Can Kayak Get Public in the Face of Uncertainty?

Kayak announced plans for an initial public offering today. 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. The financials: Kayak is growing fast… really fast. The debate: Can Kayak get public in the face of the uncertainty created by Google’s planned acquisition of ITA Software?
First the numbers. Kayak generated US$113 million in revenue in 2009, but is already at $128 million in just the first nine months of 2010. Revenue is up 48% so far this year and was up 80% in the third quarter alone. What is fueling that growth? Query volume was up 37% in the first nine months and 50% in the quarter. Profit has increased rapidly too, 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? According to the preliminary prospectus filed with the SEC, 25% of revenue comes from Expedia brands, 19% from Orbitz brands and 8% from Google.
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Next the debate. Google’s purchase of ITA Software appears to put Kayak directly in the cross-hairs. 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% of Kayak query volume is air-related and 8% 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% of Kayak’s total query volume. That could be an issue if the contract is not extended.
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. 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.