Valuation of Priceline.com

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Valuation of Priceline.com

• Professor Joshua Livnat, Ph.D., CPA
• 311 Tisch Hall
• New York University
• 40 W. 4th St.
• NY NY 10012
• Tel. [phone] Fax [phone]
• jlivnat_at_stern.nyu.edu
• Web page www.stern.nyu.edu/jlivnat

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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

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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.

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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.

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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.

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Facts about Priceline.com

• Began sales on April 1998
• Leisure airline tickets.
• Expanded into other areas
• Hotel rooms
• Mortgages
• Car rentals
• New automobiles
• Groceries-Ceased operation on Oct. 5th, 2000
• Through licensee - garage sales-Ceased 10/5/00

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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.

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Facts - Continued

• Cumulative number of customers on 12/31/00 was
  almost 9 million!
• 5.2 million new customers in 2000.
• Sold 4.6 million airline tickets in 2000, 1.7
  million hotel nights, and 1.8 million car rental
  days.
• For 2000, Priceline fulfilled 48 of airline
  ticket offers.

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Operating Results
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Priceline.com 1999 10-K

• Unqualified audit opinion.
• Cash and s.t. investments 101 million on
  12/31/00.
• Accumulated deficit of 1.5 billion on 12/31/00.
• Revenues of 482 million in 1999 and 1.235
  billion in 2000.
• Product costs 423 million in 1999 and 1.04
  billion in 2000.
• Gross margin of about 60 million in 1999 and
  194 million in 2000.
• Should revenues be 482 million or the commission
  revenues of 60 million in 1999?

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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.

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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 was about 8.2 billion.

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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.

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Financial Data
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Income Statement Ratios
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Visitors
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Gross Margin (Revenues - CGS)
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Regression of Gross Margin on Visitors
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Regression of SellMrktg on Visitors
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Regression of GeneralAdmin. on Visitors
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Regression of RD on Visitors
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Volume Analysis

• Assumptions
• Selling marketing expenses flat after 40MM.
• GA expenses flat after 12 MM, and system
  development flat after 6 MM..

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Forecasted Cash Flows
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Valuation
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Summary

• A unique concept in the Internet space.
• Ideal for perishable goods.
• Narrow market segment, but not an insignificant
  one.
• Has potential if it can control costs better.