PhoCusWright’s FYI memo to the travel industry takes a close look at Kayak’s plans for an initial public offering (IPO), asking if Kayak’s decision to go public in the face of Google’s planned acquisition of ITA Software makes sense. It also underscores the ongoing debate over travel search engines widely used by consumers.
Kayak Software Corp., (Kayak.com) is an aggregator of flight and hotel deals, filed its IPO with the Securities and Exchange Commission (SEC). Kayak was founded in 2004 and has a global presence in the online travel market.
“While details around the deal are scarce, offering documents provide some illuminating financial detail and really set the stage for what is sure to be a big debate,” PhocusWright says. “First the numbers. Kayak generated $113 million in revenue in 2009, but is already at $128 million in just the first nine months of 2010. Revenue is up 48 percent so far this year and was up 80 percent in the third quarter alone. What is fueling that growth? Query volume was up 37 percent in the first nine months and 50 percent in the quarter.”
Profit has increased rapidly too, PhoCusWright says, with earnings before interest, taxes and depreciation ramping from $16 million in all of 2009 to $25 million for the first nine months of 2010. “Where is all of that revenue coming from?” PhocusWright asks. “According to the preliminary prospectus filed with the SEC, 25 percent of revenue comes from Expedia brands, 19 percent from Orbitz brands and 8 percent from Google.”
Next the debate.
“Google's purchase of ITA Software appears to put Kayak directly in the cross-hairs,” PhocusWright says. “The prevailing thought is that Google will look to launch an air-related metasearch product. From another angle, ITA powers Kayak air search. Will the combination undermine Kayak's airline query volume? Will ITA renew its contract with Kayak when the deal expires in December 2013? If not, can Kayak find a suitable replacement? “We do not know for sure, but note that 85 percent of Kayak query volume is air-related and 8 percent of query volume is driven by keyword purchase. To the extent Google-ITA grabs share in air search, that could be an issue.”
ITA, meanwhile, handles 42 percent of Kayak’s total query volume. That could be an issue if the contract is not extended, PhoCusdWrtight says.
What now? “Details of the IPO were not disclosed. While the press has talked about a $50 million deal, that is not the real number,” PhoCusWright says. “Companies are required to include some numbers in initial documents for the purpose of calculating fees, but the deal is likely to be much larger. That will be an important detail in determining whether the public market welcomes the deal. While the growth is appealing, the uncertainty created by the Google-ITA deal is not. The valuation will have to be attractive enough to convince investors to buy into the uncertainty.”