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PRICELINE COM INC - 10-K/A - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion should be read in conjunction with our financial
statements, including the notes to those statements, included elsewhere in this
Form 10-K, and the Section entitled "Special Note Regarding Forward-Looking
Statements" in this Form 10-K. As discussed in more detail in the
Section entitled "Special Note Regarding Forward-Looking Statements," this
discussion contains forward-looking statements which involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause those
differences include those discussed in "Risk Factors" and elsewhere in this Form
10-K.
Overview
We are a leading online travel company that offers our customers hotel and
accommodation reservations at over 295,000 properties worldwide (as of February
25, 2013) through the Booking.com, priceline.com and Agoda.com brands. In the
United States, we also offer our customers reservations for car rentals, airline
tickets, vacation packages, destination services and cruises through the
priceline.com brand. We offer car rental reservations worldwide through
rentalcars.com (formerly known as TravelJigsaw).
We launched our business in the United States in 1998 under the priceline.com
brand and have since expanded our operations to include Booking.com, Agoda.com
and rentalcars.com, which are independently managed and operated international
brands. Our principal goal is to serve our customers with worldwide leadership
in online hotel, accommodation and rental car reservations. Our business is
driven primarily by international results. During the year ended December 31,
2012, our international business (the substantial majority of which is generated
by Booking.com) represented approximately 82% of our gross bookings (an
operating and statistical metric referring to the total dollar value, generally
inclusive of all taxes and fees, of all travel services purchased by our
customers), and approximately 92% of our consolidated operating income. Given
that our international business is primarily comprised of hotel reservation
services, and that hotel reservations also represent a significant majority of
our domestic business, gross profit earned in connection with the reservation of
hotel room nights represents a substantial majority of our gross profit.
Our priceline.com brand in the United States offers merchant Name Your Own
Price® travel services (sometimes referred to as "opaque" travel services
because certain elements of the service are not disclosed to the customer prior
to booking), which are recorded in revenue on a "gross" basis and have
associated cost of revenue. Retail, or price-disclosed, travel services
(including semi-opaque travel services) offered by both our U.S. and
international brands are recorded in revenue on a "net" basis and have no
associated cost of revenue. Therefore, revenue increases and decreases are
impacted by changes in the mix of our revenues between Name Your Own Price® and
retail travel services. Gross profit reflects the net margin earned for both our
Name Your Own Price® and retail travel services. Consequently, gross profit has
become an increasingly important measure of evaluating growth in our business.
At present, we derive substantially all of our gross profit from the following
sources:
• Commissions earned from facilitating reservations of price-disclosed
hotels, rental cars, cruises and other travel services;
• Transaction gross profit and customer processing fees from our price-disclosed hotel, rental car, and vacation package reservation
services;
• Transaction gross profit and customer processing fees from our Name
Your Own Price® hotel, rental car and airline ticket reservation
services;
• Global distribution system ("GDS") reservation booking fees related to
our Name Your Own Price® hotel, rental car and airline ticket
reservation services, and price-disclosed airline ticket and rental car
services; and
• Other gross profit derived primarily from selling advertising on our websites.
Over the last several years we have experienced strong growth in the number of
hotel room night reservations booked through our hotel reservation services. We
believe this growth is the result of, among other things, the broader shift of
travel purchases from offline to online, the high growth of travel overall in
emerging markets such as Asia-Pacific and South America, and the continued
innovation and execution by our teams around the world to build hotel supply,
content and distribution and to improve the customer experience on our websites.
We experienced strong year-over-year growth in recent years, though that growth
has generally decelerated. For example, in the fourth quarter of 2012, our hotel
room night growth was 38%, a substantial deceleration from 53% in the fourth
quarter of 2011. Given the sheer size of our hotel reservation business, we
believe it is highly likely that our year-over-year growth rates will continue
to decelerate, though the rate of deceleration may not be consistent. For
example, our fourth quarter 2012 room-night growth of 38% reflects slight
acceleration from 36% in the
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third quarter of 2012, driven in part by high rates of growth in Asia-Pacific
and South America, which typically represent a larger proportion of our business
in the fourth quarter based on seasonality. However, we expect the long term
deceleration trend to continue, and we therefore expect to experience further
deceleration in growth rates in the first quarter of 2013 and beyond.
Many governments around the world, including the U.S. government and certain
European governments, are operating at very large financial deficits. Failure to
reach political consensus regarding workable solutions to these issues has
resulted in a high level of uncertainty regarding the future economic outlook.
This uncertainty, as well as concern over governmental austerity measures
including higher taxes and reduced government spending, could impair consumer
spending and adversely affect travel demand. Over recent quarters, we have
experienced declines in transaction growth rates and weaker trends in hotel
average daily rates ("ADRs") across many regions of the world, particularly in
those European countries that appear to be most affected by economic
uncertainties. We believe that these business trends are likely impacted by weak
economic conditions and sovereign debt concerns. The uncertainty of
macro-economic factors and their impact on consumer behavior across regions,
which may differ, makes it more difficult to forecast industry and consumer
trends and the timing and degree of their impact on our markets and business,
which in turn could adversely affect our ability to effectively manage our
business and adversely affect our results of operations.
Large, established Internet search engines with substantial resources and
expertise in developing online commerce and facilitating Internet traffic are
creating - and we believe intend to further create - inroads into online travel,
both in the United States and internationally. For example, following its
acquisition of ITA Software, Inc., a major flight information software company,
Google launched a flight search tool that enables consumers to find fares,
schedules and availability directly on Google and excludes participation by
online travel agents ("OTAs") such as us within the search results. Google has
also invested in HomeAway, a publicly traded vacation home rental service, and
launched "Hotel Finder," a utility that allows consumers to search and compare
hotel accommodations based on parameters set by the consumer and that Google has
at times placed at or near the top of hotel-related search results. In addition,
Microsoft has launched Bing Travel, which searches for airfare and hotel
reservations online and predicts the best time to purchase them. "Meta-search"
services leverage their search technology to aggregate travel search results for
the consumer's specific itinerary across travel service provider (e.g., airlines
or hotels), OTA and other websites and, in many instances, compete directly with
us for customers. Furthermore, certain travel service providers limit OTA
participation within the meta-search results. Some meta-search services that
offer consumers the ability to make hotel reservations directly through their
websites may evolve into more traditional OTAs. Meta-search services intend to
appeal to consumers by showing more detailed travel search results, including
specific information for their own itineraries than may be available through
OTAs or other websites, which could lead to travel service providers or others
gaining a larger share of search traffic or may ultimately lead to search
engines executing transactions within their own websites. If Google (the largest
search engine in the world), Bing or other leading search engines refer
significant traffic to these or other travel services that they develop in the
future, or otherwise favor supplier websites or other travel service websites
over OTAs, including us, or if meta-search or travel research services limit our
participation within their search results, it would likely become more difficult
and expensive for us to generate traffic to our websites and therefore to
maintain or grow our market share, which could have a material adverse effect on
our business and results of operations.
Several major hotel companies, comprising Choice Hotels International, Hilton
Worldwide, Hyatt, InterContinental Hotels Group, Wyndham Hotel Group, Marriott,
La Quinta and Millennium, launched Room Key, an online hotel reservation service
that competes directly with our hotel reservation services. The hotel companies
that own Room Key have a stated goal of driving consumers directly to their
brand websites, thus reducing the share received by OTAs. They may also attempt
to improve their competitive position by offering lower room rates, better room
availability or additional features or amenities through Room Key than are
available through services like ours. If Room Key is successful, our share of
the online hotel room night reservation market could be negatively affected and
our business could suffer.
There has been a proliferation of new channels through which hotels can offer
hotel room reservations. For example, some hotels offer room reservations
through "daily deal" websites such as Groupon and Living Social, which sell
coupons to customers at a substantial discount. In 2011, Expedia, one of our
largest competitors, entered into a partnership with Groupon to sell hotel room
reservations to Groupon customers under the "Groupon Getaways" brand name. New
entrants, such as BackBid, GuestMob and Tingo, as well as Hipmunk and Room 77,
have developed new and differentiated offerings that endeavor to provide savings
on hotel rooms to consumers and that compete directly with us. If any of these
new services are successful, we may experience less demand for our services and
are likely to face more competition for access to the limited supply of
discounted hotel room rates.
Widespread adoption of mobile devices, such as the iPhone, Android-enabled smart
phones, and tablets such as the iPad, coupled with the improved web browsing
functionality and development of thousands of useful "apps" available on these
devices, is driving substantial traffic and commerce activity to mobile
platforms. We have experienced a significant shift of
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business to mobile platforms and our advertising partners are also seeing a
rapid shift of traffic to mobile platforms. Our major competitors and certain
new market entrants are offering mobile applications for travel products and
other functionality, including proprietary last-minute discounts for hotel
bookings. Advertising and distribution opportunities may be more limited on
mobile devices given their smaller screen sizes. The gross profit earned on a
mobile transaction may be less than a typical desktop transaction due to
different consumer purchasing patterns. For example, hotel reservations made on
a mobile device typically are for shorter lengths of stay and are not made as
far in advance. We have made significant progress creating mobile offerings,
which have received strong reviews, solid download trends, and are driving a
material and increasing shares of our business. We believe that mobile bookings
present an opportunity for growth and are necessary to maintain and grow our
business as consumers increasingly turn to mobile devices instead of a personal
computer and to mobile applications instead of a web browser. If we are unable
to continue to rapidly innovate and create new and differentiated mobile
offerings, and efficiently and effectively advertise and distribute on these
platforms, we could lose market share to existing competitors or new entrants.
Apple, Inc., one of the most successful companies in the world and producer of,
among other things, the iPhone and iPad, recently obtained a patent for
"iTravel," a mobile app that would allow a traveler to check in for a travel
reservation. In addition, Apple's most recent iPhone operating system includes
"Passbook," a virtual wallet app that holds tickets, boarding passes, coupons
and gift cards, and along with iTravel, may be indicative of Apple's intent to
enter the travel reservations business in some capacity. Apple has substantial
market share in the smart phone category and controls integration of offerings,
including travel services, into its mobile operating system. Apple also has more
experience producing and developing mobile apps and has access to greater
resources, than we have. Apple may use or expand iTravel, Passbook, Siri
(Apple's voice recognition "concierge" service) or another mobile app as a means
of entering the travel reservations marketplace. Similarly, Google's Android
operating system is the leading smartphone operating system in the world. As a
result, Google could leverage its Android operating system to give its travel
services a competitive advantage, either technically or with prominence on its
Google Play app store or within its mobile search results. To the extent Apple
or Google use their mobile operating systems or app distribution channels to
favor their own travel service offerings, our business could be harmed.
We use online search engines, price comparison and travel research services, and
affiliate marketing as primary means of generating traffic to our websites. As a
result, our online advertising expense has increased significantly in recent
years, a trend we expect to continue. In addition, our online advertising has
grown faster than our gross profit due to (1) brand mix within the Priceline
Group, (2) channel mix within our brands and (3) recently, lower returns on
investment ("ROIs") from our online advertising. Our international brands are
growing faster than our priceline.com U.S. brand, and spend a higher percentage
of gross profit on online advertising. Furthermore, our brands are generally
obtaining an increasing share of traffic through paid online advertising
channels. Finally, our online advertising ROIs have recently been down
year-over-year.
Advertising efficiency is impacted by a number of factors that are subject to
variability, including without limitation, ADRs, costs per click, cancellation
rates, foreign exchange rates and the extent to which we are successful in
converting paid traffic to booking customers and then having customers return
directly to our websites and mobile apps for future bookings.
International Trends. The size of the travel market outside of the United States
is substantially greater than that within the United States. Historically,
Internet adoption rates and e-commerce adoption rates of international consumers
have trailed those of the United States. However, international consumers are
rapidly moving to online means for purchasing travel. Accordingly, recent
international online travel growth rates have substantially exceeded, and are
expected to continue to exceed, the growth rates within the United States. We
expect that over the long-term, international online travel growth rates will
follow a similar trend to that experienced in the United States. In addition,
the base of hotel properties in Europe and Asia is particularly fragmented
compared to that in the United States, where the hotel market is dominated by
large hotel chains. We believe online reservation systems like ours may be more
appealing to small chains and independent hotels more commonly found outside of
the United States. Our growth has primarily been generated by our international
hotel reservation service brands, Booking.com and Agoda.com. Booking.com, our
most significant brand, includes over 275,000 hotels and accommodations on its
website as of February 25, 2013 (updated property counts are available on the
Booking.com website). Booking.com has added properties over the past year in its
core European market as well as higher-growth markets such as North America
(which is a newer market for Booking.com), Asia-Pacific and South America. An
increasing amount of our business from both a destination and point-of-sale
perspective is conducted in these newer markets which are growing faster than
our overall growth rate. We believe that the opportunity to continue to grow our
business exists for the markets in which we operate. We believe these trends and
factors have enabled us to become the leading online hotel and accommodation
reservation service provider in the world as measured by room nights booked.
As our international business represents the substantial majority of our
results, we expect to continue to see our operating expenses and other financial
metrics largely driven by international performance. For example, certain newer
markets in which we operate that are in earlier stages of development have lower
operating margins compared to more mature
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markets, which could have a negative impact on our overall margins as these
markets increase in size over time. Also, we intend to continue to invest in
adding properties to our websites. Many of the newer properties we add,
especially in highly penetrated markets, may have fewer rooms, lower ADRs or
higher credit risk, and may appeal to a smaller subset of customers (for
example, hostels and bed and breakfasts), and therefore may also negatively
impact our margins over time.
Another impact of the size of our international business is our exposure to
foreign currency exchange risk. Because we are conducting a substantial majority
of our business outside the United States and are reporting our results in U.S.
Dollars, we face exposure to adverse movements in currency exchange rates as the
financial results of our international business are translated from local
currency (principally the Euro and the British Pound Sterling) into U.S. Dollars
upon consolidation. For example, a strengthening of the Euro increases our
Euro-denominated net assets, gross bookings, gross profit, operating expenses,
and net income as expressed in U.S. Dollars, while a weakening of the Euro
decreases our Euro-denominated net assets, gross bookings, gross profit,
operating expenses, and net income as expressed in U.S. Dollars. Greece,
Ireland, Portugal and certain other European Union countries with high levels of
sovereign debt have had difficulty refinancing their debt. Concern around
devaluation or abandonment of the Euro common currency, or that sovereign
default risk may be more widespread and could include the United States, has led
to significant volatility in the exchange rate between the Euro, the U.S. Dollar
and other currencies. We generally enter into derivative instruments to minimize
the impact of short-term currency fluctuations on our consolidated operating
results. However, such derivative instruments are short term in nature and not
designed to hedge against currency fluctuation that could impact our foreign
currency denominated gross bookings, revenue or gross profit (see Note 5 to the
Consolidated Financial Statements for additional information on our derivative
contracts). For example, while revenue from our international business grew
year-over-year on a local currency basis by approximately 48% for the year ended
December 31, 2012 compared to the same period in 2011, as a result of the
negative impact of currency exchange rates, revenue from our international
business as reported in U.S. Dollars grew 39% for the year ended December 31,
2012.
Domestic Trends. Competition in domestic online travel remains intense and
online travel companies are creating new promotions and consumer value features
in an effort to gain competitive advantages. In particular, the competition to
provide "opaque" hotel reservation services to consumers, an area in which our
priceline.com U.S. business has been a leader, has become more intense. For
example, Expedia makes opaque hotel room reservations available on its principal
website under the name "Expedia Unpublished Rates" and has supported this
initiative with steeper discounts through lower margins. As with our Name Your
Own Price® hotel booking service, the name of the hotel is not disclosed until
after booking. We believe these offerings, in particular "Expedia Unpublished
Rates", have adversely impacted the market share and year-over-year growth rate
for our opaque hotel service, which experienced a decline in room night
reservations in 2012 compared to 2011. This decline may have been exacerbated by
a shift in our advertising in 2012 to focus on our non-opaque hotel reservation
services. These and other competitors could also launch opaque rental car
services, which could negatively impact our opaque Name Your Own Price® rental
car service. In addition, some hotels offer discounted room reservations through
"daily deal" websites such as Groupon and Living Social. If Expedia or others
are successful in growing their opaque and semi-opaque hotel reservation
services, and/or "daily deal" websites are successful in garnering a sizable
share of discounted hotel bookings, we may have less consumer demand for our
opaque and semi-opaque hotel reservation services over time, and we would face
more competition for access to the limited supply of discounted hotel room
rates. In an effort to compete more effectively against these new offerings, in
2012 we launched Express Deals, a semi-opaque price-disclosed hotel reservation
service. However, Express Deals may not be successful at recovering or growing
lost hotel reservation service market share. As a result, we believe our share
of the discount hotel reservation market in the United States could further
decrease.
While demand for online travel services in the United States continues to
experience annualized growth, we believe that the domestic market share of
third-party distributors is impacted in part by a concerted initiative by travel
service providers to direct customers to their own websites in an effort to
reduce distribution expenses and establish more direct control over their
pricing. The launch of Room Key discussed above is demonstrative of such
efforts. In addition, certain airlines have attempted to charge additional fees
to customers who book airline reservations through an online channel other than
their own website. Travel service providers who sell on their own websites
typically do not charge a processing fee, and, in some instances, offer
advantages such as web-only fares, bonus miles or loyalty points, which could
make their offerings more attractive to consumers than models like ours.
Some travel service providers are encouraging third-party travel intermediaries,
such as us, to develop technology to bypass the traditional GDSs, such as
enabling direct connections to the travel suppliers or using alternative global
distribution methods. For example, in 2011, we enabled a direct connection with
American Airlines. During 2011, American Airlines content was temporarily
unavailable on Expedia and Orbitz due to disputes related to enabling a direct
connection. We believe that this is consistent with an effort on the part of
American Airlines, and the airline industry in general, to reduce distribution
costs and could be indicative of the airlines in general becoming more
aggressive in requiring OTAs to implement direct connections. Development and
implementation of the technology to enable additional direct connections to
travel service
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providers could cause us to incur additional operating expenses, increase the
frequency/duration of system problems and delay other projects. In addition, any
additional migration toward direct connections would reduce the compensation we
receive from GDSs.
Domestic airlines have reduced capacity and increased fares since the latter
part of 2009, a trend which may continue. Decreases in capacity reduce the
amount of airline tickets available, while significant increases in average
airfares have adversely impacted leisure travel demand. Reduced airline capacity
and demand negatively impact our priceline.com air ticket reservation business,
which in turn has negative repercussions on our priceline.com hotel and rental
car businesses. Our rental car business has also been impacted by an increase in
the utilization of rental car fleets, resulting in less opaque rental car
availability, which has negatively impacted our Name Your Own Price® rental car
service. We expect continued variability in the breadth and depth of discounted
airline tickets and rental car rates made available to us in the future,
depending on market conditions from time to time.
Seasonality. A meaningful amount of retail gross bookings are generated early in
the year, as customers plan and reserve their spring and summer vacations in
Europe and North America. However, we generally do not recognize associated
revenue until future quarters when the travel occurs. From a cost perspective,
we expense the substantial majority of our advertising activities as they are
incurred, which is typically in the quarter in which bookings are generated. As
a result, we typically experience our highest levels of profitability in the
second and third quarters of the year, which is when we experience the highest
levels of booking and travel consumption for the year for our North American and
European businesses. However, we experience the highest levels of booking and
travel consumption for our Asia-Pacific and South American businesses in the
first and fourth quarters. Therefore, if these businesses continue to grow
faster than our North American and European businesses, our operating results
for the first and fourth quarters of the year may become more significant over
time as a percentage of full year operating results. In addition, our Name Your
Own Price® services are generally non-refundable in nature, and accordingly, we
recognize travel revenue at the time a booking is generated. However, we
recognize revenue generated from our retail hotel services at the time that the
customer checks out of the hotel. Therefore, if our retail hotel business
continues to grow faster than our Name Our Own Price® services, we expect our
quarterly results to become increasingly impacted by these seasonal factors.
Other Factors. We believe that our success will depend in large part on our
ability to continue to profitably grow our brands worldwide, and, over time, to
offer other travel services and further expand into other international markets.
Factors beyond our control, such as worldwide recession, higher oil prices,
terrorist attacks, unusual weather patterns, natural disasters such as
earthquakes, hurricanes, tsunamis, floods, volcanic eruptions (such as the April
2010 eruption of a volcano in Iceland), travel related health concerns including
pandemics and epidemics such as Influenza H1N1, avian bird flu and SARS,
political instability, regional hostilities, imposition of taxes or surcharges
by regulatory authorities or travel related accidents could adversely affect our
business and results of operations and impair our ability to effectively
implement all or some of the initiatives described above.
For example, in late 2012 Hurricane Sandy disrupted travel in the northeastern
United States. In early 2011, Japan was struck by a major earthquake, tsunami
and nuclear emergency. In October 2011, severe flooding in Thailand, a key
market for our Agoda.com business and the Asian business of Booking.com,
negatively impacted booking volumes and cancellation rates in this market. In
addition, in early 2010, Thailand experienced disruptive civil unrest, which
caused the temporary relocation of Agoda.com's Thailand-based operations. Future
natural disasters or civil or political unrest could further disrupt our
business and operations.
We intend to continue to invest in marketing and promotion, technology and
personnel within parameters consistent with attempts to improve long-term
operating results, even if those expenditures create pressure on operating
leverage. We have experienced pressure on operating margins as we prioritize
initiatives that drive growth. We also intend to broaden the scope of our
business, and to that end, we explore strategic alternatives from time to time
in the form of, among other things, mergers and acquisitions. Our goal is to
grow gross profit and achieve healthy operating margins in an effort to maintain
profitability. The uncertain environment described above makes the prediction of
future results of operations difficult, and accordingly, we may not be able to
sustain gross profit growth and profitability.
In November 2012, we entered into a definitive agreement to acquire KAYAK
Software Corporation, a leading travel meta-search service, in a stock and cash
transaction. Under the terms of the agreement, the transaction values KAYAK at
$1.8 billion ($1.65 billion net of cash acquired) or $40 per share of KAYAK
common stock, with $500 million to be paid in cash, which is expected to be made
from cash on hand in the United States, and $1.3 billion to be paid in shares of
our common stock and assumed stock options (subject to a volume-weighted average
trading price calculation and a collar on the value of our common stock). The
transaction is expected to be completed in the first half of 2013, pending
approval from relevant regulatory authorities and KAYAK shareholders.
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Our significant accounting policies and estimates are
more fully described in Note 2 to the Consolidated Financial Statements. Certain
of our accounting policies and estimates are particularly important to our
financial position and results of operations and require us to make difficult
and subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. In applying those policies, our
management uses its judgment to determine the appropriate assumptions to be used
in the determination of certain estimates. On an on-going basis, we evaluate our
estimates, including those related to the items described below. Those estimates
are based on, among other things, historical experience, terms of existing
contracts, our observance of trends in the travel industry and on various other
assumptions that we believe to be reasonable under the circumstances. Our actual
results may differ from these estimates under different assumptions or
conditions. Our significant accounting policies that involve significant
estimates and judgments of management include the following:
• Accounting for State and Local "Hotel Occupancy" Taxes. As discussed
in Note 16 to the Consolidated Financial Statements, we are
currently involved in approximately forty lawsuits brought by or
against states, cities and counties over issues involving the
payment of hotel occupancy and other related taxes (e.g., state and
local sales tax and general excise tax) and our merchant hotel
business. We are also involved in one consumer lawsuitrelating to,
among other things, the payment of hotel occupancy taxes and service
fees. In addition, over seventy municipalities or counties, and at
least eight states, have initiated audit proceedings (including
proceedings initiated by more than forty municipalities in
California), issued proposed tax assessments or started inquiries
relating to the payment of hotel occupancy and other related taxes.
Additional state and local jurisdictions are likely to assert that
we are subject to, among other things, hotel occupancy and other
related taxes and could seek to collect such taxes,retroactively
and/or prospectively. Historically, we have not collected hotel
occupancy or other taxes on the gross profit earned from merchant
hotel transactions; however, in a handful of jurisdictions, we have
been recently required by passage of a new statute or court order,
to start collecting and remitting certain taxes (local occupancy
and/or sales or excise tax) imposed upon our margin and/or service
fee. The ultimate resolution of these matters in alljurisdictions
cannot be determined at this time. We have established an accrual
for potential resolution of issues related to hotel occupancy and
other related taxes for prior and current periods, consistent with
applicable accounting principles and in light of all current facts
and circumstances. We accrue for legal contingencies where it is
probable that a loss has occurred and the amount can be reasonably
estimated; our legal expenses for these matters are expensed as
incurred and are not reflected in the amount accrued. A variety of
factors could affect the amount of the liability (both past and
future), which factors include, but are not limited to, the number
of, and amount of gross profit represented by, jurisdictions that
ultimately assert a claim and prevail in assessing such additional
tax or negotiate a settlement and changes in relevantstatutes. The
ultimate resolution of these matters may be greater or less than the
liabilities recorded.
• Stock-Based Compensation. We record stock-based compensationexpense
for equity-based awards over the recipient's service period based
upon the grant date fair value of the award. A number of our equity
awards have performance targets (a performance "contingency") which,
if satisfied, can increase the number of shares issued to the
recipients at the end of the performance period or, in certain
instances, if not satisfied, reduce the number of shares issued to
the recipients, sometimes to zero, at the end of the performance
period. The performance periods for our performance based equity
awards are typically three years. We record stock-basedcompensation
expense for these performance-based awards based upon our estimate
of the probable outcome at the end of the performance period (i.e.,
the estimated performance against the performance targets). We
periodically adjust the cumulative stock-based compensation recorded
when the probable outcome for these performance-based awards is
updated based upon changes in actual and forecasted operating
results. Stock-based compensation for the years ended December 31,
2012, 2011 and 2010 includes charges amounting to $0.9 million,
$10.3 million and $13.4 million, respectively, representing the
cumulative impact of adjusting the estimated probable outcome of
unvested performance share units. Our actual performanceagainst the
performance targets could differ materially from our estimates.
We record stock-based compensation expense net of estimated forfeitures. In
determining the estimated forfeiture rates, we periodically review actual and
projected forfeitures. To the extent that actual or projected forfeiture rates
differ from current estimates, such amounts are recorded as a cumulative
adjustment in the period in which the estimate is revised.
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• Valuation of Goodwill. We have recorded goodwill related to
businesses we have acquired. Goodwill is reviewed at least annually
for impairment using appropriate valuation techniques. In the event
that future circumstances indicate that any portion of our goodwill
is impaired, an impairment charge would be recorded.
A substantial amount of our goodwill relates to our acquisition of Booking.com.
The estimated fair value for Booking.com, as well as our other reporting units,
is substantially in excess of their respective carrying values. Since the annual
impairment test in September 2012, there have been no events or changes in
circumstances to indicate a potential impairment.
• Valuation of Long-Lived Assets and Intangibles. We evaluate whether
events or circumstances have occurred which indicate that the
carrying amounts of long-lived assets and intangibles may be
impaired. The significant factors that are considered that could
trigger an impairment review include changes in business strategies,
market conditions, or the manner of use of an asset; under
performance relative to historical or expected future operating
results; and negative industry or economic trends. Inevaluating an
asset for possible impairment, management estimates that asset's
future undiscounted cash flows to measure whether the carrying value
of the asset is recoverable. If it is determined that the asset is
not recoverable, we measure the impairment based upon the fair value
of the asset compared to its carrying value. The fair value
represents the projected discounted cash flows of the asset over its
remaining life.
• Deferred Tax Valuation Allowance. We periodically evaluate the
likelihood of the realization of deferred tax assets, andreduce the
carrying amount of these deferred tax assets by a valuation
allowance to the extent we believe a portion will not be realized.
We consider many factors when assessing the likelihood of future
realization of our deferred tax assets, including our recent
cumulative earnings experience by taxing jurisdiction,expectations
of future income, the carryforward periods available to us for tax
reporting purposes, and other relevant factors. The deferred tax
asset at December 31, 2012 amounted to $72.2 million. The valuation
allowance may need to be adjusted in the future if facts and
circumstances change, causing a reassessment of the amount of
deferred tax assets more likely than not to be realized.
Recent Accounting Pronouncements
On January 1, 2012, we adopted the amended accounting guidance issued by the
Financial Accounting Standards Board ("FASB") concerning the presentation of
comprehensive income. The new guidance requires comprehensive income to be
reported in either a single statement or in two consecutive statements reporting
net income and other comprehensive income. We selected to present two
consecutive statements. This amended guidance did not change the items that
constitute net income or other comprehensive income, the timing of when other
comprehensive income is reclassified to net income, or the earnings per share
computation. In February 2013, the FASB issued new accounting guidance which
adds new disclosure requirements for items reclassified out of accumulated other
comprehensive income. The new guidance requires that companies present either in
a single note or parenthetically on the face of the financial statements, the
effect of significant amounts reclassified based on its source and is effective
for public companies in interim and annual reporting periods beginning after
December 13, 2012. We will comply with the new disclosure requirements beginning
in the first quarter of 2013.
In September 2011, the FASB issued an accounting update, which amended the
guidance on testing goodwill for impairment. Under the revised guidance,
entities testing goodwill for impairment have the option of performing a
qualitative assessment before calculating the fair value of the reporting unit.
If, based on the qualitative factors, it is more-likely-than not that the fair
value of the reporting unit is less than its carrying value, then the unchanged
two-step approach previously used would be required. The new accounting guidance
did not change how goodwill is calculated, how goodwill is assigned to the
reporting unit, or the requirements for testing goodwill annually or when events
and circumstances warrant testing. The accounting update was effective for
annual and interim periods beginning after December 15, 2011, with early
adoption permitted. In September 2012, we performed our annual quantitative
goodwill impairment testing, and concluded that the estimated fair value for
each reporting unit substantially exceeds its respective carrying value.
In May 2010, the FASB issued amended guidance on fair value to largely achieve
common fair value measurement and disclosure requirements between U.S. GAAP and
IFRS. The new accounting guidance did not extend the use of fair value but
rather provided guidance about how fair value should be determined. For U.S.
GAAP, most of the changes were clarifications of existing guidance or wording
changes to align with IFRS. The amended guidance expanded disclosure,
particularly relating to fair value measurements based on unobservable inputs,
permitted fair value measurements for financial assets and liabilities on a net
position if market or credit risks are managed on a net basis and other criteria
are met, and allowed premiums and discounts only if a market participant would
also include them in the fair value measurement. This accounting
43
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update was effective for public companies for interim or annual periods
beginning after December 15, 2011, with early adoption permitted. The adoption
of this accounting guidance, effective with the three months ended March 31,
2012, did not impact our consolidated financial statements or disclosure.
Results of Operations
Year Ended December 31, 2012 compared to Year Ended December 31, 2011
Operating and Statistical Metrics
Our financial results are driven by certain operating metrics that encompass the
booking activity generated by our travel services. Specifically, reservations of
hotel room nights, rental car days and airline tickets capture the volume of
units purchased by our customers. Gross bookings is an operating and statistical
metric that captures the total dollar value, generally inclusive of taxes and
fees, of all travel services booked by our customers, and is widely used in the
travel business. International gross bookings reflect gross bookings generated
principally by websites owned by, operated by, or dedicated to providing gross
bookings for our international brands and operations, and domestic gross
bookings reflect gross bookings generated principally by websites owned by,
operated by, or dedicated to providing gross bookings by our domestic
operations, in each case without regard to the travel destination or the
location of the customer purchasing the travel.
Gross bookings resulting from hotel room night reservations, rental car days and
airline tickets sold through our international and domestic operations for the
years ended December 31, 2012 and 2011 were as follows (numbers may not total
due to rounding):
Year Ended December 31,
(in millions)
2012 2011 Change
International $ 23,370 $ 16,909 38.2 %
Domestic 5,086 4,748 7.1 %
Total $ 28,456 $ 21,658 31.4 %
Gross bookings increased by 31.4% for the year ended December 31, 2012, compared
to the same period in 2011 (growth on a local currency basis was approximately
37%), principally due to 39.5% growth in hotel room night reservations, partly
offset by foreign currency impact and slower growth rates for our non-hotel
businesses. The 38.2% increase in international gross bookings for the year
ended December 31, 2012 (growth on a local currency basis was approximately 46%)
was primarily attributable to growth in hotel room night reservations for our
Booking.com and Agoda.com businesses, as well as growth in rental car
reservations for our rentalcars.com business. Domestic gross bookings increased
by 7.1% for the year ended December 31, 2012, compared to the same period in
2011, primarily due to an increase in price-disclosed airline ticket
reservations and associated higher airfares, as well as an increase in
price-disclosed hotel room night reservations and associated higher average
daily rates ("ADRs"). Retail rental car day reservations for our priceline.com
business also increased in the year ended December 31, 2012. Our Name Your Own
Price® hotel, air, and rental car businesses experienced a decline in
reservations in the year ended December 31, 2012, compared to the same period in
2011.
Gross bookings resulting from hotel room night reservations, rental car days and
airline tickets sold through our agency and merchant models for the years ended
December 31, 2012 and 2011 were as follows (numbers may not total due to
rounding):
Year Ended December 31,
(in millions)
2012 2011 Change
Agency $ 23,284 $ 17,610 32.2 %
Merchant 5,172 4,048 27.8 %
Total $ 28,456 $ 21,658 31.4 %
Agency gross bookings increased 32.2% for the year ended December 31, 2012,
compared to the same period in 2011, due primarily to growth in Booking.com
hotel room night reservations. Our U.S. priceline.com business also experienced
44
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growth in reservations of agency price-disclosed hotel room nights, airline
tickets, and rental car days. Merchant gross bookings increased 27.8% for the
year ended December 31, 2012, compared to the same period in 2011, primarily due
to an increase in Agoda.com hotel room night reservations and rentalcars.com
rental car day reservations. Higher ADRs drove growth in merchant gross bookings
related to our priceline.com price-disclosed hotel business, while our Name Your
Own Price® hotel business experienced a decline in hotel room night reservations
for the year ended December 31, 2012 compared to the same period in 2011, due to
the competitive pressures discussed above in Domestic Trends. Gross bookings
related to Name Your Own Price® rental car reservations and airline ticket
reservations also experienced a decline for the year ended December 31, 2012,
compared to the same period in 2011.
Hotel Room Rental Airline
Year Ended Nights Car Days Tickets
December 31, 2012 197.5 million 32.0 million 6.4 million
December 31, 2011 141.6 million 23.8 million 6.2 million
Hotel room night reservations increased by 39.5% for the year ended December 31,
2012, compared to the same period in 2011, principally due to an increase in
Booking.com, Agoda.com and priceline.com price-disclosed hotel room night
reservations, partially offset by a decline in Name Your Own Price® hotel room
night reservations as a result of increased domestic competition in the opaque
hotel room reservation market, including from Expedia's "Expedia Unpublished
Rates" service. Booking.com, our most significant brand, includes over 275,000
hotels and accommodations on its website as of February 25, 2013 (updated
property counts are available on the Booking.com website). Booking.com has
added properties over the past year in its core European market as well as
higher-growth markets such as North America (which is a newer market for
Booking.com), Asia-Pacific and South America. An increasing amount of our
business from a destination and point-of-sale perspective is conducted in these
newer markets, which are growing faster than our overall growth rate and our
core European market. Our U.S. priceline.com agency hotel reservations
benefited from the integration of hotels from the Booking.com extranet on the
priceline.com website.
Rental car day reservations increased by 34.9% for the year ended December 31,
2012, compared to the same period in 2011, due primarily to an increase in
rental car day reservations for our rentalcars.com business and priceline.com
price-disclosed business, partially offset by a decline in Name Your Own
Price® rental car day reservations due to limited availability of discounted
supply as well as lower retail pricing.
Airline ticket reservations increased by 2.7% for the year ended December 31,
2012, compared to the same period in 2011, due to an increase in price-disclosed
airline ticket reservations partially offset by a decrease in Name Your Own
Price® ticket reservations for the year ended December 31, 2012, compared to
the same period in 2011, due to limited availability of discounted supply.
Revenues
We classify our revenue into three categories:
• Agency revenues are derived from travel related transactions where we
are not the merchant of record and where the prices of the travel
services are determined by third parties. Agency revenues include
travel commissions, GDS reservation booking fees related to certain
travel services and customer processing fees and are reported at the
net amounts received, without any associated cost of revenue.
Principally all of the revenue for Booking.com is comprised of travel
commissions.
• Merchant revenues are derived from services where we are the merchant
of record and therefore charge the customer's credit card for the travel services provided. Merchant revenues include (1) transaction
revenues representing the selling price of Name Your Own Price® hotel
room night, rental car and airline ticket reservations and
price-disclosed vacation packages; (2) transaction revenues
representing the amount charged to a customer, less the amount charged
by travel service providers in connection with (a) the hotel room
reservations provided through our merchant price-disclosed hotel
service at Agoda.com and priceline.com and (b) the reservations
provided through our merchant semi-opaque rental car service at rentalcars.com and merchant semi-opaque hotel service at priceline.com,
which allows customers to see the price of the reservation prior to
purchase but not the identity of the travel service provider; (3)
customer processing fees charged in connection with the sale of Name
Your Own Price® hotel room night, rental car and airline ticket
reservations and merchant price-disclosed hotel
45--------------------------------------------------------------------------------reservations; and (4) ancillary fees, including GDS reservation booking fees
related to certain of the services listed above.
• Other revenues are derived primarily from advertising on our websites.
Year Ended
December 31,
($000)
2012 2011 Change
Agency Revenues $ 3,142,815 $ 2,339,253 34.4 %
Merchant Revenues 2,104,752 2,004,432 5.0 %
Other Revenues 13,389 11,925 12.3 %
Total Revenues $ 5,260,956 $ 4,355,610 20.8 %
Agency Revenues
Agency revenues for the year ended December 31, 2012 increased 34.4% compared to
the same period in 2011, primarily as a result of growth in the business of
Booking.com. Our U.S. agency revenues benefited from the integration of hotels
from the Booking.com extranet on the priceline.com website as well as growth in
our priceline.com retail rental car business.
Merchant Revenues
Merchant revenues for the year ended December 31, 2012 increased 5.0% compared
to the same period in 2011, primarily due to increases in our Agoda.com hotel
business, rentalcars.com rental car business and priceline.com merchant
price-disclosed hotel business, partially offset by a decline in our Name Your
Own Price® businesses. Merchant revenue growth over the prior year period was
substantially lower than merchant gross bookings growth because our merchant
revenues are disproportionately affected by our Name Your Own Price® business.
Name Your Own Price® revenues are recorded "gross" with a corresponding provider
cost recorded in cost of revenues, and represented a smaller percentage,
year-over-year, of total revenues compared to our faster-growing Agoda.com and
rentalcars.com businesses, which are recorded in revenue "net" of provider cost.
As a result, we believe that gross profit is an important measure of evaluating
growth in our business.
Other Revenues
Other revenues consisted primarily of advertising revenues. Other revenues for
the year ended December 31, 2012 increased compared to the same period in 2011.
Cost of Revenues
Year Ended
December 31,
($000)
2012 2011 ChangeCost of Revenues $ 1,177,275 $ 1,275,730 (7.7 )%
% of Merchant Revenues 55.9 % 63.6 %
Cost of Revenues
For the year ended December 31, 2012, cost of revenues consisted primarily of:
(1) the cost of Name Your Own Price® hotel room reservations from our suppliers,
net of applicable taxes, (2) the cost of Name Your Own Price® rental cars from
our suppliers, net of applicable taxes; and (3) the cost of Name Your Own Price®
airline tickets, net of the federal air transportation tax, segment fees and
passenger facility charges imposed in connection with the sale of airline
tickets. Cost of revenues for the year ended December 31, 2012 decreased by
7.7%, compared to the same period in 2011, primarily due to a decrease in our
Name Your Own Price® businesses. Merchant price-disclosed hotel room and car
rental reservations are recorded in merchant revenues net of the amounts paid to
travel service providers, and therefore, there is no associated cost of revenues
for merchant price-disclosed hotel revenues. Cost of revenues as a percentage of
merchant revenues decreased for the year ended December
46
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31, 2012, compared to the same period in 2011, a trend we expect to continue,
primarily due to the increase in Agoda.com and rentalcars.com revenues, all of
which are recorded in revenue "net" of provider cost. Cost of revenues also
includes approximately $21 million (including estimated interest and penalties)
for an accrual recorded for the year ended December 31, 2012 related to hotel
occupancy and other related taxes in the State of Hawaii and in the District of
Columbia (see Note 16 to the Consolidated Financial Statements).
Agency revenues have no cost of revenue. Agency revenues principally consist of
travel commissions on hotel reservations.
Gross Profit
Year Ended
December 31,
($000)
2012 2011 Change
Gross Profit $ 4,083,681 $ 3,079,880 32.6 %
Gross Margin 77.6 % 70.7 %
Total gross profit for the year ended December 31, 2012 increased by 32.6%
compared to the same period in 2011, primarily as a result of increased revenue
discussed above. Total gross margin (gross profit expressed as a percentage of
total revenue) increased during the year ended December 31, 2012, compared to
the same period in 2011, because our revenues are disproportionately affected by
our Name Your Own Price® business. Name Your Own Price® revenues are recorded
"gross" with a corresponding travel service provider cost recorded in cost of
revenues, and in 2012 represented a smaller percentage of total revenues than in
2011. Our retail price-disclosed businesses, which are recorded in revenue "net"
of provider cost, have been growing faster than our Name Your Own Price®
businesses. As a result, we believe that gross profit is an important measure of
evaluating growth in our business. Our international operations accounted for
approximately $3.6 billion of our gross profit for the year ended December 31,
2012, which compares to $2.6 billion for the same period in 2011. Gross profit
attributable to our international operations increased, on a local currency
basis, by approximately 48% for the year ended December 31, 2012, compared to
the same period in 2011. Gross profit attributable to our priceline.com U.S.
business increased by approximately 2% for the year ended December 31, 2012,
compared to the same period in 2011. Gross profit for our priceline.com U.S.
business was negatively impacted by an accrual of approximately $21 million
(including estimated interest and penalties) recorded for the year ended
December 31, 2012 related to legal rulings in the State of Hawaii and the
District of Columbia pertaining to hotel occupancy and other related taxes (see
Note 16 to the Consolidated Financial Statements).
Operating Expenses
Advertising
Year Ended
December 31,
($000)
2012 2011 ChangeOnline Advertising $ 1,273,637 $ 919,214 38.6 %
% of Total Gross Profit 31.2 % 29.8 %
Offline Advertising $ 35,492 $ 35,470 0.1 %
% of Total Gross Profit 0.9 % 1.2 %
Online advertising expenses primarily consist of the costs of (1) search engine
keyword purchases; (2) referrals from meta-search and travel research websites;
(3) affiliate programs; (4) banner and pop-up advertisements; and (5) email
campaigns. For the year ended December 31, 2012, online advertising expenses
increased over the same period in 2011, primarily to support increased hotel
room night reservations for Booking.com and Agoda.com, increased rental car day
reservations for rentalcars.com and increased travel reservations for
priceline.com. Online advertising as a percentage of gross profit increased for
the year ended December 31, 2012, compared to the same period in 2011. The
increase is driven by (1) brand mix within the Priceline Group, (2) the channel
mix within our brands and (3) recently lower returns on investment ("ROIs") from
our online advertising. Our international brands are growing faster than our
priceline.com U.S. brand, and spend a higher percentage of gross profit on
online advertising. Furthermore, our brands generally are obtaining an
increasing
47
--------------------------------------------------------------------------------share of traffic through paid online advertising channels. Finally, our online
advertising ROIs have recently been down year-over-year.
Offline advertising expenses are related to our television, print and radio
advertising for our priceline.com U.S. business. For the year ended December 31,
2012, offline advertising was flat compared to the same period in 2011.
Sales and Marketing
Year Ended
December 31,
($000)
2012 2011 ChangeSales and Marketing $ 195,934 $ 162,690 20.4 %
% of Total Gross Profit 4.8 % 5.3 %
Sales and marketing expenses consist primarily of (1) credit card processing
fees associated with merchant transactions; (2) fees paid to third-parties that
provide call center, website content translations and other services; (3)
provisions for credit card chargebacks; and (4) provisions for bad debt,
primarily related to agency hotel commission receivables. For the year ended
December 31, 2012, sales and marketing expenses, which are substantially
variable in nature, increased over the same period in 2011, primarily due to
increased gross booking volumes as well as expenses related to increased content
translations. The increase was partially offset by reduced credit card
processing fees resulting from the Durbin Amendment to the Dodd-Frank Financial
Reform and Consumer Protection Act (which amendment caps the interchange fee for
debit card transactions and went into effect on October 1, 2011). Sales and
marketing expenses as a percentage of gross profit are typically higher for our
merchant business which incurs credit card processing fees. Our merchant
business grew more slowly than our agency business, and as a result, sales and
marketing expenses as a percentage of total gross profit for year ended December
31, 2012, declined compared to the same period in 2011.
Personnel
Year Ended
December 31,
($000)
2012 2011 Change
Personnel $ 466,828 $ 352,295 32.5 %% of Total Gross Profit 11.4 % 11.4 %
Personnel expenses consist of compensation to our personnel, including salaries,
stock-based compensation, bonuses, payroll taxes and employee health benefits.
For the year ended December 31, 2012, personnel expenses increased over the same
period in 2011, due primarily to increased headcount to support the growth of
our international businesses and the one-time wage tax levy of approximately $14
million described below. Stock-based compensation expense was approximately
$71.6 million for the year ended December 31, 2012 compared to $65.7 million for
the year ended December 31, 2011. Stock-based compensation for the years ended
December 31, 2012 and 2011 included charges amounting to $0.9 million and $10.3
million, respectively, representing the cumulative impact of adjusting the
estimated probable outcome at the end of the performance period for certain
outstanding unvested performance share units.
In July 2012, the Dutch Government enacted certain amendments to Dutch tax law
including, among other things, a one-time irrecoverable levy on an employer
equal to 16% of an employee's 2012 earnings in excess of 150,000 Euros. The levy
will be remitted to the tax authorities in 2013. The tax law amendments provide
for this levy to automatically be repealed after 2013. This levy resulted in
additional payroll taxes recorded in personnel expense of approximately $14
million (approximately $10 million after tax). Of the total additional payroll
taxes, approximately $13 million were recorded in the third quarter of 2012.
48
--------------------------------------------------------------------------------General and Administrative
Year Ended
December 31,
($000)
2012 2011 Change
General and Administrative $ 173,171 $ 123,652 40.0 %
% of Total Gross Profit 4.2 % 4.0 %
General and administrative expenses consist primarily of: (1) personnel related
expenses such as recruiting, training and travel expenses; (2) fees for outside
professionals, including litigation expenses; and (3) occupancy expenses.
General and administrative expenses increased during the year ended December 31,
2012 over the same period in 2011, primarily due to expansion of our office
capacity worldwide to support continued growth in our international operations.
General and administrative expenses for the year ended December 31, 2012
includes approximately $3 million of professional fees related to the
acquisition of KAYAK and a charge of approximately $3 million related to certain
leased space that was vacated in connection with the relocation of Booking.com's
headquarters to a new location in Amsterdam. Additionally, we have had higher
recruiting, training and travel expenses related to increased headcount in all
of our businesses.
Information Technology
Year Ended
December 31,
($000)
2012 2011 Change
Information Technology $ 43,685 $ 33,813 29.2 %
% of Total Gross Profit 1.1 % 1.1 %
Information technology expenses consist primarily of: (1) outsourced data center
costs relating to our U.S. and international data centers; (2) system
maintenance and software license fees; (3) data communications and other
expenses associated with operating our services; and (4) payments to outside
consultants. For the year ended December 31, 2012, the increase in information
technology expenses compared to the same period in 2011 was due primarily to
growth in our worldwide operations.
Depreciation and Amortization
Year Ended
December 31,
($000)
2012 2011 Change
Depreciation and Amortization $ 65,141 $ 53,824 21.0 %
% of Total Gross Profit
1.6 % 1.7 %
Depreciation and amortization expenses consist of: (1) amortization of
intangible assets with determinable lives; (2) depreciation on computer
equipment; (3) amortization of internally developed and purchased software; and
(4) depreciation of leasehold improvements, office equipment and furniture and
fixtures. For the year ended December 31, 2012, depreciation expense increased
from the same period in 2011 due principally to capital expenditures for
additional data center capacity and office build outs to support growth and
geographic expansion, principally related to our Booking.com brand. We expect
future capital expenditures to also be higher than prior historical levels as we
continue to invest to support business growth.
49
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Other Income (Expense)
Year Ended
December 31,
($000)
2012 2011 Change
Interest Income $ 3,860 $ 8,119 (52.5 )%
Interest Expense (62,064 ) (31,721 ) 95.7 %Foreign Currency Transactions and Other (9,720 ) (7,526 ) 29.2 %
Total
$ (67,924 ) $ (31,128 ) 118.2 %
For the year ended December 31, 2012, interest income on cash and marketable
securities decreased over the same period in 2011, primarily due to lower yields
partially offset by an increase in the average balance invested. Interest
expense increased for the year ended December 31, 2012 as compared to the same
period in 2011, primarily due to an increase in the average outstanding debt
resulting from the March 2012 issuance of $1.0 billion aggregate principal
amount of convertible senior notes, and fees on the undrawn $1.0 billion
revolving credit facility entered into in October 2011.
Derivative contracts that hedge our exposure to the impact of currency
fluctuations on the translation of our international operating results into U.S.
Dollars upon consolidation resulted in foreign exchange gains of $0.7 million
and $4.0 million for the years ended December 31, 2012 and 2011, respectively,
and are recorded in "Foreign currency transactions and other" on the
Consolidated Statements of Operations.
Foreign exchange transaction losses, including costs related to foreign exchange
transactions, resulted in losses of $10.5 million and $11.3 million for the
years ended December 31, 2012 and 2011, respectively, and are recorded in
"Foreign currency transactions and other" on the Consolidated Statements of
Operations. During the fourth quarter of 2011, we began classifying certain
foreign currency processing fees as an offset to revenue earned from the third
party that processes the payments for merchant hotel transactions. Such
processing fees recorded to "Foreign currency transactions and other" for the
nine months ended September 30, 2011 amounted to approximately $5.0 million.
Income Taxes
Year Ended
December 31,
($000)
2012 2011 Change
Income Tax Expense $ 337,832 $ 308,663 9.5 %
Our effective tax rates for the years ended December 31, 2012 and 2011 were
19.2% and 22.6%, respectively. The decrease in our effective tax rate is
primarily due to an increase in the Innovation Box Tax benefit in 2012. Our
effective tax rate differs from the expected tax provision at the U.S. statutory
tax rate of 35%, principally due to lower foreign tax rates, partially offset by
state income taxes and certain non-deductible expenses.
Effective January 1, 2010, the Netherlands modified its corporate income tax law
related to income generated from qualifying "innovative" activities (the
"Innovation Box Tax"). Earnings that qualify for the Innovation Box Tax are
taxed at the rate of 5% rather than the Dutch statutory rate of 25.0%.
Booking.com obtained a ruling from the Dutch tax authorities in February 2011
confirming that a portion of its earnings ("qualifying earnings") is eligible
for Innovation Box Tax treatment. In this ruling, the Dutch tax authorities
require that the Innovation Box Tax benefit be phased in over a multi-year
period. The benefit is fully phased in for the Company starting in 2012. The
amount of qualifying earnings expressed as a percentage of the total pretax
earnings in the Netherlands will vary depending upon the level of total pretax
earnings that is achieved in any given year. The ruling from the Dutch tax
authorities is valid from January 1, 2010 through December 31, 2014, which
includes a one year extension granted by the Dutch tax authorities in August
2012.
In order to be eligible for Innovation Box Tax treatment, Booking.com must,
among other things, apply for and obtain a research and development ("R&D")
certificate from a Dutch governmental agency every six months confirming that
the activities that Booking.com intends to be engaged in over the subsequent six
month period are "innovative." The R&D certificate is current but should
Booking.com fail to secure such a certificate in any future period - for
example, because the
50
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governmental agency does not view Booking.com's new or anticipated activities as
"innovative" - or should this agency determine that the activities contemplated
to be performed in a prior period were not performed as contemplated or did not
comply with the agency's requirements, Booking.com may lose its certificate and,
as a result, the Innovation Box Tax benefit may be reduced or eliminated.
Booking.com intends to apply for continued Innovation Box Tax treatment for
future periods. Booking.com's application may not be accepted, or, if accepted,
the amount of qualifying earnings may be reduced or the applicable tax rate on
qualifying earnings may be higher than the current rate at that time. In
addition, the tax law may change resulting in a reduction or elimination of the
tax benefit.
Until our U.S. net operating loss carryforwards are utilized or expire, we do
not expect to make tax payments on our U.S. income, except for federal
alternative minimum tax and state income taxes. However, we expect to pay
foreign taxes on our foreign income. We expect that our international operations
will grow their pretax income at higher rates than the U.S. business over the
long term and, therefore, it is our expectation that our cash tax payments will
increase as our international businesses generate an increasing share of our
pre-tax income.
The Internal Revenue Service initiated an audit of our 2009 and 2010 federal
income tax returns for the first time in the third quarter of 2011. The audit
was concluded in June 2012 with no impact on our financial position, results of
operations or cash flows (see Note 15 to the Consolidated Financial Statements
for further information on the audit).
Redeemable Noncontrolling Interests
Year Ended
December 31,
($000)
2012 2011 ChangeNet income attributable to noncontrolling interests $ 4,471 2,760 62.0 %
The net income attributable to noncontrolling interests for the year ended
December 31, 2012, compared to the same period in 2011 increased due mainly to
improved year-over-year operating performance for the rentalcars.com business,
partially offset by a reduction in redeemable noncontrolling interests from
19.0% in April 2011 to 12.7% in April 2012.
Results of Operations
Year Ended December 31, 2011 compared to Year Ended December 31, 2010
Operating and Statistical Metrics
Gross bookings resulting from hotel room night reservations, rental car days and
airline tickets sold through our international and domestic operations for the
years ended December 31, 2011 and 2010 were as follows (numbers may not total
due to rounding):
Year Ended December 31,
(in millions)
2011 2010 Change
International $ 16,909 $ 9,480 78.4 %
Domestic 4,748 4,166 14.0 %
Total $ 21,658 $ 13,646 58.7 %
Gross bookings increased by 58.7% for the year ended December 31, 2011, compared
to the same period in 2010, principally due to 52.6% growth in hotel room night
reservation. The 78.4% increase in international gross bookings (growth on a
local currency basis was approximately 70%) was attributable to growth in
international hotel room night reservations for our Booking.com and Agoda
businesses, as well as higher ADRs charged for hotel stays and growth in
international car reservations for our rentalcars.com business, which was
acquired in May 2010. Domestic gross bookings increased by 14.0% for the year
ended December 31, 2011, compared to the same period in 2010, primarily due to
growth in gross bookings from our price-disclosed airline ticket and hotel room
night reservation services and our Name Your Own Price® hotel room night
51
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and airline ticket reservation services. Higher ADRs drove growth in gross
bookings related to our Name Your Own Price® hotel business despite a modest
year-over-year decline in Name Your Own Price® hotel room night reservations for
the year ended December 31, 2011.
Gross bookings resulting from hotel room night reservations, rental car days and
airline tickets sold through our agency and merchant models for the years ended
December 31, 2011 and 2010 were as follows (numbers may not total due to
rounding):
Year Ended December 31,
(in millions)
2011 2010 Change
Agency $ 17,610 $ 10,781 63.3 %
Merchant 4,048 2,864 41.3 %
Total $ 21,658 $ 13,646 58.7 %
Agency gross bookings increased 63.3% for the year ended December 31, 2011,
compared to the same period in 2010, due to growth in the sale of Booking.com
hotel room night reservations. Our U.S. priceline.com business experienced
growth in reservations of agency price-disclosed hotel room nights, airline
tickets and rental car days. Merchant gross bookings increased 41.3% for the
year ended December 31, 2011, compared to the same period in 2010, due to an
increase in gross bookings from our Agoda hotel room night reservation service,
our rentalcars.com rental car reservation service, our priceline.com merchant
price-disclosed hotel room night reservation service and our Name Your Own
Price® hotel room night, airline ticket and rental car reservation services.
Higher ADRs drove growth in gross bookings related to our Name Your Own Price®
hotel business despite a modest year-over-year decline in Name Your Own Price®
hotel room night reservations for the year ended December 31, 2011.
Hotel Room Rental Airline
Year Ended Nights Car Days Tickets
December 31, 2011 141.6 million 23.8 million 6.2 million
December 31, 2010 92.8 million 16.3 million 5.9 million
Hotel room night reservations sold increased by 52.6% for the year ended
December 31, 2011, over the same period in 2010, principally due to an increase
in the sale of Booking.com, Agoda and priceline.com price-disclosed hotel room
night reservations, partially offset by a modest decline in Name Your Own Price®
hotel room night reservations. Booking.com, our most significant brand,
currently includes over 185,000 hotels and accommodations on its website as
compared to about 120,000 hotels and accommodations last year (updated hotel
counts are available on the Booking.com website). Booking.com has added hotels
over the past year in its core European market as well as higher-growth markets
such as North America (which is a newer market for Booking.com), Asia-Pacific
and South America. An increasing amount of our business from a destination and
point-of-sale perspective is conducted in these newer markets which are growing
faster than our overall growth rate. Our U.S. priceline.com price-disclosed
hotel room night reservations benefited from the integration of U.S. hotels from
the Booking.com extranet on the priceline.com website.
Rental car days sold increased by 45.6% for the year ended December 31, 2011,
over the same period in 2010, primarily due to the inclusion of rental car day
reservations from rentalcars.com, which we acquired in May 2010, as well as an
increase in Name Your Own Price® rental car reservations.
Airline tickets sold increased by 5.7% for the year ended December 31, 2011,
over the same period in 2010, due to an increase in both price-disclosed and
Name Your Own Price® airline ticket reservations.
52
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Revenues
Year Ended
December 31,
($000)
2011 2010 Change
Agency Revenues $ 2,339,253 $ 1,380,603 69.4 %
Merchant Revenues 2,004,432 1,691,640 18.5 %
Other Revenues 11,925 12,662 (5.8 )%
Total Revenues $ 4,355,610 $ 3,084,905 41.2 %
Agency Revenues
Agency revenues for the year ended December 31, 2011 increased 69.4% compared to
the same period in 2010, primarily as a result of growth in the business of
Booking.com. Our U.S. agency hotel room night reservations benefited from the
integration of U.S. hotels from the Booking.com extranet on the priceline.com
website.
Merchant Revenues
Merchant revenues for the year ended December 31, 2011 increased 18.5% compared
to the same period in 2010, primarily due to an increase in merchant revenues
from our Agoda price-disclosed hotel room night reservation service, our
rentalcars.com rental car reservation service, our Name Your Own Price® airline
ticket and hotel room night reservation services and our priceline.com
price-disclosed hotel room night reservation service.
Other Revenues
Other revenues during the year ended December 31, 2011 consisted primarily of
advertising. Other revenues for the year ended December 31, 2011 decreased 5.8%
compared to the same period in 2010.
Cost of Revenues
Year Ended
December 31,
($000)
2011 2010 ChangeCost of Revenues $ 1,275,730 $ 1,175,934 8.5 %
% of Merchant Revenues 63.6 % 69.5 %
Cost of Revenues
For the year ended December 31, 2011, cost of revenues consisted primarily of:
(1) the cost of Name Your Own Price® hotel room reservations from our suppliers,
net of applicable taxes, (2) the cost of Name Your Own Price® rental cars from
our suppliers, net of applicable taxes; and (3) the cost of Name Your Own Price®
airline tickets, net of the federal air transportation tax, segment fees and
passenger facility charges imposed in connection with the sale of airline
tickets. Cost of revenues for the year ended December 31, 2011 increased by
8.5%, compared to the same period in 2010, primarily due to the increase in Name
Your Own Price® revenues discussed above. Merchant price-disclosed hotel room
and car rental reservations are recorded in merchant revenues net of the amounts
paid to suppliers and therefore, there is no associated cost of revenues for
merchant price-disclosed hotel revenues. Cost of revenues as a percentage of
their associated merchant revenues decreased primarily due to the increase in
merchant price-disclosed hotel revenues and the addition of rentalcars.com
merchant revenue, all of which are recorded on a "net" basis.
Agency revenues are recorded at their net amount, which are amounts received
less amounts paid to suppliers, if any, and therefore, there are no costs of
agency revenues.
53
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Gross Profit
Year Ended
December 31,
($000)
2011 2010 Change
Gross Profit $ 3,079,880 $ 1,908,971 61.3 %
Gross Margin 70.7 % 61.9 %
Total gross profit for the year ended December 31, 2011 increased by 61.3%
compared to the same period in 2010, primarily as a result of increased revenue
discussed above. Total gross margin (gross profit expressed as a percentage of
total revenue) increased during the year ended December 31, 2011, compared to
the same period in 2010 because Name Your Own Price® revenues, which are
recorded "gross" with a corresponding cost of revenue, represented a smaller
percentage of total revenues compared to retail, price-disclosed revenues which
are primarily recorded "net" with no corresponding cost of revenues. Because
Name Your Own Price® transactions are reported "gross" and retail transactions
are primarily recorded on a "net" basis, we believe that gross profit has become
an increasingly important measure of evaluating growth in our business. Our
international operations accounted for approximately $2.6 billion of our gross
profit for the year ended December 31, 2011, which compares to approximately
$1.4 billion for the same period in 2010. Gross profit attributable to our
international operations increased, on a local currency basis, by approximately
70% in the year ended December 31, 2011, compared to the same period in 2010.
Operating Expenses
Advertising
Year Ended
December 31,
($000)
2011 2010 ChangeOnline Advertising $ 919,214 $ 552,140 66.5 %
% of Total Gross Profit 29.8 % 28.9 %
Offline Advertising $ 35,470 $ 35,714 (0.7 )%
% of Total Gross Profit 1.2 % 1.9 %
Online advertising expenses primarily consist of the costs of (1) search engine
keyword purchases; (2) referrals from meta-search and travel research websites;
(3) affiliate programs; (4) banner and pop-up advertisements; and (5) e-mail
campaigns. For the year ended December 31, 2011, online advertising expenses
increased over the same period in 2010, primarily to support increased hotel
room night reservations for Booking.com and Agoda, increased rental car day
reservations for rentalcars.com and increased hotel room night reservations for
priceline.com. Online advertising as a percentage of gross profit increased for
the year ended December 31, 2011, compared to the same period in 2010. The
increase is driven primarily by brand mix rather than a change in the
fundamental efficiency of our advertising by brand. Our international brands
grew faster than our priceline.com U.S. brands, and spent a higher percentage of
gross profit on online advertising. Furthermore, the priceline.com brand
obtained an increased share of its traffic through online advertising. We
recognize advertising expense as incurred at the time of booking, but recognize
the gross profit for price-disclosed hotel room and rental car reservations when
the travel is completed.
Offline advertising expenses are related to our domestic television, print and
radio advertising for priceline.com. For the year ended December 31, 2011,
offline advertising was flat compared to the same period in 2010. We recognize
expense for production costs of advertising the first time the advertising takes
place.
54
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Sales and Marketing
Year Ended
December 31,
($000)
2011 2010 ChangeSales and Marketing $ 162,690 $ 116,303 39.9 %
% of Total Gross Profit 5.3 % 6.1 %
Sales and marketing expenses consist primarily of (1) credit card processing
fees associated with merchant transactions; (2) fees paid to third-parties that
provide call center, website content translations and other services; (3)
provisions for credit card chargebacks; and (4) provisions for bad debt,
primarily related to agency hotel commission receivables. For the year ended
December 31, 2011, sales and marketing expenses, which are substantially
variable in nature, increased over the same period in 2010, primarily due to
increased gross booking volumes as well as expenses related to increased content
translations. Our U.S. merchant business benefited from the impact of reduced
credit card processing fees resulting from Durbin Amendment to the Dodd-Frank
Financial Reform and Consumer Protection Act (which amendment caps the
interchange fee for debit card transactions and went into effect on October 1,
2011), partially offset by the impact of higher costs resulting from increases
in foreign currency transactions and increased cancellation rates from our Agoda
business. Costs associated with our U.S. priceline.com business comprise a large
component of sales and marketing expenses. Our U.S. priceline.com business grew
more slowly than our total gross profit, which benefited from the high growth in
our international agency business, and as a result, sales and marketing expenses
as a percentage of total gross profit for the year ended December 31, 2011
declined compared to the same period in 2010.
Personnel
Year Ended
December 31,
($000)
2011 2010 Change
Personnel $ 352,295 $ 270,071 30.4 %% of Total Gross Profit 11.4 % 14.1 %
Personnel expenses consist of compensation to our personnel, including salaries,
bonuses, payroll taxes, employee health benefits and stock-based compensation.
For the year ended December 31, 2011, personnel expenses increased over the same
period in 2010, due primarily to increased headcount to support the growth of
our international businesses. Stock-based compensation expense was approximately
$65.7 million for the year ended December 31, 2011 compared to $68.2 million for
the year ended December 31, 2010. Stock-based compensation for the years ended
December 31, 2011 and 2010 included charges amounting to $10.3 million and $13.4
million, respectively, representing the cumulative impact of adjusting the
estimated probable outcome at the end of the performance period for certain
outstanding unvested performance share units.
General and Administrative
Year Ended
December 31,
($000)
2011 2010 Change
General and Administrative $ 123,652 $ 81,185 52.3 %
% of Total Gross Profit 4.0 % 4.3 %
General and administrative expenses consist primarily of: (1) personnel related
expenses such as recruiting, training and travel expenses; (2) fees for outside
professionals, including litigation expenses; and (3) occupancy expenses.
General and administrative expenses increased during the year ended December 31,
2011, over the same period in 2010, due to higher recruiting, training and
travel expenses related to increased headcount at Booking.com, Agoda and
rentalcars.com. Additionally, we significantly increased our office capacity
worldwide to support continued growth in our international
55
--------------------------------------------------------------------------------
operations. The year ended December 31, 2010 included a favorable expense
adjustment of approximately $2.7 million in connection with the resolution of
certain franchise and sales and use tax issues related to our corporate
headquarters location, and a charge of $1.7 million related to a court ruling in
South Carolina.
Information Technology
Year Ended
December 31,
($000)
2011 2010 Change
Information Technology $ 33,813 $ 20,998 61.0 %
% of Total Gross Profit 1.1 % 1.1 %
Information technology expenses consist primarily of: (1) outsourced data center
costs relating to our U.S. and international data centers; (2) system
maintenance and software license fees; (3) data communications and other
expenses associated with operating our Internet sites; and (4) payments to
outside consultants. For the year ended December 31, 2011, the increase in
information technology expenses compared to the same period in 2010 was due
primarily to growth in our worldwide operations.
Depreciation and Amortization
Year Ended
December 31,
($000)
2011 2010 Change
Depreciation and Amortization $ 53,824 $ 45,763 17.6 %
% of Total Gross Profit
1.7 % 2.4 %
Depreciation and amortization expenses consist of: (1) amortization of
intangible assets with determinable lives; (2) depreciation on computer
equipment; (3) amortization of internally developed and purchased software; and
(4) depreciation of leasehold improvements, office equipment and furniture and
fixtures. For the year ended December 31, 2011, depreciation expense increased
from the same period in 2010 due principally to capital expenditures for
additional data center capacity and office build outs to support growth and
geographic expansion, principally related to our Booking.com brand. In addition,
for the year ended December 31, 2011, amortization expense increased from the
same period in 2010 due to acquisition-related amortization in connection with
our acquisition of rentalcars.com in May 2010.
Other Income (Expense)
Year Ended
December 31,
($000)
2011 2010 Change
Interest Income $ 8,119 $ 3,857 110.5 %
Interest Expense (31,721 ) (29,944 ) 5.9 %
Foreign Currency Transactions and Other (7,526 ) (14,427 ) (47.8 )%
Total $ (31,128 ) $ (40,514 ) (23.2 )%
For the year ended December 31, 2011, interest income on cash and marketable
securities increased over the same period in 2010, primarily due to an increase
in the average balance invested. Interest expense increased for the year ended
December 31, 2011, as compared to the same period in 2010, primarily due to an
increase in the average outstanding debt resulting from the March 2010 issuance
of $575.0 million aggregate principal amount of convertible senior notes, and
fees on the undrawn $1 billion revolving credit facility entered into in October
2011.
Derivative contracts that hedge our exposure to the impact of currency
fluctuations on the translation of our international operations into U.S.
dollars upon consolidation resulted in foreign exchange gains of $4.0 million
for the year
56
--------------------------------------------------------------------------------ended December 31, 2011 compared to foreign exchange gains of $2.9 million for
the year ended December 31, 2010, and are recorded in "Foreign currency
transactions and other."
Foreign exchange transaction losses, including costs related to foreign exchange
transactions, resulted in losses of $11.3 million for the year ended December
31, 2011, compared to losses of $6.0 million for the year ended December 31,
2010, and are recorded in "Foreign currency transactions and other."
In addition, losses of $11.3 million for the year ended December 31, 2010
resulted from convertible debt conversions during 2010, and are recorded in
"Foreign currency transactions and other."
During the fourth quarter of 2011, we began classifying certain foreign currency
processing fees, amounting to $2.2 million, as an offset to revenue earned from
the third party that processes the payments for merchant hotel transactions.
Income Taxes
Year Ended
December 31,
($000)
2011 2010 Change
Income Tax Expense $ 308,663 $ 218,141 41.5 %
Our effective tax rates for the years ended December 31, 2011 and 2010 were
22.6% and 29.2%, respectively. Our effective tax rate differs from the expected
tax provision at the U.S. statutory tax rate of 35% principally due to lower
foreign tax rates, the Innovation Box Tax benefit, and the resolution of an
uncertain tax position during the second quarter of 2011. Following the
conclusion of an audit, we reversed a reserve of approximately $12.5 million in
the three months ended June 30, 2011 for unrecognized tax benefits attributable
to tax positions taken in 2010.
The effective tax rate for the year ended December 31, 2011 is lower compared to
2010 primarily due to a higher percentage of foreign income, which is taxed at
lower rates, the Innovation Box Tax benefit, and the reversal of the reserve for
unrecognized tax benefits referred to above. The Innovation Box Tax did not have
a material impact on our 2010 results. The impact of the Innovation Box Tax for
2011 reduced our consolidated effective income tax rate by approximately four
percentage points.
Redeemable Noncontrolling Interests
Year Ended
December 31,
($000)
2011 2010 ChangeNet income attributable to noncontrolling interests $ 2,760 $ 601 359.2 %
The net income attributable to redeemable noncontrolling interest for the year
ended December 31, 2011 compared to the same period in 2010 increased primarily
due to the improved year-over-year operating performance for rentalcars.com.
Liquidity and Capital Resources
As of December 31, 2012, we had $5.2 billion in cash, cash equivalents and
short-term investments. Approximately $3.1 billion of our cash, cash equivalents
and short-term investments are held by our international subsidiaries and are
denominated primarily in Euros and, to a lesser extent, in British Pound
Sterling. We currently intend to permanently reinvest this cash in our foreign
operations. We could not repatriate this cash to the United States without
utilizing our net operating loss carryforwards and potentially incurring
additional tax payments in the United States. Cash equivalents and short-term
investments are primarily comprised of foreign and U.S. government securities
and bank deposits.
In October 2011, we entered into a $1 billion five-year unsecured revolving
credit facility with a group of lenders. Borrowings under the revolving credit
facility will bear interest, at our option, at a rate per annum equal to either
(i) the adjusted LIBOR for the interest period in effect for such borrowing plus
an applicable margin ranging from 1.00% to 1.50%; or
57
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(ii) the greatest of (a) JPMorgan Chase Bank, National Association's prime
lending rate, (b) the federal funds rate plus 0.50%, and (c) an adjusted LIBOR
for an interest period of one month plus 1.00%, plus an applicable margin
ranging from 0.00% to 0.50%. Undrawn balances available under the revolving
credit facility are subject to commitment fees at the applicable rate ranging
from 0.10% to 0.25%.
The revolving credit facility provides for the issuance of up to $100.0 million
of letters of credit as well as borrowings of up to $50 million on same-day
notice, referred to as swingline loans. Borrowings under the revolving credit
facility may be made in U.S. Dollars, Euros, British Pounds Sterling and any
other foreign currency agreed to by the lenders. The proceeds of loans made
under the facility will be used for working capital and general corporate
purposes. As of December 31, 2012, there were no borrowings under the facility,
and approximately $1.9 million of letters of credit were issued under the
facility.
As of December 31, 2012, we had remaining authorizations from our Board of
Directors to repurchase $459.2 million of our common stock. We may from time to
time make additional repurchases of our common stock, depending on prevailing
market conditions, alternate uses of capital, and other factors.
Our merchant transactions are structured such that we collect cash up front from
our customers and then we pay most of our suppliers at a subsequent date. We
therefore tend to experience significant swings in deferred merchant bookings
and supplier payables depending on the absolute level of our merchant
transactions during the last few weeks of every quarter.
Net cash provided by operating activities for the year ended December 31, 2012,
was $1.8 billion, resulting from net income of $1.4 billion, a favorable impact
of non-cash items not affecting cash flows of $217.9 million and net favorable
changes in working capital of $143.8 million. The changes in working capital for
the year ended December 31, 2012, were primarily related to a $256.0 million
increase in accounts payable, accrued expenses and other current liabilities,
partially offset by a $105.3 million increase in accounts receivable. The
increase in these working capital balances was primarily related to increases in
business volumes. Non-cash items were primarily associated with deferred income
taxes, stock-based compensation expense, depreciation and amortization, and
amortization of debt discount.
Net cash provided by operating activities for the year ended December 31, 2011,
was $1.3 billion, resulting from net income of $1.1 billion and net favorable
changes in working capital of $84.8 million, and a favorable impact of $197.9
million for non-cash items not affecting cash flows. For the year ended December
31, 2011, accounts payable, accrued expenses and other current liabilities
increased by $209.5 million, partially offset by a $125.8 million increase in
accounts receivable. The increase in these working capital balances was
primarily related to increases in business volumes. Non-cash items were
principally associated with deferred income taxes, stock-based compensation
expense, depreciation and amortization, and amortization of debt discount of our
convertible notes.
Net cash used in investing activities was $1.6 billion for the year ended
December 31, 2012. Investing activities for the year ended December 31, 2012
were affected by net purchases of investments of $1.6 billion, payments of $33.9
million for acquisitions, and a change in restricted cash of $2.8 million,
partially offset by net cash proceeds of $82.1 million for the settlement of
foreign currency contracts. Net cash used in investing activities was $904.8
million for the year ended December 31, 2011. Investing activities for the year
ended December 31, 2011 were affected by payments of $68.2 million for
acquisitions, principally related to the contingent consideration associated
with the 2007 acquisition of Agoda.com, $11.0 million net payments to settle
derivative contracts, net purchases of investments of $775.8 million, and a
change in restricted cash of $2.9 million. Cash invested in purchase of property
and equipment was $55.2 million and $46.8 million in the years ended December
31, 2012 and 2011, respectively. The increase in 2012 was to support the growth
of our business, including additional data center capacity and capital
expenditures for new offices opened during the year, and we expect to see
additional future increases to support the growth of our business.
Net cash provided by financing activities was approximately $668.9 million for
the year ended December 31, 2012. The cash provided by financing activities for
the year ended December 31, 2012 was primarily related to proceeds from the
issuance of convertible senior notes with an aggregate principal amount of $1.0
billion, $2.7 million of proceeds from the exercise of employee stock options,
and $5.2 million of excess tax benefits from stock-based compensation partially
offset by treasury stock purchases of $257.0 million, $61.1 million spent to
purchase a portion of the shares underlying noncontrolling interests in
rentalcars.com, and $20.9 million of debt issuance costs. Net cash used in
financing activities was approximately $151.0 million for the year ended
December 31, 2011. The cash used in financing activities for the year ended
December 31, 2011 was primarily related to treasury stock purchases of $163.2
million, approximately $13.0 million spent to purchase a portion of the shares
underlying redeemable noncontrolling interests in rentalcars.com, and $0.2
million of principal paid upon the conversion of senior notes, partially offset
by $4.3 million of proceeds from the exercise of employee stock options and
$21.0 million of excess tax benefits related to stock-based compensation.
58
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In November 2012, we entered into a definitive agreement to acquire KAYAK
Software Corporation, a leading travel meta-search service, in a stock and cash
transaction. Under the terms of the agreement, the transaction values KAYAK at
$1.8 billion ($1.65 billion net of cash acquired) or $40 per share of KAYAK
common stock, with $500 million to be paid in cash, which is expected to be made
from cash on hand in the United States, and $1.3 billion to be paid in shares of
our common stock and assumed stock options (subject to a volume-weighted average
trading price calculation and a collar on the value of our common stock). The
transaction is expected to be completed in the first half of 2013, pending
approval from relevant regulatory authorities and KAYAK shareholders.
Contingencies
A number of jurisdictions in the United States have initiated lawsuits against
online travel companies, including us, related to, among other things, the
payment of hotel occupancy and other related taxes (i.e., state and local sales
tax and general excise tax). In addition, a number of U.S. states, counties, and
municipalities have initiated audit proceedings, issued proposed tax assessments
or started inquiries relating to the payment of hotel occupancy and other
related taxes. To date, the majority of taxing jurisdictions in which we
facilitate the making of hotel room reservations have not asserted that taxes
are due and payable on our U.S. merchant hotel business. With respect to
jurisdictions that have not initiated proceedings to date, it is possible that
they will do so in the future or that they will seek to amend their tax statutes
and seek to collect taxes from us only on a prospective basis. See Item 3 -
Legal Proceedings and Note 16 to the Consolidated Financial Statements for a
description of these pending cases and proceedings, and Item 1A Risk Factors -
"Adverse application of state and local tax laws could have an adverse effect on
our business and results of operations.".
We are vigorously defending against these claims and proceedings. However,
litigation is subject to uncertainty and there could be adverse developments in
these pending or future cases and proceedings. An unfavorable outcome or
settlement of these actions or proceedings could result in substantial
liabilities for past and/or future bookings, including, among other things,
interest, penalties, punitive damages and/or attorney fees and costs, which
could have a material adverse effect on our results of operations or cash flows
in any given operating period. Also, there have been, and will continue to be,
ongoing costs associated with defending our position in pending and any future
cases or proceedings.
To the extent that any tax authority succeeds in asserting that we have a tax
collection responsibility, or we determine that we have such a responsibility,
with respect to future transactions, we may collect any such additional tax
obligation from our customers, which would have the effect of increasing the
cost of hotel reservations to our customers and, consequently, could make our
hotel reservation services less competitive (i.e., versus the websites of other
online travel companies or hotel company websites) and reduce hotel reservation
transactions; alternatively, we could choose to reduce the compensation for our
services on merchant hotel transactions. Either action could have a material
adverse effect on our business and results of operations.
As a result of this litigation and other attempts by jurisdictions to levy
similar taxes, we have established an accrual which amounted to approximately
$56 million and $33 million as of December 31, 2012 and 2011, respectively. The
accrual is based on our estimate of the probable cost of resolving these issues.
The actual cost may be less or greater, potentially significantly, than the
liabilities recorded. We believe that even if we were to suffer adverse
determinations in the near term in more of the pending proceedings than
currently anticipated given results to date, because of our available cash, it
would not have a material impact on our liquidity.
59
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The following table represents our material contractual obligations and
commitments as of December 31, 2012 (see Note 16 to the Consolidated Financial
Statements):
Payments due by Period (in thousands)
Less than 1 to 3 More than 5
Contractual Obligations Total 1 Year Years 3 to 5 Years Years
Operating lease
obligations $ 219,029 $ 31,487 $ 62,321 $ 47,121 $ 78,100
Convertible debt(1) 1,639,283 597,200 20,000 20,000 1,002,083
Revolving credit
facility(2) 7,336 2,255 3,594 1,487 -
Redeemable
noncontrolling interests 160,287 160,287 - - -
Total(3) $ 2,025,935 $ 791,229 $ 85,915 $ 68,608 $ 1,080,183
_____________________________
(1) Convertible debt represents the aggregate principal amount of the Notes and
interest of $64 million. Convertible debt does not reflect the market value
in excess of the outstanding principal amount because we can settle the
conversion premium amount in cash or shares of common stock at our option.
See Note 11 to the Consolidated Financial Statements.
(2) Represents fees on uncommitted funds and outstanding letters of credit as of
December 31, 2012.
(3) We reported "Other long-term liabilities" of $69 million on the Consolidated
Balance Sheet at December 31, 2012, of which approximately $56 million
related to our accrual for potential resolution of issues related to hotel
occupancy and other related taxes (refer to Note 16 to the Consolidated
Financial Statements) and approximately $7 million related to unrecognized
tax benefits (refer to Note 15 to the Consolidated Financial Statements). A
variety of factors could affect the timing of payments for these
liabilities. We believe that these matters will likely not be resolved in
the next twelve months and accordingly we have classified the estimated
liability as "non-current" on the Consolidated Balance Sheet. We have excluded "Other long-term liabilities" in the amount of $69 million from the
contractual obligations table because we cannot reasonably estimate the
timing of such payments.
Since the contingent conversion threshold for the 1.25% Convertible Senior Notes
due 2015 was exceeded as of December 31, 2012, these notes are convertible at
the option of the holders. If the holders elect to convert, we will be required
to pay the aggregate principal amount in cash and we will deliver cash or shares
of common stock, at our option, for the conversion value in excess of the
aggregate principal amount. We would likely fund our conversion obligations with
cash and cash equivalents, short-term investments and borrowings under our
revolving credit facility.
We believe that our existing cash balances and liquid resources will be
sufficient to fund our operating activities, capital expenditures and other
obligations through at least the next twelve months. However, if during that
period or thereafter, we are not successful in generating sufficient cash flow
from operations or in raising additional capital when required in sufficient
amounts and on terms acceptable to us, we may be required to reduce our planned
capital expenditures and scale back the scope of our business plan, either of
which could have a material adverse effect on our future financial condition or
results of operations. If additional funds were raised through the issuance of
equity securities, the percentage ownership of our then current stockholders
would be diluted. We may not generate sufficient cash flow from operations in
the future, revenue growth or sustained profitability may not be realized, and
future borrowings or equity sales may not be available in amounts sufficient to
make anticipated capital expenditures, finance our strategies or repay our
indebtedness.
Off-Balance Sheet Arrangements.
As of December 31, 2012, we did not have any off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future effect on our
financial condition, results of operations, liquidity, capital expenditures or
capital resources.
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IP Communications 
Info Tech 
IoT/M2M 
Mobile 
Green 
Satellite 
