected term). The Company bases its expected volatility on the historical volatility of comparable publicly traded companies for a period that is equal to the expected term of the options. The expected term of options granted is derived using the “simplified” method as allowed under the provisions of the SEC’s Staff Accounting Bulletin No. 107 and represents the period of time that options granted are expected to be outstanding. The expected term for performance-based and non-employee awards is based on the period of time for which each award is expected to be outstanding, which is typically the remaining contractual term. The risk-free rate is based on the U.S. Treasury yield in effect at the time of the grant period for a period commensurate with the estimated expected life.

The following table summarizes stock option activity:
 

19



 
Number of
Shares
 
Weighted-Average
Exercise Price
 
Aggregate
Intrinsic
Value
(1)
 
Weighted-Average
Remaining
Contractual Term
(in years)
Balance, December 31, 2011
9,086,586

 
$
10.79

 
$
86,590

 
7.3
Options granted (3)
626,500

 
$
25.03

 
 
 
 
Exercised
(71,442
)
 
$
18.92

 
 
 
 
Canceled/forfeited
(399,652
)
 
$
19.09

 
 
 
 
Balance, June 30, 2012
9,241,992

 
$
11.33

 
$
140,159

 
6.9
Vested and exercisable as of June 30, 2012
5,780,981

 
$
8.09

 
$
106,431

 
5.9
Vested and exercisable as of June 30, 2012 and expected to vest thereafter (2)
8,653,670

 
$
10.85

 
$
135,450

 
6.8
 
(1)
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying award and the fair value of $26.50, and $20.14 of our common stock on June 30, 2012, and December 31, 2011.
(2)
Stock options expected to vest reflect an estimated forfeiture rate.
(3)
Includes 242,500 shares granted to non-employees. The assumptions used to value these grants are similar to those used for grants made to employees with the exception of the expected term.

The fair value of vested shares was $5,655 for the six months ended June 30, 2012 and $10,885 during the year ended December 31, 2011. The total intrinsic value of options exercised was $462 for the six months ended June 30, 2012 and $4,143 during the year ended December 31, 2011.
 
The weighted-average fair value of options granted during the six months ended June 30, 2012 was $12.72 per share and $9.71 per share for the year ended December 31, 2011 based on the Black-Scholes model. The following weighted-average assumptions were used for grants made to employees and do not include the assumptions for non-employee grants:
 
 
June 30, 2012
 
December 31, 2011
Risk-free interest rate
1.0
%
 
1.8
%
Expected volatility
44.6
%
 
43.8
%
Expected life (in years)
6

 
6

Dividend yield
%
 
%


The following table summarizes information concerning outstanding and exercisable options as of June 30, 2012:
 
 
Options Outstanding
 
Options Exercisable and Vested
Range of
Exercise
Prices
Number of Shares
 
Weighted Average
Remaining
Contractual Life
(in Years)
 
Weighted-
Average
Exercise Price
 
Number
of Shares
 
Weighted-
Average
Exercise Price
$  1.00 - $  1.40
971,103

 
2.4
 
$
1.16

 
971,103

 
$
1.16

$2.98
216,240

 
4.3
 
$
2.98

 
216,240

 
$
2.98

$5.00
1,362,500

 
4.9
 
$
5.00

 
1,362,500

 
$
5.00

$7.50
1,737,000

 
7.0
 
$
7.50

 
1,284,822

 
$
7.50

$11.29
255,000

 
7.6
 
$
11.29

 
166,041

 
$
11.29

$13.00
955,000

 
7.5
 
$
13.00

 
562,597

 
$
13.00

$14.82
1,905,316

 
8.3
 
$
14.82

 
840,814

 
$
14.82

$15.50 - $21.00
1,153,333

 
8.6
 
$
19.03

 
355,614

 
$
17.87

25.50 - 26.50
686,500

 
9.7
 
$
25.74

 
21,250

 
25.50

$  1.00 - $26.50
9,241,992

 
6.9
 
$
11.33

 
5,780,981

 
$
8.09

 
 

20



The fair value of the common stock has been determined by the Board of Directors at each award grant date based on a variety of factors, including arm’s length sales of the Company’s capital stock (including redeemable convertible preferred stock), valuations of comparable public companies, the Company’s financial position and historical financial performance, the status of technological developments within the Company’s products, the composition and ability of the technology and management team, an evaluation of and benchmark to the Company’s competition, the current climate in the marketplace, the illiquid nature of the common stock, the effect of rights and preferences of preferred shareholders, and the prospects of a liquidity event, among others. In addition, at least quarterly the Company performs a valuation to assist in determining the current market value of the stock.

At June 30, 2012 and December 31, 2011, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was approximately $29,345 and $31,124, respectively. This expense will be recognized on a straight-line basis over the weighted average remaining vesting period of 2.4 and 2.6 years as of June 30, 2012, and December 31, 2011, respectively.

 
14. Earnings per share
 
The following tables set forth the computation of basic and diluted earnings (loss) per share of common stock for the three and six months ended June 30, 2012 and June 30, 2011 were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Net income (loss)
$
7,288

 
$
3,776

 
$
11,433

 
$
(3,138
)
Redeemable convertible preferred stock dividends
(2,936
)
 
(2,936
)
 
(5,872
)
 
$
(5,872
)
Deemed dividend resulting from modification of redeemable convertible preferred stock
$
(2,929
)
 
$

 
$
(2,929
)
 
$

Net income (loss) attributable to common stockholders—Basic
$
1,423

 
$
840

 
$
2,632

 
$
(9,010
)
Weighted average common shares outstanding
7,049,863

 
7,505,505

 
7,043,571

 
7,451,737

Basic earnings (loss) per share
$
0.20

 
$
0.11

 
$
0.37

 
$
(1.21
)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders—Diluted
$
7,288

 
$
3,776

 
$
11,433

 
$
(9,010
)
Weighted average common shares outstanding
7,049,863

 
7,505,505

 
7,043,571

 
7,451,737

Options to purchase common stock
4,602,055

 
3,082,612

 
3,954,035

 

Convertible preferred stock (as converted basis)
26,767,656

 
26,767,656

 
26,767,656

 

Contingent preferred stock per Election and Amendment Agreement (1)
151,111

 

 
151,111

 

Convertible preferred stock warrants (as converted basis)
50,009

 
35,757

 
42,996

 

Weighted average shares and potential diluted shares
38,620,694

 
37,391,530


37,959,369

 
7,451,737

Diluted earnings (loss) per share
$
0.19

 
$
0.10

 
$
0.30

 
$
(1.21
)

21




(1)
Additional preferred stock per Election and Amendment Agreement as discussed in “-Note 11-Redeemable Convertible Preferred Stock." Shares calculated based on common stock fair value of $26.50 as of June 30, 2012.

The potentially dilutive securities that have been excluded from the calculation of diluted net income (loss) per common share because the effect is anti-dilutive is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Options to purchase common stock
4,639,939

 
5,953,591

 
5,287,959

 
9,036,203

Convertible preferred stock (as converted basis)

 

 

 
26,767,656

Convertible preferred stock warrants (as converted basis)
53,895

 
68,147

 
60,908

 
103,904

 
4,693,834

 
6,021,738

 
5,348,867

 
35,907,763



15. Fair Value Measurements
 
Generally accepted accounting principles set forth a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
Our preferred stock warrants are measured at fair value on a recurring basis. The preferred stock warrants are valued using the Black-Scholes model with the following assumptions: share price, exercise price, expected term, volatility, risk-free interest rate and dividend yield as described in “—Note 11—Redeemable Convertible Preferred Stock”.
  
Changes in valuation during the years ended December 31, 2011 and the six months ended June 30, 2012, were as follows:
 
 
Level 3
Warrant
Instruments
Balance, December 31, 2011
1,150

Mark-to-market adjustment
169

Balance, June 30, 2012
$
1,319

 
Mark-to-market adjustments related to stock put options and warrant instruments are included in other income (expense).
 
16. Related Party Transactions
 
In March 2010, we sold TravelPost, a website that was acquired in 2007, to a corporation affiliated with certain members of our board of directors. In connection with the sale, we entered into a commercial agreement pursuant to which we granted the new company a three-year license to reproduce and publicly display hotel reviews and hotel related information in exchange for a monthly license fee of $50 for the term of the license. In May 2011, the commercial agreement was amended to lower the monthly license fee to $10 in exchange for 1,000,000 shares of Series A Preferred Stock in TravelPost. No value was attributed to the stock.
 
17. Information about Geographic Areas
 
Revenues by geography are based on the country in which our websites are located. For example, KAYAK.com is in the United States, while de.KAYAK.com and swoodoo.com are in Germany. We allocate revenues based on the website’s proportional revenue-generating activity (generally, volume of queries and clicks relative to the whole). Long-lived assets are allocated based on the location of the corporate entity to which they relate.
 

22



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
United States
$
61,957

 
$
46,890

 
$
121,125

 
$
92,116

Germany
6,635

 
5,761

 
14,237

 
11,173

Rest of the world
8,346

 
4,102

 
14,914

 
6,138

Total revenues
$
76,938

 
$
56,753

 
$
150,276

 
$
109,427

 
 
As of June 30,
 
As of December 31,
 
2012
 
2011
Long-lived assets
 
 
 
United States
$
147,390

 
$
149,254

Germany
18,956

 
20,205

Rest of the world
8,729

 
9,376

Total long-lived assets
$
175,075

 
$
178,835

 
18. Subsequent Events (unaudited)
 
On July 25, 2012, we completed our IPO whereby we sold 4,025,000 shares of our Class A common stock at a price of $26.00 per share before underwriting discounts and commissions. The IPO generated net proceeds of approximately $97.3 million, after deducting underwriting discounts and commissions but before estimated offering expenses of $3.8 million. Upon the closing of the IPO, all shares of our then-outstanding common stock and preferred stock automatically converted into an aggregate of 33,864,565 million shares of Class B common stock. Additionally, all outstanding options and warrants as of that date automatically converted into options and warrant to purchase Class B common stock.

Effective as of July 19, 2012, upon the pricing of our IPO, options to purchase 1,300,000 shares of our common stock were awarded to certain employees and officers of the Company. The exercise price of these stock options is $26.00 per share. These options will vest over four years with 25% of the shares subject to these stock options vesting on January 19, 2013 and then monthly thereafter. Total unrecognized estimated compensation expense relate to these non-vested options is approximately $14,800, calculated using a Black-Scholes Model as described in "-Note 13 - Stock Options and Restricted Stock."

Upon the consummation of our IPO, we issued to certain stockholders, for no cash consideration, 308,032 shares of Class A common stock. In addition, certain of our stockholders also vested in a right to purchase from us, up to an aggregate of 352,178 shares of Class A common stock at an exercise price of $26.00 per share. This right terminated on August 1, 2012, and eligible stockholders elected to purchase 231,695 of these shares for an additional consideration of approximately $6.0 million. Issuances described in this paragraph were in consideration for such stockholders entry into that certain Election and Amendment Agreement, dated April 19, 2012, pursuant to which certain stockholders provided various elections, waivers, consents and amendments related to our capital structure as described in "- Note 11 - Redeemable Convertible Preferred Stock".

Effective as of July 20, 2012, we entered into a settlement agreement with Orbitz Worldwide, LLC pursuant to which the parties agreed to resolve their ongoing disputes. The settlement agreement did not involve any material financial payments between the companies, nor did it involve any material changes in contractual terms.


23



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 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 contractual commitments;

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
June 30,
 
Six months ended
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
)
 
917

Depreciation 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,
 
% increase
(decrease)
 
(Amounts in thousands (except RPM))
 
 
2012
 
2011
 
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,
 
% increase
(decrease)
 
(Amounts in thousands (except RPM))
 
 
2012
 
2011
 
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,
 
% increase
(decrease)
 
(Amounts in thousands (except RPM))
 
 
2012
 
2011
 
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,
 
% increase
(decrease)
 
(Amounts in thousands (except RPM))
 
 
2012
 
2011
 
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,
 
%
increase
(decrease)
 
(Dollar amounts in thousands)
 
 
2012
 
2011
 
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,
 
%
increase
(decrease)
 
(Dollar amounts in thousands)
 
 
2012
 
2011
 
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
(decrease)
 
2012
 
2011
 
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
(decrease)
 
2012
 
2011
 
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,
 
% increase
  
(Dollar amounts in thousands)
 
 
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,
 
% increase
  
(Dollar amounts in thousands)
 
 
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,
 
% increase
 
(Dollar amounts
in thousands)
 
 
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,
 
% increase
 
(Dollar amounts
in thousands)
 
 
2012
 
2011
 
(decrease)
Other general and administrative expenses
$
8,447