Priceline 2014 Annual Report Download - page 64

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Gross Profit
Total gross profit for the year ended December 31, 2013 increased by 40.0% compared to the same period in 2012, 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, 2013, compared to the same period in 2012, because our revenues are disproportionately affected by our Name Your Own
Price
®
service. Name Your Own Price
®
revenues are recorded "gross" with a corresponding travel service provider cost recorded in cost of
revenues, and in the year ended December 31, 2013 represented a smaller percentage of total revenues than in the same period in 2012. Our retail
and semi-opaque services, which are recorded in revenue "net" of supplier cost have been growing faster than our Name Your Own Price
®
services. As a result, we believe that gross profit is an important measure to evaluate growth in our business. Our international operations
accounted for approximately $5.02 billion of our gross profit for the year ended December 31, 2013, which compares to $3.56 billion for the
same period in 2012. Gross profit attributable to our international operations increased, on a local currency basis, by approximately 40% for the
year ended December 31, 2013 compared to the same period in 2012. Gross profit attributable to our U.S. businesses increased by approximately
32.5% for the year ended December 31, 2013, compared to the same period in 2012. Gross profit for the year ended December 31, 2013 was
positively impacted by the inclusion of KAYAK since its acquisition on May 21, 2013. Gross profit for the year ended December 31, 2013 was
negatively impacted by an accrual recorded in the first quarter of 2013 of approximately $20.5 million (including estimated interest and
penalties) for travel transaction taxes, principally related to unfavorable rulings in the State of Hawaii and the District of Columbia, partially
offset by a credit in the fourth quarter of 2013 of $6.3 million, principally related to a favorable agreement and ruling in the District of Columbia.
Gross profit for the year ended December 31, 2012 was negatively impacted by an accrual of approximately $21 million (including estimated
interest and penalties) for travel transaction taxes, principally related to unfavorable rulings in the State of Hawaii and in the District of
Columbia.
Operating Expenses
Advertising
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, pop-up and other Internet advertisements; and (5) e-mail campaigns. For the year
ended December 31, 2013, online advertising expenses increased 41.2% over the same period in 2012, primarily to generate increased gross
bookings. Online advertising as a percentage of gross profit increased for the year ended December 31, 2013 compared to the same period in
2012 due to (1) lower ROIs for our online advertising, (2) brand mix within The Priceline Group and (3) channel mix within certain of our
brands. Our online advertising ROIs were down year-over-
year for the year ended December 31, 2013. Furthermore, our international brands are
generally growing faster than our U.S. brands, and typically spend a higher percentage of gross profit on online advertising. Finally, certain of
our brands are obtaining an increasing share of traffic through paid online advertising channels.
The inclusion of KAYAK since its acquisition on May 21, 2013 had a favorable impact on online advertising as a percentage of gross
profit for the year ended December 31, 2013 because KAYAK spends a lower percentage of gross profit on online advertising than our other
brands, and our consolidated results exclude intercompany advertising by our brands on
60
Year Ended December 31,
(in thousands)
2013
2012
Change
Gross Profit
$
5,715,886
$
4,083,681
40.0
%
Gross Margin
84.1
%
77.6
%
Year Ended December 31,
(in thousands)
2013
2012
Change
Online Advertising
$
1,798,645
$
1,273,637
41.2
%
% of Total Gross Profit
31.5
%
31.2
%
Offline Advertising
$
127,459
$
35,492
259.1
%
% of Total Gross Profit
2.2
%
0.9
%