Presentation on theme: "1 Priceline I Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY 10012 Tel. (212) 998-0022 Fax (212) 995-4230"— Presentation transcript:
1 Priceline I Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY 10012 Tel. (212) 998-0022 Fax (212) 995-4230 firstname.lastname@example.org Web page: www.stern.nyu.edu/~jlivnat
2 Priceline.com A reverse auction site The “name your price” concept can be adopted to many industries. B to C with a twist Providing travel and other services to individuals Commission revenues
3 The Business Model A customer makes an offer (the customer “names a price”). –The customer agrees to lose flexibility: Exact departure times Connections A specific airline. The customer is bound if the offer is accepted. Credit card is charged for transaction upon fulfillment. Priceline matches a seller willing to sell at that price.
4 The Logic Customers obtain lower prices at the cost of flexibility -- market segmentation. Sellers can sell excess capacity without eroding current markets. Sellers do not divulge discounts until a transaction is consummated. Ideal for perishable goods. Use customers’ power. Enjoy transaction fees.
5 Potential Weaknesses Consumers with bad experiences may deter others. Sellers may decide to do it alone, or extract benefits (see warrant costs later). Others may begin similar businesses. –Patents. Actions against the patents. Governmental regulations may place restrictions on the business model: –mortgages. –automobile dealers.
6 Facts about Priceline.com Began sales on April 1998 –Leisure airline tickets. Expanded into other areas: –Hotel rooms –Mortgages –Car rentals –New automobiles –Groceries –Through licensee - garage sales
7 Facts about Priceline.com April 1999 - IPO - sold 10 million shares for net proceeds of $144.3 million. August 1999 - secondary of 1 million shares for net proceeds of $62.5 million. 3.8 million unique customers on 12/31/99. 3 million made initial purchase in 1999. Reasonable (at least 70% of lowest fare) offers by customers in 1999 were 57% of all offers. In 1999, Priceline fulfilled 43.6% of reasonable offers.
8 Opportunities Ancillary revenues –Customers sign up for other services (credit card, car rental, etc.) Exploiting other markets: –Telephone calls Expanding into other areas: –New/Zealand and Australia
10 Priceline.com 1999 10-K Unqualified audit opinion. Cash and s.t. investments $172 million on 12/31/99. Accumulated deficit of $1.18 billion. Revenues of $482 million. Product costs $423 million. Gross margin of about $60 million. Should revenues be $482 million or the commission revenues of $60 million?
11 Priceline.com 1999 10-K Split expenses into: –Sales and marketing $80 million. –General and administrative $28 million. –Systems and business development $14 million. The gross margin of about $60 million is substantially less than the marketing, G&A and R&D expenses. The business is still consuming resources. This is typical to businesses in their initial stages.
12 Priceline.com 1999 10-K The most significant expense is the warrant costs of $999 million !!! Priceline wanted to strengthen its relationships with airlines, who supply the leisure airline tickets (85% of 1999 revenues). It offered airlines warrants (stock options) to purchase 20 million shares at an exercise price of $52-60/share.
13 Priceline.com 1999 10-K The market value of one warrant is estimated at $55 (consistent with stock options to employees, see Black-Scholes assumptions). Warrants are vested immediately. No restrictions on airlines. Whose expense is it? –Shareholders transfer a portion of the firm to airlines (20 million over 164 million outstanding shares). –Market value of Priceline (using a price of $50/share is about $8.2 billion.
14 Priceline.com 1999 10-K Options granted to employees, officers, directors and consultants in 1999 were 6.5 million. No expense appears on the income statement for these options. Barter transactions are immaterial. Cash used in 1999 operations $63 million. Capital expenditures in 1999 $27 million, probably in excess of typical needs.
17 Other Unique Accounting Aspects Gross or net revenues –Record commission revenues or total revenues Are Priceline’s 1999 revenues $60 million or $480 million? Rebates for complementary service –36 months Internet connection Shipping and handling expenses included in revenues (and selling expenses). Free or introductory offer is recorded as revenue and selling expense.
18 Other Unique Accounting Aspects How is self-developed software accounted for? Over what period is it amortized? When can an auction site recognize revenues? –Sometimes needs to list an item for a specified period. How should rewards be accounted for? –Current expenses or capitalized acquisition costs?